NXST

Business Context and Reporting Period

Company: Nexstar Media Group, Inc. (Nexstar Broadcasting Group, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
Operations: Nexstar owns, operates, or provides services to 58 television stations across the U.S., including 33 owned stations and 25 stations operated via Local Service Agreements (LSAs), primarily with Mission Broadcasting, Inc. (Mission). The company operates as a single reportable segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 12.9% year-over-year. This was driven by a 14.4% drop in local advertising and a 25.1% drop in national advertising, largely due to the economic slowdown and a 78.9% decrease in political advertising (2009 is a non-election year). Automotive advertising specifically fell 41%.
• Retransmission Growth: Retransmission compensation increased 60.8% to $5.3 million, partially offsetting advertising declines.
• Profitability Turnaround: The company reported a net income of $6.1 million compared to a net loss of $15.3 million in Q1 2008. This improvement was primarily due to an $18.6 million gain on the extinguishment of debt and a $1.7 million gain on asset exchanges, which offset a $1.3 million operating loss.
• Debt Restructuring: Nexstar exchanged $143.6 million of 7% senior subordinated notes for 7% senior subordinated Payment-in-Kind (PIK) notes. This reduced cash interest obligations in the near term.
• Acquisitions: Nexstar acquired KARZ (Little Rock, AR) for $4.0 million in March 2009 and entered an agreement to acquire WCWJ (Jacksonville, FL) for $18.0 million, closing in May 2009.

Outlook, Risks, and Management Commentary

• Liquidity and Covenants: Management believes available cash, operating cash flow, and credit facility availability ($30.5 million unused) are sufficient to fund operations and debt service for the next 12 months. The company is currently in compliance with all debt covenants, including leverage and coverage ratios.
• Cost Containment: To maintain covenant compliance, Nexstar has eliminated corporate bonuses for 2008 and 2009, consolidated back-office processes, and implemented a management services agreement with Four Points Media Group. One-week furloughs for all employees remain a contingency plan.
• Digital Transition: The company is nearing the June 12, 2009, deadline for the analog-to-digital television transition. Q1 2009 DTV conversion expenditures were $4.0 million, with an estimated $1.4 million remaining for the year.
• Risks: The company is highly leveraged (132.2% debt-to-capitalization). Risks include the potential for asset impairment if advertising markets deteriorate further, the impact of the Chrysler bankruptcy on receivables (though reserves are deemed adequate), and the ability of banks to meet funding commitments under credit facilities.

Investor Verification Checklist

• Covenant Compliance: Verify continued compliance with the maximum total leverage ratio (6.50x) and senior leverage ratio (4.50x) given the high debt load and revenue pressures.
• Debt Structure: Confirm the impact of the new PIK notes on future cash flow, noting that cash interest payments on these notes do not begin until January 2011.
• Asset Impairment: Monitor goodwill and intangible assets (FCC licenses) for potential impairment charges if advertising revenue trends continue to decline.
• Chrysler Exposure: Review the adequacy of reserves for receivables related to Chrysler and subsidized auto dealers following the Chapter 11 filing.
• DTV Costs: Track remaining capital expenditures required to meet the June 12, 2009, digital conversion deadline.