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EX-32.1 - EX-32.1 - WideOpenWest, Inc.wow-20180630ex321236092.htm
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EX-31.1 - EX-31.1 - WideOpenWest, Inc.wow-20180630ex311288197.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10‑Q


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2018

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                  to                

 

Commission File Number: 001-38101


WideOpenWest, Inc.

(Exact name of registrant as specified in its charter)


 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

46-0552948
(IRS Employer
Identification No.)

 

 

7887 East Belleview Avenue, Suite 1000
Englewood, Colorado
(Address of Principal Executive Offices)

80111
(Zip Code)

 

 

(720) 479‑3500

(Registrant’s Telephone Number, Including Area Code)

 

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), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act (check one).

 

 

 

Large accelerated filer ☐

Accelerated filer ☐

 

 

Non‑accelerated filer ☒
(Do not check if a
smaller reporting company)

Smaller reporting company ☐

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

The number of outstanding shares of the registrant’s common stock as of August 8, 2018 was 82,655,561

 

 

 

 


 

WIDEOPENWEST, INC. AND SUBSIDIARIES

FORM 10‑Q

FOR THE PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

Page

PART I. Financial Information 

1

Item 1:

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Loss

3

 

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to the Condensed Consolidated Financial Statements

6

Item 2 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3 

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4 

Controls and Procedures

45

PART II. 

46

Item 1 

Legal Proceedings

46

Item 1A 

Risk Factors

46

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3 

Defaults Upon Senior Securities

47

Item 4 

Mine Safety Disclosures

47

Item 5 

Other Information

47

Item 6 

Exhibits

48

 

This Quarterly Report on Form 10‑Q is for the three and six months ended June 30, 2018. Any statement contained in a prior periodic report shall be deemed to be modified or superseded for purposes of this Quarterly Report to the extent that a statement contained herein modifies or supersedes such statement. The Securities and Exchange Commission allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information by referring you directly to those documents. Information incorporated by reference is considered to be part of this Quarterly Report. References in this Quarterly Report to “WOW,” “we,” “us,” “our”, or “the Company” are to WideOpenWest, Inc. and its direct and indirect subsidiaries, unless the context specifies or requires otherwise.

 

 

i


 

PART I-FINANCIAL INFORMATION

WIDEOPENWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

   

2018

    

2017

 

 

(in millions, except per share data)

Assets

 

 

  

 

 

  

Current assets

 

 

  

 

 

  

Cash and cash equivalents

 

$

17.1

 

$

69.4

Accounts receivable—trade, net of allowance for doubtful accounts of $5.4 and $5.8, respectively

 

 

75.6

 

 

81.5

Accounts receivable—other

 

 

3.1

 

 

2.1

Prepaid expenses and other

 

 

17.7

 

 

12.2

Total current assets

 

 

113.5

 

 

165.2

Plant, property and equipment, net

 

 

970.8

 

 

924.7

Franchise operating rights

 

 

809.2

 

 

952.4

Goodwill

 

 

270.9

 

 

384.1

Intangible assets subject to amortization, net

 

 

4.3

 

 

5.5

Other noncurrent assets

 

 

28.1

 

 

9.7

Total assets

 

$

2,196.8

 

$

2,441.6

Liabilities and stockholders’ deficit

 

 

  

 

 

  

Current liabilities

 

 

  

 

 

  

Accounts payable—trade

 

$

36.2

 

$

26.1

Accrued interest

 

 

4.5

 

 

3.6

Accrued liabilities and other

 

 

98.4

 

 

94.5

Current portion of debt and capital lease obligations

 

 

23.9

 

 

24.0

Current portion of unearned service revenue

 

 

46.2

 

 

43.2

Total current liabilities

 

 

209.2

 

 

191.4

Long term debt and capital lease obligations—less current portion and debt issuance costs

 

 

2,232.8

 

 

2,227.2

Deferred income taxes, net

 

 

168.8

 

 

220.4

Other noncurrent liabilities

 

 

8.4

 

 

7.0

Total liabilities

 

 

2,619.2

 

 

2,646.0

Commitments and contingencies

 

 

  

 

 

  

Stockholders' deficit:

 

 

 

 

 

 

Preferred stock, $0.01 par value, 100,000,000 shares authorized; 0 shares issued and outstanding

 

 

 —

 

 

 —

Common stock, $0.01 par value, 700,000,000 shares authorized; 90,524,803 and 88,887,915 issued as of June 30, 2018 and December 31, 2017, respectively; 84,104,828 and 88,426,742 outstanding as of June 30, 2018 and December 31, 2017, respectively

 

 

0.9

 

 

0.9

Additional paid-in capital

 

 

308.6

 

 

299.9

Accumulated other comprehensive loss

 

 

(0.6)

 

 

 —

Accumulated deficit

 

 

(668.8)

 

 

(500.4)

Treasury stock at cost, 6,419,975 and 461,173 shares as of June 30, 2018 and December 31, 2017, respectively

 

 

(62.5)

 

 

(4.8)

Total stockholders’ deficit

 

 

(422.4)

 

 

(204.4)

Total liabilities and stockholders’ deficit

 

$

2,196.8

 

$

2,441.6

 

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

1


 

WIDEOPENWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

    

June 30, 

 

June 30, 

 

 

2018

 

2017

 

2018

 

2017

 

 

(in millions, except per share data)

Revenue

 

$

291.3

 

$

297.5

 

$

576.8

 

$

597.5

Costs and expenses:

 

 

 

 

 

  

 

 

 

 

 

  

Operating (excluding depreciation and amortization)

 

 

157.3

 

 

157.4

 

 

315.2

 

 

317.2

Selling, general and administrative

 

 

39.7

 

 

32.5

 

 

79.4

 

 

62.8

Depreciation and amortization

 

 

46.4

 

 

50.8

 

 

92.7

 

 

101.1

Impairment losses on intangibles and goodwill

 

 

 —

 

 

 —

 

 

256.4

 

 

 —

Management fee to related party

 

 

 —

 

 

0.5

 

 

 —

 

 

1.0

 

 

 

243.4

 

 

241.2

 

 

743.7

 

 

482.1

Income (loss) from operations

 

 

47.9

 

 

56.3

 

 

(166.9)

 

 

115.4

Other income (expense):

 

 

 

 

 

  

 

 

 

 

 

  

Interest expense

 

 

(32.7)

 

 

(44.1)

 

 

(61.8)

 

 

(89.8)

Gain (loss) on sale of Lawrence, Kansas system

 

 

 —

 

 

(0.3)

 

 

 —

 

 

38.4

Loss on early extinguishment of debt

 

 

 —

 

 

(1.0)

 

 

 —

 

 

(6.0)

Other income, net

 

 

1.2

 

 

 —

 

 

1.2

 

 

1.4

Income (loss) before provision for income tax

 

 

16.4

 

 

10.9

 

 

(227.5)

 

 

59.4

Income tax benefit (expense)

 

 

8.8

 

 

(5.9)

 

 

50.0

 

 

18.0

Net income (loss)

 

$

25.2

 

$

5.0

 

$

(177.5)

 

$

77.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per common shares

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

$

0.07

 

$

(2.13)

 

$

1.10

Diluted

 

$

0.31

 

$

0.07

 

$

(2.13)

 

$

1.10

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

81,868,508

 

 

74,309,106

 

 

83,159,949

 

 

70,413,415

Diluted

 

 

82,652,715

 

 

74,333,425

 

 

83,159,949

 

 

70,437,734

 

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

 

2


 

 

WIDEOPENWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

    

June 30, 

 

June 30, 

 

 

2018

 

2017

 

2018

 

2017

 

 

(in millions)

Net income (loss)

 

$

25.2

 

$

5.0

 

$

(177.5)

 

$

77.4

Unrealized loss on interest rate derivative instrument

 

 

(0.6)

 

 

 —

 

 

(0.6)

 

 

 —

Comprehensive income (loss)

 

$

24.6

 

$

5.0

 

$

(178.1)

 

$

77.4

 

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

3


 

WIDEOPENWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Common

 

Treasury

 

Paid-in

 

Other

 

 

 

 

Total

 

 

Common

 

Stock

 

Stock at

 

Capital

 

Comprehensive

 

Accumulated

 

Stockholders'

 

    

Stock

    

Par Value

    

Cost

    

(Deficit)

 

Loss

 

Deficit

    

Deficit

 

 

(in millions, except per share data)

Balances at January 1, 2018

 

88,426,742

 

$

0.9

 

$

(4.8)

 

$

299.9

 

$

 —

 

$

(500.4)

 

$

(204.4)

Impact of change in accounting policy

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9.1

 

 

9.1

Changes in accumulated other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.6)

 

 

 

 

 

(0.6)

Stock-based compensation

 

 —

 

 

 —

 

 

 —

 

 

8.9

 

 

 —

 

 

 —

 

 

8.9

Issuance of restricted stock, net

 

1,636,888

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Purchase of shares

 

(5,958,802)

 

 

 —

 

 

(57.7)

 

 

 —

 

 

 —

 

 

 —

 

 

(57.7)

Other

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

 

 —

 

 

 —

 

 

(0.2)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(177.5)

 

 

(177.5)

Balances at June 30, 2018(1)

 

84,104,828

 

$

0.9

 

$

(62.5)

 

$

308.6

 

$

(0.6)

 

$

(668.8)

 

$

(422.4)


(1)

Included in outstanding shares as of June 30, 2018 are 2,380,631 non-vested shares of restricted stock awards granted to employees and directors.

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

4


 

WIDEOPENWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

 

 

 

 

 

 

Six Months Ended

 

    

June 30, 

 

 

2018

 

2017

 

 

(in millions)

Cash flows from operating activities:

 

 

  

 

 

  

Net income (loss)

 

$

(177.5)

 

$

77.4

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

92.7

 

 

101.1

Deferred income taxes

 

 

(51.9)

 

 

(27.6)

Provision for doubtful accounts

 

 

9.4

 

 

8.4

Amortization of debt issuance costs and discount, net

 

 

2.4

 

 

2.5

Gain on sale of Lawrence, Kansas system

 

 

 —

 

 

(38.4)

Loss on early extinguishment of debt

 

 

 —

 

 

1.0

Impairment losses on intangibles and goodwill

 

 

256.4

 

 

 —

Non-cash compensation

 

 

8.9

 

 

3.1

Other non-cash items

 

 

 —

 

 

0.3

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables and other operating assets

 

 

(17.0)

 

 

(15.1)

Payables and accruals

 

 

12.4

 

 

(5.5)

Net cash provided by operating activities

 

$

135.8

 

$

107.2

Cash flows from investing activities:

 

 

  

 

 

 

Capital expenditures

 

$

(133.5)

 

$

(152.0)

Proceeds from sale of assets

 

 

 —

 

 

213.0

Other investing activities

 

 

0.2

 

 

1.2

Net cash (used in) provided by investing activities

 

$

(133.3)

 

$

62.2

Cash flows from financing activities:

 

 

  

 

 

 

Proceeds from issuance of debt

 

$

15.0

 

$

 —

Payments on debt and capital lease obligations

 

 

(12.0)

 

 

(116.5)

Proceeds from issuance of common stock, net of issuance costs

 

 

 —

 

 

334.7

Contribution from former Parent

 

 

 —

 

 

20.3

Payment of debt issuance costs

 

 

 —

 

 

(2.3)

Repurchase of old management units

 

 

 —

 

 

(8.8)

Purchase of treasury stock

 

 

(57.7)

 

 

 —

Other

 

 

(0.1)

 

 

(0.1)

Net cash (used in) provided by financing activities

 

$

(54.8)

 

$

227.3

(Decrease) increase in cash and cash equivalents

 

 

(52.3)

 

 

396.7

Cash and cash equivalents, beginning of period

 

 

69.4

 

 

30.8

Cash and cash equivalents, end of period

 

$

17.1

 

$

427.5

Supplemental disclosures of cash flow information:

 

 

  

 

 

 

Cash paid during the periods for interest

 

$

58.3

 

$

91.9

Cash paid during the periods for income taxes

 

$

11.7

 

$

4.3

Non-cash financing activities:

 

 

  

 

 

 

Capital expenditure accounts payable and accruals

 

$

15.3

 

$

12.4

 

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

 

 

5


 

WIDEOPENWEST, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(unaudited)

Note 1. General Information

WideOpenWest, Inc. (“WOW” or the “Company”) was organized in Delaware in July 2012 as WideOpenWest Kite, Inc. WideOpenWest Kite, Inc. subsequently changed its name to WideOpenWest, Inc. in March 2017. On April 1, 2016, the Company consummated a restructuring (“Restructuring”) whereby WideOpenWest Finance, LLC (“WOW Finance”) became a wholly owned subsidiary of WOW. Previously, WOW Finance was owned by WOW, WideOpenWest Illinois, Inc., WideOpenWest Ohio, Inc. and Sigecom, Inc. (collectively, the “Members”, or WOW and “Affiliates”). Prior to the Restructuring, the Members were wholly owned subsidiaries of Racecar Acquisition, LLC (“Racecar Acquisition”).

As a result of the Restructuring, the Affiliates merged with and into WOW, WOW became the sole subsidiary of Racecar Acquisition and WOW Finance became a wholly owned subsidiary of WOW.

On May 25, 2017, the Company completed an initial public offering (“IPO”) of shares of its common stock, which are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “WOW”. Prior to its IPO, WOW was wholly owned by Racecar Acquisition, which is a wholly owned subsidiary of WideOpenWest Holdings, LLC (“Parent”).  Subsequent to the IPO, Racecar Acquisition and former Parent were liquidated and the shares distributed to their respective owners. In the following context, the terms we, us, WOW, or the Company may refer, as the context requires, to WOW or, collectively, WOW and its subsidiaries.

The Company is a fully integrated provider of high-speed data (“HSD”), cable television (“Video”), and digital telephony (“Telephony”) services. The Company serves customers in nineteen Midwestern and Southeastern markets in the United States. The Company manages and operates its Midwestern broadband cable systems in Detroit and Lansing, Michigan; Chicago, Illinois; Cleveland and Columbus, Ohio; Evansville, Indiana and Baltimore, Maryland. The Southeastern systems are located in Augusta, Columbus, Newnan and West Point, Georgia; Charleston, South Carolina; Dothan, Auburn, Huntsville and Montgomery, Alabama; Knoxville, Tennessee; and Panama City and Pinellas County, Florida.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

Subsequent to the Restructuring, the financial statements and notes to financial statements presented herein include the consolidated accounts of WOW and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates as one operating segment. Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on the Company’s previously reported results of operations, financial position, or cash flows.

Certain employees of WOW participated in equity plans administered by the Company’s former Parent. Because the management units from the equity plan were issued from the former Parent’s ownership structure, the management units’ value directly correlated to the results of WOW, as the primary asset of the former Parent’s investment in WOW. The management units for the equity plan have been “pushed down” to the Company, as the management units had been utilized as equity-based compensation for WOW management. Immediately prior to the Company’s IPO, these management units were cancelled.

6


 

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. The year-end consolidated balance sheet was derived from audited financial statements. In the opinion of management, all normally recurring adjustments considered necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results expected for the full year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the 2017 Annual Report filed with the SEC on March 14, 2018.

Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. These accounting principles require management to make assumptions and estimates that affect the reported amounts and disclosures of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts and disclosures of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. To the extent there are differences between those estimates and actual results, the unaudited condensed consolidated financial statements may be materially affected.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. There have been further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018. The amended guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The Company is in the process of evaluating the impact of the new standard on its statement of financial position, results of operations and cash flows.

Recently Adopted Accounting Pronouncements

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). ASC 606 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity is required to follow five steps which are comprised of (a) identifying the contract(s) with a customer; (b) identifying the performance obligations in the contract; (c) determining the transaction price; (d) allocating the transaction price to the performance obligations in the contract and (e) recognizing revenue when (or as) the entity satisfies a performance obligation.

7


 

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective transition method and recorded the cumulative effect to the Company’s opening accumulated deficit of $9.1 million, net of tax, representing:

(i)

the recognition of a contract liability associated with “open” or “non-completed” month-to-month and fixed term service contracts containing fees for installation related activities,

(ii)

the recognition of an asset for costs of obtaining contracts with customers, associated with “open” or “non-completed” month-to-month and fixed term service contracts, and

(iii)

the income tax impacts of items (i) and (ii) above.

A completed contract is defined in ASC 606 as a contract for which the Company has recognized all or substantially all of the revenue under the previous revenue recognition rules. In addition to applying the new revenue recognition rules under ASC 606 only to open or non-completed contracts, the Company has elected to apply the practical expedient related to contract modifications and have not separately evaluated the effects of contract modifications prior to January 1, 2018 in determining the adjustment to the Company’s opening accumulated deficit.

Prior to the adoption of ASC 606, the Company recognized revenue related to installation activities upfront to the extent of direct selling costs, which generally resulted in recognition of revenue when the installation related activities had been provided to the customer. Under ASC 606, the majority of the Company’s installation related activities are not considered to be separate performance obligations and non-refundable upfront fees related to installations are assessed to determine whether they provide the customer with a material right. Following the adoption of ASC 606, the Company began recognizing upfront fees for installation related activities as revenue (i) over the period which the customer is expected to benefit from the ability to avoid paying an additional fee upon renewal for month-to-month residential subscription service contracts and (ii) over the term of the contract for business subscription service contracts. In addition, the Company began recognizing an asset for costs associated with obtaining contracts with customers, including sales commissions, and amortizing these costs over the expected period of benefit.

The following tables summarize the impacts of adopting ASC 606 on the Company’s condensed consolidated balance sheet and statements of operations as of and for the three and six months ended June 30, 2018.

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

    

 

 

    

 

 

    

Without 

 

 

 

 

 

 

 

 

adoption of

 

 

As reported

 

Adjustments

 

Topic 606

 

 

(in millions)

Assets

 

 

  

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

 

 

  

Prepaid expenses and other

 

$

17.7

 

$

(3.8)

 

$

13.9

Total current assets

 

 

113.5

 

 

(3.8)

 

 

109.7

Other noncurrent assets

 

 

28.1

 

 

(15.0)

 

 

13.1

Total assets

 

$

2,196.8

 

$

(18.8)

 

$

2,178.0

Liabilities and Stockholders’ Deficit

 

 

  

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

 

 

  

Current portion of unearned service revenue

 

$

46.2

 

$

(3.6)

 

$

42.6

Total current liabilities

 

 

209.2

 

 

(3.6)

 

 

205.6

Deferred income taxes, net

 

 

168.8

 

 

(0.2)

 

 

168.6

Other noncurrent liabilities

 

 

8.4

 

 

(0.5)

 

 

7.9

Total liabilities

 

 

2,619.2

 

 

(4.3)

 

 

2,614.9

Accumulated deficit

 

 

(668.8)

 

 

(14.5)

 

 

(683.3)

Total stockholders’ deficit

 

 

(422.4)

 

 

(14.5)

 

 

(436.9)

Total liabilities and stockholders’ deficit

 

$

2,196.8

 

$

(18.8)

 

$

2,178.0

8


 

 

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

 

Six months ended June 30, 2018

 

    

 

 

    

 

 

    

Without

    

 

 

    

 

 

    

Without

 

 

 

 

 

 

 

 

adoption of 

 

 

 

 

 

 

 

adoption of 

 

 

As reported

 

Adjustments

 

Topic 606

 

As reported

 

Adjustments

 

Topic 606

 

 

(in millions)

Revenue

 

$

291.3

 

$

0.1

 

$

291.4

 

$

576.8

 

$

2.0

 

$

578.8

Costs and expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Selling, general and administrative

 

 

39.7

 

 

4.0

 

 

43.7

 

 

79.4

 

 

7.4

 

 

86.8

 

 

 

243.4

 

 

4.0

 

 

247.4

 

 

743.7

 

 

7.4

 

 

751.1

Income (loss) from operations

 

 

47.9

 

 

(3.9)

 

 

44.0

 

 

(166.9)

 

 

(5.4)

 

 

(172.3)

Income (loss) before provision for income taxes

 

 

16.4

 

 

(3.9)

 

 

12.5

 

 

(227.5)

 

 

(5.4)

 

 

(232.9)

Net income (loss)

 

$

25.2

 

$

(3.9)

 

$

21.3

 

$

(177.5)

 

$

(5.4)

 

$

(182.9)

 

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 eliminates the concept of separately recognizing periodic hedge ineffectiveness for cash flow and net investment hedges. ASU 2017-12 is effective for public companies for fiscal years beginning after December 15, 2018; however, the Company elected to early adopt this ASU in the second quarter of 2018 in conjunction with entering into an interest rate derivative instrument. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flows.

ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company early adopted this standard in the fourth quarter of 2017 in conjunction with its annual goodwill impairment assessment.

ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among subsidiaries. After adoption of this ASU, the income tax effects associated with these transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or the remaining useful life of the asset. The standard became effective for the Company beginning January 1, 2018, and requires any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flows.

9


 

ASU 2016-15, Statement of Cash Flows (Topic 230)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), making changes to the classification of certain cash receipts and cash payments in order to reduce diversity in presentation. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The update addresses eight specific cash flow issues, of which only one is applicable to the Company's financial statements. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

 

Note 3. Revenue from Contracts with Customers

Residential and Business Subscription Services

Residential and business subscription services revenue consists primarily of monthly recurring charges for HSD, Video, and Telephony services, including charges for equipment rentals and other regulatory fees, and non-recurring charges for optional services, such as pay-per-view, video-on-demand, and other events provided to the customer. Monthly charges for residential and business subscription services are billed in advance and recognized as revenue over the period of time the associated services are provided to the customer. Charges for optional services are generally billed in arrears and are recognized at the point in time when the services are provided to the customer.

·

HSD revenue consists primarily of fixed monthly fees for data service, including charges for rentals of modems, and revenue recognized related to non-recurring upfront fees associated with installation and other administrative activities provided to HSD customers.

·

Video revenue consists of fixed monthly fees for basic, premium and digital cable television services, including charges for rentals of video converter equipment and other regulatory fees, and revenue recognized related to non-recurring upfront fees associated with installation and other administrative activities provided to video customers, as well as non-recurring charges for optional services, such as pay-per-view, video-on-demand and other events provided to the customer.

·

Telephony revenue consists of fixed monthly fees for local services, including certain regulatory and ancillary customer fees, and enhanced services, such as call waiting and voice mail, revenue recognized related to non-recurring upfront fees associated with installation and other administrative activities provided to telephony customers as well as charges for measured and flat rate long-distance service.

The vast majority of the Company’s residential customers can cancel their subscription services at any time without paying a termination penalty. While a portion of residential customers have entered into contracts for subscription services ranging from 12 months to 24 months in length, the Company recognizes revenue for these customers on a basis that is consistent with customers that have entered into month-to-month contracts as the early termination fees within these contracts are not considered to be substantive. The Company’s business customers have entered into non-cancellable contracts for subscription services averaging 30 months.

The Company is required to pay certain cable franchising authorities an amount based on the percentage of gross revenue derived from video services. The Company generally passes these fees and other similar regulatory and ancillary fees on to the customer. Revenues from regulatory and other ancillary fees passed on to the customer are reported with the associated service revenue and the corresponding costs are reported as an operating expense.

Bundled Subscription Services

The Company often markets multiple subscription services as part of a bundled arrangement that may include a discount. When customers have entered into a bundled service arrangement, the total transaction price for the bundled arrangement is allocated between the separate services included in the bundle based on their relative stand-alone selling prices. The allocation of the transaction price in bundled services requires judgment, particularly in determining the

10


 

stand-alone selling prices for the separate services included in the bundle. The stand-alone selling price for the majority of services are determined based on the prices at which the Company separately sells the service. For services sold on an infrequent basis and for a wide range of prices, the Company estimates stand-alone selling prices using the adjusted market assessment approach, which considers the prices of competitors for similar services.

Other Business Services Revenue

Other business services revenue consists primarily of monthly recurring charges for session initiated protocol, web hosting, metro Ethernet, wireless backhaul, broadband carrier, and cloud infrastructure services provided to business customers. Monthly charges for other business services are generally billed in advance and recognized as revenue when the associated services are provided to the customer.

Other Revenue

Other revenue consists primarily of revenue from line assurance warranty services provided to residential and business customers and revenue from advertising placement. Monthly charges for line assurance warranty services are generally billed in advance and recognized as revenue over the period of time the warranty services are provided to the customer. Charges for advertising placement are generally billed in arrears and recognized as revenue at the point in time when the advertising is distributed.

Revenue by Service Offering

Revenue by service offering is set forth in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

 

Six months ended June 30, 2018

 

 

(in millions)

 

 

Residential

 

Business

 

Total

 

Residential

 

Business

 

Total

 

    

Subscription

    

Subscription

    

Revenue

    

Subscription

    

Subscription

    

Revenue

HSD

 

$

99.0

 

$

18.5

 

$

117.5

 

$

193.3

 

$

35.9

 

$

229.2

Video

 

 

119.3

 

 

3.8

 

 

123.1

 

 

237.8

 

 

7.1

 

 

244.9

Telephony

 

 

18.9

 

 

10.3

 

 

29.2

 

 

38.2

 

 

21.0

 

 

59.2

Total subscription services revenue

 

$

237.2

 

$

32.6

 

$

269.8

 

$

469.3

 

$

64.0

 

$

533.3

Other business services revenue (a)

 

 

 —

 

 

 —

 

 

6.8

 

 

 —

 

 

 —

 

 

14.0

Other revenue

 

 

 —

 

 

 —

 

 

14.7

 

 

 —

 

 

 —

 

 

29.5

Total revenue

 

$

237.2

 

$

32.6

 

$

291.3

 

$

469.3

 

$

64.0

 

$

576.8


(a)

Includes wholesale and collocation revenue of $5.2 million and $11.0 million for the three and six months ended June 30, 2018, respectively.

Costs of Obtaining Contracts with Customers

The Company recognizes an asset for incremental costs of obtaining contracts with customers when it expects to recover those costs. Costs which would be incurred regardless of whether a contract is obtained are expensed as they are incurred.  Costs of obtaining contracts with customers are amortized over the expected period of benefit, which generally ranges from three to four years for residential customers and six to seven years for business customers. As of June 30, 2018, the current portion of costs of obtaining contracts with customers of $3.8 million and non-current portion of costs of obtaining contracts with customers of $15.0 million are included in prepaid expenses and other noncurrent assets, respectively, in the Company’s condensed consolidated balance sheet. Amortization of costs of obtaining contracts with customers is included in selling, general and administrative expense in the Company’s condensed consolidated statement of operations.

11


 

Contract Liabilities

Monthly charges for residential and business subscription services are billed in advance and recorded as unearned service revenue. Residential and business customers may be charged non-recurring upfront fees associated with installation and other administrative activities. Charges for upfront fees associated with installation and other administrative activities are initially recorded as unearned services revenue and recognized as revenue over the expected period of benefit for residential customers, which has been estimated as five months, and over the contract term for business customers, which has been estimated as 30 months. The Company has estimated the expected period of benefit for residential customers based on consideration of quantitative and qualitative factors including the average installation fee charged, the average monthly revenue per customer, and customer behavior. As of June 30, 2018, the current portion of $3.6 million and the non-current portion of $0.5 million are included in current portion of unearned service revenue and other noncurrent liabilities, respectively, in the Company’s condensed consolidated balance sheet.

Unsatisfied Performance Obligations

Revenue from month-to-month residential subscription service contracts have historically represented a significant portion of the Company’s revenue and the Company expects that this will continue to be the case in future periods. The Company has elected to apply the practical expedient in paragraph 606-10-50-14(a) and has not disclosed revenue expected to be recognized in the future related to month-to-month residential subscription services.

A summary of expected commercial revenue to be recognized in future periods related to performance obligations which have not been satisfied or are partially unsatisfied as of June 30, 2018 is set forth in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2019

    

2020

    

Thereafter

    

Total

 

 

(in millions)

Subscription services

 

$

40.7

 

$

56.5

 

$

26.0

 

$

9.9

 

$

133.1

Other business services

 

 

2.3

 

 

3.7

 

 

0.8

 

 

0.3

 

 

7.1

Total expected revenue

 

$

43.0

 

$

60.2

 

$

26.8

 

$

10.2

 

$

140.2

 

 

Note 4. Plant, Property and Equipment, Net

Plant, property and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

 

 

(in millions)

Distribution facilities

 

$

1,448.8

 

$

1,373.6

Customer premise equipment

 

 

428.1

 

 

414.5

Head-end equipment

 

 

318.4

 

 

320.4

Telephony infrastructure

 

 

88.9

 

 

92.4

Computer equipment and software

 

 

117.6

 

 

107.6

Vehicles

 

 

34.6

 

 

36.0

Buildings and leasehold improvements

 

 

45.2

 

 

44.6

Office and technical equipment

 

 

32.8

 

 

32.8

Land

 

 

6.2

 

 

6.2

Construction in progress (including material inventory and other)

 

 

134.0

 

 

95.2

Total plant, property and equipment

 

 

2,654.6

 

 

2,523.3

Less accumulated depreciation

 

 

(1,683.8)

 

 

(1,598.6)

 

 

$

970.8

 

$

924.7

 

Depreciation expense for the three months ended June 30, 2018 and 2017 was $45.9 million and $50.2 million, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $91.7 million and $100.2 million, respectively. Included in depreciation expense were gains (losses) on write-offs or sales of head-end and

12


 

customer premise equipment totaling  $0.2 and $0.3 million for the three months ended June 30, 2018 and 2017, respectively; and $0.2 and $0.3 million for the six months ended June 30, 2018 and 2017, respectively.

Note 5. Asset Sales

Sale of Chicago Fiber Network

On August 1, 2017, the Company entered into a definitive agreement to sell a portion of its fiber network in the Company’s Chicago market to a subsidiary of Verizon for $225.0 million in cash. On December 14, 2017, the Company finalized the sale by entering into an Asset Purchase Agreement (“APA”) with a subsidiary of Verizon.

In addition to the APA, the Company and a subsidiary of Verizon entered into a Construction Services Agreement pursuant to which the Company will complete the build-out of the network in exchange for $50.0 million, which represents the estimated remaining build-out costs to complete the network. The $50.0 million will be payable as such network elements are completed and accepted. The Company anticipates such network will be completed in the first half of 2019.

As a result of entering into the Construction Services Agreement, the Company concluded that the assets and liabilities associated with the build-out of the network met the criteria to be classified as held for sale. As of June 30, 2018, the Chicago fiber network has $20.7 million in total assets held for sale that are included in the Company’s condensed consolidated balance sheet which represents what the Company has spent on construction subsequent to the signing of the definitive agreement, less the costs of sites completed.

Sale of Lawrence, Kansas System

On January 12, 2017, the Company and Midcontinent Communications (“MidCo”) consummated an asset purchase agreement under which MidCo acquired the Company’s Lawrence, Kansas system for net proceeds of approximately $213.0 million in cash, subject to certain normal and customary purchase price adjustments set forth in the agreement. As a result of the asset purchase agreement, the Company recorded a gain on sale of assets of $38.4 million. The results of the Company’s Lawrence, Kansas system for the first 12 days of fiscal 2017 are included in the condensed consolidated financial statements for the six months ended June 30, 2017, but not included in the three and six months ended June 30, 2018 condensed consolidated financial statements. The Company and MidCo also entered into a transition services agreement under which the Company provided certain services to MidCo on a transitional basis. The transition services agreement, originally expiring on July 1, 2017, was extended to September 28, 2017. Charges for the transition services generally allowed the Company to fully recover all allowed costs and allocated expenses incurred in connection with providing these services, generally without profit.

Note 6. Franchise Operating Rights & Goodwill

Changes in the carrying amounts of the Company’s franchise operating rights and goodwill during the six months ended June 30, 2018 are set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

    

2017

    

Acquisitions

    

Sales

    

Impairment

    

2018

 

 

 

(in millions)

Franchise operating rights

 

$

952.4

 

$

 —

 

$

 —

 

$

143.2

 

$

809.2

Goodwill

 

 

384.1

  

 

 —

 

 

 —

 

 

113.2

  

 

270.9

 

 

$

1,336.5

 

$

 —

 

$

 —

 

$

256.4

 

$

1,080.1

 

Due to the decline in the Company’s stock price during the first quarter of 2018, the Company performed an evaluation of recoverability of its franchise operating rights and goodwill.

13


 

Impaired Franchise Operating Rights

Franchise operating rights are evaluated for impairment by comparing the carrying value of the intangible asset to its estimated fair value, utilizing both quantitative and qualitative methods, at the reporting unit level. Qualitative analysis is performed for franchise assets in the event the previous analysis indicates that there is a significant margin between the carrying value of franchise operating rights and the estimated fair value of those rights, and that it is more likely than not that the estimated fair value equals or exceeds carrying value.

For franchise operating rights that were evaluated using quantitative analysis, the Company calculates the estimated fair value of franchise operating rights using the multi-period excess earnings method, an income approach, which calculates the estimated fair value of an intangible asset by discounting its future cash flows. The estimated fair value is determined based on discrete discounted future cash flows attributable to each franchise operating right intangible asset using assumptions consistent with internal forecasts. Key assumptions in estimating fair value under this method include, but are not limited to, revenue and subscriber growth rates (less anticipated customer churn), operating expenditures, capital expenditures (including any build out), market share achieved or market multiples, contributory asset charge rates, tax rates and a discount rate. The discount rate used in the model represents a weighted average cost of capital and the perceived risk associated with an intangible asset such as the Company’s franchise operating rights. Any excess of the carrying value of franchise operating rights over the estimated fair value is expensed as an impairment loss.

During the first quarter of 2018, as a result of the quantitative analysis, the carrying value of franchise operating rights exceeded the estimated fair value in four of the Company’s reporting units resulting in non-cash impairment charges of $3.2 million, $47.5 million, $77.5 million and $15.0 million in the Panama City, FL, Montgomery, AL, Huntsville, AL and Dothan, AL reporting units, respectively. The primary driver of the impairment charges was a decline in the price of the Company’s common stock, which reduced the market multiples utilized to determine estimated fair market values of indefinite-lived intangible assets in certain reporting units. The impairment charge does not have an impact on the Company’s intent and/or ability to renew or extend existing franchise operating rights.

Impaired Goodwill

Goodwill is evaluated for impairment at the reporting unit level utilizing both quantitative and qualitative methods. Qualitative analysis is performed for goodwill assets in the event the previous analysis indicates that there is a significant margin between carrying value of goodwill and estimated fair value, and that it is more likely than not that the estimated fair value equals or exceeds carrying value.

For the quantitative evaluation of the Company’s goodwill, the Company utilizes both an income approach as well as a market approach. The income approach utilizes a discounted cash flow analysis to estimate the fair value of each reporting unit, while the market approach utilizes multiples derived from actual precedent transactions of similar businesses, the market value of the Company and market valuations of guideline public companies. Any excess of the carrying value of goodwill over the estimated fair value of goodwill is expensed as an impairment loss.

During the first quarter 2018, as a result of the quantitative analysis, the carrying value of goodwill exceeded the estimated fair value in four of the Company’s reporting units resulting in non-cash impairment charges of $23.7 million, $16.7 million, $20.2 million and $52.6 million in the Panama City, FL, Huntsville, AL, Augusta, GA and Chicago, IL reporting units, respectively. The primary driver of the impairment charges was a decline in the price of the Company’s common stock, which reduced the market multiples utilized to determine estimated fair market values of goodwill in certain reporting units.

14


 

Note 7. Accrued Liabilities

Accrued liabilities consist of the following:

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

 

 

(in millions)

Programming costs

 

$

35.1

 

$

32.2

Franchise, copyright and revenue sharing fees

 

 

11.9

 

 

12.2

Payroll and employee benefits

 

 

18.6

 

 

11.5

Construction

 

 

5.8

 

 

7.5

Property, income, sales and use taxes

 

 

10.5

 

 

18.9

Utility pole rentals

 

 

2.4

 

 

1.5

Other accrued liabilities

 

 

14.1

 

 

10.7

 

 

$

98.4

 

$

94.5

 

 

Note 8. Long‑Term Debt and Capital Leases

The following table summarizes the Company’s long‑term debt and capital leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

June 30, 2018

 

2017

 

    

Available

    

 

 

    

 

 

 

borrowing

 

Effective

 

Outstanding

 

Outstanding

 

 

capacity

 

interest rate (1)

    

balance

    

balance

 

 

(in millions)

Long-term debt:

 

 

  

 

  

 

 

  

 

 

  

Term B Loans, net(2)

 

$

 —

 

5.3

%  

$

2,251.1

 

$

2,261.4

Revolving Credit facility(3)

 

 

279.6