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LIN > SEC Filings for LIN > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for LIN MEDIA LLC


12-Nov-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 websites, 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 websites, retransmission consent fees, interactive revenues and other revenues.

During the three and nine months ended September 30, 2013, net revenues increased $30.0 million and $111.2 million compared to the same periods in 2012, primarily driven by an increase in our local revenues. During the three and nine months ended September 30, 2013, local revenues, which include net local advertising sales, retransmission consent fees and television station website revenues, increased $32.5 million and $97.0 million compared to the same periods last year. In addition, interactive revenues increased $8.7 million and $21.1 million, respectively, during the three and nine months ended September 30, 2013 compared to the same periods last year and national advertising sales increased $6.7 million and $20.3 million, respectively, during the three and nine months ended September 30, 2013 compared to the same periods last year.

Excluding the impact of our 2012 station acquisitions and the 2013 acquisitions of majority interests in HYFN, Inc. ("HYFN") and Dedicated Media, Inc. ("Dedicated Media"), net revenues decreased $13.0 million and $9.2 million during the three and nine months ended September 30, 2013, respectively, as compared to the same periods in 2012 primarily due to a decrease in political advertising revenues.

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"). 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"). 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.

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") and subsequently completed this merger on July 30, 2013. For further information, see Note 1-"Basis of Presentation and Summary of Significant Accounting Policies," Note 11 - "Commitments and Contingencies."


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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, share-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 July 2013 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" to eliminate diversity in practice. This ASU requires that companies net their unrecognized tax benefits against all same-jurisdiction net operating losses or tax credit carryforwards that would be used to settle the position with a tax authority. This new guidance is effective prospectively for annual reporting periods beginning on or after December 15, 2013 and interim periods therein. We prospectively adopted this guidance effective January 1, 2013 and it did not have a material impact on our financial statements.

In February 2013, the FASB issued 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):


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                         Three Months Ended September 30,                             Nine Months Ended September 30,
                  2013          2012       $ Change       % Change           2013          2012        $ Change        % Change
Local revenues $ 105,541     $ 73,072     $  32,469          44  %        $ 312,017     $ 215,004     $  97,013            45  %
National
advertising
sales             32,845       26,103         6,742          26  %           94,913        74,627        20,286            27  %
Political
advertising
sales              2,639       20,389       (17,750 )       -87  %            4,656        30,970       (26,314 )         -85  %
Interactive
revenues          19,516       10,796         8,720          81  %           49,394        28,300        21,094            74  %
Other revenues     2,569        2,716          (147 )        -5  %            7,468         8,391          (923 )         -11  %
Net revenues     163,110      133,076        30,034          23  %          468,448       357,292       111,156            31  %

Direct
operating         62,504       38,152        24,352          64  %          180,695       110,554        70,141            63  %
Selling,
general and
administrative    41,319       28,365        12,954          46  %          118,657        84,791        33,866            40  %
Amortization
of program
rights             7,605        5,612         1,993          36  %           22,542        16,212         6,330            39  %
Corporate         10,682        9,264         1,418          15  %           30,047        24,229         5,818            24  %
Depreciation      11,429        6,824         4,605          67  %           34,387        20,234        14,153            70  %
Amortization
of intangible
assets             5,886          507         5,379          NM      (1)     17,038         1,462        15,576            NM      (1)
Restructuring        468            -           468         100  %            2,991             -         2,991           100  %
(Gain) loss
from asset
dispositions          (9 )        (15 )           6         -40  %              173           (12 )         185            NM      (1)
Total
operating
expenses         139,884       88,709        51,175          58  %          406,530       257,470       149,060            58  %
Operating
income         $  23,226     $ 44,367     $ (21,141 )       -48  %        $  61,918     $  99,822     $ (37,904 )         -38  %

(1) Percentage change not meaningful

Period Comparison

Revenues

Net revenues consist primarily of local revenues (which include net local advertising sales, retransmission consent fees and television station website revenues), net national advertising sales, interactive revenues, and political advertising sales. Other revenues include barter revenues, production revenues, tower rental income and station copyright royalties.

During the three months ended September 30, 2013, net revenues increased $30.0 million, or 23%, compared to the same period in the prior year, of which $43.1 million related to television stations acquired during 2012 and to HYFN and Dedicated Media. Excluding the impact of the television stations acquired during 2012 and of HYFN and Dedicated Media, net revenues decreased $13.1 million, or 10%, primarily due to a $17.9 million decrease in political revenues. This decrease was partially offset by a $5.1 million increase in local revenues, primarily due to a growth in retransmission consent fee revenues as a result of contractual rate increases and renewals.

During the nine months ended September 30, 2013, net revenues increased by $111.2 million, or 31%, compared to the same period in the prior year, of which $120.9 million related to television stations acquired during 2012 and to HYFN and Dedicated Media. Excluding the impact of the television stations acquired during 2012 and of HYFN and Dedicated Media, net revenues decreased $9.7 million, or 3%, primarily due to a $26.7 million decrease in political advertising sales and a $3.4 million decrease in other revenues. These decreases were partially offset by a $15.4 million increase in local revenues, primarily due to a growth in retransmission consent fee revenues as a result of contractual rate increases and renewals as well as a $5 million increase in interactive revenues.


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During the three and nine months ended September 30, 2013, the automotive category, which represented 27% and 26%, respectively, of local and national advertising sales, remained relatively consistent as compared to the three and nine months ended September 30, 2012, during which the automotive category represented 27% and 25%, respectively, of local and national advertising sales.

Operating Expenses

Operating expenses increased $51.2 million and $149.1 million, or 58%, during the three and nine months ended September 30, 2013, respectively, compared to the same periods in the prior year, of which $42.8 million and $119.6 million of the increase for the three and nine months ended September 30, 2013, respectively, related to our 2012 station acquisitions as well as HYFN and Dedicated Media. The increases during both periods were primarily due to increases in direct operating, selling general and administrative, depreciation and amortization expenses.

Direct operating expenses increased $24.4 million and $70.1 million during the three and nine months ended September 30, 2013, respectively, compared to the same periods last year, of which $19.4 million and $51.7 million, respectively, related to the 2012 station acquisitions as well as HYFN and Dedicated Media. 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 sales related to our digital operations.

Selling, general and administrative, depreciation and amortization of intangible asset expenses increased $13.0 million, $4.6 million, and $5.4 million, respectively, during the three months ended September 30, 2013 as compared to the same period in the prior year and $33.9 million, $14.2 million and $15.6 million, respectively, during the nine months ended September 30, 2013 as compared to the same period last year. The increases in selling, general and administrative, depreciation and amortization expense for both periods are all primarily as a result of our 2012 station acquisitions as well as the 2013 acquisitions of majority interests in HYFN and Dedicated Media.

Corporate expenses increased $1.4 million and $5.8 million during the three and nine months ended September 30, 2013, respectively, primarily due to expenses incurred related to the JV Sale Transaction and the Merger with LIN LLC, as well as 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 September 30,     Nine months ended September 30,
                                            2013               2012              2013               2012
Components of other expense, net:
Interest expense, net                $          13,976     $    9,310     $          42,275     $   28,946
Share of loss in equity investments                  -          4,156                    25          4,309
Loss on extinguishment of debt                       -              -                     -          2,099
Other expense, net                               2,055             88                 2,115            176
Total other expense, net             $          16,031     $   13,554     $          44,415     $   35,530

Other expense, net increased $2.5 million and $8.9 million, or 18% and 25% during the three and nine months ended September 30, 2013 compared to the same periods last year, primarily due to an increase in interest expense as further described below as well as an increase in other expense as a result of an impairment recorded during the third quarter of 2013 of a minority interest that we hold in a website platform service provider. These increases were 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.

Interest Expense

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


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                                  Three Months Ended September
                                  30,                               Nine Months Ended September 30,
                                       2013             2012               2013               2012
Components of interest expense:
Senior secured credit facility    $      4,724     $      4,896     $          13,994     $    14,851
83/8% Senior Notes                       4,312            4,396                13,005          13,044
63/8% Senior Subordinated Notes          4,686                -                14,486               -
61/2% Senior Subordinated Notes              -                -                     -             595
61/2% Senior Subordinated Notes -
Class B                                      -                -                     -             306
Other                                      254               18                   790             150
Total interest expense, net       $     13,976     $      9,310     $          42,275     $    28,946

Interest expense, net increased by $4.7 million and $13.3 million, or 50% and 46% during the three and nine months ended September 30, 2013 compared to the same periods 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 to finance a portion of the consideration paid to acquire the New Vision and ACME television stations. 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.

Income Taxes

Income taxes reflected a benefit from income taxes of $139.3 million and $135.2 million for the three and nine months ended September 30, 2013, respectively, as compared a provision for income taxes of $11.2 million and $24.1 million for the three and nine months ended September 30, 2012, respectively. The benefit from income taxes for the three and nine months ended September 30, 2013 was primarily a result of a $124.6 million discrete tax benefit recognized as a result of the Merger as well as an $18.2 million discrete tax benefit recognized as a result of the reversal of state valuation allowances. Our effective income tax rate was (772.2)% and 37.5% for the nine months ended September 30, 2013 and September 30, 2012, respectively. The decrease in the effective income tax rate was primarily due to the tax benefits discussed above. We expect our effective income tax rate to range between 42% and 44% during the remainder of 2013, although we are currently analyzing the implementation of various tax strategies that could reduce our effective rate by 1%-3%.

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, 2013 we had unrestricted cash and cash equivalents of $27.7 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, 2013 was $942.4 million.

Joint Venture Sale Transaction and Merger

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. 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.


Table of Contents

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 in such transaction, we had an approximate $163 million income tax payable remaining, $132.5 million of which was extinguished as a result of the Merger as described below.

Concurrent with the closing of the JV Sale Transaction, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with LIN Media LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of LIN TV ("LIN LLC"). Pursuant to the Merger Agreement, which was approved by the shareholders of LIN TV on July 30, 2013, LIN TV was merged with and into LIN LLC with LIN LLC continuing as the surviving entity (the "Merger"). The Merger enabled LIN TV to be classified as a partnership for federal income tax purposes and that change in classification was treated as a liquidation of LIN TV for federal income tax purposes, with the result that LIN TV realized a capital loss in its 100% equity interest in LIN Television.

Based on an average of the opening and closing trading prices of LIN TV's class A common stock at the consummation of the Merger, LIN TV realized a capital loss in the amount of approximately $344 million, which represents the difference between its tax basis in the stock of LIN Television, and the fair market value of such stock as of July 30, 2013. The capital loss realized and existing net operating losses were used to offset a portion of the capital gain recognized in the JV Sale Transaction and, as a result, we realized cash savings of $132.5 million, resulting in a remaining tax liability of $30.5 million associated with the JV Sale Transaction. We made estimated state and federal tax payments to settle $29 million of this tax liability during October 2013 and expect to fund the remaining liability when it becomes due in November 2013.

We incurred approximately $2.7 million and $5.7 million in transaction costs related to the JV Sale Transaction and the Merger during the three and nine months ended September 30, 2013, respectively, and do not expect to incur significant additional costs during the remainder of 2013. These costs are classified as corporate expense in our consolidated statement of operations.

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, 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. Our local revenues increased 44% and 45% during the three and nine months ended September 30, 2013, respectively, compared to the prior year. Additionally, during the three and nine months ended September 30, 2013, our interactive revenues increased 81% and 74%, respectively. Excluding the impact of the stations acquired during 2012 as well as of HYFN and Dedicated Media, our local revenues increased 7% during both the three and nine months ended September 30, 2013, and our interactive revenues increased 10% and 18%, respectively, as 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 . . .

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