NXST

Business Context and Reporting Period

Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Reporting Period: Fiscal year ended December 31, 2003
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, 2003, the company owned and operated 27 stations and provided management or sales services to an additional 15 stations owned by Mission Broadcasting, Inc. (Mission) and other entities. Nexstar operates in 13 "duopoly" markets where it owns or services multiple stations.
Key Transactions:

• Quorum Acquisition: On December 30, 2003, Nexstar completed the acquisition of Quorum Broadcast Holdings, LLC, adding 11 owned stations and 5 serviced stations. This was accounted for as a merger under common control (pooling of interests), resulting in restated financials for all periods presented.
• Initial Public Offering (IPO): Completed on November 28, 2003, selling 10 million shares at $14.00 per share for net proceeds of approximately $125.2 million.
• Corporate Reorganization: Concurrent with the IPO, the company reorganized from an LLC to a corporation.

Key Financial Metrics

Debt Structure: Total debt represented 99.5% of total capitalization. Significant instruments include $195 million in term loans, $10 million in revolving credit facilities, $160 million in 12% senior subordinated notes (due 2008), $125 million in 7% senior subordinated notes (due 2014), and various senior discount notes.

Material Changes vs. Prior Period

• Revenue Growth: Total net revenue increased 3.9% to $214.3 million. However, on a "same station basis" (excluding new acquisitions), net broadcast revenue decreased 8.5% to $171.9 million. This decline was primarily due to a $21.0 million drop in political revenue (2003 was a non-election year compared to 2002) and the impact of the Iraq war on advertising schedules in Q1 2003.
• Operating Loss: The company reported an operating loss of $4.0 million in 2003 compared to an operating income of $21.3 million in 2002. This $25.3 million swing was driven by $11.8 million in merger-related expenses (severance, legal, and termination costs) and the decline in same-station revenue.
• Net Loss Improvement: Despite the operating loss, the net loss decreased by $27.3 million to $71.8 million. This improvement was largely due to a $14.9 million income tax benefit (reduction in valuation allowance following reorganization) and a $3.9 million gain from the marking-to-market of derivative instruments.
• Debt Increase: Total debt increased by $127.7 million to $598.9 million, primarily to finance the Quorum acquisition and refinance existing credit facilities.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• 2004 Expectations: Management anticipates revenue growth in 2004 driven by political advertising (presidential election year) and the integration of Quorum stations. They expect revenue from recently acquired stations to grow faster than mature stations.
• Digital Conversion: The company estimates an additional capital expenditure of approximately $0.7 million per station to upgrade transmitters for full-power digital signal transmission, beyond the initial low-power costs already incurred.
• Acquisition Strategy: Nexstar intends to continue selectively pursuing acquisitions, though industry consolidation may increase purchase prices and reduce targets.

• High Leverage: With debt at 99.5% of capitalization, the company faces significant interest rate risk and limited flexibility for additional borrowing or acquisitions. Debt covenants restrict dividends and additional indebtedness.
• Advertising Dependency: Revenue is highly sensitive to economic downturns and political cycles. A small decrease in advertising revenue can have a disproportionate negative impact due to high fixed costs.
• Regulatory Risk: FCC rules regarding duopolies and cross-media ownership are subject to change. The company relies on Local Service Agreements (LSAs) to operate duopolies; if the FCC challenges these arrangements, operations could be disrupted.
• Intangible Assets: Approximately 74% of total assets consist of unamortized intangible assets (goodwill, FCC licenses). Future impairment charges could materially reduce net income.

Investor Verification Checklist

• Debt Covenants: Verify compliance with leverage and interest coverage ratios, especially given the failed sale of WTVW in January 2004 which was intended to pay down debt.
• Quorum Integration: Assess the actual revenue and cash flow performance of the 16 Quorum stations post-acquisition to validate management's growth projections.
• Political Revenue Sensitivity: Monitor Q2 and Q4 2004 results to confirm the anticipated boost from the presidential election cycle.
• Digital Conversion Costs: Track capital expenditures against the estimated $0.7 million per station for full-power digital upgrades.
• Intangible Asset Valuation: Review annual impairment testing results for goodwill and FCC licenses, given they comprise the majority of the asset base.
• LSA Compliance: Monitor FCC rulings on Local Service Agreements and duopoly rules that could impact the company's operational model in 13 markets.