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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
_______________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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.)
 
 
 
 
 
   8350 Broad Street, Suite 2000,
Tysons,
Virginia
 
22102-5151
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
(703)
873-6600
 
 
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
TGNA
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding as of April 30, 2020 was 218,530,133.
 



INDEX TO TEGNA INC.
March 31, 2020 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 (Unaudited)
 
Mar. 31, 2020
 
Dec. 31, 2019
 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
35,059

 
$
29,404

Accounts receivable, net of allowances of $5,810 and $3,723, respectively
541,324

 
581,765

Other receivables
16,316

 
19,640

Syndicated programming rights
34,683

 
49,616

Prepaid expenses and other current assets
19,501

 
26,899

Total current assets
646,883

 
707,324

Property and equipment
 
 
 
Cost
1,014,934

 
997,736

Less accumulated depreciation
(529,476
)
 
(512,015
)
Net property and equipment
485,458

 
485,721

Intangible and other assets
 
 
 
Goodwill
2,967,383

 
2,950,587

Indefinite-lived and amortizable intangible assets, less accumulated amortization of $184,669 and $168,452, respectively
2,538,687

 
2,561,614

Right-of-use assets for operating leases
104,611

 
103,461

Investments and other assets
151,083

 
145,269

Total intangible and other assets
5,761,764

 
5,760,931

Total assets
$
6,894,105

 
$
6,953,976

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 (Unaudited)
 
Mar. 31, 2020
 
Dec. 31, 2019
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
54,473

 
$
51,894

Accrued liabilities
 
 


   Compensation
33,389

 
63,876

   Interest
34,525

 
46,013

   Contracts payable for programming rights
122,045

 
119,872

   Other
69,679

 
60,983

Dividends payable

 
15,188

Income taxes payable
9,399

 
3,332

Total current liabilities
323,510

 
361,158

Noncurrent liabilities
 
 
 
Income taxes
7,016

 
7,490

Deferred income tax liability
527,057

 
515,621

Long-term debt
4,071,897

 
4,179,245

Pension liabilities
121,947

 
127,146

Operating lease liabilities
106,319

 
105,902

Other noncurrent liabilities
64,010

 
67,037

Total noncurrent liabilities
4,898,246

 
5,002,441

Total liabilities
5,221,756

 
5,363,599

 
 
 
 
Redeemable noncontrolling interest
14,093

 

 
 
 
 
Commitments and contingent liabilities (see Note 11)


 


 
 
 
 
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
152,106

 
247,497

Retained earnings
6,725,911

 
6,655,088

Accumulated other comprehensive loss
(141,175
)
 
(142,597
)
Less treasury stock at cost, 106,066,299 shares and 106,955,082 shares, respectively
(5,403,005
)
 
(5,494,030
)
Total equity
1,658,256

 
1,590,377

Total liabilities, redeemable noncontrolling interest and equity
$
6,894,105

 
$
6,953,976

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 Mar. 31,
 
2020
 
2019
 
 
 
 
Revenues
$
684,189

 
$
516,753

 
 
 
 
Operating expenses:
 
 
 
Cost of revenues1
369,368


281,311

Business units - Selling, general and administrative expenses
92,968


71,465

Corporate - General and administrative expenses
21,714

 
14,735

Depreciation
16,900


14,917

Amortization of intangible assets
16,216


8,689

Spectrum repacking reimbursements and other, net
(7,515
)

(7,013
)
Total
509,651

 
384,104

Operating income
174,538

 
132,649

 
 
 
 
Non-operating income (expense):
 
 
 
Equity income in unconsolidated investments, net
9,015

 
12,028

Interest expense
(56,960
)
 
(46,385
)
Other non-operating items, net
(19,270
)
 
(1,539
)
Total
(67,215
)

(35,896
)
 
 
 
 
Income before income taxes
107,323

 
96,753

Provision for income taxes
21,125


22,774

Net Income
86,198

 
73,979

Net loss attributable to redeemable noncontrolling interest
110

 

Net income attributable to TEGNA Inc.
$
86,308

 
$
73,979

 
 
 
 
Net income per share – basic
$
0.40

 
$
0.34

Net income per share – diluted
$
0.39

 
$
0.34

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic shares
218,277

 
216,709

Diluted shares
218,863

 
217,202

 
 
 
 
1 Cost of revenues exclude charges for depreciation and amortization expense, which are shown separately above.
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 Mar. 31,
 
2020
 
2019
 
 
 
 
Net income
$
86,198

 
$
73,979

Other comprehensive income, before tax:
 
 
 
Foreign currency translation adjustments
402

 
14

Recognition of previously deferred post-retirement benefit plan costs
1,498

 
1,425

Other comprehensive income, before tax
1,900

 
1,439

Income tax effect related to components of other comprehensive income
(478
)
 
(360
)
Other comprehensive income, net of tax
1,422

 
1,079

Comprehensive income
87,620

 
75,058

Comprehensive loss attributable to redeemable noncontrolling interest
110

 

Comprehensive income attributable to TEGNA Inc.
$
87,730

 
$
75,058

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
 
Quarter ended Mar. 31,
 
2020
 
2019
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
86,198


$
73,979

Adjustments to reconcile net income to net cash flow from operating activities:
 
 
 
Depreciation and amortization
33,116

 
23,606

Stock-based compensation
(757
)
 
4,433

     Company stock 401(k) contribution
5,138

 

Gains on sales of assets

 
(2,880
)
Equity loss (income) from unconsolidated investments, net
(9,015
)
 
(12,028
)
Pension contributions, net of expense
(3,642
)

(242
)
Change in other assets and liabilities, net
66,326

 
(38,459
)
Net cash flow from operating activities
177,364

 
48,409

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(13,264
)
 
(24,810
)
Reimbursements from spectrum repacking
7,515

 
4,134

Payments for acquisitions of businesses and other assets, net of cash acquired
(15,000
)
 
(108,872
)
Payments for investments
(509
)
 
(1,171
)
Proceeds from investments
695

 
618

Proceeds from sale of assets and businesses
5,000

 
20,064

Net cash flow used for investing activities
(15,563
)
 
(110,037
)
Cash flows from financing activities:
 
 
 
Payments under revolving credit facilities, net
(118,000
)
 
(30,000
)
Proceeds from borrowings
1,000,000

 

Debt repayments
(985,000
)
 
(25,000
)
Payments for debt issuance costs and early redemption fee
(27,603
)
 

Proceeds from sale of minority ownership interest in Premion
14,000



Dividends paid
(30,470
)
 
(15,078
)
Other, net
(9,073
)
 
(338
)
Net cash flow used for financing activities
(156,146
)
 
(70,416
)
Increase (decrease) in cash
5,655

 
(132,044
)
Balance of cash, beginning of period
29,404

 
135,862

Balance of cash, end of period
$
35,059

 
$
3,818

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid (received) for income taxes, net of refunds
$
793

 
$
(397
)
Cash paid for interest
$
66,240

 
$
27,412

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

7



TEGNA Inc.
CONSOLIDATED STATEMENTS OF EQUITY
Unaudited, in thousands of dollars, except per share data

Quarters Ended:
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
loss
Treasury
stock
Total
Balance at Dec. 31, 2019
$
324,419

$
247,497

$
6,655,088

$
(142,597
)
$
(5,494,030
)
$
1,590,377

Net Income attributable to TEGNA Inc.
 
 
86,308

 
 
86,308

Other comprehensive income, net of tax
 
 
 
1,422

 
1,422

Total comprehensive income
 
 
 
 
 
87,730

Dividends declared: $0.07 per share
 
 
(15,282
)
 
 
(15,282
)
Company stock 401(k) contribution
 
(17,831
)
 
 
22,969

5,138

Stock-based awards activity
 
(77,129
)
 
 
68,056

(9,073
)
Stock-based compensation
 
(757
)
 
 
 
(757
)
Adjustment of redeemable noncontrolling interest to redemption value
 
 
(203
)
 
 
(203
)
Other activity
 
326

 
 
 
326

Balance at Mar. 31, 2020
$
324,419

$
152,106

$
6,725,911

$
(141,175
)
$
(5,403,005
)
$
1,658,256

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
loss
Treasury
stock
Total
Balance at Dec. 31, 2018
$
324,419

$
301,352

$
6,429,512

$
(136,511
)
$
(5,577,848
)
$
1,340,924

Net Income attributable to TEGNA Inc.
 
 
73,979

 
 
73,979

Other comprehensive income, net of tax
 
 
 
1,079

 
1,079

Total comprehensive income
 
 
 
 
 
75,058

Dividends declared: $0.07 per share
 
 
(15,139
)
 
 
(15,139
)
Stock-based awards activity
 
(43,275
)
 
 
42,937

(338
)
Stock-based compensation
 
4,433

 
 
 
4,433

Other activity
 
313

 
 
 
313

Balance at Mar. 31, 2019
$
324,419

$
262,823

$
6,488,352

$
(135,432
)
$
(5,534,911
)
$
1,405,251

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


8



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 statement of the results for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with our (or TEGNA’s) audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

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. During the first quarter of 2020, a novel strain of coronavirus (COVID-19) believed to have been first identified in Wuhan, China, spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The federal and state governments in the United States have responded by instituting a wide variety of mitigating control measures, including, mandatory quarantines, closures of non-essential businesses and all other places of social interaction, while implementing “shelter in place” orders and travel restrictions. Such mitigating measures began negatively impacting our advertising and marketing services (AMS) revenue stream in mid-March as demand for non-political advertising softened. This trend has continued into the second quarter of 2020 as such measures remain largely in place as of this date.

In mid-March, as a result of the expected near-term impact on non-political advertising demand caused by the COVID-19 pandemic, we implemented cost saving measures to reduce operating expenses and discretionary capital expenditures. These measures include implementing temporary furloughs for one week during the second quarter for most personnel, reducing compensation for executives and our board of directors, and reducing non-critical discretionary spending. As is true of most businesses, the ultimate magnitude of the COVID-19 pandemic cannot be reasonably estimated at this time, but we do expect it to have a material adverse effect on our near-term results of operations.

While it is too early to predict the duration of the pandemic or the long term effects on our financial condition, results of operations, and liquidity, we use the best information available in developing significant estimates included in our financial statements. Actual results could differ from these estimates, and these differences resulting from changes in facts and circumstances could be material. 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. We eliminate all intercompany balances, transactions, and profits in consolidation. Investments in entities over which we have significant influence, but do not have control, are accounted for under the equity method. Our share of net earnings and losses from these ventures is included in “Equity (loss) income in unconsolidated investments, net” in the Consolidated Statements of Income.

We operate one operating and reportable segment, which primarily consists of our 62 television stations and two radio stations operating in 51 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 2020: In June 2016, the Financial Accounting Standards Board (FASB) issued new guidance related to the measurement of credit losses on financial instruments. The new guidance changed the way credit losses on accounts receivable are estimated. Under previous GAAP, credit losses on accounts receivable were recognized once it was probable that such losses will occur. Under the new guidance, we are required to estimate credit losses based on the expected amount of future collections which may result in earlier recognition of doubtful accounts. We adopted the new guidance on January 1, 2020 using a modified retrospective approach. Due to the short-term nature of our accounts receivable balance, there was no material change to our allowance for doubtful accounts as a result of adopting this new guidance.

In August 2018, the FASB issued new guidance that changed disclosures related to defined benefit pension and other postretirement benefit plans. The guidance removed disclosures that are no longer economically relevant, clarifies certain existing disclosure requirements and added some new disclosures. The most relevant elimination for us is the annual disclosure of the amount of gain/loss and prior service cost/credit amortization expected in the following year. Additions most relevant to us include annually disclosing narrative explanations of the drivers for significant changes in plan obligations or assets, and disclosure for cost of living adjustments for certain participants of our TEGNA retirement plan. We will include the new disclosures in our 2020 Annual Report on Form 10-K and will apply them on a retrospective basis.


9



In March 2019, the FASB issued new guidance related to the accounting for episodic television series. The most significant aspect of this new guidance that was applicable to us relates to the level at which our capitalized programming assets are monitored for impairment. Under the new guidance these assets are monitored at the film group level which is the lowest level at which independently identifiable cash flows are identifiable. We adopted the new guidance prospectively on January 1, 2020. There was no material impact on our consolidated financial statements and related disclosures as of the adoption date.

Programming assets are recorded at the gross amount of the related liability when the programs are available for telecasting. The related assets are recorded at the lower of cost or estimated net realizable value. Expense is recognized on a straight line basis which appropriately matches the cost of the programs with the revenues associated with them. We incurred programming expense of $18.2 million and $13.5 million in the first quarter of 2020 and 2019, respectively. Programming expense is included in the “cost of revenue” line item of our Consolidated Statements of Income. As of March 31, 2020 we had $34.7 million of programming assets which will be expensed within the next twelve months.

We evaluate the net realizable value of our program broadcasting contract assets when a triggering event occurs, such as a change in our intended usage, or sustained lower-than-expected ratings for the program. Impairment analyses are performed at the syndicated program level (across all stations that utilize the program). We determine the net realizable value based on a projection of the estimated revenues less projected direct costs associated with the syndicated program (which is classified as Level 3 in the fair value hierarchy). If the future direct costs exceed expected revenues, impairment of the program asset may be required. No impairment charges were recognized in 2020 or 2019.

New accounting guidance not yet adopted: There is currently no pending accounting guidance that we expect to have a material impact on our consolidated financial statements or disclosures.

Trade receivables and allowances for doubtful accounts: Trade receivables are recorded at invoiced amounts and generally do not bear interest. The allowance for doubtful accounts reflects our estimate of credit exposure, determined principally on the basis of our collection experience, aging of our receivables and any specific reserves needed for certain customers based on their credit risk. Our allowance also takes into account expected future trends which may impact our customer’s ability to pay, such as economic growth, unemployment and demand for their products and services. We monitor the credit quality of our customers and their ability to pay through the use of analytics and communication with individual customers. As of March 31, 2020, our allowance for doubtful accounts was $5.8 million as compared to $3.7 million as of December 31, 2019.

Revenue recognition: Revenue is recognized upon the transfer of control of promised services to our customers in an amount that reflects the consideration we expect to receive in exchange for those services. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Amounts received from customers in advance of providing services to our customers are recorded as deferred revenue.

The primary sources of our revenues are: 1) advertising & marketing services revenues, which include local and national non-political television advertising, digital marketing services (including Premion), and advertising on the stations’ websites and tablet and mobile products; 2) subscription revenues, reflecting fees paid by satellite, cable, OTT (companies that deliver video content to consumers over the Internet) and telecommunications providers to carry our television signals on their systems; 3) political advertising revenues, which are driven by even year election cycles at the local and national level (e.g. 2020, 2018) and particularly in the second half of those years; and 4) other services, such as production of programming and advertising material.

Revenue earned by these sources in the first quarter of 2020 and 2019 are shown below (amounts in thousands):
 
Quarter ended Mar. 31,
 
2020
 
2019
 
 
 
 
Advertising & Marketing Services
$
295,153

 
$
264,402

Subscription
332,802

 
241,575

Political
47,387

 
2,704

Other
8,847

 
8,072

Total revenues
$
684,189

 
$
516,753




10



NOTE 2 – Acquisitions

During 2019, we acquired the television stations listed in the table below, and a summary of each acquisition follows:

Market
Station
Affiliation
Seller
Indianapolis, IN
WTHR
NBC
Dispatch Broadcast Group
Columbus, OH
WBNS
CBS
Dispatch Broadcast Group
Hartford-New Haven, CT
WTIC/WCCT
FOX/CW
Nexstar Media Group
Harrisburg-Lancaster-Lebanon-York, PA
WPMT
FOX
Nexstar Media Group
Memphis, TN
WATN/WLMT
ABC/CW
Nexstar Media Group
Wilkes Barre-Scranton, PA
WNEP
ABC
Nexstar Media Group
Des Moines-Ames, IA
WOI/KCWI
ABC/CW
Nexstar Media Group
Huntsville-Decatur-Florence, AL
WZDX
FOX
Nexstar Media Group
Davenport, IA and Rock Island-Moline, IL
WQAD
ABC
Nexstar Media Group
Ft. Smith-Fayetteville-Springdale-Rogers, AR
KFSM
CBS
Nexstar Media Group
Toledo, OH
WTOL
CBS
Gray Television
Midland-Odessa, TX
KWES
NBC
Gray Television


Nexstar Stations

On September 19, 2019, we completed our acquisition of 11 local television stations in eight markets, including eight Big Four affiliates, from Nexstar Media Group (the Nexstar Stations). These stations were divested by Nexstar Media Group in connection with its acquisition of Tribune Media Company. The purchase price for the Nexstar Stations was $769.9 million which included a base purchase price of $740.0 million and working capital of $29.9 million (approximately $0.8 million was paid in April 2020 after finalization of working capital true-up with the sellers).

Dispatch Stations

On August 8, 2019, we completed the acquisition of Dispatch Broadcast Group’s two top-rated television stations and two radio stations (the Dispatch Stations). The purchase price for the Dispatch Stations was $560.5 million which consisted of a base purchase price of $535.0 million and working capital and cash acquired of $25.5 million.

Justice and Quest Multicast Networks

On June 18, 2019, we completed the acquisition of the remaining approximately 85% interest that we did not previously own in the multicast networks Justice Network and Quest from Cooper Media. Cash paid for this acquisition was $77.1 million (which included $4.6 million for working capital).
 
Gray Stations

On January 2, 2019, we completed our acquisition of WTOL, the CBS affiliate in Toledo, OH, and KWES, the NBC affiliate in Midland-Odessa, TX from Gray Television, Inc. for $109.9 million in cash (which included $4.9 million for working capital paid at closing).


11



The following table summarizes the current fair values of the assets acquired and liabilities assumed in connection with these acquisitions (in thousands):

 
 
Nexstar Stations
 
Dispatch Stations
 
Justice & Quest
 
Gray Stations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$

 
$
2,363

 
$


$

 
$
2,363

Accounts receivable
 
34,680

 
26,344

 
8,501


5,553

 
75,078

Prepaid and other current assets
 
3,776

 
6,092

 
6,987


987

 
17,842

Property and equipment
 
45,186

 
40,418

 
361


11,757

 
97,722

Goodwill
 
126,928

 
202,274

 
23,558


19,405

 
372,165

FCC licenses
 
374,269

 
295,983

 


47,061

 
717,313

Network affiliation agreements
 
123,926

 
60,765

 

 
14,420

 
199,111

Retransmission agreements
 
68,316

 
33,107

 

 
12,198

 
113,621

Other intangible assets
 

 

 
52,553



 
52,553

Right-of-use assets for operating leases
 
22,715

 
362

 

 
251

 
23,328

Other noncurrent assets
 
237

 

 
5,253


18

 
5,508

     Total assets acquired
 
$
800,033

 
$
667,708

 
$
97,213

 
$
111,650

 
$
1,676,604

Accounts Payable
 
2,037

 
954

 
725


1

 
3,717

Accrued liabilities
 
8,122

 
9,011

 
4,236


1,494

 
22,863

Deferred income tax liability
 

 
97,044

 
(471
)
 

 
96,573

Operating lease liabilities - noncurrent
 
20,346

 
226

 

 
235

 
20,807

Other noncurrent liabilities
 
426

 

 
2,677



 
3,103

     Total liabilities assumed
 
$
30,931

 
$
107,235

 
$
7,167

 
$
1,730

 
$
147,063

     Net assets acquired
 
$
769,102

 
$
560,473

 
$
90,046

 
$
109,920

 
$
1,529,541

 
 
 
 
 
 
 
 
 
 
 
Less: cash acquired
 
$

 
$
(2,363
)
 
$

 
$

 
$
(2,363
)
Less: fair value of existing ownership
 

 

 
(12,995
)
 

 
(12,995
)
Cash paid for acquisitions
 
$
769,102

 
$
558,110

 
$
77,051

 
$
109,920

 
$
1,514,183

        
We accounted for the each of these acquisitions as business combinations, which requires us to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill. The amounts recorded for assets and liabilities related to the Nexstar and Dispatch Stations and Justice and Quest Networks presented above are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the acquisition date. Assets and liabilities related to the Gray Stations are the final amounts.

During the quarter ended March 31, 2020, we continued to analyze information related to the estimated fair values for certain tangible and intangible assets acquired, liabilities assumed and the amount of goodwill recognized for these acquisitions. As a result, the carrying amounts for certain assets and liabilities were updated. The most significant changes were to retransmission agreement intangible assets, which were reduced by $21.3 million and goodwill, whose carrying amount increased by $16.8 million. As a result of these adjustments, we expect our amortization expense related to intangible assets during fiscal year 2020 to be $68.0 million.

The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date permitted under GAAP. The primary areas which are being assessed relate to the fair value of intangible assets and income taxes.



12



NOTE 3 – Goodwill and other intangible assets
The following table displays goodwill, indefinite-lived intangible assets, and amortizable intangible assets as of March 31, 2020 and December 31, 2019 (in thousands):
 
Mar. 31, 2020
 
Dec. 31, 2019
 
Gross
 
Accumulated Amortization
 
Gross
 
Accumulated Amortization
 
 
 
 
 
 
 
 
Goodwill
$
2,967,383

 
$

 
$
2,950,587

 
$

 
 
 
 
 
 
 
 
Indefinite-lived intangibles:
 
 
 
 
 
 
 
Television and radio station FCC broadcast licenses
2,105,332

 

 
2,090,732

 

Amortizable intangible assets:
 
 
 
 
 
 
 
Retransmission agreements
235,215

 
(112,853
)
 
256,533

 
(105,212
)
Network affiliation agreements
309,503

 
(54,319
)
 
309,496

 
(48,174
)
Other
73,306

 
(17,497
)
 
73,305

 
(15,066
)
Total indefinite-lived and amortizable intangible assets
$
2,723,356

 
$
(184,669
)
 
$
2,730,066

 
$
(168,452
)


Our retransmission agreements and network affiliation agreements are amortized on a straight-line basis over their estimated useful lives. Other intangibles primarily include distribution agreements and brand names from our Justice & Quest acquisition, which are also amortized on a straight-line basis over their useful lives.

Changes in goodwill and amortizable intangible asset values in the first three months of 2020 are a result of the acquisitions discussed in Note 2. Certain of those assets are valued on a preliminary basis as we continue to review underlying assumptions and valuation methodologies utilized to calculate their respective fair values. 

Interim impairment assessment

We review our goodwill and intangible assets for impairment at least annually and also when events or changes in circumstances occur that indicate the fair value may be below its carrying amount. As discussed in Note 2, during 2019 we acquired 15 television stations and as such, the indefinite-lived FCC licenses recently acquired have limited headroom as they were recorded at fair value upon acquisition. As a result of the negative effects COVID-19 will have on our expected future AMS revenue and operating cash flows, we assessed whether it was more likely than not that our FCC licenses, including those that were recently acquired, were impaired.

In performing this assessment we analyzed the significant inputs used in the fair value determination of the recently acquired FCC license assets. This included reviewing the impact of potential changes in trends in market revenues and changes in the discount rate on the fair value of our licenses. While the impacts to AMS are expected to be material, the duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (many of which are outside of management’s control). However, based on currently known information about COVID-19 trends, we generally expect the second quarter of 2020 to be the most significantly impacted this year with sequential improvement throughout the remainder of the fiscal year.

Based on the analysis performed we concluded that none of our FCC licenses were more likely than not impaired as of March 31, 2020. However, a long sustained economic decline resulting from COVID-19 could result in future non-cash impairment charges of our recently acquired FCC licenses, and any related impairment could have a material adverse impact on our results of operations.

13




NOTE 4 – Investments and other assets

Our investments and other assets consisted of the following as of March 31, 2020, and December 31, 2019 (in thousands):
 
Mar. 31, 2020
 
Dec. 31, 2019
 
 
 
 
Cash value life insurance
$
50,730

 
$
52,462

Equity method investments
36,646

 
27,650

Other equity investments
32,420

 
32,383

Deferred debt issuance costs
10,178

 
10,921

Other long-term assets
21,109

 
21,853

Total
$
151,083

 
$
145,269



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

Equity method investments: We hold equity method investments. Our largest equity method investment is our ownership in CareerBuilder, of which we own approximately 17% (or approximately 10% on a fully-diluted basis). In the first quarter of 2020, CareerBuilder sold its employment screening business; our estimated portion on the pre-tax gain of the sale is $12.1 million. Our investment balance was $17.4 million and $7.9 million as of March 31, 2020 and December 31, 2019, respectively.

Other equity investments: Represent investments in non-public businesses that do not have readily determinable pricing, and for which we do not have control or do not exert significant influence. These investments are recorded at cost less impairments, if any, plus or minus changes in observable prices for those investments. No gains or losses were recorded on these investments in the first three months of 2020.

Deferred debt issuance costs: These costs consist of amounts paid to lenders related to our revolving credit facility. Debt issuance costs paid for our term debt and unsecured notes are accounted for as a reduction in the debt obligation.

NOTE 5 – Income taxes

We generally estimate our annual effective tax rate for the full year and apply that rate to net income before tax in determining the provision for income taxes for interim periods. We record discrete items in each respective interim period as appropriate. However, for the three months ended March 31, 2020, we determined that the annual rate method would not provide for a reliable estimate due to volatility in the forecasting process as a result of the COVID-19 pandemic. As a result, we have recorded the provision for income taxes for the three months ended March 31, 2020 using the actual effective rate for the three months ended March 31, 2020 (the “cut-off” method). The effective tax rate for the three months ended March 31, 2020 was calculated based on an actual effective tax rate plus discrete items.

In response to the COVID-19 pandemic, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including refundable payroll tax credits, deferral of employer side social security payments, modifications to the net interest deduction limitations, expansions to the use and carryback of net operating losses, and a technical correction to the depreciation method applicable to qualified improvement property under the 2017 Tax Cuts and Jobs Act.  We will benefit from the technical correction for qualified improvement property which allows for immediate deduction of any eligible leasehold improvements placed in service during 2018 and 2019. We will also benefit from the new depreciation method available for qualified improvement property which allows for an immediate retroactive deduction of certain eligible leasehold improvements previously placed in service. As a result, our 2020 tax payments are expected to be reduced by approximately $7 million. There is no change to tax expense or our first quarter effective income tax rate since the changes are payment deferrals only. We will continue to monitor the impact of the CARES Act on our business as conditions change.

14



NOTE 6 – Long-term debt
Our long-term debt is summarized below (in thousands):

Mar. 31, 2020
 
Dec. 31, 2019
 
 
 
 
Unsecured floating rate term loan due quarterly through June 20201
$
10,000

 
$
20,000

Unsecured floating rate term loan due quarterly through September 20201
90,000

 
105,000

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

 
310,000

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

Borrowings under revolving credit agreement expiring August 2024
785,000

 
903,000

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

Unsecured notes bearing fixed rate interest at 4.625% due March 2028
1,000,000

 

Unsecured notes bearing fixed rate interest at 5.00% due September 2029
1,100,000

 
1,100,000

Total principal long-term debt
4,100,000

 
4,203,000

Debt issuance costs
(34,389
)
 
(26,873
)
Unamortized premiums and discounts, net
6,286

 
3,118

Total long-term debt
$
4,071,897

 
$
4,179,245

 
 
 
 
1 We have the intent and ability to refinance the principal payments due within the next 12 months on a long-term basis through our revolving credit facility. As such, all debt presented in the table above is classified as long-term on our March 31, 2020 Condensed Consolidated Balance Sheet.


On January 9, 2020, we completed a private placement offering of $1.0 billion aggregate principal amount of senior unsecured notes bearing an interest rate of 4.625% which are due in March 2028.

On February 11, 2020 we used the net proceeds from the $1.0 billion senior notes to repay the remaining $310.0 million of unsecured notes bearing fixed rate interest of 5.125%, which were due in July 2020 and $650.0 million of unsecured notes bearing fixed rate interest of 6.375%, which were due in October 2023. We incurred $13.8 million of early redemption fees in relation to the 2023 debt payoff. Additionally, we wrote off $7.9 million of unamortized financing fees and discounts related to the early payoff of the 2020 and 2023 notes. These charges were recorded in the other non-operating items, net line item of the Statement of Income.

As of March 31, 2020, we had unused borrowing capacity of $720.8 million under our $1.51 billion revolving credit facility (which expires August 2024) and we were in compliance with all covenants, including the leverage ratio (our one financial covenant) contained in our debt agreements and revolving credit facility. We believe that we will remain compliant with all covenants for the foreseeable future.

NOTE 7 – Retirement plans

We have various defined benefit 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 TEGNA Supplemental Retirement Plan (SERP). The total net pension obligations, including both current and non-current liabilities, as of March 31, 2020, were $128.7 million, of which $6.8 million is recorded as a current obligation within accrued liabilities on the Condensed Consolidated Balance Sheet.

15




Pension costs, which primarily include costs for the qualified TRP and the non-qualified SERP, are presented in the following table (in thousands):
 
Quarter ended Mar. 31,
 
2020
 
2019
 
 
 
 
Service cost-benefits earned during the period
$
2

 
$

Interest cost on benefit obligation
4,858

 
5,750

Expected return on plan assets
(7,750
)
 
(6,575
)
Amortization of prior service (credit) cost
(42
)
 
25

Amortization of actuarial loss
1,600

 
1,500

(Gains from) expense for company-sponsored retirement plans
$
(1,332
)
 
$
700



Benefits no longer accrue for substantially all TRP and SERP participants as a result of amendments to the plans in the past years and as such we no longer incur a significant amount of the service cost component of pension expense. All other components of our pension expense presented above are included within the “Other non-operating items, net” line item of the Consolidated Statements of Income.

During the three months ended March 31, 2020 and 2019, we did not make any cash contributions to the TRP. During the three months ended March 31, 2020 and 2019, we made benefit payments to participants of the SERP of $2.3 million and $0.9 million, respectively. Based on actuarial projections and funding levels, we do not expect to make any cash payments to the TRP in 2020. We expect to make additional cash contributions of $4.4 million to our SERP participants in 2020.
NOTE 8 – Accumulated other comprehensive loss

The following table summarizes the components of, and the changes in, Accumulated Other Comprehensive Loss (AOCL), net of tax (in thousands):
 
Retirement Plans
 
Foreign Currency Translation
 
Total
Quarters Ended:
 
 
 
 
 
Balance at Dec. 31, 2019
$
(142,398
)
 
$
(199
)
 
$
(142,597
)
Other comprehensive income before reclassifications

 
301

 
301

Amounts reclassified from AOCL
1,121

 

 
1,121

Total other comprehensive income
1,121

 
301

 
1,422

Balance at Mar. 31, 2020
$
(141,277
)
 
$
102

 
$
(141,175
)
 
 
 
 
 
 
Balance at Dec. 31, 2018
$
(136,893
)
 
$
382

 
$
(136,511
)
Other comprehensive income before reclassifications

 
10

 
10

Amounts reclassified from AOCL
1,069

 

 
1,069

Total other comprehensive income
1,069

 
10

 
1,079

Balance at Mar. 31, 2019
$
(135,824
)
 
$
392

 
$
(135,432
)


16



Reclassifications from AOCL to the Consolidated Statements of Income are comprised of pension and other post-retirement components. Pension and other post retirement reclassifications are related to the amortization of prior service costs, and amortization of actuarial losses. Amounts reclassified out of AOCL are summarized below (in thousands):
 
Quarter ended Mar. 31,
 
2020
 
2019
 
 
 
 
Amortization of prior service credit, net
$
(110
)
 
$
(125
)
Amortization of actuarial loss
1,608

 
1,550

Total reclassifications, before tax
1,498

 
1,425

Income tax effect
(377
)
 
(356
)
Total reclassifications, net of tax
$
1,121

 
$
1,069



NOTE 9 – Earnings per share

Our earnings per share (basic and diluted) are presented below (in thousands, except per share amounts):
 
Quarter ended Mar. 31,
 
2020
 
2019
 
 
 
 
Net income attributable to TEGNA Inc.
$
86,308

 
$
73,979

 
 
 
 
Weighted average number of common shares outstanding - basic
218,277

 
216,709

Effect of dilutive securities:
 
 
 
Restricted stock units
284

 
179

Performance shares
298

 
256

Stock options
4

 
58

Weighted average number of common shares outstanding - diluted
218,863

 
217,202

 
 
 
 
Net income per share - basic
$
0.40

 
$
0.34

Net income per share - diluted
$
0.39

 
$
0.34


Our calculation of diluted earnings per share includes the dilutive effects for the assumed vesting of outstanding restricted stock units and performance shares.

NOTE 10 – Fair value measurement

We measure and record certain assets and liabilities at fair value in the accompanying condensed consolidated financial statements. 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.

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 $3.85 billion at March 31, 2020, and $4.32 billion at December 31, 2019.


17



NOTE 11 – Other matters

Litigation

In the third quarter of 2018, certain national media outlets reported the existence of a confidential investigation by the United States Department of Justice Antitrust Division (DOJ) into the local television advertising sales practices of station owners. We received a Civil Investigative Demand (CID) in connection with the DOJ’s investigation. On November 13 and December 13, 2018, DOJ and seven broadcasters settled a DOJ complaint alleging the exchange of competitively sensitive information in the broadcast television industry. In June 2019, we and four other broadcasters entered into a substantially identical agreement with DOJ, which was entered by the court on December 3, 2019. The settlement contains no finding of wrongdoing or liability and carries no penalty. It prohibits us and the other settling entities from sharing certain confidential business information, or using such information pertaining to other broadcasters, except under limited circumstances. The settlement also requires the settling parties to make certain enhancements to their antitrust compliance programs, to continue to cooperate with the DOJ’s investigation, and to permit DOJ to verify compliance. We do not expect the costs of compliance to be material.

Since the national media reports, numerous putative class action lawsuits were filed against owners of television stations (the Advertising Cases) in different jurisdictions. Plaintiffs are a class consisting of all persons and entities in the United States who paid for all or a portion of advertisement time on local television provided by the defendants. The Advertising Cases assert antitrust and other claims and seek monetary damages, attorneys’ fees, costs and interest, as well as injunctions against the allegedly wrongful conduct.

These cases have been consolidated into a single proceeding in the United States District Court for the Northern District of Illinois, captioned Clay, Massey & Associates, P.C. v. Gray Television, Inc. et. al., filed on July 30, 2018. At the court’s direction, plaintiffs filed an amended complaint on April 3, 2019, that superseded the original complaints. Although we were named as a defendant in sixteen of the original complaints, the amended complaint did not name TEGNA as a defendant. After TEGNA and four other broadcasters entered into consent decrees with the Department of Justice in June 2019, the plaintiffs sought leave from the court to further amend the complaint to add TEGNA and the other settling broadcasters to the proceeding. The court granted the plaintiffs’ motion, and the plaintiffs filed the second amended complaint on September 9, 2019. On October 8, 2019, the defendants jointly filed a motion to dismiss the matter. The motion to dismiss remains pending before the court. We deny any violation of law, believe that the claims asserted in the Advertising Cases are without merit, and intend to defend ourselves vigorously against them.

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

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 relinquished any spectrum rights as a result of the auction. Seventeen of our stations (which includes four of our recently acquired stations from 2019) have been or will be repacked to new channels.

To date, the repacking has not had any material effect on the geographic areas or populations served by our repacked full-power stations’ over-the-air signals, and we do not expect our remaining stations undergoing repacking to experience any such effect. If the repacking did have such an effect, our television stations moving channels could have smaller service areas and/or experience additional interference.

The legislation authorizing the incentive auction and repacking established a $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.

The repacking process is scheduled to occur over a 39-month period, divided into ten phases ending mid-year 2020. Our full power stations are being completed during phases two through ten, and a majority of our capital expenditures in connection with the repack occurred in 2018 and 2019. To date, we have incurred approximately $38.5 million in capital expenditures for the spectrum repack project (of which $2.9 million was paid during the first quarter of 2020). We have received FCC reimbursements of approximately $31.9 million through March 31, 2020. The reimbursements were recorded as a contra operating expense within our “Spectrum repacking reimbursements and other, net” line item on our Consolidated Statement of Income and reported as an investing inflow on the Consolidated Statement of Cash Flows.
    

18



Related Party Transactions

We have an equity and debt investment in MadHive, Inc. (MadHive) which is a related party of TEGNA. In addition to our investment, we also have a commercial agreement with MadHive where they support our Premion business in acquiring and delivering over-the-top ad impressions. In the first quarter of 2020 and 2019, we incurred expenses of $10.5 million and $6.5 million, respectively, as a result of the commercial agreement with MadHive. As of March 31, 2020 and December 31, 2019 we had accounts payable and accrued liabilities associated with the commercial agreement of $7.5 million and $4.3 million, respectively.

Sale of minority ownership interest in Premion

On March 2, 2020, we sold a minority ownership interest in Premion, LLC (Premion) for $14.0 million to an affiliate of Gray Television (Gray). Gray is reselling Premion services across all of Gray’s 93 television markets. Our TEGNA stations and Gray will each have the right to independently sell Premion in markets where we both operate a local television station. The sale of spot television advertising is not part of this agreement, and Gray and our TEGNA stations will continue to sell spot advertising for our respective stations without any involvement from the other party.

In connection with acquiring a minority interest, Gray has the right to sell its interest to Premion if there is a change in control of TEGNA or if the commercial reselling agreement terminates. Since redemption of the minority ownership interest is outside our control, Gray’s equity interest is presented outside of the Equity section on the Condensed Consolidated Balance Sheet in the caption “Redeemable noncontrolling interest.” On the date of sale, we recorded a $14.0 million redeemable noncontrolling interest on the Condensed Consolidated Balance Sheet in connection with Gray’s investment.

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. Our business includes 62 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% of U.S. television households. Each television station also has a robust digital presence across online, mobile and social platforms, reaching consumers whenever, wherever they are. We have been consistently honored with the industry’s top awards, including Edward R. Murrow, George Polk, Alfred I. DuPont and Emmy Awards. Through TEGNA Marketing Solutions (TMS), our integrated sales and back-end fulfillment operations, we deliver results for advertisers across television, email, social, and Over the Top (OTT) platforms, including Premion, our OTT advertising network.

We have one operating and reportable segment. The primary sources of our revenues are: 1) advertising & marketing services (AMS) revenues, which include local and national non-political television advertising, digital marketing services (including Premion), and advertising on the stations’ websites and tablet and mobile products; 2) subscription revenues, reflecting fees paid by satellite, cable, OTT (companies that deliver video content to consumers over the Internet) and telecommunications providers to carry our television signals on their systems; 3) political advertising revenues, which are driven by even year election cycles at the local and national level (e.g. 2020, 2018) and particularly in the second half of those years; and 4) other services, such as production of programming and advertising material.

As illustrated in the table below, our business continues to evolve toward growing stable and profitable revenue streams. We expect high margin subscription and political revenues will account for approximately half of our total two-year revenue beginning in 2019/2020, and a larger percentage on a rolling two-year cycle thereafter. In 2020, we expect our combined subscription and political revenues to be more than 50% of our total revenues.

 
Two Years Ending Mar. 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
Advertising & Marketing Services
50
%
 
 
54
%
 
 
Subscription
42
%
}
49%
39
%
}
45%
Political
7
%
6
%
Other
1
%
 
 
1
%
 
 
Total revenues
100
%
 
 
100
%
 
 

Over the past several years, we have transformed our company to become a pure-play broadcasting company, adding approximately 40 stations in attractive markets and divesting non-core assets. During 2019 alone, we completed four strategic acquisitions for a total purchase price of $1.5 billion which enhanced our geographic diversity and bolstered our portfolio of Big Four stations while positioning our company to take full advantage of emerging viewing trends. As a result of this strategic

19



evolution, we have increased revenue and cash flow, reduced economic cyclicality, delivered value for shareholders, and continue to be well-positioned to benefit from additional industry consolidation.

Recent Developments from COVID-19

During the first quarter of 2020, a novel strain of coronavirus (COVID-19) believed to have been first identified in Wuhan, China, spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The federal and state governments in the United States have responded by instituting a wide variety of mitigating control measures, including, mandatory quarantines, closures of non-essential businesses and all other places of social interaction, while implementing “shelter in place” orders and travel restrictions. Such control measures have resulted in cancellation or postponement of sporting events, including the Olympics, and suspension of popular entertainment content production.

Despite a strong start to the year, the wide variety of measures began negatively impacting our AMS revenue stream in mid-March as demand for non-political advertising softened. This trend has continued into the second quarter of 2020 as such measures remain largely in place as of this date. As noted above, the relative percentage of subscription and political revenues has grown over recent years and we expect this trend to continue. These revenue streams are influenced less than AMS when economic conditions change. While the contribution of subscription and political revenues are increasing, AMS revenue still accounts for a significant amount of our total revenue. The impacts to AMS revenues in the near-term are expected to be material. However, the duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (many of which are outside of management’s control), including those presented in Item 1A. “Risk Factors” of this Quarterly Report. However, based on currently known information about COVID-19 trends, we generally expect the second quarter of 2020 to be the most significantly impacted this year, with sequential improvement throughout the remainder of the fiscal year.

Our broadcast business has been designated an essential business, and therefore, our stations’ operations are continuing with new safeguards put in place to create a safe work environment for our employees. At most of our television stations, approximately 90-95 percent of the employees are working remotely. We have also adopted new measures based on current Center of Disease Control guidelines to keep our employees safe and healthy. Measures include limiting the number of news and production employees in our stations to only those necessary to put on the newscasts, remote interviews, social distancing, eliminating guests, and telework for all non-news personnel.

As a result of the near-term impact of non-political advertising demand caused by the COVID-19 pandemic, we implemented cost saving measures to reduce operating expenses and capital expenditures. These measures include implementing temporary furloughs for one week during the second quarter for most personnel, reducing compensation for executives and our board of directors, and reducing non-critical discretionary spending. As is true of most businesses, the ultimate magnitude of the COVID-19 pandemic cannot be reasonably estimated at this time, but we do expect it to have a material adverse effect on our near-term results of operations.

We are experiencing a significant increase in ratings and audiences on all of our platforms, highlighting the crucial role our stations play by delivering important local journalism which builds trust and loyalty among our viewers. For example, TEGNA (and its portfolio of stations) has ascended into the top 50 digital properties (not just news) in terms of total audience in the U.S. according to Comscore’s report on Top 50 Multi-Platform Properties for March 2020.

The scope and nature of the COVID-19 impacts continue to evolve each day. For a discussion of mitigating measures being taken by management to navigate through these conditions as well as a discussion of key trends and uncertainties that have affected our business, see the sections that follow under the captions “Consolidated Results from Operations” and “Liquidity, Capital Resources and Cash Flows,” as well as within Part II, Item 1A “Risk Factors.”

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.
During 2019, we acquired multiple local television stations and multicast networks. Specifically, we acquired the Gray stations (January 1, 2019), Justice/Quest multicast networks (June 18, 2019), the Dispatch stations (August 8, 2019) and the Nexstar stations (September 9, 2019). See Note 2 to the condensed consolidated financial statements for further details. The Dispatch and Nexstar stations and multicast networks are collectively referred to as the “2019 Acquisitions” in the discussion that follows. The inclusion of the operating results from these 2019 Acquisitions for the periods subsequent to their acquisition impacts the year-to-year comparability of our consolidated operating results. The Gray stations do not impact the year-to-year comparability as their operating results are included in both the first quarter of 2019 and 2020.


20



Our consolidated results of operations on a GAAP basis were as follows (in thousands, except per share amounts):
 
Quarter ended Mar. 31,
 
2020
 
2019
 
Change
 
 
 
 
 
 
Revenues
$
684,189

 
$
516,753

 
32
%
 
 
 
 
 
 
Operating expenses:
 
 
 
 


Cost of revenues
369,368

 
281,311

 
31
%
Business units - Selling, general and administrative expenses
92,968

 
71,465

 
30
%
Corporate - General and administrative expenses
21,714

 
14,735

 
47
%
Depreciation
16,900

 
14,917

 
13
%
Amortization of intangible assets
16,216

 
8,689

 
87
%
Spectrum repacking reimbursements and other, net
(7,515
)
 
(7,013
)
 
7
%
Total operating expenses
$
509,651

 
$
384,104

 
33
%
 
 
 
 
 
 
Total operating income
$
174,538

 
$
132,649

 
32
%
 
 
 
 
 
 
Non-operating expenses
(67,215
)
 
(35,896
)
 
87
%
Provision for income taxes
21,125

 
22,774

 
(7
%)
Net income
86,198

 
73,979

 
17
%
Net loss attributable to redeemable noncontrolling interest
110

 

 
***

Net income attributable to TEGNA Inc.
$
86,308

 
$
73,979

 
17
%
 
 
 
 
 
 
Net income per share - basic
$
0.40

 
$
0.34

 
18
%
Net income per share - diluted
$
0.39

 
$
0.34

 
15
%
 
 
 
 
 
 
*** Not meaningful

Revenues

Our Advertising and Marketing Services (AMS) category includes all sources of our traditional television advertising and digital revenues including Premion and other digital advertising and marketing revenues across our platforms. Our Subscription revenue category includes revenue earned from cable and satellite providers for the right to carry our signals and the distribution of TEGNA stations on OTT streaming services.

Our revenues and 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 and national elections. Additionally, every four years, we typically experience even greater increases in political advertising in connection with the presidential election. The strong demand for advertising from political advertisers in these even years can result in the significant use of our available inventory (leading to a “crowd out” effect), which can diminish our AMS revenue from our non-political advertising customers in the even year of a t