NXST

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2010, for Nexstar Broadcasting Group, Inc. (Nexstar). Nexstar operates as a single reportable segment, owning and operating 34 television stations and providing sales and programming services to 25 additional stations, including 16 owned by Mission Broadcasting, Inc. (Mission), which Nexstar consolidates as a Variable Interest Entity (VIE). The company is highly leveraged and operates in a market influenced by political election cycles and general economic conditions.

Key Financial Metrics

Note: Operating margins improved significantly due to revenue growth and the absence of impairment charges recorded in the prior year.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 21.1% in Q3 2010 and 21.5% for the nine-month period compared to 2009. This was driven by a surge in political advertising (up over 5x in Q3 due to the 2010 election cycle), increased local and national advertising, and higher retransmission compensation.
• Operational Turnaround: The company reported operating income of $12.9 million in Q3 2010, a stark contrast to the $13.6 million operating loss in Q3 2009. The prior year's loss was heavily impacted by a $16.2 million impairment charge on goodwill and intangible assets, which did not recur in 2010.
• Debt Restructuring: In April 2010, Nexstar issued $325.0 million of 8.875% senior secured second lien notes due 2017. Proceeds were used to refinance senior credit facilities, repurchase approximately $34.3 million of Senior Subordinated PIK Notes, and pay transaction fees. This resulted in a $7.9 million loss on debt extinguishment for the nine months ended September 30, 2010.
• Interest Expense: Interest expense increased 65.1% in Q3 2010 compared to Q3 2009, primarily due to the higher interest rate on the new 8.875% notes compared to the previous credit facilities.

Outlook, Risks, and Management Commentary

• Liquidity: Management believes available cash, operating cash flow, and $75.0 million in unused revolving credit commitments are sufficient to fund operations and debt service for at least the next 12 months. The company is in compliance with all debt covenants as of September 30, 2010.
• Seasonality: Advertising revenue is expected to remain strong in the fourth quarter due to the holiday retail season and the conclusion of the 2010 political election cycle.
• Stock-Based Compensation: A one-time non-cash charge of $1.6 million was recognized in the nine months ended September 30, 2010, related to the repricing of stock options approved by shareholders in May 2010.
• Risks: The company remains highly leveraged, making it vulnerable to economic downturns and changes in credit markets. Future impairment of goodwill or intangible assets could occur if advertising marketplaces deteriorate significantly. Regulatory changes by the FCC regarding media ownership and digital transition also pose potential risks.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the maximum total leverage ratio (8.75:1) and fixed charge coverage ratio (1.10:1) given the high debt load.
• Political Revenue Sustainability: Assess the extent to which Q3 and YTD revenue growth is attributable to the 2010 election cycle versus organic growth in local/national advertising.
• Interest Coverage: Monitor the impact of the new 8.875% notes on future cash flows, as interest expense has risen significantly.
• Asset Impairment: Review the carrying value of goodwill ($109.1 million) and FCC licenses ($127.5 million) for potential future impairment triggers if ad markets soften.
• Mission Consolidation: Understand the financial exposure related to Mission Broadcasting, which is consolidated as a VIE despite Nexstar not owning the stations directly.