Document


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
_______________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6961
___________________________
TEGNA INC.
(Exact name of registrant as specified in its charter)
___________________________
Delaware
 
16-0442930
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7950 Jones Branch Drive, McLean, Virginia
 
22107-0150
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (703) 873-6600.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. c
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding as of June 30, 2018 was 215,266,835.
 




INDEX TO TEGNA INC.
June 30, 2018 FORM 10-Q
 
Item No.
 
Page
 
PART I. FINANCIAL INFORMATION
 
 
 
 
1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 
 

2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

TEGNA Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands of dollars
 
June 30, 2018
 
Dec. 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
24,503

 
$
98,801

Accounts receivable, net of allowances of $3,459 and $3,266, respectively
414,316

 
406,852

Other receivables
32,018

 
32,442

Programming rights
11,669

 
37,758

Prepaid expenses and other current assets
20,372

 
61,070

Total current assets
502,878

 
636,923

Property and equipment
 
 
 
Cost
822,065

 
782,602

Less accumulated depreciation
(470,697
)
 
(447,262
)
Net property and equipment
351,368

 
335,340

Intangible and other assets
 
 
 
Goodwill
2,596,505

 
2,579,417

Indefinite-lived and amortizable intangible assets, less accumulated amortization
1,542,171

 
1,273,269

Investments and other assets
149,741

 
137,166

Total intangible and other assets
4,288,417

 
3,989,852

Total assets
$
5,142,663

 
$
4,962,115

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



TEGNA Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands of dollars, except par value and share amounts
 
June 30, 2018
 
Dec. 31, 2017
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
45,565

 
$
52,992

Accrued liabilities


 


   Compensation
35,984

 
54,088

   Interest
38,664

 
39,217

   Contracts payable for programming rights
75,996

 
105,040

   Other
49,247

 
58,196

Dividends payable
15,158

 
15,173

Current portion of long-term debt
323

 
646

Total current liabilities
260,937

 
325,352

Noncurrent liabilities
 
 
 
Income taxes
20,247

 
20,203

Deferred income taxes
395,611

 
382,310

Long-term debt
3,131,137

 
3,007,047

Pension liabilities
136,986

 
144,220

Other noncurrent liabilities
80,834

 
87,942

Total noncurrent liabilities
3,764,815

 
3,641,722

Total liabilities
4,025,752

 
3,967,074

 
 
 
 
Shareholders’ equity
 
 
 
Common stock of $1 par value per share, 800,000,000 shares authorized, 324,418,632 shares issued
324,419

 
324,419

Additional paid-in capital
304,066

 
382,127

Retained earnings
6,201,694

 
6,062,995

Accumulated other comprehensive loss
(124,741
)
 
(106,923
)
Less treasury stock at cost, 109,151,797 shares and 109,487,979 shares, respectively
(5,588,527
)
 
(5,667,577
)
Total equity
1,116,911

 
995,041

Total liabilities and equity
$
5,142,663

 
$
4,962,115

The accompanying notes are an integral part of these condensed consolidated financial statements.



4



TEGNA Inc.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited, in thousands of dollars, except per share amounts
 
Quarter ended
June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Revenues
$
524,080

 
$
489,369

 
$
1,026,170

 
$
948,439

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenues, exclusive of depreciation
264,294


229,683

 
522,787


461,091

Business units - Selling, general and administrative expenses, exclusive of depreciation
78,933


75,302

 
152,554


143,731

Corporate - General and administrative expenses, exclusive of depreciation
11,221

 
14,248

 
23,929

 
29,581

Depreciation
13,861


13,318

 
27,332


26,535

Amortization of intangible assets
7,962


5,388

 
14,744


10,777

Asset impairment and facility consolidation (gains) charges
(6,326
)

1,350

 
(6,326
)

3,533

Total
369,945

 
339,289

 
735,020

 
675,248

Operating income
154,135

 
150,080

 
291,150

 
273,191

 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 
 
 
 
 
 
Equity income (loss) in unconsolidated investments, net
15,547

 
(946
)
 
14,309

 
(2,415
)
Interest expense
(49,104
)
 
(54,843
)
 
(96,829
)
 
(110,258
)
Other non-operating items
(311
)
 
(21,108
)
 
(12,791
)
 
(23,182
)
Total
(33,868
)

(76,897
)
 
(95,311
)

(135,855
)
 
 
 
 
 
 
 
 
Income before income taxes
120,267

 
73,183

 
195,839

 
137,336

Provision for income taxes
27,755


23,913

 
48,140


43,408

Net Income from continuing operations
92,512

 
49,270

 
147,699

 
93,928

Loss from discontinued operations, net of tax

 
(241,699
)
 

 
(222,458
)
Net income (loss)
92,512

 
(192,429
)
 
147,699

 
(128,530
)
Net loss attributable to noncontrolling interests from discontinued operations

 
62,077

 


55,892

Net income (loss) attributable to TEGNA Inc.
$
92,512

 
$
(130,352
)
 
$
147,699

 
$
(72,638
)
 
 
 
 
 
 
 
 
Earnings from continuing operations per share - basic
$
0.43

 
$
0.23

 
$
0.68


$
0.44

Loss from discontinued operations per share - basic

 
(0.83
)
 

 
(0.77
)
Net income (loss) per share – basic
$
0.43

 
$
(0.60
)
 
$
0.68

 
$
(0.33
)
 
 
 
 
 
 
 
 
Earnings from continuing operations per share - diluted
$
0.43

 
$
0.23

 
$
0.68


$
0.43

Loss from discontinued operations per share - diluted

 
(0.83
)
 

 
(0.77
)
Net income (loss) per share – diluted
$
0.43

 
$
(0.60
)
 
$
0.68

 
$
(0.34
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic shares
216,342

 
215,501

 
216,309

 
215,404

Diluted shares
216,515

 
217,812

 
216,753

 
217,691

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.07

 
$
0.07

 
$
0.14

 
$
0.21

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



TEGNA Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited, in thousands of dollars
 
Quarter ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income (loss)
$
92,512

 
$
(192,429
)
 
$
147,699

 
$
(128,530
)
Redeemable noncontrolling interests (earnings not available to shareholders)

 
(1,017
)
 

 
(2,832
)
Other comprehensive income, before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
382

 
7,099

 
582

 
9,362

Recognition of previously deferred post-retirement benefit plan costs
1,302

 
2,327

 
2,552

 
4,402

Pension lump-sum payment charge

 

 
6,300

 

Unrealized gains on available for sale investment during the period

 
4,069

 

 
1,776

Other comprehensive income, before tax
1,684

 
13,495

 
9,434

 
15,540

Income tax effect related to components of other comprehensive income
(432
)
 
(896
)
 
(2,408
)
 
(1,693
)
Other comprehensive income, net of tax
1,252

 
12,599

 
7,026

 
13,847

Comprehensive income (loss)
93,764

 
(180,847
)
 
154,725

 
(117,515
)
Comprehensive income attributable to noncontrolling interests, net of tax

 
59,750

 

 
54,315

Comprehensive income (loss) attributable to TEGNA Inc.
$
93,764

 
$
(121,097
)
 
$
154,725

 
$
(63,200
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

6



TEGNA Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, in thousands of dollars
 
Six months ended June 30,
 
2018
 
2017
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
147,699


$
(128,530
)
Adjustments to reconcile net income to net cash flow from operating activities:
 
 
 
Depreciation and amortization
42,076

 
97,181

Stock-based compensation
7,967

 
10,160

Loss on write down of CareerBuilder

 
344,772

Other (gains) losses on sales of assets and impairment charges
(7,406
)
 
11,506

Equity (income) losses in unconsolidated investments, net
(14,309
)
 
2,354

Pension contributions, net of expense
(31,158
)

(1,843
)
Change in other assets and liabilities, net
9,172

 
(92,576
)
Net cash flow from operating activities
154,041

 
243,024

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(20,864
)
 
(49,703
)
Reimbursement from spectrum repacking
2,025

 

Payments for acquisitions of businesses, net of cash acquired
(325,902
)
 

Payments for investments
(4,479
)
 
(1,363
)
Proceeds from investments
1,224

 
1,369

Proceeds from sale of assets and businesses
16,126

 
5,556

Net cash flow used for investing activities
(331,870
)
 
(44,141
)
Cash flows from financing activities:
 
 
 
Proceeds (payments) of borrowings under revolving credit facilities, net
186,000

 
(635,000
)
Proceeds from Cars.com borrowings

 
675,000

Debt repayments
(66,123
)
 
(66,124
)
Payments of debt issuance costs
(5,269
)
 
(6,208
)
Dividends paid
(30,137
)
 
(60,073
)
Repurchases of common stock
(5,831
)
 
(8,453
)
Cash transferred to the Cars.com business

 
(20,133
)
Other, net
(4,349
)
 
(5,795
)
Net cash flow provided by (used for) financing activities
74,291

 
(126,786
)
Decrease (increase) in cash and cash equivalents
(103,538
)
 
72,097

Cash, cash equivalents and restricted cash from continuing operations, beginning of period
128,041

 
44,076

Cash, cash equivalents and restricted cash from discontinued operations, beginning of period

 
61,041

Balance of cash and cash equivalents, beginning of period
128,041

 
105,117

Cash, cash equivalents and restricted cash from continuing operations, end of period
24,503

 
98,452

Cash, cash equivalents and restricted cash from discontinued operations, end of period

 
78,762

Balance of cash and cash equivalents, end of period
$
24,503

 
$
177,214

The accompanying notes are an integral part of these condensed consolidated financial statements.

7



TEGNA Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Accounting Policies

Basis of presentation: Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting, the instructions for Form 10-Q and Article 10 of the U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all information and footnotes which are normally included in the Form 10-K and annual report to shareholders. In our opinion, the condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of results for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with our (or “TEGNA’s”) audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Significant estimates include, but are not limited to, evaluation of goodwill and other intangible assets for impairment, business combinations, fair value measurements, post-retirement benefit plans, income taxes including deferred taxes, and contingencies. The condensed consolidated financial statements include the accounts of subsidiaries we control and variable interest entities (VIEs) if we are the primary beneficiary. We eliminate all intercompany balances, transactions, and profits in consolidation. Investments in entities over which we have significant influence, but do not have control, are accounted for under the equity method. Our share of net earnings and losses from these ventures is included in “Equity income (loss) in unconsolidated investments, net” in the Consolidated Statements of Income. In addition, certain reclassifications have been made to prior year’s consolidated financial statements to conform to the current year’s presentation, specifically as it relates to our presentation of Investments and other assets in Note 3 of the condensed consolidated financial statements.

On May 31, 2017, we completed the spin-off of our digital automotive marketplace business, Cars.com. In addition, on July 31, 2017, we completed the sale of our majority ownership stake in CareerBuilder. As a result of these strategic actions, we have disposed of substantially all of our former Digital Segment business and have therefore classified its historical financial results as discontinued operations in our Consolidated Statements of Income. See Note 12, “Discontinued Operations”, for further details regarding the spin-off of Cars.com and the sale of CareerBuilder and the impact of each transaction on our condensed consolidated financial statements.

We operate one operating and reportable segment, which primarily consists of our 47 television stations operating in 39 markets, offering high-quality television programming and digital content. Our reportable segment determination is based on our management and internal reporting structure, the nature of products and services we offer, and the financial information that is evaluated regularly by our chief operating decision maker.

Accounting guidance adopted in 2018: In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance related to revenue recognition. Under the new guidance, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the guidance requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

We adopted the guidance beginning January 1, 2018 using the modified retrospective method. We began recognizing revenue under this new guidance in the first quarter of 2018 and did not restate prior years. We applied the standard to all contracts open as of January 1, 2018. The cumulative prior period effect of applying the guidance was $3.7 million which was recorded as a decrease to retained earnings upon adoption. This adjustment represents a deferral of revenue associated with certain performance obligations that were not fully completed as of the reporting date. In addition, with the adoption of the new guidance, we have determined that certain barter revenue and expense related to syndicated programming will no longer be recognized. The revenue and expense previously recognized for this type of barter transaction would have been approximately $0.5 million in the second quarter of 2018 and $1.0 million in the six months ended 2018. Other than these two items, there were no other changes to the timing and amount of revenue recognition for our contracts.

For contracts with an effective term of less than one year, and for our subscription revenue contracts, we applied certain of the standard’s practical expedients relating to disclosure that permit the exclusion of quantifying and disclosing unsatisfied performance obligations. In addition, the adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls. See discussion of our revenue policy below.

In August 2016, the FASB issued new guidance which clarifies several specific cash flow classification issues. The objective of the new guidance is to reduce the existing diversity in practice in how these cash flows are presented in the Statement of Cash Flows. The guidance updated the classification in the Statement of Cash Flows in several areas. The most relevant updates for us are the following: 1) payments made for premiums, fees paid to lenders and other related third party costs when debt is repaid early will each be classified as financing cash outflows (we have historically classified these types of cash payments as operating outflows), 2) contingent consideration payments made for acquisitions will be classified as either

8



operating, investing, or financing cash outflows depending on the timing and nature of the payment, 3) cash receipts received due to the settlement of insurance claims will be classified as either operating or investing cash inflows, depending on the nature of the underlying loss, 4) proceeds received from trust owned life insurance policies will be classified as investing cash inflows (we have historically classified these types of cash receipts as operating inflows), and 5) distributions received from equity method investments will be classified as either operating or investing cash inflows, depending on the amount of cash received as compared to the amount of inception to date earnings recognized on the individual investment. We adopted the guidance retrospectively beginning in the first quarter of 2018. As a result of adopting this guidance, we reclassified approximately $0.9 million of life insurance proceeds received in the first six months of 2017 from operating to investing inflows.

In January 2016, the FASB issued new guidance that amended several elements surrounding the recognition and measurement of financial instruments. Most notably for our company, the new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income. For equity investments that do not have readily determinable prices, those investments may be recorded at cost less impairments, if any, plus or minus changes in observable prices for those investments. This new guidance requires us to adjust the value of our cost method investments to account for any observable price changes in those investments. Cost method investments had previously been recorded at cost, less any impairments. We adopted the new guidance in the first quarter of 2018 and the provision discussed above has been adopted on a prospective basis. There was no impact to our financial statements as a result of adopting this new guidance.

In February 2018, the FASB issued guidance on accounting for certain tax effects that resulted from the Tax Cuts and Jobs Act, or the Act, that was enacted into law as of December 22, 2017. The guidance addresses the accounting for amounts that had previously been recorded in accumulated other comprehensive income on a net tax basis, using the tax rate that was in effect at the time. Due to the reduction in the tax rates under the Act, certain tax effects were “stranded” in accumulated other comprehensive income. This new guidance allows these stranded tax effects to be reclassified from accumulated other comprehensive income to retained earnings. Other tax amounts stranded in accumulated other comprehensive income due to reasons other than the Act may not be reclassified. As a result of adopting this guidance, in the first quarter of 2018, we reclassified approximately $24.8 million from accumulated other comprehensive income to retained earnings. We believe that reclassifying these amounts more accurately presents the balance of accumulated other comprehensive loss.

In November 2016, the FASB issued guidance on the presentation of restricted cash which requires that on the statement of cash flows, amounts generally described as restricted cash or restricted cash equivalents should be included within the beginning and ending balances of cash and cash equivalents. We adopted this guidance in the first quarter of 2018 on a retrospective basis. As a result, restricted cash amounts that have historically been included in prepaid expenses and other current assets and investments and other assets on our Consolidated Balance Sheets are now included with cash and cash equivalents on the Consolidated Statements of Cash Flows. We did not have any restricted cash as of June 30, 2018, however, these restricted cash balances totaled $29.2 million as of December 31, 2017, $32.8 million as of June 30, 2017 and $28.2 million as of December 31, 2016. Our restricted cash is used to pay deferred compensation and TEGNA Supplemental Retirement Plan (SERP) obligations. The adoption of this standard did not change our balance sheet presentation. See Note 10 for additional information about our restricted cash balances.

New accounting pronouncements not yet adopted: In February 2016, the FASB issued new guidance related to leases which will require lessees to recognize assets and liabilities on the balance sheet for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new guidance will require both types of leases to be recognized on the balance sheet. The new guidance is effective for us beginning in the first quarter of 2019. In July 2018, the FASB issued an amendment giving companies the option to apply the requirements of the standard in the period of adoption (January 1, 2019 for us), with no restatement of prior periods. A cumulative effect of applying the guidance would be recorded to the opening balance of retained earnings. We plan to utilize this adoption method. We are currently evaluating the effect the standard will have on our consolidated financial statements and related disclosures, but currently we estimate that our total assets and liabilities as presented on our Condensed Consolidated Balance Sheet as of June 30, 2018, will increase by less than 5% as a result of adopting this standard. Additionally, we do not expect there to be a significant difference in our pattern of lease expense recognition under the new standard.

In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments. The new guidance changes the way credit losses on accounts receivable are estimated. Under current GAAP, credit losses on accounts receivable are recognized once it is probable that such losses will occur. Under the new guidance, we will be required to estimate credit losses based on the expected amount of future collections which may result in earlier recognition of allowance for doubtful accounts. The new guidance is effective for public companies beginning in the first quarter of 2020 and will be adopted using a modified retrospective approach. We are currently evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures.
Revenue recognition: Revenue is recognized upon transfer of control of promised services to our customers in an amount that reflects the consideration we expect to receive in exchange for those services. Revenue is recognized net of any taxes

9



collected from customers, which are subsequently remitted to governmental authorities. Amounts received from customers in advance of providing services to our customers are recorded as deferred revenue.
Our primary source of revenue is earned through the sale of advertising and marketing services (AMS). This revenue stream includes all sources of our traditional television and radio advertising, as well as digital revenues including Premion, our digital marketing services business unit and other digital advertising across our platforms. Contracts within this revenue stream are short-term in nature (most often three months or less). Contracts generally consist of multiple deliverables, such as television commercials, or digital advertising solutions, that we have identified as individual performance obligations. Before performing under the contract we establish the transaction price with our customer based on the agreed upon rates for each performance obligation. There is no material variability in the transaction price during the term of the contract.
Revenue is recognized as we deliver our performance obligations to our customers. For our AMS revenue stream, we measure our performance based on the airing of the individual television commercials or display of digital advertisements. This measure is most appropriate as it aligns our revenue recognition with the value we are providing to our customers. The price of each individual commercial and digital advertisement is negotiated with our customer and is determined based on multiple factors, including, but not limited to, the programming and day-part selected, supply of available inventory, our station’s viewership ratings and overall market conditions (e.g., timing of year and strength of U.S. economy). Customers are billed monthly and payment is generally due 30 days after the date of invoice. Commission costs related to these contracts are expensed as incurred due to the short term nature of the contracts.
We also earn subscription revenue from retransmission consent contracts with multichannel video programming distributors (e.g., cable and satellite providers) and over the top providers (companies that deliver video content to consumers over the Internet). Under these multi-year contracts, we have performance obligations to provide our customers with our stations’ signals, as well as our consent to retransmit those signals to their customers. Subscription revenue is recognized in accordance with the guidance for licensing intellectual property utilizing a usage based method. The amount of revenue earned is based on the number of subscribers to which our customers retransmit our signal to, and the negotiated fee per subscriber included in our contract agreement. Our customers submit payments monthly, generally within 60-90 days after the month that service was provided. Our performance obligations are satisfied, and revenue is recognized, as we provide our consent for our customers to retransmit our signal. This measure toward satisfaction of our performance obligations and recognition of revenue is the most appropriate as it aligns our revenue recognition with the value that we are delivering to our customers through our retransmission consent.
We also generate revenue from the sale of political advertising. Contracts within this revenue stream are short term in nature (typically weekly or monthly buys during political campaigns). Customers pre-pay these contracts and we therefore defer the associated revenue until the advertising has been delivered, at which time we have satisfied our performance obligations and recognize revenue. Commission costs related to these contracts are expensed as incurred due to the short term nature of the contracts.
Our remaining revenue is comprised of various other services, primarily production services (for news content and commercials) and sublease rental income. Revenue is recognized as these various services are provided to our customers.
In instances where we sell services from more than one revenue stream to the same customer at the same time, we recognize one contract and allocate the transaction price to each deliverable element (e.g. performance obligation) based on the relative fair value of each element.
Revenue earned by categories in the second quarter and six months of 2018 and 2017 are shown below (amounts in thousands):
 
Quarter ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
AMS
$
281,847

 
$
296,346

 
$
564,786

 
$
565,358

Subscription
209,363

 
180,343

 
414,919

 
362,652

Political
25,709

 
7,446

 
33,315

 
9,604

Other
7,161

 
5,234

 
13,150

 
10,825

Total revenue
$
524,080

 
$
489,369

 
$
1,026,170

 
$
948,439


10



NOTE 2 – Goodwill and other intangible assets
The following table displays goodwill, indefinite-lived intangible assets, and amortizable intangible assets as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
Dec. 31, 2017
 
Gross
 
Accumulated Amortization
 
Gross
 
Accumulated Amortization
 
 
 
 
 
 
 
 
Goodwill
$
2,596,505

 
$

 
$
2,579,417

 
$

Indefinite-lived intangibles:
 
 
 
 
 
 
 
Television and radio station FCC licenses
1,384,186

 

 
1,191,950

 

Amortizable intangible assets:
 
 
 
 
 
 
 
Retransmission agreements
121,594

 
(70,671
)
 
110,191

 
(62,355
)
Network affiliation agreements
110,390

 
(24,622
)
 
43,485

 
(19,371
)
Other
28,865

 
(7,571
)
 
15,763

 
(6,394
)
Total indefinite-lived and amortizable intangible assets
$
1,645,035

 
$
(102,864
)
 
$
1,361,389

 
$
(88,120
)

Our retransmission agreements and network affiliation agreements are amortized on a straight-line basis over their estimated useful lives. Other intangibles primarily include customer relationships and favorable lease agreements which are amortized on a straight-line basis over their useful lives.

On February 15, 2018 we acquired a business consisting of assets in San Diego: KFMB-TV (the CBS affiliated station), KFMB-D2 (the CW station), and radio stations KFMB-AM and KFMB-FM (collectively KFMB). The estimated transaction price is $328.4 million, which includes a pending final working capital adjustment of $2.5 million. The initial transaction price of $325.9 million was paid in cash and funded through the use of available cash and borrowings under our revolving credit facility (see Note 5). In connection with this acquisition, we recorded indefinite lived intangible assets for FCC licenses of $192.2 million and amortizable intangible assets of $91.4 million, primarily related to retransmission and network affiliation agreements. The amortizable assets will be amortized over a weighted average period of 10 years. We also recognized goodwill of $17.1 million as a result of the acquisition.

The fair value of the assets acquired and liabilities assumed were based on a preliminary valuation and, as such, our estimates and assumptions are subject to change as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The primary area of purchase price allocation not yet finalized relates to income taxes.

NOTE 3 – Investments and other assets

Our investments and other assets consisted of the following as of June 30, 2018, and December 31, 2017 (in thousands):
 
June 30, 2018
 
Dec. 31, 2017
 
 
 
 
Cash value life insurance
$
51,163

 
$
51,188

Equity method investments
31,910

 
27,098

Cost method investments
20,637

 
17,374

Deferred debt issuance cost
10,709

 
6,048

Other long term assets
35,322

 
35,458

Total
$
149,741

 
$
137,166


Cash value life insurance: We are the beneficiary of life insurance policies on the lives of certain employees/retirees, which are recorded at their cash surrender value as determined by the insurance carrier. These policies are utilized as a partial funding source for deferred compensation and other non-qualified employee retirement plans. Gains and losses on these investments are included in Other non-operating expenses within our Consolidated Statement of Income and were not material for all periods presented.

Equity method investments: We hold several strategic equity method investments. Our largest equity method investment is our ownership in CareerBuilder, of which we own approximately 17% (or approximately 12% on a fully-diluted basis) and has an investment balance of $20.8 million as of June 30, 2018. Our ownership stake provides us with two seats on CareerBuilder’s board of directors and thus we concluded that we have significant influence over the entity.


11



On May 14, 2018, CareerBuilder sold Economic Modeling LLC (also known as EMSI). As a result, we received a dividend of $9.9 million in connection with the sale commensurate with our equity ownership in CareerBuilder. Our share of CareerBuilder’s gain on the sale was approximately $16.8 million which is included in Equity income (loss) in unconsolidated investments, net, on our Consolidated Statements of Income. During the six months ended June 30, 2018, we recorded $14.8 million in equity income from our CareerBuilder investment.
NOTE 4 – Income taxes
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $10.5 million as of June 30, 2018, and $10.7 million as of December 31, 2017. The amount of accrued interest and penalties payable related to unrecognized tax benefits was $1.8 million as of June 30, 2018, and $1.6 million as of December 31, 2017.
It is reasonably possible that the amount of unrecognized benefits with respect to certain of our unrecognized tax positions will increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits, lapses of statutes of limitations or other regulatory developments. At this time, we estimate the amount of gross unrecognized tax positions may be reduced by up to approximately $4.0 million within the next 12 months primarily due to lapses of statutes of limitations and settlement of ongoing audits in various jurisdictions.
Pub. L. No. 115-97, commonly referred to as the Tax Cuts and Jobs Act, or the Act, was enacted into law as of December 22, 2017. Among other provisions, the Act reduced the federal tax rate to 21% effective for us as of January 1, 2018. On the same date, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. We recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act. Our accounting is expected to be complete when our 2017 U.S. federal and state corporate income tax returns are filed in late 2018. During the six month period ending June 30, 2018, there were no changes made to the provisional amounts recognized in 2017. We will continue to analyze the effects of the Act on our consolidated financial statements. Additional impacts from the enactment will be recorded as they are identified during the measurement period as provided for in Staff Accounting Bulletin No. 118.
NOTE 5 – Long-term debt
Our long-term debt is summarized below (in thousands):

June 30, 2018
 
Dec. 31, 2017
 
 
 
 
Unsecured floating rate term loan due quarterly through August 2018
$
4,700

 
$
20,500

VIE unsecured floating rate term loans due quarterly through December 2018
323

 
646

Unsecured floating rate term loan due quarterly through June 2020
80,000

 
100,000

Unsecured floating rate term loan due quarterly through September 2020
195,000

 
225,000

Borrowings under revolving credit agreement expiring June 2023
186,000

 

Unsecured notes bearing fixed rate interest at 5.125% due October 2019
320,000

 
320,000

Unsecured notes bearing fixed rate interest at 5.125% due July 2020
600,000

 
600,000

Unsecured notes bearing fixed rate interest at 4.875% due September 2021
350,000

 
350,000

Unsecured notes bearing fixed rate interest at 6.375% due October 2023
650,000

 
650,000

Unsecured notes bearing fixed rate interest at 5.50% due September 2024
325,000

 
325,000

Unsecured notes bearing fixed rate interest at 7.75% due June 2027
200,000

 
200,000

Unsecured notes bearing fixed rate interest at 7.25% due September 2027
240,000

 
240,000

Total principal long-term debt
3,151,023

 
3,031,146

Debt issuance costs
(18,051
)
 
(20,551
)
Other (fair market value adjustments and discounts)
(1,512
)
 
(2,902
)
Total long-term debt
3,131,460

 
3,007,693

Less current portion of long-term debt maturities
323

 
646

Long-term debt, net of current portion
$
3,131,137

 
$
3,007,047


On February 15, 2018, we borrowed $220.0 million under the revolving credit facility primarily to finance the acquisition of KFMB.

12




On June 21, 2018, we entered into an amendment of our Amended and Restated Competitive Advance and Revolving Credit Agreement. Under the amended terms, the $1.51 billion of revolving credit commitments and letter of credit commitments have been extended until June 21, 2023. The amendment also extended our permitted total leverage ratio to remain at 5.0x through June 30, 2019, reducing to 4.75x for the fiscal quarter ending September 30, 2019 through the end of the fiscal quarter ending June 30, 2020, and then reducing to 4.50x for the fiscal quarter ending September 30, 2020 and thereafter.

As of June 30, 2018, we had unused borrowing capacity of $1.30 billion under our revolving credit facility.

NOTE 6 – Retirement plans

Our principal defined benefit pension plan is the TEGNA Retirement Plan (TRP). The disclosure table below includes the pension expenses of the TRP and the Supplemental Retirement Plan (SERP). In connection with our acquisition of KFMB, we assumed its preexisting pension plan which, as of the acquisition date, had a total net pension obligation of $7.3 million. All plan participants’ benefits were frozen prior to the acquisition date. During the second quarter of 2018, the KFMB pension plan was merged into the TRP. The total net pension obligations, both current and non-current liabilities, as of June 30, 2018, were $142.1 million ($5.1 million is recorded as a current obligation within accrued liabilities on the Condensed Consolidated Balance Sheet).

Our pension costs, which primarily include costs for the qualified TRP and the non-qualified SERP plan, are presented in the following table (in thousands):
 
Quarter ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Service cost-benefits earned during the period
$
6

 
$
311

 
$
6

 
$
436

Interest cost on benefit obligation
5,074

 
6,056

 
10,224

 
11,981

Expected return on plan assets
(7,480
)
 
(6,511
)
 
(14,930
)
 
(13,161
)
Amortization of prior service cost
34

 
167

 
84

 
317

Amortization of actuarial loss
1,293

 
2,187

 
2,543

 
4,162

Lump-sum payment charge

 

 
6,300

 

Expense for company-sponsored retirement plans
$
(1,073
)
 
$
2,210

 
$
4,227

 
$
3,735


The service cost component of our pension expense is recorded within the operating expense line items Cost of revenue, Business units - Selling, general and administrative, and Corporate - General and administrative within the Consolidated Statements of Income. All other components of the pension expense are included within the Other non-operating items line item of the Consolidated Statements of Income.

During the six months ended June 30, 2018 we made $6.4 million in cash contributions to the TRP, and plan to make additional contributions of $4.7 million to the TRP during the remainder of 2018. We made $1.7 million in cash contributions to the TRP during the six months ended June 30, 2017. During the six months ended June 30, 2018 and 2017, we made benefit payments to participants of the SERP of $28.8 million and $3.8 million, respectively.

In the first quarter of 2018, we incurred a special charge as a result of the lump sum payments under the SERP plan. This charge of $6.3 million was reclassified from accumulated other comprehensive income (loss) into net periodic benefit cost.

13



NOTE 7 – Supplemental equity information
The following table summarizes equity account activity for the six months ended June 30, 2018 and 2017 (in thousands):
 
TEGNA Inc. Shareholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
Balance at Dec. 31, 2017
$
995,041

 
$

 
$
995,041

Comprehensive income:
 
 
 
 
 
Net income
147,699

 

 
147,699

Other comprehensive income
7,026

 

 
7,026

Total comprehensive income
154,725

 

 
154,725

Dividends declared
(30,122
)
 

 
(30,122
)
Stock-based compensation
7,967

 

 
7,967

Treasury shares acquired
(5,831
)
 

 
(5,831
)
Impact from adoption of new revenue standard
(3,724
)
 

 
(3,724
)
Other activity, including shares withheld for employee taxes
(1,145
)
 

 
(1,145
)
Balance at June 30, 2018
$
1,116,911

 
$

 
$
1,116,911

 
 
 
 
 
 
Balance at Dec. 31, 2016
$
2,271,418

 
$
281,587

 
$
2,553,005

Comprehensive income:
 
 
 
 
 
Net loss
(72,638
)
 
(55,892
)
 
(128,530
)
Redeemable noncontrolling interests (income not available to shareholders)

 
(2,832
)
 
(2,832
)
Other comprehensive income
9,438

 
4,409

 
13,847

Total comprehensive loss
(63,200
)
 
(54,315
)
 
(117,515
)
Dividends declared
(45,055
)
 

 
(45,055
)
Stock-based compensation
10,160

 

 
10,160

Treasury shares acquired
(8,453
)
 

 
(8,453
)
Spin-off of Cars.com
(1,510,342
)
 

 
(1,510,342
)
Other activity, including shares withheld for employee taxes
(5,443
)
 
(2,179
)
 
(7,622
)
Balance at June 30, 2017
$
649,085

 
$
225,093

 
$
874,178



14



The following table summarizes the components of, and the changes in, Accumulated Other Comprehensive Loss (AOCL), net of tax and noncontrolling interests (in thousands):
 
Retirement Plans
 
Foreign Currency Translation
 
Other
 
Total
 
 
 
 
 
 
 
 
Quarters Ended:
 
 
 
 
 
 
 
Balance at Mar. 31, 2018
$
(126,257
)
 
$
264

 
$

 
$
(125,993
)
Other comprehensive income before reclassifications

 
283

 

 
283

Amounts reclassified from AOCL
969

 

 

 
969

Total other comprehensive income
969

 
283

 

 
1,252

Balance at June 30, 2018
$
(125,288
)
 
$
547

 
$

 
$
(124,741
)
 
 
 
 
 
 
 
 
Balance at Mar. 31, 2017
$
(126,063
)
 
$
(27,363
)
 
$
(7,965
)
 
$
(161,391
)
Other comprehensive income before reclassifications

 
3,755

 
586

 
4,341

Amounts reclassified from AOCL
1,431

 

 
9,743

 
11,174

Other comprehensive income
1,431

 
3,755

 
10,329

 
15,515

Balance at June 30, 2017
$
(124,632
)
 
$
(23,608
)
 
$
2,364

 
$
(145,876
)
 
 
 
 
 
 
 
 
 
Retirement Plans
 
Foreign Currency Translation
 
Other
 
Total
 
 
 
 
 
 
 
 
Six Months Ended:
 
 
 
 
 
 
 
Balance at Dec. 31, 2017
$
(107,037
)
 
$
114

 
$

 
$
(106,923
)
Other comprehensive income before reclassifications

 
433

 

 
433

Amounts reclassified from AOCL
6,593

 

 

 
6,593

Total other comprehensive income
6,593

 
433

 

 
7,026

Reclassification of stranded tax effects to retained earnings
(24,844
)
 

 

 
(24,844
)
Balance at June 30, 2018
$
(125,288
)
 
$
547

 
$

 
$
(124,741
)
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2016
$
(127,341
)
 
$
(28,560
)
 
$
(5,672
)
 
$
(161,573
)
Other comprehensive income (loss) before reclassifications

 
4,952

 
(1,707
)
 
3,245

Amounts reclassified from AOCL
2,709

 

 
9,743

 
12,452

Other comprehensive income
2,709

 
4,952

 
8,036

 
15,697

Balance at June 30, 2017
$
(124,632
)
 
$
(23,608
)
 
$
2,364

 
$
(145,876
)
 
 
 
 
 
 
 
 


15



Reclassifications from AOCL to the Statement of Income are comprised of pension and other post-retirement components. Pension and other post retirement reclassifications are related to the amortization of prior service costs, amortization of actuarial losses, and a lump-sum payment charge related to our SERP plan. Amounts reclassified out of AOCL are summarized below (in thousands):
 
Quarter ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Amortization of prior service (credit) cost
$
(101
)
 
$
32

 
$
(201
)
 
$
32

Amortization of actuarial loss
1,403

 
2,295

 
2,753

 
4,370

Reclassification of available for sale investment

 
9,743

 

 
9,743

Lump-sum payment charge

 

 
6,300

 

Total reclassifications, before tax
1,302

 
12,070

 
8,852

 
14,145

Income tax effect
(333
)
 
(896
)
 
(2,259
)
 
(1,693
)
Total reclassifications, net of tax
$
969

 
$
11,174

 
$
6,593

 
$
12,452


Performance Share Award Program

During the first quarter of 2018, the Leadership Development and Compensation Committee (LDCC) of the Board of Directors established new performance metrics for long-term incentive awards under the Company’s 2001 Omnibus Incentive Compensation Plan (Amended and restated as of May 4, 2010), as amended (Plan), for our executives designed to better reflect TEGNA as a pure-play broadcaster. On March 1, 2018, we granted certain employees performance share awards (PSAs) reflecting these new metrics with an aggregate target award of approximately 0.6 million shares of our common stock.

The number of shares earned under the March 1 PSAs will be determined based on the achievement of certain financial performance criteria (adjusted EBITDA and free cash flow as defined by the PSA) over a two-year cumulative financial performance period. If the financial performance criteria are met and certified by the LDCC, the shares earned under the PSA will be subject to an additional one year service period before the common stock is released to the employees. The PSAs do not pay dividends or allow voting rights during the performance period. Therefore, the fair value of the PSA is the quoted market value of our stock on the grant date less the present value of the expected dividends not received during the relevant performance period. The PSA provides the LDCC with limited discretion to make adjustments to the financial targets to ensure consistent year-to-year comparison for the performance criteria.

For expense recognition, in the period it becomes probable that the minimum performance criteria specified in the PSA will be achieved, we will recognize expense for the proportionate share of the total fair value of the shares subject to the PSA related to the vesting period that has already lapsed. Each reporting period we will adjust the fair value of the PSAs to the quoted market value of our stock price. In the event we determine it is no longer probable that we will achieve the minimum performance criteria specified in the PSA, we will reverse all of the previously recognized compensation expense in the period such a determination is made.


16



NOTE 8 – Earnings per share

Our earnings per share (basic and diluted) are presented below (in thousands of dollars, except per share amounts):
 
Quarter ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income from continuing operations
$
92,512

 
$
49,270

 
$
147,699

 
$
93,928

Loss from discontinued operations, net of tax

 
(241,699
)
 

 
(222,458
)
Net income attributable to noncontrolling interests from discontinued operations

 
62,077

 

 
55,892

Net income (loss) attributable to TEGNA Inc.
$
92,512

 
$
(130,352
)
 
$
147,699

 
$
(72,638
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
216,342

 
215,501

 
216,309

 
215,404

Effect of dilutive securities:
 
 
 
 


 


Restricted stock units
2

 
818

 
90

 
905

Performance share units

 
761

 
108

 
651

Stock options
171

 
732

 
246

 
731

Weighted average number of common shares outstanding - diluted
216,515

 
217,812

 
216,753

 
217,691

 
 
 
 
 
 
 
 
Earnings from continuing operations per share - basic
$
0.43

 
$
0.23

 
$
0.68

 
$
0.44

Loss from discontinued operations per share - basic

 
(0.83
)
 

 
(0.77
)
Net income (loss) per share - basic
$
0.43

 
$
(0.60
)
 
$
0.68

 
$
(0.33
)
 
 
 
 
 
 
 
 
Earnings from continuing operations per share - diluted
$
0.43

 
$
0.23

 
$
0.68

 
$
0.43

Loss from discontinued operations per share - diluted

 
(0.83
)
 

 
(0.77
)
Net income (loss) per share - diluted
$
0.43

 
$
(0.60
)
 
$
0.68

 
$
(0.34
)

Our calculation of diluted earnings per share includes the impact of the assumed vesting of outstanding restricted stock units, performance share units, and the exercise of outstanding stock options based on the treasury stock method when dilutive. The diluted earnings per share amounts exclude the effects of approximately 431,000 and 259,000 stock awards for the three and six months ended June 30, 2018, respectively; and 229,000 and 165,000 for the three and six months ended June 30, 2017, respectively, as their inclusion would be accretive to earnings per share.

NOTE 9 – Fair value measurement

We measure and record in the accompanying condensed consolidated financial statements certain assets and liabilities at fair value. U.S. GAAP establishes a hierarchy for those instruments measured at fair value that distinguishes between market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 - Quoted market prices in active markets for identical assets or liabilities;

Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 - Unobservable inputs developed using our own estimates and assumptions, which reflect those that a market participant would use.

Our deferred compensation investments were valued using Level 1 inputs with a fair value of $14.6 million as of December 31, 2017. Our deferred compensation assets were invested in a fixed income mutual fund. During the first quarter of 2018, we liquidated the deferred compensation investment to cover payments made to SERP participants (see Note 6).

Cost method investments in private companies are recorded at cost, less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. The carrying value of these investments was $20.6 million as of June 30, 2018 and $17.4 million as of December 31, 2017. During the six months ended June 30, 2018 there were no events or changes in circumstance that suggested an impairment or an observable price change to any of these investments. The cost method investments are classified in Level 3 of the fair value hierarchy.


17




We additionally hold other financial instruments, including cash and cash equivalents, receivables, accounts payable and debt. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The fair value of our total debt, based on the bid and ask quotes for the related debt (Level 2), totaled $3.20 billion at June 30, 2018, and $3.16 billion at December 31, 2017.

NOTE 10 – Supplemental cash flow information

The following table provides a reconciliation of cash and cash equivalents, as reported on our Condensed Consolidated Balance Sheets, to cash, cash equivalents, and restricted cash, as reported on our Condensed Consolidated Statement of Cash Flows (in thousands):
 
June 30, 2018
 
Dec. 31, 2017
 
June 30, 2017
 
Dec. 31, 2016
Cash and cash equivalents included in:
 
 
 
 
 
 
 
Continuing operations
$
24,503

 
$
98,801

 
$
65,669

 
$
15,879

Discontinued operations

 

 
78,762

 
61,041

Restricted cash equivalents included in:
 
 
 
 
 
 
 
Prepaid expenses and other current assets

 
29,240

 

 

Investments and other assets

 

 
32,783

 
28,197

Cash, cash equivalents and restricted cash
$
24,503

 
$
128,041

 
$
177,214

 
$
105,117


Our restricted cash equivalents consist of highly liquid investments that were held within a rabbi trust and are used to pay our deferred compensation and SERP obligations.

The following table provides additional information about cash flows related to interest and taxes (in thousands):
 
Six months ended June 30,
 
2018
 
2017
Supplemental cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
37,013

 
$
64,999

Cash paid for interest
$
91,360

 
$
104,834


NOTE 11 – Other matters

Commitments, contingencies and other matters

We, along with a number of our subsidiaries, are defendants in judicial and administrative proceedings involving matters incidental to our business. We do not believe that any material liability will be imposed as a result of these matters.

FCC Broadcast Spectrum Program

In April 2017, the FCC announced the completion of a voluntary incentive auction to reallocate certain spectrum currently occupied by television broadcast stations to mobile wireless broadband services, along with a related “repacking” of the television spectrum for remaining television stations. None of our stations will relinquish any spectrum rights as a result of the auction, and accordingly we will not receive any incentive auction proceeds. The FCC has, however, notified us that 13 of our stations will be repacked to new channels. The repacking requires that certain television stations move to different channels, and some stations may have smaller service areas and/or experience additional interference. The legislation authorizing the incentive auction and repacking established a $1.75 billion fund for reimbursement of costs incurred by stations required to change channels in the repacking. Subsequent legislation enacted on March 23, 2018, appropriated an additional $1 billion for the repacking fund, of which up to $750 million may be made available to repacked full power and Class A television stations and multichannel video programming distributors. Other funds are earmarked to assist affected low power television stations, television translator stations, and FM radio stations, as well for consumer education efforts. Some of our television translator stations have been or will be displaced as a result of the repacking, and thus may be eligible under the new repacking funds appropriation to seek reimbursement for costs incurred as a result of such displacement. No reimbursement funds will be available to television translator stations until the FCC completes a rulemaking to govern reimbursement requests by such stations, and there is no guarantee that all costs will be reimbursed. The FCC is statutorily required to complete its rulemaking regarding these reimbursements by March 23, 2019.

The repacking process is scheduled to occur over a 39-month period, divided into ten phases. Our full power stations have been assigned to phases two through nine, and a majority of our capital expenditures in connection with the repack will occur in

18



2018 and 2019. To date, we have incurred approximately $4.5 million in capital expenditures for the spectrum repack project (of which $3.2 million was purchased during the first six months of 2018). During the second quarter of 2018, we began receiving FCC reimbursements which totaled $2.0 million. The reimbursements were recorded as a contra operating expense within our asset impairment and facility consolidation charges line item on our Consolidated Statement of Income and reported as an investing inflow on the Consolidated Statement of Cash Flows.
    
Each repacked full power commercial television station, including each of our 13 repacked stations, has been allocated a reimbursement amount equal to approximately 92.5% of the station’s estimated repacking costs, as verified by the FCC’s fund administrator. Although we expect the FCC to make additional allocations from the fund, it is not guaranteed that the FCC will approve all reimbursement requests necessary to completely reimburse each repacked station for all amounts incurred in connection with the repack. Beyond the potential for not being reimbursed for all amounts we incur, it is still too early to predict the ultimate impact of the incentive auction and repacking upon our business.

NOTE 12 – Discontinued operations

Cars.com spin-off

On May 31, 2017, we completed the previously announced spin-off of Cars.com. The spin-off was effected through a pro rata distribution of all outstanding common shares of Cars.com to TEGNA stockholders of record at the close of business on May 18, 2017 (the Record Date). Stockholders retained their TEGNA shares and received one share of Cars.com for every three shares of TEGNA stock they owned on the Record Date. Cars.com began “regular way” trading on the New York Stock Exchange on June 1, 2017 under the symbol “CARS”.

CareerBuilder Sale

On July 31, 2017, we sold our majority ownership interest in CareerBuilder to an investor group led by investment funds managed by affiliates of Apollo Global Management, LLC, a leading global alternative investment manager, and the Ontario Teachers’ Pension Plan Board. Our share of the pre-tax net cash proceeds from the sale was $198.3 million. As part of the agreement, we remain an ongoing partner in CareerBuilder, retaining an approximately 17% interest (or approximately 12% on a fully-diluted basis) and two seats on CareerBuilder’s 10 person board. Following the sale, CareerBuilder is no longer consolidated within our reported operating results. Our remaining ownership interest is being accounted for as an equity method investment. In the first six months of 2018, we recorded $14.8 million of equity earnings from our remaining interest in CareerBuilder.

Financial Statement Presentation of Digital Segment

As a result of the Cars.com and CareerBuilder transactions described above, the operating results of our former Digital Segment have been included in discontinued operations in the Consolidated Statements of Income for the prior year period.

The following table presents the financial results of discontinued operations (in thousands):
 
Quarter ended June 30, 2017
 
Six months ended
June 30, 2017
 
 
 
 
Revenues
$
272,746

 
$
592,147

Operating expenses
577,492

 
866,627

Loss from discontinued operations, before income taxes
(304,535
)
 
(276,205
)
Benefit for income taxes
62,836

 
53,747

Income from discontinued operations, net of tax
(241,699
)
 
(222,458
)
Net loss attributable to noncontrolling interests from discontinued operations
$
62,077

 
$
55,892


The financial results reflected above may not represent our former Digital stand alone operating results, as the results reported within income from discontinued operations, net, include only certain costs that are directly attributable to those businesses and exclude certain corporate overhead costs that were previously allocated. For earnings per share information on discontinued operations, see Note 8.
 

19



In our Condensed Consolidated Statement of Cash Flows, the cash flows from discontinued operations are not separately classified, but supplemental cash flow information for these business units is presented below. The depreciation, amortization, and significant cash investing items of the discontinued operations were as follows (in thousands):
 
Six Months ended June 30, 2017
 
 
Depreciation
$
19,569

Amortization of intangible assets
40,300

Capital expenditures
$
34,482


20



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview

We are an innovative media company that serves the greater good of our communities through empowering stories, impactful investigations and innovative marketing services. With 47 television stations in 39 U.S. markets, we are the largest owner of big four network affiliates in the top 25 markets, reaching approximately one-third of all television households nationwide. Each television station also has a robust digital presence across online, mobile and social platforms, reaching consumers whenever, wherever they are. Each month, we reach approximately 50 million consumers on-air and approximately 30 million across our digital platforms. We have been consistently honored with the industry’s top awards, including Edward R. Murrow, George Polk, Alfred I. DuPont and Emmy Awards. Beyond integrated broadcast advertising products and services, we deliver results for advertisers through innovative solutions including our Over the Top (OTT) local advertising network, Premion; and our digital marketing services (DMS) business, a one-stop shop for local businesses to connect with consumers through digital marketing.

We operate one operating and reportable segment. The primary sources of our revenues are: 1) advertising & marketing services revenues, which include local and national non-political 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. 2018, 2016) and particularly in the second half of those years; and 4) other services, such as production of programming from third parties and production of advertising material.

Our business continues to evolve toward more predictable and less cyclical subscription-based revenue streams. Subscription revenue now represents approximately 40% of our total revenues and we expect this percentage to continue to increase. Our balance sheet combined with these strong accelerating dependable cash flows provide us the ability to pursue the path that offers the most attractive return on capital at any given point in time. We have a broad set of capital deployment opportunities ranging from retiring debt to create additional future flexibility, to investing in original, relevant and engaging content, to investing in growth businesses like our new OTT advertising service Premion, to value accretive acquisition-related growth. We will continue to review all opportunities in a disciplined manner, both strategically and financially. In the near-term, our priorities continue to be maintaining a strong balance sheet, enabling organic growth, acquiring attractively priced strategic assets and returning capital to shareholders in the form of dividends and opportunistic share repurchases.

Our corporate costs are separated from our business expenses and are recorded as general and administrative expenses in our Consolidated Income Statement. These costs include activities that are not directly attributable or allocable to our media business operations. 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.

On February 15, 2018, we acquired assets in San Diego consisting of KFMB-TV (the CBS affiliated station), KFMB-D2 (CW channel) and radio broadcast stations KFMB-AM and KFMB-FM (collectively KFMB). The estimated transaction price is $328.4 million, which includes a pending final working capital adjustment of $2.5 million. Through this transaction, we added a strong market to our portfolio. San Diego is the 29th largest U.S. TV market with 1.1 million households and the 17th largest radio market. KFMB-TV is the long-standing market leader in San Diego. It leads the market in audience ratings and share across all demographics and is number one in news across all major time slots. As a result of this acquisition, our U.S. television household reach increased by more than one million or one percentage point.


21



Consolidated Results from Operations

The following discussion is a comparison of our consolidated results from continuing operations 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 25 titled ‘Results from Operations - Non-GAAP Information’ for additional tables presenting information which supplements our financial information provided on a GAAP basis. Our consolidated results of continuing operations on a GAAP basis were as follows (in thousands, except per share amounts):
 
Quarter ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
524,080

 
$
489,369

 
7
%
 
$
1,026,170

 
$
948,439

 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 


 
 
 
 
 
 
Cost of revenues, exclusive of depreciation
264,294

 
229,683

 
15
%
 
522,787

 
461,091

 
13
%
Business units - Selling, general and administrative expenses, exclusive of depreciation
78,933

 
75,302

 
5
%
 
152,554

 
143,731

 
6
%
Corporate - General and administrative expenses, exclusive of depreciation
11,221

 
14,248

 
(21
%)
 
23,929

 
29,581

 
(19
%)
Depreciation
13,861

 
13,318

 
4
%
 
27,332

 
26,535

 
3
%
Amortization of intangible assets
7,962

 
5,388

 
48
%
 
14,744

 
10,777

 
37
%
Asset impairment and facility consolidation (gains) charges
(6,326
)
 
1,350

 
***

 
(6,326
)
 
3,533

 
***

Total operating expenses
$
369,945

 
$
339,289

 
9
%
 
$
735,020

 
$
675,248

 
9
%
 
 
 
 
 
 
 
 
 
 
 
 
Total operating income
$
154,135


$
150,080

 
3
%
 
$
291,150

 
$
273,191

 
7
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-operating items
(33,868
)
 
(76,897
)
 
(56
%)
 
(95,311
)
 
(135,855
)
 
(30
%)
Provision for income taxes
27,755

 
23,913

 
16
%
 
48,140

 
43,408

 
11
%
Net income from continuing operations
$
92,512

 
$
49,270

 
88
%
 
$
147,699

 
$
93,928

 
57
%
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations per share - basic
$
0.43

 
$
0.23

 
87
%
 
$
0.68

 
$
0.44

 
55
%
Earnings from continuing operations per share - diluted
$
0.43

 
$
0.23

 
87
%
 
$
0.68

 
$
0.43

 
58
%
 
 
 
 
 
 
 
 
 
 
 
 
*** Not meaningful

Revenues

Our Advertising and Marketing Services (AMS) category includes all sources of our traditional television advertising and digital revenues including Premion, DMS and other digital advertising and marketing revenues across our platforms. Our Subscription revenue category includes revenue earned from cable and satellite providers for the right to carry our signals and the distribution of TEGNA stations on OTT streaming services.
The following table summarizes the year-over-year changes in our revenue categories (in thousands):
 
Quarter ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
Advertising & Marketing Services
$
281,847

 
$
296,346

 
(5
%)
 
$
564,786

 
$
565,358

 
0
%
Subscription
209,363

 
180,343

 
16
%
 
414,919

 
362,652

 
14
%
Political
25,709

 
7,446

 
***

 
33,315

 
9,604

 
***

Other
7,161

 
5,234

 
37
%
 
13,150

 
10,825

 
21
%
Total
$
524,080

 
$
489,369

 
7
%
 
$
1,026,170

 
$
948,439

 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
*** Not meaningful

22




Revenues increased $34.7 million, or 7%, in the second quarter of 2018 compared to the same period in 2017. This net increase was primarily due to an increase in subscription revenue of $29.0 million, or 16%, in the second quarter of 2018, primarily due to annual rate increases under existing retransmission agreements and increases from OTT streaming service providers. Also contributing to the overall increase was political revenue which increased $18.3 million in the second quarter of 2018, largely due to activity related to the midterm elections cycle. These increases were partially offset by a decrease in AMS revenue of $14.5 million, or 5%, in the second quarter of 2018. This decline was primarily due to a softening of demand for traditional television advertising and a decline in DMS revenue (due to conclusion of a transition service agreement with Gannett in June 2017), which was partially offset by an increase in digital revenue (primarily from Premion) and revenue from our KFMB station acquisition.

In the first six months of 2018, revenues increased $77.7 million, or 8%, compared to the same period in 2017. This increase was primarily due to an increase in subscription revenue of $52.3, or 14%, in the first six months of 2018 primarily due to annual rate increases under existing retransmission agreements and increases from OTT streaming service providers. Also contributing to the overall increase was political revenue which increased $23.7 million in the second quarter of 2018, largely due to activity related to the midterm elections cycle. AMS revenue during first six months of 2018 were comparable to the same period in 2017. Increases in AMS from Winter Olympic and Super Bowl advertising, KFMB station acquisition, and digital advertising (primarily Premion) were offset by declines in DMS revenue (due to conclusion of a transition service agreement with Gannett in June 2017) and a softening of demand for traditional television advertising.

Cost of Revenues

Cost of revenues increased $34.6 million, or 15%, in the second quarter of 2018 compared to the same period in 2017. The increase was primarily due to a $16.4 million increase in programming costs, a $12.7 million increase in digital expenses (due to investments made in the Premion business), and an approximately $6.1 million increase comprised of the increase from our KFMB station acquisition and increases in costs from production of original content (Daily Blast LIVE!, local news, and Sister Circle). These increases were partially offset by a decline in DMS costs of $2.7 million primarily due to the conclusion of the transition services agreement with Gannett.

In the first six months of 2018, cost of revenues increased $61.7 million, or 13%, compared to the same period in 2017. The increase was primarily due to a $29.9 million increase in programming costs, a $22.7 million increase in digital expenses (due to investments made in the Premion business), and a $12.1 million increase comprised of the increase from our KFMB station acquisition and increases associated with production of original content (Daily Blast LIVE!, local news, and Sister Circle), and variable editorial costs tied to increased revenues (event coverage costs of Olympics and Super Bowl). These increases were partially offset by a decline in DMS costs of $8.7 million due to the conclusion of the transition services agreement with Gannett.

Business Units - Selling, General and Administrative Expenses

Business unit selling, general and administrative expenses increased $3.6 million, or 5%, in the second quarter of 2018 compared to the same period in 2017. The increase was primarily driven by a $4.4 million net increase related to the acquisition of KFMB and an increase in legal costs. This increase was partially offset by the absence of $0.8 million in severance expenses incurred in the second quarter of 2017.

In the six months ended June 30, 2018, business unit selling, general and administrative expenses increased $8.8 million, or 6% compared to the same period in 2017. The increase was primarily the result of a $10.4 million net increase mostly driven by incremental revenue from the Olympics and Super Bowl, the acquisition of KFMB and legal costs. These increases were offset by the absence of $1.6 million of severance expenses incurred in 2017.

Corporate General and Administrative Expenses

Corporate general and administrative expenses decreased $3.0 million, or 21%, in the second quarter of 2018 compared to the same period in 2017. The decrease was primarily due to continued reductions in various departments associated with the right-sizing of the corporate function following the spin-off of Cars.com and the sale of our majority interest in CareerBuilder in 2017 and lower corporate rent expense.

In the six months ended June 30, 2018, corporate general and administrative experiences decreased $5.7 million, or 19%, compared to the same period in 2017. The decrease was primarily due the absence of $0.9 million in severance incurred in the first six months of 2017, and lower corporate expenses associated with the right-sizing of the corporate function following the spin-off of Cars.com and the sale of our majority interest in CareerBuilder in 2017.


23



Depreciation Expense

Depreciation expense increased less than $1.0 million in both the second quarter and first six months 2018 compared to the same periods in 2017. The increases were primarily due to incremental depreciation expense resulting from our acquisition of KFMB.

Amortization Expense

Amortization expense increased $2.6 million, or 48%, in the second quarter of 2018 and $4.0 million or 37% in the first six months of 2018 compared to the same periods in 2017. The increases were primarily due to incremental amortization expense resulting from our acquisition of KFMB.

Asset Impairment and Facility Consolidation (Gains) Charges

We had $6.3 million of net asset impairment and facility consolidation gains in the second quarter of 2018 compared to charges of $1.4 million in the second quarter of 2017. The 2018 net gains primarily consist of a gain recognized on the sale of real estate in Houston and gains due to reimbursements received from the Federal Communications Commission (FCC) for required spectrum repacking. These gains were partially offset by a $0.6 million early lease termination charge. The 2017 charges related to the consolidation of office space at corporate headquarters and at our DMS business unit.

In the first six months of 2018, we recognized net gains of $6.3 million, compared to $3.5 million of charges recognized in the same period in 2017. The 2018 net gain relates to the gains discussed above. The 2017 charges consisted of the above mentioned $1.4 million in consolidation charges and $2.2 million of non-cash asset impairment charge associated with the sale of a building by our one of our stations.

Operating Income

Our operating income increased $4.1 million, or 3%, in the second quarter of 2018 compared to the same period in 2017. The increase was driven by the changes in revenue and expenses discussed above. Revenue increased by $34.7 million, or 7%, in the second quarter. As a result, our consolidated operating margins were 29% and 31% in the second quarter of 2018 and 2017, respectively.

Our operating income increased $18.0 million, or 7%, in the first six months of 2018 compared to the same period in 2017. The increase was driven by the changes in revenue and expenses discussed above. Revenue increased by $77.7 million, or 8%, in the first six months. As a result, our consolidated operating margins were 28% and 29% in the first six months of 2018 and 2017, respectively.

Non-Operating Expense

Non-operating expense decreased $43.0 million, or 56%, in the second quarter of 2018 compared to the same period in 2017. This decrease was partially due to a $16.5 million increase in equity earnings driven by recording equity income of $16.8 million related to our share of CareerBuilder’s gain on the sale of their Economic Modeling Specialists International business. The decrease was also attributable to a decline in transaction costs of $6.8 million in 2018 as compared to 2017 as well as the absence of impairment charges recognized in 2017 of $9.3 million (related to the write-off of a note receivable from a former equity investment and impairment on our former investment in Gannett stock). Pension expense was $3.1 million lower due to recent strong investment returns achieved. Lastly, interest expense declined $5.7 million in 2018 driven by lower average debt outstanding, partially offset by slightly higher interest rates. The total average outstanding debt was $3.18 billion for the second quarter of 2018, compared to $3.81 billion in the same period of 2017. The weighted average interest rate on total outstanding debt was 5.88% for the second quarter of 2018, compared to 5.51% in the same period of 2017.

In the first six months of 2018, non-operating expenses decreased $40.5 million or 30% compared to the same period in 2017. The decrease was partially due to our $16.8 million gain from CareerBuilder in 2018 and the absence of the $9.3 million of impairments in 2018, both discussed above. Also contributing to the decrease was a decline in transaction expenses of $4.2 million in 2018. Lastly, interest expense declined $13.4 million in the first six months of 2018 compared to the same period in 2017 driven by lower average debt outstanding, partially offset by slightly higher interest rates. The total average outstanding debt was $3.15 billion during the first six months in 2018 compared to $3.93 billion in 2017. The weighted average interest rate on total outstanding debt was 5.85% for the first six months of 2018 compared to 5.39% for the same period of 2017.


24



Income Tax Expense

Income tax expense increased to $27.8 million in the second quarter of 2018 from $23.9 million in the second quarter of 2017, an increase of 16%. Income tax expense increased $4.7 million in the first six months of 2018 compared to the same period in 2017, an increase of 11%. The income tax increases were primarily due to increases in net income before tax, partially offset by a reduction in the federal corporate tax rate from 35% to 21% as a result of the enactment of Pub. L. No. 115-97 (the Act). Our reported effective income tax rate was 23.1% for the second quarter of 2018, compared to 32.7% for continuing operations for the second quarter of 2017. Our reported effective income tax rate was 24.6% for the first six months of 2018, compared to 31.6% for the same period in 2017. The tax rates for the second quarter and first six months of 2018 are lower than the comparable rate in 2017 primarily due to the corporate tax rate reduction from 35% to 21%, partially offset by the repeal of the domestic manufacturing deduction, both in accordance with the Act, as well as an increase in state income taxes due to the acquisition of KFMB.

Income From Continuing Operations

Income from continuing operations was $92.5 million, or $0.43 per diluted share, in the second quarter of 2018 compared to $49.3 million or $0.23 per diluted share during the same period in 2017. For the first six months of 2018, we reported net income from continuing operations of $147.7 million, or $0.68 per diluted share, compared to $93.9 million, or $0.43 per diluted share, for the same period in 2017. Both income from continuing operations and earnings per share were affected by the factors discussed above.

The weighted average number of diluted shares outstanding in the second quarter of 2018 and 2017 was 216.5 million and 217.8 million, respectively. The weighted average number of diluted shares outstanding in the first six months of 2018 and 2017 was 216.8 million and 217.7 million, respectively.
Results from Operations - Non-GAAP Information

Presentation of Non-GAAP information

We use non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, the related GAAP measures, nor should they be considered superior to the related GAAP measures, and should be read together with financial information presented on a GAAP basis. Also, our non-GAAP measures may not be comparable to similarly titled measures of other companies.

Management and our Board of Directors use the non-GAAP financial measures for purposes of evaluating business unit and consolidated company performance. Furthermore, the Leadership Development and Compensation Committee of our Board of Directors uses non-GAAP measures such as Adjusted EBITDA, non-GAAP net income, non-GAAP EPS, Adjusted revenues 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 discuss in this Form 10-Q non-GAAP financial performance measures that exclude from our reported GAAP results the impact of “special items” consisting of severance expense, items related to asset impairment and facility consolidations, TEGNA Foundation donations, certain non-operating expenses (business acquisition and integration costs), costs associated with the Cars.com spin-off transaction, tax impacts associated with the acquisition of KFMB, and a net gain on equity method investment. We believe that such gains, expenses and charges are not indicative of normal, ongoing operations. Such items vary from period to period and are significantly impacted by the timing and nature of these events. Therefore, while we may incur or recognize these types of gains, expenses and charges 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), non-GAAP financial performance measures that we believe offers a useful view of the overall operation of our businesses. We define Adjusted EBITDA as net income from continuing operations before (1) interest expense, (2) income taxes, (3) equity income (losses) in unconsolidated investments, net, (4) other non-operating items such as corporate transaction expenses (such as business acquisition and disposition costs) and investment income, (5) severance expense, (6) facility consolidation charges, (7) impairment charges, (8) depreciation and (9) amortization. The most directly comparable GAAP financial measure to Adjusted EBITDA is Net income from continuing operations. 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 alternative 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 free 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.


25



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 net incremental Olympic and Super Bowl revenue, (2) Political revenues, and (3) revenues associated with a discontinued portion of our DMS business. 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 broadcast business.

We also discuss free cash flow, a non-GAAP liquidity measure. Free cash flow is defined as “net cash flow from operating activities” as reported on the statement of cash flows reduced by “purchase of property and equipment”. We believe that free cash flow is a useful measure for management and investors to evaluate the level of cash generated by operations and the ability of its operations to fund investments in new and existing businesses, return cash to shareholders under the company’s capital program, repay indebtedness, add to our cash balance, or use in other discretionary activities. We use free cash flow to monitor cash available for repayment of indebtedness and in discussions with the investment community. Like Adjusted EBITDA, free cash flow is not intended to be a measure of cash flow available for management’s discretionary use.

Discussion of special charges affecting reported results

Our results for the quarter and first six months ended June 30, 2018 included the following items we consider “special items” and are not indicative of our normal ongoing operations:

Operating asset impairment and facility consolidation net gain primarily consists of a gain recognized on the sale of real estate in Houston and gain due to reimbursements from the FCC for required spectrum repacking. These gains are partially offset by an early lease termination payment;
Pension lump-sum payment charge as a result of payments that were made to certain SERP plan participants in early 2018;
Other non-operating items associated with business acquisition and integration costs, a deferred tax provision impact related to our acquisition of KFMB, and a charitable donation made to the TEGNA Foundation; and
A gain recognized in our equity income in unconsolidated investments, related to our share of CareerBuilder’s gain on the sale of their EMSI business.
Our results for the quarter and first six months ended June 30, 2017 included the following special items:
Severance charges which included payroll and related benefit costs;
Operating asset impairment and facility consolidation charges related to the consolidation of office space at corporate headquarters and at our DMS business unit;
Other non-operating items associated with costs of the spin-off of our Cars.com business unit, a charitable donation made to the TEGNA Foundation, and non-cash asset impairment charges associated with write off of a note receivable associated with an equity method investment; and
Special tax benefit related to deferred tax remeasurement attributable to the spin-off of our Cars.com business unit.

26




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
 
 
 
 
Quarter ended June 30, 2018
 
GAAP
measure
 
Operating asset impairment and facility consolidation
 
Other non-operating items
 
Net gain on equity method investment
 
Non-GAAP measure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset impairment and facility consolidation (gains) charges
 
$
(6,326
)
 
$
6,326

 
$

 
$

 
$

 

Operating expenses
 
369,945

 
6,326

 

 

 
376,271

 
 
Operating income
 
154,135

 
(6,326
)
 

 

 
147,809

 
 
Equity income (loss) in unconsolidated investments, net
 
15,547

 

 

 
(16,758
)
 
(1,211
)
 

Other non-operating items
 
(311
)
 

 
5,722

 

 
5,411

 

Total non-operating expense
 
(33,868
)
 

 
5,722

 
(16,758
)
 
(44,904
)
 

Income before income taxes
 
120,267

 
(6,326
)
 
5,722

 
(16,758
)
 
102,905

 


Provision (benefit) for income taxes
 
27,755

 
2

 
971

 
(4,216
)
 
24,512

 

Net income from continuing operations
 
92,512

 
(6,328
)
 
4,751

 
(12,542
)
 
78,393

 


Net income from continuing operations per share-diluted (a)
 
$
0.43

 
$
(0.03
)
 
$
0.03

 
$
(0.06
)
 
$
0.36

 

(a) Per share amounts do not sum due to rounding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Special Items
 
 
Quarter ended June 30, 2017
 
GAAP
measure
 
Severance expense
 
Operating asset impairment and facility consolidation
 
Other non-operating items
 
Special tax benefit
 
Non-GAAP measure
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset impairment and facility consolidation charges
 
$
1,350

 
$

 
$
(1,350
)
 
$

 
$

 
$

Operating expenses
 
339,289

 
(1,354
)
 
(1,350
)
 

 

 
336,585

Operating income
 
150,080

 
1,354

 
1,350

 

 

 
152,784