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2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, HTML 460K
Liquidation or Succession
3: EX-2.2 Plan of Acquisition, Reorganization, Arrangement, HTML 467K
Liquidation or Succession
4: EX-2.3 Plan of Acquisition, Reorganization, Arrangement, HTML 468K
Liquidation or Succession
5: EX-10.1 Material Contract HTML 48K
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7: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
9: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
16: R1 Cover Page HTML 73K
17: R2 Condensed Consolidated Balance Sheets HTML 140K
18: R3 Condensed Consolidated Balance Sheets HTML 32K
(Parenthetical)
19: R4 Consolidated Statements of Income HTML 92K
20: R5 Consolidated Statements of Comprehensive Income HTML 48K
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22: R7 Consolidated Statements of Equity Consolidated HTML 69K
Statements of Equity
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Statements of Equity (Parenthetical)
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(Exact name of registrant as specified in its charter)
___________________________
iDelaware
i16-0442930
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i 8350 Broad Street, Suite 2000,
iTysons,
iVirginia
i22102-5151
(Address
of principal executive offices)
(Zip Code)
i(703)
i873-6600
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon
Stock
iTGNA
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required
to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge accelerated filer
☒
Accelerated filer
☐
Non-accelerated
filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes i☐ No ☒
The total number of shares of the registrant’s Common Stock, $1 par value, outstanding as of July 31, 2019 was i216,654,162.
The
accompanying notes are an integral part of these condensed consolidated financial statements.
9
TEGNA Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – iAccounting
policies
i
Basis of presentation: Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting, the instructions for Form 10-Q and Article 10 of the U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all information and footnotes which are normally included in the Form 10-K and annual report to shareholders. In our opinion, the condensed consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with our (or TEGNA’s) audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
iThe preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying
notes. Actual results could differ from these estimates. Significant estimates include, but are not limited to, evaluation of goodwill and other intangible assets for impairment, business combinations, fair value measurements, post-retirement benefit plans, income taxes including deferred taxes, and contingencies.iThe condensed consolidated financial statements include the accounts of subsidiaries we control and variable interest entities (VIEs) if we are the primary beneficiary. We eliminate all intercompany balances,
transactions, and profits in consolidation. Investments in entities over which we have significant influence, but do not have control, are accounted for under the equity method. Our share of net earnings and losses from these ventures is included in Equity (loss) income in unconsolidated investments, net in the Consolidated Statements of Income.
We operate one operating and reportable segment, which primarily consists of our i49 television stations
operating in i41 markets, offering high-quality television programming and digital content. Our reportable segment determination is based on our management and internal reporting structure, the nature of products and services we offer, and the financial information that is evaluated regularly by our chief operating decision maker.
i
Accounting
guidance adopted in 2019: In February 2016, the FASB issued new guidance related to leases which require lessees to recognize assets and liabilities on the balance sheet for leases with lease terms of more than 12 months. Consistent with previous GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depends on its classification as a finance or operating lease. However, unlike previous GAAP–which requires only capital leases (renamed finance leases under the new guidance) to be recognized on the balance sheet–the new guidance requires both finance and operating leases to be recognized on the balance sheet. This update requires the lessee to recognize a lease liability equal to the present value of the lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases longer than 12 months.
We
adopted the guidance on January 1, 2019. The FASB provided companies with the option to apply the requirements of the guidance in the period of adoption, with no restatement of prior periods. We utilized this adoption method. We also elected an accounting policy allowed by the guidance to not account for lease and non-lease components separately. Additionally, in adopting the guidance, we utilized the package of practical expedients permitted by the FASB, which among other things, allowed us to carry forward our historical lease classification. Lastly, as permitted by the guidance, we elected a policy to not record leases with an original lease term of twelve months or less on the balance sheet.
Adoption of the guidance resulted in recording of new right-of-use asset and lease liability balances of $i73.8
million and $i91.8 million, respectively, as of the adoption date. The difference between right-of-use lease asset and lease liability balances was primarily due to previously accrued rent expense relating to periods prior to January 1, 2019. The new guidance did not have a material impact on our Consolidated Statements of Income, Comprehensive Income, Cash Flows or Equity. See Note 6 for additional information.
In
August 2018, the FASB issued new guidance on the accounting for implementation costs incurred in cloud computing arrangements that are service contracts. The new guidance requires a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract. The guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted the new guidance on a prospective basis beginning in the second quarter of 2019. There was no material impact to our condensed consolidated financial statements as a result of adopting
this guidance.
New accounting guidance not yet adopted: In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments. The new guidance changes the way credit losses on accounts receivable are estimated. Under current GAAP, credit losses on accounts receivable are recognized once it is probable that such losses will occur. Under the new guidance, we will be required to estimate credit losses based on the expected amount of future collections which may result in earlier recognition of doubtful accounts. The new guidance is effective for public companies beginning in the first quarter of 2020 and will be adopted using a modified retrospective approach. We are currently evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures.
/
10
In
August 2018, the FASB issued new guidance that changes disclosures related to defined benefit pension and other postretirement benefit plans. The guidance removes disclosures that are no longer economically relevant, clarifies certain existing disclosure requirements and adds some new disclosures. The most relevant elimination for us is the annual disclosure of the amount of gain/loss and prior service cost/credit amortization expected in the following year. Additions most relevant to us include disclosing narrative explanations of the drivers for significant changes in plan obligations or assets, and disclosure for cost of living adjustments for certain participants of our TEGNA retirement plan. We plan to adopt the new guidance beginning in 2020 and it will be applied on a retrospective basis.
In March 2019, the FASB issued new guidance related to the accounting for episodic
television series. The most significant aspect of this new guidance that is applicable to us relates to the level at which our capitalized programming assets are monitored for impairment. Under the new guidance these assets will be monitored at the film group level which is the lowest level at which independently identifiable cash flows are identifiable. We plan to adopt the new guidance beginning in the first quarter of 2020 and it will be adopted prospectively. We do not expect this guidance to have a material impact on our consolidated financial statements and related disclosures.
Revenue recognition: Revenue is recognized upon the transfer of control of promised services to our customers in an amount that reflects the consideration we expect to receive in exchange for those services. Revenue is recognized net of any taxes collected from customers,
which are subsequently remitted to governmental authorities. Amounts received from customers in advance of providing services to our customers are recorded as deferred revenue.
The primary sources of our revenues are: 1) advertising & marketing services revenues, which include local and national non-political television advertising, digital marketing services (including Premion), and advertising on the stations’ websites and tablet and mobile products; 2) subscription revenues, reflecting fees paid by satellite, cable, OTT (companies that deliver video content to consumers over the Internet) and telecommunications providers to carry our television signals on their systems; 3) political advertising revenues, which are driven by even year election cycles at
the local and national level (e.g. 2020, 2018) and particularly in the second half of those years; and 4) other services, such as production of programming and advertising material.
i
Revenue earned by these sources in the second quarter and first six months of 2019 and 2018 are shown below (amounts in thousands):
The following table displays goodwill, indefinite-lived intangible assets, and amortizable intangible assets as of June
30, 2019 and December 31, 2018 (in thousands):
Total
indefinite-lived and amortizable intangible assets
$
i1,775,508
$
(i136,469
)
$
i1,645,035
$
(i118,958
)
/
11
Our
retransmission consent contracts and network affiliation agreements are amortized on a straight-line basis over their estimated useful lives. Other intangibles primarily include distribution agreements, customer relationships and favorable lease agreements which are amortized on a straight-line basis over their useful lives.
On January 2, 2019, we completed our acquisition of WTOL, the CBS affiliate in Toledo, OH, and KWES, the NBC affiliate in Midland-Odessa, TX from Gray Television, Inc. The estimated transaction price is $i109.9
million, which includes a small pending final working capital adjustment of approximately $i1.0 million. The initial purchase price of $i108.9
million (which included $i3.9 million for estimated working capital paid at closing) was funded through the use of available cash and borrowings under our revolving credit facility. WTOL and KWES are strong local media brands in key markets, and they further expand our station portfolio of top 4 affiliates. In connection with the purchase accounting performed for this acquisition, we recorded indefinite lived intangible assets for
FCC licenses of $i53.4 million and amortizable intangible assets of $i28.4
million related to retransmission consent contracts and network affiliation agreements. The amortizable assets will be amortized over a weighted average period of i7 years. We also recognized goodwill of $i11.5
million, all of which is deductible for tax purposes. The fair value of these assets are based on a preliminary valuation and, as such, our estimates and assumptions are subject to change as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The primary area of purchase price allocation that is not yet finalized is related to the fair value of intangible assets and the working capital adjustment with the seller.
On June 18, 2019, we completed the acquisition of the remaining approximately i85%
interest in the multicast networks Justice Network and Quest from Cooper Media that we did not previously own. Justice and Quest are two leading multicast networks that offer unique ad-supported programming. Justice Network’s content is focused on true-crime genre, while Quest features factual-entertainment programs such as science, history, and adventure-reality series.
The initial purchase price of $i77.2
million (which included $i4.7 million for estimated working capital paid at closing) was funded through the use of available cash and borrowings under our revolving credit facility. As a result of acquiring the remaining ownership of the networks, we recognized a $i7.3
million gain due to the write-up of our prior investment in the Justice Network and Quest multicast networks to its fair value at the time of the acquisition. This gain was recorded in Other non-operating items, net within the Consolidated Statement of Income.
In connection with our preliminary purchase accounting for the acquisition of the multicast networks, we recorded amortizable intangible assets of $i44.1
million related to distribution agreements and $i4.7 million for trade names. We also recognized goodwill of approximately $i27.5
million, the majority of which is expected to be deductible for tax purposes. The fair values of these assets were based on a preliminary valuation, and as such, our estimates and assumptions are subject to change as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The primary open area of purchase accounting is related to the fair value of intangible assets and determination of their useful lives.
Cash
value life insurance: We are the beneficiary of life insurance policies on the lives of certain employees/retirees, which are recorded at their cash surrender value as determined by the insurance carrier. These policies are utilized as a partial funding source for deferred compensation and other non-qualified employee retirement plans. Gains and losses on these investments are included in Other non-operating items, net within our Consolidated Statement of Income and were not material for all periods presented.
Equity method investments: We hold several strategic equity method investments. Our largest equity method investment is our ownership in CareerBuilder, of which we own approximately i17% (or
approximately i10% on a fully-diluted basis), which has an investment balance of $i12.7
million and $i12.4 million as of June 30, 2019 and December 31, 2018, respectively. Our ownership stake provides us with two seats on CareerBuilder’s board of directors and thus we concluded that we have significant influence over the entity.
In
the first quarter of 2019, we sold our investment in Captivate, which had been accounted for as an equity method investment, for $i16.2 million, which resulted in a pre-tax gain of $i12.2
million (after-tax gain of $i9.2 million). This gain was
12
recorded in Equity (loss) income in unconsolidated investments, net within the Consolidated Statement
of Income and Statement of Cash Flows.
Other equity investments: Represent investments in non-public businesses that do not have readily determinable pricing, and for which we do not have control or do not exert significant influence. These investments are recorded at cost less impairments, if any, plus or minus changes in observable prices for those investments. In the second quarter of 2019 we recognized a $i1.6 million
gain due to one of these investments having an observable price increase. This gain was recorded in the Other non-operating items, net line item in our Consolidated Statements of Income. iNo other gains or losses were recorded on these investments in the first six months of 2019, nor were there any gains or losses recorded during the six months ended June 30, 2018.
NOTE
4 – iLong-term debt
i
Our long-term debt is summarized below (in thousands):
Unsecured floating rate term loan due quarterly through June 20201
$
i40,000
$
i60,000
Unsecured
floating rate term loan due quarterly through September 20201
i135,000
i165,000
Borrowings
under revolving credit agreement expiring June 2023
i105,000
i50,000
Unsecured
notes bearing fixed rate interest at 5.125% due October 20191
i320,000
i320,000
Unsecured
notes bearing fixed rate interest at 5.125% due July 2020
i600,000
i600,000
Unsecured
notes bearing fixed rate interest at 4.875% due September 2021
i350,000
i350,000
Unsecured
notes bearing fixed rate interest at 6.375% due October 2023
i650,000
i650,000
Unsecured
notes bearing fixed rate interest at 5.50% due September 2024
i325,000
i325,000
Unsecured
notes bearing fixed rate interest at 7.75% due June 2027
i200,000
i200,000
Unsecured
notes bearing fixed rate interest at 7.25% due September 2027
i240,000
i240,000
Total
principal long-term debt
i2,965,000
i2,960,000
Debt
issuance costs
(i12,820
)
(i15,458
)
Unamortized
premiums and discounts, net
i1,389
(i76
)
Total
long-term debt
$
i2,953,569
$
i2,944,466
1
We have the intent and ability to refinance the principal payments due within the next 12 months on a long-term basis through our revolving credit facility. As such, all debt presented in the table above is classified as long-term on our June 30, 2019 Condensed Consolidated Balance Sheet.
/
As discussed in Note 2, during the second quarter of 2019, we borrowed $i71.0
million under the revolving credit facility to finance the majority of our purchase of the controlling interests in Justice Network LLC and Quest Network LLC.
As of June 30, 2019, we had unused borrowing capacity of $i1.39 billion under our revolving credit facility.
13
NOTE
5 – iRetirement plans
Our principal defined benefit pension plan is the TEGNA Retirement Plan (TRP). The disclosure table below includes the pension expenses of the TRP and the TEGNA Supplemental Retirement Plan (SERP). The total net pension obligations, including both current and non-current liabilities, as of June 30, 2019, were $i139.7
million, of which $i7.9 million is recorded as a current obligation within accrued liabilities on the Condensed Consolidated Balance Sheet.
i
Pension
costs, which primarily include costs for the qualified TRP and the non-qualified SERP, are presented in the following table (in thousands):
Our
TRP and SERP are frozen plans, and as such we no longer incur the service cost component of pension expense. All other components of our pension expense presented above are included within the Other non-operating items, net line item of the Consolidated Statements of Income.
During the six months ended June 30, 2019 and 2018 we made cash contributions of $i0.9
million and $i6.4 million to the TRP and benefit payments to participants of the SERP of $i5.0
million and $i28.8 million respectively. Based on actuarial projections, we expect to make additional cash payments of $i6.0
million in 2019 on account of these benefit plans (comprised of payments of $i3.0 million each to the TRP and SERP participants).
We incurred pension payment timing related charges of $i0.7
million and $i6.3 million in the first six months of 2019 and 2018, respectively, as a result of lump sum SERP payments made to certain former employees. These charges were reclassified from accumulated other comprehensive loss into net periodic benefit cost.
NOTE 6 – iLeases
We
adopted the FASB’s new lease accounting guidance on January 1, 2019. We determine if an arrangement contains a lease at the agreement’s inception. As permitted under the lease accounting standards adoption guidance, arrangements prior to the adoption date retained their previous determination as to whether or not an arrangement contained a lease. Arrangements entered into subsequent to the adoption date of the new guidance are analyzed to determine if a lease exists depending on whether there is an identified underlying asset that we control.
Our portfolio of leases primarily consists of leases for the use of corporate offices, station facilities, equipment and for antenna/transmitter sites. Our lease portfolio consists entirely of operating leases, with most of our leases having remaining terms ranging i1
to i15 years. Operating lease balances are included in our right-of-use assets for operating leases, other accrued liabilities and operating lease liabilities on our Condensed Consolidated Balance Sheet.
Lease liabilities are calculated as of the lease commencement date based on the present value of lease payments to be made over the term of the lease. Our lease agreements often contain lease and non-lease components (e.g., common-area maintenance or other executory costs). We include the non-lease payments in the calculation
of our lease liabilities to the extent they are either fixed or included within the fixed base rental payments. Some of our leases include variable lease components (e.g., rent increases based on the consumer price index) and variable non-lease components, which are expensed as they are incurred. Such variable costs are not material. As our lease agreements do not include an implicit interest rate, we use our incremental borrowing rate in determining the present value of future payments, which is determined using our credit rating and information available as of the lease commencement date.
The operating lease right-of-use assets as of the lease commencement date are calculated based on the amount of the operating lease liability, less any lease incentives. Some of our lease agreements include options to renew for additional terms or provide us with the ability terminate the lease early. In determining the term of the lease,
we considered whether or not we are reasonably certain to exercise these options. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term.
14
i
The following table presents lease related assets and liabilities on the Condensed Consolidated Balance Sheet as of June 30, 2019
(in thousands):
Assets
Right-of-use assets for operating leases
$
i70,687
Liabilities
Operating
lease liabilities (current)1
i6,696
Operating lease liabilities (non-current)
i83,222
Total
operating lease liabilities
$
i89,918
(1) Current operating lease liabilities are included within the other accrued liabilities line item of the Condensed Consolidated Balance Sheet.
/
As
of June 30, 2019, the weighted-average remaining lease term for our lease portfolio was i10.8 years and the weighted average discount rate used to calculate the present value of our lease liabilities was i5.4%.
For the six months ended June 30, 2019 and 2018, we recognized lease expense of $i6.3 million and $i8.8
million, respectively. Lease expense for the three months ended June 30, 2019 and 2018 were $i3.0 million and $i4.4
million, respectively. In addition, we made cash payments for operating leases of $i2.4 million and $i5.1 million
during the three months and six months ended June 30, 2019, respectively, which are included in cash flows from operating activities on Statement of Cash Flows.
i
The table below reconciles future lease payments for each of the next five years and remaining years thereafter, in aggregate, to the lease liabilities recorded on the Condensed Consolidated Balance Sheet as of June 30, 2019 (in thousands):
Future
Period
Cash Payments
Remaining in 2019
$
i4,523
2020
i10,866
2021
i12,358
2022
i11,574
2023
i10,814
Thereafter
i74,043
Total
lease payments
i124,178
Less: amount of lease payments representing interest
i34,260
Present
value of lease liabilities
$
i89,918
/
As of December
31, 2018, operating lease commitments under lessee arrangements were $i10.4 million, $i9.9
million, $i11.7 million, $i10.9
million, and $i10.3 million for the years 2019 through 2023, respectively, and $i73.9
million thereafter.
15
NOTE 7 – iAccumulated other comprehensive loss
i
The
following table summarizes the components of, and the changes in, Accumulated Other Comprehensive Loss (AOCL), net of tax (in thousands):
Reclassifications
from AOCL to the Consolidated Statements of Income are comprised of pension and other post-retirement components. Pension and other post retirement reclassifications are related to the amortization of prior service costs, amortization of actuarial losses, and pension payment timing related charges related to our SERP plan. iAmounts reclassified out of AOCL are summarized below (in thousands):
Weighted
average number of common shares outstanding - basic
i217,089
i216,342
i216,900
i216,309
Effect
of dilutive securities:
Restricted stock units
i476
i2
i327
i90
Performance
share units
i315
i—
i286
i108
Stock
options
i25
i171
i42
i246
Weighted
average number of common shares outstanding - diluted
i217,905
i216,515
i217,555
i216,753
Net
income per share - basic
$
i0.37
$
i0.43
$
i0.71
$
i0.68
Net
income per share - diluted
$
i0.37
$
i0.43
$
i0.71
$
i0.68
/
Our
calculation of diluted earnings per share includes the impact of the assumed vesting of outstanding restricted stock units, performance share units, and the exercise of outstanding stock options based on the treasury stock method when dilutive. The diluted earnings per share amounts exclude the effects of approximately i2,000 and i36,000
stock awards for the three and six months ended June 30, 2019, respectively, and i431,000 and i259,000
for the three and six months ended June 30, 2018, respectively, as their inclusion would be accretive to earnings per share.
NOTE 9 – iFair value measurement
We measure and record in the accompanying condensed consolidated financial statements certain
assets and liabilities at fair value. U.S. GAAP establishes a hierarchy for those instruments measured at fair value that distinguishes between market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 - Quoted market prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 - Unobservable inputs developed using our own estimates and assumptions, which reflect those that a market participant would use.
In the second
quarter of 2019 we recognized a $i1.6 million gain on one of our investments due to an observable price increase, which represents a Level 2 input (see Note 3 for further discussion). This gain was recorded in the Other non-operating items, net line item in our Consolidated Statements of Income. iNo
other gains or losses were recorded on these investments in 2019, or during the six months ended June 30, 2018.
Prior to the closing of our acquisition in the multicast networks Justice Network and Quest we held an approximately i15% ownership
interest. Upon completion of the step acquisition, we recognized a gain of $i7.3 million in Other non-operating items, net within the Consolidated Statement of Income, for the remeasurement of our previously held ownership interest to fair value, which was $i8.0
million. The fair value was determined using an income approach which was based on significant inputs not observable in the market, and thus represented a Level 3 fair value measurement
We additionally hold other financial instruments, including cash and cash equivalents, receivables, accounts payable and debt. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The fair value of our total debt, based on the bid and ask quotes for the related debt (Level 2), totaled $i3.06
billion at June 30, 2019, and $i2.96 billion at December 31, 2018.
17
NOTE
10 – iSupplemental cash flow information
The following table provides a reconciliation of cash and cash equivalents, as reported on our Condensed Consolidated Balance Sheets, to cash, cash equivalents, and restricted cash, as reported on our Condensed Consolidated Statement of Cash Flows (in thousands):
Our
restricted cash equivalents consisted of highly liquid investments that were held within a rabbi trust and were used to pay our deferred compensation and SERP obligations.
i
The following table provides additional information about cash flows related to interest and taxes (in thousands):
1
The 2019 amount is comprised of net tax payments of $56.2 million made during second quarter, and $0.4 million of net refunds received during first quarter. For 2018, we had net tax payments of $39.8 million during second quarter, and $2.8 million of net refunds received during first quarter. The quarterly tax payment amounts reflect the timing of federal income tax payment due dates (no payments due in the first quarter; two payments due in the second quarter; and one payment due in each of the third and fourth quarter).
/
NOTE 11 – iOther
matters
Commitments, contingencies and other matters
In the third quarter of 2018, certain national media outlets reported the existence of a confidential investigation by the United States Department of Justice Antitrust Division (DOJ) into the local television advertising sales practices of station owners. On November 13 and December 13, 2018, DOJ and seven broadcasters settled a DOJ complaint alleging the exchange of competitively sensitive information in the broadcast television industry. On June 17, 2019, we and four other broadcasters entered into a substantially identical agreement with DOJ. The settlement contains no finding of wrongdoing or liability and carries no
penalty. It prohibits us and the other settling entities from sharing certain confidential business information, or using such information pertaining to other broadcasters, except under limited circumstances. The settlement also requires the settling parties to make certain enhancements to their antitrust compliance programs; to continue to cooperate with the DOJ’s investigation and to permit DOJ to verify compliance. We do not expect the costs of compliance to be material.
Since the national media reports, numerous putative class action lawsuits were filed against owners of television stations (the Advertising Cases) in different jurisdictions. Plaintiffs are a class consisting of all persons and entities in the United States who paid for all or a portion of advertisement time on local TV provided by the defendants. The Advertising Cases assert antitrust and other claims and
seek monetary damages, attorneys’ fees, costs and interest, as well as injunctions against the allegedly wrongful conduct.
These cases have been consolidated into a single proceeding in the United States District Court for the Northern District of Illinois, captioned Clay, Massey & Associates, P.C. v. Gray Television, Inc. et. al., filed on July 30, 2018. At the court’s direction, plaintiffs filed an amended complaint on April 3, 2019, that superseded the original complaints. Defendants filed a motion to dismiss on June 5, 2019. In response, plaintiffs have indicated their intention to ask the court for permission to file another amended complaint, currently due on or before August
7, 2019. Although we were named as a defendant in sixteen of the original complaints, the amended complaint did not name TEGNA as a defendant. We could still be named as a defendant, however, in this or other related suits.
We, along with a number of our subsidiaries, also are defendants in other judicial and administrative proceedings involving matters incidental to our business. We do not believe that any material liability will be imposed as a result of any of the foregoing matters.
18
FCC Broadcast Spectrum
Program
In April 2017, the FCC announced the completion of a voluntary incentive auction to reallocate certain spectrum currently occupied by television broadcast stations to mobile wireless broadband services, along with a related “repacking” of the television spectrum for remaining television stations. None of our stations are relinquishing any spectrum rights as a result of the auction, and accordingly we are not receiving any incentive auction proceeds. The FCC has, however, notified us that i13
of our existing stations will be repacked to new channels.
Based on our transition planning to date, we do not expect the repacking to have any material effect on the geographic areas or populations served by our repacked full-power stations’ over-the-air signals. If the repacking did have such an effect, our television stations moving channels could have smaller service areas and/or experience additional interference.
The legislation authorizing the incentive auction and repacking established a $i1.75
billion fund for reimbursement of costs incurred by stations required to change channels in the repacking. Subsequent legislation enacted on March 23, 2018, appropriated an additional $i1 billion for the repacking fund, of which up to $i750
million may be made available to repacked full power and Class A television stations and multichannel video programming distributors. Other funds are earmarked to assist affected low power television stations, television translator stations, and FM radio stations, as well as for consumer education efforts.
The repacking process is scheduled to occur over a i39-month period, divided into iten
phases. Our full power stations have been assigned to phases two through nine, and a majority of our remaining capital expenditures in connection with the repack will occur in 2019. To date, we have incurred approximately $i23.7 million in capital expenditures for the spectrum repack project (of which $i6.2
million was paid during the first six months of 2019). We have received FCC reimbursements of approximately $i15.8 million through June 30, 2019. The reimbursements were recorded as a contra operating expense within our Spectrum repacking reimbursements and other line item on our Consolidated Statement of Income and reported as an investing inflow on the Consolidated Statement of Cash Flows.
Each
repacked full power commercial television station, including each of our i13 repacked stations, has been allocated a reimbursement amount equal to approximately i92.5%
of the station’s estimated repacking costs, as verified by the FCC’s fund administrator. Although we expect the FCC to make additional allocations from the fund, it is not guaranteed that the FCC will approve all reimbursement requests necessary to completely reimburse each repacked station for all amounts incurred in connection with the repack.
Reduction in Force Programs
In 2018, we initiated reduction in force programs at our corporate headquarters and our Digital Marketing Services (DMS) business unit, which resulted in a total severance charge of $i7.3
million which was recorded within the Cost of Revenues, Business Units - Selling and Administrative, and Corporate - General and Administrative Costs within the Consolidated Statement of Income in the third quarter of 2018. The corporate headquarters reductions were part of our ongoing consolidations of our corporate structure following our strategic transformation into a pure play broadcast company. The reduction in force at our DMS unit is a result of a rebranding of our service offerings and unification of our sales strategy to better serve our customers. A majority of the employees impacted by these reductions will receive lump sum severance payments. As of the end of the second quarter of 2019, we have a remaining accrual of approximately $i3.0
million related to these actions, substantially all of which will be paid throughout the remainder of the year.
Acquisitions
On June 18, 2019, we completed the acquisition of the remaining interest that we did not currently own (approximately i85%)
of leading 24/7 multicast networks Justice Network and Quest, for approximately $i77 million in cash. These are two fast growing networks that leverage the increasing numbers of over-the-air viewers, which have increased more than i48%
over the past eight years. Justice Network and Quest offer unique ad-supported programming and reach more than i87 million television homes nationwide. We financed the transaction through the use of available cash and borrowing under our existing credit facility.
On March 20, 2019, we announced that we entered into a definitive agreement with Nexstar Media Group to acquire i11
local television stations in ieight markets, including ieight
Big Four network affiliates, for $i740 million in cash. These stations are expected to bring additional geographic diversity to our existing station portfolio and add ifour
additional key markets to our strong political footprint as the 2020 presidential election gets underway. The acquisition of these stations is contingent on the closing of the Nexstar Media - Tribune merger, which is expected to take place in the third quarter of 2019, and other customary closing conditions.
On June 11, 2019, we announced that we had entered into a definitive agreement with Dispatch Broadcast to acquire two top-rated television stations and a radio station for $i535
million in cash. Through this acquisition we will purchase WTHR, the NBC affiliate station in Indianapolis, IN, WBNS, the CBS affiliate in Columbus, OH and WBNS Radio (97.1 FM and 1460 AM) in Columbus, OH. We expect that this acquisition will close in the third quarter of 2019, pending customary regulatory approvals.
We expect to finance both acquisitions through the use of available cash and borrowing under our revolving credit facility, which we expect to amend and extend in connection with the closing of the proposed transactions.
19
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
We are an innovative media company that serves the greater good of our communities. Across platforms, we tell empowering stories, conduct impactful investigations and deliver innovative marketing services. With 49 television stations and two radio stations in 41 U.S. markets, we are the largest owner of top four network affiliates in the top 25 markets, reaching approximately one-third of all television households nationwide. We also own leading multicast networks Justice Network and Quest that reach more than 87 million U.S. television homes. Each television station also has a robust digital presence across
online, mobile and social platforms, reaching consumers whenever, wherever they are. Each month we reach approximately 50 million consumers on-air and 40 million across our digital platforms. We have been consistently honored with the industry’s top awards, including Edward R. Murrow, George Polk, Alfred I. DuPont and Emmy Awards. Through TEGNA Marketing Solutions (TMS), our integrated sales and back-end fulfillment operations, we deliver results for advertisers across television, email, social, and Over the Top (OTT) platforms, including Premion, our OTT advertising network.
We have one operating and reportable segment. The primary sources of our revenues are: 1) advertising & marketing services revenues, which include local and national non-political television advertising, digital marketing services (including Premion), and advertising on the stations’ websites
and tablet and mobile products; 2) subscription revenues, reflecting fees paid by satellite, cable, OTT (companies that deliver video content to consumers over the Internet) and telecommunications providers to carry our television signals on their systems; 3) political advertising revenues, which are driven by even year election cycles at the local and national level (e.g. 2020, 2018) and particularly in the second half of those years; and 4) other services, such as production of programming and advertising material.
As illustrated in the table below, our business continues to evolve toward growing stable and profitable revenue streams. As a result of growing importance of even-year political advertising on our results, management increasingly looks at revenue trends over two-year periods. We expect high margin subscription and political revenues will account for approximately
half of our total two-year revenue beginning in 2019/2020, and a larger percentage on a rolling two-year cycle thereafter.
Our balance sheet combined with these strong, accelerating and dependable cash flows provide us the ability to pursue the path that offers the most attractive return on capital at any given point in time. We have a broad set of capital deployment opportunities, including retiring debt to create additional future flexibility;
investing in original, relevant and engaging content; investing in growth businesses like our OTT advertising service Premion; and pursuing value accretive acquisition-related growth. We will continue to review all opportunities in a disciplined manner, both strategically and financially. In the near-term, our priorities continue to be maintaining a strong balance sheet, enabling organic growth, acquiring attractively priced strategic assets and returning capital to shareholders in the form of dividends.
On January 2, 2019, we acquired stations in Toledo, OH and Midland-Odessa, TX. The estimated transaction price is $109.9 million, which includes a pending final working capital adjustment of approximately $1.0 million. WTOL, the CBS affiliate in Toledo and KWES, the NBC affiliate in Midland-Odessa are recognized as strong local
media brands well-positioned in key markets that further enhance our portfolio of top 4 affiliates. KWES further deepens our presence in the high-growth state of Texas where we now own 11 stations, covering 87 percent of television households in the state.
On June 18, 2019, we acquired, for $77.2 million in cash, the remaining 85% of leading multicast networks Justice Network and Quest from Cooper Media. We previously owned approximately 15% of the two networks. Justice Network and Quest offer unique ad-supported programing and reach more than 87 million television homes.
On March 20, 2019, we announced that we entered into a definitive agreement with Nexstar Media Group to acquire 11 local television stations in eight markets, including
eight Big Four network affiliates, for $740 million in cash. These stations are expected to bring additional geographic diversity to our existing station portfolio and add four additional key markets to our strong political footprint as the 2020 presidential election gets underway. We expect the acquisition will be EPS accretive within a year after close and immediately accretive to free cash flow (see definition non-GAAP measure within Presentation of Non-GAAP information). The acquisition of these stations is contingent on the closing of the Nexstar Media - Tribune merger, which is expected to take place in the third quarter of 2019, and other customary closing conditions.
20
On June 11, 2019,
we announced that we had entered into a definitive agreement with Dispatch Broadcast to acquire two top-rated television stations and a radio station for $535 million in cash. Through this acquisition we will acquire WTHR, the NBC affiliate and #1 rated station in Indianapolis, IN, and WBNS, the CBS affiliate and #1 rated station in Columbus, OH and WBNS Radio (97.1 FM and 1460 AM), the leader in sports radio in Central Ohio, and flagship home of leading Ohio sports teams, including the Ohio State Buckeyes. WTHR and WBNS will add to our existing station portfolio of leading top four network affiliates in large markets. We expect that this acquisition will close in the third quarter of 2019, pending customary regulatory approvals.
We expect to finance both acquisitions through the use of available cash and borrowing under our revolving credit facility, which we expect to amend and extent in connection with the closing of the
proposed transactions.
Consolidated Results from Operations
The following discussion is a comparison of our consolidated results on a GAAP basis. The year-to-year comparison of financial results is not necessarily indicative of future results. In addition, see the section on page 24 titled ‘Results from Operations - Non-GAAP Information’ for additional tables presenting information which supplements our financial information provided on a GAAP basis. Our consolidated results of operations on a GAAP basis were as follows (in thousands, except per share amounts):
Business
units - Selling, general and administrative expenses, exclusive of depreciation
73,941
78,933
(6
%)
145,406
152,554
(5
%)
Corporate
- General and administrative expenses, exclusive of depreciation
15,836
11,221
41
%
30,571
23,929
28
%
Depreciation
14,533
13,861
5
%
29,450
27,332
8
%
Amortization
of intangible assets
8,823
7,962
11
%
17,512
14,744
19
%
Spectrum
repacking reimbursements and other
(4,306
)
(6,326
)
(32
%)
(11,319
)
(6,326
)
79
%
Total
operating expenses
$
394,120
$
369,945
7
%
$
778,224
$
735,020
6
%
Total
operating income
$
142,812
$
154,135
(7
%)
$
275,461
$
291,150
(5
%)
Non-operating
expenses
(37,978
)
(33,868
)
12
%
(73,874
)
(95,311
)
(22
%)
Provision
for income taxes
24,879
27,755
(10
%)
47,653
48,140
(1
%)
Net
income
$
79,955
$
92,512
(14
%)
$
153,934
$
147,699
4
%
Earnings
per share - basic
$
0.37
$
0.43
(14
%)
$
0.71
$
0.68
4
%
Earnings
per share - diluted
$
0.37
$
0.43
(14
%)
$
0.71
$
0.68
4
%
Revenues
Our
Advertising and Marketing Services (AMS) category includes all sources of our traditional television advertising and digital revenues including Premion and other digital advertising and marketing revenues across our platforms. Our Subscription revenue category includes revenue earned from cable and satellite providers for the right to carry our signals and the distribution of TEGNA stations on OTT streaming services.
Our revenues, and thus operating results, are subject to seasonal fluctuations. Generally, our second and fourth quarter revenues and operating results are stronger than those we report for the first and third quarter. This is driven by the second quarter usually reflecting increased spring seasonal advertising, while the fourth quarter typically includes increased advertising related to the holiday season. In addition, our revenue and operating results are subject
to significant fluctuations across yearly periods resulting from political advertising. In even numbered years, political spending is usually significantly higher than in odd
21
numbered years due to advertising for the local and national elections. Additionally, every four years, we typically experience even greater increases in political advertising in connection with the presidential election. The strong demand for advertising from political advertisers in these even years can result in the significant use of our available inventory, which can have the effect of lowering our AMS revenue from our non-political advertising customers in the even year of a two year election cycle.
The following table
summarizes the year-over-year changes in our revenue categories (in thousands):
Total
revenues increased $12.9 million, or 2%, in the second quarter of 2019 compared to the same period in 2018. This increase was primarily due to an increase in subscription revenue of $27.0 million, or 13%, primarily due to annual rate increases under existing retransmission agreements. Also contributing to the overall revenue increase was AMS revenue of $7.7 million, or 3%, comprised of our recent acquisitions (primarily WTOL and KWES) and increases in digital revenue (primarily Premion), and gains in certain categories (including professional services, banking/financing and education). These increases were partially offset by political revenue which decreased $22.5 million, or 87%, reflecting the decrease of political advertising compared to 2018.
AMS revenue increased 3% in the
second quarter of 2019, a sequential improvement compared to the first quarter of 2019 even when adjusting out the incremental impact on revenue related to the Winter Olympics and Super Bowl being broadcast on NBC. The increase was driven by Premion’s revenue growth and improvement in traditional TV advertising.
In the first six months of 2019, revenues increased $27.5 million, or 3%, compared to the same period in 2018. This increase was primarily due to an increase in subscription revenue of $62.8 million, or 15%, in the first six months of 2019 primarily due to annual rate increases under existing retransmission agreements. This increase was partially offset by political revenue which decreased $27.4 million, or 82%. Lastly, AMS revenue declined $10.8 million, or 2%, due to the absence of Winter Olympic and lower Super Bowl advertising
(we estimate the incremental sports events combined for approximately $16.0 million higher revenue in 2018), partially offset by our recent acquisitions (the six month comparisons include KFMB, WTOL and KWES) and increases in digital revenue (primarily Premion).
Cost of Revenues
Cost of revenues increased $21.0 million, or 8%, in the second quarter of 2019 compared to the same period in 2018. The increase was primarily due to a $17.0 million increase in programming costs (due to the growth in subscription revenues and recent acquisitions).
In
the first six months of 2019, cost of revenues increased$43.8 million, or8%, compared to the same period in 2018. This increase was primarily due to a $38.2 million increase in programming costsdue to the same factors as the second quarter comparison above.
Business Units - Selling, General and Administrative Expenses
Business unit selling, general and administrative expenses decreased $5.0 million, or 6%, in the second quarter of 2019 compared to
the same period in 2018. The decrease was primarily due to the decrease of $2.8 million of legal and professional costs.
In the six months ended June 30, 2019, business unit selling, general and administrative expenses decreased $7.1 million, or 5% compared to the same period in 2018. The decrease was primarily the result of a $5.3 million net decrease mostly driven by the decrease of legal and professional costs.
Corporate General and Administrative Expenses
Our Corporate costs are separated from our business expenses and are recorded as general
and administrative expenses in our Consolidated Statement of Income. This category primarily consists of broad corporate management functions including Legal, Human Resources, and Finance, as well as activities and costs not directly attributable to the operations of our media business. In addition, beginning in the first quarter of 2019, we now record acquisition-related costs within our Corporate
22
operating expense due to their recurring nature as we have recently become more acquisitive. Prior to the first quarter of 2019, such costs were recorded as other non-operating expense.
Corporate general and administrative expenses increased $4.6
million, or 41%, in the second quarter of 2019 compared to the same period in 2018. The increase was primarily driven by $5.2 million of acquisition-related costs associated with recent acquisitions and strategic initiatives. Partially offsetting these expenses were cost savings as a result of right sizing our corporate function mostly driven by a reduction in force in the third quarter of 2018.
In the six months ended June 30, 2019, corporate general and administrative expenses increased $6.6 million, or 28%, compared to the same period in 2018. The increase was primarily due to $9.1 million in acquisition-related costs associated with recent acquisitions and
strategic initiatives. Partially offsetting this increase were lower corporate expenses associated with the right-sizing of the corporate function mostly driven by a reduction in force in the third quarter of 2018.
Depreciation Expense
Depreciation expense increased by $0.7 million, or 5%, in the second quarter of 2019 and $2.1 million, or 8% in the first six months of 2019, both as compared to the same periods in 2018. The increases were primarily due to the assets acquired in recent acquisitions.
Amortization Expense
Amortization
expense increased $0.9 million, or 11%, in the second quarter of 2019 and $2.8 million, or 19% in the first six months of 2019, both as compared to the same periods in 2018. The increases were primarily due to incremental amortization expense resulting from our recent acquisitions (which include WTOL/KWES and KFMB).
Spectrum repacking reimbursements and other
We had $4.3 million of other gains in the second quarter of 2019 compared to net gains of $6.3 million in the second quarter of 2018. The 2019 gain consists of $4.3 million of reimbursements received from the Federal Communications Commission (FCC) for required spectrum repacking. The 2018 net gains primarily consist of a gain recognized
on the sale of real estate in Houston and gains due to reimbursements received from the FCC for required spectrum repacking. These gains were partially offset by a $0.6 million early lease termination charge.
In the first six months of 2019, we recognized net gains of $11.3 million, compared to $6.3 million recognized in the same period in 2018. The 2019 net gains primarily relate to $8.4 million of reimbursements received from the FCC for required spectrum repacking. We also had a gain of $2.9 million as a result of the sale of certain real estate. The 2018 net gain relates to the same activity discussed above.
Operating Income
Our operating income decreased $11.3
million, or 7%, in the second quarter of 2019 compared to the same period in 2018. The decrease was driven by the changes in revenue and expenses discussed above, most notably the decline of high margin political advertising. The revenue increase of $12.9 million, or 2%, was more than offset by a $24.2 million, or 7%, increase in operating expenses. As a result, our consolidated operating margins were 27% in the second quarter of 2019 as compared to 29% in the second quarter of 2018.
Our operating income decreased $15.7 million, or 5%, in the first six months of 2019 compared to the same period in 2018. The decrease
was driven by the changes in revenue and expenses discussed above, most notably the decline of high margin political advertising, as well as the absence of Winter Olympic and lower Super Bowl advertising. Revenue increased by $27.5 million, or 3%, while expenses increased $43.2 million, or 6%. As a result, our consolidated operating margins were 26% and 28% in the first six months of 2019 and 2018, respectively.
Non-Operating Expenses
Non-operating expenses decreased $4.1 million, or 12%, in the second quarter of 2019 compared to the same period in 2018. This decrease was primarily due to a decrease in equity earnings of $16.2 million due to the absence of a $16.8 million gain recognized
as a result of the sale of our interest in CareerBuilder’s EMSI business in the second quarter of 2018. Partially offsetting this decrease was a $7.3 million gain we recognized from the acquisition of Justice and Quest, $3.7 million of acquisition-related costs which were classified as non-operating in 2018 and are now classified as a corporate operating cost and $2.8 million of lower interest expense. The decline in interest expense was driven by lower average outstanding debt, partially offset by higher interest rates. Total average outstanding debt was $2.91 billion for the second quarter of 2019, compared to $3.18 billion in the same period of 2018. The weighted average interest rate on total outstanding debt was 6.04% for the second quarter of 2019, compared to 5.88% in the same period of 2018.
In the first six months of 2019, non-operating expenses decreased $21.4
million or 22% compared to the same period in
23
2018. This decrease was primarily due to a decrease in other non-operating items, net of $20.2 million due to the absence of $13.2 million acquisition-related costs which were classified as non-operating in 2018 and are now classified as a corporate operating cost and a $7.3 million gain recognized as a result of a gain from the acquisition of Justice and Quest multicast networks in the second quarter of 2019. The decrease was also partially due to a reduction in interest expense of $4.1 million in 2019 driven by lower average debt outstanding, partially offset by slightly higher interest rates. The total average outstanding debt
was $2.97 billion for the first six months of 2019, compared to $3.15 billion in the same period of 2018. The weighted average interest rate on total outstanding debt was 6.05% for the first six months of 2019, compared to 5.85% in the same period of 2018.
Income Tax Expense
Income tax expense decreased $2.9 million, or 10%, in the second quarter of 2019 compared to the same period in 2018. The decrease was primarily due to decreases in net income before tax. Our effective income tax rate was 23.7% for the second quarter of 2019, compared to 23.1% for the second quarter of 2018. The tax rate for the second quarter of 2019 is higher than the comparable rate in 2018 primarily as a result of reduced tax benefits associated with the release of uncertain tax positions and an increase
in expenses that are not deductible for tax purposes.
Income tax expense decreased $0.5 million in the first six months of 2019 compared to the same period in 2018, a decrease of 1%. The income tax decrease was primarily due to a lower effective income tax rate for the first six months of 2019 than the comparable rate in 2018, partially offset by higher net income before tax. Our effective income tax rate was 23.6% for the first six months of 2019, compared to 24.6% for the same period in 2018. The tax rate is lower in 2019 than the comparable rate in 2018 primarily as a result of the revaluation of deferred taxes in 2018 for the increase in the effective state tax rate due to the acquisition of KFMB.
Net Income
Net
income was $80.0 million, or $0.37 per diluted share, in the second quarter of 2019 compared to $92.5 million, or $0.43 per diluted share, during the same period in 2018. For the first six months of 2019, we reported net income of $153.9 million, or $0.71 per diluted share, compared to $147.7 million, or $0.68 per diluted share, for the same period in 2018. Both income and earnings per share were affected by the factors discussed above.
The weighted average number of diluted common shares outstanding in the second quarter of 2019 and 2018 was 217.9 million and 216.5 million, respectively. The weighted average number of diluted shares outstanding
in the first six months of 2019 and 2018 was 217.6 million and 216.8 million, respectively.
Results from Operations - Non-GAAP Information
Presentation of Non-GAAP information
We use non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, the related GAAP measures, nor should they be considered superior to the related GAAP measures, and should be read together with financial information presented on a GAAP basis. Also, our non-GAAP measures may not be
comparable to similarly titled measures of other companies.
Management and our Board of Directors use the non-GAAP financial measures for purposes of evaluating company performance. Furthermore, the Leadership Development and Compensation Committee of our Board of Directors uses non-GAAP measures such as Adjusted EBITDA, non-GAAP net income, non-GAAP EPS, free cash flow and Adjusted revenues to evaluate management’s performance. Therefore, we believe that each of the non-GAAP measures presented provides useful information to investors and other stakeholders by allowing them to view our business through the eyes of management and our Board of Directors, facilitating comparisons of results across historical periods and focus on the underlying ongoing operating performance of our business. We discuss in this Form 10-Q non-GAAP financial performance measures that exclude from
our reported GAAP results the impact of “special items” consisting of spectrum repacking reimbursements and other, gains on sale of equity method investments, acquisition-related costs, severance costs and certain non-operating expenses (TEGNA foundation donation and pension payment timing related charges). In addition, we have income tax special items associated with tax impacts related to the acquisition of KFMB.
We believe that such expenses and gains are not indicative of normal, ongoing operations. While these items may be recurring in nature and should not be disregarded in evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur. Therefore, while
we may incur or recognize these types of expenses and gains in the future, we believe that removing these items for purposes of calculating the non-GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.
24
We discuss Adjusted EBITDA (with and without corporate expenses), a non-GAAP financial performance measure that we believe offers a useful view of the overall operation of our businesses. We define Adjusted EBITDA as net income before (1) interest expense, (2) income taxes, (3) equity income (loss) in unconsolidated investments, net, (4) other non-operating items, net, (5) severance expense, (6) acquisition-related costs, (7) spectrum repacking
reimbursements and other, (8) depreciation and (9) amortization. The most directly comparable GAAP financial measure to Adjusted EBITDA is Net income. Users should consider the limitations of using Adjusted EBITDA, including the fact that this measure does not provide a complete measure of our operating performance. Adjusted EBITDA is not intended to purport to be an alternate to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. In particular, Adjusted EBITDA is not intended to be a measure of cash flow available for management’s discretionary expenditures, as this measure does not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments and other debt service requirements.
We also consider adjusted revenues to be an
important non-GAAP financial measure. Our adjusted revenue is calculated by taking total company revenues on a GAAP basis and adjusting it to exclude (1) estimated incremental Olympic and Super Bowl revenue and (2) political revenues. These adjustments are made to our reported revenue on a GAAP basis in order to evaluate and assess our core operations on a comparable basis, and it represents the ongoing operations of our media business.
We also discuss free cash flow, a non-GAAP performance measure. Beginning in the first quarter of 2019 we began using a new methodology to compute free cash flow. The change in methodology was determined to be preferable as it better reflects how the Board of Directors reviews the performance of the business and it more closely aligns to how other companies in the broadcast industry calculate this non-GAAP performance metric. The most directly
comparable GAAP financial measure to free cash flow is Net income. Free cash flow is now calculated as non-GAAP Adjusted EBITDA (as defined above), further adjusted by adding back (1) stock-based compensation, (2) non-cash 401(k) company match, (3) syndicated programming amortization, (4) pension reimbursements, (5) severance expense, (6) dividends received from equity method investments and
(7) reimbursements from spectrum repacking. This is further adjusted by deducting payments made for (1) syndicated programming, (2) pension, (3) interest, (4) taxes (net of refunds) and (5) purchases of property and equipment. Like Adjusted EBITDA, free cash flow is not intended to be a measure of cash flow available for management’s discretionary use.
Discussion of special charges affecting reported results
Our
results for the quarter and first six months ended June 30, 2019 included the following items we consider “special items” that while not always non-recurring, can vary significantly from period to period:
•
Severance expense which include payroll and related benefit costs at our stations and corporate headquarters;
•
Acquisition-related costs associated with business acquisitions;
•
Spectrum
repacking reimbursements and other consisting of a gain recognized on the sale of real estate and gains due to reimbursements from the FCC for required spectrum repacking;
•
Gains recognized in our equity income in unconsolidated investments as a result of the sale of two investments; and
•
Other non-operating item related to gains from equity method investments and a charitable donation made to the TEGNA Foundation.
Our
results for the quarter and first six months ended June 30, 2018 included the following items we consider “special items” that while not always non-recurring, can vary significantly from period to period:
•
Spectrum repacking reimbursements and other consisting of a gain recognized on the sale of real estate in Houston and gains due to reimbursements from the FCC for required spectrum repacking. These gains are partially offset by an early lease termination payment;
•
Other
non-operating items associated with business acquisition-related costs, a deferred tax provision impact related
to our acquisition of KFMB, and a charitable donation made to the TEGNA Foundation;
•
Pension lump-sum payment charge as a result of payments that were made to certain SERP plan participants in early 2018; and
•
A gain recognized in our equity income in unconsolidated investments, related to our share of CareerBuilder’s gain on the
sale
of their EMSI business.
25
Reconciliations of certain line items impacted by special items to the most directly comparable financial measure calculated
and presented in accordance with GAAP on our Consolidated Statements of Income follow (in thousands, except per share amounts):
Equity
income (loss) in unconsolidated investments, net
14,309
—
(16,758
)
—
—
(2,449
)
Other
non-operating items
(12,791
)
—
—
15,184
6,300
8,693
Total
non-operating expense
(95,311
)
—
(16,758
)
15,184
6,300
(90,585
)
Income
before income taxes
195,839
(6,326
)
(16,758
)
15,184
6,300
194,239
Provision
for income taxes
48,140
2
(4,216
)
(472
)
1,608
45,062
Net
income
147,699
(6,328
)
(12,542
)
15,656
4,692
149,177
Net
income per share-diluted (a)
$
0.68
$
(0.03
)
$
(0.06
)
$
0.07
$
0.02
$
0.69
(a)
Per share amounts do not sum due to rounding.
27
Adjusted
Revenues
Reconciliations of adjusted revenues to our revenues presented in accordance with GAAP on our Consolidated Statements of Income are presented below (in thousands):
Excluding the impacts of estimated net incremental Olympic and Super Bowl and
Political advertising revenue, total company adjusted revenues on a comparable basis increased 7% in the second quarter 2019 and 7% in the first six months of 2019 compared to the same periods in 2018. This increase was primarily attributable to increases in subscription revenue.
Adjusted EBITDA - Non-GAAP
Reconciliations of Adjusted EBITDA to net income presented in accordance with GAAP on our Consolidated Statements of Income are presented below (in thousands):
Adjusted
EBITDA margin in the second quarter of 2019 and for the six months ended June 30, 2019 was 33% without corporate expense or 31% with corporate expense. Our total Adjusted EBITDA decreased $1.1 million or 1% in the second quarter of 2019 compared to 2018. The decrease in the second quarter was primarily driven by the operational factors discussed above within the revenue and operating expense fluctuation explanation sections. Most notably, for the second quarter, the decline was primarily driven by an increase in subscription revenue partially offset by higher programming costs and the expected decline of political revenue. For the first six months of 2019, the Adjusted EBITDA decrease of $5.2 million is primarily due to the same factors affecting the second quarter.
Free cash flow reconciliation
Our
free cash flow, a non-GAAP performance measure, was $160.7 million in the first half of 2019 compared to $193.6 millionfor the same period in 2018.
Reconciliations from “Net income” to “Free cash flow” follow (in thousands):
Plus:
Cash dividend from equity investments for return on capital
—
11,295
***
Plus: Cash reimbursements from spectrum repacking
8,439
2,025
***
(Less)
Plus: Other non-operating items, net
(7,425
)
12,791
***
Less: Tax payments, net of refunds
(55,785
)
(37,013
)
51
%
Less:
Spectrum repacking reimbursements and other
(11,319
)
(6,326
)
79
%
Less: Equity income in unconsolidated investments, net
(11,413
)
(14,309
)
(20
%)
Less:
Syndicated programming payments
(23,722
)
(26,020
)
(9
%)
Less: Pension contributions
(5,947
)
(35,384
)
(83
%)
Less:
Interest payments
(85,961
)
(91,360
)
(6
%)
Less: Purchases of property and equipment
(37,684
)
(20,864
)
81
%
Free
cash flow (non-GAAP basis)
$
160,695
$
193,598
(17
%)
***
Not meaningful
Liquidity, Capital Resources and Cash Flows
Our cash generation capability and financial condition, together with our significant borrowing capacity under our revolving credit agreement, are sufficient to fund our capital expenditures, interest expense, dividends, investments
in strategic initiatives (including acquisitions) and other operating requirements. Over the longer term, we expect to continue to fund debt maturities, acquisitions and investments through a combination of cash flows from operations, borrowings under our revolving credit agreement and funds raised in the capital markets.
During the second quarter of 2019, we borrowed $71.0 million under the revolving credit facility to finance the purchase of the interest in Justice Network LLC and Quest that we did not previously own. As of June 30, 2019, our total debt was $2.95 billion, cash and cash equivalents totaled $29.3 million, and we had unused borrowing capacity of $1.39
billion under our revolving credit facility. As of June 30, 2019, approximately $2.69 billion, or 91%, of our debt has a fixed interest rate.
29
Our operations have historically generated strong positive cash flow which, along with availability under our existing revolving credit facility, provides adequate liquidity to invest in organic and strategic growth opportunities, as well as acquisitions such as our 2019 acquisitions of WTOL/KWES and Justice/Quest multicast networks. We expect to finance our recently announced 11 station acquisition from Nexstar Media Group and WTHR/WBNS stations, through the use of available cash
and borrowing under our revolving credit facility, which we expect to amend and extend in connection with the closing of the proposed transactions. Our financial and operating performance, as well as our ability to generate sufficient cash flow to maintain compliance with credit facility covenants, are subject to certain risk factors; see Item 1A. “Risk Factors” in our 2018 Annual Report on Form 10-K for further discussion.
On September 19, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $300 million of our common stock over three years. During the first six month of 2019, given acquisition investment opportunities, no shares were repurchased and as of June 30, 2019, approximately $279.1 million remained under this program.
As a result of our pending 11 station acquisition from Nexstar Media Group, we have suspended share repurchases under this program.
Cash Flows
The following table provides a summary of our cash flow information followed by a discussion of the key elements of our cash flow (in thousands):
Balance of cash, cash equivalents and restricted cash beginning of the period
$
135,862
$
128,041
Operating
activities:
Net income
153,934
147,699
Depreciation, amortization and other non-cash adjustments
36,510
28,328
Pension
(contributions), net of expense
(3,812
)
(31,158
)
Other, net
(69,781
)
9,172
Net cash flows from operating activities
116,851
154,041
Net
cash used for investing activities
(197,705
)
(331,870
)
Net cash (used for) from financing activities
(25,740
)
74,291
Decrease in cash and
cash equivalents
(106,594
)
(103,538
)
Balance of cash, cash equivalents and restricted cash end of the period
$
29,268
$
24,503
Operating
Activities -Cash flow from operating activities was $116.9 million for the six months ended June 30, 2019, compared to $154.0 million for the same period in 2018. The $37.1 million net decrease in cash flow from operating activities was primarily due to a decrease in political revenue, for which customers pre-pay, a decline in AMS revenue due to the absence of the Olympics and lower Super Bowl related revenue, and a decline in payables and accruals (due to refunds paid to certain Premion customers and the payment of legal fees related to the DOJ matter described in Note 11 of the condensed consolidated financial statements). Also contributing to the decline was an increase in tax payments of $18.8 million. These amounts were partially offset by a decline
in pension payments of $29.1 million.
Investing Activities -Cash flow used for investing activities was $197.7 million for the six months ended June 30, 2019, compared to $331.9 million for the same period 2018. The decrease of $134.2 million was primarily due a reduction in the amount of cash used for acquisitions. In 2019, we used $185.9 million for the acquisition of WTOL/KWES and Justice/Quest as compared to the 2018 acquisition of KFMB for $325.9 million.
Financing Activities - Cash flow
used for financing activities was $25.7 million for the six months ended June 30, 2019, compared to cash flow from financing activities of $74.3 million for the same period in 2018. The change was primarily due to activity on our revolving credit facility. In the first six months of 2019 we made net borrowings of $55 million (used to partially fund Justice/Quest acquisition) on the revolver as compared to the same period in 2018 when we had borrowings of $186 million (primarily for the acquisition of KFMB).
30
Certain
Factors Affecting Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q contain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words “believe,”“expect,”“estimate,”“could,”“should,”“intend,”“may,”“plan,”“seek,”“anticipate,”“project” and similar expressions, among others, generally identify “forward-looking statements”. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated in the forward-looking statements, including those described under Item 1A. “Risk Factors” in our 2018 Annual Report on Form 10-K.
Our
actual financial results may be different from those projected due to the inherent nature of projections. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. The forward-looking statements contained in this Form 10-Q speak only as of the date of its filing. Except where required by applicable law, we expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-Q to reflect subsequent events, changed circumstances, changes in expectations, or the estimates and assumptions associated with them. The forward-looking statements in this Form 10-Q are intended to be subject to the safe harbor protection provided by the federal securities laws.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For
quantitative and qualitative disclosures about market risk, refer to the following section of our 2018 Annual Report on Form 10-K: “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.” Our exposures to market risk have not changed materially since December 31, 2018.
As of June 30, 2019, approximately $2.69 billion of our debt has a fixed interest rate (which represents approximately 91% of our total principal debt obligation). Our remaining debt obligation of $280 million has floating interest rates. These obligations fluctuate with market interest rates. By way of comparison, a 50 basis points increase or decrease in the average interest rate for these obligations would result in a change in annual interest expense of approximately $1.4 million. The
fair value of our total debt, based on bid and ask quotes for the related debt, totaled $3.1 billion as of June 30, 2019 and $2.96 billion as of December 31, 2018.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June
30, 2019. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective, as of June 30, 2019, to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no material changes in our internal controls or in other factors during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
31
PART
II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 to the condensed consolidated financial statements for information regarding our legal proceedings.
Item 1A. Risk Factors
While we attempt to identify, manage and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. “Item 1A. Risk Factors” of our 2018 Annual Report on Form 10-K describes the risks and uncertainties that
we believe may have the potential to materially affect our business, results of operations, financial condition, cash flows, projected results and future prospects. We do not believe that there have been any material changes from the risk factors previously disclosed in our 2018 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 19, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $300.0 million of our common stock over three years. During the second quarter of 2019, no shares were repurchased and as of June
30, 2019, approximately $279.1 million remained under this program. As a result of our pending 11 station acquisition from Nexstar Media Group, we have suspended share repurchases under this program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item
5. Other Information
None.
32
Item 6. Exhibits
Exhibit Number
Description
Location
2-1
Agreement
and Plan of Merger, dated as of June 10, 2019, by and among RadiOhio Incorporated, Radio Acquisition Corp., TEGNA Inc., and Michael J. Fiorile, solely in his capacity as Stockholder Representative
Stock
Purchase Agreement, dated as of June 10, 2019, by and among VideoIndiana, Inc., the Sellers named therein, Michael J. Fiorile, solely in his capacity as Stockholder Representative, and TEGNA Inc.
Stock
Purchase Agreement, dated as of June 10, 2019, by and among WBNS TV, Inc., the Sellers named therein, Michael J. Fiorile, solely in his capacity as Stockholder Representative, and TEGNA Inc.
The following financial information from TEGNA Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2019,
formatted in iXBRL includes: (i) Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Income for the quarter and year-to-date periods ended June 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the quarter and year-to-date periods ended June 30, 2019 and 2018, (iv) Condensed Consolidated Cash Flow Statements for the year-to-date periods ended June 30, 2019 and June 30, 2018, (v) Consolidated Statements of Equity for the quarter and year-to-date periods ended June
30, 2019 and 2018 and (vi) the notes to unaudited condensed consolidated financial statements.
We agree to furnish to the Commission, upon request, a copy of each agreement with respect to long-term debt not filed herewith in reliance upon the exemption from filing applicable to any series of debt representing less than 10% of our total consolidated assets.
* Asterisks identify management contracts
and compensatory plans or arrangements.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
