Business Context and Reporting Period
Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Operations: Nexstar owns, operates, or provides services to 50 television stations across the U.S., including 32 owned stations and 18 stations operated via local service agreements with Mission Broadcasting, Inc. (Mission). Nexstar consolidates Mission's financials under U.S. GAAP due to a controlling financial interest, despite Mission being independently owned.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Dec 31, 2007 (Balance Sheet) |
|---|---|---|---|
| Net Revenue | $70.3 million | $204.6 million | N/A |
| Net Loss | $(45.3) million | $(56.8) million | N/A |
| Loss Per Share (Basic/Diluted) | $(1.59) | $(2.00) | N/A |
| Operating Cash Flow (9mo) | N/A | $40.7 million | N/A |
| Cash and Equivalents | N/A | N/A | $11.6 million |
| Total Debt (Long-term + Current) | N/A | N/A | $666.2 million |
| Stockholders' Deficit | N/A | N/A | $(144.3) million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 9.0% in Q3 2008 and 4.8% for the nine-month period compared to 2007. This growth was driven primarily by a surge in political advertising revenue ($7.8 million in Q3 vs. $0.8 million in Q3 2007) due to the 2008 election cycle, as well as increases in retransmission compensation and eMedia revenue.
- Significant Impairment Charge: The company recorded a non-cash impairment charge of $48.5 million in Q3 2008. This included $27.8 million for goodwill, $19.7 million for FCC licenses, and $1.0 million for network affiliation agreements. This charge was triggered by a decline in stock price, deteriorating economic conditions, and lower non-political advertising revenues.
- Contract Termination Fee: A non-cash charge of $7.2 million was recognized for the termination of a national sales representation contract with Petry and Blair, replaced by a new agreement with Katz Television Group.
- Operating Loss: The company reported an operating loss of $36.8 million for Q3 2008, compared to an operating income of $8.3 million in Q3 2007. The decline is almost entirely attributable to the $48.5 million impairment charge.
- Debt Reduction: Total debt decreased from $681.2 million at year-end 2007 to $666.2 million at September 30, 2008, following the redemption of $46.9 million of 11.375% senior discount notes and a $5.3 million repurchase of the same notes.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects 2008 full-year capital expenditures to be approximately $33.0 million, largely driven by digital television (DTV) conversion costs. They anticipate concluding DTV expenditures in early 2009.
- Liquidity: The company is highly leveraged. While they believe current cash, operating cash flow, and available borrowings ($19.0 million available under revolving facilities) are sufficient for the next 12 months, they note that disruptions in credit markets could adversely affect their ability to draw on facilities.
- Risks:
- Economic Slowdown: Continued economic weakness may reduce demand for local and national advertising, particularly in the automotive sector, which saw a 7.5% decline in the first nine months of 2008.
- Further Impairments: If economic trends continue to deteriorate, the company may record further impairments of goodwill and intangible assets in Q4 2008.
- DTV Conversion: Significant capital is required to meet FCC deadlines for full-power DTV operations, with some stations requiring extensions.
- Unusual Items:
- Gain on Asset Exchange: Recognized a $4.1 million gain (nine months) from exchanging analog equipment for digital equipment with Sprint Nextel.
- Acquisition: Mission acquired KTVE (NBC affiliate) for $8.3 million in January 2008.
Investor Verification Checklist
- Impairment Assumptions: Verify the discounted cash flow assumptions (discount rate of 9.5%, market growth of 2.0%-2.8%) used to calculate the $48.5 million impairment charge.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios, especially given the high debt load ($666.2 million) and potential for further revenue declines.
- Political Revenue Sustainability: Assess the extent to which 2008 revenue growth is dependent on the election cycle, which is not a recurring annual event.
- DTV Capital Expenditures: Monitor the $30.0 million projected for digital conversion to ensure it does not strain liquidity or require additional financing.
- Mission Consolidation: Review the terms of the local service agreements and purchase options with Mission Broadcasting to understand the extent of Nexstar's control and financial exposure.