NXST

Business Context and Reporting Period

Company: Nexstar Broadcasting Group, Inc. (Nexstar)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Nexstar is a television broadcasting company focused on acquiring, developing, and operating stations in medium-sized U.S. markets (DMA ranks 50–175). As of December 31, 2007, Nexstar owned and operated 32 stations and provided sales or other services to 17 additional 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 company reported a net loss for the third consecutive year, though the loss narrowed significantly compared to 2005. Total debt represented 115.1% of total capitalization as of December 31, 2007.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 0.6% to $266.8 million. This was driven by a $14.1 million increase in gross local and national advertising revenue (partially due to the inclusion of newly acquired station WTAJ), a $3.1 million increase in retransmission compensation, and a $5.0 million increase in new media revenue.
• Political Advertising Decline: Political advertising revenue dropped significantly from $27.0 million in 2006 to $4.3 million in 2007, reflecting the difference between an election year (2006) and a non-election year (2007).
• Operating Expenses: Total operating expenses increased, primarily due to the inclusion of expenses from the newly acquired WTAJ station and increased payroll costs. However, corporate expenses decreased by $1.3 million due to lower incentive compensation and professional fees.
• Acquisitions: In December 2006, Nexstar acquired WTAJ (CBS, Johnstown-Altoona) and WLYH (The CW, Harrisburg-Lancaster-Lebanon-York) for $55.1 million. These stations contributed to 2007 results but were not present in 2006.
• Debt Repayment: The company repaid $21.5 million of debt under senior secured credit facilities in 2007, including $18.0 million in revolving loan repayments.

Guidance, Outlook, and Risks

• Outlook: Management expects a significant increase in political advertising revenue in 2008 due to the upcoming election cycle. The Television Bureau of Advertising forecasted a 9% to 10% increase in U.S. television spot advertising revenue for 2008.
• Digital Television (DTV) Conversion: The company is in the process of converting to digital-only broadcasting by the February 17, 2009 deadline. Capital expenditures for DTV conversion were $8.6 million in 2007. Management projects 2008 capital expenditures to be approximately $33 million, with $29 million dedicated to DTV conversion.
• Debt Covenants: The company is highly leveraged. A significant covenant compliance issue is anticipated for June 30, 2008, when the remaining principal of the 11.375% senior discount notes ($83.1 million) must be included in the total leverage ratio calculation. Management is pursuing initiatives to ensure compliance, including modifying vendor payment terms and repositioning capital expenditures.
• Key Risks:
  • High Leverage: Debt levels limit flexibility for acquisitions and growth and expose the company to interest rate risk.
  • Regulatory Risk: FCC ownership rules, specifically regarding duopolies and local service agreements, could restrict future growth or require divestitures.
  • Advertising Dependence: Revenue is heavily dependent on advertising, making the company vulnerable to economic downturns and shifts in viewer preferences.
  • Network Affiliations: Loss or non-renewal of network affiliation agreements could materially harm operations.

Investor Verification Checklist

• Covenant Compliance: Verify the company's ability to meet the June 30, 2008 leverage ratio covenant after the inclusion of the 11.375% senior discount notes.
• DTV Capital Expenditures: Monitor actual 2008 capital spending against the projected $33 million to ensure liquidity is not strained.
• Political Revenue Volatility: Assess the impact of the 2008 election cycle on Q2 and Q4 2008 revenue compared to the low base of 2007.
• Mission Consolidation: Review the terms of the local service agreements and purchase options with Mission Broadcasting to understand the risks associated with consolidating an entity not wholly owned.
• Debt Maturities: Note the $46.9 million redemption of 11.375% senior discount notes required on April 1, 2008, and the company's funding strategy for this payment.