ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements contained in this Quarterly Report that are not historical facts contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events. Such statements involve certain risks, uncertainties and assumptions. Forward-looking statements include all statements that are not historical fact and can be identified by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “anticipate,” “expect,” “believe,” “estimate,” “plan,” “project,” “predict,” “potential,” or the negative of these terms. Although these forward-looking statements reflect our good-faith belief and reasonable judgment based on current information, these statements are qualified by important factors, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including, but not limited to:
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the wide range of competition we face;
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competitors that are larger and possess more resources;
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competition for the leisure and entertainment time of audiences;
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whether our edge-out strategy will succeed;
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dependence upon a business services strategy, including our ability to secure new businesses as customers;
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conditions in the economy, including potentially uncertain economic conditions, unemployment levels and turbulent developments in the housing market;
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demand for our bundled broadband communications services may be lower than we expect;
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our ability to respond to rapid technological change;
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increases in programming and retransmission costs;
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a decline in advertising revenues;
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the effects of regulatory changes in our business;
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our substantial level of indebtedness;
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certain covenants in our debt documents;
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programming exclusivity in favor of our competitors;
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inability to obtain necessary hardware, software and operational support;
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loss of interconnection arrangements;
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failure to receive support from various funds established under federal and state law;
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exposure to credit risk of customers, vendors and third parties;
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strain on business and resources from future acquisitions or joint ventures, or the inability to identify suitable acquisitions;
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potential impairments to our goodwill or franchise operating rights;
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our ability to manage the risks involved in the foregoing; and
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other factors described from time to time in our reports filed or furnished with the SEC, and in particular those factors set forth in the section entitled “Risk Factors” in our annual report filed on Form 10‑K with the SEC on March 14, 2018 and other reports subsequently filed with the SEC. Given these uncertainties, you should not place undue reliance on any such forward-looking statements. The forward-looking statements included in this report are made as of the date hereof or the date specified herein, based on information available to us as of such date. Except as required by law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future.
Overview
We provide high-speed data (“HSD”), cable television (“Video”), digital telephony (“Telephony”), and business-class services to a service area that includes approximately 3.1 million homes and businesses. Our services are delivered across nineteen markets via our advanced HFC cable network. Our footprint covers the states of Alabama, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, Ohio, South Carolina and Tennessee. Led by our robust HSD offering, our products are available either as a bundle or as an individual service to residential and business services customers. As of June 30, 2018, 800,100 customers subscribed to our services.
Since commencing operations in 2001, our focus has been to offer a competitive alternative cable service and establish a brand with a strong market position. We have scaled our business through (i) organic subscriber growth and increased penetration within our existing markets and footprint, (ii) edge-outs to grow our footprint, (iii) upgrades to introduce enhanced broadband services to networks we have acquired, (iv) entry into business services, with a broad range of HSD, Video and Telephony products, and (v) acquisitions and integration of cable systems.
We operate primarily in economically stable suburbs that are adjacent to large metropolitan areas as well as secondary and tertiary markets, which we believe have favorable competitive and demographic profiles and include businesses operating across a range of industries. We benefit from the ability to augment our footprint by pursuing value-accretive network extensions, or edge-outs, to increase our addressable market and grow our customer base. We have historically made selective capital investments in edge-outs to facilitate growth in residential and business services.
We are focused on efficient capital spending and maximizing adjusted earnings before income taxes, depreciation and amortization (“Adjusted EBITDA”) through an Internet-centric growth strategy while maintaining a profitable video subscriber base. Based on our per subscriber economics, we believe that HSD represents the greatest opportunity to enhance profitability across our residential and business markets. We believe that our advanced network is designed to meet our current and future customers’ HSD needs. We offer HSD speeds up to 1 GIG in 95% of our footprint.
Our most significant competitors are other cable television operators, direct broadcast satellite providers and certain telephone companies that offer services that provide features and functionality similar to our HSD, Video and Telephony services. We believe that our strategy of operating primarily in suburban areas provides better operating and financial stability compared to the more competitive environments in large metropolitan markets. We have a history of successfully competing in chosen markets despite the presence of competing incumbent providers through attractive high value bundling of our services and investments in new service offerings.
We believe that a prolonged economic downturn, especially any downturn in the housing market, may negatively impact our ability to attract new subscribers and generate increased revenues. Additional capital and credit market disruptions could cause broader economic downturns, which could also lead to lower demand for our products and lower levels of advertising sales. A slowdown in growth of the housing market could severely affect consumer
confidence and may cause increased delinquencies or cancellations by our customers or lead to unfavorable changes in the mix of products purchased.
In addition, we are susceptible to risks associated with the potential financial instability of our vendors and third parties on which we rely to provide products and services or to which we delegate certain functions. The same economic conditions that may affect our customers, as well as volatility and disruption in the capital and credit markets, also could adversely affect vendors and third parties and lead to significant increases in prices, reduction in output or the bankruptcy of our vendors or third parties upon which we rely. In addition, programming costs are a significant part of our operating expenses and are expected to continue to increase primarily as a result of contractual rate increases and additional service offerings.
Ownership and Basis of Presentation
WideOpenWest, LLC commenced operations in 2001. WideOpenWest, LLC was wholly owned by WideOpenWest Kite, Inc., which was wholly owned by Racecar Acquisition, LLC (“Racecar Acquisition”). Racecar Acquisition was a wholly owned subsidiary of WideOpenWest Holdings, LLC (“Parent”).
WideOpenWest, Inc. 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, we consummated a restructuring (“Restructuring”) whereby WideOpenWest Finance, LLC (“WOW Finance”) became a wholly owned subsidiary of WOW. Previously, WOW Finance was owned by WideOpenWest Illinois, Inc., WideOpenWest Ohio, Inc., WideOpenWest Cleveland, Inc., WOW Sigecom, Inc. and WOW (collectively, the “Members”). Prior to the Restructuring, the Members were wholly owned subsidiaries of Racecar Acquisition.
As a result of the Restructuring, each of the Members, other than WOW, 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, we completed an initial public offering (“IPO”) of shares of our common stock, which are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “WOW”. Prior to our IPO, WOW was wholly owned by Racecar Acquisition, which is a wholly owned subsidiary of the 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.
Certain employees of WOW participated in equity plans administered by the Company’s former Parent. 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.
As of June 30, 2018, Crestview Advisors, LLC (“Crestview”) and Avista Capital Partners (“Avista”) hold approximately 65% of the Company’s outstanding shares of common stock.
Stock Repurchase Programs
On December 14, 2017, the Board of Directors authorized the Company to repurchase up to $50.0 million of our outstanding common stock. As of March 26, 2018, we completed the stock repurchase program with total common stock shares repurchased of 5.1 million for $50.0 million.
On May 10, 2018, the Board of Directors authorized the Company to repurchase up to $25.0 million of our outstanding common stock. As of June 30, 2018, the Company purchased 1,026,000 shares of common stock for approximately $9.6 million.
Interest Rate Swap
On May 9, 2018, we entered into interest rate swap agreements for a notional amount covering approximately 60% of the outstanding principal balance of our floating rate debt to mitigate the risk of rising interest rates.
Refinancing of the Term B Loans and Revolving Credit Facility
On July 17, 2017, we entered into an eighth amendment (“Eighth Amendment”) to our Credit Agreement, with JPMorgan Chase Bank, N.A., as the administrative agent and revolver agent. Under the Eighth Amendment, (i) we borrowed new Term B loans in an aggregate principal amount of $230.5 million, for a total outstanding Term B loan principal amount of $2.28 billion and (ii) the revolving credit commitments were increased by an aggregate principal amount of $100.0 million, for a total outstanding revolving credit commitment of $300.0 million available to us under the revolving credit facility. The new Term B loans will mature on August 19, 2023 and bear interest, at our option, at a rate equal to ABR plus 2.25% or LIBOR plus 3.25%. Loans under the revolving credit facility will mature on May 31, 2022 and bear interest, at our option, at a rate equal to ABR plus 2.00% or LIBOR plus 3.00%. The guarantees, collateral and covenants in the Eighth Amendment remain unchanged from those contained in the credit agreement prior to the Eighth Amendment.
On May 31, 2017, we entered into a seventh amendment (“Seventh Amendment”) to our Credit Agreement. The Seventh Amendment (i) refinanced the existing $200.0 million of borrowings available to us under the revolving credit facility and (ii) extended the maturity date of the revolving credit facility to May 31, 2022. The interest rate margins applicable to the revolving credit facility bore interest at a rate equal to ABR plus 2.00% or LIBOR plus 3.00%. Additionally, we entered into an Incremental Commitment Letter to our revolving credit facility that increased the available borrowings to $300.0 million. The guarantees, collateral and covenants in the Seventh Amendment remain unchanged from those contained in the credit agreement prior to the Seventh Amendment.
Redemption of 10.25% Senior Notes
On March 20, 2017, we utilized cash on hand to redeem $95.1 million in aggregate principal amount outstanding of the 10.25% Senior Notes due 2019 (“Senior Notes”). In addition to the partial redemption, we paid accrued interest on the Senior Notes of $1.7 million and a call premium of $4.9 million. We recorded a loss on early extinguishment of debt of $5.0 million, primarily representing the cash call premium paid.
On July 17, 2017, we used the proceeds of the new Term B loans, and borrowed $180.0 million under our revolving credit facility and cash on hand to fully redeem all of the Company’s remaining outstanding Senior Notes and to pay certain fees and expenses. In connection with the redemption of the Senior Notes, we satisfied and discharged the indenture governing the Senior Notes. We paid $729.9 million in principal amount, incurred prepayment fees of $18.7 million and paid accrued interest of $37.6 million.
Sale of Chicago Fiber Network
On December 14, 2017, we finalized the sale of a portion of our fiber network in the Chicago market to a subsidiary of Verizon for $225.0 million in cash. In addition, we and a subsidiary of Verizon entered into a construction agreement pursuant to which we agreed to complete the build-out of the network in exchange for $50.0 million (which approximates our remaining estimate to complete the network build-out), payable as the remaining network elements are completed. The final build-out of the network is expected to be completed during the first half of 2019.
Sale of Lawrence, Kansas System
On January 12, 2017, we and Midcontinent Communications (“MidCo”) consummated an asset purchase agreement under which MidCo acquired our 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. The first 12 days of results of our Lawrence, Kansas system are included in the six months ended June 30, 2017 unaudited condensed consolidated financial statements but not included in the three and six months ended June 30, 2018 unaudited condensed consolidated financial statements.
Critical Accounting Policies and Estimates
In the preparation of our unaudited condensed consolidated financial statements, we are required to make estimates, judgments and assumptions we believe are reasonable based upon the information available, in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which would potentially result in materially different results under different assumptions and conditions. We believe the following accounting policies are the most critical in the preparation of our unaudited condensed consolidated financial statements because of the judgment necessary to account for these matters and the significant estimates involved, each of which are susceptible to change.
Valuation of Plant, Property and Equipment and Intangible Assets
Carrying Value.
The aggregate carrying value of our plant, property and equipment and intangible assets (including franchise operating rights and goodwill) comprised approximately 94% and 93% of our total assets at June 30, 2018 and December 31, 2017, respectively.
Plant, property and equipment are recorded at cost and include costs associated with the construction of cable transmission and distribution facilities and new service installations at customer locations. Capitalized costs include materials, labor and certain indirect costs attributable to the capitalization activity. Maintenance and repairs are expensed as incurred. Upon sale or retirement of an asset, the cost and related depreciation are removed from the related accounts, and resulting gains or losses are reflected in operating results. We make judgments regarding the installation and construction activities to be capitalized. We capitalize direct labor associated with capitalizable activities and indirect cost using standards developed from operational data, including the proportionate time to perform a new installation relative to the total technical operations activities and an evaluation of the nature of the indirect costs incurred to support capitalizable activities. Judgment is required to determine the extent to which indirect costs that have been incurred are related to capitalizable activities and, as a result, should be capitalized. Indirect costs include (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable cost of installation and construction vehicle costs, (iii) the direct variable costs of support personnel directly involved in assisting with installation activities, such as dispatchers and (iv) indirect costs directly attributable to capitalizable activities.
Intangible assets consist primarily of acquired franchise operating rights, franchise-related customer relationships and goodwill. Franchise operating rights represent the value attributable to agreements with local franchising authorities, which allows access to homes in the public right of way. Our franchise operating rights were acquired through business combinations. We do not amortize cable franchise operating rights as we have determined that they have an indefinite life. Costs incurred in negotiating and renewing cable franchise agreements are expensed as incurred. Franchise-related customer relationships represent the value of the benefit to us of acquiring the existing cable subscriber base and are amortized over the estimated life of the subscriber base, generally four years, on a straight-line basis. Goodwill represents the excess purchase price over the fair value of the identifiable net assets we acquired in business combinations.
Asset Impairments.
Long-lived assets, including plant, property and equipment and intangible assets subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. If the total of the expected undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying value of the asset.
We evaluate the recoverability of our franchise operating rights at least annually on October 1, or more frequently whenever events or substantive changes in circumstances indicate that the assets might be impaired. 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 carrying value of franchise operating rights and estimated fair value of those rights, and that it is more likely than not that the estimated fair values equal or exceed carrying value.
For franchise assets that undergo quantitative analysis, we calculate 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 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 our franchise operating rights. The estimates and assumptions made in our valuations are inherently subject to significant uncertainties, many of which are beyond our control, and there is no assurance that these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would significantly affect the measurement value include the assumptions regarding revenue growth, programming expense growth rates, the amount and timing of capital expenditures and the discount rate utilized. Any excess of the carrying value of franchise operating rights over the estimated fair value would be expensed as an impairment loss.
We conduct our cable operations under the authority of state cable television franchises, except in Alabama and parts of Michigan where we continue to operate under local franchises. Our franchises generally have service terms that last from five to 15 years, but we operate in some states that have perpetual terms. All of our term-limited franchise agreements are subject to renewal. The renewal process for our state franchises is specified by state law and tends to be a simple process, requiring the filing of a renewal application with information no more burdensome than that contained in our original application. Although renewal is not assured, there are provisions in the law that protect the Company from arbitrary or unreasonable denial. This is especially true for competitive cable providers like us. In most areas in which we operate, we are a “competitive” operator, meaning that we compete directly in the service area with at least one other franchised cable operator. The Cable Television Consumer Protection and Competition Act of 1992 (the “Cable Act”) says that “a franchising authority may not unreasonably refuse to award an additional competitive franchise.” The Cable Act also provides a formal renewal process that protects cable operators against arbitrary or unreasonable refusals to renew a franchise. In those few areas where we operate under local franchises, we can use this formal renewal process if needed.
In our experience, state and local franchising authorities encourage our entry into the market, as our competitive presence often leads to overall better service, more service options and lower prices. In our and our expert advisors’ experience, it has not been the practice for a franchising authority to deny a cable franchise renewal. We have never had a renewal denied.
We also, at least annually on October 1, evaluate our goodwill for impairment for each reporting unit (which generally are represented by geographical operations of cable systems managed by us), utilizing both quantitative and qualitative methods. Qualitative analysis is performed for goodwill in the event the previous analysis indicates that there is a significant margin between carrying value of goodwill and estimated fair value of the reporting units, and that it is more likely than not that the estimated fair value equals or exceeds carrying value.
For our quantitative evaluation of our goodwill, we utilize 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 would be expensed as an impairment loss.
Fair Value Measurements
GAAP provides guidance for a framework for measuring fair value in the form of a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Financial assets and liabilities are classified by level in their entirety based upon the lowest level of input that is significant to the fair value measurement. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability due to the fact there is no market activity. We record our interest rate swaps at fair value on the balance sheet and perform recurring fair value measurements with respect to these derivative financial instruments. The fair value measurements of our interest rate swaps were determined using cash flow valuation models. The inputs to the cash flow models consist of, or are derived from, observable data for substantially the full term of the swaps. This observable data includes interest and swap rates, yield curves and credit ratings, which are retrieved from available market data. The valuations are then adjusted for our own nonperformance risk as well as the counterparty as required by the provisions of the authoritative guidance using a discounted cash flow technique that accounts for the duration of the interest rate swaps and our and the counterparty’s risk profile.
We also have non-recurring valuations primarily associated with (i) the application of acquisition accounting and (ii) impairment assessments, both of which require that we make fair value determinations as of the applicable valuation date. In making these determinations, we are required to make estimates and assumptions that affect the recorded amounts, including, but not limited to, expected future cash flows, market comparables and discount rates, remaining useful lives of long-lived assets, replacement or reproduction costs of plant, property and equipment and the amounts to be recovered in future periods from acquired net operating losses and other deferred tax assets. To assist us in making these fair value determinations, we may engage third- party valuation specialists. Our estimates in this area impact, among other items, the amount of depreciation and amortization, and any impairment charges that we may report. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain. A significant portion of our long-lived assets were initially recorded through the application of acquisition accounting and all of our long-lived assets are subject to periodic or event-driven impairment assessments.
Legal and Other Contingencies
Legal and other contingencies have a high degree of uncertainty. When a loss from a contingency becomes estimable and probable, a reserve is established. The reserve reflects management’s best estimate of the probable cost of ultimate resolution of the matter and is revised as facts and circumstances change. A reserve is released when a matter is ultimately brought to closure or the statute of limitations lapses. The actual costs of resolving a claim may be substantially different from the amount of reserve we recorded. In addition, in the normal course of business, we are subject to various other legal and regulatory claims and proceedings directed at or involving us, which in our opinion will not have a material adverse effect on our financial position or results of operations or liquidity.
Programming Agreements
We exercise significant judgment in estimating programming expense associated with certain video programming contracts. Our policy is to record video programming costs based on our contractual agreements with our programming vendors, which are generally multi-year agreements that provide for us to make payments to the programming vendors at agreed upon market rates based on the number of customers to which we provide the programming service. If a programming contract expires prior to the parties’ entry into a new agreement and we continue to distribute the service, we estimate the programming costs during the period there is no contract in place. In doing so, we consider the previous contractual rates, inflation and the status of the negotiations in determining our estimates. When the programming contract terms are finalized, an adjustment to programming expense is recorded, if necessary, to reflect the terms of the new contract. We also make estimates in the recognition of programming expense
related to other items, such as the accounting for free periods, timing of rate increases and credits from service interruptions, as well as the allocation of consideration exchanged between the parties in multiple-element transactions.
Significant judgment is also involved when we enter into agreements which result in us receiving cash consideration from the programming vendor, usually in the form of advertising sales, channel positioning fees, launch support or marketing support. In these situations, we must determine based upon facts and circumstances if such cash consideration should be recorded as revenue, a reduction in programming expense or a reduction in another expense category (e.g., marketing).
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Additionally, the impact of changes in the tax rates and laws on deferred taxes, if any, is reflected in the unaudited condensed consolidated financial statements in the period of enactment.
As a result of the Restructuring, WOW Finance became a single member LLC for U.S. federal income tax purposes. The Restructuring is treated as a change in tax status related to WOW Finance, since a single member LLC is required to record current and deferred income taxes reflecting the results of its operations.
From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include business acquisitions and dispositions, including dispositions designed to be tax-deferred transactions for tax purposes, investments and certain financing transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on interpretations of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax, interest and penalty assessments by these taxing authorities. In determining our income tax provision for financial reporting purposes, we establish a reserve for uncertain income tax positions unless such positions are determined to be more likely than not of being sustained upon examination, based on their technical merits, and, accordingly, for financial reporting purposes, we only recognize tax benefits taken on the tax return that we believe are more likely than not of being sustained. There is considerable judgment involved in determining whether positions taken on the tax return are more likely than not of being sustained.
We adjust our tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The condensed consolidated income tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest. Our policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of income tax provision.
Homes Passed and Subscribers
We report homes passed as the number of serviceable addresses, such as single residence homes, apartments and condominium units, and businesses passed by our broadband network and listed in our database. We report total subscribers as the number of subscribers who receive at least one of our HSD, Video or Telephony services, without regard to which or how many services they subscribe. We define each of the individual HSD subscribers, Video subscribers and Telephony subscribers as a revenue generating unit (“RGU”). The following table summarizes homes
passed, total subscribers and total RGUs for our services as of each respective date and does not make adjustment for any of the Company’s acquisitions or divestitures:
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Mar. 31,
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Jun. 30,
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Sep. 30,
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Dec. 31,
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Mar. 31,
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Jun. 30,
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2017
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2017
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2017
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2017(1)
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2018
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2018
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Homes passed
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3,047,800
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3,072,500
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3,097,500
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3,109,200
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3,129,300
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3,149,200
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Total subscribers
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780,100
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776,500
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776,400
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777,300
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798,500
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800,100
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HSD RGUs
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729,000
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727,600
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730,000
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732,700
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743,900
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747,800
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Video RGUs
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474,000
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458,200
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442,500
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432,600
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429,000
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419,900
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Telephony RGUs
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243,000
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235,400
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226,200
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219,900
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218,300
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214,000
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Total RGUs
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1,446,000
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1,421,200
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1,398,700
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1,385,200
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1,391,200
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1,381,700
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(1)
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Statistical reporting was standardized to a single reporting methodology beginning in the first quarter of 2018. Previously, the data was maintained and accumulated separately through independent processes and procedures. The standardized reporting had the following increase/(decrease) on December 31, 2017 homes passed and subscriber numbers: homes passed (700); total subscribers 14,200; HSD RGUs 2,500; Video RGUs 4,100; Telephony RGUs 2,700; and Total RGUs 9,300.
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The following table displays the homes passed and subscribers related to the Company’s edge-out activities:
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Mar. 31,
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Jun. 30,
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Sep. 30,
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Dec. 31,
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Mar. 31,
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Jun. 30,
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2017
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2017
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2017
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2017
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2018
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2018
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Homes passed
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55,700
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75,000
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96,200
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104,800
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107,400
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116,600
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Total subscribers
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13,000
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16,900
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22,700
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26,400
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28,600
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30,900
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HSD RGUs
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13,000
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16,800
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22,600
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26,200
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28,300
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30,600
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Video RGUs
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7,600
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9,700
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12,500
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14,400
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15,200
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16,100
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Telephony RGUs
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2,800
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3,700
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4,500
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5,200
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5,600
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6,000
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Total RGUs
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23,400
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30,200
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39,600
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45,800
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49,100
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52,700
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Subscriber information for acquired entities is preliminary and subject to adjustment until we have completed our review of such information and determined that it is presented in accordance with our policies. While we take appropriate steps to ensure subscriber information is presented on a consistent and accurate basis at any given balance sheet date, we periodically review our policies in light of the variability we may encounter across our different markets due to the nature and pricing of products and services and billing systems. Accordingly, we may from time to time make appropriate adjustments to our subscriber information based on such reviews.
Financial Statement Presentation
Revenue
Our operating revenue is primarily derived from monthly charges for HSD, Video, and Telephony to residential and business customers, other business services and other revenues.
|
·
|
|
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 primarily 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.
|
|
·
|
|
Other business service revenue consists of session initiated protocol, web hosting, metro Ethernet, wireless backhaul, broadband carrier services, dark fiber sales, advanced collocation and cloud infrastructure services.
|
|
·
|
|
Other revenue consists primarily of advertising, late fees, line assurance warranty program, program guides and commissions related to the sale of merchandise by home shopping services.
|
Revenues attributable to monthly subscription fees charged to customers for our HSD, Video and Telephony services provided by our cable systems were 92% and 87% of total revenue for the six months ended June 30, 2018 and 2017, respectively. The remaining percentage of non-subscription revenue is derived primarily from advertising revenues, cloud services and collocation.
Costs and Expenses
Our expenses primarily consist of operating, selling, general and administrative expenses, depreciation and amortization expense, and interest expense.
Operating expenses
primarily include programming costs, data costs, transport costs and network access fees related to our HSD and Telephony services, cable service related expenses, costs of dark fiber sales, network operations and maintenance services, customer service and call center expenses, bad debt, billing and collection expenses, franchise fees and other regulatory fees.
Selling, general and administrative expenses
primarily include salaries and benefits of corporate and field management, sales and marketing personnel, human resources and related administrative costs.
Operating and selling, general and administrative expenses exclude depreciation and amortization expense, which is presented separately in the Company’s unaudited condensed consolidated statements of operations.
Depreciation and amortization
includes depreciation of our broadband networks and equipment, buildings and leasehold improvements and amortization of other intangible assets with definite lives primarily related to acquisitions.
We control our costs of operations by maintaining strict controls on expenditures. More specifically, we are focused on managing our cost structure by improving workforce productivity, increasing the effectiveness of our purchasing activities and maintaining discipline in customer acquisition. We expect programming expenses to continue to increase due to a variety of factors, including increased demands by owners of some broadcast stations for carriage of other services or payments to those broadcasters for retransmission consent and annual increases imposed by programmers with additional selling power as a result of media consolidation. We have not been able to fully pass these increases on to our customers without the loss of customers, nor do we expect to be able to do so in the future.
Results of operations
The following table summarizes our results of operations for the three months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
(in millions)
|
|
Revenue
|
|
$
|
291.3
|
|
$
|
297.5
|
|
$
|
(6.2)
|
|
(2)
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
157.3
|
|
|
157.4
|
|
|
(0.1)
|
|
*
|
|
Selling, general and administrative
|
|
|
39.7
|
|
|
32.5
|
|
|
7.2
|
|
22
|
%
|
Depreciation and amortization
|
|
|
46.4
|
|
|
50.8
|
|
|
(4.4)
|
|
(9)
|
%
|
Management fee to related party
|
|
|
—
|
|
|
0.5
|
|
|
(0.5)
|
|
*
|
|
|
|
|
243.4
|
|
|
241.2
|
|
|
2.2
|
|
1
|
%
|
Income from operations
|
|
|
47.9
|
|
|
56.3
|
|
|
(8.4)
|
|
(15)
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(32.7)
|
|
|
(44.1)
|
|
|
11.4
|
|
(26)
|
%
|
Loss on sale of Lawrence, Kansas system
|
|
|
—
|
|
|
(0.3)
|
|
|
0.3
|
|
*
|
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(1.0)
|
|
|
1.0
|
|
*
|
|
Other income, net
|
|
|
1.2
|
|
|
—
|
|
|
1.2
|
|
*
|
|
Income before provision for income taxes
|
|
|
16.4
|
|
|
10.9
|
|
|
5.5
|
|
50
|
%
|
Income tax benefit (expense)
|
|
|
8.8
|
|
|
(5.9)
|
|
|
14.7
|
|
*
|
|
Net income
|
|
$
|
25.2
|
|
$
|
5.0
|
|
$
|
20.2
|
|
*
|
|
*
Not meaningful
The following table summarizes our results of operations for the six months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
(in millions)
|
|
Revenue
|
|
$
|
576.8
|
|
$
|
597.5
|
|
$
|
(20.7)
|
|
(3)
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
315.2
|
|
|
317.2
|
|
|
(2.0)
|
|
(1)
|
%
|
Selling, general and administrative
|
|
|
79.4
|
|
|
62.8
|
|
|
16.6
|
|
26
|
%
|
Depreciation and amortization
|
|
|
92.7
|
|
|
101.1
|
|
|
(8.4)
|
|
(8)
|
%
|
Impairment losses on intangibles and goodwill
|
|
|
256.4
|
|
|
—
|
|
|
256.4
|
|
*
|
|
Management fee to related party
|
|
|
—
|
|
|
1.0
|
|
|
(1.0)
|
|
*
|
|
|
|
|
743.7
|
|
|
482.1
|
|
|
261.6
|
|
54
|
%
|
(Loss) income from operations
|
|
|
(166.9)
|
|
|
115.4
|
|
|
(282.3)
|
|
*
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(61.8)
|
|
|
(89.8)
|
|
|
28.0
|
|
(31)
|
%
|
Gain on sale of Lawrence, Kansas system
|
|
|
—
|
|
|
38.4
|
|
|
(38.4)
|
|
*
|
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(6.0)
|
|
|
6.0
|
|
*
|
|
Other income, net
|
|
|
1.2
|
|
|
1.4
|
|
|
(0.2)
|
|
(14)
|
%
|
(Loss) income before provision for income taxes
|
|
|
(227.5)
|
|
|
59.4
|
|
|
(286.9)
|
|
*
|
|
Income tax benefit
|
|
|
50.0
|
|
|
18.0
|
|
|
32.0
|
|
*
|
|
Net (loss) income
|
|
$
|
(177.5)
|
|
$
|
77.4
|
|
$
|
(254.9)
|
|
*
|
|
*
Not meaningful
Three months ended June 30, 2018 compared to the three months ended June 30, 2017
Revenue
Revenue for the three months ended June 30, 2018 decreased $6.2 million, or 2%, as compared to revenue for the three months ended June 30, 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
(in millions)
|
|
Residential subscription
|
|
$
|
237.2
|
|
$
|
231.3
|
|
$
|
5.9
|
|
3
|
%
|
Business services subscription
|
|
|
32.6
|
|
|
28.7
|
|
|
3.9
|
|
14
|
%
|
Total subscription
|
|
|
269.8
|
|
|
260.0
|
|
|
9.8
|
|
4
|
%
|
Other business services
|
|
|
6.8
|
|
|
10.6
|
|
|
(3.8)
|
|
(36)
|
%
|
Other
|
|
|
14.7
|
|
|
26.9
|
|
|
(12.2)
|
|
(45)
|
%
|
|
|
$
|
291.3
|
|
$
|
297.5
|
|
$
|
(6.2)
|
|
(2)
|
%
|
Total subscription revenue increased $9.8 million, or 4%, during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Contributing to the increase was approximately $10.7 million related to adjustments for the new revenue recognition accounting guidance.
After accounting for this non-recurring change in revenue, the resulting decline of $0.9 million in subscription revenue is primarily due to a $11.7 million reduction in average total RGUs, partially offset by an $10.8 million increase in the average revenue per unit (“ARPU”) of our customer base, which is calculated as subscription revenue for each of the HSD, Video and Telephony services divided by the average total RGUs for each service category for the respective period.
The decrease in other business services revenue of $3.8 million, or 36%, is primarily due to decreased revenue generated by network construction activities and the sale of the Chicago fiber assets and associated loss of wholesale customers.
The decrease in other revenue of $12.2 million, or 45%, is primarily due to the reclassification of franchise and installation fees to residential video subscription revenue in accordance with the new revenue recognition accounting guidance for the three months ended June 30, 2018 compared to the three months ended June 30, 2017.
The following table details subscription revenue by service offering for the three months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Subscription
|
|
|
|
2018
|
|
2017
|
|
Revenue
|
|
|
|
Subscription
|
|
Average
|
|
Subscription
|
|
Average
|
|
Change
|
|
|
|
Revenue
|
|
RGUs
|
|
Revenue
|
|
RGUs
|
|
$
|
|
%
|
|
|
|
(in millions)
|
|
(in thousands)
|
|
(in millions)
|
|
(in thousands)
|
|
|
|
|
|
|
HSD subscription
|
|
$
|
117.5
|
|
745.8
|
|
$
|
99.9
|
|
728.3
|
|
$
|
17.6
|
|
18
|
%
|
Video subscription
|
|
|
123.1
|
|
424.5
|
|
|
126.0
|
|
466.1
|
|
|
(2.9)
|
|
(2)
|
%
|
Telephony subscription
|
|
|
29.2
|
|
216.2
|
|
|
34.1
|
|
239.2
|
|
|
(4.9)
|
|
(14)
|
%
|
|
|
$
|
269.8
|
|
|
|
$
|
260.0
|
|
|
|
$
|
9.8
|
|
4
|
%
|
HSD Subscription
HSD subscription revenue increased $17.6 million, or 18%, during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase in HSD subscription revenue includes an increase of $2.6 million related to new revenue recognition accounting guidance.
After accounting for this non-recurring change in revenue, the remaining increase of $15.0 million in HSD subscription revenue is primarily due to a $2.7 million increase in average HSD RGUs and a $12.3 million increase in HSD ARPU.
Video Subscription
Video subscription revenue decreased $2.9 million, or 2%, during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease includes an increase of $9.2 million related to new revenue recognition accounting guidance.
After accounting for this non-recurring change in revenue, the resulting decrease of $12.1 million in Video subscription revenue is primarily due to a $11.2 million decrease in average Video RGUs and a $0.9 million decrease in Video ARPU.
Telephony Subscription
Telephony subscription revenue decreased $4.9 million, or 14%, during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease includes a decrease of $1.1 million related to new revenue recognition accounting guidance.
After accounting for this non-recurring change in revenue, the remaining $3.8 million decrease in Telephony subscription revenue is primarily due to a $3.2 million decrease in average Telephony RGUs and a $0.6 million decrease in Telephony ARPU.
Operating expenses (excluding depreciation and amortization)
Operating expenses (excluding depreciation and amortization) declined $0.1 million from the three months ended June 30, 2018 compared to the three months ended June 30, 2017. While operating expenses remained fairly consistent period over period, we experienced an increase in eligible capitalizable costs, partially offset by increases in employee related costs and repair and maintenance.
Incremental contribution
A presentation of incremental contribution, a non-GAAP measure, is included below.
Incremental contribution is included herein because we believe that it is a key metric used by our management to assess the financial performance of the business by showing how the relative relationship of the various components of subscription services contributes to our overall consolidated historical results. Our management further believes that it provides useful information to investors in evaluating our financial condition and results of operations because the additional detail illustrates how an incremental dollar of revenue, by particular service type, generates cash, before any unallocated costs are considered, which we believe is a key component of our overall strategy and important for understanding what drives our cash flow position relative to our historical results. We believe that when evaluating our business, investors apply varying degrees of importance to the different types of subscription revenue we generate and providing supplemental detail on these services, as well as third party costs associated with each service, is useful to investors because it allows investors to better evaluate these aspects of our performance. Incremental contribution is defined by us as the components of subscription revenue, less costs directly incurred from third parties in connection with the provision of such services to our customers.
Incremental contribution is not calculated in accordance with GAAP and our use of the term incremental contribution varies from others in our industry. Incremental contribution has important limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP as it does not identify or allocate any other operating costs and expenses that are components of our income from operations to specific subscription revenues as we do not measure or record such costs and expenses in a manner that would allow attribution to a specific component of subscription revenue. Accordingly, incremental contribution should not be
considered as an alternative to operating income or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows, or as measures of liquidity.
The following tables provide the most comparable GAAP measurements (i.e. income from operations) for the three months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
|
(in millions)
|
Income from operations
|
|
$
|
47.9
|
|
$
|
56.3
|
Incremental contribution for the provision of such services for the three months ended June 30, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
|
(in millions)
|
|
HSD subscription revenue
|
|
$
|
117.5
|
|
$
|
99.9
|
|
$
|
17.6
|
|
18
|
%
|
HSD expenses(1)
|
|
|
3.7
|
|
|
3.5
|
|
|
0.2
|
|
6
|
%
|
HSD incremental contribution
|
|
$
|
113.8
|
|
$
|
96.4
|
|
$
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
|
(in millions)
|
|
Video subscription revenue
|
|
$
|
123.1
|
|
$
|
126.0
|
|
$
|
(2.9)
|
|
(2)
|
%
|
Video expenses(2)
|
|
|
93.5
|
|
|
86.1
|
|
|
7.4
|
|
9
|
%
|
Video incremental contribution
|
|
$
|
29.6
|
|
$
|
39.9
|
|
$
|
(10.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
|
(in millions)
|
|
Telephony subscription revenue
|
|
$
|
29.2
|
|
$
|
34.1
|
|
$
|
(4.9)
|
|
(14)
|
%
|
Telephony expenses(3)
|
|
|
3.1
|
|
|
3.5
|
|
|
(0.4)
|
|
(11)
|
%
|
Telephony incremental contribution
|
|
$
|
26.1
|
|
$
|
30.6
|
|
$
|
(4.5)
|
|
|
|
|
(1)
|
|
HSD expenses represent costs incurred from third-party vendors related to maintaining our network and internet connectivity fees.
|
|
(2)
|
|
Video expenses represent fees paid to content providers for programming.
|
|
(3)
|
|
Telephony expenses represent costs incurred from third-party providers for circuit rental, interconnectivity and switching costs.
|
The following table provides a reconciliation of incremental contribution to income from operations, which is the most directly comparable GAAP measure, for the three months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
|
(in millions)
|
Income from operations
|
|
$
|
47.9
|
|
$
|
56.3
|
Revenue (excluding subscription revenue)
|
|
|
(21.5)
|
|
|
(37.5)
|
Other non-allocated operating expense (excluding depreciation and amortization)(1)
|
|
|
57.0
|
|
|
64.3
|
Selling, general and administrative(1)
|
|
|
39.7
|
|
|
32.5
|
Depreciation and amortization(1)
|
|
|
46.4
|
|
|
50.8
|
Management fee to related party(1)
|
|
|
—
|
|
|
0.5
|
|
|
$
|
169.5
|
|
$
|
166.9
|
HSD incremental contribution
|
|
|
113.8
|
|
|
96.4
|
Video incremental contribution
|
|
|
29.6
|
|
|
39.9
|
Telephony incremental contribution
|
|
|
26.1
|
|
|
30.6
|
Total incremental contribution
|
|
$
|
169.5
|
|
$
|
166.9
|
|
(1)
|
|
Operating expenses (other than third-party direct expenses excluding depreciation and amortization); selling, general and administrative; depreciation and amortization; and management fees to related party are not allocated by product or location for either internal or external reporting.
|
Selling, general and administrative (SG&A) expenses
Selling, general and administrative expenses increased $7.2 million, or 22%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase is primarily due to higher employee related salary and non-cash compensation cost. Partially offsetting the overall increase is a decrease in commission expense due to the impact of the new revenue recognition accounting guidance.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased $4.4 million, or 9%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease is primarily due to the disposition of Chicago fiber assets.
Management fee to related party expenses
Prior to our IPO, we paid a quarterly management fee of approximately $0.4 million per quarter plus any travel and miscellaneous expenses to Avista. In addition, pursuant to a consulting agreement dated as of December 18, 2015 by and among former Parent, Avista and Crestview, Crestview is entitled to 50% of any management fee actually received by Avista. In connection with our IPO, this obligation terminated and we no longer pay any management fee to Avista or Crestview.
Interest expense
Interest expense decreased $11.4 million, or 26%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease is primarily due to lower overall debt and a lower blended interest rate mainly driven by the redemption of the 10.25% Senior Notes on July 17, 2017.
Income tax benefit (expense)
We reported a total income tax benefit of $8.8 million and income tax expense of $5.9 million for the three months ended June 30, 2018 and 2017, respectively. The income tax benefit reported during the three months ended June 30, 2018 is primarily due to a change in the valuation allowance that was recorded. This charge was the result of recording indefinite lived deferred tax assets related to a business interest expense limitation and net operating loss carryforwards. As a result of these indefinite lived deferred tax assets, we recorded an income tax benefit of approximately $12.7 million.
Six months ended June 30, 2018 compared to the six months ended June 30, 2017
Revenue
Revenue for the six months ended June 30, 2018 decreased $20.7 million, or 3%, as compared to revenue for the six months ended June 30, 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
(in millions)
|
|
Residential subscription
|
|
$
|
469.3
|
|
$
|
463.7
|
|
$
|
5.6
|
|
1
|
%
|
Business services subscription
|
|
|
64.0
|
|
|
56.8
|
|
|
7.2
|
|
13
|
%
|
Total subscription
|
|
|
533.3
|
|
|
520.5
|
|
|
12.8
|
|
2
|
%
|
Other business services
|
|
|
14.0
|
|
|
21.7
|
|
|
(7.7)
|
|
(35)
|
%
|
Other
|
|
|
29.5
|
|
|
55.3
|
|
|
(25.8)
|
|
(47)
|
%
|
|
|
$
|
576.8
|
|
$
|
597.5
|
|
$
|
(20.7)
|
|
(3)
|
%
|
Total subscription revenue increased $12.8 million, or 2%, during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Contributing to the increase was approximately $19.6 million related to adjustments for the new revenue recognition accounting guidance, partially offset by a decrease of $1.3 million related to the disposition of our Lawrence, Kansas system on January 12, 2017.
After accounting for these non-recurring changes in revenue, the resulting decline of $5.5 million in subscription revenue is primarily due to a $26.7 million reduction in average total RGUs, partially offset by an $21.2 million increase in ARPU of our customer base, which is calculated as subscription revenue for each of the HSD, Video and Telephony services divided by the average total RGUs for each service category for the respective period.
The decrease in other business services revenue of $7.7 million, or 35%, is primarily due to decreased revenue generated by network construction activities and the sale of the Chicago fiber assets and associated loss of wholesale customers.
The decrease in other revenue of $25.8 million, or 47%, is primarily due to the reclassification of franchise and installation fees to residential video subscription revenue in accordance with the new revenue recognition accounting guidance for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.
The following table details subscription revenue by service offering for the six months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Subscription
|
|
|
|
2018
|
|
2017
|
|
Revenue
|
|
|
|
Subscription
|
|
Average
|
|
Subscription
|
|
Average
|
|
Change
|
|
|
|
Revenue
|
|
RGUs
|
|
Revenue
|
|
RGUs(1)
|
|
$
|
|
%
|
|
|
|
(in millions)
|
|
(in thousands)
|
|
(in millions)
|
|
(in thousands)
|
|
|
|
|
|
|
HSD subscription
|
|
$
|
229.2
|
|
740.2
|
|
$
|
196.8
|
|
737.5
|
|
$
|
32.4
|
|
16
|
%
|
Video subscription
|
|
|
244.9
|
|
426.3
|
|
|
254.7
|
|
479.8
|
|
|
(9.8)
|
|
(4)
|
%
|
Telephony subscription
|
|
|
59.2
|
|
216.9
|
|
|
69.0
|
|
246.7
|
|
|
(9.8)
|
|
(14)
|
%
|
|
|
$
|
533.3
|
|
|
|
$
|
520.5
|
|
|
|
$
|
12.8
|
|
2
|
%
|
|
(1)
|
|
Average subscribers, presented in thousands, is calculated based on reported subscribers and is not adjusted for changes related to the disposition of our Lawrence, Kansas system.
|
HSD Subscription
HSD subscription revenue increased $32.4 million, or 16%, during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase in HSD subscription revenue includes an increase of $3.5 million related to new revenue recognition accounting guidance, partially offset by a decrease of $0.6 million related to the disposition of our Lawrence, Kansas system on January 12, 2017.
After accounting for these non-recurring changes in revenue, the remaining increase of $29.5 million in HSD subscription revenue is primarily due to a $5.2 million increase in average HSD RGUs and a $24.3 million increase in HSD ARPU.
Video Subscription
Video subscription revenue decreased $9.8 million, or 4%, during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decrease includes an increase of $18.8 million related to new revenue recognition accounting guidance, partially offset by a decrease of $0.6 million related to the disposition of our Lawrence, Kansas system on January 12, 2017.
After accounting for these non-recurring changes in revenue, the resulting decrease of $28.0 million in Video subscription revenue is primarily due to a $24.4 million decrease in average Video RGUs and a $3.6 million decrease in Video ARPU.
Telephony Subscription
Telephony subscription revenue decreased $9.8 million, or 14%, during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decrease includes a $2.7 million decrease related to new revenue recognition accounting guidance and $0.1 million decrease related to the disposition of our Lawrence, Kansas system on January 12, 2017.
After accounting for these non-recurring changes in revenue, the remaining $7.0 million decrease in Telephony subscription revenue is primarily due to a $7.5 million decrease in average Telephony RGUs, partially offset by a $0.5 million increase in Telephony ARPU.
Operating expenses (excluding depreciation and amortization)
Operating expenses (excluding depreciation and amortization) declined $2.0 million, or 1%, from the six months ended June 30, 2018 compared to the six months ended June 30, 2017. While operating expenses remained
fairly consistent period over period, we experienced an increase in eligible capitalizable costs, partially offset by increases in installation and repair and maintenance costs.
Incremental contribution
A presentation of incremental contribution, a non-GAAP measure, is included below. See prior presentation of incremental contribution for the three months ended June 30, 2017 for an explanation of why we present this metric and the limitations thereof.
The following tables provide the most comparable GAAP measurements (i.e. income from operations) for the six months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
|
(in millions)
|
Income (loss) from operations
|
|
$
|
(166.9)
|
|
$
|
115.4
|
Incremental contribution for the provision of such services for the six months ended June 30, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
|
(in millions)
|
|
HSD subscription revenue
|
|
$
|
229.2
|
|
$
|
196.8
|
|
$
|
32.4
|
|
16
|
%
|
HSD expenses(1)
|
|
|
7.4
|
|
|
6.8
|
|
|
0.6
|
|
9
|
%
|
HSD incremental contribution
|
|
$
|
221.8
|
|
$
|
190.0
|
|
$
|
31.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
|
(in millions)
|
|
Video subscription revenue
|
|
$
|
244.9
|
|
$
|
254.7
|
|
$
|
(9.8)
|
|
(4)
|
%
|
Video expenses(2)
|
|
|
187.9
|
|
|
174.9
|
|
|
13.0
|
|
7
|
%
|
Video incremental contribution
|
|
$
|
57.0
|
|
$
|
79.8
|
|
$
|
(22.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
|
|
|
Telephony subscription revenue
|
|
$
|
59.2
|
|
$
|
69.0
|
|
$
|
(9.8)
|
|
(14)
|
%
|
Telephony expenses(3)
|
|
|
6.5
|
|
|
6.8
|
|
|
(0.3)
|
|
(4)
|
%
|
Telephony incremental contribution
|
|
$
|
52.7
|
|
$
|
62.2
|
|
$
|
(9.5)
|
|
|
|
|
(1)
|
|
HSD expenses represent costs incurred from third-party vendors related to maintaining our network and internet connectivity fees.
|
|
(2)
|
|
Video expenses represent fees paid to content providers for programming.
|
|
(3)
|
|
Telephony expenses represent costs incurred from third-party providers for circuit rental, interconnectivity and switching costs.
|
The following table provides a reconciliation of incremental contribution to income from operations, which is the most directly comparable GAAP measure, for the six months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
|
(in millions)
|
Income (loss) from operations
|
|
$
|
(166.9)
|
|
$
|
115.4
|
Revenue (excluding subscription revenue)
|
|
|
(43.5)
|
|
|
(77.0)
|
Other non-allocated operating expense (excluding depreciation and amortization)(1)
|
|
|
113.4
|
|
|
128.7
|
Selling, general and administrative(1)
|
|
|
79.4
|
|
|
62.8
|
Depreciation and amortization(1)
|
|
|
92.7
|
|
|
101.1
|
Impairment losses on intangibles and goodwill(1)
|
|
|
256.4
|
|
|
—
|
Management fee to related party(1)
|
|
|
—
|
|
|
1.0
|
|
|
$
|
331.5
|
|
$
|
332.0
|
HSD incremental contribution
|
|
|
221.8
|
|
|
190.0
|
Video incremental contribution
|
|
|
57.0
|
|
|
79.8
|
Telephony incremental contribution
|
|
|
52.7
|
|
|
62.2
|
Total incremental contribution
|
|
$
|
331.5
|
|
$
|
332.0
|
|
(1)
|
|
Operating expenses (other than third-party direct expenses excluding depreciation and amortization); selling, general and administrative; depreciation and amortization; impairment losses on intangibles and goodwill; and management fees to related party are not allocated by product or location for either internal or external reporting.
|
Selling, general and administrative (SG&A) expenses
Selling, general and administrative expenses increased $16.6 million, or 26%, in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase is primarily due to higher employee related salary and non-cash compensation costs. Partially offsetting the overall increase is a decrease in commission expense due to the impact of the new revenue recognition accounting guidance.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased $8.4 million, or 8%, in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decrease is primarily due to the disposition of Chicago fiber assets.
Impairment Losses on Intangibles and Goodwill
As a result of a decline in the Company’s stock price during the three months ended March 31, 2018, we recorded a non-cash impairment charge of $143.2 million related to certain franchise operating rights and a $113.2 million non-cash impairment charge of goodwill in certain of our markets. The primary driver of the impairment charges was decline in the price of our common stock, which reduced the market multiples utilized to determine estimated fair market values of indefinite-lived intangible assets and goodwill in certain reporting units. See Note 6 — Franchise Operating Rights & Goodwill for discussion of non-cash impairment charges recognized for the six months ended June 30, 2018.
Management fee to related party expenses
Prior to our IPO, we paid a quarterly management fee of approximately $0.4 million per quarter plus any travel and miscellaneous expenses to Avista. In addition, pursuant to a consulting agreement dated as of December 18, 2015 by and among former Parent, Avista and Crestview, Crestview is entitled to 50% of any management fee actually received
by Avista. In connection with our IPO, this obligation terminated and we no longer pay any management fee to Avista or Crestview.
Interest expense
Interest expense decreased $28.0 million, or 31%, in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The decrease is primarily due to lower overall debt and a lower blended interest rate mainly related to the redemption of the 10.25% Senior Notes on July 17, 2017.
Income tax benefit
We reported total income tax benefit of $50.0 million and $18.0 million for the six months ended June 30, 2018 and 2017, respectively. An income tax benefit recorded in the first quarter of the current year was primarily due to recording a non-cash impairment charge on certain franchise operating rights and goodwill which are indefinite lived assets. As a result of this impairment, we recorded an income tax benefit of approximately $46.1 million.
On January 12, 2017, the Company and MidCo consummated the Asset Purchase Agreement under which MidCo acquired the Company’s Lawrence, Kansas system, for gross 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 Lawrence sale, the Company recorded $11.1 million of associated income tax expense in the first quarter of 2017. In addition, a deferred income tax benefit of $39.3 million was recognized in the first quarter of 2017 as a result of the change in valuation allowance. The change in valuation allowance was due primarily to the utilization of NOLs from the disposal of indefinite lived assets related to the Lawrence sale transaction.
Liquidity and Capital Resources
At June 30, 2018, we had $113.5 million in current assets, including $17.1 million in cash and cash equivalents, and $209.2 million in current liabilities. Our outstanding consolidated debt and capital lease obligations aggregated to $2,256.7 million, of which $23.9 million is classified as current in our unaudited condensed consolidated balance sheet as of such date.
On December 14, 2017, our Board of Directors authorized us to repurchase up to $50.0 million of our outstanding common stock. As of March 26, 2018, we completed such stock repurchase program with total common stock shares repurchased of 5.1 million for $50.0 million.
On May 10, 2018, the Board of Directors authorized the Company to repurchase up to $25.0 million of our outstanding common stock. As of June 30, 2018, the Company purchased 1,026,000 shares of common stock for approximately $9.6 million.
On December 14, 2017, we completed our asset purchase agreement with a subsidiary of Verizon and entered into a Construction Services Agreement pursuant to which we will complete the build-out of the network in exchange for $50.0 million. The $50.0 million will be payable as such network elements are completed and accepted. We have incurred expenses of approximately $23.7 million on the construction as of June 30, 2018.
We are required to prepay principal amounts under our Senior Secured Credit Facilities credit agreement if we generate excess cash flow, as defined in the credit agreement. As of June 30, 2018, we had borrowing capacity of $279.6 million under our Revolving Credit Facility and were in compliance with all our debt covenants. Accordingly, we believe that we have sufficient resources to fund our obligations and anticipated liquidity requirements in the foreseeable future.
Historical Operating, Investing, and Financing Activities
Operating Activities
Net cash provided by operating activities increased from $107.2 million for the six months ended June 30, 2017 to $135.8 million for the six months ended June 30, 2018. The increase is primarily due to working capital fluctuations regarding the timing of accrued liabilities and unearned service revenue related to our construction activities.
Investing Activities
Net cash provided by (used in) investing activities decreased from $62.2 million cash provided by investing activities for the six months ended June 30, 2017 to $133.3 million cash used in investing activities for the six months ended June 30, 2018. The decrease is attributable to net cash proceeds from the sale of our Lawrence, Kansas system in 2017 in the amount of $213.0 million partially offset by a decrease in capital expenditures of $18.5 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.
We have ongoing capital expenditure requirements related to the maintenance, expansion and technological upgrades of our cable network. Capital expenditures are funded primarily through a combination of cash on hand and cash flow from operations. Our capital expenditures were $133.5 million and $152.0 million for the six months ended June 30, 2018 and 2017, respectively. The $18.5 million decrease from the six months ended June 30, 2017 to the six months ended June 30, 2018 is primarily due to the decrease in capital expenditures related to the Chicago fiber network.
The following table sets forth additional information regarding our capital expenditures for the periods presented:
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
|
(in millions)
|
Capital Expenditures
|
|
|
|
|
|
|
Customer premise equipment(1)
|
|
$
|
54.3
|
|
$
|
51.0
|
Scalable infrastructure(2)
|
|
|
17.6
|
|
|
15.5
|
Line extensions(3)
|
|
|
35.1
|
|
|
64.5
|
Upgrade / rebuild(4)
|
|
|
—
|
|
|
0.2
|
Support capital(5)
|
|
|
26.5
|
|
|
20.8
|
Total
|
|
$
|
133.5
|
|
$
|
152.0
|
Capital expenditures included in total related to:
|
|
|
|
|
|
|
Edge-outs(6)
|
|
$
|
15.8
|
|
$
|
26.4
|
Business services(7)
|
|
$
|
23.1
|
|
$
|
43.8
|
|
(1)
|
|
Customer premise equipment, or CPE, includes equipment and installation costs incurred to deliver services to residential and business services customers. CPE includes the costs of acquiring and installing our set-top boxes and modems, as well as the cost of customer connections to our network.
|
|
(2)
|
|
Scalable infrastructure includes costs, not directly related to customer acquisition activity, to support new customer growth and provide service enhancements (e.g., headend equipment).
|
|
(3)
|
|
Line extensions include costs associated with new home development within our footprint and edge-outs (e.g., fiber / coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
|
|
(4)
|
|
Upgrade / rebuild includes costs to modify or replace existing HFC network, including enhancements.
|
|
(5)
|
|
Support capital includes all other non-network-related costs to support day-to-day operations, including land, buildings, vehicles, office equipment, tools and test equipment.
|
|
(6)
|
|
Edge-outs represent costs to extend our network into new adjacent service areas, including the associated CPE.
|
|
(7)
|
|
Business services represent costs associated with the build-out of our network to support business services customers, including the associated CPE, as well as the construction of the Chicago fiber network.
|
Financing Activities
Net cash provided by (used in) financing activities decreased from $227.3 million provided by financing activities for the six months ended June 30, 2017 to $54.8 million used in financing activities for the six months ended June 30, 2018. The decrease is primarily due to the receipt of cash proceeds from our initial public offering of $334.7 million during the six months ended June 30, 2017 and a $20.3 million capital contribution from our former Parent. Additionally, we completed a $57.7 million share repurchase associated with the stock buyback program during the six months ended June 30, 2018. These decreases are partially offset by lower cash payments on outstanding debt of $2,256.7 million for the six months ended June 30, 2018 compared to $2,755.7 million for the six months ended June 30, 2017.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is limited and primarily related to fluctuating interest rates associated with our variable rate indebtedness under our Senior Secured Credit Facility. As of June 30, 2018, borrowings under our Term B Loans and Revolving Credit Facility bear interest at our option at a rate equal to either an adjusted LIBOR rate (which is subject to a minimum rate of 1.00% for Term B Loans) or an ABR (which is subject to a minimum rate of 1.00% for Term B Loans), plus the applicable margin. The applicable margins for the Term B Loans is 3.25% for adjusted LIBOR loans and 2.25% for ABR loans. The applicable margin for borrowings under the Revolving Credit Facility is 3.00% for adjusted LIBOR loans and 2.00% for ABR loans. A hypothetical 100 basis point (1%) change in LIBOR interest rates (based on the interest rates in effect under our Senior Secured Credit Facility as of June 30, 2018) would result in an annual interest expense change of up to approximately $9.2 million on our Senior Secured Credit Facility.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this quarterly report. The evaluation was based in part upon reports and certifications provided by a number of executives. Based upon, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, we believe that our controls provide such reasonable assurances.
Changes in Internal Control over Financial Reporting
On January 1, 2018, we adopted Accounting Standards Codification 606,
Revenue from Contracts with Customers
, and as a result, we have incorporated internal controls over significant process changes for revenue recognition that we believe to be appropriate and necessary in consideration of the related integration of the new standard. There were no other changes in our internal control over financial reporting during the quarter ended June 30, 2018, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a‑15 and 15d‑15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.