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TVL > SEC Filings for TVL > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for LIN TV CORP.

Form 10-Q for LIN TV CORP.


9-Nov-2012

Quarterly Report

Management's Discussion and Analysis

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note about Forward-Looking Statements

This report contains certain forward-looking statements with respect to our financial condition, results of operations and business, including statements under this caption Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations". All of these forward-looking statements are based on estimates and assumptions made by our management, which, although we believe them to be reasonable, are inherently uncertain. Therefore, you should not place undue reliance upon such estimates and statements. We cannot assure you that any of such estimates or statements will be realized and actual results may differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include those discussed under the caption Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011 ("10-K"). Many of these factors are beyond our control.

Forward-looking statements contained herein speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Executive Summary

We are a local multimedia company that, upon the completion of the acquisition further described below, operates or services 43 television stations, seven digital channels and a growing portfolio of web sites, applications and mobile products in 23 U.S. markets. Our operating revenues are primarily derived from the sale of advertising time to local, national and political advertisers. Additional, but less significant revenues are generated from our television station web sites, retransmission consent fees, interactive revenues and other revenues.

During the three and nine months ended September 30, 2012, net revenues increased $35.3 million and $68.8 million, respectively, compared to the same periods in 2011, primarily driven by an increase in our political advertising sales and local revenues. Political advertising sales increased $18.1 million and $25.9 million for the three and nine months ended September 30, 2012, respectively, compared to the same periods last year. During the three and nine months ended September 30, 2012, local revenues, which include net local advertising sales, retransmission consent fees and television station web site revenues, increased $10.7 million and $29.3 million, respectively, compared to the same periods last year. Our interactive revenues and national advertising sales also increased during both periods. Interactive revenues increased $4.1 million and $9.6 million, and national advertising sales increased $2.6 million and $5 million during the three and nine months ended September 30, 2012, respectively, compared to the same periods last year.

During the three and nine months ended September 30, 2012, we recognized an additional shortfall liability of $4.2 million, for our approximate 20% share of debt service shortfalls at our joint venture with NBCUniversal Media, LLC ("NBCUniversal"). During the three and nine months ended September 30, 2012, we made shortfall loans in the principal amounts of $0.6 million and $2.3 million, respectively, to our joint venture with NBCUniversal. As of September 30, 2012, we have an accrued shortfall liability of $6 million for our approximate 20% share of debt service shortfalls that we expect to fund during the remainder of 2012 and through 2013. Based on the joint venture's preliminary budget for 2013, and certain long range forecast data provided by joint venture management, we believe that additional debt service shortfalls beyond those currently accrued are not probable. However, our prospective shortfall obligations could vary from our estimate based upon changes in the performance of the joint venture stations and any changes to the proportionate share of each party's debt service shortfall obligation. For further information see Note 11 - "Commitments and Contingencies".

On October 12, 2012, LIN Television completed its acquisition (the "Acquisition") of television stations in eight markets from affiliates and subsidiaries of New Vision Television, LLC ("New Vision") for $334.9 million, subject to certain post-closing adjustments, and including the assumption of $14.3 million of finance lease obligations. Additionally, on October 12, 2012, Vaughan Acquisition LLC ("Vaughan"), a third-party licensee, completed its acquisition of separately owned television stations in three markets for $4.6 million from PBC Broadcasting, LLC ("PBC"). LIN Television also agreed to provide certain services to the television stations acquired by Vaughan pursuant to shared services arrangements with Vaughan. We expect that Vaughan will be considered a VIE, of which we are the primary beneficiary, and that we will consolidate the assets, liabilities, and results of operations of Vaughan and its consolidated subsidiaries. For further information on these acquisitions see Note 2 - "Acquisitions".


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On October 12, 2012, LIN Television completed the issuance and sale of $290 million in aggregate principal amount of its 63/8% Senior Notes due 2021 (the "63/8% Senior Notes"). The net proceeds of the 63/8% Senior Notes were used to fund the remaining purchase price for the acquisition of television stations from New Vision as further described above. Additionally, on October 12, 2012, Vaughan entered into a five-year term loan with an unrelated third party in a principal amount of approximately $4.6 million to fund the purchase price for the television stations from PBC that were acquired by Vaughan. LIN Television fully and unconditionally guarantees this loan. For further information see Note 13 - "Subsequent Events".

On February 16, 2012, we completed the sale of substantially all of the assets of WWHO-TV in Columbus, OH to Manhan Media, Inc. On April 21, 2012, we completed the sale of substantially all of the assets of WUPW-TV in Toledo, OH to WUPW, LLC. For further information see Note 3 - "Discontinued Operations".

On January 20, 2012, we completed the redemption of $251 million, net of a discount of $1.2 million, of our 6% Senior Subordinated Notes and our 6% Senior Subordinated Notes - Class B ("6% Senior Subordinated Notes"), and as of that date, there were no 6% Senior Subordinated Notes outstanding. We used proceeds from an incremental term loan under our senior secured credit facility and cash on hand to fund the aggregate redemption price.

Critical Accounting Policies and Estimates

Certain of our accounting policies, as well as estimates we make, are critical to the presentation of our financial condition and results of operations since they are particularly sensitive to our judgment. Some of these policies and estimates relate to matters that are inherently uncertain. The estimates and judgments we make affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an on-going basis, we evaluate our estimates, including those used for allowance for doubtful accounts in receivables, valuation of goodwill and intangible assets, amortization and impairment of program rights and intangible assets, stock-based compensation and other long-term incentive compensation arrangements, pension costs, barter transactions, income taxes, employee medical insurance claims, useful lives of property and equipment, contingencies, including shortfall funding liabilities to our joint venture with NBCUniversal, litigation and net assets of businesses acquired. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and it is possible that such differences could have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements

In July 2012, there were revisions to the accounting standard for impairment tests of indefinite-lived intangible assets other than goodwill. Under the revised standard a company can first perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. A company can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets, and can also bypass the qualitative assessment and perform the quantitative impairment test for any indefinite-lived intangible in any period. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted during 2012 if a company has not yet performed its 2012 annual impairment test or issued its financial statements. We will adopt this guidance no later than January 1, 2013, and we do not expect it to have a material impact on our financial position or results of operations.

In September 2011, there were revisions to the accounting standard for goodwill impairment tests. A company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The revisions are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this guidance effective January 1, 2012, and the adoption did not have an impact on our financial position or results of operations.

In September 2011, there were revisions to the accounting standard for reporting comprehensive income, which require presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We elected to present this information in a separate statement included within the primary financial statements following our consolidated statement of operations. The revisions are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. We adopted this guidance effective January 1, 2012, and the adoption did not have an impact on our financial position or results of operations.

In May 2011, the fair value accounting standard was amended to change fair value measurement principles and disclosure requirements. The key changes in measurement principles include limiting the concepts of the highest and best use and valuation premise to nonfinancial assets, providing a framework for considering whether a premium or discount can be applied in a fair value


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measurement, and aligning the fair value measurement of instruments classified within an entity's stockholders' equity with the guidance for liabilities. Disclosures are required for all transfers between Levels 1 and 2 within the valuation hierarchy, the use of a nonfinancial asset measured at fair value if its use differs from its highest and best use, the level in the valuation hierarchy of assets and liabilities not recorded at fair value but for which fair value is required to be disclosed, and for Level 3 measurements, quantitative information about unobservable inputs used, a description of the valuation processes used, and qualitative discussion about the sensitivity of the measurements. We adopted this guidance effective January 1, 2012, and the adoption did not have an impact on our financial position or results of operations.

Results of Operations



Set forth below are key components that contributed to our operating results (in
thousands):



                                Three Months Ended                 Nine Months Ended
                                   September 30,                     September 30,
                                                    %                                  %
                             2012       2011     Change       2012        2011      Change
Local revenues             $ 72,993   $ 62,323     17%      $ 214,924   $ 185,632     16%
National advertising
sales                        26,102     23,473     11%         74,625      69,651     7%
Political advertising
sales                        20,389      2,320    779%         30,970       5,092    508%
Interactive revenues         10,876      6,815     60%         28,382      18,772     51%
Other revenues                2,716      2,885    (6)%          8,391       9,351    (10)%
Net revenues                133,076     97,816     36%        357,292     288,498     24%

Direct operating             38,152     33,501     14%        110,554      95,571     16%
Selling, general and
administrative               28,365     25,182     13%         84,791      76,881     10%
Amortization of program
rights                        5,612      5,517     2%          16,212      16,192      -
Corporate                     9,264      5,881     58%         24,229      19,703     23%
Depreciation                  6,824      6,530     5%          20,234      19,153     6%
Amortization of
intangible assets               507        233    118%          1,462         781     87%
Restructuring charge              -        498   (100)%             -         498   (100)%
(Gain) loss from asset
dispositions                    (15 )       51   (129)%           (12 )       409   (103)%
Total operating expenses     88,709     77,393     15%        257,470     229,188     12%
Operating income           $ 44,367   $ 20,423    117%      $  99,822   $  59,310     68%

Period Comparison

Revenues

Net revenues consist primarily of local revenues, which include net local advertising sales, retransmission consent fees and television station web site revenues, and net national and political advertising sales. Additional revenues include interactive revenues, barter revenues, network compensation, production revenues, tower rental income and station copyright royalties.

During the three months ended September 30, 2012, net revenues increased by $35.3 million, or 36%, compared to the same period in the prior year. The increase was primarily due to: (i) an $18.1 million increase in political advertising sales; (ii) a $10.7 million increase in local revenues; (iii) a $4.1 million increase in interactive revenues; and (iv) a $2.6 million increase in national advertising sales. These increases were partially offset by a $0.2 million decrease in other revenues.

During the nine months ended September 30, 2012, net revenues increased by $68.8 million, or 24%, compared to the same period in the prior year. The increase was primarily due to: (i) a $29.3 million increase in local revenues; (ii) a $25.9 million increase in political advertising sales; (iii) a $9.6 million increase in interactive revenues; and (iv) a $5 million increase in national advertising sales. These increases were partially offset by a $1 million decrease in other revenues.

The increase in local revenues during both periods is a result of growth in local advertising sales, retransmission consent revenues and television station web site revenues. The growth in retransmission consent revenues was a result of contract renewals and contractual rate increases. Television station web site revenues increased as a result of increased advertising and increased traffic to our web sites, as well as rate increases compared to the same periods in the prior year. We also benefited during both periods from incremental advertising revenue from the 2012 Summer Olympic Games. The increase in political advertising sales during both periods is due to the 2012 Presidential, Congressional, state and local elections. The increase in interactive revenues during both periods is a result of


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growth in advertising sales from RMM compared to the same period in the prior year and revenues generated by Nami Media, which we acquired during the fourth quarter of 2011.

During the three and nine months ended September 30, 2012, the automotive category, which represented 28% and 27%, respectively, of local and national advertising sales, increased by 23% and 21%, respectively, as compared to the three and nine months ended September 30, 2011, during which the automotive category represented 24% and 23%, respectively, of local and national advertising sales. We believe the increases were primarily the result of disruptions in the automotive supply chain during the same periods of 2011, resulting from the March 2011 Japan earthquake and tsunami.

Operating Expenses

Operating expenses increased $11.3 million and $28.3 million, or 15% and 12%, for the three and nine months ended September 30, 2012, respectively, compared to the same periods last year. These increases are primarily due to increases in direct operating, selling, general and administrative and corporate expenses. Direct operating expenses increased $4.7 million and $15 million during the three and nine months ended September 30, 2012, respectively, compared to the same periods last year, primarily as a result of an increase in fees pursuant to network affiliation agreements, employee compensation expense and higher cost of goods sold related to RMM. Selling, general and administrative expenses increased $3.2 million and $7.9 million during the three and nine months ended September 30, 2012, respectively, primarily due to higher variable costs attributable to the growth in revenue compared to the same periods last year. Corporate expenses increased $3.4 million and $4.5 million during the three and nine months ended September 30, 2012, respectively, primarily due to increases in employee compensation expense and acquisition related expenses compared to the same periods last year.

Other Expense



The following summarizes the components of other expense, net (in thousands):



                                        Three Months Ended       Nine Months Ended
                                          September 30,            September 30,
                                         2012         2011        2012        2011
Components of other expense, net:
Interest expense, net                 $     9,310   $ 12,608   $   28,946   $ 38,257
Share of loss in equity investments         4,156      3,071        4,309      4,238
Gain on derivative instruments                  -       (565 )          -     (1,768 )
Loss on extinguishment of debt                  -          -        2,099        192
Other expense, net                             88         60          176         58
Total other expense, net              $    13,554   $ 15,174   $   35,530   $ 40,977

Other expense, net decreased $1.6 million and $5.4 million, or 11% and 13%, during the three and nine months ended September 30, 2012, respectively, compared to the same periods last year, primarily due to a decrease in interest expense as further described below. The decrease in other expense, net during the nine months ended September 30, 2012 was partially offset by a $1.9 million increase in loss on extinguishment of debt, which was a result of the redemption of our 6% Senior Subordinated Notes during the first quarter of 2012.

Interest Expense



The following summarizes the components of interest expense, net (in thousands):



                                            Three Months Ended       Nine Months Ended
                                              September 30,            September 30,
                                             2012         2011        2012        2011
Components of interest expense:
Senior secured credit facility            $    4,896    $    164   $   14,851   $    808
83/8% Senior Notes due 2018                    4,396       4,347       13,044     12,995
6% Senior Subordinated Notes                      -       4,664          595     14,042
6% Senior Subordinated Notes - Class B            -       2,757          306      8,295
Other                                             18         676          150      2,117
Total interest expense, net               $    9,310    $ 12,608   $   28,946   $ 38,257


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Interest expense, net decreased by $3.3 million and $9.3 million, or 26% and 24%, during the three and nine months ended September 30, 2012, respectively, compared to the same periods last year, primarily as a result of the redemption of our 6% Senior Subordinated Notes during the first quarter of 2012. The decreases were partially offset by an increase in interest expense in both periods as a result of an increase in borrowings under our senior secured credit facility compared to the same periods last year.

Provision for Income Taxes

Provision for income taxes increased $8.9 million and $11.3 million for the three and nine months ended September 30, 2012, respectively, compared to the same periods last year. The increase in the tax provision was primarily a result of the increase in income from operations before taxes as compared to the same period last year. Our effective income tax rate was 37.5% and 69.9 % for the nine months ended September 30, 2012 and September 30, 2011, respectively. The decrease in the effective income tax rate was primarily a result of state tax legislation enacted in Michigan in May 2011, which repealed the Michigan business tax ("MBT"), and implemented a corporate income tax instead, effective January 2012. As a result of the elimination of the MBT, certain future tax deductions, which were available to be utilized beginning in 2015, and had been recognized as deferred tax assets in our financial statements, will be not be deductible. Therefore, during the second quarter of 2011, we recognized incremental deferred income tax expense of $5.1 million, net of federal benefit, for the reversal of these previously established deferred tax assets.

Liquidity and Capital Resources

Our principal sources of funds for working capital have historically been cash from operations and borrowings under our senior secured credit facility. As of September 30, 2012, we had unrestricted cash and cash equivalents of $32.8 million, and a $75 million revolving credit facility, all of which was available, subject to certain covenant restrictions.

Our total outstanding debt as of September 30, 2012 was $580.9 million. This excludes the contingent obligation associated with our guarantee of the $815.5 million GECC Note associated with our joint venture with NBCUniversal (see Note
11 - "Commitments and Contingencies" for further details).

Our operating plan for the next 12 months anticipates that we generate cash from operations, utilize available borrowings, and make certain repayments of indebtedness, including mandatory repayments of term loans and incremental term loans under our senior secured credit facility. Our ability to borrow under our revolving credit facility is contingent on our compliance with certain financial covenants, which are measured, in part, by the level of earnings before interest expense, taxes, depreciation and amortization ("EBITDA") that we generate from our operations. As of September 30, 2012, we were in compliance with all financial and nonfinancial covenants under our senior secured credit facility.

Our future ability to generate cash from operations and from borrowings under our senior secured credit facility could be adversely affected by a number of risks, which are discussed in the Liquidity and Capital Resources section within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Item 1A. "Risk Factors" in our 10-K and elsewhere herein.

Our liquidity position during 2012 has been, and over the next 12 months and beyond will primarily be affected by, but is not limited to, the following:

Continued growth in local and interactive revenues. During the three and nine months ended September 30, 2012, our local revenues increased 17% and 16%, respectively, compared to the same periods in the prior year. Additionally, during the three and nine months ended September 30, 2012, our interactive revenues increased 60% and 51%, respectively, compared to the same periods in the prior year. We expect further growth in our local and interactive revenues, however, there can be no assurance that this will occur.

Cyclical fluctuations. We experience significant fluctuations in our political advertising revenues since advertising revenues are generally higher in even-numbered years due to additional revenues associated with political advertising related to local and national elections. During the three and nine months ended September 30, 2012, our net political advertising sales increased $18.1 million and $25.9 million, respectively, compared to the same periods in the prior year. We anticipate increased advertising revenues during the remainder of 2012 as a result of these cyclical fluctuations. Additionally, the U.S. Supreme Court's ruling in 2010 that allowed for unlimited independent political expenditures from corporations and unions may further increase political advertising spending in even numbered years.


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Acquisition of television stations from New Vision. On October 12, 2012, LIN Television completed its acquisition of television stations in eight markets from affiliates and subsidiaries of New Vision for $334.9 million, subject to certain post-closing adjustments, and including the assumption of $14.3 million of finance lease obligations. Pursuant to the terms of our purchase agreement with New Vision, $33.5 million of the purchase price at closing was funded from amounts previously deposited into escrow. The remaining purchase price of $301.4 million was funded from cash on hand and the net proceeds of the issuance and sale of the 63/8% Senior Notes. Additionally, on October 12, 2012, Vaughan, a third-party licensee, completed its acquisition of separately owned television stations in three markets for $4.6 million from PBC. For further information see Note 2 - "Acquisitions".

63/8% Senior Notes. On October 12, 2012, LIN Television completed the issuance and sale of $290 million in aggregate principal amount of its 63/8% Senior Notes. The net proceeds of the 63/8% Senior Notes were used to fund the remaining purchase price for the Acquisition. Additionally, on October 12, 2012, Vaughan entered into a five-year term loan with an unrelated third party in a principal amount of approximately $4.6 million to fund the purchase price for the television stations from PBC that were acquired by Vaughan. Vaughan subsequently made a principal payment of $1.3 million to the balance of the term loan. LIN Television fully and unconditionally guarantees this loan. For further information see Note 13 - "Subsequent Events".

6% Senior Subordinated Notes. On January 20, 2012, we completed the redemption of $251 million, net of a discount of $1.2 million, of our 6% Senior . . .

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