NXST

Business Context and Reporting Period

Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Nexstar is a television broadcasting company focused on acquiring, developing, and operating stations in medium-sized U.S. markets (ranks 50–175). As of December 31, 2006, the company owned and operated 32 stations and provided sales or other services to an additional 17 stations, including 15 owned by Mission Broadcasting, Inc. (Mission). Nexstar consolidates Mission's financials under U.S. GAAP due to a controlling financial interest established through local service agreements, debt guarantees, and purchase options, despite Mission being 100% owned by an independent third party.

Key Financial Metrics

Note: The filing does not provide a specific "profit margin" percentage, but operating income represented 17.3% of net revenue in 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 15.8% to $265.2 million, driven primarily by a surge in political advertising revenue ($27.0 million in 2006 vs. $2.2 million in 2005) due to the 2006 election cycle, increased retransmission compensation, and Olympic Games coverage.
• Operating Income: Income from operations improved significantly by 146.4% to $45.9 million, reflecting revenue growth and cost controls, despite higher corporate expenses related to the adoption of SFAS 123(R) for stock-based compensation.
• Net Loss Reduction: Net loss narrowed to $9.0 million from $48.7 million in 2005. The 2005 loss included a $15.7 million charge for the extinguishment of debt (redemption of 12% notes), which did not recur in 2006.
• Acquisitions: Nexstar completed the acquisition of WTAJ (Johnstown-Altoona, PA) and WLYH (Harrisburg, PA) on December 29, 2006, for total consideration of $55.1 million.
• Debt Levels: Total debt increased to $681.1 million, representing 112.1% of total capitalization. The company made $15.5 million in voluntary and scheduled repayments on term loans during the year.

Guidance, Outlook, and Risks

• Outlook: Management expects nominal political advertising revenue in 2007 compared to the election year of 2006. Automotive-related advertising, the largest category, decreased 4.3% in 2006, and a significant change in this sector could materially affect future results.
• Capital Expenditures: Projected 2007 capital expenditures are approximately $14.5 million, primarily for digital television (DTV) conversion. The company estimates an additional $1.5 million per station is required to modify remaining stations for full-power DTV operations.
• Key Risks:
  • High Leverage: Debt levels limit flexibility for acquisitions and growth and expose the company to interest rate risk on variable-rate borrowings.
  • Regulatory: FCC ownership rules, specifically regarding duopolies and local service agreements, are under review. Petitions to deny license renewals for stations KFTA and KNWA remain pending.
  • Asset Impairment: Approximately 71.7% of total assets consist of goodwill and intangible assets. A significant reduction in operating results or adverse changes in the advertising marketplace could trigger impairment charges.
  • Network Affiliations: Revenue depends on maintaining network affiliation agreements, which expire at various times through 2016.

Investor Verification Checklist

• Political Revenue Sustainability: Verify the expected drop in revenue for 2007 given the non-election year status and the heavy reliance on political ads in 2006.
• Debt Covenant Compliance: Confirm continued compliance with leverage and interest coverage ratios under the senior credit facilities, given the high debt-to-capitalization ratio.
• DTV Conversion Costs: Assess the sufficiency of cash flow to fund the estimated $1.5 million per station capital expenditure required for full-power digital conversion by the 2009 deadline.
• FCC Regulatory Status: Monitor the outcome of pending FCC petitions to deny license renewals for KFTA and KNWA and the potential impact of new media ownership rules on the company's duopoly strategy.
• Intangible Asset Valuation: Review the annual impairment testing of goodwill and FCC licenses, which comprise the majority of the company's asset base.