NEXSTAR MEDIA GROUP, INC. (NXST) FY 2022 MD&A

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 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 interests in the consolidated VIEs in accordance with U.S. GAAP, we consolidate the financial position, results of operations and cash flows of these VIEs as if they were wholly-owned entities. 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 determinations of VIE consolidation under the related authoritative guidance. The following discussion of our financial position and results of operations includes the consolidated VIEs’ financial position and results of operations.

Executive Summary

2022 Highlights

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Achieved record $5.2 billion of net revenue for 2022, surpassing the $5.0 billion milestone for the first time, including a record $505.6 million of non-presidential election year political advertising revenue.

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Returned over $1.0 billion of capital to shareholders through repurchases of common stock of $880.7 million and dividends of $142.2 million, funded by cash on hand.

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Successfully renewed distribution agreements with over half our subscriber base.

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Successfully extended affiliation agreement with ABC to 2026.

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Acquired a 75% ownership interest in The CW Network for no consideration which acquisition was strategically important to support our CW-affiliated stations and to drive the overall growth of our national platform.

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Expanded news programming at NewsNation, America’s fastest growing cable news network, to 17 hours per weekday of national news, analysis, and talk.

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Launched FAST channels for The Hill and CTV/OTT apps for NewsNation on a variety of platforms.

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Deployed NEXTGEN TV (or ATSC 3.0) in an additional 20 markets to a total of 37 markets.

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Completed the $3.05 billion refinancing of near-term maturities while reducing interest expense.

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Net reduction in debt of $477.6 million, funded by cash on hand.

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Eliminated Nexstar’s Class B and Class C common stock via an amendment to Nexstar’s certificate of incorporation approved by Nexstar shareholders on June 13, 2022.

2022 Acquisition of The CW

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On September 30, 2022, Nexstar acquired a 75.0% ownership interest in The CW from the Sellers for no purchase consideration. Each of the Sellers retained a 12.5% ownership interest and will produce 12 original, scripted series for The CW primarily to air during the 2022/2023 broadcast season. The Sellers have granted Nexstar a call right and Nexstar has granted each of the Sellers a put right for such Seller’s ownership interest beginning in August 2024 and June 2026, respectively. The acquisition solidifies Nexstar’s revenue opportunities as the largest owner of The CW-affiliated stations, diversifies its content outside of news, improves its national advertising opportunities, establishes it as a participant in advertising video-on-demand services via The CW App and creates value by improving The CW’s ratings, revenue, and profitability. As a result of the acquisition, Nexstar recognized a gain on bargain purchase of $55.6 million representing the excess of the fair value of the net assets acquired over the $0 purchase consideration and the fair value of noncontrolling interests. For additional information on this acquisition, see Note 3, “Acquisitions and Dispositions” to our Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

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2022 Debt Transactions

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On June 21, 2022, Nexstar amended its credit agreement (also herein referred to as senior secured credit facility) which provided for a $2.425 billion Nexstar Term Loan A, due June 2027, and a $550.0 million Nexstar revolving credit facility, due June 2027, of which no amount was drawn as of December 31, 2022. During 2022, Nexstar repaid a total of $2.902 billion of its debt, including refinancing of certain term loans of $2.414 billion funded by the new Nexstar Term Loan A, $417.2 million repayments of term loans funded by cash on hand, and repurchased and cancelled $71.2 million (at a weighted average purchase price of 94.2%) of its senior unsecured notes.

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On June 21, 2022, Mission, an independently owned VIE consolidated by Nexstar, also amended its credit agreement (also herein referred to as senior secured credit facility) which provided for a $75.0 million Mission revolving credit facility, of which $61.5 million was drawn and the proceeds used to repay the outstanding Mission revolving loan of $61.5 million.

Overview of Operations

As of December 31, 2022, we owned, operated, programmed or provided sales and other services to 199 full power television stations and one AM radio station, including those owned by VIEs, in 116 markets in 39 states and the District of Columbia. The stations are affiliates of ABC, NBC, FOX, CBS, The CW, MNTV and other broadcast television networks. Through various local service agreements, we provided sales, programming and other services to 36 full power television stations owned by independent third parties, of which 35 full power television stations are VIEs that are consolidated into our financial statements. See Note 2 to our Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for a discussion of the local service agreements we have with these independent third parties. We also own NewsNation, a national cable news network, a recently acquired 75.0% ownership interest in The CW, the fifth major broadcast network in the U.S., two digital multicast networks, Antenna TV and Rewind TV, multicast network services provided to third parties, and a 31.3% ownership stake in TV Food Network. Our digital assets include more than 140 local websites, 280 mobile applications, 22 connected television applications, and six free-ad supported television channels representing products of our local television stations, The CW, NewsNation, The Hill, and BestReviews and a suite of advertising solutions. Together, our other digital properties attracted almost 100 million unique visitors in December 2022 according to Comscore.

The largest portion of operating revenue of our Company is derived from distribution revenue which relates to retransmission of Company stations’ signals and the carriage of our cable and broadcast networks by cable, satellite and other MVPDs and OVDs and, in the case of The CW, its local affiliates. For the year ended December 31, 2022, the Company’s distribution revenue represented 49.3% of total net revenue. MVPDs generally pay for retransmission rights on a rate per subscriber basis. The growth of this revenue stream was primarily due to increases in the subscriber rates paid by MVPDs resulting from contract renewals (retransmission consent and carriage agreements generally have a three-year term), scheduled annual escalation of rates per subscriber, and the establishment of distribution agreements with OVDs, typically via our network affiliation partner and paid to us net of our affiliation fees. Nexstar anticipates that retransmission fees will continue to increase until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.

We also generate revenue from core television advertising and digital advertising revenue. For the year ended December 31, 2022, the Company generated 33.0% of our net revenue from core advertising and 7.0% from digital advertising revenue. Core television and digital advertising is affected by a number of factors, including the economic conditions of the markets in which we operate, the demographic makeup of those markets, the marketing strategy we employ in each market and the health of the overall national advertising market. Most advertising contracts (other than national advertising contracts placed with our national networks at the beginning of the broadcast season) are short-term and generally run for a few weeks. Local advertising time is sold by each station’s local sales staff via advertising agencies and directly to local businesses. National core television advertising revenue is derived from advertisements placed through advertising agencies. While the majority of local spot revenue is placed by local agencies, some advertisers place their schedules directly with the local sales force, thereby eliminating the agency commission. Our stations, cable and broadcast networks have various agreements with national representative firms which provide sales representation for national or large regional accounts that advertise in several markets simultaneously. National representative commission rates vary within the industry and are governed by each agreement. In addition, we generate digital advertising revenue from the sale of advertising on third party sites and other local and national services.

In even years, we generate a substantial amount of revenue from political advertising. For the year ended December 31, 2022, the Company generated 9.7% of our net revenue from political advertising. Political advertising is affected by the number of competitive races there are and the location of the Company’s station in the relevant competitive markets, the amount of funds raised by candidates, PACs and others, the availability and pricing of television advertising inventory as well as the availability of alternative media. Because of the scale of Nexstar, we typically have a presence in the substantial majority of markets with competitive political races. All national revenue is derived from advertisements placed through advertising agencies pursuant to the agreements described above.

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Most of our stations have a network affiliation agreement pursuant to which the network provides programming to the station during specified time periods, including prime time, in exchange for affiliation fees paid to the networks, in most cases, and the right to sell a substantial majority of the advertising time during these broadcasts. Network affiliation fees have been increasing industry wide and we expect that they will continue to increase over the next several years.

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. Our majority owned broadcast network, The CW, acquires licenses to broadcast programs from affiliates of Paramount Global and Warner Bros. Discovery, among others.

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

We (excluding The CW) guarantee full payment of all obligations incurred under Mission’s senior secured credit facility in the event of its default. Mission is a guarantor of our senior secured credit facility, our 5.625% Notes, due July 2027 and our 4.75% Notes, due November 2028. 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. These option agreements (which expire on various dates between 2023 and 2033) are freely exercisable or assignable by us without consent or approval by Mission or its shareholders. We expect these option agreements to be renewed upon expiration.

We do not own the consolidated VIEs or their television stations. However, we are deemed under U.S. GAAP to have controlling financial interests for financial reporting purposes in these entities because of (i) the local service agreements we have with their stations, (ii) our (excluding The CW) guarantee of the obligations incurred under Mission’s senior secured credit facility, (iii) our power over significant activities affecting the VIEs’ economic performance, including budgeting for advertising revenue, advertising sales and, in some cases, hiring and firing of sales force personnel and (iv) purchase options granted by each consolidated VIE which permit us to acquire the assets and assume the liabilities of each of these VIEs’ stations, subject to FCC consent. In compliance with FCC regulations for all the parties, each of the consolidated VIEs maintains complete responsibility for and control over programming, finances and personnel for its stations.

Refer to Note 2 to our Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional information with respect to consolidated VIEs.

Regulatory Developments

As a television broadcaster, the Company is highly regulated, and its operations require that it retain or renew a variety of government approvals and comply with changing federal regulations. On April 1, 2021, the U.S. Supreme Court issued a decision that reversed a lower court of appeals ruling and upheld the FCC’s elimination or modification of certain of its media ownership rules in the agency’s 2010/2014 quadrennial review of those rules. Among the regulations eliminated in 2021 as a result of the Supreme Court ruling was a rule providing that a television station licensee which sells more than 15 percent of the weekly advertising inventory of another television station in the same market under a JSA is deemed to have an attributable ownership interest in that station, as well as a requirement that at least eight independently owned television stations remain in a local television market for a party to acquire a second station in that market. While these restrictions are no longer in effect, the FCC’s 2018 quadrennial media ownership review is currently pending and the 2022 quadrennial review has also commenced. An FCC proceeding is also pending to review the current national limit on television station ownership. The FCC could reinstitute its earlier restrictions or impose other limitations in these or any future reviews.

The FCC has repurposed a portion of the broadcast television spectrum for wireless broadband use. In an incentive auction which concluded in April 2017, certain television broadcasters accepted bids from the FCC to voluntarily relinquish their spectrum in exchange for consideration. Television stations that did not relinquish their spectrum were “repacked” into the frequency band still remaining for television broadcast use. The Company has received payment for eleven television stations that accepted bids and either moved to different channels or (in one case) discontinued operations. Seventy-four (74) full power stations owned by Nexstar and 17 full power stations owned by VIEs were assigned to new channels in the reduced post-auction television band. These stations have commenced operation on their new assigned channels and have ceased operating on their former channels. The Company is in the final stages of obtaining reimbursements for the costs of repacking these stations.

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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. 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 congressional and/or presidential elections occur and from advertising aired during the Olympic Games.

Historical Performance

Revenue

The following table sets forth the amounts of the Company’s principal types of revenue (dollars in millions) and each type of revenue as a percentage of total net revenue for the years ended December 31:

Results of Operations

The following table sets forth a summary of the Company’s operations for the years ended December 31 (dollars in millions), and each component of operating expense as a percentage of net revenue:

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The period-to-period comparability of our consolidated operating results is affected by acquisitions. For each quarter we present, our legacy business units include those business units that we owned or consolidated into our financial statements for the complete quarter in the current and prior years. For our annual and year to date presentations, we combine the legacy business unit amounts presented in each quarter.

Revenue

Core advertising revenue was $1,718.3 million for the year ended December 31, 2022 compared to $1,761.7 million for the same period in 2021, a decrease of $43.4 million, or 2.5%, primarily due to a weaker national advertising market, the absence of third quarter advertising revenue from the Olympics on our NBC affiliate stations and changes in the mix between our core and political advertising revenues of $70.1 million, partially offset by incremental revenue from our acquisition of The CW of $26.6 million. Key categories driving the decrease were direct response, insurance, gaming/sports betting, government services and radio/tv/cable/newspaper partially offset by increases in entertainment, home repair/manufacturing, drug stores/medication, travel, and attorneys. Automotive, our largest advertiser category, represented approximately 15.4% in 2022 and 15.5% in 2021 of our core advertising revenue for each of the years ended December 31, 2022 and 2021. Overall, automotive advertising revenues decreased by approximately 0.8% in 2022 compared to 2021, primarily due to the shortage in supply of chips and semiconductors which impacted the availability of automobiles for sale and the need by automotive dealers to advertise.

Political advertising revenue was $505.6 million for the year ended December 31, 2022 compared to $45.2 million for the same period in 2021, an increase of $460.4 million, as 2022 was a mid-term election year.

Distribution revenue was $2,571.3 million for the year ended December 31, 2022 compared to $2,472.9 million for the same period in 2021, an increase of $98.4 million, or 4.0%. The increase was primarily due to scheduled annual escalation of rates per subscriber, renewals of contracts in 2021 providing for higher rates per subscriber and incremental revenue from our acquisition of The CW of $17.2 million, partially offset by continued MVPD subscriber attrition, a few periods during the negotiation of new contracts with our MVPD partners where our partners’ stations were not available and a settlement of a dispute in connection with a new contract with one of our distributors. We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.

Digital revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $364.6 million for the year ended December 31, 2022 compared to $322.6 million for the same period in 2021, an increase of $42.0 million, or 13.0%, primarily due to growth in our television stations digital advertising and services revenue, incremental revenue from our acquisitions of The CW in September 2022 of $17.0 million and a digital business we acquired in the third quarter of 2021 of $22.1 million, offset by weakness in the national digital advertising market and ecommerce.

Operating Expenses

Direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses were $2,908.3 million for the year ended December 31, 2022 compared to $2,710.8 million for the same period in 2021, an increase of $197.5 million, or 7.3%. This was primarily due to an increase in cost related to incremental operating expenses from our acquisitions of The CW in September 2022 of $70.2 million and a digital business we acquired in the third quarter of 2021 of $16.1 million, an increase in variable costs associated with the increase in net revenue, an increase in station programming costs due to network affiliation renewals and annual increases in network affiliation costs, increased promotion costs, partially offset by a reversal of an accrual in connection with a settlement of a dispute in connection with a new contract with one of our distributors and some administrative savings, primarily related to healthcare.

Corporate expenses, related to costs associated with the centralized management of our stations, were $198.4 million for the year ended December 31, 2022 compared to $175.8 million for the same period in 2021, an increase of $22.6 million, or 12.9% primarily due to an increase in stock-based compensation of $14.9 million.

Depreciation and amortization expense were $662.1 million for the year ended December 31, 2022 compared to $588.6 million for the same period in 2021, an increase of $73.5 million, or 12.5%. Depreciation and amortization expense consists of the following:

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Amortization of broadcast rights was $192.9 million for the year ended December 31, 2022 compared to $121.1 million for the same period in 2021, an increase of $71.8 million, or 59.3%. The increase was primarily due to incremental amortization from our acquisition of The CW of $89.8 million, partially offset by a reduction in NewsNation’s costs of $9.4 million as it continues to shift its focus from syndicated programming to national news programs.

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Amortization of intangible assets was $309.3 million for the year ended December 31, 2022 compared to $300.9 million for the same period in 2021, an increase of $8.4 million, or 2.8% (no significant change).

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Depreciation of property and equipment was $159.9 million for the year ended December 31, 2022 compared to $166.6 million for the same period in 2021, a decrease of $6.7 million, or 4.0% (no significant change).

In the fourth quarter of 2022, we recorded a $96.1 million goodwill and intangible assets impairment on our product review and recommendation platform reporting unit. The Company’s assessment indicated that the reporting unit’s carrying amount exceeded its fair value, and therefore an impairment loss was identified.

In 2022 and 2021, certain real estate properties located in Chicago were classified as held for sale. Due to designations as held for sale assets, the properties’ carrying amounts were written down to their estimated fair value, less estimated cost to sell resulting to the Company’s recognition of impairment charges of $36.8 million and $23.0 million in the fourth quarter of 2022 and 2021, respectively.

Gain on bargain purchase

Gain on bargain purchase of $55.6 million for the year ended December 31, 2022 pertains to our acquisition of The CW representing the excess of the fair value of the net assets acquired over the $0 purchase consideration and the fair value of noncontrolling interests. For additional information on this acquisition, see Note 3, “Acquisitions and Dispositions” to our Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

Income from equity method investments, net

Income from equity method investments, net was $153.4 million for the year ended December 31, 2022, compared to $124.6 million for the same period in 2021, an increase of $28.8 million, primarily due to a decrease in the amortization of basis difference associated with our investment in TV Food Network of $55.7 million, partially offset by a lower equity in TV Food Network’s net income of $26.7 million. For additional information on basis difference in our investment in TV Food Network, refer to Note 6 to our Consolidated Financial Statements.

Interest Expense, net

Interest expense, net was $336.6 million for the year ended December 31, 2022 compared to $282.7 million for the same period in 2021, an increase of $53.9 million, or 19.1%, primarily due to increases in interest rates in the Company’s outstanding loans under its senior secured credit facilities, partially offset by decreases in interest expense from debt repayments and lower interest rates obtained in connection with the refinancing of certain of our term loans in June 2022. Interest rates on outstanding loans under the Company’s senior secured credit facilities ranged from 5.86% to 6.89% as of December 31, 2022, compared to interest rates ranging from 1.60% to 2.60% as of December 31, 2021. These interest rates were a mixture of SOFR plus CSA, or credit spread adjustment used to account for the difference between SOFR and LIBOR, plus applicable margin and U.S. LIBOR plus applicable margin in 2022 compared to U.S. LIBOR plus applicable margin only in 2021.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $2.9 million for the year ended December 31, 2022 compared to $3.2 million for the same period in 2021, a decrease of $0.3 million (no significant change).

Pension and other postretirement plans credit, net

Pension and other postretirement plans credit, net was $43.1 million for the year ended December 31, 2022 compared to $80.9 million for the same period in 2021, a decrease of $37.8 million, primarily due to lower estimated expected return on plan assets of $18.6 million, higher estimated interest cost of $6.7 million and a $12.5 million settlement gain from the purchase of an annuity contract related to certain participants of a qualified pension plan during the fourth quarter of 2021.

Income Taxes

Income tax expense was $273.6 million for the year ended December 31, 2022 compared to an income tax expense of $262.9 million for the same period in 2021, an increase of $10.7 million. The effective tax rates during the years ended December 31, 2022 and 2021 were 22.5% and 24.1%, respectively. The decrease in the effective tax rate is primarily related to changes in the valuation allowance resulted in an incremental income tax benefit of $23.8 million, or 2.1% decrease to the effective tax rate in 2022. The gain on bargain purchase arising from the acquisition of The CW resulted in a 1.1% decrease to the effective tax rate.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The period-to-period comparability of our consolidated operating results is affected by acquisitions. For each quarter we present, our legacy business units include those business units that we owned or consolidated into our financial statements for the complete quarter in the current and prior years. For our annual and year to date presentations, we combine the legacy business unit amounts presented in each quarter.

Revenue

Core advertising revenue was $1,761.7 million for the year ended December 31, 2021 compared to $1,571.1 million for the same period in 2020, an increase of $190.6 million, or 12.1%. The increase was primarily due to an increase in our legacy stations’ core advertising revenue of $141.0 million, as a result of recovery from the adverse effects of the COVID-19 pandemic and growth in new business. The television stations acquired in 2020 also increased our advertising revenue by $61.9 million, partially offset by a decrease in advertising revenue from station divestitures of $12.3 million. Our largest advertiser category, automotive, represented approximately 16% and 18% of our core advertising revenue for the years ended December 31, 2021 and 2020, respectively. Overall, including past results of our newly acquired stations, automotive revenues decreased by approximately 5% in 2021 compared to 2020, primarily due to the current shortage in supply of chips and semiconductors, partially offset by the recovery from the effects of the COVID-19 pandemic. The other categories representing our top five largest categories by revenue increased in 2021, led by attorneys and followed by medical/healthcare, gaming/sports betting and services. While we are encouraged by the positive trends we saw during 2021, to the extent that the pandemic continues to have a negative impact on the U.S. economy, our results will be affected.

Political advertising revenue was $45.2 million for the year ended December 31, 2021 compared to $507.6 million for the same period in 2020, a decrease of $462.4 million, as 2021 was not a nationwide election year.

Distribution revenue was $2,472.9 million for the year ended December 31, 2021 compared to $2,152.6 million for the same period in 2020, an increase of $320.3 million, or 14.9%. Our legacy stations’ revenue increased by $222.0 million primarily due to the combined effect of scheduled annual escalation of rates per subscriber and renewals of contracts providing for higher rates per subscriber. Additionally, our stations acquired in 2020 increased our revenue in 2021 by $113.5 million, partially offset by a decrease in revenue from our station divestitures of $15.3 million. We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.

Digital revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $322.6 million for the year ended December 31, 2021 compared to $223.4 million for the same period in 2020, an increase of $99.2 million, or 44.4%. This increase was primarily due to incremental revenue from the digital businesses and television stations we acquired in 2021 and 2020 of $70.3 million, and a net increase in revenue from our legacy stations and other digital businesses of $34.6 million.

Operating Expenses

Direct operating expenses, consisting primarily of news, engineering, programming and selling, general and administrative expenses were $2,710.8 million for the year ended December 31, 2021 compared to $2,449.6 million for the same period in 2020, an increase of $261.2 million, or 10.7%. This increase was primarily due to expenses associated with our television stations and digital businesses we acquired in 2021 and 2020 of $177.8 million, partially offset by station divestitures of $22.6 million. In addition, our legacy stations’ programming costs increased by $56.3 million, primarily due to network affiliation renewals and annual increases in our network affiliation costs. Our legacy stations’ and business units’ other operating expenses increased by $50.1 million, primarily due to recovery from the COVID-19 pandemic, an increase in sales and promotional costs to drive revenue and an increase in NewsNation’s news related operating costs as it continues to shift its focus from syndicated programming to national newscast programs.

Corporate expenses, related to costs associated with the centralized management of our stations, were $175.8 million for the year ended December 31, 2021 compared to $183.0 million for the same period in 2020, a decrease of $7.2 million, or 3.9%.

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Depreciation and amortization expense were $588.6 million for the year ended December 31, 2021 compared to $564.9 million for the same period in 2020, an increase of $23.7 million, or 4.2%. Depreciation and amortization expense consists of the following:

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Amortization of broadcast rights was $121.1 million for the year ended December 31, 2021 compared to $137.5 million for the same period in 2020, a decrease of $16.4 million, or 11.9%. The decrease was primarily due to the reduction of NewsNation’s costs by $17.5 million as it continues to shift its focus from syndicated programming to national news programs.

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Amortization of intangible assets was $300.9 million for the year ended December 31, 2021 compared to $279.7 million for the same period in 2020, an increase of $21.2 million, or 7.6%. This increase was primarily due to incremental amortization from business acquisitions.

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Depreciation of property and equipment was $166.6 million for the year ended December 31, 2021 compared to $147.7 million for the same period in 2020, an increase of $18.9 million, or 12.8%. The increase was primarily due to newly capitalized assets and incremental depreciation from business acquisitions.

Certain of the Company’s stations were repacked in connection with the FCC’s process of repurposing a portion of the broadcast television spectrum for wireless broadband use. These stations have vacated their former channels and spent costs, mainly capital expenditures, to construct and license the necessary technical modifications to permanently operate on their newly assigned channels. Subject to fund limitations, the FCC reimburses television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. In 2021 and 2020, the Company received $19.7 million and $57.3 million, respectively, in reimbursements from the FCC which it recognized as operating income. The Company is in the final stages of requesting and receiving reimbursements for the costs of repacking these stations, as the FCC is now closing out its process for such reimbursements.

In April 2020, we completed a station’s conversion to a VHF channel representing our final relinquishment of spectrum pursuant to the FCC’s incentive auction conducted in 2016-2017. Accordingly, the associated spectrum asset with a carrying amount of $67.2 million and liability to surrender spectrum of $78.0 million were derecognized, resulting in a non-cash gain on relinquishment of spectrum of $10.8 million.

In the fourth quarter of 2021, certain non-depreciable real estate property located in Chicago was classified as held for sale due to the expected consummation of a contract to sell within one year. As of December 31, 2021, the property’s previous carrying amount of $68.3 million was written down to its estimated fair value, less estimated cost to sell, of $45.3 million resulting in a $23.0 million impairment charge.

Income from equity method investments, net

Income from equity method investments, net was $124.6 million for the year ended December 31, 2021, compared to $70.2 million for the same period in 2020, an increase of $54.4 million, primarily attributable to higher equity in TV Food Network’s net income, net of the amortization of basis difference of $55.1 million.

Interest Expense, net

Interest expense, net was $282.7 million for the year ended December 31, 2021 compared to $335.3 million for the same period in 2020, a decrease of $52.6 million, or 15.7%. The decrease was primarily due to the combined effect of (i) a reduction in the outstanding balance of debt, (ii) reductions in LIBOR and (iii) a reduction in the Applicable Margin for the portion of certain interest rates that is based on the consolidated first lien net leverage ratio of the Company which was lower.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $3.2 million for the year ended December 31, 2021 compared to $50.7 million for the same period in 2020, a decrease of $47.5 million. In 2021, we made $280.0 million in prepayments on our term loan B resulting in recognition of loss of $3.2 million. In 2020, we redeemed our $900.0 million 5.625% Notes due 2024 and prepaid $1.0 billion of our outstanding term loans. These transactions resulted in a premium paid on bond redemption of $25.3 million and a write-off of unamortized debt discount/premiums and debt financing costs of $25.7 million associated with these extinguished debt obligations.

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Pension and other postretirement plans credit, net

Pension and other postretirement plans credit, net was $80.9 million for the year ended December 31, 2021 compared to $46.0 million for the same period in 2020, an increase of $34.9 million, primarily attributable to an increase in expected return on pension plan assets and an estimated reduction in interest costs on projected benefit obligations, and a $12.5 million settlement gain from the purchase of an annuity contract related to certain participants of a qualified pension plan during the fourth quarter of 2021.

Income Taxes

Income tax expense was $262.9 million for the year ended December 31, 2021 compared to an income tax expense of $296.5 million for the same period in 2020, a decrease of $33.6 million. The effective tax rates during the years ended December 31, 2021 and 2020 were 24.1% and 26.9%, respectively. The decrease in the effective rate was driven by an increased deduction for excess benefits related to stock-based compensation, a decrease in non-deductible goodwill on divestitures, and a release of certain federal and state reserves. The increase in excess benefits deduction resulted in a $19.6 million tax benefit or a decrease of 1.8% to the effective rate. The decrease in non-deductible goodwill resulted in a tax benefit of $8.3 million or a decrease of 0.8% to the effective tax rate. Additionally, the release of $13.3 million of certain federal and state reserves resulted in a 1.2% reduction to the effective rate. These decreases to the effective tax rate were offset by an increase in the valuation allowance of $18.9 million resulting in a 1.3% increase to the effective rate.

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Liquidity and Capital Resources

The Company is leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to repay or refinance its debt will depend on, among other things, financial, business, market, competitive and other conditions, many of which are beyond the Company’s control. The Company believes it has sufficient unrestricted cash on hand, positive working capital, and availability to access additional cash under its revolving credit facilities (with a maturity date of June 2027) to meet its business operating requirements, its capital expenditures and to continue to service its debt for at least the next 12 months as of the filing date of this Annual Report on Form 10-K. As of December 31, 2022, the Company was in compliance with the financial covenants contained in the amended credit agreements governing its senior secured credit facilities.

Any future adverse economic conditions, including those resulting from the COVID-19 pandemic, heightened and sustained inflation and higher interest rates, could adversely affect the Company’s future operating results, cash flows and financial condition.

Cash Flow Summary

The following tables present the Company’s total operating, investing and financing activity cash flows for the three years ended December 31 (in millions):

(1)
In 2022, 2021 and 2020, the investing activities included total capital expenditures of $157.3 million, $150.7 million and $217.0 million, respectively, of which $0.8 million, $10.0 million and $54.7 million, respectively, were reimbursed from the FCC in connection with the station repack. In 2020, $4.9 million of such capital expenditures were also funded by the incentive auction proceeds received from the FCC in 2017.

(2)
In 2022, income taxes paid, net of refunds, includes $48.0 million in tax payments related to various sales of real estate properties. In 2020, income taxes paid, net of refunds, includes $82.7 million in tax payments related to various sales of stations and cash consideration received to settle a litigation.

Cash Flows – Operating Activities

Net cash provided by operating activities increased by $188.2 million during the year ended December 31, 2022 compared to the same period in 2021. This was primarily due to an increase in operating income (excluding non-cash transactions) of $356.9 million, sources of cash resulting from timing of accounts receivable collections of $108.2 million, and an increase in distributions from our equity investment in TV Food Network of $10.1 million. These increases were partially offset by an increase in payments for broadcast rights of $76.9 million, use of cash from timing of payments to our vendors of $107.0 million, higher interest payments of $56.9 million, and higher tax payments of $50.0 million and other items. The increase in payments for broadcast rights was due to incremental payments from our acquisition of The CW of $118.5 million, partially offset by a decrease in payments for our syndicated programming of $41.6 million.

Cash paid for interest increased primarily due to increases in the effective interest rates in the Company’s outstanding floating rate loans under its senior secured credit facilities due to the increase in SOFR and LIBOR, partially offset by decreases in interest expense from debt repayments and lower interest rates obtained in connection with the refinancing of certain of our term loans in June 2022. The increase in tax payments was primarily due to the sale of certain real estate properties in 2022 resulting in tax payments of $48.0 million.

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Net cash provided by operating activities decreased by $39.3 million during the year ended December 31, 2021 compared to the same period in 2020. This was primarily due to a decrease in operating income (excluding non-cash transactions) of $136.3 million and uses of cash resulting from timing of accounts receivable collections of $102.5 million. These decreases were partially offset by lower interest payments of $51.1 million, timing of payments to our vendors of $46.8 million, collection of copyright royalty receivables of $35.0 million, lower payments for broadcast rights of $26.2 million, lower tax payments of $31.9 million and an increase in distributions from our equity investment in TV Food Network of $15.8 million.

Cash paid for interest decreased by $51.1 million during the year ended December 31, 2021 compared to the same period in 2020, primarily due to a reduction in outstanding principal debt balance due to prepayments and scheduled repayments of term loans and reductions in LIBOR and a portion of certain interest rates that is based on the Company’s consolidated first lien net leverage ratio.

Cash Flows – Investing Activities

Net cash provided by investing activities during the year ended December 31, 2022 was $125.2 million. Net cash used in investing activities during the years ended December 31, 2021 and 2020 was $232.1 million and $39.8 million, respectively.

In 2022, the Company received proceeds from the sale of certain real estate properties of $241.8 million, received a deposit associated with a proposed sale of real estate property of $10.0 million and recorded cash acquired from The CW acquisition of $28.9 million, partially offset by capital expenditures of $157.3 million.

In 2021, we spent a total of $150.7 million in capital expenditures and $138.4 million to acquire television stations, a digital business and certain license assets. These decreases were partially offset by the proceeds from the sale of stations and business units and asset disposals of $20.1 million, reimbursements from the FCC related to station repack of $19.7 million and deposits received associated with the sale of real estate assets of $13.5 million.

In 2020, we acquired seven television stations, certain non-license assets, and a product recommendations company for total cash consideration payments of $386.4 million. Our capital expenditures for the year ended December 31, 2020 were $217.0 million, including $54.7 million related to station repack. These uses of cash were partially offset by the proceeds from the disposal of two television stations and our sports betting information website business for $349.9 million and $12.9 million in cash, respectively, and reimbursements received from the FCC related to station repack of $57.3 million. We also received $98.0 million of cash proceeds from the settlement of litigation between Sinclair and Tribune and Mission collected a loan receivable of $49.0 million from Marshall Broadcasting Group, Inc.

Cash Flows – Financing Activities

Net cash used in financing activities for the years ended December 31, 2022, 2021 and 2020 was $1,515.0 million, $945.5 million and $1,293.8 million, respectively.

In 2022, we received $2,420.2 million (net of $4.8 million discount) from our new Term Loan A, due June 2027 and utilized $2,414.3 million to repay outstanding principal balances of our Term Loan A, due October 2023, Term Loan A, due September 2024, Term Loan B, due January 2024 and a portion of Term Loan B, due September 2026. Nexstar prepaid an additional $333.0 million in principal balance under its Term Loan B, repaid scheduled principal maturities of $84.2 million of its term loans, and repurchased and cancelled $71.2 million of its senior unsecured notes all funded by cash on hand. We paid dividends to our common stockholders of $142.2 million ($0.90 per share per quarter), repurchased 5.1 million shares of our common stock for total payments of $880.7 million, paid for software obligations of $16.3 million, paid contingent consideration in connection with a past acquisition of $13.9 million, and paid cash for taxes in exchange for shares of common stock withheld of $12.6 million resulting from net share settlements of certain stock-based compensation. These decreases were partially offset by contribution from noncontrolling interests of $30.4 million. Mission also borrowed $61.5 million in a revolving loan, due June 2027 and utilized the proceeds to repay all of its outstanding borrowings under its revolving loan, due October 2023 of $61.5 million.

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In 2021, we prepaid a portion of the outstanding principal balance of our Term Loan B, due January 2024 of $280.0 million and made scheduled principal payments on our Term Loan A, due September 2024 of $21.4 million, paid dividends to our common stockholders of $118.2 million ($0.70 per share during each quarter), repurchased common shares of $536.8 million, paid cash for taxes in exchange for shares of common stock withheld of $10.9 million resulting from net share settlements of certain stock-based compensation, and paid finance lease and software obligations of $18.0 million. These outflows were partially offset by the proceeds from the exercise of stock options during the year amounting to $8.2 million. Mission also received $298.5 million (net of $1.5 million discount) from its new Term Loan B, due June 2028 and utilized $268.0 million to repay a portion of its revolving loans. We also borrowed $20.0 million under our revolving credit facilities which was repaid in full in 2021.

In 2020, the Company made payments on the outstanding principal balance of its term loans of $1.284 billion (including $980.0 million in Nexstar debt prepayments, Mission’s full repayment of its term loan B of $226.2 million and Shield Media, LLC’s full repayment of its term loan A of $20.7 million). Also, we redeemed our $900.0 million 5.625% Notes due 2024 and paid a $25.1 million premium on such redemption. Additionally, we repurchased shares of our common stock for a total price of $281.9 million, paid dividends to our common stockholders of $101.0 million ($0.56 per share during each quarter), paid deferred financing costs of $10.7 million associated with our new $1.0 billion 4.75% Notes, due November 2028, paid cash for taxes in exchange for shares of common stock withheld of $6.8 million resulting from net share settlements of certain stock-based compensation and paid finance lease and software obligations of $14.5 million. These decreases were offset by the proceeds from the issuance of our new $1.0 billion senior unsecured notes issued at par and from Mission’s drawing from its revolving credit facility of $327.0 million.

Subsequent Investing and Financing Activities

From January 1, 2023 to February 27, 2023, we repurchased 171,208 shares of our common stock for $32.9 million, funded by cash on hand. As of the date of filing this Annual Report on Form 10-K, the total remaining available amount under the existing and new share repurchase authorizations was $1.225 billion.

On January 26, 2023, our board of directors approved a 50% increase in the quarterly cash dividend to $1.35 per share of our common stock beginning with the dividend declared for the first quarter of 2023. The dividend was paid on February 24, 2023 to stockholders of record on February 10, 2023.

Our senior secured credit facilities and the indentures governing our existing notes may limit the amount of dividends we may pay to stockholders and share repurchases we may make over the term of the agreement.

Long-term debt

As of December 31, 2022, the Company had total outstanding debt of $6.952 billion, net of unamortized financing costs, discounts and premium, which represented 71.7% of the Company’s combined capitalization. The Company’s high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.

______________________________________________

(1)
Based on the covenant calculations as of December 31, 2022, all of the $529.1 million (net of outstanding standby letters of credit of $20.9 million) and $13.5 million unused revolving loan commitments under the respective Nexstar and Mission senior secured credit facilities were available for borrowing.

We (excluding The CW) guarantee full payment of all obligations incurred under Mission’s senior secured credit facility in the event of its default. Mission is a guarantor of our senior secured credit facility, our 5.625% Notes, due July 2027 and our 4.75% Notes, due November 2028.

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We make semiannual interest payments on the 5.625% Notes, due July 2027 on January 15 and July 15 of each year. We make semiannual interest payments on our 4.75% Notes, due November 2028 on May 1 and November 1 of each year. Interest payments on our and Mission’s senior secured credit facilities are generally paid every one to three months and are payable based on the type of interest rate selected.

The terms of our and Mission’s senior secured credit facilities, as well as the indentures governing our 5.625% Notes, due July 2027 and 4.75% Notes, due November 2028, limit, but do not prohibit us or Mission, from incurring substantial amounts of additional debt in the future.

The Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt. However, a downgrade in the Company’s credit rating could adversely affect its ability to renew the existing credit facilities, obtain access to new credit facilities or otherwise issue debt in the future and could increase the cost of such debt.

The Company’s ability to access funds under its senior secured credit facilities depends, in part, on its compliance with certain financial covenants. Any additional drawings under the senior secured credit facilities will reduce the Company’s future borrowing capacity and the amount of total unused revolving loan commitments. Any adverse impact of the COVID-19 pandemic or any future adverse economic conditions, including those resulting from heightened and sustained inflation and higher interest rates could adversely affect our future operating results and cash flows and may cause us to seek alternative sources of funding, including accessing capital markets, subject to market conditions. Such alternative sources of funding may not be available on commercially reasonable terms or at all.

Our credit agreement contains a covenant which requires us to comply with a maximum consolidated first lien net leverage ratio of 4.25 to 1.00. The financial covenant, which is formally calculated on a quarterly basis, is based on the Company’s combined results. The Mission amended credit agreement does not contain financial covenant ratio requirements but does provide for default in the event we do not comply with all covenants contained in our credit agreement. As of December 31, 2022, we were in compliance with our financial covenant. We believe the Company will be able to maintain compliance with all covenants contained in the credit agreements governing its senior secured facilities and the indentures governing Nexstar’s 5.625% Notes, due July 2027 and Nexstar’s 4.75% Notes, due November 2028 for a period of at least the next 12 months from December 31, 2022.

Off-Balance Sheet Arrangements

As of December 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or VIEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. All of our arrangements with our VIEs in which we are the primary beneficiary are on-balance sheet arrangements. Our variable interests in other entities are obtained through local service agreements, which have valid business purposes and transfer certain station activities from the station owners to us. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

As of December 31, 2022, we have outstanding standby letters of credit with various financial institutions amounting to $20.2 million, of which $16.7 million was in support of the worker’s compensation insurance program. The outstanding balance of standby letters of credit is deducted against our unused revolving loan commitment under our senior secured credit facility and would not be available for withdrawal.

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Material Cash Requirements

The Company is a party to many contractual obligations involving commitments to make payments to third parties. Certain contractual obligations are recorded on the Consolidated Balance Sheet as of December 31, 2022, while others are considered future commitments. The following summarizes the Company’s contractual obligations as of December 31, 2022, and the effect such obligations are expected to have on the Company’s short-term and long-term liquidity and capital resource needs (in millions):

(1)
Future minimum payments for license agreements for which the license period has begun and liabilities have been recorded.

(2)
As of December 31, 2022, we had $29.8 million of unrecognized tax benefits, inclusive of interest and certain deduction benefits. This liability represents an estimate of tax positions that the Company has taken in its tax returns, which may ultimately not be sustained upon examination by the tax authorities. The resolution of these tax positions may not require cash settlement due to the existence of federal and state NOLs. As such, our contractual obligations table above excludes this liability.

(3)
As of December 31, 2022, we had $216.8 million and $21.3 million of funding obligations with respect to our pension benefit plans and other postretirement benefit plans, respectively, which are not included in the table above. See Note 10 to our Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information regarding our funding obligations for these benefit plans.

(4)
Estimated interest payments due as if all debt outstanding as of December 31, 2022 remained outstanding until maturity, based on interest rates in effect at December 31, 2022.

(5)
Includes the employment contracts for all corporate executive employees and general managers of our stations and entities. We expect our contracts will be renewed or replaced with similar agreements upon their expiration. Amounts included in the table above assume that contracts are not terminated prior to their expiration.

(6)
Future minimum payments for license agreements for which the license period has not commenced and no liability has been recorded.

Issuer and Guarantor Summarized Financial Information

Nexstar Media Inc. (the “Issuer”) is the issuer of 5.625% Notes, due July 2027 and 4.75% Notes, due November 2028. These notes are fully and unconditionally guaranteed, jointly and severally, by Nexstar Media Group, Inc. (“Parent”) and Mission (a consolidated VIE) and the Subsidiary Guarantors (as defined below). The Issuer, Subsidiary Guarantors, Parent and Mission are collectively referred to as the “Obligor Group” for the 5.625% Notes, due July 2027 and 4.75% Notes, due November 2028. “Subsidiary Guarantors” refers to certain of the Issuer’s restricted subsidiaries (excluding The CW) that guarantee these notes. The guarantees of the notes are subject to release in limited circumstances upon the occurrence of certain customary conditions set forth in the indentures governing the 5.625% Notes, due July 2027 and the 4.75% Notes, due November 2028. The 5.625% Notes, due July 2027 and 4.75% Notes, due November 2028 are not registered with the SEC.

The following combined summarized financial information is presented for the Obligor Group after elimination of intercompany transactions between Parent, Issuer, Subsidiary Guarantors and Mission in the Obligor Group and amounts related to investments in any subsidiary that is a non-guarantor. This information is not intended to present the financial position or results of operations of the consolidated group of companies in accordance with U.S. GAAP.

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Summarized Balance Sheet Information for the Obligor Group as of December 31 (in millions):

(1)
Excludes the assets and liabilities of The CW as it is not a guarantor of the 4.75% Notes due November 2028 and 5.625% Notes due July 2027. On September 30, 2022, Nexstar acquired a 75.0% ownership interest in The CW (see Note 3, “Acquisitions and Dispositions” to our Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional information).

(2)
Excludes Issuer’s equity investments of $1,119.0 million and $1,218.8 million as of December 31, 2022 and 2021, respectively, in unconsolidated investees. These unconsolidated investees do not guarantee the 4.75% Notes due November 2028 and 5.625% Notes due July 2027. For additional information on equity investments, refer to Note 6 to our Consolidated Financial Statements.

Summarized Statements of Operations Information for the Obligor Group (in millions):

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Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and reported amounts of revenue and expenses during the period. On an ongoing basis, we evaluate our estimates, including those related to business acquisitions, goodwill, indefinite-lived intangible assets, definite-lived intangible assets and other long-lived assets, equity investments, distribution revenue, pension and postretirement benefit plans and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

For an overview of our significant accounting policies, we refer you to Note 2 to our Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report on Form 10-K. We believe the following critical accounting policies are those that are the most important to the presentation of our Consolidated Financial Statements, affect our more significant estimates and assumptions, and require the most subjective or complex judgments by management.

Consolidation of Variable Interest Entities

We regularly evaluate our local service agreements and other arrangements where we may have variable interests to determine whether we are the primary beneficiary of a VIE. Under U.S. GAAP, a company must consolidate an entity when it has a “controlling financial interest” resulting from ownership of a majority of the entity’s voting rights. Accounting rules expanded the definition of controlling financial interest to include factors other than equity ownership and voting rights.

In applying accounting and disclosure requirements, we must base our decision to consolidate an entity on quantitative and qualitative factors that indicate whether or not we have the power to direct the activities of the entity that most significantly affect its economic performance and whether or not we have the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Our evaluation of the “power” and “economics” model must be an ongoing process and may alter as facts and circumstances change.

Mission and the other consolidated VIEs are included in our Consolidated Financial Statements because we are deemed to have controlling financial interests in these entities as VIEs for financial reporting purposes as a result of (i) local service agreements we have with the stations they own, (ii) Nexstar’s (excluding The CW) guarantee of the obligations incurred under Mission’s senior secured credit facility, (iii) our power over significant activities affecting these entities’ economic performance, including budgeting for advertising revenue, advertising sales and, in some cases, hiring and firing of sales force personnel and (iv) purchase options granted by each consolidated VIE which permit Nexstar to acquire the assets and assume the liabilities of all of these VIEs’ stations at any time, subject to FCC consent. These purchase options are freely exercisable or assignable by Nexstar without consent or approval by the VIEs. These option agreements expire on various dates between 2023 and 2033. We expect to renew these option agreements upon expiration. Therefore, these VIEs are consolidated into these financial statements.

Valuation of Goodwill and Intangible Assets

Intangible assets represented $8.305 billion, or 65.5%, of our total assets as of December 31, 2022. Intangible assets consist primarily of goodwill, indefinite-lived intangible assets (such as FCC licenses), and definite-lived intangible assets (such as network affiliation agreements).

The purchase prices of acquired businesses are allocated to the assets and liabilities acquired at estimated fair values at the date of acquisition using various valuation techniques, including discounted projected cash flows, the replacement cost approach and other income, market or cost approaches.

The estimated fair value of an FCC license acquired in a business combination is calculated using a discounted projected cash flow model referred to as the Greenfield Method. The Greenfield Method attempts to isolate the income that is attributable to the license alone. This approach is based upon modeling a hypothetical start-up station and building it up to a normalized operation that, by design, lacks an affiliation with a network (commonly known as an independent station), lacks inherent goodwill and whose other assets have essentially been added as part of the build-up process. The Greenfield Method assumes annual cash flows over a projection period model. Inputs to this model include, but are not limited to, (i) a four-year build-up period for a start-up station to reach a normalized state of operations, (ii) television market long-term revenue growth rate over a projection period, (iii) estimated market revenue share for a typical market participant without a network affiliation, (iv) estimated profit margins based on industry data, (v) capital expenditures based on the size of market and the type of station being constructed, (vi) estimated tax rates in the appropriate jurisdiction, and (vii) an estimated discount rate using a weighted average cost of capital analysis. The Greenfield Method also includes an estimated terminal value by discounting an estimated annual cash flow with an estimated long-term growth rate.

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The assumptions used in estimating the fair value of a network affiliation agreement acquired in a business combination are similar to those used in the valuation of an FCC license. The Greenfield Method is also utilized in the valuation of network affiliation agreements except that the estimated market revenue share, estimated profit margins, capital expenditures and other assumptions reflect a market participant premium based on the programming of a network affiliate relative to an independent station. This approach would result in an estimated collective fair value of the FCC license and a network affiliation agreement. The excess of the estimated fair value in this model over the estimated value of an FCC license of an independent station under the Greenfield Method represents the estimated fair value of a network affiliation agreement.

Goodwill represents the excess of the purchase price of a business over the fair value of the net assets acquired.

For purposes of goodwill impairment tests, the Company has one aggregated television stations reporting unit, because of the stations’ similar economic characteristics, one cable network reporting unit and two digital business reporting units. The Company’s impairment review for FCC licenses is performed at the television station market level.

We test our goodwill and FCC licenses in our fourth quarter each year, or more frequently whenever events or changes in circumstances indicate that such assets might be impaired. We first assess the qualitative factors to determine the likelihood of our goodwill and FCC licenses being impaired. Our qualitative impairment test includes, but is not limited to, assessing the changes in macroeconomic conditions, regulatory environment, industry and market conditions, and the financial performance versus budget of the reporting units, as well as any other events or circumstances specific to the reporting unit or the FCC licenses. If it is more likely than not that the fair value of a reporting unit or an FCC license is greater than its respective carrying amount, no further testing will be required. Otherwise, we will apply the quantitative impairment test method.

The quantitative impairment test for goodwill is performed by comparing the fair value of a reporting unit with its carrying amount. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The quantitative impairment test for FCC licenses consists of a market-by-market comparison of the carrying amounts of FCC licenses with their fair values, using the Greenfield Method of discounted cash flow analysis. An impairment is recorded when the carrying value of an FCC license exceeds its fair value.

We test our definite-lived intangible assets and other long-lived assets to be held and used for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable, relying on certain factors including operating results, business plans, economic projections and anticipated future cash flows. The carrying value of a long-lived asset or asset group is considered impaired when the projected future undiscounted cash flows to be generated from the asset or asset group over its remaining life, or primary asset’s life, plus proceeds received from its eventual disposition are less than its carrying value. The Company measures impairment based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset or asset group. The fair value is determined primarily by using the projected future cash flows discounted at a rate commensurate with the risk involved as well as market valuations.

In the fourth quarter of 2022, using the qualitative impairment test, the Company performed its annual impairment assessment on goodwill attributable to its aggregated television stations reporting unit and cable network reporting unit. Based on the results of such qualitative impairment tests, the Company concluded that it was more likely than not that each reporting unit’s fair value would sufficiently exceed the related carrying amount. The Company also performed its annual impairment assessment on FCC licenses for each television station market using the qualitative impairment test and concluded that it was more likely than not that their fair values exceeded the respective carrying amounts. Thus, no impairment was recorded on the associated goodwill and FCC licenses.

With respect to the Company’s digital reporting units, the Company elected to perform quantitative impairment tests due to uncertain economic conditions in the fourth quarter of 2022. The Company’s assessment indicated that the fair value of one digital reporting unit exceeded the carrying amount by over 19%, and therefore no goodwill impairment was identified. Goodwill associated with this reporting unit was $69.1 million as of December 31, 2022.

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In the second digital reporting unit, which was tested for impairment, quantitatively, in the fourth quarter of 2021 with an identified fair value exceeding the carrying value of the reporting unit by approximately 10%, the Company identified a partial goodwill impairment of $90.8 million. The impairment was identified in the fourth quarter of 2022 given the operating performance of the reporting unit, the seasonality of the business and changes in the outlook of the business. The fair value was estimated using a combination of an income approach, which employs a discounted cash flow model, and market approaches. The significant assumptions used in estimating fair value included: (i) compound annual growth rates for revenues ranging from 6.1% to 8.1%, (ii) operating profit margins ranging from 8.3% to 15.0%, (iii) an income tax rate of 26.0% based on statutory federal and blended state tax rates, (iv) a discount rate of 14.5% based on an analysis of e-commerce companies, (v) a terminal growth rate of 1.5% based on a mature company in the e-commerce industry, and (vi) market net revenue and earnings multiples of comparable publicly traded businesses. As of December 31, 2022, this second digital reporting unit has an immaterial remaining goodwill balance.

We also performed qualitative tests to determine whether our definite-lived intangible assets and other long-lived assets are recoverable. Based on our estimate of undiscounted future pre-tax cash flows expected to result from the use and eventual disposition of these assets, we determined that the carrying amounts are recoverable except for an immaterial impairment on definite-lived intangible assets of one digital reporting unit recorded in the fourth quarter of 2022. No other events or circumstances were noted in 2022 that would indicate impairment.

Our quantitative goodwill impairment tests are sensitive to changes in key assumptions used in our analysis, such as expected future cash flows and market trends. If the assumptions used in our analysis are not realized, it is possible that an additional impairment charge may need to be recorded in the future. We cannot accurately predict the amount and timing of any impairment of goodwill or other intangible assets.

Valuation of Investments

We account for investments in which we own at least 20% of an investee’s voting securities or we have significant influence over an investee under the equity method of accounting. We record equity method investments at cost. For investments acquired in a business combination, the cost is the estimated fair value allocated to the investment.

We evaluate our equity method investments for other-than temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In each of the quarters of 2022, the Company evaluated its equity method investments for OTTI and determined that an impairment did not exist. The Company will continue to evaluate its equity method investments for OTTI in future periods.

Pension plans and other postretirement benefits

A determination of the liabilities and cost of Nexstar’s pension and other postretirement plans (“OPEB”) requires the use of assumptions. The actuarial assumptions used in the pension and postretirement reporting are reviewed annually with independent actuaries and are compared with external benchmarks, historical trends and Nexstar’s own experience to determine that its assumptions are reasonable. The assumptions used in developing the required estimates include the following key factors:

•
discount rates

•
expected return on plan assets

•
mortality rates

•
retirement rates

•
expected contributions

As of December 31, 2022, the effective discount rates used for determining pension benefit obligations were 4.98% to 4.99%. During 2022, the assumptions utilized in determining net periodic benefit credit on our pension plans were (i) 4.01% to 5.01% expected rate of return on plan assets and (ii) 2.69% to 2.70% effective discount rates. As of December 31, 2022, our pension plans’ benefit obligations were $1.779 billion. For the year ended December 31, 2022, our pension plans’ net periodic benefit credit was $37.6 million. As of December 31, 2022, a 1% change in the discount rates would have the following effects (in millions):

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For additional information on our pension and OPEB, see Note 10 to our Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

Distribution Revenue

We earn revenues from MVPDs and OVDs for the retransmission of our broadcasts and the carriage of NewsNation. These revenues are generally earned based on a price per subscriber of the distributor within the retransmission or carriage area. The distributors report their subscriber numbers to us generally on a 30- to 60-day lag, generally upon payment of the fees due to us. Prior to receiving the reports, we record revenue based on management’s estimate of the number of subscribers, utilizing historical levels and trends of subscribers for each distributor. Adjustments associated with the resolution of such estimates have, historically, been inconsequential.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. While we have considered future taxable income in assessing the need for a valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such a determination was made.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The estimate of the Company’s tax liabilities relating to uncertain tax positions requires management to assess uncertainties and to make judgements about the application of complex tax laws and regulations. We recognize interest and penalties relating to income taxes as components of income tax expense.

Recent Accounting Pronouncements

Refer to Note 2 of our Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.