NXST

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008, for Nexstar Broadcasting Group, Inc. (Nexstar). Nexstar operates in a single reportable segment: television broadcasting. As of June 30, 2008, the company owned and operated 32 television stations and provided sales, programming, and other services to 18 additional stations through local service agreements, including 16 stations owned by Mission Broadcasting, Inc. (Mission), which Nexstar consolidates as a Variable Interest Entity (VIE). The company is highly leveraged and operates in markets across the United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 2.7% for both the three and six months ended June 30, 2008, compared to the prior year periods. This growth was driven primarily by a significant increase in political advertising revenue (up $2.4 million in Q2 and $3.9 million in the first half) due to the 2008 election cycle, as well as growth in eMedia and retransmission compensation revenue.
• Operating Expenses: For the six months ended June 30, 2008, operating expenses included a $7.2 million non-cash charge for contract termination fees related to a new national sales representation agreement with Katz Television Group. This charge significantly impacted the six-month operating income compared to the prior year.
• Net Loss: While the company reported a net income of $3.9 million for the second quarter, it reported a net loss of $11.5 million for the six-month period, compared to a net loss of $10.3 million for the same period in 2007. The six-month loss was exacerbated by the contract termination fee and higher direct operating expenses.
• Debt Reduction: On April 1, 2008, Nexstar redeemed $46.9 million of its 11.375% senior discount notes. Additionally, on June 30, 2008, the company issued $35.6 million of senior subordinated payment-in-kind (PIK) notes.
• Acquisition: Mission completed the acquisition of KTVE (NBC affiliate in Monroe, Louisiana) on January 16, 2008, for approximately $7.9 million. Results for KTVE are included in the 2008 periods but not in the 2007 comparative periods.

Guidance, Outlook, and Risks

• Capital Expenditures: The company projects full-year 2008 capital expenditures to be approximately $33.0 million, with roughly $30.0 million dedicated to Digital Television (DTV) conversion. The company expects to conclude DTV conversion expenditures during 2008.
• Liquidity: Management believes available cash, anticipated cash flow from operations, and available borrowings under senior credit facilities will be sufficient to fund working capital, capital expenditures, and debt service for at least the next twelve months. As of June 30, 2008, there was $69.5 million in unused revolving loan commitments, of which $7.2 million was available for borrowing based on covenant calculations.
• Debt Covenants: The company is in compliance with all financial covenants as of June 30, 2008, including maximum leverage ratios and minimum interest coverage ratios. However, the company is highly leveraged, making it vulnerable to changes in economic conditions.
• Regulatory Risks: The company faces ongoing FCC regulatory matters, including deadlines for full-power DTV operations (November 2008 and February 2009 for various stations) and potential changes to media ownership rules.
• Impairment Risk: Management noted that while no impairment indicators existed as of June 30, 2008, a significant adverse change in advertising marketplaces could lead to an impairment charge on goodwill and intangible assets.

Investor Verification Checklist

• Debt Structure: Verify the terms and interest rates of the newly issued $35.6 million PIK notes and the remaining balance of the 11.375% senior discount notes.
• Political Revenue Sustainability: Assess the extent to which the 2008 revenue growth is attributable to the election cycle and the potential impact on future non-election year revenues.
• DTV Conversion Costs: Monitor actual capital expenditures against the projected $33.0 million for 2008, specifically regarding DTV conversion.
• Covenant Compliance: Review future quarterly filings to ensure continued compliance with leverage and coverage ratios, particularly given the high debt load.
• Contract Termination Fee Amortization: Track the amortization of the $7.2 million deferred representation fee incentive over the term of the new Katz agreement to understand its impact on future operating expenses.