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TVL > SEC Filings for TVL > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for LIN TV CORP.


Annual Report

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

Executive Summary

We own, operate or service 43 television stations and seven digital channels in 23 U.S. markets, with multiple network affiliates in 18 markets, along with a diverse portfolio of web sites, apps and mobile products. Our operating revenues are primarily derived from the sale of advertising time to local, national and political advertisers. Less significant revenues are generated from our television station web sites, retransmission consent fees, interactive revenues and other revenues. We recorded net (loss) income of ($7.6) million, $48.8 million and $36.5 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Our operating highlights for 2012 include the following:

Net revenues increased $153.5 million, or 38%, compared to 2011, primarily as a result of a $68.3 million increase in net political advertising sales as well as an increase of $61 million, or 24%, in local revenues, which include net local advertising sales, retransmission consent fees and television station web site revenues. Also contributing to the increase in net revenues was an increase in interactive revenues, which include revenues from LIN Digital and Nami Media of $13.9 million, or 51%, and an increase in net national revenues of $11.6 million, or 12%. Television stations acquired during the fourth quarter of 2012 accounted for approximately $41 million of our net revenues for the year ended December 31, 2012.

On February 12, 2013, we entered into and closed the JV Sale Transaction whereby in exchange for LIN Television causing a $100 million capital contribution to SVH (which was used to prepay a portion of the GECC Note), LIN Texas sold its interest in SVH, a joint venture with NBC, and LIN TV was released from the GECC Guarantee and any further obligations related to the shortfall funding agreements. The $100 million capital contribution was financed by a combination of cash on hand, borrowings under LIN Television's revolving credit facility, and a new $60 million incremental term facility under LIN Television's existing senior secured credit facility. The JV Sale Transaction resulted in a $100 million charge recognized in the fourth quarter of 2012 to accrue for our obligations related to the JV Sale Transaction, and the recognition of taxable gains from the JV Sale Transaction resulting in a $163 million short-term deferred federal and state tax liability. Also on February 12, 2013, we announced that we entered into an Agreement and Plan of Merger with LIN LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of LIN TV. For further information, see Item 1. "Business-Joint Venture Sale Transaction," Note 1-"Basis of Presentation and Summary of Significant Accounting Policies," and Note 15-"Commitments and Contingencies" to our consolidated financial statements.

On October 12, 2012, we completed the acquisition of television stations in eight markets that were previously owned by affiliates 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. New Vision television stations accounted for approximately $40.0 million of our net revenues as of December 31, 2012. 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. We provide certain services to the television stations acquired by Vaughan pursuant to shared services and joint sales arrangements with Vaughan.

On December 10, 2012, we acquired certain assets of KWBQ-TV, in Santa Fe, New Mexico, KRWB-TV, in Roswell, New Mexico, and KASY-TV, Albuquerque, New Mexico from ACME for approximately $17.3 million, and KASY-TV Licensee, LLC ("KASY"), a third-party licensee, acquired the remaining assets of these television stations for $1.7 million. We provide certain services to the television stations acquired by KASY pursuant to a shared services agreement with KASY.

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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" to our consolidated financial statements.

On January 20, 2012, we completed the redemption of $251 million, net of a discount of $1.2 million, of our 61/2% Senior Subordinated Notes and our 61/2% Senior Subordinated Notes-Class B ("61/2% Senior Subordinated Notes"), and as of that date, there were no 61/2% 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.

On October 12, 2012, we completed the issuance and sale of $290 million in aggregate principal amount of our 63/8% Senior Notes due 2021 (the "63/8% Senior Notes"). The net proceeds of the 63/8% Senior Notes were used to fund a portion of the 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. We fully and unconditionally guarantee this loan. For further information see Note 7-"Long-term debt" to our consolidated financial statements.

On December 24, 2012, we entered into an amendment to our Credit Agreement, which (1) replaced our $257.4 million tranche B term loan maturing in December 2018 with a new tranche B term loan of the same maturity which bears interest at a reduced rate, at our option, equal to an adjusted LIBOR rate plus 3.00%, or an adjusted Base Rate plus 2.00%, (2) made certain other changes to the Credit Agreement, including changes to the financial covenants therein that are favorable to us and our affiliates, and (3) extended the maturity for a $60 million tranche of our revolving credit facility to October 2017.

Critical Accounting Policies, Estimates and Recently Issued Accounting Pronouncements

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, 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.

We believe the following critical accounting policies are those that are most important to the presentation of our consolidated financial statements, affect our more significant estimates and assumptions, and require the most subjective or complex judgments by management. We have discussed each of these critical accounting policies and related estimates with the Audit Committee of our Board of Directors. For additional information about these and other accounting policies, see Note 1-"Basis of Presentation and Summary of Significant Accounting Policies" to our consolidated financial statements included elsewhere in this report.

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Valuation of long-lived assets and intangible assets

Approximately $725.7 million, or 58.4%, of our total assets as of December 31, 2012 consisted of indefinite-lived intangible assets. Intangible assets principally include broadcast licenses and goodwill. If the fair value of these assets is less than the carrying value, we may be required to record an impairment charge.

We test the impairment of our broadcast licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of broadcast licenses with their carrying amount on a station-by-station basis using a discounted cash flow valuation method, assuming a hypothetical startup scenario. The future value of our broadcast licenses could be significantly impaired by the loss of the corresponding network affiliation agreements. Accordingly, such an event could trigger an assessment of the carrying value of a broadcast license.

We test the impairment of our goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. Our reporting units are comprised of the markets in which our TV stations operate, LIN Digital and Nami Media. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the reporting unit and prevailing rates in the markets for broadcasters. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing a hypothetical purchase price allocation, using the reporting unit's fair value (as determined in the first step described above) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recognized in an amount equal to that excess, but not more than the carrying value of the goodwill. An impairment assessment could be triggered by a significant reduction, or a forecast of such reductions, in operating results or cash flows at one or more of our reporting units, a significant adverse change in the national or local advertising marketplaces in which our television stations operate, or by adverse changes to FCC ownership rules, among other factors.

The assumptions used in the valuation testing have certain subjective components including anticipated future operating results and cash flows based on our own internal business plans as well as future expectations about general economic and local market conditions. The changes in the discount rate used for our broadcast licenses and goodwill reflected in the table below are primarily driven by changes in the average beta for the public equity of companies in the television and media sector and the average cost of capital in each of the periods. The changes in the market growth rates and operating profit margins for both our broadcast licenses and goodwill reflect changes in the outlook for advertising revenues in certain markets where our stations operate in each of the periods.

We based the valuation of broadcast licenses on the following average industry-based assumptions:

                                    December 31,     December 31,     December 31,
                                        2012             2011             2010
     Market revenue growth                   0.87 %            1.2 %            0.9 %
     Operating cash flow margins             30.9 %           30.6 %           30.5 %
     Discount rate                           10.5 %           10.5 %           10.5 %
     Tax rate                                38.3 %           38.3 %           38.3 %
     Long-term growth rate                    1.8 %            1.8 %            1.8 %

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As of December 31, 2012, we would not incur an impairment charge if we were to decrease the market revenue growth rate by 1% and 2%, respectively. A 5% and 10% decrease in operating profit margins would result in an impairment charge of $0 million and $18.7 million, respectively. An increase of 1% and 2% in the discount rate would not result in an impairment charge.

The valuation of goodwill is based on the following assumptions, which take into account our internal projections and industry assumptions related to market revenue growth, operating cash flows and prevailing discount rates:

                                    December 31,     December 31,     December 31,
                                        2012             2011             2010
     Market revenue growth                    1.2 %            1.8 %            1.0 %
     Operating cash flow margins             48.2 %           42.3 %           39.9 %
     Discount rate                           12.0 %           12.0 %           12.0 %
     Tax rate                                38.4 %           38.4 %           38.4 %
     Long-term growth rate                    1.8 %            1.8 %            1.9 %

As of December 31, 2012, if we were to decrease the market revenue growth by 1% and 2% of the projected growth rate, the enterprise value of our stations with goodwill would decrease by $152.9 million and $280.8 million, respectively. If we were to decrease the operating profit margins by 5% and 10% from the projected operating profit margins, the enterprise value of our stations with goodwill would decrease by $224.2 million and $447 million, respectively. If we were to increase the discount rate used in the valuation calculation by 1% and 2%, the enterprise value of our stations with goodwill would decrease by $203.2 million and $370.4 million, respectively.

Network affiliations

Other broadcast companies may use different assumptions in valuing acquired broadcast licenses and their related network affiliations than those that we use. These different assumptions may result in the use of valuation methods that can result in significant variances in the amount of purchase price allocated to these assets by these broadcast companies.

We believe that the value of a television station is derived primarily from the attributes of its broadcast license. These attributes have a significant impact on the audience for network programming in a local television market compared to the national viewing patterns of the same network programming. These attributes and their impact on audiences can include:

the scarcity of broadcast licenses assigned by the FCC to a particular market determines how many television networks and other program sources are viewed in a particular market;

the length of time the broadcast license has been broadcasting. Television stations that have been broadcasting since the late 1940s are viewed more often than newer television stations;

the quality of the broadcast signal and location of the broadcast station within a market (i.e. the value of being licensed in the smallest city within a tri-city market has less value than being licensed in the largest city);

the audience acceptance of the local news programming and community involvement of the local television station. The local television station's news programming that attracts the largest audience in a market generally will provide a larger audience for its network programming; and

the quality of the other non-network programming carried by the television station. A local television station's syndicated programming that attracts the largest audience in a market generally will provide larger audience lead-ins to its network programming.

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A local television station can be the top-rated station in a market, regardless of the national ranking of its affiliated network, depending on the factors or attributes listed above. ABC, CBS, FOX and NBC, each have affiliations with local television stations that have the largest primetime audience in the local market in which the station operates regardless of the network's primetime rating.

Some broadcasting companies believe that network affiliations are the most important component of the value of a station. These companies generally believe that television stations with network affiliations have the most successful local news programming and the network affiliation relationship enhances the audience for local syndicated programming. As a result, these broadcasting companies allocate a significant portion of the purchase price for any station that they may acquire to the network affiliation relationship.

We generally have acquired broadcast licenses in markets with a number of commercial television stations equal to or less than the number of television networks seeking affiliates. The methodology we used in connection with the valuation of the stations acquired is based on our evaluation of the broadcast licenses and the characteristics of the markets in which they operated. We believed that in substantially all our markets we would be able to replace a network affiliation agreement with little or no economic loss to our television station. As a result of this assumption, we ascribed no incremental value to the incumbent network affiliation in substantially all our markets in which we operate beyond the cost of negotiating a new agreement with another network and the value of any terms that were more favorable or unfavorable than those generally prevailing in the market. Other broadcasting companies have valued network affiliations on the basis that it is the affiliation and not the other attributes of the station, including its broadcast license, which contributes to the operating performance of that station. As a result, we believe that these broadcasting companies include in their network affiliation valuation amounts related to attributes that we believe are more appropriately reflected in the value of the broadcast license or goodwill.

In future acquisitions, the valuation of the broadcast licenses and network affiliations may differ from those attributable to our existing stations due to different facts and circumstances for each station and market being evaluated.

Valuation allowance for deferred tax assets

We consider future taxable income and feasible tax planning strategies in assessing the need for establishing or removing a valuation allowance. We record or subsequently remove a valuation allowance to reflect our deferred tax assets to an amount that is more likely than not to be realized.

In the event that our determination changes regarding the realization of all or part of our deferred tax assets in the future, an adjustment to the deferred tax asset is recorded to our consolidated statement of operations in the period in which such a determination is made.

Revenue recognition

We recognize local, national and political advertising sales, net of agency commissions, during the period in which the advertisements or programs are aired on our television stations, and when payment is reasonably assured. Internet and mobile advertisement sales are recognized when the advertisement is displayed on our web sites or the web sites of our advertising network. We recognize retransmission consent fees in the period in which our service is delivered.

Stock-based compensation

We estimate the fair value of stock option awards using a Black-Scholes valuation model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculation, including the option's expected term, the price volatility of the underlying stock and the number of stock

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option awards that are expected to be forfeited. The expected term represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. Expected volatility is based on historical trends for our class A common stock over the expected term, and prior to 2010, we used the historical trends of our class A common stock over the expected term, as well as a comparison to peer companies. Expected forfeitures are estimated using our historical experience. If future changes in estimates differ significantly from our current estimates, our future stock-based compensation expense and results of operations could be materially impacted.

Retirement plan

We have historically provided a defined benefit retirement plan to our employees who did not receive matching contributions from our Company to their
401(k) Plan accounts. Our pension benefit obligations and related costs are calculated using actuarial concepts. Our defined benefit plan is a non-contributory plan under which we made contributions either to:
a) traditional plan participants based on periodic actuarial valuations, which are expensed over the expected average remaining service lives of current employees; or b) cash balance plan participants based on 5% of each participant's eligible compensation. Effective April 1, 2009, this plan was frozen and we do not expect to make additional benefit accruals to this plan, however we continue to fund our existing vested obligations.

We contributed $7.4 million, $5.4 million and $5.4 million to our pension plan during the years ended December 31, 2012, 2011 and 2010, respectively. We anticipate contributing $5.4 million to our pension plan in 2013.

Weighted-average assumptions used to estimate our pension benefit obligations and to determine our net periodic pension benefit cost are as follows:

                                                         Year Ended December 31,
                                                       2012           2011       2010
Discount rate used to estimate our pension           3.60% -        3.90% -
benefit obligation                                    4.00%          4.20%       5.25%
Discount rate used to determine net periodic         3.90% -
pension benefit cost                                  4.20%          5.25%       5.75%
Rate of compensation increase                          N/A            N/A         N/A
Expected long-term rate-of-return on plan assets      7.00%          7.00%       8.00%

The discount rate for the year ended December 31, 2012 was determined using a custom bond modeler that develops a hypothetical portfolio of high quality corporate bonds, rated AA- and above by Standard & Poor's, that could be purchased to settle the obligations of the plan. The yield on this hypothetical portfolio represents a reasonable rate to value our plan liability. Prior to 2011, we used the Citigroup Pension Discount Curve to aid in the selection of our discount rate, which we believe reflects the weighted rate of a theoretical high quality bond portfolio consistent with the duration of the cash flows related to our pension liability.

We considered the current levels of expected returns on a risk-free investment, the historical levels of risk premium associated with each of our pension asset classes, the expected future returns for each of our pension asset classes and then weighted each asset class based on our pension plan asset allocation to derive an expected long-term return on pension plan assets. During the year ended December 31, 2012, our actual rate of return on plan assets was 15.4%.

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As a result of the plan freeze during 2009, we have no further service cost or amortization of prior service cost related to the plan. In addition, because the plan is now frozen and participants became inactive during 2009, the net losses related to the plan included in accumulated other comprehensive income are now amortized over the average remaining life expectancy of the inactive participants instead of the average remaining service period. We expect to record a pension expense of approximately $0.3 million in 2013. For every 0.25% change in the actual return compared to the expected long-term return on pension plan assets and for every 0.25% change in the actual discount rate compared to the discount rate assumption for 2013, our 2013 pension expense would change by less than $0.1 million, respectively.

Our investment objective is to achieve a consistent total rate-of-return that will equal or exceed our actuarial assumptions and to equal or exceed the benchmarks that we use for each of our pension plan asset classes. The following asset allocation is designed to create a diversified portfolio of pension plan assets that is consistent with our target asset allocation and risk policy:

                                                         of Plan
                                         Target        Assets as of
                                       Allocation      December 31,
                  Asset Category          2012        2012      2011
                  Equity securities             60 %      55 %     60 %
                  Debt securities               40 %      45 %     40 %

100 % 100 % 100 %

Recently issued accounting pronouncements

For a discussion of new accounting standards please read Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" to our consolidated financial statements included in this report.

Results of Operations

Set forth below are the key operating areas that contributed to our results for the years ended December 31, 2012, 2011 and 2010. Our consolidated financial statements reflect the operations of WWHO-TV, in Columbus, OH and WUPW-TV in Toledo, OH as discontinued for all periods presented. As a result, reported financial results may not be comparable to certain historical financial information.

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Our results of operations are as follows (in thousands):

                            Year Ended December 31,
                         2012        2011        2010        2012 vs. 2011        2011 vs. 2010
Local revenues         $ 316,471   $ 255,478   $ 237,744   $  60,993      24 %  $  17,734        7 %
National advertising
sales                    107,325      95,734      98,915      11,591      12 %     (3,181 )     (3 )%
. . .
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