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LIN > SEC Filings for LIN > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for LIN MEDIA LLC

Form 10-K for LIN MEDIA LLC


3-Mar-2014

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 affiliated channels in 18 markets. Our growing digital media portfolio helps agencies and brands effectively and efficiently reach their target audiences at scale by utilizing our comScore, Inc. rated Top 15 Video market share and the latest in conversational marketing, video, display, mobile, social intelligence and monetization, as well as reporting across all screens. 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. We recorded net income (loss) of $156.6 million, $(7.6) million and $48.8 million for the years ended December 31, 2013, 2012, and 2011, respectively. Our operating highlights for 2013 include the following:
         Net revenues increased $98.9 million, or 18%, compared to 2012
          primarily as a result of a $111.3 million, or 35%, increase in local
          revenues, which include net local advertising sales, retransmission
          consent fees and television station website revenues, as well as an
          increase of $35 million, or 85%, in interactive revenues, which include
          revenues from LIN Digital, Nami Media, HYFN, and Dedicated Media. Also
          contributing to the increase in net revenues was an increase in net
          national revenues of $23.6 million, or 22%. Excluding the impact of the
          television stations acquired in 2012 and the 2013 acquisitions of
          majority interests in HYFN and Dedicated Media, net revenues decreased
          approximately $31.8 million, or 6%, primarily the result of a decrease
          in political advertising revenues.


         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 be made 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 $162.8 million
          short-term deferred federal and state tax liability. For further
          information, see Item 1. "Business-Joint Venture Sale Transaction,"
          Note 1-"Basis of Presentation and Summary of Significant Accounting
          Policies," and Note 13-"Commitments and Contingencies" to our
          consolidated financial statements.


         On July 30, 2013, we completed the merger of LIN TV with and into LIN
          LLC, with LIN LLC continuing as the surviving entity. As a result of
          the Merger, we realized a capital loss in the amount of approximately
          $343 million. 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 we realized cash savings of $131.5 million,
          resulting in a remaining tax liability of $31.3 million associated with
          the JV Sale Transaction. We made state and federal tax payments to
          settle this tax liability during the fourth quarter of 2013. For
          further information, see Item 1. "Business-Joint Venture Sale
          Transaction," Note 1-"Basis of Presentation and Summary of Significant
          Accounting Policies," and Note 13-"Commitments and Contingencies" to
          our consolidated financial statements.


         On April 4, 2013, we acquired a 50.1% interest (calculated on a fully
          diluted basis) in HYFN, a full service digital advertising agency
          specializing in the planning, development, deployment and support for
          websites, mobile sites, interactive banners, games and various
          applications for multiple devices, for $7.2 million.


         On April 9, 2013, we acquired a 60% interest (calculated on a fully
          diluted basis) in Dedicated Media, a multi-channel advertisement buying
          and optimization company, for $5.8 million. Dedicated Media employs new
          technologies to create, plan and execute digital marketing campaigns on
          behalf of its clients.

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, 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,


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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.
Valuation of long-lived assets and intangible assets Approximately $740 million, or 61% of our total assets as of December 31, 2013, 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. We proceed directly to the first step of the impairment test without attempting to qualitatively assess whether an impairment was more likely than not. The impairment test consists of a comparison of the fair value of broadcast licenses with their carrying amount on a market-by-market 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 television stations operate, LIN Digital, Nami Media, HYFN and Dedicated Media. We proceed directly to the first step of the impairment test without attempting to qualitatively assess whether an impairment was more likely than not. 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 and projected 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 reduction, 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:


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                             December 31,     December 31,     December 31,
                                 2013             2012             2011
Market revenue growth              2.7 %           0.87 %            1.2 %
Operating cash flow margins       32.4 %           30.9 %           30.6 %
Discount rate                     11.0 %           10.5 %           10.5 %
Tax rate                          38.9 %           38.3 %           38.3 %
Long-term growth rate              2.0 %            1.8 %            1.8 %

As of December 31, 2013, we would incur an impairment charge of $1 million and $7.7 million if we were to decrease the market revenue growth rate by 1% and 2%, respectively. A 5% and 10% decrease in operating cash flow margins would result in an impairment charge of approximately $10.4 million and $88.7 million, respectively. An increase of 1% in the discount rate would result in an impairment charge of approximately $1.8 million and an increase of 2% would result in an impairment charge of approximately $10.8 million.
The valuation of goodwill for our television stations 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,
                                 2013             2012             2011
Market revenue growth              2.7 %            1.2 %            1.8 %
Operating cash flow margins       41.5 %           48.2 %           42.3 %
Discount rate                     12.5 %           12.0 %           12.0 %
Tax rate                          39.0 %           38.4 %           38.4 %
Long-term growth rate              2.0 %            1.8 %            1.8 %

As of December 31, 2013, 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 $41.2 million and $76.8 million, respectively. If we were to decrease the operating cash flow margins by 5% and 10% from the projected operating cash flow margins, the enterprise value of our stations with goodwill would decrease by $178.3 million and $355.8 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 $103.6 million and $196.7 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. 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 believe 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 at 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.
As of December 31, 2012, we had a valuation allowance of $18.2 million offsetting certain state net operating loss carryforwards and other state deferred tax assets. During the third quarter of 2013, after evaluating our ability to recover certain net operating loss carryforwards due to the change in tax structure as a result of the Merger, we determined that we will more likely than not be able to realize these deferred tax assets. As a result, we reversed the valuation allowance and recognized a corresponding tax benefit of $18.2 million.
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 websites or the websites, mobile applications, or those of our advertising network. We recognize retransmission consent fees in the period in which our service is delivered. Revenue generated by our digital companies is recognized over the service delivery period when necessary provisions of the contracts have been met. In addition, for the sale of third-party products and services by our digital companies, we evaluate whether it is appropriate to recognize revenue based on the gross amount billed to the customer or the net amount retained by us.
Share-based compensation
We estimate the fair value of share 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 shares and the number of share 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 shares over the expected term. Expected forfeitures are estimated using our historical experience. If future changes in estimates differ significantly from our current estimates, our future share-based compensation expense and results of operations could be materially impacted.


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Retirement plans
We have historically provided defined benefit retirement plans 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 through the LIN Television Corporation Retirement Plan ('Retirement Plan"); or b) cash balance plan participants based on 5% of each participant's eligible compensation through the Supplemental Benefit Retirement Plan of LIN Television Corporation ("SERP"). Effective April 1, 2009, these plans were frozen and we do not expect to make additional benefit accruals to these plans, however we continue to fund our existing vested obligations.
We contributed $5.4 million, $7.4 million and $5.4 million to our pension plans during the years ended December 31, 2013, 2012 and 2011, respectively. We anticipate contributing $5.7 million to our pension plans in 2014. 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,
                                           2013                        2012                         2011
                                  SERP     Retirement Plan    SERP     Retirement Plan     SERP     Retirement Plan
Discount rate used to estimate
our pension benefit obligation    4.70%         5.00%         3.60%         4.00%          3.90 %           4.20 %
Discount rate used to determine
net periodic pension benefit      3.60%         4.00%         3.90%         4.20%          5.25 %           5.25 %
Rate of compensation increase      N/A           N/A           N/A           N/A            N/A              N/A
Expected long-term
rate-of-return on plan assets      N/A          7.00%          N/A          7.00%           N/A             7.00 %

The discount rate for the years ended December 31, 2013, 2012 and 2011 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. 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, 2013, our actual rate of return on plan assets was 12%. As a result of the plan freeze during 2009, we have no further service cost or amortization of prior service cost related to the plans. In addition, because the plans are now frozen and participants became inactive during 2009, the net losses related to the plans 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 $0.2 million in 2014. 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 2014, our 2014 pension expense would change by less than $0.2 million and 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:

                                    Percentage
                                     of Plan
                     Target        Assets as of
                   Allocation      December 31,
Asset Category        2013        2013      2012
Equity securities       60 %       60 %      55 %
Debt securities         40 %       40 %      45 %
                       100 %      100 %     100 %


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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, 2013, 2012 and 2011. 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.
Our results of operations are as follows (in thousands):

                             Year Ended December 31,
                        2013          2012          2011           2013 vs. 2012           2012 vs. 2011
Local revenues       $ 427,819     $ 316,471     $ 255,478     $ 111,348       35  %   $  60,993       24  %
National advertising
sales                  130,935       107,325        95,734        23,610       22  %      11,591       12  %
Political
advertising sales        7,600        76,458         8,132       (68,858 )    (90 )%      68,326      840  %
Interactive revenues    75,853        41,095        27,220        34,758       85  %      13,875       51  %
. . .
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