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BLC > SEC Filings for BLC > Form 10-K on 6-Mar-2013All Recent SEC Filings

Show all filings for BELO CORP

Form 10-K for BELO CORP


6-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the other sections of the Annual Report on Form 10-K, including Item 1-Business, Item 1A-Risk Factors, Item 6-Selected Financial Data, Item 7A-Quantitative and Qualitative Disclosures about Market Risks, Item 9A-Controls and Procedures and the Consolidated Financial Statements and the notes thereto. Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Item 1A-Risk Factors.

All references to earnings per share represent diluted earnings per share.

Dollars in thousands, except per share amounts.

OVERVIEW

Belo, a Delaware corporation, began as a Texas newspaper company in 1842 and today is one of the nation's largest publicly-traded pure-play television companies. The Company owns 20 television stations (nine in the top 25 U.S. markets) that reach more than 14 percent of U.S. television households, including ABC, CBS, NBC, FOX, CW and MyNetwork TV affiliates, and their associated websites, in 15 markets across the United States. The Company also has three local and two regional news channels.

Belo Corp. 2012 Annual Report on Form 10-K PAGE 17


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The Company believes the success of its media franchises is built upon providing the highest quality local and regional news, entertainment programming and service to the communities in which they operate. These principles have built durable relationships with viewers, readers, advertisers and online users and have guided Belo's success.

The Company intends for the discussion of its 2012 and prior period financial condition and results of operations that follows to provide information that will assist in understanding the Company's financial statements, the changes in certain key items in those statements from period to period and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the Company's financial statements.

The principal source of the Company's revenue is from the sale of local, regional and national advertising. During 2012, the Company benefited from record political revenue and had significant growth in its largest industry category, automotive. The Company's combined station and corporate operating costs grew by two percent for the year compared to 2011. During 2011, spot revenues (excluding political spot revenues) increased over 2010 despite the uneven economy and an automotive category that was adversely affected by events in Japan during 2011. Additional discussion regarding the Company's results of operations in 2012 as compared to 2011, and 2011 as compared to 2010, is provided below.

RESULTS OF OPERATIONS

Consolidated Results of Operations



                                                  Percentage                            Percentage
Year ended December 31,              2012           Change              2011              Change            2010
Net operating revenues             $ 714,719              9.9 %       $ 650,142                (5.4 %)    $ 687,395
Pension settlement charge and
contribution reimbursements                -               NM            20,466                  NM          (8,572 )
Other operating costs and
expenses                             485,639              2.0 %         475,968                (0.9 %)      480,429

Total operating costs and
expenses                             485,639             (2.2 %)        496,434                 5.2 %       471,857

Earnings from operations             229,080             49.0 %         153,708               (28.7 %)      215,538
Other income (expense)               (72,421 )           10.0 %         (65,852 )             (13.9 %)      (76,518 )

Earnings before income taxes         156,659             78.3 %          87,856               (36.8 %)      139,020
Income tax expense                    56,929             90.4 %          29,898               (42.6 %)       52,114

Net earnings                       $  99,730             72.1 %       $  57,958               (33.3 %)    $  86,906
Less: Net (loss) from
noncontrolling interests                (440 )             NM                 -                   -               -

Net earnings attributable to
Belo Corp.                         $ 100,170             72.8 %       $  57,958               (33.3 %)    $  86,906


NM means not meaningful

Net Operating Revenues



                                                 Percentage                         Percentage
Year ended December 31,            2012            Change             2011            Change            2010
Spot advertising revenue         $ 586,193              10.1 %      $ 532,228              (7.2 %)    $ 573,638
Other revenue                      128,526               9.0 %        117,914               3.7 %       113,757

Net operating revenues           $ 714,719               9.9 %      $ 650,142              (5.4 %)    $ 687,395

Spot advertising revenue increased $53,965, or 10.1 percent, in the year ended December 31, 2012, compared to the year ended December 31, 2011. This increase is primarily due to a $51,616 increase in political spot revenue. Political revenues are generally higher in even-numbered years than in odd-numbered years due to elections for various state and national offices. Combined local and national spot revenue was up slightly with increases in the automotive, travel and financial services categories offset by decreases in the entertainment and gambling, restaurants, healthcare, grocery and telecommunications categories. Other revenue increased primarily due to an 18.8 percent increase in retransmission revenue and a 15.5 percent increase in Internet revenue. The increases were partially offset by a decline of $5,454 in network compensation.

PAGE 18 Belo Corp. 2012 Annual Report on Form 10-K


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Spot advertising revenue decreased $41,410, or 7.2 percent, in the year ended December 31, 2011, compared to the year ended December 31, 2010. This decrease is primarily due to a $46,041 decrease in political spot revenue. Political revenues are generally higher in even-numbered years than in odd-numbered years due to elections for various state and national offices. Combined local and national spot revenue was up slightly with increases in the automotive, healthcare, retail, and telecommunications categories offset by decreases in the entertainment and gambling, grocery and professional services categories. Other revenue increased primarily due to a 20.1 percent increase in retransmission revenue and a 12.0 percent increase in Internet revenue, partially offset by lower network compensation of $7,005.

Operating Costs and Expenses

For the year ended December 31, 2012, station salaries, wages and employee benefits increased $9,487, or 4.4 percent, primarily due to an increase of $4,507 related to annual merit increases and sales commissions on higher revenue, increases in accrued performance-based bonus expense of $2,119, increases in the Company's employer match for the Belo Savings Plan
(401(k) plan) of $1,179, and an increase in expenses for workers' compensation and medical insurance of $1,340. Station programming and other operating costs decreased $7,178, or 3.5 percent, primarily related to a $15,622 decrease in programming costs. The decrease in programming costs was mostly related to savings in syndicated programming expenses, which were partially offset by a less significant increase in programming payments to the networks. The decrease in programming expense was partially offset by a $2,733 increase in national representation fees related to political revenue, a $1,479 increase in repairs and maintenance expenses, a $1,399 increase in spending for revenue-generating interactive initiatives.

For the year ended December 31, 2011, station salaries, wages and employee benefits increased $4,916, or 2.3 percent, primarily due to increases in salary expense of $3,535, partial reinstatement of the Company's employer match for the Belo Savings Plan (401(k) plan) of $2,474, and higher station pension expense of $2,110, partially offset by decreases in accrued performance-based bonuses of $4,234. Station programming and other operating costs increased $5,669, or 2.8 percent, primarily due to the non-cash expense reduction in 2010 of $7,037 related to a 2005 Federal Communications Commission decision that allowed a major wireless provider to finance the replacement of analog news gathering equipment with digital equipment in exchange for stations vacating the analog spectrum earlier than required. Six Belo markets converted to this digital equipment in the first half of 2010. Additionally, technology costs increased $3,495, advertising expense increased $3,330 and interactive outside services increased $1,545. These increases were partially offset by decreases in programming expense of $7,691 and national representation fees of $2,333.

Corporate operating costs increased $8,055, or 31.8 percent, for the year ended December 31, 2012, primarily due to increases in salary expense of $1,230, performance-based compensation under the long-term incentive plan of $4,701 and due to the non-cash expense reduction in 2011 related to a favorable settlement of a property tax issue.

Corporate operating costs decreased $11,149, or 30.6 percent, for the year ended December 31, 2011, primarily due to decreases in technology support costs of $3,620, lower pension expense of $3,366 related to the pension split discussed below, and lower accrued performance-based bonuses of $2,679.

In October 2010, Belo and A. H. Belo agreed to split The G. B. Dealey Retirement Pension Plan (Pension Plan) into separately-sponsored pension plans effective January 1, 2011. Under the agreement, participant benefit liabilities and assets allocable to approximately 5,100 current and former employees of A. H. Belo and its related newspaper businesses were transferred to two new defined benefit pension plans created, sponsored, and managed by or on behalf of A. H. Belo. Effective January 1, 2011, the new A. H. Belo plans were solely responsible for paying participant benefits for the current and former employees of A. H. Belo, and the Company is no longer responsible for those liabilities. The participant benefit liabilities and assets pertaining to current and former employees of Belo, and its related television businesses, continue to be held by the Pension Plan sponsored and managed by or on behalf of Belo.

For Belo, the January 1, 2011, pension split transaction was treated as a settlement under ASC 715. Under settlement accounting for pensions, the split of the Company's Pension Plan resulted in the transfer of $238,833 in Pension Plan assets and $339,799 in Pension Plan liabilities to the new plans sponsored by
A. H. Belo. This resulted in a reduction in the net unfunded liability of $100,966, which was recorded as a non-cash settlement gain, and recognition of $129,665 in actuarial losses previously recognized in accumulated other comprehensive loss, which was

Belo Corp. 2012 Annual Report on Form 10-K PAGE 19


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recorded as a non-cash settlement charge. This settlement gain and charge resulted in a net non-cash settlement charge of $28,699. This charge was partially offset by a final net pension contribution reimbursement of $8,233 received from A. H. Belo as previously discussed. For the year ended December 31, 2011, the Company made contributions totaling $27,157 to the Pension Plan related to the 2010 and 2011 plan years and A. H. Belo reimbursed the Company $8,233 related to the contributions for the 2010 plan year. A. H. Belo has no further obligations to reimburse the Company for any contributions after the 2010 plan year. The combined result of all pension split settlement transactions in 2011 was a net charge before taxes of $20,466.

Other income (expense)

Interest expense decreased $2,688, or 3.7 percent, for the year ended December 31, 2012, compared to the year ended December 31, 2011, primarily due to decreased interest costs associated with the early redemption of the Senior Notes originally due May 2013 (the 2013 Senior Notes) and decreased interest costs associated with lower variable rate debt borrowings versus the same period in 2011.

Interest expense decreased $5,502, or 7.1 percent, for the year ended December 31, 2011, compared to the year ended December 31, 2010, primarily due to decreased interest costs associated with lower variable rate debt borrowings versus the same period in 2010. In addition, commitment fees and amortization of financing costs associated with the variable rate debt declined due to the Company's election to reduce commitments under the credit agreements in August 2010. In connection with the December 2011 amendment to the credit facility, the Company recognized a charge to interest expense of $698 related to the write-off of prior debt issuance costs. This charge partially offset the decrease in interest expense discussed above.

Other income, net decreased $9,257, in 2012 primarily due to a $5,702 charge related to the early repayment of the 2013 Senior Notes and a $4,467 non-cash gain realized in 2011 as described below.

Other income, net increased $5,164, in 2011 primarily due a $4,467 non-cash gain realized on the settlement of ownership of certain Dallas, Texas properties previously held in a limited liability company jointly owned with A. H. Belo.

Income taxes

Income tax expense increased $27,031, or 90.4 percent, for the year ended December 31, 2012, compared to the year ended December 31, 2011, primarily due to higher pretax earnings and a tax benefit in 2011 as described below. The Company's effective tax rate was 36.3 percent for the year ended December 31, 2012.

Income tax expense decreased $22,216, or 42.6 percent, for the year ended December 31, 2011, compared to the year ended December 31, 2010, primarily due to lower pretax earnings, including a $7,143 tax benefit related to deferred tax adjustments for the pension settlement charge, and settlement of certain tax matters in 2011. The Company's effective tax rate was 34.0 percent for the year ended December 31, 2011.

Net earnings attributable to Belo Corp.

As a result of the matters discussed above, the Company recorded net earnings attributable to Belo Corp. of $100,170, or $0.95 per share, for 2012, compared with net earnings attributable to Belo Corp. of $57,958, or $0.55 per share, for 2011, and net earnings attributable to Belo Corp. of $86,906, or $0.83 per share, for 2010.

PAGE 20 Belo Corp. 2012 Annual Report on Form 10-K


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Station Adjusted EBITDA



                                                   Percentage                            Percentage
Year ended December 31,             2012             Change              2011              Change            2010
Station Adjusted EBITDA           $ 292,576               27.0 %       $ 230,308               (17.2 %)    $ 278,146
Corporate operating costs           (33,393 )             31.8 %         (25,338 )             (30.6 %)      (36,487 )
Depreciation                        (30,103 )             (2.3 %)        (30,796 )             (11.2 %)      (34,693 )
Pension settlement charge and
contribution reimbursements               -                 NM           (20,466 )                NM           8,572


Earnings from operations          $ 229,080               49.0 %       $ 153,708               (28.7 %)    $ 215,538

NM means not meaningful

Belo's management uses Station Adjusted EBITDA as the primary measure of profitability to evaluate operating performance and to allocate capital resources and bonuses to eligible operating company employees. Station Adjusted EBITDA represents the Company's earnings from operations before interest expense, income taxes, depreciation, amortization, impairment charges, pension settlement charge and contribution reimbursements and corporate operating costs and expenses. Other income (expense), net is not allocated to television station earnings from operations because it consists primarily of equity in earnings (losses) from investments in partnerships and joint ventures and other non-operating income (expense). Station Adjusted EBITDA is a common alternative measure of performance used by investors, financial analysts and rating agencies to evaluate financial performance.

For the year ended December 31, 2012, Station Adjusted EBITDA increased $62,268, or 27.0 percent, compared with the year ended December 31, 2011. As discussed above, this increase was primarily due to higher 2012 political spot revenues and lower station programming and other operating costs, partially offset by increases in station salaries, wages and employee benefits. For the year ended December 31, 2011, Station Adjusted EBITDA decreased $47,838, or 17.2 percent, compared with the year ended December 31, 2010. As discussed above, this decrease was primarily due to lower 2011 political spot revenues, and increases in station salaries, wages and employee benefits, and station programming and other operating costs.

FORWARD-LOOKING STATEMENTS

Statements in Items 7 and 7A and elsewhere in this Annual Report on Form 10-K concerning Belo's business outlook or future economic performance, anticipated profitability, revenues, expenses, capital expenditures, investments, future financings, impairments, pension matters, and other financial and non-financial items that are not historical facts, are "forward-looking statements" as the term is defined under applicable federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors described throughout this filing, and particularly in Item 1A-Risk Factors, that could cause actual results to differ materially from those predicted in any such forward-looking statement. Belo undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Such risks, uncertainties and factors include, but are not limited to, uncertainties regarding changes in capital market conditions and prospects, and other factors such as changes in advertising demand, interest and discount rates and programming and production costs; changes in viewership patterns and demography, and actions by viewership measurement services; changes in the network-affiliate business model for broadcast television; technological changes, and the development of new systems and devices to distribute and consume television and other audio-visual content; changes in the ability to secure, and in the terms of, carriage of Belo programming on cable, satellite, telecommunications and other program distribution methods; development of Internet commerce; industry cycles; changes in pricing or other actions by competitors and suppliers; FCC and other regulatory, tax and legal changes, including changes regarding spectrum; adoption of new accounting standards or changes in existing accounting standards by the Financial Accounting Standards Board or other accounting standard-setting bodies or authorities; the effects of Company acquisitions, dispositions, co-owned ventures and investments; pension plan matters; general economic conditions; and significant armed conflict, as well as other risks detailed in Belo's other public disclosures and filings with the SEC and elsewhere in this Annual Report on Form 10-K.

Belo Corp. 2012 Annual Report on Form 10-K PAGE 21


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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Belo's financial statements are based on the selection and application of accounting policies that require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical accounting policies currently affecting Belo's financial position and results of operations. See the Consolidated Financial Statements, Note 1-Summary of Significant Accounting Policies, for additional information concerning significant accounting policies.

Revenue Recognition Belo's principal sources of revenue are the sale of airtime on its television stations, advertising space on the Company's Internet websites and retransmission of its programming by cable, satellite, telephone and wireless companies. Broadcast revenues are recorded, net of agency commissions, when commercials are aired. Advertising revenues for Internet websites are recorded, net of agency commissions, as advertisements are displayed on websites. Retransmission revenues are recognized in the period earned.

Program Rights Program rights represent the right to air various forms of first-run and existing second-run programming. Program rights and the corresponding contractual obligations are recorded when the license period begins and the programs are available for use. Program rights are carried at the lower of unamortized cost or estimated net realizable value on a program-by-program basis. Program rights and the corresponding contractual obligations are classified as current or long-term based on estimated usage and payment terms, respectively. Costs of off-network syndicated programs, first-run programming and feature films are amortized on a straight-line basis over the future number of showings allowed in the contract.

Impairment of Property, Plant and Equipment The Company reviews the carrying amount of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is measured by comparison of the carrying amount to the future undiscounted net cash flows the property and equipment is expected to generate. Based on assessments performed during the years ended December 31, 2012, 2011 and 2010, the Company did not record any impairment losses related to property, plant and equipment.

Impairment of Goodwill and Intangible Assets The Company classifies the FCC licenses apart from goodwill as separate indefinite-lived intangible assets. The Company's indefinite-lived intangible assets represent FCC licenses in markets (as defined by Nielsen Media Research's Designated Market Area report) where the Company's stations operate. Goodwill is recorded by reporting unit, with each reporting unit consisting of the television station(s) and cable news operations within a market. Goodwill and indefinite-lived intangible assets are required to be tested at least annually for impairment or between annual tests if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying amount. The Company measures the fair value of goodwill and indefinite-lived intangible assets annually as of December 31. Impairment arises when the carrying amount of the goodwill or FCC licenses is greater than its fair value.

The Company assesses qualitative factors to establish whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If the Company determines that the qualitative evaluation indicates that the reporting unit does not meet the more likely than not criteria of its fair value exceeding its carrying value, then further quantitative analysis is required.

For FCC licenses, the quantitative analysis for reporting units that do not pass the qualitative evaluation consists of comparing the calculated fair value of the market with its carrying amount. The calculated fair value is determined using a discounted projected cash flow analysis that assumes that the FCC licenses are held by hypothetical start-up stations. If the calculated fair value of the FCC license exceeds its carrying amount, the FCC license is not considered to be impaired.

For goodwill, the quantitative analysis for reporting units that do not pass the qualitative evaluation uses a two-step process. The first step is to identify whether a potential impairment exists by comparing the calculated fair value of a reporting unit with its carrying amount, including goodwill. The calculated fair value is determined using a discounted cash flow model that considers an estimated weighted-average cost of capital. If the calculated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds the calculated fair value, a second step is performed to determine the implied fair value of the goodwill of the reporting unit by deducting the fair value of all of the individual assets and liabilities of the reporting unit from the respective fair values of the reporting unit as a whole. To the extent the implied fair value of the goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.

PAGE 22 Belo Corp. 2012 Annual Report on Form 10-K


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In performing the quantitative assessments of the Company's goodwill and indefinite-lived intangible assets, the Company must make assumptions regarding future cash flow projections and other factors to estimate the fair value of the reporting units and intangible assets. Estimates of fair value are subjective in nature, involve uncertainties and matters of significant judgment, and are made at a specific point in time. Thus, changes in key assumptions from period to period could significantly affect the estimates of fair value. Significant assumptions used in the fair value estimates include projected revenues and related growth rates over time and in perpetuity (for 2012, perpetuity growth rates used in the quantitative analysis ranged from 1.7% to 3.0%), forecasted operating margins, estimated tax rates, capital expenditures, required working capital needs, and an appropriate risk-adjusted weighted-average cost of capital (for 2012, the weighted-average cost of capital used was 9.0%). Additionally, for the Company's FCC licenses, significant assumptions include costs and time associated with start-up, initial capital investments, and forecasts related to overall market performance over time.

Fair value estimates are inherently sensitive, particularly with respect to FCC licenses. At December 31, 2012, in two of the Company's 15 markets, the estimated fair value of the FCC licenses is less than 30 percent greater than their respective carrying values, with the closest market having an excess of estimated fair value over carrying value of 24 percent. A significant reduction in the fair value of the FCC licenses in either of these two markets could result in an impairment charge. As of December 31, 2012, the carrying value of the FCC licenses in those two markets represents approximately $231,415 of the Company's total $725,399 of FCC licenses. If some or all of the aforementioned key estimates or assumptions change in the future, the Company may be required to record impairment charges related to its indefinite-lived intangible assets.

As of December 31, 2012, goodwill at the Company's reporting units is somewhat . . .

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