NXST

Business Context and Reporting Period

This summary covers the Annual Report on Form 10-K for Nexstar Broadcasting Group, Inc. for the fiscal year ended December 31, 2010. Nexstar is a television broadcasting and digital media company focused on medium-sized U.S. markets (ranks 50–175). As of year-end, the company owned, operated, or provided services to 59 television stations and four digital multi-cast channels across 34 markets. The company consolidates the financial results of Mission Broadcasting, Inc., an independent third-party owner of 16 stations, due to local service agreements and debt guarantees that grant Nexstar a controlling financial interest under U.S. GAAP.

Key Financial Metrics

Revenue Composition (2010): Local advertising (52.9%), National advertising (18.8%), Political advertising (12.0%), Retransmission compensation (9.1%), and eMedia revenue (4.2%).

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 24.4% to $313.4 million. This was driven primarily by a 566% increase in political advertising revenue ($39.3 million vs. $5.9 million in 2009) due to the 2010 election cycle, and an 11.0% increase in local and national advertising revenue, led by a recovery in automotive advertising.
• Profitability Improvement: Income from operations surged to $67.5 million from $8.2 million in 2009. This improvement was aided by the absence of significant impairment charges in 2010, compared to $16.2 million in impairment charges (goodwill and FCC licenses) recorded in 2009.
• Debt Restructuring: In April 2010, the company issued $325.0 million of 8.875% senior secured second lien notes due 2017. Proceeds were used to repurchase approximately 82% of outstanding Senior Subordinated PIK Notes and refinance senior secured credit facilities. Total debt decreased by $27.3 million year-over-year.
• Interest Expense: Interest expense increased 38.3% to $54.3 million, primarily due to the higher interest rate on the new 8.875% Notes compared to previous credit facilities.

Outlook, Risks, and Management Commentary

• Guidance and Outlook: Management expects a significant decrease in political advertising revenue in 2011 as it is not an election year. The company anticipates continued growth in retransmission and eMedia revenues. No specific financial guidance for 2011 was provided in the text.
• Key Risks:
  • High Leverage: Total debt represents 137.4% of total capitalization. The company is subject to restrictive covenants regarding leverage ratios and fixed charge coverage.
  • Regulatory Environment: The FCC is reviewing media ownership rules, including local service agreements and retransmission consent regulations, which could impact the company's duopoly strategy and revenue streams.
  • Asset Impairment: Approximately 56.3% of total assets consist of goodwill and intangible assets (FCC licenses). Future deterioration in advertising markets could trigger further impairment charges.
  • Network Affiliations: Revenue depends on maintaining network affiliation agreements; failure to renew could force the company to seek more expensive alternative programming.
• Unusual Items: The company recognized an $8.4 million loss on extinguishment of debt in 2010 related to debt amendments and repurchases. A $1.6 million non-cash stock-based compensation expense was recognized due to the repricing of stock options.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the maximum consolidated total leverage ratio (8.00:1.00) and minimum fixed charge coverage ratio (1.10:1.00) required by the senior secured credit facility.
• Political Revenue Volatility: Assess the impact of the non-election year 2011 on revenue projections, given the 12% revenue contribution from political ads in 2010.
• Intangible Asset Valuation: Review the assumptions used in the annual impairment testing of FCC licenses and goodwill, particularly regarding market growth rates and discount rates.
• Mission Broadcasting Relationship: Confirm the status of local service agreements and purchase options with Mission Broadcasting, Inc., which are critical to the consolidation of Mission's assets and cash flows.
• Refinancing Needs: Monitor upcoming debt maturities, specifically the $45.9 million of 11.375% senior discount notes due in 2013 and the $183.3 million of notes due in 2014.