NXST

Nexstar Media Group, Inc. (Nexstar Broadcasting Group, Inc.) - 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for the period ended June 30, 2009. Nexstar operates as a television broadcasting company, owning and operating 34 stations and providing sales and programming services to 25 additional stations, including 16 owned by Mission Broadcasting, Inc. (Mission), which is consolidated as a Variable Interest Entity (VIE). The company operates in a single reportable segment.

Key Financial Metrics

Note: The six-month net income includes a significant non-cash gain of $18.6 million on the extinguishment of debt.

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 12.0% for the quarter and 12.4% for the six-month period compared to 2008. This was driven by a 31.4% drop in national advertising and a 77.0% drop in political advertising (due to 2009 being a non-election year). Automotive advertising revenue fell approximately 43% year-over-year.
• Retransmission Growth: Retransmission compensation revenue increased 91.3% for the quarter and 76.2% for the six-month period, partially offsetting declines in traditional advertising.
• Operating Expenses: Corporate expenses increased 53.7% for the six-month period, primarily due to $2.9 million in fees associated with a debt exchange offer. Station direct operating expenses decreased slightly due to lower sales commissions.
• Acquisitions: Nexstar acquired WCWJ (Jacksonville, FL) for $17.2 million and KARZ (Little Rock, AR) for $4.0 million during the period.

Guidance, Outlook, and Risks

• Debt Restructuring: In March 2009, Nexstar exchanged $143.6 million of 7% senior subordinated notes for 7% senior subordinated Payment-in-Kind (PIK) notes. This was done to manage leverage ratios and preserve cash. The PIK notes do not count toward leverage covenants until January 2011.
• Liquidity and Covenants: The company is highly leveraged. As of June 30, 2009, Nexstar was in compliance with all debt covenants. Management believes cash flow and available borrowings ($2.2 million available under revolving facilities) are sufficient for the next 12 months, though they may need to divest assets or refinance if conditions worsen.
• DTV Conversion: The company completed the analog-to-digital transition for most stations by the June 12, 2009 deadline. Remaining capital expenditures for DTV conversion are expected to be funded by cash on hand.
• Cost Containment: Management implemented cost-saving measures including a one-week company-wide furlough, elimination of corporate bonuses, and regionalization of back-office functions.
• Accounting Correction: The company corrected an error regarding depreciation of fixed assets related to the KTVE acquisition, which increased the net loss by $0.2 million for the period. Management deemed this immaterial.

Investor Verification Checklist

• Covenant Compliance: Verify the company's ability to maintain leverage and interest coverage ratios given the high debt load and revenue declines.
• Debt Maturity Wall: Review the schedule of debt maturities, noting significant principal payments due in 2012-2013 and the conversion of PIK notes to cash interest in 2011.
• Advertising Trends: Monitor the recovery of automotive and national advertising spend, which are key revenue drivers.
• Asset Impairment Risk: Assess the risk of goodwill or FCC license impairment if advertising market conditions deteriorate further.
• Capital Expenditures: Confirm the completion and cost of remaining DTV conversion projects for stations KSNF, KQTV, and KMID.