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TVL > SEC Filings for TVL > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for LIN TV CORP.


10-May-2013

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, 2012 ("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 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.

During the three months ended March 31, 2013, net revenues increased $37.8 million compared to the same period in 2012, primarily driven by an increase in our local revenues. During the three months ended March 31, 2013, local revenues, which include net local advertising sales, retransmission consent fees and television station web site revenues, increased $31.8 million compared to the same period last year. In addition, national advertising sales increased $6.4 million and interactive revenues increased $2.1 million during the three months ended March 31, 2013, respectively, compared to the same periods last year.

Excluding the impact of the television stations acquired during 2012, net revenues increased $4.2 million compared to the same period in 2012.

On February 12, 2013, we, along with our wholly-owned subsidiaries LIN Television, Corporation ("LIN Television") and LIN Television of Texas, L.P., a Delaware limited partnership ("LIN Texas") entered into and closed a transaction agreement (the "Transaction Agreement") with NBC Telemundo License LLC, a Delaware limited liability company ("NBC"), NBCU New LLC I, a Delaware limited liability company, NBCU New LLC II, a Delaware limited liability company, General Electric Company, a New York corporation ("GE"), General Electric Capital Corporation, a Delaware corporation ("GECC" and together with GE, the "GE Parties"), National Broadcasting Company Holding, Inc., a Delaware corporation, Comcast Corporation, a Pennsylvania corporation ("Comcast"), NBCUniversal Media, LLC, a Delaware limited liability company ("NBCUniversal"), Lone Star SPV, LLC, a Delaware limited liability company and Station Venture Holdings, LLC, a Delaware limited liability company ("SVH"). SVH held a 99.75% interest in Station Venture Operations, LP ("SVO"), which is the operating company that managed KXAS-TV and KNSD-TV, the television stations that comprised the joint venture. The Transaction Agreement effected a series of transactions related to the ownership and sale of LIN Texas's 20.38% equity interest in SVH, a joint venture in which NBC, an affiliate of NBCUniversal, held the remaining 79.62% equity interest (collectively, the "JV Sale Transaction"). Also on February 12, 2013, we announced that we entered into an Agreement and Plan of Merger with LIN Media, LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of LIN TV ("LIN LLC"). For further information, see Note 1-"Basis of Presentation and Summary of Significant Accounting Policies" and Note 11 - "Commitments and Contingencies" to our consolidated financial statements.

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


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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.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which amends Accounting Standards Codification 220, "Comprehensive Income." The amendments require an entity to disclose the impact of amounts reclassified out of accumulated other comprehensive income and into net income, by the respective line items of net income, if the amounts reclassified are reclassified to net income in their entirety in the same reporting period. The disclosure is required either on the face of the statement where net income is presented or in the notes. For amounts that are not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We prospectively adopted this guidance effective January 1, 2013 and it did not have a material impact on our financial statements.

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 adopted this guidance effective January 1, 2013 and do not expect it to have a material impact on our impairment tests of indefinite-lived intangible assets.

Results of Operations



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



                                        Three Months Ended
                                            March 31,
                                         2013         2012     $ Change    % Change

Local revenues                        $    99,418   $ 67,659   $  31,759         47 %
National advertising sales                 29,496     23,121       6,375         28 %
Political advertising sales                   509      2,936      (2,427 )      (83 )%
Interactive revenues                        9,041      6,986       2,055         29 %
Other revenues                              2,528      2,498          30          1 %
Net revenues                              140,992    103,200      37,792         37 %
Operating expenses:
Direct operating                           54,568     35,157      19,411         55 %
Selling, general and administrative        37,298     28,383       8,915         31 %
Amortization of program rights              7,785      5,219       2,566         49 %
Corporate                                  10,271      6,746       3,525         52 %
Depreciation                               11,638      6,759       4,879         72 %
Amortization of intangible assets           5,429        477       4,952       1038 %
Restructuring                               2,132          -       2,132        100 %
Loss (gain) from asset dispositions            95         (1 )        96     (9,600 )%
Total operating costs                     129,216     82,740      46,476         56 %
Operating income                      $    11,776   $ 20,460   $  (8,684 )      (42 )%


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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), net national advertising sales, political advertising sales, and interactive revenues. Other revenues include barter revenues, production revenues, tower rental income and station copyright royalties.

During the three months ended March 31, 2013, net revenues increased $37.8 million, or 37%, compared to the same period in the prior year, of which $33.6 million related to television stations acquired during 2012. The increase was primarily due to: (i) a $31.8 million increase in local revenues; (ii) a $6.4 million increase in national advertising sales; and (iii) a $2.1 million increase in interactive revenues. These increases were partially offset by a $2.4 million decrease in political advertising. Television stations acquired during 2012 accounted for $26.3 million and $6.2 million of the increase in local and national advertising revenues, respectively, and were not material to the overall change in interactive and political advertising revenues.

On a same station basis, the increase in local revenues over the same period in the prior year is primarily a result of growth in retransmission consent fee revenues. The growth in retransmission consent fee revenues was a result of contract renewals and contractual rate increases.

During the three months ended March 31, 2013, the automotive category, which represented 25% of local and national advertising sales, remained relatively flat as compared to the three months ended March 31, 2012, during which the automotive category represented 26% of local and national advertising sales.

Operating Expenses

Operating expenses increased $46.5 million, or 56%, for the three months ended March 31, 2013 compared to the same period in the prior year, of which $34.4 million related to television stations acquired during 2012. The increase was primarily due to increases in direct operating, selling, general and administrative, depreciation and amortization expenses and corporate expenses. Direct operating expenses increased $19.4 million during the three months ended March 31, 2013 compared to the same period last year, of which $12.5 million related to the stations acquired during 2012. The remainder of the increase was primarily a result of an increase in fees pursuant to network affiliation agreements, growth in employee compensation expense and growth in cost of goods sold related to LIN Digital (formerly RMM). Selling, general and administrative, depreciation and amortization expenses increased $8.9 million, $4.9 million and $5.0 million, respectively, during the three months ended March 31, 2013 compared to the same period last year primarily as a result of the television stations acquired during 2012. Corporate expenses increased $3.5 million during the three months ended March 31, 2013 primarily due to expenses incurred related to the JV Sale Transaction, as well as increases in employee compensation expense and acquisition related expenses compared to the same period last year.

Other Expense



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



                                         Three Months Ended March 31,
                                           2013               2012
Components of other expense:
Interest expense, net                 $        13,871    $        10,370
Share of loss in equity investments                 -                 91
Loss on extinguishment of debt                      -              2,099
Other income, net                                 (24 )              (13 )
Total other expense, net              $        13,847    $        12,547

Other expense, net increased $1.3 million or 10% during the three months ended March 31, 2013 compared to the same period last year, primarily due to an increase in interest expense as further described below, which was partially offset by a $2.1 million decrease in loss on extinguishment of debt, which was a result of the redemption of our 61/2% Senior Subordinated Notes during the first quarter of 2012.


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Interest Expense



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



                                               Three Months Ended March 31,
                                                 2013               2012
Components of interest expense:
Senior secured credit facility              $         4,059    $         5,008
83/8% Senior Notes                                    4,347              4,347
63/8% Senior Notes                                    4,873                  -
61/2% Senior Subordinated Notes                           -                595
61/2% Senior Subordinated Notes - Class B                 -                306
Other interest costs                                    592                114
Total interest expense, net                 $        13,871    $        10,370

Interest expense, net increased by $3.5 million or 34% during the three months ended March 31, 2013 compared to the same period last year, primarily as a result of the interest incurred on our 63/8% Senior Notes, which were issued during the fourth quarter of 2012. This increase was partially offset by a decrease in interest expense due to the redemption of our 61/2% Senior Subordinated Notes during the first quarter of 2012 as well as reductions in interest expense under our senior secured credit facility.

(Benefit from) provision for Income Taxes

(Benefit from) provision for income taxes increased $3.8 million for the three months ended March 31, 2013 to a $1.1 million tax benefit from $2.8 million of tax expense for the three months ended March 31, 2012. The increase in the tax benefit was primarily a result of our $2.1 million pre-tax loss from continuing operations for the three months ended March 31, 2013. Our effective income tax rate was 50.7% and 35.4% for the three months ended March 31, 2013 and 2012, respectively. The increase in the effective income tax rate was primarily a result of an increase in the proportionate share of income from zero-rate variable interest entities that are excluded from the effective tax rate computation. We expect the effective income tax rate to range between 38% and 40% throughout the remainder of 2013.

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 March 31, 2013, we had unrestricted cash and cash equivalents of $23.5 million, and a $75 million revolving credit facility, $70 million of which was available, subject to certain covenant restrictions. Our total outstanding debt as of March 31, 2013 was $952.5 million.

Joint Venture Sale Transaction

On February 12, 2013, we, along with our wholly-owned subsidiaries, LIN Television and LIN Texas, entered into, and simultaneously closed the transactions contemplated by the Transaction Agreement with subsidiaries of NBCUniversal, the GE Parties, Comcast, and SVH. The Transaction Agreement effected a series of transactions whereby in exchange for LIN Television causing a $100 million capital contribution to be made to SVH (which was used to prepay a portion of the GECC Note), LIN TV was released from the GECC Guarantee and any further obligations relating to the shortfall funding agreements. Further, LIN Texas sold its 20.38% equity interest in SVH to affiliates of NBCUniversal, and the LIN parties transferred their rights to receivables related to the Shortfall Funding Loans for $1.00. The Transaction Agreement contains certain indemnifications and obligations with respect to representations and warranties; however, we do not anticipate that such obligations will result in any material liability to the Company. For further information, refer to Note 1 - "Basis for Presentation and Summary of Significant Accounting Policies" and Note 11 - "Commitments and Contingencies" to our consolidated financial statements.

We accrued for and expensed the $100 million capital contribution to SVH to secure the release of the GECC Guarantee and recorded the related tax effects in our consolidated financial statements as of December 31, 2012 because it represented a probable and estimable obligation of the Company. In February 2013, we issued a $60 million incremental term loan, and utilized $40 million of cash on hand and borrowings under our revolving credit facility to fund the $100 million payment. As a result of the JV Sale Transaction, after utilizing all of our available Federal net operating loss ("NOL") carryforwards to offset the taxable gain recognized


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in such transaction, we have an approximate $163 million income tax payable remaining as of March 31, 2013. The Company's plans with regard to the $163 million tax liability are presented below.

Concurrent with the closing of the JV Sale Transaction, we also entered into an Agreement and Plan of Merger (the "Merger Agreement") with LIN LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of LIN TV. Pursuant to the Merger Agreement, LIN TV will be merged with and into LIN LLC with LIN LLC continuing as the surviving entity (the "Merger"). The Merger, which is subject to shareholder approval (among other closing conditions), is expected to enable LIN LLC to be classified as a partnership for federal income tax purposes, and such change in classification would be treated as a liquidation of LIN TV for federal income tax purposes with the result that LIN TV would recognize a gain or loss, as applicable, in its 100% equity interest in LIN Television. As a result, LIN TV is expected to realize a capital loss between its tax basis in the stock of LIN Television and the fair market value of this stock at the closing of this transaction.

The Merger will be submitted to a vote of the holders of outstanding common stock of LIN TV. Proxies will be solicited by LIN TV's board of directors pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") in order for LIN TV's stockholders to consider approving the Merger at a special meeting of stockholders and a registration statement was filed with the Securities and Exchange Commission ("SEC") on May 2, 2013 and later amended on May 8, 2013 under the Securities Act of 1933, as amended, with respect to the class A common shares representing limited liability company interests in LIN LLC. This Report is not a solicitation of a proxy from any security holder of LIN TV. Holders of LIN TV common stock are urged to read the proxy statement/prospectus and registration statement filed with the SEC by LIN LLC on May 2, 2013 and later amended on May 8, 2013 and any other relevant documents when they become available because they will contain important information about LIN TV, LIN LLC and the Merger, including its terms and anticipated effect and risks to be considered by the Company's stockholders in connection with the Merger. The proxy statement/prospectus and other documents relating to the Merger (when they are available) can be obtained free of charge from the SEC's web site at www.sec.gov. Such documents (when they are available) can also be obtained free of charge from LIN TV on its web site (www.linmedia.com) or upon written request to LIN TV Corp., Attention: Secretary, One West Exchange Street, Suite 5A, Providence, Rhode Island 02903. Information on LIN TV's web site does not constitute a part of this Current Report on Form 10-Q.

In the event that LIN TV does not complete the Merger for any reason, or if the Merger does not generate a capital loss sufficient to offset fully the capital gain from the JV Sale Transaction, due to LIN TV's stock price at the time of the Merger, LIN TV could incur cash income taxes of up to $163 million related to the JV Sale Transaction, payable beginning in the second half of 2013. If necessary, we would seek to fund the current federal and state tax liabilities, and any interest and penalties for late payment of taxes, through cash generated from operations, amounts available under our revolving credit facility, and additional borrowings. There can be no assurance that additional borrowings will be available on acceptable terms or at all. Should additional borrowings be unavailable, we may defer payment of such tax liabilities into 2014 and incur late payment interest and penalties. However, we believe that there may be cost and capital expenditure reduction initiatives available in 2013 and 2014 that, based on our current forecast of operating results, would allow us to generate sufficient cash flows to fund our operations, pay the tax liability and related penalties described above in 2014, and maintain compliance with the financial covenants under our debt obligations into 2014.

We have incurred approximately $2 million in transaction costs during the three months ended March 31, 2013 and expect to incur additional costs of $3 - $5 million during the remainder of 2013 related to the JV Sale Transaction and the Merger.

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 March 31, 2013, 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 2013 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 months ended March 31, 2013 and 2012, our local revenues increased 47% and 16%, respectively, compared to the prior year. Additionally, during the three months ended March 31, 2013 and 2012, our interactive revenues increased 29% and 41%, respectively. Excluding the impact of the stations acquired during 2012, our local and interactive revenues increased 8% and 28%, respectively, during the three months ended March 31, 2013 as compared to the same period 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 months ended March 31, 2013, our net political advertising sales were $0.5 million compared to $2.9 million for the same period last year. We anticipate decreased advertising revenues during the remainder of 2013 as a result of these cyclical fluctuations.

Employee benefit contributions. Our employee benefit plan contributions include contributions to our pension plan and the 401(k) Plan. Volatility in the equity markets impacts the fair value of our pension plan assets and ultimately the cash funding requirements of our pension plan. We expect to contribute $5.4 million to our pension plan and $5.3 million to our
401(k) Plan during 2013.

Cash requirements related to the acquisition of LIN Digital (formerly RMM). In connection with our acquisition of RMM (now LIN Digital), we entered into an incentive compensation arrangement with certain key members of management that provides


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payments to those employees based on a computation of EBITDA generated by LIN Digital during 2012. Based on that computation, as of March 31, 2013, we recognized a current liability of $8.9 million related to this incentive compensation arrangement, and plan to pay this amount during the second quarter of 2013.

Payments related to capital expenditures. We expect to make cash payments of approximately $25 - $28 million related to capital expenditures during the remainder of 2013, primarily as a result of our recent acquisitions.

Other investments. In connection with our acquisitions of Nami Media, Dedicated Media, and HYFN, we may be required to purchase the remaining outstanding shares of these companies in 2014, 2015 and 2016, respectively, if certain financial targets as defined in each applicable purchase agreement are met. Our maximum potential obligation under the Nami Media, HYFN and Dedicated Media agreements is $37.4 million, $26 million, and $62.4 million, respectively. For further information see Note 2 - "Acquisitions" included in our 10-K.

As of March 31, 2013, there had been no material changes in our contractual . . .

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