TEGNA INC. 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 64 television stations and two 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. We also own leading multicast networks True Crime Network, Twist and Quest. Each television station also has a robust digital presence across online, mobile, connected television and social platforms, reaching consumers on all devices and platforms they use to consume news content. 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, digital 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) 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; 2) 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, tablet and mobile products and OTT apps; 3) political advertising revenues, which are driven by even year election cycles at the local and national level (e.g. 2020, 2018, etc.) and particularly in the second half of those years; and 4) other services, such as production of programming, tower rentals, and distribution of our local news content. As illustrated in the table below, our business continues to evolve toward growing recurring and highly profitable revenue streams, driven by the increasing concentration of both political and subscription revenue streams. As a result of the growing importance of even-year political advertising on our results, management increasingly looks at revenue trends over two-year periods. High margin-subscription and political revenues account for approximately half of our total two-year revenue, a trend that began in 2019, and are expected to comprise an increasingly larger percentage on a rolling two-year cycle thereafter. Two Years Ending September 30, 2021 2020 Advertising & Marketing Services 44 % 47 % Subscription 46 % } 55% 45 % } 52% Political 9 % 7 % Other 1 % 1 % Total revenues 100 % 100 % COVID-19 Update During fiscal year 2020 and continuing into 2021, the world has been, and continues to be, impacted by the novel coronavirus (COVID-19) pandemic. The COVID-19 pandemic has brought unprecedented challenges and widespread economic and social change throughoutthe United States . TheU.S. economy continued on a path to recovery during the first nine months of 2021 with millions of Americans receiving COVID-19 vaccines, states/municipalities increasingly reopening and continued growth in employment. In addition, theU.S. federal government continued to enact policies to provide fiscal stimulus to the economy and relief to those affected by the pandemic, with the stimulus bolstering household finances as well as those of small businesses, states and municipalities. Our AMS revenues were most negatively impacted by the pandemic in the second quarter of 2020. The continued roll out of vaccines together with lower COVID-19 case counts in theU.S. are encouraging. However, the impact of COVID-19 and the extent of its adverse impact on our financial and operating results will be dictated by the length of time that the pandemic continues to affect our advertising customers. This will depend on future pandemic-related developments, including the duration of the pandemic; developments concerning the severity of COVID-19 variants; disruptions to our customers' supply chains and impacts to their advertising and marketing purchasing patterns; the effectiveness, distribution and acceptance of COVID-19 vaccines; consumer confidence; andU.S. government actions to prevent and manage the virus spread, all of which are uncertain and cannot be predicted. While we use the best information available in developing significant estimates included in our financial statements, the effects of the pandemic on our operations may not be fully realized, or reflected in our financial results, until future periods. As such, actual results could differ from our estimates, and these differences resulting from changes in facts and circumstances could be material. 18
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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 titled "Results from Operations - Non-GAAP Information" for additional tables presenting information which supplements our financial information provided on a GAAP basis. As discussed above, our operating results are subject to significant fluctuations across yearly periods (primarily driven by even-year election cycles). As such, in addition to one year ago comparisons, our management team and Board of Directors also review current period operating results compared to the same period two years ago (e.g., 2021 vs. 2019). We believe this comparison will also provide useful information to investors and therefore, have supplemented our prior year comparison of consolidated results to also include a comparison against the third quarter and nine months endedSeptember 30, 2019 results (through operating income). During 2019, we acquired multiple local television stations and multicast networks. Specifically, we acquired certain stations divested by Gray (January 2, 2019 ), the Justice Network (rebranded as True Crime Network) and Quest multicast networks (June 18, 2019 ), the Dispatch stations (August 8, 2019 ) and certain stations divested byNexstar (September 19, 2019 ). The Dispatch andNexstar stations are collectively referred to as the "2019 Acquisitions" in the discussion of the results for the quarter endedSeptember 30, 2021 compared to the same period in 2019. When discussing results for the nine months endedSeptember 30, 2021 compared to the same period in 2019, the "2019 Acquisitions" also include the multicast networks. The 2019 Acquisitions did not contribute to the periods prior to their acquisition in our financial statements which therefore impacts comparisons between 2021 and 2019. The Gray stations do not impact the 2021 to 2019 comparability.
Our consolidated results of operations on a GAAP basis were as follows (in thousands, except per share amounts):
Quarter ended Sept. 30, Nine months ended Sept. 30,
Change from Change from Change from Change from
2021 2020 2020 2019 2019 2021 2020 2020 2019 2019
Revenues $ 756,487 $ 738,389 2 % $ 551,857 37 % $ 2,216,446 $ 2,000,205 11 % $ 1,605,542 38 %
Operating expenses:
Cost of revenues 399,751 379,185 5 % 306,474 30 % 1,191,561 1,103,920 8 % 873,078 36 %
Business units - Selling,
general and
administrative expenses 100,425 89,943 12 % 78,439 28 % 286,700 267,919 7 % 223,845 28 %
Corporate - General and
administrative expenses 11,891 11,263 6 % 29,792 (60 %) 51,944 61,289 (15 %) 60,363 (14 %)
Depreciation 16,792 16,086 4 % 15,381 9 % 48,526 49,697 (2 %) 44,831 8 %
Amortization of
intangible assets 15,774 17,113 (8 %) 15,018 5 % 47,307 50,577 (6 %) 32,530 45 %
Spectrum repacking 504 (2,902) *** (80) *** (2,394) (10,533) (77 %) (11,399) (79 %)
reimbursements and other,
net
Total operating expenses $ 545,137 $ 510,688 7 % $ 445,024 22 % $ 1,623,644 $ 1,522,869 7 % $ 1,223,248 33 %
Total operating income $ 211,350 $ 227,701 (7 %) $ 106,833 98 % $ 592,802 $ 477,336 24 % $ 382,294 55 %
Non-operating expenses (45,781) (53,464) (14 %) (53,408) (14 %) (140,947) (169,596) (17 %) (127,282) 11 %
Provision for income
taxes 36,870 41,967 (12 %) 5,079 *** 103,470 69,699 48 % 52,732 96 %
Net income 128,699 132,270 (3 %) 48,346 *** 348,385 238,041 46 % 202,280 72 %
Net (income) loss
attributable to
redeemable noncontrolling
interest (419) (51) *** - *** (861) 433 *** - ***
Net income attributable
to TEGNA Inc. $ 128,280 $ 132,219 (3 %) $ 48,346 *** $ 347,524 $ 238,474 46 % $ 202,280 72 %
Net income per share -
basic $ 0.58 $ 0.60 (3 %) $ 0.22 *** $ 1.57 $ 1.08 45 % $ 0.93 69 %
Net income per share -
diluted $ 0.58 $ 0.60 (3 %) $ 0.22 *** $ 1.56 $ 1.08 44 % $ 0.93 68 %
*** Not meaningful
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Revenues
Our Subscription revenue category includes revenue earned from cable and satellite providers for the right to carry our signals and the distribution ofTEGNA stations on OTT streaming services. 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 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 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, state 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 in the even year of a two year election cycle, particularly in the fourth quarter of those years.
The following table summarizes the year-over-year changes in our revenue categories (in thousands):
Quarter ended Sept. 30 ,
Nine months ended
Change from Change from Change from Change from
2021 2020 2020 2019 2019 2021 2020 2020 2019 2019
Subscription $ 368,672 $ 316,677 16 % $ 240,735 53 % $ 1,130,490 $ 972,954 16 % $ 718,472 57 %
Advertising &
Marketing Services 364,234 298,605 22 % 297,333 23 % 1,027,957 822,841 25 % 851,304 21 %
Political 15,010 116,494 (87) % 8,131 85 % 34,019 181,425 (81) % 14,064 ***
Other 8,571 6,613 30 % 5,658 51 % 23,980 22,985 4 % 21,702 10 %
Total revenues $ 756,487 $ 738,389 2 % $ 551,857 37 % $ 2,216,446 $ 2,000,205 11 % $ 1,605,542 38 %
*** Not meaningful
2021 vs. 2020
Total revenues increased $18.1 million in the third quarter of 2021 and $216.2
million in the first nine months of 2021 compared to the same periods in 2020.
The net increases were primarily due to growth in AMS revenue ($65.6 million
third quarter, $205.1 million first nine months) reflecting higher demand for
television and digital advertising (as fiscal year 2020 was adversely impacted
by reduced demand due to the COVID-19 pandemic). Growth in subscription revenue
($52.0 million third quarter, $157.5 million first nine months) primarily due to
annual rate increases under existing and newly renegotiated retransmission
agreements, partially offset by declines in subscribers, also contributed to our
increases in revenues. These increases were partially offset by a decrease in
political revenue ($101.5 million third quarter and $147.4 million first nine
months), following the 2020 presidential election year.
2021 vs. 2019
Total revenues increased$204.6 million in the third quarter of 2021 and$610.9 million in the first nine months of 2021 compared to the same periods in 2019. Our 2019 Acquisitions contributed total revenues of$74.3 million and$298.0 million in the third quarter and first nine months of 2021, respectively. Excluding the 2019 Acquisitions, total revenues increased$130.3 million and$312.9 million in the third quarter and first nine months of 2021, respectively. The increases were primarily due to a rise in subscription revenues ($85.3 million third quarter,$259.8 million first nine months) primarily due to annual rate increases under existing and newly renegotiated retransmission agreements, partially offset by declines in subscribers. Also contributing to the increase was AMS revenue ($36.5 million third quarter,$31.0 million first nine months), driven in part by Premion and political revenue ($6.1 million third quarter,$17.8 million first nine months).
Cost of Revenues
2021 vs. 2020
Cost of revenues increased$20.6 million in the third quarter of 2021 and$87.6 million in the first nine months of 2021 compared to the same periods in 2020. The increases were primarily due to growth in programming costs ($19.1 million third quarter,$60.6 million first nine months) driven by a rise in rates under existing and newly renegotiated affiliation agreements and growth in subscription revenues (certain programming costs are linked to such revenues). Higher digital expenses of$11.8 million driven by growth in Premion also contributed to the increase in the first nine months. 20 --------------------------------------------------------------------------------
2021 vs. 2019
Cost of revenues increased$93.3 million in the third quarter of 2021 and$318.5 million in the first nine months of 2021 compared to the same periods in 2019. Our 2019 Acquisitions added cost of revenues of$42.1 million and$159.2 million in the third quarter and first nine months of 2021, respectively. Excluding the 2019 Acquisitions, cost of revenues increased$51.2 million and$159.3 million in the third quarter and first nine months of 2021, respectively. The increases were partially due to rising programming costs ($48.2 million third quarter,$141.3 million first nine months). Higher digital expenses of$5.3 million driven by growth in Premion also contributed to the increase in the first nine months.
Business Units - Selling, General and Administrative Expenses
2021 vs. 2020
Business unit selling, general and administrative expenses (SG&A) increased$10.5 million in the third quarter of 2021 and$18.8 million in the first nine months of 2021 compared to the same periods in 2020. The increases were partially due to higher professional fees ($1.6 million third quarter,$11.0 million first nine months). Also contributing was a rise in marketing costs ($2.2 million third quarter,$5.4 million first nine months). Sales commissions and other selling costs also increased ($8.6 million third quarter,$13.2 million first nine months) driven by growth in AMS revenues. The nine months increase was partially offset by a$7.0 million reduction in bad debt expense attributed to improved collection trends as a result of continued recovery in theU.S. economy. 2021 vs. 2019 Business unit SG&A expenses increased$22.0 million in the third quarter of 2021 and$62.9 million in the first nine months of 2021 compared to the same periods in 2019. Our 2019 Acquisitions added business unit SG&A expenses of$7.5 million and$32.7 million in the third quarter and first nine months of 2021, respectively. Excluding the 2019 Acquisitions, SG&A expenses increased$14.5 million and$30.2 million in the third quarter and first nine months of 2021, respectively. The increases were primarily due to higher sales commissions and other selling costs (approximately$9.3 million third quarter,$15.3 million first nine months) driven by growth in AMS revenues. Also contributing were higher professional fees ($3.3 million third quarter,$11.1 million first nine months). Stock based compensation expense was also higher ($1.1 million third quarter,$2.9 million first nine months) and was driven by our higher stock price. These increases were partially offset by reductions in bad debt expense ($1.0 million third quarter,$3.0 million first nine months).
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.
2021 vs. 2020
Corporate general and administrative expenses increased$0.6 million in the third quarter of 2021 and decreased$9.3 million in the first nine months of 2021 compared to the same periods in 2020. The nine months decrease was primarily driven by a$6.5 million decline in advisory fees related to activism defense. Also contributing to the decrease in the first nine months of 2021 was the absence of$4.6 million of M&A due diligence costs. The decrease in the first nine months of 2021 was partially offset by an increase in stock based compensation expense of$2.3 million driven by our higher stock price.
2021 vs. 2019
Corporate general and administrative expenses decreased$17.9 million in the third quarter of 2021 and$8.4 million in the first nine months of 2021 compared to the same periods in 2019. The decreases were primarily due to the absence of acquisition-related costs, ($20.0 million third quarter,$29.1 million first nine months) due to the reduction in acquisition activity in 2021. Partially offsetting the first nine months decrease was an increase of$16.6 million in advisory fees related to activism defense and a$1.6 million increase in stock based compensation expense due to our higher stock price.
Depreciation Expense
2021 vs. 2020
Depreciation expense increased by$0.7 million in the third quarter of 2021 and decreased$1.2 million in the first nine months of 2021 compared to the same periods in 2020. The decrease in the first nine months of 2021 was due to a decline in capital expenditures following the onset of COVID-19, resulting in less depreciation in 2021. 21 --------------------------------------------------------------------------------
2021 vs. 2019
Depreciation expense increased by$1.4 million in the third quarter of 2021 and$3.7 million in the first nine months of 2021 compared to the same periods in 2019. Our 2019 Acquisitions added depreciation expense of$2.5 million and$8.3 million in the third quarter and first nine months of 2021, respectively. Excluding the impact of the 2019 Acquisitions, depreciation expense decreased$1.1 million and$4.6 million in the third quarter and first nine months of 2021, respectively, primarily due to a decline in capital expenditures following the onset of COVID-19 and certain assets reaching the end of their assumed useful lives. Amortization Expense 2021 vs. 2020 Amortization expense decreased$1.3 million in the third quarter of 2021 and$3.3 million in the first nine months of 2021 compared to the same periods in 2020. The decreases were due to certain assets reaching the end of their assumed useful lives and therefore becoming fully amortized.
2021 vs. 2019
Amortization expense increased$0.8 million in the third quarter of 2021 and$14.8 million in the first nine months of 2021 compared to the same periods in 2019. Our 2019 Acquisitions added amortization expense of$3.9 million and$22.9 million in the third quarter and first nine months of 2021, respectively. Excluding the impact of the 2019 Acquisitions, amortization expense decreased$3.1 million and$8.1 million in the third quarter and first nine months of 2021, respectively, due to certain assets reaching the end of their assumed useful lives.
Spectrum Repacking Reimbursements and Other, net
2021 vs. 2020
Spectrum repacking reimbursements and other net losses were$0.5 million in the third quarter of 2021 compared to net gains of$2.9 million in the same period in 2020 and net gains of$2.4 million in the first nine months of 2021 compared to$10.5 million in the same period in 2020. The 2021 activity is related to reimbursements received from theFederal Communications Commission (FCC) for required spectrum repacking ($0.6 million third quarter,$5.0 million first nine months), offset by a$1.1 million write off of certain assets for both periods and a$1.5 million contract termination fee which impacted the first nine months. The 2020 activity primarily consists of reimbursements received from the FCC for required spectrum repacking ($2.9 million third quarter,$12.7 million first nine months), partially offset by$2.1 million impairment charge due to the retirement of a brand name that impacted the first nine months.
2021 vs. 2019
Spectrum repacking reimbursements and other net losses were$0.5 million in the third quarter of 2021 compared to an immaterial amount in the same period in 2019 and$2.4 million of gains in the first nine months of 2021 compared to$11.4 million of gains in the same period in 2019. The 2021 activity consists of the items discussed above. The 2019 activity reflects gains due to reimbursements received from the FCC ($5.5 million third quarter,$14.0 million first nine months). The first nine months of 2019 also included a gain of$2.9 million as a result of the sale of real estate, partially offset by one-time contract termination and incremental transition costs of$5.5 million related to bringing our national sales organization in-house, which impacted both periods of 2019. Operating Income 2021 vs. 2020 Our operating income decreased$16.4 million in the third quarter of 2021 and increased$115.5 million in the first nine months of 2021 compared to the same periods in 2020. The decrease in the third quarter was driven by the changes in revenue and expenses discussed above, but primarily a decline in high-margin political revenue. The increase in the first nine months was driven by the changes in revenue and expenses discussed above, most notably the growth of AMS and subscription revenue. 2021 vs. 2019 Our operating income increased$104.5 million in the third quarter of 2021 and$210.5 million in the first nine months of 2021 compared to the same periods in 2019. Results from our 2019 Acquisitions added operating income of$18.3 million in the first quarter of 2021 and$74.8 million in the first nine months of 2021. Excluding the 2019 Acquisitions, operating income increased$86.2 million and$135.7 million in the third quarter and first nine months of 2021, respectively, driven by the changes in revenue and expenses discussed above. 22 --------------------------------------------------------------------------------
Non-Operating Expenses
Non-operating expenses decreased$7.7 million in the third quarter of 2021 compared to the same period in 2020. This decrease was primarily due to an interest expense decline of$5.4 million driven by lower average outstanding debt partially offset by higher average interest rate. Total average outstanding debt was$3.37 billion for the third quarter of 2021, compared to$4.04 billion in the same period of 2020. The weighted average interest rate on outstanding debt was 5.18% for the third quarter of 2021, compared to 4.89% in the same period of 2020. In the first nine months of 2021, non-operating expenses decreased$28.6 million compared to the same period in 2020. This decrease was primarily due to interest expense declining$21.2 million driven by lower average outstanding debt partially offset by higher average interest rate. The average debt outstanding was$3.46 billion for the first nine months of 2021, compared to$4.12 billion in the same period of 2020. The weighted average interest rate on outstanding debt was 5.13% for the first nine months of 2021, compared to 4.99% in the same period of 2020. The decrease was also due to the absence of a$13.8 million call premium related to the repayment of our 2023 Senior Notes and expense of$7.9 million of previously deferred financing fees associated with the 2023 and 2020 Senior Notes that were accelerated due to these note's early repayments. Partially offsetting these decreases was a decline in equity earnings of$14.5 million from our CareerBuilder investment (which sold its employment screening business in 2020 resulting in our share of a gain of$18.6 million ).
Income Tax Expense
Income tax expense decreased$5.1 million in the third quarter of 2021 compared to the same period in 2020. Income tax expense increased$33.8 million in the first nine months of 2021 compared to the same period in 2020. The income tax expense fluctuations were primarily due to changes in net income before tax. Our effective income tax rate was 22.3% for the third quarter of 2021, compared to 24.1% for the third quarter of 2020. The tax rate for the third quarter of 2021 is lower than the comparable rate in 2020 primarily due to discrete tax benefits realized related to a previously-disposed business. Our effective income tax rate was 22.9% for the first nine months of 2021, which is comparable to the effective tax rate of 22.6% for the same period in 2020.
Net Income attributable to
Net income attributable toTEGNA Inc. was$128.3 million , or$0.58 per diluted share, in the third quarter of 2021 compared to$132.2 million , or$0.60 per diluted share, during the same period in 2020. For the first nine months of 2021, net income attributable toTEGNA Inc. was$347.5 million , or$1.56 per diluted share, compared to$238.5 million , or$1.08 per diluted share, for the same period in 2020. Both income and earnings per share were affected by the factors discussed above. The weighted average number of diluted common shares outstanding in the third quarter of 2021 and 2020 were 222.8 million and 220.0 million, respectively. The weighted average number of diluted shares outstanding in the first nine months of 2021 and 2020 was 222.2 million and 219.4 million, respectively. 23 --------------------------------------------------------------------------------
Results from Operations - Non-GAAP Information
Presentation of Non-GAAP information
We use non-GAAP financial performance 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 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 and free cash flow 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-Q non-GAAP financial performance measures that exclude from our reported GAAP results the impact of "special items" which are described in detail below in the section titled "Discussion of Special Charges Affecting Reported Results." 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. 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 attributable toTEGNA before (1) net (income) loss attributable to redeemable noncontrolling interest, (2) income taxes, (3) interest expense, (4) equity (loss) income in unconsolidated investments, net, (5) other non-operating items, net, (6) M&A due diligence 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 attributable toTEGNA . 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 discuss free cash flow, a non-GAAP performance measure that the Board of Directors uses to review the performance of the business. Free cash flow is reviewed by the Board of Directors as a percentage of revenue over a trailing two-year period (reflecting both an even and odd year reporting period given the political cyclicality of our business). The most directly comparable GAAP financial measure to free cash flow is Net income attributable toTEGNA . 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) dividends received from equity method investments and (5) 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. 24
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Discussion of Special Charges Affecting Reported Results
Our results included the following items we consider "special items" that, while at times recurring, can vary significantly from period to period:
Quarter and nine months ended
•Spectrum repacking reimbursements and other, net consisting of gains due to reimbursements from the FCC for required spectrum repacking, a contract termination fee and the write off of certain fixed assets; •Advisory fees related to activism defense; •Other non-operating items consisting of a gain due to an observable price increase in an equity investment; and •Net deferred tax benefits as a result of state tax planning strategies implemented during the second quarter of 2021 and deferred tax benefits related to partial capital loss valuation allowance release.
Quarter and nine months ended
•Workforce restructuring expense which included payroll and related benefit costs at our stations (including the shutdown of our TMSPhoenix operations) and corporate headquarters; •Spectrum repacking reimbursements and other, net consists of gains due to reimbursements from the FCC for required spectrum repacking, partially offset by an intangible asset impairment charge due to the retirement of a brand name; •Advisory fees related to activism defense; •M&A due diligence costs we incurred to assist prospective buyers of our company with their due diligence; •A gain recognized in our equity income in unconsolidated investments, related to our share of CareerBuilder's gain on the sale of its employment screening business; •Other non-operating items primarily related to costs incurred in connection with the early extinguishment of debt; and •Deferred tax benefits related to partial capital loss valuation allowance release. 25
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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):
Special Items
Spectrum repacking
Quarter ended GAAP reimbursements and Other non-operating Special tax Non-GAAP
Sept. 30, 2021 measure other items items measure
Spectrum repacking
reimbursements and
other, net $ 504 $ (504) $ - $ - $ -
Operating expenses 545,137 (504) - - 544,633
Operating income 211,350 504 - - 211,854
Other non-operating
items, net 2,486 - (1,941) - 545
Income before income
taxes 165,569 504 (1,941) - 164,132
Provision for income
taxes 36,870 115 (502) 4,347 40,830
Net income
attributable to TEGNA
Inc. 128,280 389 (1,439) (4,347) 122,883
Net income per
share-diluted $ 0.58 $ - $ (0.01) $ (0.02) $ 0.55
Special Items
Spectrum repacking
Quarter ended GAAP Workforce restructuring reimbursements and Non-GAAP
Sept. 30, 2020 measure expense other measure
Cost of revenues $ 379,185 $ (595) $ - $ 378,590
Business units -
Selling, general and
administrative
expenses 89,943 (372) - 89,571
Corporate - General
and administrative
expenses 11,263 (54) - 11,209
Spectrum repacking
reimbursements and
other, net (2,902) - 2,902 -
Operating expenses 510,688 (1,021) 2,902 512,569
Operating income 227,701 1,021 (2,902) 225,820
Income before income
taxes 174,237 1,021 (2,902) 172,356
Provision for income
taxes 41,967 256 (749) 41,474
Net income
attributable to TEGNA
Inc. 132,219 765 (2,153) 130,831
Net income per
share-diluted $ 0.60 $ - $ (0.01) $ 0.59
26
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Special Items
Advisory fees Spectrum repacking
Nine months ended GAAP related to
activism reimbursements and Other non-operating
measure defense other items Special tax items Non-GAAP measure
Corporate - General and administrative expenses$ 51,944 $ (16,611) $ - $ - $ -$ 35,333 Spectrum repacking reimbursements and other, net (2,394) - 2,394 - - - Operating expenses 1,623,644 (16,611) 2,394 - - 1,609,427 Operating income 592,802 16,611 (2,394) - - 607,019 Equity income (loss) in unconsolidated investments, net (5,716) - - - - (5,716) Other non-operating items, net 4,340 - - (1,941) - 2,399 Total non-operating expenses (140,947) - - (1,941) - (142,888) Income before income taxes 451,855 16,611 (2,394) (1,941) - 464,131 Provision for income taxes 103,470 4,291 (626) (502) 7,144 113,777 Net income attributable to TEGNA Inc. 347,524 12,320 (1,768) (1,439) (7,144) 349,493 Net income per share-diluted$ 1.56 $ 0.06 $ (0.01) $ (0.01)$ (0.03) $ 1.57 Special Items Spectrum Workforce repacking Nine months ended GAAP restructuring M&A due diligence Advisory fees related reimbursements Gains on equity Other non-operating Special taxSept. 30, 2020 measure expense costs to activism defense and other method investment items items Non-GAAP measure Cost of revenues$ 1,103,920 $ (595) $ - $ - $ - $ - $ - $ -$ 1,103,325 Business units - Selling, general and administrative expenses 267,919 (372) - - - - - - 267,547 Corporate - General and administrative expenses 61,289 (54) (4,588) (23,087) - - - - 33,560 Spectrum repacking reimbursements and other, net (10,533) - - - 10,533 - - - - Operating expenses 1,522,869 (1,021) (4,588) (23,087) 10,533 - - - 1,504,706 Operating income 477,336 1,021 4,588 23,087 (10,533) - - - 495,499 Equity income (loss) in unconsolidated investments, net 8,407 - - - - (18,585) - - (10,178) Other non-operating items, net (17,270) - - - - - 21,744 - 4,474 Total non-operating expenses (169,596) - - - - (18,585) 21,744 - (166,437) Income before income taxes 307,740 1,021 4,588 23,087 (10,533) (18,585) 21,744 - 329,062 Provision for income taxes 69,699 256 1,151 5,801 (2,766) (4,670) 5,463 3,944 78,878 Net income attributable toTEGNA Inc. 238,474 765 3,437 17,286 (7,767) (13,915) 16,281 (3,944) 250,617 Net income per share-diluted (a)$ 1.08 $ - $ 0.02 $ 0.08$ (0.04) $ (0.06) $ 0.07$ (0.02) $ 1.14
(a) Per share amounts do not sum due to rounding.
27
--------------------------------------------------------------------------------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):
Quarter ended Sept. 30, Nine months ended Sept. 30,
2021 2020 Change 2021 2020 Change
Net income attributable to TEGNA Inc. (GAAP
basis) $ 128,280 $ 132,219 (3 %) $ 347,524 $ 238,474 46 %
Plus (Less): Net income (loss) attributable to
redeemable noncontrolling interest 419 51 *** 861 (433) ***
Plus: Provision for income taxes 36,870 41,967 (12 %) 103,470 69,699 48 % Plus: Interest expense 46,477 51,896 (10 %) 139,571 160,733 (13 %) Plus (Less): Equity loss (income) in unconsolidated investments, net 1,790 2,529 (29 %) 5,716 (8,407)
***
(Less) Plus: Other non-operating items, net (2,486) (961) *** (4,340) 17,270
***
Operating income (GAAP basis) 211,350 227,701 (7 %) 592,802 477,336 24 % Plus: Workforce restructuring expense - 1,021 *** - 1,021
***
Plus: M&A due diligence and acquisition-related costs - - *** - 4,588
***
Plus: Advisory fees related to activism defense - - *** 16,611 23,087 (28 %) Plus (Less): Spectrum repacking reimbursements and other, net 504 (2,902) *** (2,394) (10,533) (77 %) Adjusted operating income (non-GAAP basis) 211,854 225,820 (6 %) 607,019 495,499 23 % Plus: Depreciation 16,792 16,086 4 % 48,526 49,697 (2 %) Plus: Amortization of intangible assets 15,774 17,113 (8 %) 47,307 50,577 (6 %) Adjusted EBITDA (non-GAAP basis) 244,420 259,019 (6 %) 702,852 595,773 18 % Corporate - General and administrative expense (non-GAAP basis) 11,891 11,209 6 % 35,333 33,560 5 % Adjusted EBITDA, excluding Corporate (non-GAAP basis)$ 256,311 $ 270,228 (5 %)$ 738,185 $ 629,333 17 % *** Not meaningful In the third quarter of 2021 Adjusted EBITDA margin was 34% without corporate expense or 32% with corporate expense, compared to third quarter of 2020 Adjusted EBITDA margin of 37% without corporate expense or 35% with corporate expense. For the nine months endedSeptember 30, 2021 , Adjusted EBITDA margin was 33% without corporate expense or 32% with corporate expense, compared to nine months endedSeptember 30, 2020 Adjusted EBITDA of 31% without corporate expense or 30% with corporate expense. These margin decreases were primarily driven by the operational factors discussed above within the revenue and operating expense fluctuation explanation sections, most notably the decline in high margin political revenue. 28
--------------------------------------------------------------------------------
Free Cash Flow Reconciliation
Our free cash flow, a non-GAAP performance measure, was
Reconciliation from "Net income" to "Free cash flow" follow (in thousands):
Two-year period
ended
Sept. 30, 2021
Net income attributable to TEGNA Inc. (GAAP basis) $ 914,257
Plus: Provision for income taxes 294,453
Plus: Interest expense 410,169
Plus: M&A due diligence and acquisition-related costs 6,252
Plus: Depreciation 131,100
Plus: Amortization 132,571
Plus: Stock-based compensation 49,702
Plus: Company stock 401(k) contribution 33,116
Plus: Syndicated programming amortization 141,983
Plus: Workforce restructuring expense 5,933
Plus: Advisory fees related to activism defense 45,778
Plus: Cash dividend from equity investments for return on capital
9,235
Plus: Cash reimbursements from spectrum repacking 21,209
Plus: Other non-operating items, net 24,691
Plus: Net income attributable to redeemable noncontrolling interest
846
Plus: Reimbursement from Company-owned life insurance policies 530
Less: Income tax payments, net of refunds (242,077)
Less: Equity income in unconsolidated investments, net (3,908)
Less: Spectrum repacking reimbursements and other, net (6,285)
Less: Syndicated programming payments (147,411)
Less: Pension contributions (25,230)
Less: Interest payments (434,763)
Less: Purchases of property and equipment (122,042)
Free cash flow (non-GAAP basis) $ 1,240,109
Revenue $ 5,848,181
Free cash flow as a % of Revenue 21.2 %
29
--------------------------------------------------------------------------------Liquidity, Capital Resources and Cash Flows
Our operations have historically generated strong positive cash flow which, along with availability under our existing revolving credit facility and cash and cash equivalents on hand, have been sufficient to fund our capital expenditures, interest expense, dividends, investments in strategic initiatives (including acquisitions) and other operating requirements. The COVID-19 pandemic has had far-reaching impacts on many aspects of our operations, directly and indirectly, including our employees, consumer behavior, distribution of our content, our vendors, and the overall market. The full impact of the COVID-19 pandemic, particularly with regard to the broader advertising industry, remains uncertain and continues to evolve. However, during the first nine months of 2021, theU.S. economy continued on a path towards recovery with millions of Americans receiving COVID-19 vaccines, states and municipalities increasingly reopening and continued growth in employment, although the Delta variant of the virus continues to cause concern. In addition, theU.S. federal government continued to enact policies to provide fiscal stimulus to the economy and relief to those affected by the pandemic, with stimulus bolstering household finances as well as those of small businesses, states and municipalities. The improving conditions around the pandemic, coupled with strategic actions we've taken with our 2020 and 2019 debt refinancings and reduction of discretionary spending, have helped strengthen our financial position. OnMarch 29, 2021 , we announced that our Board of Directors approved a dividend increase often cents per share on an annual basis, to$0.38 per common share (approximately 2.0% dividend yield as ofJune 30, 2021 ), which represents an approximately 36% increase above the prior dividend. OnSeptember 9, 2021 , we announced that our$300 million share repurchase program is expected to be completed by year-end 2022, one year earlier than planned, given that we have now achieved our planned debt reduction targets. These two capital allocation programs demonstrate the Board's and management's confidence in our business and continued focus on making prudent, disciplined decisions intended to drive near and long-term shareholder value. Our capital allocation decisions focus on optimizing investments in organic and inorganic growth opportunities, paying down debt, issuing dividends, and repurchasing shares. As ofSeptember 30, 2021 , we were in compliance with all covenants contained in our debt agreements and credit facility and our leverage ratio, calculated in accordance with our revolving credit agreement, was 3.35x, well below the permitted leverage ratio of less than 5.5x. The leverage ratio is calculated using annualized adjusted EBITDA (as defined in the agreement) for the trailing eight quarters. We believe that we will remain compliant with all covenants for the foreseeable future.
As of
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 2020 Annual
Report on Form 10-K for further discussion. We expect our existing cash and cash
equivalents, cash flow from our operations, and borrowing capacity under the
revolving credit facility will be more than sufficient to satisfy our debt
service obligations, capital expenditure requirements, discretionary share
repurchases, and working capital needs for the next twelve months.
30
--------------------------------------------------------------------------------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):
Nine months ended Sept. 30,
2021 2020
Balance of cash and cash equivalents beginning of the period $ 40,968 $ 29,404
Operating activities:
Net income 348,385 238,041
Depreciation, amortization and other non-cash adjustments 138,261 117,468
Pension contributions, net of income (14,821) (8,144)
(Increase) decrease in trade receivables (49,687) 73,838
(Decrease) increase in interest and taxes payable (76,372) 13,793
Other, net (3,162) 80,755
Cash flow from operating activities 342,604 515,751
Investing activities: Payments for acquisitions of businesses and other assets, net of cash acquired
(13,335) (15,841)
All other investing activities (32,021) (8,571)
Cash flow used for investing activities (45,356) (24,412)
Cash flow used for financing activities (287,002) (356,157)
Increase in cash and cash equivalents 10,246 135,182
Balance of cash and cash equivalents end of the period $
51,214
Operating Activities - Cash flow from operating activities was$342.6 million for the nine months endedSeptember 30, 2021 , compared to$515.8 million for the same period in 2020. Driving the decrease in operating cash flow was a decline of$147.4 million in political revenue (which is paid upfront and provides immediate benefit to operating cash flow). In addition, we had an increase in tax payments of$106.7 million in the nine months endedSeptember 30, 2021 compared to the same period in 2020. This was driven by the adverse impact of COVID-19 on our 2020 financial results, particularly during the first six months of 2020. The subsequent recovery in demand for advertising thereafter resulted in an increase in our taxable income, and led to the increase in tax payments in the first nine months of 2021. Partially offsetting the decline in operating cash flow resulting from lower political revenues and higher tax payments, were increases in operating cash flows during the nine months endedSeptember 30, 2021 , associated with higher AMS and subscription revenues. Investing Activities - Cash flow used for investing activities was$45.4 million for the nine months endedSeptember 30, 2021 , compared to$24.4 million for the same period in 2020. The increase was partially due to a$8.8 million increase in the purchase of property and equipment. Also contributing to the increase was a$7.6 million decline in spectrum repack reimbursements in 2021. Financing Activities - Cash flow used for financing activities was$287.0 million for the nine months endedSeptember 30, 2021 , compared to$356.2 million for the same period in 2020. The change was primarily due to debt activity in 2020. Specifically, inJanuary 2020 we issued$1.0 billion of unsecured notes, the proceeds of which were used to early redeem$650.0 million of unsecured notes due inOctober 2023 and$310.0 million due inJuly 2020 . Additionally, inSeptember 2020 we issued$550 million of senior unsecured notes. We incurred fees of$36.9 million related to these debt issuances, and an amendment of the revolving credit facility. We also had net repayments of$219.0 million on our revolving credit facility early in the first nine months of 2021 as compared to net repayments of$728.0 million in the first nine months of 2020. 31 --------------------------------------------------------------------------------
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, which include, but are not limited to the adverse impacts caused by the COVID-19 pandemic and its effect on our revenues, particularly our non-political advertising revenues. 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 within Item 1A. "Risk Factors" in our 2020 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 2020 Annual Report on Form 10-K: "Item 7A. Quantitative and Qualitative Disclosures about Market Risk." Our exposures to market risk have not changed materially sinceDecember 31, 2020 . As ofSeptember 30, 2021 , approximately$3.23 billion of our debt has a fixed interest rate (which represents approximately 96% of our total principal debt obligation). Our remaining debt obligation of$136 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$0.7 million . The fair value of our total debt, based on bid and ask quotes for the related debt, totaled$3.52 billion as ofSeptember 30, 2021 and$3.79 billion as ofDecember 31, 2020 .
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