NXST

Nexstar Media Group, Inc. - Q1 2007 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2007. Nexstar Broadcasting Group, Inc. (Nexstar) operates 49 television stations, including 32 owned and operated stations and 17 stations managed through local service agreements with Mission Broadcasting, Inc. (Mission). Nexstar consolidates Mission's financial results under U.S. GAAP due to a controlling financial interest, despite Mission being owned by independent third parties. The company operates in a single reportable segment: television broadcasting.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 3.7% year-over-year. This was driven by a 6.1% increase in local advertising revenue and a 30.9% increase in retransmission compensation. The growth was partially offset by a 76.3% decline in political advertising revenue, as 2006 was an election year and 2007 is not.
• Acquisition Impact: The first quarter included the initial full quarter of results for WTAJ and WLYH, acquired in December 2006, contributing approximately $2.5 million to revenue.
• Expense Increases: Operating expenses rose due to the inclusion of the new stations and higher interest rates. Interest expense increased 12.1% to $13.7 million due to higher rates on senior credit facilities and increased debt levels from the acquisition.
• Cash Flow Decline: Net cash provided by operating activities decreased by $2.6 million compared to the prior year, primarily due to changes in accounts payable, accrued expenses, and accounts receivable.
• Capital Expenditures: Investing cash outflows increased significantly to $5.9 million (from $3.0 million), largely due to $3.7 million in digital television (DTV) conversion expenditures.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: Management projects full-year 2007 capital expenditures to be approximately $15 million, driven by DTV conversion requirements.
• Liquidity: The company is highly leveraged (debt represents 113.3% of combined capitalization). Management believes available cash, operating cash flow, and $59.5 million in unused credit facility commitments are sufficient to fund operations and debt service for the next 12 months.
• Regulatory Risks:
  • FCC Petitions: Equity Broadcasting Corporation has filed petitions to deny Nexstar's license renewals and the assignment of the KFTA license to Mission. The outcome is uncertain.
  • DTV Conversion: Stations must broadcast full-power DTV signals by February 17, 2009. Nexstar has requested extensions for remaining stations; denial could result in loss of interference protection.
• Debt Covenants: The company is in compliance with all debt covenants as of March 31, 2007, including leverage and coverage ratios.
• Accounting Changes: The company adopted FIN No. 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, resulting in a $1.5 million cumulative-effect adjustment to accumulated deficit.

Investor Verification Checklist

• Verify the status of the FCC petitions to deny filed by Equity Broadcasting regarding KFTA and KNWA licenses.
• Monitor the progress of DTV conversion expenditures against the projected $15 million full-year budget.
• Review the impact of the non-election year on political advertising revenue trends for the remainder of 2007.
• Assess the sustainability of operating cash flows given the high debt service requirements ($13.8 million cash paid for interest in Q1).
• Confirm continued compliance with debt covenants, specifically the maximum total combined leverage ratio of 7.00x.