NXST

Business Context and Reporting Period

Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Operations: Nexstar owns, operates, or provides services to 63 television stations across the U.S. The company consolidates Mission Broadcasting, Inc. (Mission) due to controlling financial interest via local service agreements and debt guarantees, though Mission's stations are legally owned by third parties. Nexstar operates in a single reportable segment: television broadcasting.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 14.1% in Q3 2009 and 13.0% for the nine-month period compared to 2008. This was driven by significant drops in local and national advertising (particularly automotive, down ~40% YTD) and political advertising (down 87% in Q3 due to 2008 being an election year).
• Retransmission Growth: Retransmission compensation revenue increased 62.0% in Q3 and 71.0% YTD, partially offsetting advertising declines.
• Impairment Charges: A non-cash impairment charge of $16.2 million was recorded in Q3 2009 (down from $48.5 million in Q3 2008), affecting FCC licenses and goodwill due to economic recession and declining ad demand.
• Operating Loss Improvement: Loss from operations improved to $13.6 million in Q3 2009 from $36.8 million in Q3 2008, primarily due to the reduced magnitude of impairment charges.
• Debt Restructuring: In Q1 2009, Nexstar exchanged $143.6 million of 7% senior subordinated notes for PIK (Payment-in-Kind) notes and purchased $27.8 million of 11.375% senior discount notes, resulting in an $18.6 million gain on extinguishment of debt.

Outlook, Risks, and Management Commentary

• Liquidity and Covenants: As of September 30, 2009, Nexstar was not in compliance with leverage ratio covenants in its senior secured credit facility. On October 8, 2009, the company amended the credit agreement to modify covenants and obtained a limited waiver to cure the violation. Management believes these actions will allow compliance for at least the next 12 months.
• Debt Structure: The company is highly leveraged. Total debt represents 135.7% of combined capitalization. The amended credit agreement includes an "anti-cash hoarding" provision requiring the use of unrestricted cash balances over $15.0 million to repay revolving credit facility principal.
• Capital Expenditures: Full-year 2009 capital expenditures are projected at approximately $17.0 million, including $8.5 million for Digital Television (DTV) conversion. Most stations have completed the transition to digital, with two (KQTV and KMID) expected to finish by late 2009.
• Risks: Key risks include the high debt load, vulnerability to economic downturns affecting advertising revenue, and the potential for further asset impairments if market conditions deteriorate. The company also faces regulatory risks regarding FCC media ownership rules.

Investor Verification Checklist

• Covenant Compliance: Verify the terms of the October 8, 2009 credit facility amendment and the specific leverage ratio waivers granted.
• Debt Maturity Profile: Review the schedule of debt maturities, noting that significant principal payments are due in 2012-2013 and 2014.
• Impairment Assumptions: Scrutinize the discounted cash flow assumptions (discount rates, growth rates, margins) used to value FCC licenses and goodwill, as these are highly subjective.
• Advertising Trends: Monitor the automotive advertising sector, which constitutes a significant portion of revenue and has shown a consistent downward trend.
• Mission Consolidation: Understand the financial exposure related to Mission Broadcasting, including the guarantee of Mission's debt and the mechanics of the local service agreements.