TEGNA(TGNA) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements TEGNA's unaudited condensed consolidated financial statements for Q3 2020 are presented, showing significant revenue and net income growth driven by political advertising and acquisitions, with notes detailing key financial impacts Notes to Condensed Consolidated Financial Statements These notes detail financial statement preparation, COVID-19's impact on advertising, revenue breakdowns, 2019 acquisitions, goodwill impairment, debt structure, and legal proceedings - The COVID-19 pandemic negatively impacted Advertising & Marketing Services (AMS) revenue starting mid-March 2020, leading to company-wide cost-saving measures including furloughs and compensation reductions[21][22] - In 2019, the company significantly expanded its portfolio through major acquisitions, including 11 stations from Nexstar for $770 million, two stations from Dispatch Broadcast Group for $561 million, and two stations from Gray Television for $110 million[35][36][37] - The company is a defendant in consolidated class action antitrust lawsuits regarding local television advertising sales practices, denying any violation and intending to defend itself vigorously[70][71] Revenue by Source (in thousands) | Revenue Source | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Advertising & Marketing Services | $298,605 | $297,333 | $822,841 | $851,304 | | Subscription | $316,677 | $240,735 | $972,954 | $718,472 | | Political | $116,494 | $8,131 | $181,425 | $14,064 | | Other | $6,613 | $5,658 | $22,985 | $21,702 | Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sept. 30, 2020 | Dec. 31, 2019 | | :--- | :--- | :--- | | Total current assets | $763,281 | $707,324 | | Total assets | $6,944,996 | $6,953,976 | | Total current liabilities | $399,344 | $361,158 | | Long-term debt | $3,906,196 | $4,179,245 | | Total liabilities | $5,130,807 | $5,363,599 | | Total equity | $1,799,536 | $1,590,377 | Consolidated Statements of Income Highlights (in thousands) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $738,389 | $551,857 | 34% | | Operating income | $227,701 | $106,833 | 113% | | Net income attributable to TEGNA Inc. | $132,219 | $48,346 | 173% | | Diluted EPS | $0.60 | $0.22 | $1.08 | Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sept. 30, 2020 | Nine Months Ended Sept. 30, 2019 | | :--- | :--- | :--- | | Net cash flow from operating activities | $515,751 | $214,585 | | Net cash flow used for investing activities | ($24,412) | ($1,523,027) | | Net cash flow (used for) provided by financing activities | ($356,157) | $1,181,774 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses TEGNA's financial performance, highlighting its transformation into a pure-play broadcaster with growing high-margin subscription and political revenues, which drove significant Q3 2020 revenue growth despite COVID-19 impacts Company Overview & COVID-19 Impact TEGNA operates 63 television stations across 51 U.S. markets, with its revenue mix shifting towards high-margin subscription and political revenues, while implementing cost-saving measures in response to COVID-19's impact on advertising - TEGNA is the largest owner of top four network affiliates in the top 25 U.S. markets, reaching approximately 39% of U.S. television households[80] - The company's revenue mix shifted, with subscription and political revenues growing to 52% of total revenue for the two years ending September 30, 2020, up from 46% in the prior period[82][83] - In response to COVID-19's impact on advertising, TEGNA implemented cost-saving measures including temporary furloughs, reduced executive and board compensation, and decreased non-critical discretionary spending[88] Consolidated Results of Operations Q3 2020 total revenues increased 34% to $738.3 million, with operating income more than doubling, driven by 2019 acquisitions, political advertising, and subscription revenue growth, offsetting COVID-19's impact on AMS revenue - Q3 2020 revenue growth was driven by a $73.3 million contribution from 2019 acquisitions, a $95.1 million increase in political advertising, and a $39.1 million increase in subscription revenue, offsetting a $21.7 million decline in AMS revenue[98] - Corporate G&A expenses decreased by $18.5 million in Q3 2020, primarily due to the absence of $20.0 million in acquisition-related costs incurred in Q3 2019[106] GAAP Consolidated Results of Operations (in thousands) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $738,389 | $551,857 | 34% | | Total operating expenses | $510,688 | $445,024 | 15% | | Total operating income | $227,701 | $106,833 | 113% | | Net income attributable to TEGNA Inc. | $132,219 | $48,346 | 173% | Results from Operations - Non-GAAP Information This section presents non-GAAP financial measures like Adjusted EBITDA and Free Cash Flow, excluding special items to reflect ongoing operational performance, with Q3 2020 Adjusted EBITDA increasing 65% to $259.0 million and nine-month free cash flow growing 47% to $391.4 million - Special items excluded from non-GAAP results for 2020 include advisory fees for activism defense ($23.1 million), M&A due diligence costs ($4.6 million), and costs for early debt extinguishment ($21.7 million)[128][132] Adjusted EBITDA Reconciliation (in thousands) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Net income attributable to TEGNA Inc. (GAAP) | $132,219 | $48,346 | 173% | | Adjusted EBITDA (non-GAAP) | $259,019 | $157,125 | 65% | Free Cash Flow Reconciliation (in thousands) | Metric | Nine Months 2020 | Nine Months 2019 | % Change | | :--- | :--- | :--- | :--- | | Net income attributable to TEGNA Inc. (GAAP) | $238,474 | $202,280 | 18% | | Free cash flow (non-GAAP) | $391,352 | $265,363 | 47% | Liquidity, Capital Resources and Cash Flows TEGNA maintained strong liquidity with $164.6 million in cash and $1.31 billion in unused credit capacity as of September 30, 2020, with operating cash flow more than doubling to $515.8 million due to political ad revenue - As of September 30, 2020, the company held $164.6 million in cash and $1.31 billion of unused borrowing capacity under its revolving credit facility[149] - The company's net leverage ratio was 4.5x as of September 30, 2020, with an expectation to be 4.2x or less by year-end 2020[144][149] - Operating cash flow increased to $515.8 million for the first nine months of 2020, up from $214.6 million in the prior year, primarily due to a $167.4 million increase in political revenue[152] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's market risk exposure remains largely unchanged, with primary risk from interest rate fluctuations on variable-rate debt, though 96% of debt is fixed-rate, limiting impact to approximately $0.9 million annually for a 50 basis point rate change - As of September 30, 2020, approximately 96% of the company's total debt, or $3.77 billion, has a fixed interest rate[158] - A 50 basis point change in the average interest rate for the remaining $175 million of floating-rate debt would result in an annual interest expense change of approximately $0.9 million[158] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2020, with a new ERP system implemented in Q3 2020 expected to enhance the overall control environment - The principal executive and financial officers concluded that the company's disclosure controls and procedures are effective as of September 30, 2020[159] - An enterprise resource planning (ERP) system was implemented in Q3 2020 as a systems improvement initiative, expected to improve the overall control environment[160] PART II. OTHER INFORMATION Item 1. Legal Proceedings TEGNA is a defendant in consolidated class action antitrust lawsuits concerning local television advertising sales practices, denying any violation and vigorously defending itself after a motion to dismiss was denied - The company is a defendant in consolidated antitrust class action lawsuits (the "Advertising Cases") related to local television advertising sales practices[70][71] - After TEGNA entered a consent decree with the DOJ in June 2019, plaintiffs amended their complaint to add TEGNA as a defendant, with a motion to dismiss denied on November 6, 2020[71] Item 1A. Risk Factors A new risk factor highlights the potential for COVID-19 resurgence to cause widespread business closures, materially impacting financial condition, especially non-political advertising revenues, and potentially affecting debt covenant compliance - A new risk factor addresses the potential for a resurgence in COVID-19 infections to force widespread business closures[164][165] - Such a resurgence could materially and adversely affect financial results, especially near-term AMS revenues, and a sustained impact could risk future compliance with debt covenants[166][167] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's $300 million share repurchase program expired in September 2020 with no Q3 2020 repurchases, concluding with approximately $279.1 million remaining due to prior suspension after 2019 acquisitions - The company's $300 million share repurchase program expired in September 2020[168] - No shares were repurchased in Q3 2020, and approximately $279.1 million remained under the program upon expiration, due to suspension after 2019 acquisitions[168] Item 3, 4, 5. Other Information The company reported no defaults on senior securities, no mine safety disclosures, and no other information required under Item 5 for the reporting period - Item 3: No defaults upon senior securities[169] - Item 4: No mine safety disclosures[169] - Item 5: No other information to report[170] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the Fifteenth Supplemental Indenture related to long-term debt and required CEO and CFO certifications under the Sarbanes-Oxley Act - A list of exhibits filed with the report is provided, including corporate governance documents, debt indentures, and officer certifications[171]