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NXST > SEC Filings for NXST > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for NEXSTAR BROADCASTING GROUP INC


15-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion and analysis should be read in conjunction with Item 6. "Selected Financial Data" and our Consolidated Financial Statements and related Notes included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

As a result of our deemed controlling financial interest in Mission, in accordance with U.S. GAAP, we consolidate the financial position, results of operations and cash flows of Mission as if it were a wholly-owned entity. We believe this presentation is meaningful for understanding our financial performance. Refer to Note 2 to our Consolidated Financial Statements for a discussion of our determination that we are required to consolidate Mission's financial position, results of operations and cash flows under the authoritative guidance for variable interest entities. Therefore, the following discussion of our financial position and results of operations includes Mission's financial position and results of operations.

Executive Summary

2012 Highlights

Net revenue increased 23.5% during 2012 compared to 2011. The increase in net revenue was primarily due to our July and December 2011 acquisitions of WFRV and WEHT, respectively, our December 2012 acquisition of ten television stations and Inergize Digital Media from Newport and increases in political advertising and retransmission compensation, which were partially offset by the discontinuance of management fee revenue from our terminated management services agreement with Four Points Media Group, LLC as well as termination of certain station affiliation agreements. The 2012 and 2011 acquired stations contributed a total of approximately $38.6 million to our net revenue for the year ended December 31, 2012.

On December 1, 2012, we acquired the assets of ten television stations in seven markets and Inergize Digital Media, a digital media management entity that offers solutions for companies in building presence on the web and in the mobile arena, from Newport for $225.5 million in cash, exclusive of working capital adjustment, funded by our senior secured credit facility.

On December 1, 2012, we and Mission entered into amendments to each of our senior secured credit facilities with a group of commercial banks which replaced the Company's previous credit facilities. The new senior secured credit facilities consist of a $246.0 million term loan and a $65.0 million revolving credit facility for us and a $104.0 million term loan and $35.0 million revolving credit facility for Mission. We and Mission used the proceeds of these loans to finance acquisitions as well as for Mission to repay $38.1 million debt outstanding under its previous Term Loan B, plus accrued interest.


On December 1, 2012, we sold the net assets of KBTV, our FOX and Bounce TV affiliate in Beaumont-Port Arthur, TX, to Deerfield Media (Port Arthur), Inc. and San Antonio Television, LLC for $13.9 million, net of $0.1 million working capital sold. Proceeds of the sale were used to repay debt obligations and for general corporate purposes. We recognized a $5.1 million gain on disposal of KBTV, net of $3.1 million of income tax expense.

On November 26, 2012, we announced a new dividend policy pursuant to which our board of directors intends to declare a total annual cash dividend with respect to our outstanding shares of Class A common stock and Class B common stock of $0.48 per share in equal quarterly installments of $0.12 per share. On January 24, 2013, our board of directors declared a quarterly dividend of $0.12 per share of our Class A and Class B common stock. The first dividend payment was made on March 1, 2013 for a total of $3.5 million to our shareholders of record on February 15, 2013.

On November 9, 2012, we completed the sale and issuance of our $250.0 million 6.875% Senior Notes due 2020 (the "6.875 Notes") at par. The proceeds of the 6.875% Notes were used to retire the 7% Notes and the 7% PIK Notes, repay the amounts outstanding under our previous senior secured credit facility and for related fees and expenses. The 6.875% Notes are our senior unsecured obligations and are guaranteed by Mission.

On November 9, 2012, we retired our previous senior secured credit facility, repaying the outstanding principal balances of $108.9 million of Term Loan B and $23.0 million of revolving loans, plus accrued interest. During October and November of 2012, Mission repaid the principal amounts outstanding of its revolving credit facility of $10.0 million plus accrued interest. These transactions resulted in a loss on extinguishment of debt of $1.7 million.

On November 9, 2012, we redeemed $3.8 million and $110.7 million of our 7% senior subordinated notes due 2014 ("7% Notes") and 7% senior subordinated PIK notes due 2014 ("7% PIK Notes"), respectively, for $1,003 per each $1,000 of outstanding principal, plus accrued and unpaid interest in accordance with the tender offer dated October 24, 2012. The tender offer expired on November 21, 2012 and we redeemed the remaining $0.1 million and $1.9 million outstanding principal balance of the 7% Notes and 7% PIK Notes, respectively, at the redemption price of 100.0%. These transactions resulted in a loss on extinguishment of debt of $1.0 million.

On November 2, 2012, we and Mission entered into definitive agreements to acquire the assets of WFFF, the FOX affiliate, and WVNY, the ABC affiliate, both in the Burlington, Vermont, from Smith Media for a total purchase price of $16.9 million, subject to working capital adjustment. We made an initial payment of $0.8 million pursuant to the terms of the purchase agreement. We and Mission completed the acquisition and paid the remaining $16.1 million on February 15, 2013, funded by a combination of the Company's borrowings from revolving credit facilities and cash on hand.

On November 1, 2012, we entered into a definitive agreement and made an initial payment of $3.5 million to acquire the assets of KGPE, the CBS affiliate in the Fresno, California market, and KGET, the NBC/CW affiliate, and KKEY-LP, the low powered Telemundo affiliate, both in the Bakersfield, California market, from Newport for a total purchase price of $35.4 million, subject to working capital adjustment. We completed the acquisition and paid the remaining $31.9 million on February 15, 2013 funded by existing cash on hand.

On July 18, 2012, Mission entered into a definitive agreement and made an initial payment of $6.0 million to acquire the assets of KLRT, the FOX affiliate, and KASN, the CW affiliate, both in the Little Rock, Arkansas market, from Newport for a total of purchase price $60.0 million, subject to working capital adjustment. Mission completed the acquisition on January 1, 2013 and paid the remaining $54.0 million on January 3, 2013 funded by the proceeds of Mission's senior secured credit facility.

On May 11, 2012, we redeemed $34.0 million of our outstanding 7% Notes at 100%. As a result of the redemption, we recorded $0.5 million of loss on extinguishment of debt related to this transaction. We funded the redemption from cash on hand and borrowings under our revolving credit facility.

Throughout 2012, we and Mission repaid the contractual maturities under each of our previous Term Loan B, for a total of $1.1 million.

During 2012, we and Mission repaid $24.3 million, net, of our revolving loan borrowings under our senior secured credit facilities.


Overview of Operations

We owned and operated 45 television stations and 10 digital multi-cast channels as of December 31, 2012. Through various local service agreements, we programmed or provided sales and other services to 19 additional television stations and four digital multicast channels, including 17 television stations and four digital multicast channels owned and operated by Mission as of December 31, 2012. All of the stations that we program or provide sales and other services to, including Mission, are 100% owned by independent third parties.

The following table summarizes the various local service agreements we had in effect as of December 31, 2012 with Mission:

Service Agreements           Mission Stations

TBA Only(1)        WFXP and KHMT
SSA & JSA(2)       KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP,
                   KAMC, KRBC, KSAN, WUTR, WAWV, WYOU,
                   KODE, WTVO, KTVE and WTVW

(1) We have a time brokerage agreement ("TBA") with each of these stations which allows us to program most of each station's broadcast time, sell each station's advertising time and retain the advertising revenue generated in exchange for monthly payments to Mission.

(2) We have both a shared services agreement ("SSA") and a joint sales agreement ("JSA") with each of these stations. Each SSA allows our station in the market to provide services including news production, technical maintenance and security, in exchange for our right to receive certain payments from Mission as described in the SSAs. Each JSA permits us to sell the station's advertising time and retain a percentage of the station's net advertising revenue, as described in the JSAs.

Our ability to receive cash from Mission is governed by these local service agreements. Under the local service agreements, we have received substantially all of Mission's available cash, after satisfaction of its operating costs and debt obligations. We anticipate we will continue to receive substantially all of Mission's available cash, after satisfaction of its operating costs and debt obligations.

We also guarantee all obligations incurred under Mission's senior secured credit facility. Similarly, Mission is a guarantor of our senior secured credit facility and senior subordinated notes. In consideration of our guarantee of Mission's senior secured credit facility, Mission has granted us purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent, for an amount equal to the greater of (1) seven times the station's cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. Additionally, on November 29, 2011, Mission's shareholders granted Nexstar an option to purchase any or all of Mission's stock, subject to FCC consent, for a price equal to the pro rata portion of the greater of (1) five times the stations' cash flow, as defined in the agreement, reduced by the amount of indebtedness, as defined in the agreement, or (2) $100,000. These option agreements (which expire on various dates between 2013 and 2022) are freely exercisable or assignable by Nexstar without consent by Mission or its shareholders. These option agreements expire on various dates between 2013 and 2022 and are freely exercisable or assignable by us without consent or approval by Mission. We expect these option agreements to be renewed upon expiration.

We do not own Mission or its television stations. However, we are deemed under U.S. GAAP to have a controlling financial interest in Mission because of (1) the local service agreements Nexstar has with the Mission stations, (2) Nexstar's guarantee of the obligations incurred under Mission's senior secured credit facility, (3) Nexstar having power over significant activities affecting Mission's economic performance, including budgeting for advertising revenue, advertising and hiring and firing of sales force personnel and (4) purchase options granted by Mission that permit Nexstar to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. In compliance with FCC regulations for both us and Mission, Mission maintains complete responsibility for and control over programming, finances and personnel for its stations.

The operating revenue of our stations is derived primarily from broadcast and website advertising revenue, which is affected by a number of factors, including the economic conditions of the markets in which we operate, the demographic makeup of those markets and the marketing strategy we employ in each market. Most advertising contracts are short-term and generally run for a few weeks. For the years ended December 31, 2012 and 2011, revenue generated from local broadcast advertising represented 71.4% and 73.4%, respectively, of our consolidated spot revenue (total of local and national broadcast advertising revenue, excluding political advertising revenue). The remaining broadcast advertising revenue represents inventory sold for national or political advertising. All national and political revenue is derived from advertisements placed through advertising agencies. The agencies receive a commission rate of 15.0% of the gross amount of advertising schedules placed by them. While the majority of local spot revenue is placed by local agencies, some advertisers place their schedules directly with the stations' local sales staff, thereby eliminating the


agency commission. Each station also has an agreement with a national representative firm that provides for sales representation outside the particular station's market. Advertising schedules received through the national representative firm are for national or large regional accounts that advertise in several markets simultaneously. National commission rates vary within the industry and are governed by each station's agreement.

Most of our stations have a network affiliation agreement pursuant to which the network provides programming to the stations during specified time periods, including prime time. NBC and CBS compensate some of the stations for distributing the network's programming over the air and for allowing the network to keep a portion of advertising inventory during those time periods. The affiliation agreements with ABC, FOX, MyNetworkTV, The CW and Bounce TV do not provide for compensation. In recent years, in conjunction with the renewal of affiliation agreements with NBC, CBS, ABC and FOX, network compensation is being eliminated and many of the networks are now seeking cash payments from their affiliates.

Each station acquires licenses to broadcast programming in non-news and non-network time periods. The licenses are either purchased from a program distributor for cash and/or the program distributor is allowed to sell some of the advertising inventory as compensation to eliminate or reduce the cash cost for the license. The latter practice is referred to as barter broadcast rights. Barter broadcast rights are recorded at management's estimate of the value of the advertising time exchanged using historical advertising rates, which approximates the fair value of the program material received. The programming expense is recognized over the license period or period of usage, whichever ends earlier.

Our primary operating expenses consist of commissions on advertising revenue, employee compensation and benefits, newsgathering and programming costs. A large percentage of the costs involved in the operation of our stations and the stations we provide services to remains relatively fixed.

Seasonality

Advertising revenue is positively affected by national and regional political election campaigns and certain events such as the Olympic Games or the Super Bowl. The Company's stations' advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years, when state, congressional and presidential elections occur and from advertising aired during the Olympic Games. As 2012 was an election year, we are reporting significantly more political advertising revenue in 2012 compared to 2011, which is consistent with our expectations.

Debt Transactions

On December 1, 2012, we and Mission entered into amendments to each of our senior secured credit facilities with a group of commercial banks which replaced the Company's previous credit facilities. The new senior secured credit facilities consist of a $246.0 million term loan and a $65.0 million revolving credit facility for us and a $104.0 million term loan and $35.0 million revolving credit facility for Mission. We and Mission used the proceeds of these loans to finance acquisitions as well as for Mission to repay $38.1 million debt outstanding under its previous Term Loan B, plus accrued interest.

On November 9, 2012, we retired our previous senior secured credit facility, repaying the outstanding principal balances of $108.9 million of Term Loan B and $23.0 million of revolving loans, plus accrued interest. During October and November of 2012, Mission repaid the principal amounts outstanding of its revolving credit facility of $10.0 million plus accrued interest. These transactions resulted in a loss on extinguishment of debt of $1.7 million.

On November 9, 2012, we redeemed $3.8 million and $110.7 million of our 7% Notes and 7% PIK Notes, respectively, for $1,003 per each $1,000 of outstanding principal, plus accrued and unpaid interest in accordance with the tender offer dated October 24, 2012. The tender offer expired on November 21, 2012 and we redeemed the remaining $0.1 million and $1.9 million outstanding principal balance of the 7% Notes and 7% PIK Notes, respectively, at the redemption price of 100.0%. These transactions resulted in a loss on extinguishment of debt of $1.0 million.

On November 9, 2012, we completed the sale and issuance of our 6.875% Notes at par. The proceeds of the 6.875% Notes were used to retire the 7% Notes and the 7% PIK Notes, repay the amounts outstanding under our previous senior secured credit facility and for related fees and expenses. The 6.875% Notes are our senior unsecured obligations and are guaranteed by Mission.


On October 23, 2012, we and Mission entered into amendments to each of our senior secured credit facilities. The amendments exclude, through and including December 31, 2012, from the calculation of indebtedness and prepayment requirement, the proceeds of the 6.875% Notes and permit us to hold the net proceeds of the 6.875% Notes, pending repurchase of our outstanding 7% Notes and 7% PIK Notes and refinancing of a portion of the borrowings outstanding under our senior secured credit facilities with such proceeds, until December 31, 2012.

On September 27, 2012, we and Mission entered into amendments to each of our senior secured credit facilities. The amendments remove the requirement for the Company to provide pro forma certificates to the lenders prior to entering into an acquisition and exclude any acquisitions from dollar limitations within the credit agreements if they are not to be funded with the existing senior secured credit facilities.

On May 11, 2012, we redeemed $34.0 million of our outstanding 7% Notes at 100.0%. As a result of the redemption, we recorded approximately $0.5 million of loss on extinguishment of debt related to this transaction. We funded the redemption of the notes from a combination of cash on hand and borrowings under its revolving credit facility.

Throughout 2012, we and Mission repaid the contractual maturities under each of our previous Term Loan B, for a total of $1.1 million.

During 2012, we and Mission repaid $24.3 million, net, of our revolving loan borrowings under our senior secured credit facilities.

Historical Performance

Revenue

The following table sets forth the amounts of the Company's principal types of
revenue (in thousands) and each type of revenue (other than trade and barter)
and agency commissions as a percentage of total gross revenue for the years
ended December 31:

                                 2012                        2011                        2010
                         Amount           %          Amount           %          Amount           %
Local                   $ 190,168        47.8       $ 181,569        57.3       $ 173,901        52.9
National                   76,123        19.1          65,728        20.8          61,995        18.8
Political                  46,276        11.6           6,326         2.0          39,318        12.0
Retransmission
compensation               60,933        15.4          37,393        11.8          29,911         9.1
eMedia revenue             18,363         4.6          16,224         5.1          13,821         4.2
Network compensation          770         0.2             987         0.3           2,050         0.6
Management fee              1,961         0.6           6,189         2.0           5,674         1.7
Other                       2,938         0.7           2,307         0.7           2,270         0.7
Total gross revenue       397,532        100.0        316,723        100.0        328,940        100.0
Less: Agency
commissions               (40,820 )     (10.3)        (31,689 )     (10.0)        (35,317 )     (10.7)
Net broadcast revenue     356,712        89.7         285,034        90.0         293,623        89.3
Trade and barter
revenue                    21,920                      21,457                      19,727
Net revenue             $ 378,632                   $ 306,491                   $ 313,350


Results of Operations

The following table sets forth a summary of the Company's operations (in thousands) and each component of operating expense as a percentage of net revenue:

                                 2012                        2011                        2010
                         Amount           %          Amount           %          Amount           %
Net revenue             $ 378,632        100.0      $ 306,491        100.0      $ 313,350        100.0
Operating expenses
(income):
Corporate expenses         24,636         6.5          19,780         6.4          19,890         6.3
Station direct
operating expenses,
net of trade               84,743        22.4          73,829        24.1          70,674        22.6
Selling, general and
administrative
expenses                   92,899        24.5          85,387        27.9          81,001        25.8
Gain on asset
exchange                        -          -                -          -              (30 )        -
Loss on asset
disposal, net                 468         0.1             461         0.2             294         0.1
Trade and barter
expense                    20,841         5.5          21,270         6.9          19,602         6.3
Depreciation and
amortization               46,549        12.3          47,824        15.6          44,844        14.3
Amortization of
broadcast rights,
excluding barter            8,591         2.3           9,947         3.2           9,527         3.0
Income from
operations              $  99,905                   $  47,993                   $  67,548

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenue

Gross local advertising revenue was $190.2 million for the year ended December 31, 2012, compared to $181.6 million for the same period in 2011, an increase of $8.6 million, or 4.7%. The increase was primarily related to incremental advertising from our automotive customers and revenue from our acquired stations in December 2012 and during the second half of 2011 which more than offset the decrease associated with the termination of certain station affiliation agreements. Gross national advertising revenue was $76.1 million for the year ended December 31, 2012, compared to $65.7 million for the same period in 2011, an increase of $10.4 million, or 15.8%, primarily attributable to the stations acquired as well as changes in mix between our local and national advertising revenues. Our largest advertiser category, automotive, represented 24.2% and 21.1% of local and national advertising revenue for the year ended December 31, 2012 and 2011, respectively. Overall, this category increased by 24.9%, of which approximately 7.1% came from our acquired stations during the second half of 2011. The other categories representing our top five were fast food/restaurants, which decreased 4.5%, paid programming, which increased 4.3%, furniture, which increased 7.2%, and department/retail stores, which increased 3.3%.

Gross political advertising revenue was $46.3 million for the year ended December 31, 2012, compared to $6.3 million for the same period in 2011, an increase of $40.0 million, or 631.5%, as expected, due to 2012 being an election year.

Retransmission compensation was $60.9 million for the year ended December 31, 2012, compared to $37.4 million for the same period in 2011, an increase of $23.5 million, or 63.0%. The increase in retransmission compensation was primarily the result of contracts providing for higher rates per subscriber during the year. We also earned approximately $4.0 million in retransmission compensation from new stations acquired in December 2012 and during the second half of 2011.

eMedia revenue, representing web-based and mobile advertising revenue generated at the Company's stations, was $18.4 million for the year ended December 31, 2012, compared to $16.2 million for the same period in 2011, an increase of $2.2 million or 13.2%. The increase in eMedia revenue is primarily attributable to eMedia sales efforts and the incremental revenue from new stations acquired in December 2012 and during the second half of 2011.


Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, were $24.6 million for the year ended December 31, 2012, compared to $19.8 million for the same period in 2011, an increase of $4.8 million, or 24.6%. This was due to an increase in legal and professional fees associated with our acquisitions of $1.9 million and capital market activities of $0.4 million, increased bonus expense related to higher revenues in this political year of $1.3 million, increased payroll and related costs of $0.8 million, primarily resulting from 2012 and 2011 acquisitions, as well as $0.2 million incremental stock-based compensation expense due to stock option grants during the third quarter of 2012.

Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses (net of trade expense) were $177.6 million for the year ended December 31, 2012, compared to $159.2 million for the same period in 2011, an increase of $18.4 million, or 11.6%. The increase was primarily due to expenses of the acquired stations in December 2012 and during the second half of 2011, increase of $4.1 million in programming costs primarily due to the renewed network affiliation agreements entered into during 2012 and 2011, as well as increases of $0.8 million in amounts paid under station outsourcing agreements. These increases were partially offset by a decrease in employee health claims of $0.9 million and a $0.6 million decrease in provision for bad debts due to our improved accounts receivable collection practices.

Amortization of broadcast rights, excluding barter was $8.6 million for the year ended December 31, 2012, compared to $9.9 million for the same period in 2011, a decrease of $1.4 million, or 13.6%, of which $0.5 million is attributable to changes in sports programming on one of our stations and $1.6 million attributable to general programming mix changes among our stations. These were partially offset by the $0.7 million incremental amortization of broadcast rights of acquired stations in 2012 and 2011.

Amortization of intangible assets was $23.0 million for the year ended December . . .

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