NXST

Business Context and Reporting Period

Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2006
Operations: Nexstar owns, operates, or provides services to 46 television stations across 11 states. The company consolidates Mission Broadcasting, Inc. (Mission) as a Variable Interest Entity (VIE), providing sales and programming services to 15 Mission stations via Local Service Agreements (LSAs). Nexstar operates as a single reportable segment: television broadcasting.

Key Financial Metrics

Debt Structure: Total debt consists of Term Loans ($337.9 million), 7% Senior Subordinated Notes ($197.7 million net), and 11.375% Senior Discount Notes ($107.1 million net). As of June 30, 2006, approximately $28.4 million of borrowing availability remained under senior credit facilities.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 10.1% in Q2 2006 and 11.1% for the six months ended June 30, 2006, compared to the prior year. This was driven by a 162.3% increase in political advertising (election year impact) and a 209.7% increase in retransmission compensation.
• Operating Income: Operating income improved significantly, rising 60.8% in Q2 and 103.0% for the six-month period, primarily due to revenue growth outpacing expense increases.
• Net Loss Reduction: The net loss for the six months ended June 30, 2006, was $9.7 million, a substantial improvement from the $33.7 million loss in the same period in 2005. The 2005 loss included a $15.7 million one-time charge for the extinguishment of debt.
• Expense Trends: Corporate expenses increased due to the adoption of SFAS 123(R) (stock-based compensation) and higher incentive compensation. Depreciation increased slightly due to accelerated depreciation of analog equipment ahead of the 2009 digital transition deadline.

Guidance, Outlook, and Risks

• Capital Expenditures: Management projects full-year 2006 capital expenditures to be approximately $22.0 million, with $4.8 million already spent on digital conversion in the first six months.
• Acquisitions: On July 26, 2006, Nexstar agreed to acquire WTAJ (Altoona-Johnstown, PA) and WLYH (Harrisburg-Lancaster-Lebanon-York, PA) for $56.0 million, expected to close in Q4 2006. Financing will come from the senior secured credit facility.
• Regulatory Risks:
  • FCC Petition: Equity Broadcasting Corporation filed a petition to deny Nexstar's proposed sale of KFTA to Mission, alleging improper control. Nexstar opposes the petition, but the outcome is uncertain.
  • Digital Transition: Nexstar must complete the transition to digital transmission by February 17, 2009. Several stations have requested extensions for full-power DTV construction.
• Liquidity: The company is highly leveraged (113.2% debt-to-capitalization). Management believes cash flow and available borrowings are sufficient for the next 12 months but notes vulnerability to economic conditions.
• Accounting Changes: Adoption of SFAS 123(R) on Jan 1, 2006, resulted in $0.8 million of stock-based compensation expense for the six months ended June 30, 2006. Annual expense is estimated at $1.6 million for 2006.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with leverage ratios (max 7.75x total leverage, 5.25x senior leverage) and interest coverage ratios (min 1.50x) given the high debt load.
• FCC Approval: Monitor the status of the Equity Broadcasting petition to deny regarding the KFTA/Mission transaction and the upcoming WTAJ/WLYH acquisition.
• Digital Conversion Costs: Track capital expenditures against the $22 million full-year projection and the estimated $1.5 million per station cost for full-power DTV upgrades.
• Political Revenue Volatility: Assess the sustainability of revenue growth given the significant contribution of political advertising in an election year (2006).
• Refinancing Needs: Review the maturity schedule of the 11.375% Senior Discount Notes (due 2013) and Term Loans (due 2012) to evaluate future refinancing risks.