NXST

Business Context and Reporting Period

Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2010
Operations: Nexstar owns, operates, or provides services to 59 television stations across the U.S. The company consolidates Mission Broadcasting, Inc. (Mission) as a Variable Interest Entity (VIE) due to local service agreements and guarantees, though Nexstar does not legally own Mission's stations. Nexstar operates in a single reportable segment: television broadcasting.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 19.9% for the quarter and 21.7% for the six-month period compared to 2009. This was driven by a 690.9% increase in political advertising revenue (due to the 2010 election cycle), a 32.6% increase in national advertising, and a 14.1% increase in retransmission compensation.
• Operating Income: Income from operations improved significantly, rising 54.3% for the quarter and 207.5% for the six-month period year-over-year, primarily due to revenue growth.
• Net Loss: Despite higher operating income, the company reported a net loss of $9.4 million for the quarter and $13.1 million for the six months, compared to a net loss of $1.2 million and net income of $4.8 million in the prior year periods. This deterioration was caused by a $7.9 million loss on debt extinguishment and increased interest expense.
• Interest Expense: Interest expense increased 55.7% for the quarter and 37.6% for the six months, largely due to the issuance of new senior secured notes in April 2010.

Guidance, Outlook, and Material Events

• Debt Refinancing: In April 2010, Nexstar and Mission issued $325.0 million of 8.875% senior secured second lien notes due 2017. Proceeds were used to refinance senior secured credit facilities and repurchase approximately 82% of outstanding Senior Subordinated PIK Notes due 2014.
• Debt Extinguishment Loss: The company recognized a $7.9 million loss on debt extinguishment for the quarter and $7.8 million for the six months, resulting from the repurchase of PIK notes and retirement of credit facility debt.
• Stock Option Repricing: Shareholders approved the repricing of stock options in May 2010, resulting in a one-time non-cash stock-based compensation expense of approximately $1.6 million recognized in the second quarter.
• Liquidity: Management believes available cash, operating cash flow, and $75.0 million in unused revolving credit commitments are sufficient to fund operations and debt service for at least the next 12 months. The company is in compliance with all debt covenants.
• Risks: The company remains highly leveraged (debt represents 140.2% of capitalization). Future performance is subject to economic conditions, FCC regulatory changes regarding media ownership, and the ability to refinance debt.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the maximum total leverage ratio (9.5:1) and fixed charge coverage ratio (1.10:1) given the high debt load.
• Political Revenue Sustainability: Assess the impact of the 2010 election cycle on revenue, as political advertising is expected to decline significantly in non-election years.
• Interest Rate Exposure: Review the impact of the new 8.875% fixed-rate notes on future cash flow requirements versus the variable-rate term loans.
• Goodwill and Intangibles: Monitor for potential impairment charges on goodwill ($109.1 million) and FCC licenses ($127.5 million) if advertising markets deteriorate.
• Mission Consolidation: Understand the risks associated with the consolidation of Mission Broadcasting, including the guarantee of Mission's debt and the reliance on local service agreements for cash flow.