TEGNA INC. Introduction
We are an innovative media company that serves the greater good of our communities. Our business includes 62 television stations and four radio stations in 51 U.S. markets, we are the largest owner of top four network affiliates in the top 25 markets among independent station groups, reaching approximately 39% ofU.S. television households. Each television station also has a robust digital presence across online, mobile and social platforms, reaching consumers whenever, wherever they are. We have been consistently honored with the industry's top awards, includingEdward 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 (AMS) 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. Our revenues and 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 reflecting increased spring seasonal advertising, while the fourth quarter typically includes increased advertising related to the holiday season. In even years, our advertising revenue benefits significantly from theOlympics when carried onNBC , our largest network affiliation. To a lesser extent, theSuper Bowl can influence our advertising results, the degree to which depending on which network broadcast's the event. 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 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 (leading to a "crowd out" effect), which can diminish our AMS revenue from our non-political advertising customers in the even year of a two year election cycle, particularly in the fourth quarter of those years. As discussed above in "Business Overview" section of Item 1, during 2019 we acquired multiple local television stations and two multicast networks in four different business acquisitions for an aggregate purchase price of approximately$1.5 billion . The four acquisitions are collectively referred to as the "Recent Acquisitions" in the results of operations discussion that follows. The inclusion of the operating results from these Recent Acquisitions for the periods subsequent to their acquisition impacts the year-to-year comparability of our consolidated operating results in 2019. 19 --------------------------------------------------------------------------------
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 23 titled 'Operating results non GAAP information' for additional tables presenting information which supplements our financial information provided on a GAAP basis. For a comparative discussion of our results of operations for the years endedDecember 31, 2018 andDecember 31, 2017 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onMarch 1, 2019 .
A consolidated summary of our results is presented below (in thousands).
2019 Change 2018 Change 2017
Revenues: $ 2,299,497 4% $ 2,207,282 16% $ 1,903,026
Operating expenses:
Cost of revenues 1,228,237 15% 1,065,933 14% 933,718
Business units - Selling,
general and administrative
expenses 326,804 4% 315,320 10% 287,396
Corporate - General and (1)
administrative expenses 80,144 53% 52,467 (5%) 54,943
Depreciation 60,525 8% 55,949 2% 55,068
Amortization of intangible
assets 50,104 62% 30,838 43% 21,570
Spectrum repacking
reimbursements and other,
net (5,335 ) (54%) (11,701 ) *** 4,429
Total 1,740,479 15% 1,508,806 11% 1,357,124
Operating income 559,018 (20%) 698,476 28% 545,902
Non-operating income
(expense):
Equity income in
unconsolidated investments,
net 10,149 (26%) 13,792 33% 10,402
Interest expense (205,470 ) 7% (192,065 ) (9%) (210,284 )
Other non-operating items,
net 11,960 *** (11,496 ) (67%) (35,304 )
Total (183,361 ) (3%) (189,769 ) (19%) (235,186 )
Income before income taxes 375,657 (26%) 508,707 64% 310,716
Provision (benefit) for
income taxes 89,422 (17%) 107,367 *** (137,246 )
Income from continuing
operations 286,235 (29%) 401,340 (10%) 447,962
Earnings from continuing
operations per share - basic 1.32 (29%) 1.86 (11%) 2.08
Earnings from continuing
operations per share -
diluted $ 1.31 (29%) $ 1.85 (10%) $ 2.06
*** Not meaningful
(1) This increase in corporate expense was driven by acquisition-related costs
totaling $30.7 million in 2019 due to the Recent Acquisitions (principally
advisory fees). In addition, our 2019 Corporate expense includes $6.1 million of
advisory fees related to activism defense. Excluding these advisory fees,
corporate expenses were down approximately $9.1 million . See the section on page
23 titled 'Operating results non-GAAP information' for additional tables and
information regarding our Corporate expense on a non-GAAP basis.
Revenues
Our 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
2019 Change 2018 Change 2017
Advertising & Marketing Services $ 1,226,607 11% $ 1,106,754 (3%) $ 1,139,642
Subscription 1,005,030 20% 840,838 17% 718,750
Political 38,478 (84%) 233,613 *** 23,258
Other 29,382 13% 26,077 22% 21,376
Total revenues $ 2,299,497 4% $ 2,207,282 16% $ 1,903,026
*** Not meaningful
20-------------------------------------------------------------------------------- Total revenues increased$92.2 million in 2019 as compared to 2018. Our Recent Acquisitions contributed total revenues of$185.0 million in 2019. Excluding Recent Acquisitions, total revenues decreased$92.8 million . This decrease was primarily due to a$200.4 million reduction in political advertising, reflecting significantly fewer elections compared to 2018. This decrease was partially offset by an increase in subscription revenue of$96.6 million , primarily due to annual rate increases under existing retransmission agreements and an increase in AMS revenue of$8.6 million (due to higher digital revenue).
Cost of revenues
Cost of revenues increased$162.3 million in 2019 as compared to 2018. Our Recent Acquisitions added cost of revenues of$95.0 million . Excluding our Recent Acquisitions, cost of revenues increased$67.3 million . This increase was primarily due to a$61.1 million increase in programming costs, due to the growth in subscription revenues (certain programming cost are linked to such revenues), and higher severance expense of$3.7 million incurred in 2019 as compared to 2018. Partially offsetting this increase was a reduction of$8.6 million of digital costs as a result of the fourth quarter 2018 reduction in force and rebranding of our digital business unit (which resulted in lower third party digital platform costs in 2019, see Note 13 to the consolidated financial statements for further details).
Business units - Selling, general and administrative expenses
Business unit selling, general, and administrative expenses increased$11.5 million in 2019 as compared to 2018. Our Recent Acquisitions added business unit selling, general and administrative (SG&A) expenses of$25.7 million . Excluding the Recent Acquisitions, SG&A expenses decreased$14.2 million . The decrease was primarily the result of an$11.1 million reduction of professional and legal costs (due to the settlement of theDepartment of Justice Antitrust Division matter inJune 2019 , see Note 13 to the consolidated financial statements for further details).
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 2019, we now record acquisition-related costs within our Corporate operating expense. Prior to 2019, such costs were recorded in other non-operating items, net. Corporate general and administrative expenses increased$27.7 million in 2019 as compared to 2018. The increase was primarily due to$30.7 million in acquisition-related costs (principally advisory fees) associated with the Recent Acquisitions. Also contributing to the increase was$6.1 million of advisory fees related to activism defense. Excluding these professional fees, corporate expenses were down approximately$9.1 million , primarily due to a decline in severance expense of$5.3 million in 2019 as compared to 2018 as well as the full-year impact of certain cost-saving initiatives implemented in 2018.
Depreciation
Depreciation expense increased
Amortization of intangible assets
Intangible asset amortization expense increased
Spectrum repacking reimbursements and other, net
We had other net gains of$5.3 million in 2019 compared to net gains of$11.7 million in 2018. The 2019 net gains consisted of gains of$17.0 million of reimbursements received from theFederal Communications Commission for required spectrum repacking and a gain of$2.9 million as a result of the sale of certain real estate. These gains were partially offset by a$5.5 million in contract termination charge and incremental transition costs related to bringing our national sales organization in-house and$9.1 million of non-cash charges to reduce the value of certain assets classified as held-for-sale. The 2018 net gains primarily consisted of$7.4 million of spectrum repack reimbursements and a$6.0 million gain recognized on the sale of real estate inHouston .
Operating income
Operating income decreased$139.5 million in 2019 as compared to 2018. Our Recent Acquisitions added$39.1 million in operating income. Excluding the impact of Recent Acquisitions, operating income decreased$178.6 million which was driven by the changes in revenue and operating expenses described above. Our operating margins were 24.3% in 2019 compared to 31.6% in 2018, primarily reflecting the typical decline of high-margin political advertising revenue in odd calendar years ($195.1 million lower). 21 --------------------------------------------------------------------------------
Programming and payroll expense trends
Programming and payroll expenses are the two largest elements of our operating
expenses, and are summarized below, expressed as a percentage of total operating
expenses. Programming expenses as a percentage of total operating expenses have
increased due to an increase in reverse compensation payments to our network
affiliation partners associated with higher subscription revenues (certain
affiliation partners are compensated based on a percentage of subscription
revenues). Payroll expenses have increased during 2019 primarily due to our
Recent Acquisitions, but as a percentage of total operating expenses have
decreased in 2019 primarily due to increases in programming expenses, which make
up a larger percentage of operating costs.
Percentage of total operating expenses
Expense Category 2019 2018 2017
Programming expenses 35.5% 33.3% 32.4%
Payroll expenses 28.6% 29.8% 31.3%
Non-operating income and expense
Equity income: This income statement category reflects earnings or losses from our equity method investments. Equity income decreased$3.6 million from$13.8 million in 2018 to$10.1 million in 2019. The 2019 income was primarily due to a gain of$12.2 million recognized in connection with the sale of investment in Captivate. The 2018 income was primarily due to$14.2 million of equity earnings from our CareerBuilder investment, resulting from a$17.9 million gain recorded in connection with our share of the gain on sale of its subsidiary,Economic Modeling, LLC . Interest expense: Interest expense increased$13.4 million in 2019 as compared to 2018, primarily due to a higher average outstanding total debt balance, partially offset by lower interest rates. The total average outstanding debt was$3.37 billion in 2019 compared to$3.09 billion in 2018. The impact of the increase in outstanding debt was partially offset by a decrease in the weighted average interest rate on total outstanding debt, which was 5.85% in 2019 compared to 5.90% in 2018. A further discussion of our borrowing and related interest cost is presented in the "Liquidity and capital resources" section of this report beginning on page 29 and in Note 6 to the consolidated financial statements. Other non-operating items, net: Other non-operating items decreased$23.5 million from a net expense of$11.5 million in 2018 to a net income of$12.0 million in 2019. This decrease was primarily due to the absence of$15.4 million acquisition-related costs which were classified as non-operating in 2018. Beginning in 2019, such cost are now classified as a corporate operating cost. In addition, we recognized a$7.3 million gain in the second quarter of 2019 due to the write-up of our prior investment in the Justice and Quest multicast networks at the time of our acquisition.
Provision for income taxes
We reported pre-tax income from continuing operations attributable toTEGNA of$375.7 million for 2019. The effective tax rate on pre-tax income was 23.8%. The 2019 effective tax rate increased compared to 21.1% in 2018 primarily due to a 2019 valuation allowance recorded on a minority investment, higher nondeductible transaction costs incurred in 2019, and the 2018 effective tax rate included benefits from finalizing provisional amounts related to the Tax Cuts and Jobs Act (Tax Act). Partially offsetting the increase were higher tax benefits from the release of uncertain tax positions in 2019. The release of uncertain tax positions in 2019 was primarily related to the lapse of certain federal and state statutes of limitation as well as various state audit settlements. We reported pre-tax income from continuing operations attributable toTEGNA of$508.7 million for 2018. The effective tax rate on pre-tax income was 21.1%. The 2018 effective tax rate reflects the 21.0%U.S. federal statutory that was effectiveJanuary 1, 2018 as a result of the Tax Act enacted inDecember 2017 . The tax expense for state taxes was partially offset by a tax benefit from finalizing provisional amounts recorded in 2017 from the Tax Act.
Further information concerning income tax matters is contained in Note 5 of the consolidated financial statements.
Net income from continuing operations
Net income from continuing operations and related per share amounts are presented in the table below (in thousands, except per share amounts).
2019 Change 2018 Change 2017
Net income from continuing operations $ 286,235 (29%) $ 401,340 (10%) $ 447,962
Per basic share $ 1.32 (29%) $ 1.86 (11%) $ 2.08
Per diluted share $ 1.31 (29%) $ 1.85 (10%) $ 2.06 Our 2019 earnings per share was lower than 2018, primarily due to the
22
--------------------------------------------------------------------------------Operating results non-GAAP information
Presentation of non-GAAP information: We use non-GAAP financial performance 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, theLeadership 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 also believe these non-GAAP measures are frequently used by investors, securities analysts and other interested parties in their evaluation of our business and other companies in the broadcast industry. We discuss in this Form 10-K non-GAAP financial performance measures that exclude from our reported GAAP results the impact of "special items" consisting of spectrum repacking reimbursements and other, net, gains on sale of equity method investments, acquisition-related costs, advisory fees related to activism defense, severance costs, gains on equity method investments and certain non-operating expenses (TEGNA foundation donation and pension payment timing related charges). In addition, we have income tax special items associated with the tax impacts related to the Recent Acquisitions (including the 2018 acquisition of KFMB), adjustments related to previously-disposed businesses, and adjustments related to provisional tax impacts of tax reform. 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, charges 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. 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 in unconsolidated investments, net, (4) other non-operating items, net, (5) severance expense, (6) acquisition-related costs, (7) advisory fees related to activism defense, (8) spectrum repacking reimbursements and other, net, (9) depreciation and (10) amortization. We believe these adjustments facilitate company-to-company operating performance comparisons by removing potential differences caused by variations unrelated to operating performance, such as capital structures (interest expense), income taxes, and the age and book appreciation of property and equipment (and related depreciation expense). 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 andSuper 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 from continuing operations. Free cash flow is 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) dividends received from equity method investments and (6) 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.
As described in "Forward Looking Financial Information" below, we provided guidance ranges for non-GAAP Corporate expenses and Free Cash Flow as a percentage of Revenue (FCF as % Revenue). We also provided Adjusted EBITDA margin
23
--------------------------------------------------------------------------------
guidance. We are not able to reconcile non-GAAP Corporate expenses, or in the
case of Adjusted EBITDA margin and FCF as % Revenue, their key inputs of
Adjusted EBITDA or Free Cash Flow to their comparable GAAP financial measures
without unreasonable efforts because certain information necessary to calculate
such measures on a GAAP basis is unavailable, dependent on future events outside
of our control and cannot be predicted. Examples of such information include (1)
government reimbursement for spectrum repacking, the amount and timing of which
are uncertain (2) share based compensation, which is impacted by future share
price movement in our stock price and also dependent on future hiring and
attrition (3) expenses related to acquisitions and dispositions, the timing and
volume of which cannot be predicted. In addition, we believe such
reconciliations could imply a degree of precision that might be confusing or
misleading to investors. The actual effect of the reconciling items that we may
exclude from these non-GAAP expense numbers, when determined, may be significant
to the calculation of the comparable GAAP measures.
Discussion of special charges and credits affecting reported results: Our results during 2019 and 2018 included the following items we consider "special items" that while at times recurring, can vary significantly from period to period:
Results for the year ended
• Severance expense which include payroll and related benefit costs at our
stations and corporate headquarters;
• Acquisition-related costs which primarily includes advisory fees associated
with business acquisitions;
• Advisory fees related to activism defense;
• Spectrum repacking reimbursements and other, net is comprised of gains due to
reimbursements from the FCC for required spectrum repacking, non-cash charges
to reduce the value of certain assets classified as held-for-sale, gains recognized on the sale of real estate, and a contract termination and incremental transition costs related to bringing our national sales organization in-house;
• Gains recognized in our equity income in unconsolidated investments as a
result of the sale of two investments;
• Other non-operating items primarily relates to a gain for the remeasurement of
our previously held ownership in Justice Network and Quest to fair value, a
charitable donation made to the
with the early extinguishment of debt, and a gain due to an observable price
increase in an equity investment; and
• Realization of discrete tax benefits related to one of the Recent Acquisitions
and a previously-disposed business.
Results for the year ended
• Severance expense which include payroll and related benefit costs due to
restructuring at our DMS business and at our corporate headquarters;
• Spectrum repacking reimbursements and other, net, is comprised of gains due to
reimbursements from the FCC for required spectrum repacking and a gain
recognized on the sale of real estate in
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, a
charitable donation made to the
investment;
• Pension lump-sum payment charge as a result of payments that were made to
certain SERP plan participants in early 2018;
• A gain recognized in our equity income in unconsolidated investments, related
to our share of CareerBuilder's gain on the sale of its EMSI business; and
• Deferred tax benefits related to adjusting the provisional tax impacts of the
tax reform (enacted in
allowance release, both resulting from the completion of our 2017 federal
income tax return in the third quarter of 2018.
24
--------------------------------------------------------------------------------
Below are 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 (in thousands,
except per share amounts):
Special Items
Advisor fees
Year Ended Dec. 31, GAAP Severance related to Spectrum repacking Gains on equity Other non-operating
2019 measure expense Acquisition-related costs activism defense reimbursements and other method investments
items Special tax items Non-GAAP measure
Cost of revenues $ 1,228,237 $ (4,651 ) $ - $ - $ - $ - $ - $ - $ 1,223,586
Business units -
Selling, general and
administrative
expenses 326,804 (1,490 ) - - - - - - 325,314
Corporate - General
and administrative
expenses 80,144 (223 ) (30,756 ) (6,080 ) - - - - 43,085
Spectrum repacking
reimbursements and
other, net (5,335 ) - - - 5,335 - - - -
Operating expenses 1,740,479 (6,364 ) (30,756 ) (6,080 ) 5,335 - - - 1,702,614
Operating income 559,018 6,364 30,756 6,080 (5,335 ) - - - 596,883
Equity income (loss)
in unconsolidated
investments, net 10,149 - - - - (13,126 ) - - (2,977 )
Other non-operating
items, net 11,960 - - - - - (8,891 ) - 3,069
Total non-operating
expenses (183,361 ) - - - - (13,126 ) (8,891 ) - (205,378 )
Income before income
taxes 375,657 6,364 30,756 6,080 (5,335 ) (13,126 ) (8,891 ) - 391,505
Provision for income taxes 89,422 1,596 6,249 1,472 (1,311 ) (3,169 ) (2,230 ) (568 ) 91,461 Net income from continuing operations 286,235 4,768 24,507 4,608 (4,024 ) (9,957 ) (6,661 ) 568 300,044 Net income from continuing operations per share - diluted (a)$ 1.31 $ 0.02 $ 0.11 $ 0.02 $ (0.02 ) $ (0.05 ) $ (0.03 ) $ - $
1.38
(a) Per share amounts do not sum due to rounding.
Special Items
Pension
payment
timing
Year Ended Dec. 31, GAAP Spectrum repacking Gain on equity Other non-operating related Special tax
2018 measure Severance expense reimbursements and other method investment items charges benefits Non-GAAP measure
Cost of revenues $ 1,065,933 $ (931 ) $ - $ - $ - $ - $ - $ 1,065,002
Business units -
Selling, general and
administrative
expenses 315,320 (875 ) - - - - - 314,445
Corporate - General
and administrative
expenses 52,467 (5,481 ) - - - - - 46,986
Spectrum repacking
reimbursements and
other, net (11,701 ) - 11,701 - - - - -
Operating expenses 1,508,806 (7,287 ) 11,701 - - - - 1,513,220
Operating income 698,476 7,287 (11,701 ) - - - - 694,062
Equity income (loss)
in unconsolidated
investments, net 13,792 - - (17,883 ) - - - (4,091 )
Other non-operating
items, net (11,496 ) - - - 19,406 7,498 - 15,408
Total non-operating
expenses (189,769 ) - - (17,883 ) 19,406 7,498 - (180,748 )
Income before income
taxes 508,707 7,287 (11,701 ) (17,883 ) 19,406 7,498 - 513,314
Provision for income
taxes 107,367 1,714 (1,379 ) (4,498 ) 4,981 1,909 7,007 117,101
Net income from
continuing operations 401,340 5,573 (10,322 ) (13,385 ) 14,425 5,589 (7,007 ) 396,213
Net income from
continuing operations
per share - diluted
(a) $ 1.85 $ 0.03 $ (0.05 ) $ (0.06 ) $ 0.07 $ 0.03 $ (0.03 ) $ 1.83(a) Per share amounts do not sum due to rounding.
25
--------------------------------------------------------------------------------Non-GAAP consolidated results
The following is a comparison of our as adjusted non-GAAP financial results between 2019 and 2018. Changes between the periods are driven by the same factors summarized above in the "Results of Operations" section within Management's Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except per share amounts).
2019 Change 2018
Adjusted operating expenses $ 1,702,614 13% $ 1,513,220
Adjusted operating income 596,883 (14%) 694,062
Adjusted equity (loss) in unconsolidated
investments, net (2,977 ) (27%) (4,091 )
Adjusted other non-operating income 3,069 (80%) 15,408
Adjusted total non-operating (expense) (205,378 ) 14% (180,748 ) Adjusted income before income taxes 391,505 (24%)
513,314
Adjusted provision for income taxes 91,461 (22%)
117,101
Adjusted net income from continuing operations 300,044 (24%)
396,213
Adjusted net income from continuing operations per share - diluted$ 1.38 (25%)$ 1.83 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):
2019 Change 2018
Advertising & Marketing Services$ 1,226,607 11%$ 1,106,754 Subscription 1,005,030 20% 840,838 Political 38,478 (84%) 233,613 Other 29,382 13% 26,077 Total revenues (GAAP basis)$ 2,299,497 4%$ 2,207,282 Factors impacting comparisons:
Estimated net incremental Olympic and
Political (38,478 ) (84%) (233,613 ) Total company adjusted revenues (non-GAAP basis)$ 2,253,019 16%
Excluding the impacts of incremental Olympic andSuper Bowl revenue and Political advertising revenue, total company adjusted revenues on a comparable basis increased 16% in 2019. This is primarily attributable to increases in subscription revenue and increases in AMS revenue as described in the Results from Operations section above. 26 --------------------------------------------------------------------------------
Adjusted EBITDA - Non-GAAP
Reconciliations of Adjusted EBITDA (inclusive and exclusive of Corporate expenses) to net income from continuing operations presented in accordance with GAAP on our Consolidated Statements of Income is presented below (in thousands):
2019 Change 2018
Net income from continuing operations (GAAP
basis) $ 286,235 (29%) $ 401,340
Plus: Provision for income taxes 89,422 (17%) 107,367
Plus: Interest expense 205,470 7%
192,065
(Less): Equity income in unconsolidated investments, net (10,149 ) (26%) (13,792 ) Plus: Other non-operating items, net (11,960 ) *** 11,496 Operating income (GAAP basis)$ 559,018 (20%)$ 698,476 Plus: Severance expense 6,364 (13%) 7,287 Plus: Acquisition-related costs 30,756 ***
-
Plus: Advisory fees related to activism defense 6,080 ***
-
Less: Spectrum repacking reimbursements and other, net (5,335 ) (54%) (11,701 ) Adjusted operating income (non-GAAP basis)$ 596,883 (14%)$ 694,062 Plus: Depreciation 60,525 8%
55,949
Plus: Amortization of intangible assets 50,104 62%
30,838
Adjusted EBITDA (non-GAAP basis)$ 707,512 (9%)$ 780,849 Corporate - General and administrative expense (non-GAAP basis) 43,085 (8%)
46,986
Adjusted EBITDA, excluding Corporate (non-GAAP basis)$ 750,597 (9%)$ 827,835 *** Not meaningful Adjusted EBITDA margin was 33% (without corporate expense) and 31% including corporate. Our total Adjusted EBITDA decreased$73.3 million or 9% in 2019 compared to 2018. Our Recent Acquisitions added$64.3 million of Adjusted EBITDA. Excluding the Recent Acquisitions, Adjusted EBITDA was lower by$137.6 million . This decrease was primarily driven by the operational factors discussed above within the revenue and operating expense fluctuation explanation sections, most notably, the expected decline of political revenue and absence of revenue associated with the Winter Olympics.
Free cash flow reconciliation
Our free cash flow, a non-GAAP liquidity measure, was$376.2 million for the year endedDecember 31, 2019 , compared to$486.7 million for the same period in 2018. Our free cash flow in 2019 is lower compared to 2018 due to lower EBITDA, higher tax payments and higher purchases of property and equipment. 27 --------------------------------------------------------------------------------
Reconciliations from "Net income from continuing operations" to "Free cash flow" are presented below (in thousands):
2019 2018
Net Income from continuing operations (GAAP basis)
Plus: Provision for income taxes 89,422
107,367
Plus: Interest expense 205,470
192,065
Plus: Acquisition-related costs 30,756 - Plus: Depreciation 60,525 55,949 Plus: Amortization 50,104 30,838 Plus: Stock-based compensation 20,146
12,531
Plus: Company stock 401(k) contribution 9,558
-
Plus: Syndicated programming amortization 60,757
53,435
Plus: Pension reimbursements -
29,240
Plus: Severance expense 6,364
7,287
Plus: Advisory fees related to activism defense 6,080
-
Plus: Cash dividend from equity investments for return on capital
1,325 13,543
Plus: Cash reimbursements from spectrum repacking 16,974
7,400
(Less) Plus: Other non-operating items, net (11,960 )
11,496
Less: Tax payments, net of refunds (84,045 )
(62,889 )
Less: Spectrum repacking reimbursement and other, net (5,335 ) (11,701 )
Less: Equity income in unconsolidated investments, net (10,149 ) (13,792 )
Less: Syndicated programming payments (58,436 )
(54,543 )
Less: Pension contributions (23,101 )
(45,219 )
Less: Interest payments (186,086 )
(182,465 )
Less: Purchases of property and equipment (88,356 ) (65,230 ) Free cash flow (non-GAAP basis)$ 376,248 $
486,652
Forward Looking Financial Information
As announced onJanuary 9, 2020 , we updated our full-year 2020 financial guidance on certain items including subscription revenue following the successful negotiation of significant distribution agreements during the fourth quarter of 2019, interest expense following the completion of our$1.0 billion refinancing in early 2020 and amortization expense following the completion of appraisals related to the Recent Acquisitions. We also updated our guidance regarding depreciation, capital expenditures, and leverage ratio. We now expect the following full-year 2020 guidance metrics: Including All
Acquisitions
Full Year 2020 Key Guidance Metrics As Reported1 Subscription Revenue + mid-twenties
percent
Political Revenue >$300 million Non-GAAP Corporate Expenses$41 - 43 million Depreciation$66 - 69 million Amortization$73 - 75 million Interest Expense$220 - 225 million Total Capital Expenditures2$62 - 66 million Non-Recurring Cap Ex3$20 - 24 million Effective Tax Rate 23.5 - 24.5% Leverage Ratio ~4.0x by year end (4.6x by mid-year) Free Cash Flow as a % of est. combined 2019/20 19 - 20%
Revenue
Free Cash Flow as a % of est. combined 2020/21 19 - 20%
Revenue
1 Includes legacyTEGNA business and multicast networks Justice and Quest, Dispatch stations andNexstar /Tribune station acquisitions subsequent to their acquisition dates; assumes no additional acquisitions or share buyback. 2 Prior to reimbursements for repack. 3 Approximately$7 million related to spectrum repacking; the remaining is related to investments in key projects such as our new master control, traffic streaming and monitoring platform. 28 --------------------------------------------------------------------------------
Preliminary 2021 Outlook
During 2021, we anticipate the following revenue and Adjusted EBITDA guidance:
• We expect total revenue to grow percentage-wise in the mid-to-high
twenties in 2021 compared to 2019 (prior non-election cycle odd year),
driven by our newly renegotiated retransmission rates, accretive
acquisitions and ongoing revenue growth from Premion.
• Projected 2021 subscription and AMS revenue growth will all but offset the
expected decline of political revenue in 2021 (based on 2020 guided amount
above).
• Our 2021 Adjusted EBITDA margin is expected to be in line with the 2019
margin benefiting from approximately $50 million in incremental cost
savings from initiatives underway.
FINANCIAL POSITION
Liquidity and capital resources
Our operations have historically generated strong and dependable cash flows which, along with availability under our existing revolving credit facility, have been sufficient to fund our capital expenditures, interest expense, dividends, investments in strategic initiatives (including acquisitions) and other operating requirements.
During 2019, we used these sources of cash to opportunistically access the
credit markets to complete the following four acquisitions with an aggregate
purchase price of approximately
• Nexstar Stations: On
11 local television stations, including eight Big Four Affiliates from
Nexstar Media Group. The purchase price was approximately
and was financed through the use of a portion of a
Notes issued on September 13, 2019 and borrowing under our revolving
credit facility.
• Dispatch Stations: On August 8, 2019 , we completed the acquisition of
stations. The purchase price was approximately
financed through available cash and borrowing under our revolving credit
facility.
• Justice and Quest Multicast Networks: On
acquisition of the remaining approximately 85% interest that we did not
previously own in the multicast networks Justice Network and Quest from
Cooper Media. Cash paid for this transaction was $77.1 million and wasfunded through available cash and borrowing under our revolving credit
facility.
• Gray stations: On January 2, 2019 , we completed the acquisition of two
television stations, WTOL, the
approximately
of available cash and borrowings under our revolving credit facility.
As we summarize in the Long-term debt section below, during 2019 we completed several strategic actions which have positioned us to continue to pursue strategic acquisition opportunities that may develop in our sector, invest in new content and revenue initiatives, and grow revenue in fiscal year 2020. 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 facility and funds raised in the capital markets. Since 2017, we have been paying a regular quarterly cash dividend of$0.07 per share. We paid dividends totaling$60.6 million in 2019 and$60.3 million in 2018. We expect to continue paying comparable regular cash dividends in the future. The rate and frequency of future dividends will depend on future earnings, capital requirements and financial condition and other factors considered relevant by our Board of Directors. Our financial and operating performance, as well as our ability to generate sufficient cash flow to maintain compliance with credit facility covenants, are subject to certain risk factors; see Item 1A. "Risk Factors" for further discussion. As ofDecember 31, 2019 , we were in compliance with all covenants contained in our debt agreements and credit facility. As ofDecember 31, 2019 , our leverage ratio, calculated in accordance with our revolving credit agreement and term loan agreements, was 4.72x, well below the permitted leverage ratio of less than 5.5x. 29
--------------------------------------------------------------------------------
The following table provides a summary of our cash flow information for the
three years ended
2019 2018 2017
Cash, cash equivalents and restricted cash from continuing operations$ 135,862 $ 128,041 $ 44,076 Cash, cash equivalents and restricted cash from discontinued operations - -
61,041
Balance at beginning of the year 135,862 128,041 105,117 Operating activities: Net income 286,235 405,665 215,046 Non-cash adjustments 144,846 97,793 209,026 Changes in working capital (123,048 ) 47,799
(40,798 )
Changes in other assets and liabilities (10,560 ) (24,048 ) 6,155 Net cash flows from operating activities 297,473 527,209
389,429
Investing activities: Payments for acquisitions of businesses, net of cash acquired (1,514,183 ) (328,433 ) - All other investing activities (49,287 ) (45,983 ) 176,231 Net cash (used for) provided by investing activities (1,563,470 ) (374,416
) 176,231
Financing activities: Proceeds from (payment of) borrowings under revolving credit facility, net 853,000 50,000 (635,000 ) Proceeds from borrowings 1,100,000 - - Debt repayments (710,000 ) (121,146 ) (412,246 ) Proceeds from Cars.com borrowings - -
675,000
All other financing activities (83,461 ) (73,826 ) (170,490 ) Net cash provided by (used for) financing activities 1,159,539 (144,972
) (542,736 )
Net change in cash, cash equivalents and restricted cash (106,458 ) 7,821
22,924
Cash, cash equivalents and restricted cash at end of year$ 29,404 $ 135,862 $ 128,041 Operating Activities Cash flow from operating activities was$297.5 million in 2019, compared to$527.2 million in 2018. The$229.7 million net decrease in cash flow from operating activities was primarily due to a$195.1 million decrease in political revenue, for which customers pre-pay, the absence of theOlympics in 2018 and lowerSuper Bowl related revenue, and a decline in certain payables and accruals (due to refunds paid to certain Premion customers and the payment of legal fees related to theDepartment of Justice matter described in Note 13 of the consolidated financial statements). Also contributing to the decline was an increase in tax payments of$21.2 million . These amounts were partially offset by a decline in pension payments of$22.1 million .
Investing Activities
Cash flow used for investing activities was$1.56 billion in 2019, compared to$374.4 million in 2018. The increase of$1.19 billion was primary due to cash used in 2019 for Recent Acquisitions. In 2019, we used$1.51 billion for the acquisition of the Gray Stations, Justice/Quest multicast networks, and the Dispatch andNexstar stations as compared to the 2018 acquisition of KFMB for$328.4 million .
Financing Activities
Cash flow provided by financing activities was$1.16 billion in 2019, compared to cash used for financing of$145.0 million in 2018. The change was primarily due to the issuance of$1.1 billion of Senior Notes in 2019. The proceeds from this note offering were used to finance a portion of the acquisition of the Nexstar Stations, and along with borrowing under the revolving credit facility, were used to repay the remaining$320 million of notes due inOctober 2019 and early repay$290 million of our$600 million unsecured notes due inJuly 2020 . Debt repayments in 2018 were$121.1 million . In 2019, we had net borrowings of$853.0 million on our revolving credit facility as compared to$50 million in 2018. The borrowings in 2019 were primarily used to finance the Recent Acquisitions while the 2018 borrowings were primarily used to partially finance the acquisition of KFMB. 30
-------------------------------------------------------------------------------- For a comparative discussion of changes in our cash flow comparing the years endedDecember 31, 2018 andDecember 31, 2017 , see "Part II, Item 7. Financial Position" of our annual report on Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onMarch 1, 2019 .
Long-term debt
As ofDecember 31, 2019 , our total principal debt outstanding was$4.2 billion , cash and cash equivalents totaled$29.4 million , and we had unused borrowing capacity of$594.8 million under our revolving credit facility. As ofDecember 31, 2019 , approximately$3.18 billion , or 76%, of our debt has a fixed interest rate. During 2019, we completed several strategic actions which have positioned us to continue to pursue strategic acquisition opportunities that may develop in our sector, invest in new content and revenue initiatives, and grow revenue in fiscal year 2020. See "Note 6 Long-term debt" to our consolidated financial statements for a table summarizing the components of our long-term debt. Our primary source for funding short-term cash requirements is our revolving credit facility. OnAugust 15, 2019 , we amended our revolving credit facility. Under the amended terms, the$1.51 billion of revolving credit commitments and letter of credit commitments have been extended untilAugust 15, 2024 . The amendment increased our permitted total leverage ratio as follows: Period Leverage Ratio
The amendment also increased the amount of unrestricted cash that we are allowed to offset debt by in our leverage ratio calculation to$500.0 million . Under our revolving credit facility, we may borrow at an applicable margin above the Eurodollar base rate (LIBOR loan) or the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50%, or the one month LIBOR rate plus 1.00% (ABR loan). The applicable margin is determined based on our leverage ratio but differs between LIBOR loans and ABR loans. For LIBOR-based borrowing, the margin varies from 1.75% to 2.50%. For ABR-based borrowing, the margin will vary from 0.75% to 1.50%. Total commitments are$1.51 billion . OnSeptember 13, 2019 , we completed a private placement offering of$1.1 billion aggregate principal amount of unsecured notes bearing an interest rate of 5.00% which are due inSeptember 2029 . The proceeds from this note offering were used to finance a portion of the acquisition of the Nexstar Stations, and along with borrowing under the revolving credit facility, were used to repay the remaining$320 million of notes bearing fixed rate interest at 5.125% which had become due inOctober 2019 . Additionally we early repaid$290 million of our$600 million unsecured notes bearing fixed interest at 5.125% which are due inJuly 2020 . OnJanuary 9, 2020 we completed a private placement offering of$1.0 billion senior notes bearing an interest rate of 4.625% which are due inMarch 2028 . These senior notes, as well as those issued inSeptember 2019 , include customary market covenants and call provisions consistent with our past issuances. OnFebruary 11, 2020 we used the net proceeds to repay the remaining$310 million principal amount of our 5.125% Senior Notes due 2020, the$650 million principal amount of our 6.375% Senior Notes due 2023, a$13.8 million call premium on our 6.375% Senior Notes due 2023 and borrowings under our revolving credit facility. We also have an effective shelf registration statement on Form S-3 on file with theU.S. Securities and Exchange Commission under which an unspecified amount of securities may be issued, subject to a$7.0 billion limit established by the Board of Directors. Proceeds from the sale of such securities may be used for general corporate purposes, including capital expenditures, working capital, securities repurchase programs, repayment of debt and financing of acquisitions. We may also invest borrowed funds that are not required for other purposes in short-term marketable securities. We expect our existing cash and cash equivalents, cash flow from our operations, and borrowing capacity under the revolving credit facility will be sufficient to satisfy our debt service obligations, capital expenditure requirements, and working capital needs for the next twelve months. Our debt maturities may be repaid with cash flow from operating activities, accessing capital markets or a combination of both. The following schedule of annual maturities of the principal amount of total debt assumes we use available capacity under our revolving credit facility to refinance unsecured floating rate term loans payments and unsecured notes due in 2020 and 2021 to the extent of the then undrawn capacity. Based on this refinancing assumption, all maturities repaid utilizing the revolver in 2020 and 2021 are reflected as maturities for 2024, the year the revolving credit facility expires (in thousands). 31 -------------------------------------------------------------------------------- Repayment schedule of principal long-term debt as ofDec. 31, 2019 2020 (1) $ - 2021 (1) 190,200 2022 - 2023 650,000 2024 (2) 1,822,800 Thereafter 1,540,000 Total $ 4,203,000 (1) Debt payments due in 2020 and 2021 are assumed to be repaid with funds from the revolving credit facility, up to our maximum borrowing capacity. The revolving credit facility expires in 2024. Excluding our ability to repay funds with the revolving credit facility, contractual debt maturities are$435 million in 2020,$350 million in 2021,$650 million in 2023 and$1.2 billion in 2024.
(2) Assumes the then current revolving credit facility borrowings come due in 2024 and the revolving credit facility is not extended.
Contractual obligations and commitments
The following table summarizes the expected cash outflows resulting from financial contracts and commitments as of the end of 2019 (in thousands). Contractual obligations
Payments due by period
Total 2020 2021-2022 2023-2024 Thereafter
Long-term debt (1) $ 4,203,000 $ - $ 190,200 $ 2,472,800 $ 1,540,000
Interest payments (2) 1,065,303 176,109 306,511 239,141 343,542
Operating leases (3) 152,547 15,618 33,013 27,920 75,996
Talent and employment
contracts (4) 262,077 133,070 118,700 9,102 1,205
Purchase obligations
(5) 129,530 97,586 25,606 6,338 -
Programming contracts
(6) 2,312,734 758,608 1,083,290 470,836 -
Other noncurrent
liabilities (7) 54,407 7,389 11,416 10,783 24,819
Total $ 8,179,598 $ 1,188,380 $ 1,768,736 $ 3,236,920 $ 1,985,562 (1) Long-term debt includes scheduled principal payments only. We have
contractual debt maturities of
consolidated financial statements for further information.
(2) Interest on the senior notes is based on the stated cash coupon rate and
excludes the amortization of debt issuance discount. The floating rate term
loan interest rates are based on the actual rates as of
have
facility as of
payments in the table above since payments into and out of the credit
facility change daily. For illustrative purposes, assuming the
2019 revolving credit facility balance does not change during 2020 and rates
remain at the same level as those existing as of
estimate interest payments in 2020 would be approximately
(3) See Note 8 to the consolidated financial statements.
(4) Our talent and employment contracts primarily secure our on-air talent and
other personnel for our television stations through multi-year talent and
employment agreements. We expect our contracts will be renewed or replaced
with similar agreements upon their expiration. Amounts due under the
contracts, assuming the contracts are not terminated prior to their
expiration, are included in the contractual commitments table.
(5) Includes purchase obligations pertaining to technology related capital
projects, news and market data services, and other legally binding
commitments. Amounts which we are liable for under purchase orders
outstanding as of
Sheets as accounts payable and accrued liabilities and are excluded from the
table above.
(6) Programming contracts include television station commitments to purchase
programming to be produced in future years. This also includes amounts
related to our network affiliation agreements. Network affiliation agreements
may include variable fee components such as subscriber levels, which in have
been estimated and reflected in the table above.
(7) Other noncurrent liabilities consist of both unfunded and under-funded
postretirement benefit plans. Unfunded plans include the TEGNA Supplemental
Retirement Plan and the TEGNA Retiree Welfare Plan. Employer contributions,
which equal the expected benefit payments, are reflected in the table above
over the next ten-year period. Our under-funded pension plan is the
Retirement Plan (TRP). In 2020, we expect no contributions to the TRP and
excluded due to uncertainties regarding significant assumptions involved in
estimating these contributions, such as interest rate levels as well as the
amount and timing of invested asset returns.
32-------------------------------------------------------------------------------- Due to uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits as ofDecember 31, 2019 , we are unable to make reasonably reliable estimates of the period of cash settlement. Therefore, approximately$8.1 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 5 to the consolidated financial statements for a further discussion of income taxes.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements as defined by theSecurities and Exchange Commission include the following four categories: obligations under certain guarantee contracts; retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements that serve as credit, liquidity or market risk support; obligations under certain derivative arrangements classified as equity; and obligations under material variable interests. As ofDecember 31, 2019 , we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Capital stock
OnSeptember 19, 2017 , our Board of Directors authorized a new share repurchase program for up to$300.0 million of our common stock over the next three years. As ofDecember 31, 2019 , we have$279.1 million remaining under this authorization. As a result of our Recent Acquisitions during 2019, we have suspended share repurchases under this program. The table below summarizes our share repurchases during the past three years (in thousands). Repurchases made in fiscal year Stock repurchases 2019 2018 2017 Number of shares purchased - 5451,498 Dollar amount purchased $ -$ 5,831 $ 23,480 The shares may be repurchased at management's discretion, either in the open market or in privately negotiated block transactions. Management's decision to repurchase shares will depend on price and other corporate developments. Purchases may occur from time to time and no maximum purchase price has been set. Certain of the shares we previously acquired have been reissued in settlement of employee stock awards.
Our common stock outstanding as of
Critical accounting policies and the use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting policies, which are those that are material to the presentation of our financial condition and results of operations and require management's most subjective and complex judgments. This commentary should be read in conjunction with our consolidated financial statements, selected financial data and the remainder of this Form 10-K. Goodwill : As ofDecember 31, 2019 , our goodwill balance was$3.0 billion and represented approximately 42% of our total assets. Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed. Goodwill is tested for impairment at a level referred to as the reporting unit. A reporting unit is a business for which discrete financial information is available and segment management regularly reviews the operating results. The level at which we test goodwill for impairment requires us to determine whether the operations below the operating segment level constitute a reporting unit. We have determined that our one segment, Media, consists of a single reporting unit. Goodwill is tested for impairment on an annual basis (first day of our fourth quarter) or between annual tests if events or changes in circumstances occurred that indicate the fair value of a reporting unit may be below its carrying amount. Before performing the annual goodwill impairment test quantitatively, we first have the option to perform a qualitative assessment to determine if the quantitative test must be completed. The qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company and specific reporting unit specifications. If after performing this assessment, we conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we are required to perform the quantitative test. Otherwise, the quantitative test is not required. In 2019, we elected not to perform the optional qualitative assessment of goodwill and instead performed the quantitative impairment test. 33 -------------------------------------------------------------------------------- When performing the quantitative test, we determine the fair value of the reporting unit and compare it to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the reporting unit's goodwill is impaired and we recognize an impairment loss equal to the difference between the reporting unit's carrying amount and fair value. We estimate the fair value of our one reporting unit based on a market-based valuation methodology, which is primarily based on our consolidated market capitalization plus a control premium. In the fourth quarter of 2019, we completed our annual goodwill impairment test for our reporting unit. The results of the test indicated that the estimated fair value of our reporting unit significantly exceeded the carrying value. For our reporting unit, the estimated value would need to decline by over 50% to fail the quantitative goodwill impairment test. We do not believe that the reporting unit is currently at risk of incurring a goodwill impairment in the foreseeable future. Impairment assessment inherently involves management judgments regarding the assumptions described above. Fair value of the reporting unit also depends on the future strength of the economy in our principal media markets. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of the reporting unit's fair value and the relative size of our recorded goodwill, differences in assumptions could have a material effect on the estimated fair value of our reporting unit and could result in a goodwill impairment charge in a future period. Indefinite Lived Intangibles: Consist entirely of FCC broadcast licenses related to our acquisitions of television stations. As ofDecember 31, 2019 , indefinite lived intangible assets were$2.1 billion and represented approximately 30% of our total assets. The FCC broadcast licenses are recorded at their estimated fair value as of the date of the business acquisition. We determine the fair value of each FCC broadcast license using an income approach referred to as the Greenfield method. The Greenfield method utilizes a discounted cash flow model that incorporates several key assumptions, including market revenues, long-term growth projections, estimated market share for a typical market participant, estimated profit margins based on market size and station type, and a discount rate (determined using a weighted average cost of capital). Since these licenses are considered indefinite lived intangible assets we do not amortize them, rather they are tested for impairment annually (on the first day of our fourth quarter), or more often if circumstances dictate, for impairment and written down to fair value as required. We have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the indefinite lived asset is more than its carrying amount. If that is the case, then we do not need to perform the quantitative analysis. The qualitative assessment considers trends in macroeconomic conditions, industry and market conditions, cost factors and overall financial performance of the indefinite lived asset. In 2019, we elected to perform the optional qualitative assessment for all of our licenses, including our FCC license from the KFMB acquisition (which had limited headroom in 2018 due to the fact that we had recently recorded the intangible asset at fair value upon acquiring the station in February of 2018). In performing the qualitative impairment analysis, we analyzed trends in the significant inputs used in the fair value determination of the FCC license assets. This included reviewing trends in market revenues, market share, profit margins, long-term expected growth rates, and changes in discount rate. The results of our qualitative procedures showed improvement in the significant inputs from the prior year (including those related to the KFMB FCC license). As such, we concluded it was more likely than not that the fair value of all of our indefinite lived FCC broadcast licenses was more than their carrying amounts. As such, we did not perform a quantitative test in 2019. Pension Liabilities: Certain employees participate in qualified and non-qualified defined benefit pension plans (see Note 7 to consolidated financial statements). Our principal defined benefit pension plan is theTEGNA Retirement Plan (TRP). We also sponsor the TEGNA Supplemental Retirement Plan (SERP) for certain employees. Substantially all participants in the TRP and SERP had their benefits frozen before 2009, and inDecember 2017 , we froze all remaining accruing benefits for certain grandfathered SERP participants. We recognize the net funded status of these postretirement benefit plans as a liability on our Consolidated Balance Sheets. There is a corresponding non-cash adjustment to accumulated other comprehensive loss, net of tax benefits recorded as deferred tax assets, in stockholders' equity. The funded status represents the difference between the fair value of each plan's assets and the benefit obligation of the plan. The benefit obligation represents the present value of the estimated future benefits we currently expect to pay to plan participants based on past service. The plan assets and benefit obligations are measured as ofDecember 31 of each year, or more frequently, upon the occurrence of certain events such as a plan amendment, settlement, or curtailment. The amounts we record are measured using actuarial valuations, which are dependent upon key assumptions such as discount rates, participant mortality rates and the expected long-term rate of return on plan assets. The assumptions we make affect both the calculation of the benefit obligations as of the measurement date and the calculation of net periodic pension expense in subsequent periods. When reassessing these assumptions we consider past and current market conditions and make judgments about future market trends. We also consider factors such as the timing and amounts of expected contributions to the plans and benefit payments to plan participants. 34 -------------------------------------------------------------------------------- The most important assumptions include the discount rate applied to pension plan obligations and the expected long-term rate of return on plan assets related for the TRP (the SERP is an unfunded plan). The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match the expected benefit payment stream. A decrease in discount rates would increase pension obligations. We establish the expected long-term rate of return by developing a forward-looking, long-term return assumption for each pension fund asset class, taking into account factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset allocation percentages and the long-term return assumption for each asset class. We apply the expected long-term rate of return to the fair value of its pension assets in determining the dollar amount of its expected return. Changes in the expected long-term return on plan assets would increase or decrease pension plan expense. For 2019, we assumed a rate of 6.75% for our long-term expected return on pension assets used for our TRP plan. As an indication of the sensitivity of pension expense to the long-term rate of return assumption, a plus or minus 50 basis points change in the expected rate of return on pension assets (with all other assumptions held constant) would have decreased or increased estimated pension plan expense for 2019 by approximately$1.9 million . The effects of actual results differing from these assumptions are accumulated as unamortized gains and losses. For theDecember 31, 2019 measurement, the assumption used for the discount rate was 3.30% for our principal retirement plan. As an indication of the sensitivity of pension liabilities to the discount rate assumption, a plus or minus 50 basis points change in the discount rate as of the end of 2019 (with all other assumptions held constant) would have decreased or increased plan obligations by approximately$28.0 million . For 2019, the discount rate used to determine the pension expense was 4.35%. A 50 basis points change in this discount rate would have changed total pension plan expense for 2019 by approximately$0.4 million . Income Taxes: Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. Tax law requires certain items to be included in our tax returns at different times than when the items are reflected in the financial statements. The annual tax expense reflected in the Consolidated Statements of Income is different than that reported in our tax returns. Some of these differences are permanent (for example, expenses recorded for accounting purposes that are not deductible in the returns such as certain entertainment expenses) and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial statements, as well as tax losses that can be carried over and used in future years. Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts we believe are more likely than not to be recovered. In evaluating the amount of any such valuation allowance, we consider the existence of cumulative income or losses in recent years, the reversal of existing temporary differences, the existence of taxable income in prior carry back years, available tax planning strategies and estimates of future taxable income for each of our taxable jurisdictions. The latter two factors involve the exercise of significant judgment. As ofDecember 31, 2019 , deferred tax asset valuation allowances totaled$45.7 million , primarily related to minority investments, federal and state capital losses, state interest disallowance carryovers, and state net operating losses available for carry forward to future years. Although realization is not assured, we believe it is more likely than not that all other deferred tax assets for which no valuation allowances have been established will be realized. This conclusion is based on our history of cumulative income in recent years and review of historical and projected future taxable income. We determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in our financial statements. A tax position is measured as the portion of the tax benefit that is greater than 50% likely to be realized upon settlement with a taxing authority (that has full knowledge of all relevant information). We may be required to change our provision for income taxes when the ultimate treatment of certain items is challenged or agreed to by taxing authorities, when estimates used in determining valuation allowances on deferred tax assets significantly change, or when receipt of new information indicates the need for adjustment in valuation allowances. Future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur. 35
--------------------------------------------------------------------------------
© Edgar Online, source
