Business Context and Reporting Period
Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Nexstar is a television broadcasting company focused on acquiring, developing, and operating stations in medium-sized U.S. markets (ranks 50–175). As of December 31, 2008, Nexstar owned and operated 32 stations and provided sales or other services to 18 additional stations owned by Mission Broadcasting, Inc. (Mission) and other entities. Nexstar consolidates Mission's financial results due to a controlling financial interest established through local service agreements, debt guarantees, and purchase options.
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Net Revenue | $284.9 million | $266.8 million | $265.2 million |
| Net Loss | $(78.1) million | $(19.8) million | $(9.0) million |
| Operating Loss | $(38.2) million | $40.5 million | $45.9 million |
| Operating Cash Flow | $60.6 million | $37.0 million | $54.5 million |
| Total Debt | $662.1 million | $681.2 million | $681.1 million |
| Cash and Equivalents | $15.8 million | $16.2 million | $11.2 million |
| Capitalization Ratio (Debt/Total Cap) | 133.2% | N/A | N/A |
Note: The 2008 Net Loss includes a non-cash impairment charge of $82.4 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 6.8% to $284.9 million, driven primarily by a 663.4% surge in political advertising revenue ($32.9 million in 2008 vs. $4.3 million in 2007) due to the presidential election cycle. This was partially offset by a 4.8% decline in local and national advertising revenue, largely attributed to a downturn in automotive advertising.
- Impairment Charges: The company recorded a significant non-cash impairment charge of $82.4 million in 2008. This included $41.4 million for FCC licenses, $38.9 million for goodwill, and $2.1 million for network affiliation agreements, reflecting deteriorating economic conditions and lower advertising forecasts.
- Operating Expenses: Operating expenses increased due to the impairment charges, a $7.2 million non-cash contract termination fee for national sales representation, and higher corporate expenses. However, cash broadcast payments as a percentage of net broadcast revenue decreased to 3.1% in 2008 from 3.4% in 2007.
- Debt Reduction: Total debt decreased by approximately $19 million to $662.1 million, following repayments totaling $110.3 million, including the redemption of $46.9 million of senior discount notes and the issuance of $35.6 million in PIK notes.
Guidance, Outlook, and Risks
- Outlook: Management expects a significant decrease in political advertising revenue in 2009 as it is not an election year. The company anticipates continued pressure on local and national advertising due to the economic slowdown.
- Liquidity and Covenants: Nexstar is highly leveraged. To maintain compliance with debt covenants (specifically leverage ratios), the company executed a debt exchange in March 2009, swapping $143.6 million of 7% senior subordinated notes for PIK notes. Additional cost containment measures include eliminating corporate bonuses for 2008/2009, consolidating back-office processes, and potential employee furloughs.
- Digital Transition: The mandatory transition to digital television (DTV) by June 12, 2009, requires significant capital expenditures. Nexstar spent $23.3 million on DTV conversion in 2008 and estimates an additional $5.4 million will be required in 2009.
- Risks: Key risks include the impact of the economic downturn on advertising demand, the ability to access credit markets, potential further asset impairments, and regulatory changes regarding FCC ownership rules and local service agreements.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to maintain leverage and interest coverage ratios under its senior credit facility, particularly given the high debt load and economic headwinds.
- Asset Valuation: Assess the risk of further impairment charges on goodwill and FCC licenses if advertising revenues continue to decline in 2009.
- Debt Structure: Review the terms of the newly issued PIK notes and the impact of the debt exchange on future cash flow requirements and leverage calculations.
- DTV Capital Expenditures: Confirm the funding sources for the remaining $5.4 million in DTV conversion costs and the timeline for analog shutdowns.
- Political Revenue Normalization: Analyze the sustainability of revenue streams once the election-year political advertising boost dissipates in 2009.