|TEGNA INC filed this Form 10-K on 03/01/2018|
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
For the fiscal year ended December 31, 2017
For the transition period from to
Commission file number 1-6961
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (703) 873-6600
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (Check box if no delinquent filers). x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting 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:
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 Act). Yes ¨ No x
The aggregate market value of the voting common equity held by non-affiliates of the registrant based on the closing sales price of the registrant’s Common Stock as reported on The New York Stock Exchange on June 30, 2017, was $3,089,117,473. The registrant has no non-voting common equity.
As of January 31, 2018, 215,603,092 shares of the registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant’s Annual Meeting of Shareholders to be held on April 26, 2018, is incorporated by reference in Part III to the extent described therein.
INDEX TO TEGNA INC.
2017 FORM 10-K
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 50 million consumers on-air and approximately 35 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.
All of this is now delivered through a company with one singular focus; in 2017, we completed our transformation into a pure-play media company. On May 31, 2017 we successfully completed the spin-off of Cars.com into a separate stand-alone public company and on July 31, 2017, we completed the sale of our controlling ownership interest in CareerBuilder. The completion of these strategic actions has reduced our debt and has further strengthened our balance sheet, providing us the ability to invest in our media businesses, capitalizing on opportunities for organic and acquisition-related growth. Our media operations generate strong and dependable cash flows and we are financially disciplined, which allows us to return additional value to shareholders through dividends and share repurchases. We are a leader in embracing change and driving innovation across our businesses, and we are well-positioned to benefit from the evolving regulatory environment.
After completing these strategic actions, we now have one operating and reportable segment which generated revenues of $1.9 billion in 2017. 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) 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; 3) 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; and 4) other services, such as production of programming from third parties and production of advertising material.
The advertising revenues generated by a station’s local news programs make up a significant part of its total advertising revenues. Advertising pricing is influenced by demand for advertising time. This demand is influenced by a variety of factors, including the size and demographics of the local populations, the concentration of businesses, local economic conditions, and the popularity or ratings of the station’s programming. Almost all national advertising is placed through independent advertising representatives, while local advertising time is sold by each station’s own sales force.
Our portfolio of NBC, CBS, ABC and FOX stations operate under long-term affiliation agreements. Generally, a network provides programs to its affiliated television stations and the network sells commercial advertising for certain of the available advertising spots within the network programs, while our television stations sell the remaining available commercial advertising spots. Our television stations also produce local programming such as news, sports, and entertainment.
Broadcast affiliates and their network partners continue to have the broadest appeal in terms of household viewership, viewing time and audience reach. The overall reach of events such as the Olympics and NFL Football, along with our extensive local news and non-news programming, continues to surpass the reach in viewership of individual cable channels. Our ratings and reach are driven by the quality of programs we and our network partners produce and by the strong local connections we have to our communities, which gives us a unique position among the numerous program choices viewers have, regardless of platform.
Our Board of Directors actively and regularly reviews, guides and oversees the development and implementation of our long-term strategic plan to create value for our stakeholders. The key elements of our strategy are as follows:
Continue to innovate in our content offerings to our consumers. Our trusted, local content is the driver of our success across all distribution channels and is a key ingredient that powers our current and future revenues. Our scale has allowed us to invest in comprehensive content and digital innovation initiatives. Our focus on data-driven editorial processes, new storytelling formats, and unique visual presentations across all our platforms are helping to make our content the consumers’ first choice, no matter the platform.
In 2017, we continued significant efforts to embrace change, transform our content and connect with audiences in unique and powerful ways. Our culture encourages and embraces bold thinking and innovative ideas from across the company. We are creating unique, live and original content in news and non-news time periods to meet changing viewer habits. In an on-demand OTT world, live, locally-relevant content is becoming far more important than it was in the past, and we are acting on that trend. We have continued to make wholesale transformations of our local news operations. We have invested in true digital-first newsrooms, leveraging analytics to better serve audiences and clients on-air and via mobile devices.
We are recognized nationally for our innovation in reinventing local journalism in the digital age. Over the past year, we have conducted digital-first investigations that shined a light on important issues, holding the powerful accountable and helping drive change and results for those without a voice. Projects like “Verify,” which provides unbiased fact-checking on a variety of topics, developed before ‘fake news’ entered the common vernacular, was rolled out across all markets in 2017. “Verify” segments are platform agnostic and air on broadcast channels, are posted to social media channels and are shared across desktop, digital and mobile apps. Other impactful digital-first investigations such as “Selling Girls,” a six-part series produced by the award-winning investigative news teams from 11Alive in Atlanta and KHOU in Houston, focused on trafficking of American minor children. Initially launched across stations’ digital platforms, the series was localized, highlighting the direct impact of child sex trafficking in specific communities across the U.S.
In 2017, we launched innovative, multi-platform, non-news programs, replacing the syndicated programs in these timeslots. These programs are produced at our local stations, reducing cost while allowing us to quickly respond to local needs and tastes in content. We premiered “Daily Blast LIVE,” a groundbreaking 30-minute live news and entertainment show produced out of KUSA in Denver. “Daily Blast LIVE” is a first-of-its-kind format that is live in every time zone across 35 TEGNA markets, something unprecedented in TV syndication, and is also available on Facebook and YouTube. The content on “Daily Blast LIVE” is always live and crowdsourced in real-time from viewers though social media. We also debuted “Sister Circle,” a new live daily talk show that targets African-American women - a large and traditionally underserved audience. Produced by WATL in Atlanta, “Sister Circle” reaches 60 percent of U.S. television households, distributed across 12 TEGNA markets and on TV One, a cable network offering a broad range of programming for a diverse audience of adult African-American viewers. We also introduced “Sing Like A Star,” a singing competition program produced by WWL in New Orleans that now airs in 34 markets.
Increase engagement across all platforms. In 2017, we took several important steps to enhance the user experience across digital products, creating a more efficient digital publishing organization and laying the foundation for more diverse revenue streams.
As a result of these efforts, pages per visitor in the fourth quarter of 2017 grew by 23% compared to the prior year quarter, and for the year total monetizable video plays increased 41%, and our social media interactions across platforms grew by 24% from 2016.
Grow subscription revenue. Subscription revenue has steadily increased in the last several years, better reflecting the value of the content that our business provides. Pursuant to Federal Communications Commission (FCC) rules, every three years a local television station must elect to either (1) require cable and/or direct broadcast satellite operators to carry the station’s signal or (2) require such cable and satellite operators to negotiate retransmission consent agreements to secure carriage. At present, we have retransmission consent agreements with almost all cable operators and satellite providers for carriage of our television stations. We also have retransmission agreements with major telecommunications companies. Our scale and strength in local content has contributed to our ability to grow our subscription revenue beyond traditional multichannel video programming distributors (MVPDs) into the growing OTT space as well.
Our market affiliates are also pivotal to the success of companies offering platforms in the OTT space. In late 2017, we closed large OTT distribution deals with major network partners and streaming services like YouTube TV and Direct TV Now, permitting them to carry our stations’ content. Our negotiations with these providers reinforced how critical strong broadcast affiliates are to any OTT service. Because our stations serve large markets that are pivotal to the success of companies offering
platforms in the OTT space, we have negotiated favorable agreements with economics that are as good or better with new OTT entrants than with traditional MVPDs, making us economically agnostic to consumer platform choices.
The additional benefit of moving our content onto OTT platforms is that it allows us to reach customers through additional platforms, increasing our exposure to an additional demographic of newer viewers that had previously consumed less of our product nor paid subscriber revenues to us.
Improve the value we bring to advertisers. We continued to expand market share through our sales transformation efforts, including innovations like Hatch, our centralized 360-degree marketing services agency, our centralized pricing platform, and a well trained, solutions-oriented salesforce. We provide our clients with data-driven integrated marketing services, a holistic approach to put their advertising dollars to work in the channels that make the most sense for them, regardless of the platform. We serve our clients by providing deep consumer insights, unique creative solutions, and customization. To that end, in 2017 we rolled out a sophisticated pricing platform that marries disparate data sets and other advanced technologies to provide more optimal predictive pricing insights both for our salesforce and, ultimately, for our advertising clients. This software will also allow us to play a pivotal role as the industry shifts to more automated buying platforms.
Late in 2016, we launched the industry’s first OTT local advertising network, Premion, which is unparalleled in the industry. Premion is a one-stop-shop that allows local, regional and national customers to place advertising on long-form programs across a broad array of services such as streaming devices, smart TVs and web browsers. Premion is a highly desirable buy for advertisers trying to reach cord cutters, and is helping us expand our revenue base and giving us access to new markets. Our large, local salesforce is leveraging relationships with local and regional advertisers to sell Premion inventory. Premion’s revenue in 2017 was just over $30.0 million compared to $0.6 million in 2016.
Invest in new growth initiatives. We are further diversifying our revenue base by investing in new business models that leverage our strong assets and scale.
In addition to Premion, we are working to accelerate the automation of national spot advertising. In 2017, we teamed with several other broadcasters to create a set of Application Programming Interface’s (API’s) to enable software companies to more easily enter the market and work with the broader ecosystem. In 2018, we will continue to seek additional investment opportunities in this space.
Capitalize on opportunities to grow inorganically. Our strong balance sheet and cash flow generation enables us to opportunistically grow the business through acquisitions. We believe that we are well-positioned to participate in a changing media landscape. For example, our 47 television stations (excluding the station we currently service under a services arrangement) reach 28% of U.S. television households when the UHF discount is applied, well below the 39% ownership cap which gives us ample headroom to pursue large vertical consolidations and other opportunities as we have done in the past. We also see accretive in-market consolidation opportunities within our existing footprint, where we have strong stations and mediums in large markets.
On February 15, 2018, we acquired, for approximately $325 million in cash, 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. 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.
Our company competes for audience share and advertising revenues primarily with other local television broadcasters (including network-affiliated and independent) and with other advertising media, such as radio broadcasters, MVPDs, newspapers, magazines, direct mail and Internet media. Other sources of competition for our media stations include home video and audio recorders and players, direct broadcast satellite, low power television, Internet radio, video offerings (both wire line and wireless) of telephone companies as well as developing video services. Within their respective Designated Market Area (DMA), our stations compete for audience share and audience composition which is largely driven by program popularity. Our share of the DMA has a direct effect on the rates we are able to charge advertisers. MVPDs can also increase competition by bringing additional cable network channels and content into the DMA.
The advertising industry is dynamic and rapidly evolving. Our stations compete in the emerging local electronic media space, which includes the Internet or Internet-enabled devices, handheld wireless devices such as mobile phones and tablets, social media platforms, digital spectrum opportunities and OTT. The technology that enables consumers to receive news and information continues to evolve.
Our television stations are operated under the authority of the Federal Communications Commission (FCC or Commission), the Communications Act of 1934, as amended (Communications Act), and the rules and policies of the FCC (FCC regulations). As a result, our television stations are subject to a variety of obligations, such as restrictions on the broadcast of material deemed “indecent” or “profane,” requirements to provide or pass through closed captioning for most programming, rules requiring the public disclosure of certain information about our stations’ operations, and the obligation to offer programming responsive to the needs and interests of our stations’ communities. The FCC may alter or add to these requirements, and any such changes may affect the performance of our business. Certain significant elements of the FCC’s current regulatory framework for broadcast television are described in further detail below.
Television broadcast licenses generally are granted for eight year periods. They are renewable upon application to the FCC and usually are renewed except in rare cases in which a petition to deny, a complaint or an adverse finding as to the licensee’s qualifications results in loss of the license. We believe that our stations operate in substantial compliance with the Communications Act and FCC regulations.
FCC regulations limit the concentration of broadcasting control and regulate network and local programming practices. In November 2017, the FCC adopted an order altering its regulations governing media ownership, generally making these regulations less restrictive. For example, the order eliminated the newspaper/broadcast cross-ownership rule, which generally prohibited an entity from holding an ownership interest in a daily print newspaper and a full-power broadcast station within the same market, and the television/radio cross-ownership rule, which imposed a number of limits on the ability to own television and radio stations in the same market. Under the revised FCC regulations that took effect on February 7, 2018, common ownership of two television stations in the same market will be permitted so long as at least one of the commonly owned stations is not among the top four rated stations in the market at the time of acquisition. Such transactions no longer will be subject to the “Eight Voices Test,” which required applicants seeking to acquire a second television station in a market to show that at least eight independently owned television stations would remain after the acquisition. Applications seeking FCC consent for a party to acquire control of two top four rated television stations in the same market will be considered on a case-by-case basis.
The November 2017 ownership order also eliminated a rule making certain joint advertising sales agreements (JSAs) attributable in calculating compliance with the ownership limits. Various parties - including cable operators and other advocates for more stringent broadcast ownership restrictions - opposed these and other changes adopted in the November 2017 order and have challenged the order in court. The FCC will continue to require the disclosure of shared services agreements (SSAs) in stations’ online public inspection files, though these agreements generally are not deemed to be attributable ownership interests. The FCC defines SSAs broadly to include a wide range of agreements between separately owned stations, including news sharing agreements and other agreements involving “station-related services.” We are party to a transition services agreement (which is similar to, but more limited than, the typical shared services agreement) and a JSA with a third party that owns a television station in Tucson, where we also own a television station. We are not party to any other JSAs. We are party to agreements in several other markets involving the limited sharing of certain equipment and resources; some of these agreements may qualify as SSAs subject to disclosure.
The Communications Act includes a national ownership cap for broadcast television stations that prohibits any one person or entity from having, in the aggregate, market reach of more than 39% of all U.S. television households. FCC regulations permit
stations to discount the market reach of stations that broadcast on UHF channels by 50% (the UHF discount), though the FCC’s decision in early 2017 to reinstate the UHF discount (reversing an earlier order that would have repealed the discount) has been challenged in court. In December 2017, the FCC issued a Notice of Proposed Rulemaking seeking comments on whether it can or should modify or eliminate the national ownership cap and/or the UHF discount. Our 47 television stations (excluding the station we currently service under a services arrangement) reach approximately 28% of U.S. television households when the UHF discount is applied and approximately 33% without the UHF discount.
As permitted by the Communications Act and FCC rules, we require cable and satellite operators to negotiate retransmission consent agreements to retransmit our stations’ signals. Under the applicable statutory provisions and FCC rules, such negotiations must be conducted in “good faith.” FCC rules also provide stations with certain protections against cable and satellite operators importing duplicating network or syndicated programming broadcast by distant stations. Pay-TV interests and other parties continue to advocate for the FCC to alter or eliminate various aspects of the rules governing retransmission consent negotiations and stations’ exclusivity rights. If such changes were adopted, they could give cable and satellite operators leverage against broadcasters in retransmission consent negotiations and, as a result, adversely impact our revenue from retransmission and advertising.
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 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 establishes a $1.75 billion fund for reimbursement of costs incurred by stations required to change channels in the repacking. The FCC has notified us that 13 of our stations will be repacked to new channels. We estimate that we will incur approximately $34.0 million in capital expenditures associated with the repack of our 13 stations, of which approximately $19.0 million will be incurred in 2018. While we are eligible to seek reimbursement for costs associated with implementing these changes, the FCC has announced that aggregate reimbursement estimates from all eligible entities, after review and adjustment by the FCC’s reimbursement fund administrator, total $1.864 billion, or approximately $114 million more than is currently statutorily authorized for such reimbursements. Each repacked commercial television station, including each of our 13 repacked stations, has been allocated an initial reimbursement amount equal to approximately 52 percent of the station’s estimated repacking costs, as verified by the FCC’s fund administrator. Particular requests for reimbursement of actual costs incurred are subject to further FCC review and approval. Further reimbursement allocations will depend on the amount of funds actually drawn from the FCC’s reimbursement fund and whether any additional reimbursement funding is made available by Congress. We also own various low-power television stations, which are not entitled to repacking protection, some of which have been or will be displaced. Any such displaced low-power stations either would need to cease operations or be relocated to a new channel (if one is available) at our expense. It is still too early to assess the ultimate impact of the incentive auction and repacking upon our business, as this impact will depend upon numerous factors, including the actual operational effects of the channel changes implemented in the repacking and the degree to which our repacked stations are reimbursed.
In November 2017, the FCC adopted an order authorizing broadcast television stations to voluntarily transition to a new technical standard, called Next Generation TV or ATSC 3.0. The new standard makes possible a variety of benefits for both broadcasters and viewers, including better sound and picture quality, hyper-localized programming including news and weather, enhanced emergency alerts, improved mobile reception, the use of targeted advertising, and more efficient use of spectrum, potentially allowing for more multicast streams to be aired on the same 6 megahertz channel. However, ATSC 3.0 is not backwards compatible with existing television equipment. To ensure continued service to all viewers, the FCC’s order authorizing ATSC 3.0 operations requires full-power television stations that transition to the new standard to continue broadcasting a signal in the existing DTV standard until the FCC phases out the requirement in a future order. The content of this simulcast signal must be substantially similar to the programming aired on the ATSC 3.0 channel for a period of at least five years. Transitioning a station to ATSC 3.0 is voluntary under current FCC rules and may require significant expenditures. We are evaluating potential ATSC 3.0 roll out plans, pending completion of the standard and coordination with repacking-related changes. In the event we elect to offer ATSC 3.0 service on any of our stations, there can be no guarantee that such service would earn sufficient additional revenues to offset the related expenditures.
General Company Information
Our company was founded by Frank E. Gannett and associates in 1906 and was incorporated in 1923. We listed shares publicly for the first time in 1967 and reincorporated in Delaware in 1972. In June 2015, we completed the spin-off of our former publishing businesses, and our company was renamed TEGNA. In addition, in May 2017, we completed the spin-off of our digital automotive business, Cars.com, and in July 2017, we completed the sale of our controlling ownership interest in CareerBuilder, completing our transformation into a pure-play media company. Our approximately 215.6 million outstanding shares of common stock are held by 6,189 shareholders of record as of January 31, 2018. Our headquarters is located at 7950 Jones Branch Drive, McLean, VA, 22107. Our telephone number is (703) 873-6600 and our website home page is www.tegna.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K (Form 10-K).
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meetings and amendments to those reports are available free of charge on our investor website, under “Investor Relations” at www.tegna.com as soon as reasonably practical after we electronically file the material with, or furnish it to, the Securities and Exchange Commission (SEC). In addition, copies of our annual reports will be made available, free of charge, upon written request. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including TEGNA Inc.
At the end of 2017, we employed 5,283 full-time and part-time people, all of whom were located in the U.S. The following table summarizes our employee headcount at the end of 2017 and 2016.
Approximately 11% of our employees in the U.S. are represented by labor unions. They are represented by 24 local bargaining units, most of which are affiliated with one of four international unions under collective bargaining agreements. These agreements conform generally with the pattern of labor agreements in the broadcasting industry. We do not engage in industry-wide or company-wide bargaining.
Environmental Regulatory Matters
We are subject to various laws and government regulations concerning environmental matters and employee safety and health. U.S. federal environmental legislation that affects us include the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act and the Comprehensive Environmental Response, Compensation and Liability Act (also known as Superfund). We are also regulated by the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The Environmental Protection Agency (EPA), OSHA and other federal agencies have the authority to write regulations that have an effect on our operations.
In addition to these federal regulations, various states have authority under the federal statutes mentioned above. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to federal requirements. State and federal authorities may seek fines and penalties for violating these laws and regulations. We believe that we have complied with such proceedings and orders at our stations without any materially adverse effect on our consolidated balance sheet, consolidated statements of income or consolidated statement of cash flows.
Environmental and Sustainability Initiatives
We are committed to managing our environmental impact responsibly and protecting the environment through our media programs and our charitable endeavors.
Our television stations regularly cover environmental and sustainability issues that affect their communities. In 2017, WWL dedicated an investigative team of journalists to explore failures by the city of New Orleans to adequately maintain and invest in the infrastructure of the city’s drainage system following widespread failures. The “Down the Drain” project resulted in a series of reports that led to community outrage, changes in municipal leadership, and a spotlight on a lack of environmental and sustainability initiatives in New Orleans. WZZM in Grand Rapids, Michigan reported on possible links between groundwater contamination in Kent County and now defunct tannery operations. As a result, the state legislature is considering changes in safe drinking water standards to address concerns. KING in Seattle, Washington revealed civilian workers at the Puget Sound Naval Shipyard were exposed to dangerous toxins for years, despite warnings from employees. WFAA in Dallas/Fort Worth, Texas, continued a series of investigative reports exposing links between groundwater contamination and fracking operations in the Barnett Shale. The ongoing investigative efforts raised questions from state lawmakers about the relationship between state regulators and the oil and gas industry. WFAA also continued its Project Green initiative, partnering with schools across North Texas to recognize educators who promote environmental and sustainability efforts.
We continue to focus on energy efficiency and reducing our carbon footprint. Efforts to digitize paper files has helped reduce paper storage and usage. Shredding of these paper files is part of a recycling program through a local business. Recycling copier waste toner cartridges, re-purposing office supplies, and the strategic placement of recycling waste containers throughout office space all contribute to a conscientious effort of responsibly managing our environmental impact. At our corporate offices in McLean, Virginia, we comply with the recycling guidelines set forth by Fairfax County and building management. This includes
specialized recycling of electronics such as rechargeable batteries, computer peripherals and cell phones, as well as common everyday items such as cans, office paper and other paper products, glass and plastic bottles.
At our stations, sustained power and energy efficiency projects were initiated or completed in 2017 to reduce electrical and heating costs. This includes a LED tower lighting replacement at WBIR in Knoxville, Tennessee; new studio LED lighting at WHAS in Louisville, Kentucky, KUSA/KTVD in Denver, Colorado, and KSDK in St. Louis, Missouri; energy-efficient HVAC replacement at KTVB in Boise, Idaho; as well as A/C unit replacements at WTSP in Tampa, Florida, a new hot water heater at WUSA in Washington, DC, and boiler replacement at WBIR in Knoxville.
TEGNA employees and their families took part in 51 Make A Difference Day projects in 2017. Make A Difference Day is one of the largest annual single-days of service nationwide. Since 1992, volunteers and communities have come together on Make A Difference Day with a single purpose: to improve the lives of others. Volunteer efforts often include environmentally beneficial projects such as planting trees, plants or keyhole gardens and cleaning up debris and repairing community spaces.
The TEGNA Foundation supports nonprofit activities in communities where we do business and contributes to a variety of charitable causes through its Community Grant Program. One of the TEGNA Foundation’s community action grant priorities is environmental conservation.
MARKETS WE SERVE
TELEVISION STATIONS AND AFFILIATED DIGITAL PLATFORM
Certain factors affecting forward-looking statements
Certain statements in this Annual Report on Form 10-K contain certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project” and similar expressions, among others, generally identify “forward-looking statements”. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated in the forward-looking statements.
Our actual financial results may be different from those projected due to the inherent nature of projections. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. The forward-looking statements contained in this Form 10-K speak only as of the date of its filing. Except where required by applicable law, we expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-K to reflect subsequent events, changed circumstances, changes in expectations, or the estimates and assumptions associated with them. The forward-looking statements in this Form 10-K are intended to be subject to the safe harbor protection provided by the federal securities laws.
ITEM 1A. RISK FACTORS
An investment in our common stock involves risks and uncertainties and investors should consider carefully the following risk factors before investing in our securities. We seek to identify, manage and mitigate risks to our business, but risk and uncertainty cannot be eliminated or necessarily predicted. The risks described below may not be the only risks we face. Additional risks that we do not yet perceive or that we currently believe are immaterial may adversely affect our business and the trading price of our securities.
Changes in economic conditions in the U.S. markets we serve may depress demand for our products and services
We generate a significant portion of our revenues from the sale of advertising at our television stations. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as budgeting and buying patterns. As a result, our operating results depend on the relative strength of the economy in our principal television markets as well as the strength or weakness of regional and national economic factors. A decline in economic conditions in the U.S. could have a significant adverse impact on our businesses and could significantly impact all key advertising revenue categories.
Competition from alternative forms of media may impair our ability to grow or maintain revenue levels in traditional and new businesses
Advertising and marketing services produces the majority of our revenues, with our stations’ affiliated desktop, mobile and
tablet advertising revenues being an important component. Technology, particularly new video formats, streaming and downloading capabilities via the Internet, video-on-demand, personal video recorders and other devices and technologies used in the entertainment industry continues to evolve rapidly, leading to alternative methods for the delivery and storage of digital content. These technological advancements have driven changes in consumer behavior and have empowered consumers to seek more control over when, where and how they consume news and entertainment, including through so-called “cutting the cord” and other consumption strategies. These innovations may affect our ability to generate television audience, which may make our television stations less attractive to both household audiences and advertisers. This competition may make it difficult for us to grow or maintain our revenues.
We are dependent on advertising revenues, which, in turn, depend on a number of factors, some of which are cyclical and many of which are beyond our control
In 2017, 61% of our revenues were derived from television spot and digital advertising. Demand for advertising is highly dependent upon the strength of the U.S. economy, both in the markets our stations serve and in the nation as a whole. During an economic downturn, demand for advertising may decrease. Our advertising revenues can also vary substantially from year to year, driven by the political election cycle (e.g., even years); the ability and willingness of candidates and political action committees to raise and spend funds on television and digital advertising, and the competitive nature of the elections impacting viewers within our stations’ markets. Advertising revenues will also vary based on the coverage of major sporting events (e.g., Olympics and Super Bowl) due to our high concentration of NBC stations.
In addition, shifting viewer preferences could cause our advertising revenues to decline as a result of changes to the ratings of our programming, which may materially negatively affect our business and results of operations.
The value of our assets or operations may be diminished if our information technology systems fail to perform adequately or if we are the subject of a data breach or cyber attack
Our information technology systems are critically important to operating our business efficiently and effectively. We rely on our information technology systems to manage our business data, communications, news and advertising content, digital products, order entry, fulfillment and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, broadcasting disruptions, and loss of sales and customers, causing our business and results to be impacted.
Furthermore, attempts to compromise information technology systems occur regularly across many industries and sectors, and we may be vulnerable to security breaches beyond our control. We invest in security resources and technology to protect our data and business processes against risk of data security breaches and cyber-attack, but the techniques used to attempt attacks are constantly changing. A breach or successful attack could have a negative impact on our operations or business reputation. We maintain cyber risk insurance, but this insurance may be insufficient to cover all of our losses from any future breaches of our systems.
As has historically been the case in the broadcast sector, loss of, or changes in, affiliation agreements or retransmission consent agreements could adversely affect operating results for our stations
Most of our stations are covered by our network affiliation agreements with the major broadcast television networks (ABC, CBS, NBC, and Fox). These television networks produce and distribute programming in exchange for each of our stations’ commitment to air the programming at specified times and for commercial announcement time during the programming. The cost of network affiliation agreements represents a significant portion of our television operating expenses.
Each of our affiliation agreements has a stated expiration date (NBC-2021, CBS-2019, ABC-2018, Fox-2019). If renewed, our network affiliation agreements may be renewed on terms that are less favorable to us. The non-renewal or termination of any of our network affiliation agreements would prevent us from being able to carry programming of the affiliate network. This loss of programming would require us to obtain replacement programming, which may involve higher costs and/or which may not be as attractive to our audiences, resulting in reduced revenues.
In recent years, the networks have streamed their programming on the Internet and other distribution platforms, in some cases live or within a short period of the original network programming broadcast on local television stations, including those we own. An increase in the availability of network programming on alternative platforms that either bypass or provide less favorable terms to local stations - such as cable channels, the Internet and other distribution vehicles - may dilute the exclusivity and value of network programming originally broadcast by the local stations and could adversely affect the business, financial condition and results of operations of our stations.
Our retransmission consent agreements with major cable, satellite and telecommunications service providers permit them to retransmit our stations’ signals to their subscribers in exchange for the payment of compensation to us (which we classify as subscription revenues). This source of revenue represented approximately 38% of our 2017 total revenues, and we expect subscription revenues to increase in 2018 and moving forward. As is the case in the broadcast television industry generally, if we
are unable to renegotiate these agreements on favorable terms, or at all, the failure to do so could have an adverse effect on our business, financial condition, and results of operations.
The spin-off of our Cars.com business and sale of our majority ownership interest in CareerBuilder has reduced the size and diversification of our business, which in turn increases our exposure to the changes and highly competitive environment of the broadcast industry.
We now operate as a single business segment which has more broadcast sector concentration. Broadcast companies operate in a highly competitive environment and compete for audiences, advertising and marketing services revenue and quality programing. Lower audience share, declines in advertising and marketing services spending, and increased programming costs would adversely affect our business, financial condition and results of operations.
In addition, the Federal Communications Commission (FCC) and Congress are contemplating several new laws and changes to existing media ownership and other broadcast-related regulations, regarding a wide range of matters (including permitting companies to own more stations in a single market, as well as owning more stations nationwide). Changes to FCC rules may lead to additional opportunities as well as increased uncertainty in the industry. We cannot be assured that we will be able to compete successfully in the future against existing, new or potential competitors, or that competition and consolidation in the media marketplace will not have a material adverse effect on our business, financial condition or results of operations.
Changing regulations may also impair or reduce our leverage in negotiating affiliation or retransmission agreements, adversely affecting our revenues, or result in increased costs, reduced valuations for certain broadcasting properties or other impacts, all of which may adversely impact our future profitability. All of our television stations are required to hold television broadcasting licenses from the FCC; when granted, these licenses are generally granted for a period of eight years. Under certain circumstances, the FCC is not required to renew any license and could decline to renew future license applications.
Changes in the regulatory environment could increase our costs or limit our opportunities for growth
Our television stations are subject to various obligations and restrictions under the Communications Act and FCC regulations. These requirements may be affected by legislation, FCC actions, or court decisions, and any such changes may affect the performance of our business, such as by imposing new obligations or by limiting our television stations’ exclusivity or retransmission consent rights. In addition, although the FCC voted in November 2017 to reduce restrictions on local broadcast ownership, these regulatory changes could be overturned in pending court challenges or could be reversed in the future by Congress or the FCC. If broadcast ownership rules become more restrictive, our opportunities to grow our broadcast business through acquisitions or other strategic transactions could be impaired.
There could be significant liability if the spin-off of either the publishing businesses or Cars.com were determined to be a taxable transaction
In June 2015, we spun off our former publishing businesses, Gannett Co. Inc. (Gannett) and on May 31, 2017 we completed our spin-off of Cars.com, collectively “the spin-offs”. In connection with each of the spin-offs, we received an opinion from outside tax counsel to the effect that the requirements for tax-free treatment under Section 355 of the Internal Revenue Code were satisfied. The opinion relies on certain facts, assumptions, representations and undertakings from TEGNA and the spun-off businesses regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings is incorrect or not satisfied, TEGNA and its stockholders may not be able to rely on the opinion of tax counsel and could be subject to significant tax liabilities.
Notwithstanding the opinion of tax counsel, the Internal Revenue Service could determine on audit that either of the spin-offs are taxable if it determines that any of these facts, assumptions, representations or undertakings were incorrect or have been violated or if it disagrees with the conclusions in the opinion, or for other reasons, including as a result of certain significant changes in the share ownership of TEGNA or the spin-off businesses after the separation. If either spin-off were determined to be taxable for U.S. federal income tax purposes, TEGNA and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.
Volatility in the U.S. credit markets could significantly impact our ability to obtain new financing to fund our operations and strategic initiatives or to refinance our existing debt at reasonable rates and terms as it matures
At December 31, 2017, we had approximately $3.01 billion in debt and approximately $1.49 billion of undrawn additional borrowing capacity under our revolving credit facility that expires in 2020. This debt matures at various times during the years 2018-2027. While our cash flow is expected to be sufficient to pay amounts when due, if operating results deteriorate significantly, a portion of these maturities may need to be refinanced. Access to the capital markets for longer-term financing is generally unpredictable and volatile credit markets could make it harder for us to obtain debt financings.
The value of our existing intangible assets may become impaired, depending upon future operating results
Goodwill and other intangible assets were approximately $3.85 billion at December 31, 2017, representing approximately 78% of our total assets. These assets are subject to annual impairment testing and more frequent testing upon the occurrence of certain events or significant changes in circumstance that indicate all or a portion of their carrying values may no longer be recoverable in which case a non-cash charge to earnings may be necessary. We may subsequently experience market pressures which could cause future cash flows to decline below our current expectations, or volatile equity markets could negatively impact market factors used in the impairment analysis, including earnings multiples, discount rates, and long-term growth rates. Any future evaluations requiring an asset impairment charge for goodwill or other intangible assets would adversely affect future reported results of operations and shareholders’ equity, although such charges would not affect our cash flow.
Our strategic acquisitions, investments and partnerships could pose various risks, increase our leverage and may significantly impact our ability to expand our overall profitability
Acquisitions involve inherent risks, such as increasing leverage and debt service requirements and combining company cultures and facilities, which could have a material adverse effect on our results of operations or cash flow and could strain our human resources. We may be unable to successfully implement effective cost controls, achieve expected synergies or increase revenues as a result of an acquisition. Acquisitions may result in us assuming unexpected liabilities and in management diverting its attention from the operation of our business. Acquisitions may result in us having greater exposure to the industry risks of the businesses underlying the acquisition. Strategic investments and partnerships with other companies expose us to the risk that we may be unable to control the operations of our investee or partnership, which could decrease the amount of benefits we realize from a particular relationship. We are exposed to the risk that our partners in strategic investments and infrastructure may encounter financial difficulties which could disrupt investee or partnership activities, or impair assets acquired, which would adversely affect future reported results of operations and shareholders’ equity. The failure to obtain regulatory approvals may prevent us from completing or realizing the anticipated benefits of acquisitions. Furthermore, acquisitions may subject us to new or different regulations which could have an adverse effect on our operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Our media facilities are adequately equipped with the necessary television digital broadcasting equipment. We own or lease 51 transmitter facilities. All of our stations have converted to digital television operations in accordance with applicable FCC regulations. Our broadcasting facilities are adequate for present purposes. A listing of television station locations can be found on page 10.
Our digital businesses that support our media operations lease their facilities. This includes facilities for executive offices, sales offices and data centers. Our facilities are adequate for present operations. We believe that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion. A listing of our digital businesses locations can be found on page 11.
In October 2015, we sold our corporate headquarters in McLean, VA for a purchase price of $270 million. Since the sale, we have been leasing a portion of the facility pursuant to a lease which runs through January 2019.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings may be found in Note 12 of the Notes to consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our shares are traded on the New York Stock Exchange (NYSE) with the symbol TGNA. Information regarding outstanding shares, shareholders and dividends may be found on pages 1, 7 and 15 of this Form 10-K.
TEGNA Common Stock Prices
High-low range by quarters based on NYSE-composite prices. On May 31, 2017, we completed the previously announced spin-off of Cars.com creating two publicly traded companies. TEGNA’s common stock prices in and after the second quarter of 2017 reflect the price impact of the spin-off transaction.
Following the Cars.com spin-off on May 31, 2017, we announced that we would begin paying a regular quarterly cash dividend of $0.07 per share. We paid dividends totaling $90.2 million in 2017 and $121.6 million in 2016. We expect to continue paying comparable regular cash dividends in the future. The rate and frequency of future dividends will depend on future earnings, capital requirements and financial condition and other factors considered relevant by our Board of Directors.
Purchases of Equity Securities
On September 19, 2017, our Board of Directors authorized a new share repurchase program for up to $300.0 million over the next three years. Under our former and current share repurchase programs, we spent $23.5 million in 2017 to repurchase 1.5 million of our shares, at an average price per share of $15.67. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. As of December 31, 2017, approximately $285 million remained under this authorization.
Comparison of shareholder return – 2013 to 2017
The following graph compares the performance of our common stock during the period December 30, 2012, to December 31, 2017, with the S&P 500 Index, and two peer group indices we selected.
Our 2016 peer group includes Angie’s List Inc., CBS Corp., Constant Contact Inc., Discovery Communications Inc., E.W. Scripps Company, Gray Television Inc., Groupon Inc., Harte Hanks Inc., IAC/InterActiveCorp, LinkedIn Corp., Media General, Inc., Meredith Corp., Monster Worldwide Inc., Nexstar Broadcasting Group Inc., Sinclair Broadcast Group Inc., Tribune Media Company, Yahoo Inc., and Yelp Inc. (collectively, the “2016 Peer Group”). Our 2016 Peer Group reflects our business segments prior to the Cars.com spin-off and the sale of our controlling interest in CareerBuilder and therefore includes both media and digital companies.
Our 2017 peer group includes CBS Corp., Discovery Communications Inc., E.W. Scripps Company, Graham Holdings Co., Gray Television Inc., Meredith Corp., Nexstar Media Group Inc., Scripps Networks Interactive, Sinclair Broadcast Group Inc., Tribune Media Company and Twenty-First Century Fox, Inc. (collectively, the “2017 Peer Group”). Our 2017 Peer Group reflects our post-spin business and therefore only includes media companies.
The S&P 500 Index includes 500 U.S. companies in the industrial, utilities and financial sectors and is weighted by market capitalization. The total returns of each peer group index also are weighted by market capitalization.
The graph depicts representative results of investing $100 in our common stock, the S&P 500 Index, the 2016 Peer Group and the 2017 Peer Group index at closing on December 31, 2012. It assumes that dividends were reinvested monthly with respect to our common stock (including, as it relates to the Gannett spin-off, the aggregate value of the former publishing businesses as distributed to our shareholders, and, as it relates to the Cars.com spin-off, the aggregate value of the former digital automotive marketplace business as distributed to our shareholders), daily with respect to the S&P 500 Index and monthly with respect to each 2016 and 2017 Peer Group company.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the years 2013 through 2017 is contained under the heading “Selected Financial Data” on page 72 and is derived from our audited financial statements for those years.
The information contained in the “Selected Financial Data” is not necessarily indicative of the results of operations to be expected for future years, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are an innovative media company that serves the greater good of our communities. Our business includes 47 television stations operating in 39 markets, offering high-quality television programming and digital content. Each television station also has a robust digital presence across online, mobile and social platforms.
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. Our digital marketing services (DMS) business is now reported within our Media business. As a result of these strategic actions, we have disposed of substantially all of our Digital Segment business and have therefore classified substantially all of its historical financial results as discontinued operations for all periods presented. Historic Digital Segment results relate to our former Cofactor (sold in December 2016), Blinq (disposed in 2015) and PointRoll (sold in 2015) business units.
Consolidated Results from Operations
A consolidated summary of our results is presented below (in thousands).
**** Not meaningful
During 2017, we changed the way we present certain revenues, which we now call Advertising and Marketing Services, to better reflect the way we sell our products and services to our clients. This category includes all sources of our traditional television and digital revenues including Premion, DMS and other digital advertising and marketing revenues across our platforms.
Also during 2017, the “Retransmission” revenue category was renamed “Subscription” to better reflect changes in that revenue stream, including the distribution of TEGNA stations on OTT streaming services.
As a result of these changes, revenues are grouped into the following categories: Advertising & Marketing Services (AMS), political, subscription, other, and our former digital businesses that were not classified as discontinued operations.The following table summarizes the year-over-year changes in these select revenue categories (in thousands):
**** Not meaningful
Revenue decreased $101.1 million, or 5%, in 2017 as compared to 2016. This net decrease was primarily driven by lower political revenue of $131.6 million, due to an expected decrease reflecting the absence of 2016 politically related advertising spending. In addition, the decrease was due to a decline in AMS revenue of $98.1 million, or 8%, in 2017. This decline was primarily due to the absence of Olympic revenue in 2017 as compared to $57.3 million in 2016 and lower DMS revenue due to the conclusion of a transition services agreement with Gannett. Partially offsetting the overall AMS decline was an increase in digital revenue, including Premion revenue. Partially offsetting the overall decrease was an increase in subscription revenue of $137.0 million, or 24%, due to the recent renewal of certain retransmission agreements as well as annual rate increases under other existing retransmission agreements.
Revenue increased $239.3 million, or 14%, in 2016 as compared to 2015. The increase was driven by political advertising, Summer Olympics advertising, and a substantial increase in subscription revenues. Political advertising revenue increased $133.4 million due to the presidential election year political spending. Political revenues are cyclical and higher in even years (e.g. 2016, 2018). Summer Olympic revenue of $57.3 million also contributed to the overall increase. Subscription revenues increased $133.1 million or 30% in 2016, reflecting retransmission agreements renewals, as well as annual rate increases for existing agreements. These increases were partially offset by a decrease of $40.9 million in revenue from our former digital businesses (Cofactor, Blinq, and PointRoll), which was sold in December 2016.
Costs of Revenue
Cost of revenue increased $138.3 million, or 17%, in 2017 as compared to 2016. This increase was primarily due to an $175.9 million increase in reverse compensation related programming costs (primarily driven by 11 of our stations paying NBC reverse compensation payments for the first time in 2017). This increase was partially offset by a decline in DMS costs of $18.7 million driven by the termination of the transition service agreement with Gannett, the absence of $11.4 million of expense related to our 2016 voluntary early retirement program, and a $7.4 million decrease in Cofactor expenses due to its disposition in 2016.
Cost of revenue increased $67.3 million, or 9%, in 2016 as compared to 2015. This increase was primarily due to an $88.6 million increase in programming costs.
Business Units - Selling, General and Administrative Expenses
Business unit selling, general, and administrative expenses decreased $43.6 million, or 13%, in 2017 as compared to 2016. The decrease was primarily the result of a $19.3 million decline in DMS selling and advertising expense related to the termination of the transition service agreement with Gannett and a reduction of $2.2 million in severance expense. Also contributing to the decline was the absence of $8.6 million of Cofactor expenses, due to its disposition in December 2016, and the absence of $4.0 million of expense related to our 2016 voluntary early retirement program.
Business unit selling, general, and administrative expenses increased $12.9 million, or 4%, in 2016 as compared to 2015. The increase is primarily due to $4.0 million of expense related to our voluntary early retirement program and $2.2 million of severance expense for our DMS business.
Corporate - General and Administrative Expenses
Our corporate costs are separated from our business expenses and are recorded as general and administrative expenses in our Consolidated Statements of Income. 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.
Corporate general and administrative expenses decreased $3.7 million, or 6%, in 2017 as compared to 2016. The decrease was primarily due to a reduction in severance expenses of $0.9 million incurred in 2017. The remaining difference is attributable to the right sizing of the corporate function in connection with the strategic actions impacting our former Digital Segment.
Corporate general and administrative expenses decreased $2.4 million, or 4%, in 2016 as compared to 2015. The fluctuation is due to the right sizing of the corporate function following the 2015 publishing businesses spin-off.
Depreciation expense decreased $0.3 million, or 1%, in 2017 as compared to 2016. The decrease was primarily due to recent declines in the purchase of property and equipment, partially offset by additional depreciation related to a change in useful lives of certain broadcasting assets, including accelerated depreciation expense of $1.5 million in connection with the FCC channel repack process.
Depreciation expense decreased $6.8 million, or 11%, in 2016 as compared to 2015. The decrease was primarily due a decrease of $3.6 million in depreciation expense due to the sale of our corporate headquarters, and a $2.7 million decrease in depreciation expense due to the absence of property and equipment related to a business sold in 2015.
Amortization of Intangible Assets
Intangible asset amortization expense decreased $1.7 million, or 7%, in 2017 as compared to 2016 and $1.3 million, or 5%, in 2016 as compared to 2015. The decreases were a result of certain intangible assets associated with previous acquisitions reaching the end of their useful lives.
Asset Impairment and Facility Consolidation Charges (Gains)
Asset impairment and facility consolidation charges declined $27.7 million from a charge of $32.1 million in 2016 to a charge of $4.4 million in 2017. The 2017 charges primarily consisted of $0.9 million in net expenses related to Hurricane Harvey (expenses of $26.9 million, net of insurance proceeds of $26.0 million), $1.4 million related to the consolidation of office space at our DMS business unit and corporate headquarters, and $2.2 million of non-cash impairment charges incurred by our broadcast station related to a building sale. The 2016 charges were comprised of a goodwill impairment charge of $15.2 million (for our former Cofactor business), a $6.3 million impairment related to a programming asset, a $4.7 million impairment charge related to a long-lived-asset, and a $4.6 million lease related charge (for our former Cofactor business).
Asset impairment and facility consolidation charges (gains) fluctuated $91.5 million from gains of $59.4 million in 2015 to charges of $32.1 million in 2016. The year-over-year fluctuation was primarily driven by the $89.9 million net gain from the sale of our corporate headquarters building in 2015.
Operating income decreased $162.3 million, or 23%, in 2017 as compared to 2016. The decrease was driven by the changes in revenue and operating expenses described above. Our operating margins were lower at 28.7% in 2017 compared to 35.3% in 2016, primarily driven by the increase in programming expenses and absence of $131.6 million of political revenue compared to 2016.
Operating income increased $77.9 million, or 12%, in 2016 as compared to 2015, primarily driven by the changes in revenue and operating expenses discussed above. Our operating margins were consistent in 2016, 35.3%, compared to 35.7% in 2015, as 2016 increases in revenues were offset by 2016 increases in programming expenses and the absence of the 2015 gain on sale of our corporate headquarters building.
Payroll and programming expense trends:
Payroll and programming expenses are the two largest elements of our normal operating expenses, and are summarized below, expressed as a percentage of total pre-tax operating expenses. Payroll expenses as a percentage of total pre-tax operating expenses decreased in 2017 primarily due to increases in programming expenses, which now make up a larger percentage of operating costs, and lower headcount as a result of right sizing of the corporate function in connection with the strategic actions impacting our former Digital Segment, and at DMS driven by the conclusion of the transition service agreement
with Gannett. Programming expenses as a percentage of total pre-tax operating expenses have increased due to an increase in reverse compensation payments (primarily driven by 11 of our stations paying NBC reverse compensation payments for the first time in 2017).
Non-operating income and expense
Equity income (loss): This income statement category reflects earnings or losses from our equity method investments. Equity income (loss) fluctuated $13.8 million from losses of $3.4 million in 2016 to earnings of $10.4 million in 2017. The fluctuation was primarily due to a $17.5 million gain we recorded in 2017 as a result of the sale of our Livestream investment. This gain was partially offset by a $2.6 million impairment of an equity method investment recorded in 2017.
Between 2015 and 2016, equity (losses) increased $0.6 million, from a loss of $2.8 million in 2015 to a loss of $3.4 million in 2016. This is driven by fluctuations in our share of earnings from our equity method investments.
Interest expense: Interest expense decreased $21.7 million, or 9%, in 2017 as compared to 2016, primarily due to lower average outstanding total debt balance, due to the $609.9 million mid-year paydown of our revolving credit facility and the accelerated repayment of $280 million of principal on unsecured notes due in October 2019 (which will result in approximately $14.4 million of interest expense savings in 2018). The total average outstanding debt was $3.59 billion in 2017 compared to $4.25 billion in 2016. The decline in outstanding debt was partially offset by an increase in the weighted average interest rate on total outstanding debt which was 5.57% in 2017, compared to 5.29% in 2016.
Interest expense decreased $41.2 million, or 15%, in 2016 as compared to 2015, primarily due to lower average outstanding total debt balance and a lower average interest rate, reflecting the extinguishment of higher cost debt in 2015 and 2016, including the 10% senior notes and 7.125% notes that we repaid in April and November of 2016, respectively. The total average outstanding debt was $4.25 billion in 2016 compared to $4.37 billion in 2015. The weighted average interest rate on total outstanding debt was 5.29% in 2016, compared to 5.98% in 2015.
A further discussion of our borrowing and related interest cost is presented in the “Liquidity and capital resources” section of this report beginning on page 26 and in Note 6 to the consolidated financial statements.
Other non-operating expenses: Other non-operating expenses increased $11.8 million from $23.5 million in 2016 to $35.3 million in 2017. The 2017 non-operating expenses primarily consisted of $18.7 million in transaction costs associated with strategic actions (primarily the Cars.com spin-off). The 2017 non-operating expenses also consisted of $6.6 million in costs incurred in connection with the early extinguishment of debt, a $5.8 million loss associated with the write-off of a note receivable from one of our former equity method investments, and a $3.9 million impairment of our stock investment in Gannett. The 2016 non-operating expenses primarily consisted of $21.0 million in costs associated with the spin-off of our Cars.com business unit and acquisition related costs.
Other non-operating expenses increased $14.8 million from $8.7 million in 2015 to $23.5 million in 2016. The 2016 non-operating expenses primarily consisted of $21.0 million in expenses associated with the spin-off of our Cars.com business unit. Our 2015 non-operating expenses consisted of $46.8 million in expenses related to the spin-off of our former publishing business and $5.9 million in costs incurred in connection with the early extinguishment of debt. These 2015 expenses were offset by a gain of $43.8 million on the sale of a business.
(Benefit) provision for income taxes
On December 22, 2017, Pub. L. No. 115-97, commonly known as the Tax Cuts and Jobs Act (the Act), was enacted into law. Among other provisions, the Act lowered the corporate tax rate from 35% to 21% as of January 1, 2018. The Act also contains certain provisions that will partially reduce the benefit of the lower corporate tax rate, most notably for us is the repeal of the domestic manufacturing deduction. Overall, we believe the Act will be beneficial to us, lowering our effective tax rate and cash tax payments.
We are required to revalue our deferred tax assets and deferred tax liabilities as of the Act’s enactment date to reflect the future impact of the 21% corporate tax rate. This resulted in a one-time $221 million deferred tax benefit being recorded in the fourth quarter statement of income, and a reduction to our December 31, 2017 net deferred tax liability as compared to the ending 2016 net deferred tax liability. This deferred tax benefit will be updated upon the filing of our 2017 income tax returns in late 2018.
We reported pre-tax income from continuing operations attributable to TEGNA of $310.7 million for 2017. The effective tax rate on pre-tax income was -44.2% including a 71% or $221 million one-time deferred tax benefit recorded in conjunction with the Act. We reported pre-tax income from continuing operations attributable to TEGNA of $449.3 million for 2016. The effective tax rate on pre-tax income was 31.2%. The 2017 effective tax rate decreased as compared to 2016 primarily due to the recognition of the one-time deferred tax benefit recorded in conjunction with the Act.
We reported pre-tax income from continuing operations attributable to TEGNA of $345.6 million for 2015. The 2015 provision for income taxes reflects nondeductible transaction costs and effective tax rate changes associated with the spin-off of our former publishing business. The effective tax rate in 2015 was 33.6%.
Taking into account the Act’s new 21% corporate tax rate and the Act’s other provisions, we currently anticipate the combined federal and state effective tax rate will be between 23% and 25% for calendar year 2018. We expect our cash taxes will decline by approximately $35 million in 2018 as a result of the new legislation, and plan to reinvest the proceeds to pursue organic and inorganic growth opportunities during 2018. Further information concerning income tax matters is contained in Note 5 of the consolidated financial statements.
Net income from continuing operations
Net income from continuing operations and related per share amounts are presented in the table below (in thousands, except per share amounts).
We reported net income from continuing operations of $448.0 million or $2.06 per diluted share for 2017 compared to $309.1 million or $1.41 per diluted share for 2016. Our 2017 earnings per share was benefited by approximately $1.02 as a result of one-time deferred tax benefit recorded in connection with the Act (as discussed above).
Earnings per share also benefited from a net decrease of approximately 2.2 million diluted shares from December 31, 2016 to December 31, 2017, and approximately 10.0 million diluted shares from December 31, 2015, to December 31, 2016, as a result of share repurchases, which were partially offset by share issuances under our stock-based award programs.
Operating results 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 Executive 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-K non-GAAP financial performance measures that exclude from our reported GAAP results the impact of “special items” consisting of severance expense, charges related to asset impairment and facility consolidations, gain on sale and an impairment of equity method investments, gains/losses related to business disposals, costs associated with debt repayment, TEGNA Foundation donations, costs associated with the Cars.com spin-off transaction, and certain tax benefits associated with the impact of tax reform that was enacted in December 2017. We believe that such expenses, charges and gains 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 expenses, charges and gains in the future, we believe that removing these items for purposes of calculating the non-GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.
We discuss Adjusted EBITDA (with and without corporate expenses), a non-GAAP financial performance measure that we believe offers a useful view of the overall operation of its 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 spin-off transaction expenses 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 alternate to net income as a measure of operating performance or to cashflows 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.
We also consider adjusted revenues to be an important non-GAAP financial measure. Our adjusted revenue is calculated by taking total company revenues on a GAAP basis and adjusting it to exclude (1) estimated incremental Olympic and Super Bowl revenue, (2) political revenues, (3) revenues from a previously sold business (Cofactor), and (4) 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 and credits affecting reported results: Our results for the year ended December 31, 2017, included the following items we consider “special items” and are not indicative of our normal ongoing operations:
Results for the year ended December 31, 2016, included the following special items:
Below are reconciliations of certain line items impacted by special items to the most directly comparable financial measure calculated and presented in accordance with GAAP on our Consolidated Statements of Income (in thousands, except per share amounts):
Non-GAAP consolidated results
The following is a comparison of our as adjusted non-GAAP financial results between 2017 and 2016. Changes between the periods are driven by the same factors summarized above in the “Results of Operations” section within Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except per share amounts).
**** Not meaningful
Reconciliations of adjusted revenues to our revenues presented in accordance with GAAP on our Consolidated Statements of Income are presented below (in thousands):
Adjusted EBITDA - Non-GAAP
Reconciliations of Adjusted EBITDA (inclusive and exclusive of Corporate expenses) to net income from continuing operations presented in accordance with GAAP on our Consolidated Statements of Income is presented below:
**** Not meaningful
Adjusted EBITDA margin was 36% (without corporate expense) and 33% including corporate. Our total Adjusted EBITDA decreased $211.4 million or 25% in 2017 compared to 2016. The decrease was primarily driven by higher programming costs (primarily driven by 11 of our stations paying NBC reverse compensation payments for first time in 2017) and the expected absence of Olympic and political revenue in 2017.
Free cash flow reconciliation
Our free cash flow, a non-GAAP liquidity measure, was $309.3 million for the year ended December 31, 2017, compared to $588.6 million for the same period in 2016. Cash flows include the operations of our former publishing businesses (through its spin-off date of June 29, 2015), Cars.com (through its spin-off date of May 31, 2017), and CareerBuilder (through its date of sale on July 31, 2017). Our 2017 free cash flow was lower than 2016 due to the same factors affecting cash flow from operating activities summarized within “Liquidity and capital resources” discussed below.
Reconciliations from “Net cash flow from operating activities” to “Free cash flow” are presented below (in thousands):
Liquidity and capital resources
Our cash generation capability and financial condition, together with our significant borrowing capacity under our revolving credit agreement, are sufficient to fund our capital expenditures, interest expense, dividends, share repurchases, investments in strategic initiatives and other operating requirements. Over the longer term, we expect to continue to fund debt maturities, acquisitions and investments through a combination of cash flows from operations, borrowings under our revolving credit agreement and funds raised in the capital markets. As we summarize below, during 2017 we have completed several strategic actions that have positioned us to be able to pursue strategic acquisition opportunities that may develop in our sector, invest in new content and revenue initiatives, and grow revenue in fiscal year 2018.
During the second quarter we completed our spin-off of Cars.com which resulted in a one-time tax-free cash distribution of $650.0 million to TEGNA. We used $609.9 million of the distribution proceeds to fully pay down our then outstanding revolving credit agreement borrowings.
On July 31, 2017, we sold our controlling ownership interest in CareerBuilder. Our share of the pre-tax net cash proceeds from the sale was $198.3 million, net of cash transferred of $36.6 million. Additionally, prior to the sale, CareerBuilder issued a final dividend to its selling shareholders, of which $25.8 million was retained by TEGNA. In October 2017, we used the net proceeds from the CareerBuilder sale and cash on hand, including the remaining cash distribution proceeds from Cars.com of $40.1 million, to early retire $280.0 million of principal of unsecured notes due in October 2019.
Our strategic actions and operating cash flows enabled our Board of Directors to approve two key capital allocation initiatives. First, we have been paying a regular quarterly cash dividend. We paid dividends totaling $90.2 million in 2017. Second, in the third quarter of 2017, our Board of Directors approved a new share repurchase program for up to $300 million of our common stock over the next three years. See the “Capital stock” section below for more information on the share repurchase program.
As of December 31, 2017, our total long-term debt, net of unamortized discounts and deferred financing costs, was $3.01 billion. Cash and cash equivalents as of December 31, 2017 totaled $98.8 million.
Our operations have historically generated strong positive cash flow which, along with availability under our existing revolving credit facility, has provided adequate liquidity to meet our internal investment requirements, as well as acquisitions. Our financial and operating performance, as well as our ability to generate sufficient cash flow to maintain compliance with credit facility covenants, are subject to certain risk factors; see Item 1A - Risk Factors for further discussion.
Our cash flows include the operations of Cars.com (through its spin-off date of May 31, 2017) and CareerBuilder (through its date of sale on July 31, 2017). The following table provides a summary of our cash flow information followed by a discussion of the key elements of our cash flows (in thousands):
2017 compared to 2016: Our net cash flow from operating activities was $386.2 million in 2017, compared to $683.4 million in 2016. The decrease was primarily due to higher programming costs of $175.9 million (primarily due to the NBC affiliation agreement), the decline in political revenue of $131.6 million, and the decline of approximately $230.9 million of operating cash flow from Cars.com and CareerBuilder. These decreases were partially offset by an increase in subscription revenue of $137.0 million and declines in tax payments of $51.6 million and interest payments of $25.0 million. Also partially offsetting the net operating cash flow decrease was a cash inflow received in 2017 of $32.6 million from a spectrum channel sharing agreement.
2016 compared to 2015: Our net cash flow from operating activities was $683.4 million in 2016, compared to $651.2 million in 2015. Operating cash flow in 2016 increased due to the absence of any pension contributions to our principal retirement plan (we made a special $100.0 million contribution in 2015 at the time of the publishing spin). In addition, operating cash flow increased due to higher revenue in 2016 largely driven by political spending. Partially offsetting these increases in cash flow from operating activities was a $101.0 million increase in income tax payments (due to higher taxable income), and the absence of our former publishing businesses which generated approximately $27.0 million of operating cash flow in the first half of 2015 (through the spin-off date of June 29, 2015).
2017 compared to 2016: Net cash provided by investing activities was $174.8 million in 2017 compared to cash used for investing activities of $273.3 million in 2016. The 2017 net cash inflow was primarily a result of the sale of the majority of our ownership in CareerBuilder, which provided $198.3 million of proceeds, net of cash transferred. Additionally, we had cash inflow of $36.5 million from the sale of assets, primarily comprised of proceeds of $21.3 million from the sale of our partial ownership in
Livestream and $14.6 million from the sale of our Gannett Co., Inc., common stock. These inflows were partially offset by purchases of property and equipment of $76.9 million in 2017.
The 2016 net cash used for investing activities of $273.3 million was primarily comprised of $206.1 million paid for the acquisitions of businesses (net of cash acquired), including DealerRater, Aurico, and Workterra. DealerRater was part of the Cars.com spin-off and Aurico and Workterra were included in the sale of our majority ownership in CareerBuilder, both occurring in 2017. Also contributing to the net outflow was the purchase of property and equipment in the amount of $94.8 million. Partially offsetting these outflows was $40.0 million of inflow from the sale of investments, primarily consisting of non-operating investments.
2016 compared to 2015: Net cash used by investing activities was $273.3 million in 2016 compared to cash provided by investing activities of $217.3 million in 2015. The difference between periods was primarily attributable to proceeds received in 2015 of $411.0 million related to sales of assets (primarily the sales of our corporate headquarters and Seattle broadcast buildings) and the sale of businesses (primarily Gannett Healthcare, Clipper and PointRoll). The year-over-year change was also attributable to the increase in cash paid for acquisitions from $54.0 million in 2015 to $206.1 million in 2016.
2017 compared to 2016: Net cash used for financing activities was $539.1 million in 2017 compared to $462.4 million in 2016. The 2017 net outflow of cash for financing activities was primarily due to debt activity and dividends. With regards to 2017 debt activity, prior to the completion of the spin-off, Cars.com borrowed approximately $675.0 million under a revolving credit facility agreement, while incurring $6.2 million of debt issuance costs. The proceeds were used to make a one-time tax-free cash distribution of $650.0 million from Cars.com to TEGNA. We used most of the cash received to pay down our then-outstanding revolving credit balance of $609.9 million. Total net payments on the revolving credit facility in 2017 were $635.0 million. Additionally, we used $412.3 million to pay down other existing debt, $90.2 million to pay dividends, and $23.5 million to repurchase common stock.
The 2016 net financing outflow of $462.4 million was primarily a result of stock repurchases of $161.9 million and dividend payments of $121.6 million. Additionally, we had a net debt outflow of $137.6 million primarily comprised of $310.0 million of borrowings which were partially offset by debt repayments of $447.6 million.
2016 compared to 2015: Net cash used for financing activities was $462.4 million in 2016 compared to $857.8 million in 2015. The difference between periods is primarily due to 2016 decreases in: debt repayments of $170.0 million; repurchases of our common stock of $109.0 million; and a one-time cash transfer in 2015 of $63.0 million to our former publishing businesses in connection with its spin-off.
As of December 31, 2017, our outstanding debt, net of unamortized discounts and deferred financing costs, was $3.01 billion and mainly is in the form of fixed rate notes. See “Note 6 Long-term debt” to our consolidated financial statements for a table summarizing the components of our long-term debt.
Our primary source of long-term debt is our revolving credit facility that expires on June 29, 2020 (the Amended and Restated Competitive Advance and Revolving Credit Agreement). On August 1, 2017, we amended our Amended and Restated Competitive Advance and Revolving Credit Agreement. Under the amended terms, our maximum total leverage ratio will remain at 5.0x through June 30, 2018, after which, as amended, it will be reduced to 4.75x through June 2019 and then to 4.5x until the expiration date of the credit agreement on June 29, 2020. Commitment fees on the revolving credit agreement are equal to 0.25% - 0.40% of the undrawn commitments, depending upon our leverage ratio, and are computed on the average daily undrawn balance under the revolving credit agreement and paid each quarter. Under the Amended and Restated Competitive Advance and Revolving Credit Agreement, we may borrow at an applicable margin above the Eurodollar base rate (LIBOR loan) or the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50%, or the one month LIBOR rate plus 1.00% (ABR loan). The applicable margin is determined based on our leverage ratio but differs between LIBOR loans and ABR loans. For LIBOR-based borrowing, the margin varies from 1.75% to 2.50%. For ABR-based borrowing, the margin will vary from 0.75% to 1.50%. Total commitments under the Amended and Restated Competitive Advance and Revolving Credit Agreement are $1.5 billion. As of December 31, 2017, we were in compliance with all covenants contained in our debt and credit agreements.
Below is a summary of our 2017 debt activity:
accelerated basis. We redeemed the 5.125% notes by paying 101.281% of the outstanding principal amount in accordance with the original terms.
We also have an effective shelf registration statement on Form S-3 on file with the U.S. Securities and Exchange Commission under which an unspecified amount of securities may be issued, subject to a $7.0 billion limit established by the Board of Directors. Proceeds from the sale of such securities may be used for general corporate purposes, including capital expenditures, working capital, securities repurchase programs, repayment of debt and financing of acquisitions. We may also invest borrowed funds that are not required for other purposes in short-term marketable securities.
Our debt maturities may be repaid with cash flow from operating activities, accessing capital markets or a combination of both. The following schedule of annual maturities of the principal amount of total debt assumes we use available capacity under our revolving credit agreement to refinance unsecured floating rate term loans and fixed rate notes due in 2018 and 2019. Based on this refinancing assumption, all of the obligations other than the VIE unsecured floating rate term loan due prior to 2020 are reflected as maturities for 2020 (in thousands).
(1) Amortization of term debt due in 2018 and 2019 are assumed to be repaid with funds from the revolving credit agreement, which matures in 2020. Excluding our ability to repay funds with the revolving credit agreement, contractual debt maturities is $121 million in 2018 and $420 million in 2019.
(2) Assumes current revolving credit agreement borrowings comes due in 2020 and credit facility is not extended.
Contractual obligations and commitments
The following table summarizes the expected cash outflows resulting from financial contracts and commitments as of the end of 2017 (in thousands).
Due to uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at December 31, 2017, we are unable to make reasonably reliable estimates of the period of cash settlement. Therefore, approximately $15 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 5 to the consolidated financial statements for a further discussion of income taxes.
On September 19, 2017, our Board of Directors authorized a new share repurchase program for up to $300.0 million over the next three years. As of December 31, 2017, we have $285.0 million remaining under this authorization. The table below summarizes our share repurchases during the past three years (in thousands).
The shares may be repurchased at management’s discretion, either in the open market or in privately negotiated block transactions. Management’s decision to repurchase shares will depend on price and other corporate developments. Purchases may occur from time to time and no maximum purchase price has been set. Certain of the shares we previously acquired have been reissued in settlement of employee stock awards.
Our common stock outstanding at December 31, 2017, totaled 214,930,653 shares, compared with 214,487,800 shares at December 31, 2016.
Effects of inflation and changing prices and other matters
Our results of operations and financial condition have not been significantly affected by inflation. The effects of inflation and changing prices on our property and equipment and related depreciation expense have been reduced as a result of an ongoing capital expenditure program and the availability of replacement assets with improved technology and efficiency.
Critical accounting policies and the use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting policies, which are those that are important to the presentation of our financial condition and results of operations and require management’s most subjective and complex judgments. This commentary should be read in conjunction with our financial statements, selected financial data and the remainder of this Form 10-K.
Revenue Recognition: Revenue is recognized when persuasive evidence of an arrangement exists, performance under the contract has begun, the contract price is fixed or determinable and collectibility of the related transaction price is reasonably assured. Revenue from sales agreements that contain multiple deliverables is allocated to each element based on the relative best estimate of selling price. Elements are treated as separate units of accounting if there is standalone value upon delivery. Amounts received from customers in advance of revenue recognition are deferred as liabilities.
Our primary source of revenue is through the sale of advertising time on our television stations. Advertising revenues are recognized, net of agency commissions, in the period when the advertisements are aired. We also earn subscription revenue (formerly retransmission revenue) from retransmission consent arrangements. Under these agreements, we receive cash consideration from multichannel video programming distributors (e.g., cable and satellite providers) and over the top (OTT) providers in return for our consent to permit the cable/satellite/OTT provider to retransmit our television signal. Consent fees are recognized over the contract period based on a negotiated fee per subscriber. Subscription revenues have increased as a percentage of overall revenue in recent years. In 2017, such revenues accounted for approximately 38% of overall revenue compared to 29% in 2016. In addition, we also generate online advertising revenue through the display of digital advertisements across various digital platforms. Online advertising agreements typically take the form of an impression-based contract, fixed fee time-based contract or transaction based contract. The customers are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an advertisement. Revenue is recognized evenly over the contract term for fixed fee contracts where a minimum number of impressions or click-throughs is not guaranteed. Revenue is recognized as the service is delivered for impression and transaction based contracts.
Goodwill: As of December 31, 2017, our goodwill balance was $2.58 billion and represented approximately 52% of our total assets. Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed. Goodwill is tested for impairment on an annual basis (first day of our fourth quarter) or between annual tests if events or changes in circumstances occurred that indicate the fair value of a reporting unit may be below its carrying amount.
Goodwill is tested for impairment at a level referred to as the reporting unit. A reporting unit is a business for which discrete financial information is available and segment management regularly reviews the operating results. The level at which we test goodwill for impairment requires us to determine whether the operations below the operating segment level constitute a reporting unit. We have determined that our one segment, Media, consists of a single reporting unit.
Before performing the annual goodwill impairment test quantitatively, we first have the option to perform a qualitative assessment to determine if the quantitative test must be completed. The qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company and specific reporting unit specifications. If after performing this assessment, we conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we are required to perform the quantitative test. Otherwise, the quantitative test is not required. In 2017, we elected not to perform the optional qualitative assessment of goodwill and instead performed the quantitative impairment test.
When performing the quantitative test, we determine the fair value of the reporting unit and compare it to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the reporting unit’s goodwill is impaired and we recognize an impairment loss equal to the difference between the reporting unit’s carrying amount and fair value.
We estimate the fair value of our reporting unit based on a market-based valuation methodology, which is primarily based on
our consolidated market capitalization plus a control premium. In the fourth quarter of 2017, we completed our annual goodwill impairment test for our reporting unit. The results of the test indicated that the estimated fair value of our reporting unit significantly exceeded the carrying value. For the Media reporting unit, the estimated value would need to decline by over 70% to fail the quantitative goodwill impairment test. We do not believe that the reporting unit is currently at risk of incurring a goodwill impairment in the foreseeable future.
Impairment assessment inherently involves management judgments regarding a number of assumptions described above. Fair value of the reporting unit also depends on the future strength of the economy in our principal media markets. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many
variables inherent in the estimation of the reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions could have a material effect on the estimated fair value of our reporting unit and could result in a goodwill impairment charge in a future period.
In connection with the strategic review and sale process for CareerBuilder, during the second quarter of 2017, we performed an interim impairment test for our former CareerBuilder reporting unit within our Digital Segment, and as a result recorded a goodwill impairment charge of $332.9 million which has been recorded within loss from discontinued operations in the accompanying Consolidated Statements of Income.
Indefinite Lived Intangibles: This asset grouping consists of FCC broadcast licenses related to our acquisitions of television stations. As of December 31, 2017, indefinite lived intangible assets were $1.19 billion and represented approximately 24% of our total assets.
Indefinite lived assets are not subject to amortization and, as a result, they are tested for impairment annually (on the first day of our fourth quarter), or more frequently if events or changes in circumstances suggest that the asset might be impaired. We have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the indefinite lived asset is more than its carrying amount. If that is the case, then we would not have to perform the quantitative analysis. The qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance of the indefinite lived asset. In 2017, we elected not to perform the optional qualitative assessment; and instead, we performed the quantitative impairment test.
The fair value of each FCC broadcast license was determined using an income approach referred to as the Greenfield method. This method requires multiple assumptions relating to the future prospects of each individual television station including, but not limited to: (i) expected long-term market growth characteristics, (ii) station revenue shares within a market for a new entrant, (iii) future expected operating expenses, (iv) costs of capital and (v) appropriate discount rates. We performed a quantitative analysis on all of our FCC licenses on the impairment testing date and each fair value exceeded the carrying value by more than 30%, and therefore, concluded that no impairment existed. Future increases in discount rate assumptions could cause a decline in the fair value of our FCC licenses which may result in a future impairment charge. For example, a 50 basis point increase in the discount rate would cause the fair value of our FCC license with the lowest clearance to exceed its carrying value by 20%.
Pension Liabilities: Certain employees participate in qualified and nonqualified defined benefit pension plans (see Note 7 to Financial Statements). Our principal defined benefit pension plan is the TEGNA Retirement Plan (TRP). We also sponsor the TEGNA Supplemental Retirement Plan (SERP) for certain employees. Substantially all participants in the TRP and SERP had their benefits frozen before 2009, and in December 2017, we froze all remaining accruing benefits for certain grandfathered SERP participants.
We recognize the net funded status of these postretirement benefit plans under GAAP as a liability on our Consolidated Balance Sheets. There is a corresponding non-cash adjustment to accumulated other comprehensive loss, net of tax benefits recorded as deferred tax assets, in stockholders’ equity. The GAAP funded status represents the difference between the fair value of each plan’s assets and the benefit obligation of the plan. The GAAP benefit obligation represents the present value of the estimated future benefits we currently expect to pay to plan participants based on past service.
The plan assets and benefit obligations are measured at December 31 of each year, or more frequently, upon the occurrence of certain events such as a plan amendment, settlement or curtailment. The amounts we record are measured using actuarial valuations, which are dependent upon key assumptions such as discount rates, participant mortality rates and the expected long-term rate of return on plan assets. The assumptions we make affect both the calculation of the benefit obligations as of the measurement date and the calculation of net periodic pension expense in subsequent periods. When reassessing these assumptions we consider past and current market conditions and make judgments about future market trends. We also consider factors such as the timing and amounts of expected contributions to the plans and benefit payments to plan participants.
The most important assumptions include the discount rate applied to pension plan obligations and the expected long-term rate of return on plan assets related for the TRP (the SERP is an unfunded plan). The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match the expected benefit payment stream. A decrease in discount rates would increase pension obligations.
We establish the expected long-term rate of return by developing a forward-looking, long-term return assumption for each pension fund asset class, taking into account factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset allocation percentages and the long-term return assumption for each asset class. We apply the expected long-term rate of return to the fair value of its pension assets in determining the dollar amount of its expected return. Changes in the expected long-term return on plan assets would increase or decrease pension plan expense. For December 31, 2017 measurement, we assumed a rate of 7.00% for our long-term expected return on pension assets used for our TRP plan. As an indication of the sensitivity of pension expense to the long-term rate of return assumption, a plus or minus 50 basis points change in the expected rate of return on pension assets (with all other assumptions held constant) would have decreased or increased estimated pension plan expense for 2018 by
approximately $2.1 million. The effects of actual results differing from these assumptions are accumulated as unamortized gains and losses.
For the December 31, 2017 measurement, the assumption used for the discount rate was 3.65% for our principal retirement plan. As an indication of the sensitivity of pension liabilities to the discount rate assumption, a plus or minus 50 basis points change in the discount rate at the end of 2017 (with all other assumptions held constant) would have decreased or increased plan obligations by approximately $27.0 million. A 50 basis points change in the discount rate used to calculate 2018 expense would have changed total pension plan expense for 2017 by approximately $0.5 million.
Income Taxes: Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions.
Tax law requires certain items to be included in our tax returns at different times than when the items are reflected in the financial statements. The annual tax expense reflected in the Consolidated Statements of Income is different than that reported in our tax returns. Some of these differences are permanent (for example, expenses recorded for accounting purposes that are not deductible in the returns such as non-deductible goodwill) and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial statements, as well as tax losses that can be carried over and used in future years. Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts we believe are more likely than not to be recovered. In evaluating the amount of any such valuation allowance, we consider the existence of cumulative income or losses in recent years, the reversal of existing temporary differences, the existence of taxable income in prior carry back years, available tax planning strategies and estimates of future taxable income for each of our taxable jurisdictions. The latter two factors involve the exercise of significant judgment. As of December 31, 2017, deferred tax asset valuation allowances totaled $136.4 million, primarily related to federal and state capital losses, and state net operating losses available for carry forward to future years. Although realization is not assured, we believe it is more likely than not that all other deferred tax assets for which no valuation allowances have been established will be realized. This conclusion is based on our history of cumulative income in recent years and review of historical and projected future taxable income.
We determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded in our financial statements. A tax position is measured as the portion of the tax benefit that is greater than 50% likely to be realized upon settlement with a taxing authority (that has full knowledge of all relevant information). We may be required to change our provision for income taxes when the ultimate treatment of certain items is challenged or agreed to by taxing authorities, when estimates used in determining valuation allowances on deferred tax assets significantly change, or when receipt of new information indicates the need for adjustment in valuation allowances. Future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential gain/loss arising from changes in market rates and prices, such as interest rates and changes in the market value of financial instruments. Our main exposure to market risk relates to interest rates. We have $346.1 million in floating interest rate obligations outstanding on December 31, 2017, and therefore are subject to changes in the amount of interest expense we might incur. A 50 basis point increase or decrease in the average interest rate for these obligations would result in an increase or decrease in annual interest expense of $1.7 million. Refer to Note 6 to the consolidated financial statements for information regarding the fair value of our long-term debt. With the sale of our controlling interest in CareerBuilder we no longer have a material market risk to changes in foreign exchange currency rates.
We believe that our market risk from financial instruments, such as accounts receivable, accounts payable and debt, is not material.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of TEGNA Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TEGNA Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2005.
March 1, 2018
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.