|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) In the following discussion, General Communication, Inc. ("GCI") and its direct
and indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis, we
evaluate our estimates and judgments, including those related to the allowance
for doubtful receivables, unbilled revenues, accrual of the USF high cost Remote
area program support, share-based compensation, inventory at lower of cost or
market, reserve for future customer credits, valuation allowances for deferred
income tax assets, depreciable and amortizable lives of assets, the carrying
value of long-lived assets including goodwill, cable certificates and wireless
licenses, our effective tax rate, purchase price allocations, the accrual of
cost of goods sold (exclusive of depreciation and amortization expense) ("Cost
of Goods Sold"), depreciation, and contingencies and litigation. We base our
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. See also
our "Cautionary Statement Regarding Forward-Looking Statements."
General Overview
Through our focus on long-term results, acquisitions, and strategic capital
investments, we strive to consistently grow our revenues and expand our
margins. We have historically met our cash needs for operations, regular capital
expenditures and maintenance capital expenditures through our cash flows from
operating activities. Historically, cash requirements for significant
acquisitions and major capital expenditures have been provided largely through
our financing activities.
The national economy continues to see persistent unemployment and slow economic
growth and even once stabilized is not expected to return quickly to a period of
strong growth. Should the national economy deteriorate further, it could lead to
reductions in consumer spending which could impact our revenue growth. We
believe the Alaska economy continues to perform well compared to most other
states at the current time. The State of Alaska has large cash reserves that
should enable it to maintain its budget for at least the short-term. This cash
reserve is important for Alaska's economy as the State is the largest employer
and second largest source of gross state product. The majority of our revenue is
driven by the strength of the Alaska economy which appears to have weathered the
economic pressures relatively well to date. Nonetheless we cannot predict the
impact the nation's future economic situation may have on us in the future.
On June 4, 2012, we entered into an Asset Purchase and Contribution Agreement
("Wireless Agreement") by and among Alaska Communications Systems Group, Inc.
("ACS"), GCI, ACS Wireless, Inc., a wholly owned subsidiary of ACS ("ACS
Member"), GCI Wireless Holdings, LLC, a wholly owned subsidiary of GCI, and The
Alaska Wireless Network, LLC ("AWN"), a wholly owned subsidiary of GCI, pursuant
to which the parties have agreed to contribute the respective wireless network
assets of GCI, ACS and their affiliates to AWN. We entered into this agreement
to provide a robust, statewide network with the spectrum mix, scale, advanced
technology and cost structure necessary to compete with Verizon and AT&T in
Alaska. After the transaction closes AWN will provide wholesale services to GCI
and ACS. GCI and ACS will use the AWN network in order to continue to sell
services to their respective retail customers. GCI and ACS will continue to
compete against each other and other wireless providers in the retail market.
Under the terms of the Wireless Agreement, we agreed to purchase certain
wireless network assets from ACS and its affiliates for $100.0 million and we
will contribute the purchased assets, our wireless network assets and certain
IRU capacity to AWN. ACS also agreed to contribute its remaining wireless
network assets and certain IRU capacity to AWN. Upon the contribution of assets
to AWN, ACS Member will own one-third of AWN and we will own two-thirds of
AWN. ACS Member will be entitled to receive preferential cash distributions
totaling $190.0 million over the first four years of AWN's operations and we
will be entitled to all remaining cash distributions during that period. We
anticipate that the $190.0 million preferential distributions to ACS will
constitute approximately $60.0 million in distributions over the distributions
otherwise attributable to their ownership percentage during such
period. Following the initial four year period, we and ACS Member will receive
distributions proportional to our ownership interests. We are evaluating the
accounting treatment for this transaction.
29
--------------------------------------------------------------------------------
The closing of the transactions is subject to the satisfaction of customary
closing conditions, including the receipt of required governmental and third
party consents and approvals and the expiration of any applicable waiting
periods under competition laws, including the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. The transactions are expected to close by the second
quarter of 2013.
As part of an agreement signed in December 2007 with AT&T Mobility, AT&T
Mobility provided to us a large block of wireless network usage at no charge
that we used for roaming. This block of minutes was depleted in January 2012 and
we expect our wireless Cost of Goods Sold for the year ending December 31, 2012,
to increase in the range of $4.8 million to $5.3 million as compared to the year
ended December 31, 2011, before factoring in the impact of 2012 subscriber
growth. Our future wireless Cost of Goods Sold will depend on several factors
including the impact and timing of our wireless network build-out, the pattern
of usage by our wireless subscribers, and negotiated rates with our roaming
partners.
As an eligible telecommunications carrier ("ETC"), we receive support from the
Universal Service Fund ("USF") to support the provision of wireline local access
and wireless service in high cost areas. On November 29, 2011, the Federal
Communications Commission ("FCC") published a final rule to reform the
methodology for distributing USF high cost support for voice and broadband
services, as well as to the access charge regime for terminating traffic between
carriers ("High Cost Order"). The High Cost Order defined Urban and Remote areas
and divided support to Alaska between these two areas. Support for competitive
eligible telecommunications carriers ("CETCs") serving Urban areas that
generally include Anchorage, Fairbanks, and Juneau will follow national reforms,
with capped support per provider per service area as of January 1, 2012, and
commencing a five-step phase-down on July 1, 2012. In addition to broader
reforms, the FCC tailored revisions specifically for CETCs serving Remote
Alaska, intended to address the unique challenges for serving these
areas. Support to these locations will continue to be distributed on a per-line
basis until the later of July 1, 2014, or the implementation of a successor
funding mechanism. A further rulemaking to consider successor funding mechanisms
is underway. We cannot predict at this time the outcome of this proceeding or
its effect on Remote high cost support available to us, but our revenue for
providing local services in these areas would be materially adversely affected
by a substantial reduction of USF support.
The High Cost Order Remote and Urban program changes primarily impacted our
Consumer segment. We expect that the High Cost Order Remote and Urban program
changes will result in decreased Consumer segment voice revenue of approximately
$1.6 million and decreased Consumer segment wireless revenue of approximately
$1.7 million for the year ending December 31, 2012, as compared to the year
ended December 31, 2011. At September 30, 2012, we have $31.7 million and $4.5
million in Remote and Urban high cost accounts receivable, respectively.
On February 6, 2012, the FCC released its Report and Order and Further Notice of
Proposed Rulemaking to comprehensively reform and modernize the USF's Lifeline
program. The Lifeline program is administered by the Universal Service
Administrative Company ("USAC") and is designed to ensure that quality
telecommunications services are available to low-income customers at affordable
rates. Following are the reforms included in the order that we expect to impact
Consumer segment wireless revenue in the year ending December 31, 2012:
· The order adopted on an interim basis a flat rate of $9.25 to replace the
support previously available under Tier I through Tier III support mechanisms
as defined by USAC. The replacement support reduced the wireless subscriber
per line support $0.75 and took effect in August 2012. The FCC intends to
further investigate whether this support amount is reasonable over the long
term in further rulemaking.
· The order adopted a requirement for annual recertification of all Lifeline
subscribers enrolled as of June 1, 2012, to be completed by the end of
2012. We have made significant progress toward completing the annual
recertification process.
30--------------------------------------------------------------------------------
We have recognized $11.2 million in Consumer wireless Lifeline revenue for the
nine months ended September 30, 2012. We expect that these Lifeline program
changes will result in decreased Consumer segment wireless revenue in the range
of $850,000 to $950,000 for the year ending December 31, 2012, as compared to
the year ended December 31, 2011, and in the range of $2.5 million to $3.0
million for the year ending December 31, 2013, as compared to the year ending
December 31, 2012.
As a related matter, in April 2012 the Regulatory Commission of Alaska ("RCA")
issued a notice of inquiry to consider whether to modify the state-funded
component of Lifeline support, which is currently $3.50 per month. In May 2012,
we responded in favor of preserving the current level of support. We cannot
predict the outcome of the support review proceedings or the impact on our
income statement, financial position or cash flows.
In November 2010, Verizon acquired a license for 700 MHz wireless spectrum
covering Alaska. Verizon has been building an LTE network in 2012 and
subsequently we expect they will be an additional competitor where our markets
overlap. We cannot predict the potential impact this new competition may have on
us in the future.
On October 3, 2012, we entered into a second arrangement under the New Markets
Tax Credit ("NMTC") program with US Bancorp for $12.9 million to fund the
further extension of terrestrial broadband service to rural Northwestern Alaska
communities via a high capacity hybrid fiber optic and microwave network ("Phase
3 of TERRA-NW") ("NMTC #2"). In connection with this NMTC #2 transaction we
loaned $37.7 million to two special purpose entities created to effect the
financing arrangement, at 1.0% interest due October 2, 2042. Simultaneously, US
Bancorp invested $17.5 million in these special purpose entities, and as such,
is entitled to substantially all of the benefits derived from the NMTCs. The
special purpose entities then contributed US Bancorp's contribution and the loan
proceeds to certain community development entities ("CDEs") less payment of
placement fees of $3.2 million. The CDEs, in turn, loaned $52.0 million, at
interest rates varying from 0.7099% to 0.7693%, to Unicom, our wholly owned
subsidiary, as partial financing for Phase 3 of TERRA-NW. The loan proceeds to
Unicom, net of syndication and arrangement fees, are restricted for use on Phase
3 of TERRA-NW. Restricted cash of $12.9 million was received by Unicom on
October 3, 2012. We plan to begin construction on Phase 3 of TERRA-NW in 2013
and expect to complete the project in 2014.
Following are our segments and the services and products each offers to its
customers:
Reportable Segments
Network Managed Regulated
Services and Products Consumer Access Commercial Broadband Operations
Voice:
Long-distance X X X X
Local Access X X X X
Video X X
Data:
Internet X X X X X
Data Networks X X X
Managed Services X X
Managed Broadband Services X
Wireless X X X
31--------------------------------------------------------------------------------Results of Operations
The following table sets forth selected financial data as a percentage of total
revenues for the periods indicated (underlying data rounded to the nearest
thousands):
Percentage Percentage
Three Months Ended Change1 Nine Months Ended Change1
September 30, 2012 September 30, 2012
2012 2011 vs. 2011 2012 2011 vs. 2011
Income Statement Data:
Revenues:
Consumer segment 49% 50% (3%) 50% 52% (1%)
Network Access segment 15% 17% (7%) 15% 16% (1%)
Commercial segment 20% 20% 2% 20% 20% 3%
Managed Broadband
segment 13% 10% 30% 12% 9% 38%
Regulated Operations
segment 3% 3% (11%) 3% 3% (4%)
Total revenues 100% 100% 0% 100% 100% 3%
Selling, general and
administrative expenses 33% 31% 7% 34% 34% 6%
Depreciation and
amortization expense 18% 17% 5% 19% 18% 5%
Operating income 14% 18% (20%) 13% 15% (6%)
Other expense, net 9% 9% (1%) 10% 12% (16%)
Income before income tax
expense 5% 9% (42%) 4% 3% 36%
Net income 2% 4% (51%) 2% 1% 30%
Net income attributable to
GCI 2% 4% (49%) 2% 1% 38%
1 Percentage change in underlying
data
We evaluate performance and allocate resources based on earnings before
depreciation and amortization expense, net interest expense, income taxes,
share-based compensation expense, accretion expense, loss attributable to
non-controlling interest and non-cash contribution adjustment ("Adjusted
EBITDA"). Management believes that this measure is useful to investors and other
users of our financial information in evaluating operating profitability as an
analytical indicator of income generated to service debt and fund capital
expenditures. In addition, multiples of current or projected earnings before
depreciation and amortization expense, net interest expense and income taxes
("EBITDA") are used to estimate current or prospective enterprise value. See
note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Three Months Ended September 30, 2012 ("third quarter of 2012") Compared to
Three Months Ended September 30, 2011 ("third quarter of 2011")
Overview of Revenues and Cost of Goods Sold
Total revenues increased slightly from $177.7 million in the third quarter of
2011 to $178.5 million in the third quarter of 2012. Revenue increases in our
Commercial and Managed Broadband segments were partially off-set by decreased
revenue in our Consumer, Network Access and Regulated Operations segments. See
the discussion below for more information by segment.
Total Cost of Goods Sold increased 3% from $60.7 million in the third quarter of
2011 to $62.8 million in the third quarter of 2012. Cost of Goods Sold increases
in our Consumer and Managed Broadband segments were partially off-set by
decreased Cost of Goods Sold in our Network Access, Commercial and Regulated
Operations segments. See the discussion below for more information by segment.
Consumer Segment Overview
Consumer segment revenue represented 49% of the third quarter of 2012
consolidated revenues. The components of Consumer segment revenue are as follows
(amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Voice $ 9,968 13,164 (24 %)
Video 28,394 29,155 (3 %)
Data 21,379 18,088 18 %
Wireless 27,066 28,860 (6 %)
Total Consumer segment revenue $ 86,807 89,267 (3 %)
32
--------------------------------------------------------------------------------Consumer segment Cost of Goods Sold represented 53% of the third quarter of 2012
consolidated Cost of Goods Sold. The components of Consumer segment Cost of
Goods Sold are as follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Voice $ 2,340 2,555 (8 %)
Video 12,668 12,994 (3 %)
Data 1,449 1,351 7 %
Wireless 16,570 10,536 57 %
Total Consumer segment Cost of Goods Sold $ 33,027 27,436 20 %
Consumer segment Adjusted EBITDA, representing 35% of the third quarter of 2012
consolidated Adjusted EBITDA, is as follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Consumer segment Adjusted EBITDA $ 20,916 30,373 (31 %)
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Selected key performance indicators for our Consumer segment follow:
September 30, Percentage
2012 2011 Change
Voice:
Total local access lines in service1 71,900 79,100 (9 %)
Local access lines in service on GCI facilities1 66,900 73,200 (9 %)
Video:
Basic subscribers2 122,200 126,400 (3 %)
Digital programming tier subscribers3 72,000 76,700 (6 %)
HD/DVR converter boxes4 89,200 87,400 2 %
Homes passed 248,400 239,800 4 %
Average monthly revenue per subscriber5 $ 77.45 $ 76.85 1 %
Data:
Cable modem subscribers6 113,100 106,800 6 %
Wireless:
Lifeline wireless lines in service7 35,500 43,100 (18 %)
Non-Lifeline wireless lines in service8 87,300 82,700 6 %
Average monthly revenue per subscriber9 $ 67.98 $ 72.60 (6 %)
1 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to
the public switched telephone network.
2 A basic subscriber is defined as one basic tier of service delivered to an address or separate subunits thereof
regardless of the number of outlets purchased.
3 A digital programming tier subscriber is defined as one digital programming tier of service delivered to an
address or separate subunits thereof regardless of the number of outlets or digital programming tiers purchased.
Digital programming tier subscribers are a subset of basic subscribers.
4 A high-definition/digital video recorder ("HD/DVR") converter box is defined as one box rented by a digital
programming or basic tier subscriber. A digital programming or basic tier subscriber is not required to rent an
HD/DVR converter box to receive service.
5 Average monthly consumer video revenues divided by the average of consumer basic subscribers at the beginning
and end of each month in the period.
6 A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service
purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a
subscriber. Cable modem subscribers may also be video basic subscribers though basic video service is not
required to receive cable modem service.
7 A Lifeline wireless line in service is defined as a revenue generating wireless device that is eligible for
Lifeline support.
8 A non-Lifeline wireless line in service is defined as a revenue generating wireless device that is not eligible
for Lifeline support.
9 Average monthly consumer wireless revenues divided by the average of consumer Lifeline and non-Lifeline
wireless subscribers at the beginning and end of each month in the period.
33
--------------------------------------------------------------------------------
Consumer Segment Revenues
The decrease in voice revenue is primarily due to:
· A 30% decrease in local service high cost support to $2.0 million due to the
changes in the high cost support program as discussed above in the General
Overview section of this Item 2, changes in the variables used to calculate
our estimate and a decrease in subscribers, and
· A 24% decrease in local service plan fee revenue to $3.8 million due to
decreased subscribers and a rate decrease to one of our popular plans.
The increase in data revenue is primarily due to a 17% increase in cable modem
revenue to $18.9 million due to increased subscribers and our subscribers'
selection of plans that offer higher speeds.
The decrease in wireless revenue is primarily due to:
· A 19% decrease in wireless high cost support to $8.0 million due to the
changes in the high cost support program as discussed above in the General
Overview section of this Item 2 and changes in the variables used to calculate
our Remote high-cost estimate, and
· A 22% decrease in Lifeline support to $3.2 million primarily due to decreased
subscribers resulting from the recertification program started in June 2012
and discussed above in the General Overview section of this Item 2.
These decreases were partially offset by an increase in plan fee revenue due to
our subscribers' selection of plans that offer more data and an increase in
non-Lifeline subscribers.
Consumer Segment Cost of Goods Sold
The wireless Cost of Goods Sold increase is primarily due to increased costs for
roaming and increased costs for wireless handset equipment sales. The increase
in roaming costs is due to the end of free network service as discussed above in
the General Overview section of this Item 2 and an increase in data usage by our
customers. The increase in handset sales is due to an increased number of
premium wireless smartphone handsets which have higher costs and an increased
number of handsets issued to new customers and those extending their
service. This increase in smartphones resulted in an increase in data usage.
Consumer Segment Adjusted EBITDA
The decrease in Adjusted EBITDA is primarily due to decreased revenue as
discussed above in "Consumer Segment Revenues", increased Cost of Goods Sold as
described above in "Consumer Segment Cost of Goods Sold" and an increase in the
selling, general and administrative expense that was allocated to our Consumer
segment due to an increase in consolidated selling, general and administrative
expense.
34--------------------------------------------------------------------------------
Network Access Segment Overview
Network access segment revenue represented 15% of the third quarter of 2012
consolidated revenues. The components of Network Access segment revenue are as
follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Voice $ 5,664 6,213 (9 %)
Data 14,093 17,140 (18 %)
Wireless 7,718 6,114 26 %
Total Network Access segment revenue $ 27,475 29,467 (7 %)
Network Access segment Cost of Goods Sold represented 10% of the third quarter
of 2012 consolidated Cost of Goods Sold. The components of Network Access
segment Cost of Goods Sold are as follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Voice $ 2,307 3,460 (33 %)
Data 3,433 5,697 (40 %)
Wireless 454 374 21 %
Total Network Access segment Cost of Goods Sold $ 6,194 9,531 (35 %)
Network Access segment Adjusted EBITDA, representing 26% of the third quarter of
2012 consolidated Adjusted EBITDA, is as follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Network Access segment Adjusted EBITDA $ 15,383 13,729 12 %
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Network Access Segment Revenues
The decrease in data revenue is primarily due to the absence in the third
quarter of 2012 of $1.9 million in revenue for special project work for a new
customer recognized in the third quarter of 2011.
Network Access Segment Cost of Goods Sold
The decrease in voice Cost of goods Sold is primarily due to Intrastate Access
Reform which eliminated the incumbent local exchange carrier's ("ILEC") ability
to bill long distance carriers for certain intrastate line charges.
The decrease in data Cost of Goods Sold is primarily due to the absence in the
third quarter of 2012 of $1.8 million in Cost of Goods Sold recognized in the
third quarter of 2011 related to the special project work revenue described
above in "Network Access Segment Revenues."
Network Access Segment Adjusted EBITDA
The Adjusted EBITDA increase is primarily due to decreased Cost of Goods Sold as
described above in "Network Access Segment Cost of Goods Sold." This change was
partially offset by decreased revenue as described above in "Network Access
Segment Revenues."
35
--------------------------------------------------------------------------------
Commercial Segment Overview
Commercial segment revenue represented 20% of the third quarter of 2012
consolidated revenues. Commercial segment data revenue is comprised of monthly
recurring charges for data services and charges billed on a time and materials
basis largely for personnel providing on-site customer support. This latter
category can vary significantly based on project activity. The components of
Commercial segment revenue are as follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Voice $ 6,896 7,137 (3 %)
Video 3,142 2,830 11 %
Data 23,622 23,040 3 %
Wireless 2,548 2,565 (1 %)
Total Commercial segment revenue $ 36,208 35,572 2 %
Commercial segment Cost of Goods Sold represented 26% of the third quarter of
2012 consolidated Cost of Goods Sold. The components of Commercial segment Cost
of Goods Sold are as follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Voice $ 2,434 3,001 (19 %)
Video 486 542 (10 %)
Data 11,906 12,522 (5 %)
Wireless 1,781 1,167 53 %
Total Commercial segment Cost of Goods Sold $ 16,607 17,232 (4 %)
Commercial segment Adjusted EBITDA, representing 16% of the third quarter of
2012 consolidated Adjusted EBITDA, is as follows (amounts in thousands):
Third Quarter of Percentage
2012 2011 Change
Commercial segment Adjusted EBITDA $ 9,892 9,117 9 %
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Selected key performance indicators for our Commercial segment follow:
September 30, Percentage
2012 2011 Change
Voice: Total local access lines in service1 51,800 50,800 2%
Local access lines in service on GCI
facilities1 30,500 27,200 12%
Data:
Cable modem subscribers2 11,600 11,100 5%
Wireless:
Wireless lines in service3 16,600 14,900 11%
1 A local access line in service is defined as a revenue generating circuit or channel
connecting a customer to the public switched telephone network.
2 A cable modem subscriber is defined by the purchase of cable modem service regardless
of the level of service purchased. If one entity purchases multiple cable modem service
access points, each access point is counted as a subscriber.
3 A wireless line in service is defined as a revenue generating wireless device.
Commercial Segment Adjusted EBITDA
The Adjusted EBITDA increase is primarily due to decreased Cost of Goods Sold
and an increase in revenue. These changes were partially offset by an increase
in the selling, general and administrative expense that was allocated to our
Commercial segment due to an increase in consolidated selling, general and
administrative expense.
36
--------------------------------------------------------------------------------
Managed Broadband Segment Overview
Managed Broadband segment revenue, Cost of Goods sold and Adjusted EBITDA
represented 13%, 8% and 21% of the third quarter of 2012 consolidated revenues,
Cost of Goods Sold and Adjusted EBITDA, respectively.
Managed Broadband Segment Revenues
Managed Broadband segment revenue, which includes data products only, increased
30% to $22.7 million in the third quarter of 2012 as compared to the third
quarter of 2011. The increase is primarily due to:
· A $4.2 million increase in monthly contract revenue due to new ConnectMD® and
SchoolAccess® customers and increased data network capacity purchased by our
existing ConnectMD® and SchoolAccess® customers, and
· A $1.1 million increase in product sales to our customers.
Managed Broadband Segment Cost of Goods Sold
Managed Broadband segment Cost of Goods Sold increased 15% to $5.2 million in
the third quarter of 2012 as compared to the third quarter of 2011. The increase
is primarily due to Cost of Goods Sold associated with the product sales revenue
described above in "Managed Broadband Segment Revenues."
Managed Broadband Segment Adjusted EBITDA
Managed Broadband segment Adjusted EBITDA increased 39% to $12.2 million in the
third quarter of 2012 primarily due to an increase in revenue as described above
in "Managed Broadband Segment Revenues." This change was partially offset by an
increase in Cost of Goods Sold as described above in "Managed Broadband Segment
Cost of Goods Sold" and an increase in the selling, general and administrative
expense that was allocated to our Managed Broadband segment. The increase in
selling, general and administrative expense is primarily due to an increase in
the 2011 segment margin upon which the selling, general and administrative
expense allocation is based and an increase in consolidated selling, general and
administrative expense.
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Regulated Operations Segment Overview
Regulated Operations segment revenue, Cost of Goods Sold and Adjusted EBITDA
represented 3%, 3% and 2% of the third quarter of 2012 consolidated revenues,
Cost of Goods Sold and Adjusted EBITDA, respectively.
A selected key performance indicator for our Regulated Operations segment
follows:
September 30, Percentage
2012 2011 Change
Voice: Total local access lines in service on
GCI facilities1 8,500 9,300 (9%)
1 A local access line in service is defined as a revenue generating circuit or
channel connecting a customer to the public switched telephone network.
Regulated Operations Segment Revenues
Regulated Operations segment revenues decreased from $6.0 million in the third
quarter of 2011 to $5.3 million in the third quarter of 2012.
Regulated Operations Segment Cost of Goods Sold
Regulated Operations segment Cost of Goods Sold decreased from $1.9 million in
the third quarter of 2011 to $1.7 million in the third quarter of 2012.
37
--------------------------------------------------------------------------------
Regulated Operations Segment Adjusted EBITDA
Regulated Operations segment Adjusted EBITDA was $1.0 million in each of the
third quarters of 2011 and 2012.
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income tax expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 7% to $58.2 million in
the third quarter of 2012. Individually significant items contributing to the
increase include:
· A $1.9 million increase in labor costs,
· A $919,000 increase in share-based compensation expense,
· A $599,000 increase in workers compensation expense, and
· $456,000 in transaction costs related to the transactions described in the
Wireless Agreement as discussed in the General Overview section of this Item
2.
These increases were partially offset by a $1.0 million decrease in health
benefit costs.
As a percentage of total revenues, selling, general and administrative expense
increased from 31% in the third quarter of 2011 to 33% in the third quarter of
2012.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 5% to $32.1 million in the third
quarter of 2012 primarily due to new assets placed in service in 2011 and
through September 2012 partially offset by assets which became fully depreciated
during 2012.
Other Expense, Net
Other expense, net of other income, decreased 1% to $16.6 million in the third
quarter of 2012.
Income Tax Expense
Income tax expense totaled $5.3 million and $8.0 million in the third quarters
of 2012 and 2011, respectively. Our effective income tax rate increased from 52%
in the third quarter of 2011 to 60% in the third quarter of 2012, primarily due
to an increase in the amount of estimated permanent tax differences as compared
to our estimated net income before income tax expense in 2012 as compared to
2011.
At September 30, 2012, we have income tax net operating loss carryforwards of
$306.4 million that will begin expiring in 2019 if not utilized, and alternative
minimum tax credit carryforwards of $1.9 million available to offset regular
income taxes payable in future years.
We have recorded deferred tax assets of $126.0 million associated with income
tax net operating losses that were generated from 1999 to 2012 and that expire
from 2019 to 2032, and with charitable contributions that were converted to net
operating losses in 2004 through 2007, and that expire in 2024 through 2027,
respectively.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable income
during the carryforward period are reduced which would result in additional
income tax expense. We estimate that our effective annual income tax rate for
financial statement purposes will be 53% to 58% in the year ending December 31,
2012, primarily due to the large amount of permanent differences expected in
2012 as compared to our net income before income tax expense.
38
--------------------------------------------------------------------------------Nine Months Ended September 30, 2012 ("2012") Compared to Nine Months Ended
September 30, 2011 ("2011")
Overview of Revenues and Cost of Goods Sold
Total revenues increased 3% from $510.6 million in 2011 to $526.5 million in
2012. Revenue increases in our Commercial and Managed Broadband segments were
partially off-set by decreased revenues in our Consumer, Network Access and
Regulated Operations segments. See the discussion below for more information by
segment.
Total Cost of Goods Sold increased 3% from $171.7 million in 2011 to $177.7
million in 2012. Cost of Goods Sold increases in our Consumer, Managed Broadband
and Regulated Operations segments were partially off-set by decreased Cost of
Goods Sold in our Network Access and Commercial segments. See the discussion
below for more information by segment.
Consumer Segment Overview
Consumer segment revenue represented 50% of 2012 consolidated revenues. The
components of Consumer segment revenue are as follows (amounts in thousands):
Percentage
2012 2011 Change
Voice $ 31,731 40,541 (22 %)
Video 86,651 89,040 (3 %)
Data 63,351 52,046 22 %
Wireless 81,381 84,611 (4 %)
Total Consumer segment revenue $ 263,114 266,238 (1 %)
Consumer segment Cost of Goods Sold represented 52% of 2012 consolidated Cost of
Goods Sold. The components of Consumer segment Cost of Goods Sold are as follows
(amounts in thousands):
Percentage
2012 2011 Change
Voice $ 6,982 8,194 (15 %)
Video 38,196 39,982 (4 %)
Data 4,295 4,265 1 %
Wireless 42,759 30,314 41 %
Total Consumer segment Cost of Goods Sold $ 92,232 82,755 11 %
Consumer segment Adjusted EBITDA, representing 40% of 2012 consolidated Adjusted
EBITDA, is as follows (amounts in thousands):
Percentage
2012 2011 Change
Consumer segment Adjusted EBITDA $ 69,718 87,024 (20 %)
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Selected key performance indicators for our Consumer segment follow:
September 30, Percentage
2012 2011 Change
Video:
Average monthly revenue per subscriber1 $ 78.01 $ 77.06 1 %
Wireless:
Average monthly revenue per subscriber2 $ 68.11 $ 70.89 (4 %)
1 Average monthly consumer video revenues divided by the average of consumer basic subscribers at the beginning and
end of each month in the period.
2 Average monthly consumer wireless revenues divided by the average of consumer Lifeline and non-Lifeline wireless
subscribers at the beginning and end of each month in the period.
39
--------------------------------------------------------------------------------Consumer Segment Revenues
The decrease in voice revenue is primarily due to:
· A 29% decrease in local service high cost support to $6.2 million due to the
changes in the high cost support program as discussed above in the General
Overview section of this Item 2, changes in the variables used to calculate
our estimate and a decrease in subscribers,
· A 21% decrease in local service plan fee revenue to $12.3 million due to
decreased subscribers and a rate decrease to one of our popular plans, and
· A 41% decrease in long distance usage revenue to $1.9 million due to the lower
rates mandated by the Intrastate Access Reform which went into effect in the
third quarter of 2011 along with our introduction of a popular new plan
offering unlimited interstate and intrastate calling.
The increase in data revenue is primarily due to:
· A 19% increase in cable modem revenue to $55.0 million due to increased
subscribers and our subscribers' selection of plans that offer higher speeds,
and
· A 78% increase in excess usage revenue to $5.8 million due to customers moving
from plans with unlimited usage to plans with limited usage.
The decrease in wireless revenue is primarily due to:
· A 17% decrease in wireless high cost support to $23.8 million due to the
changes in the high cost support program as discussed above in the General
Overview section of this Item 2 and changes in the variables used to calculate
our Remote high-cost estimate, and
· A 12% decrease in Lifeline support revenue to $11.2 million primarily due to
decreased subscribers resulting from the recertification program started in
June 2012 and discussed above in the General Overview section of this Item 2.
These decreases were partially offset by an increase in plan fee revenue due to
our subscribers' selection of plans that offer more data and an increase in
non-Lifeline subscribers.
Consumer Segment Cost of Goods Sold
The decrease in video Cost of Goods Sold is primarily due to decreased costs
resulting from programming changes and a decrease in subscribers.
The wireless Cost of Goods Sold increase is primarily due to increased costs for
roaming, increased costs for wireless handset equipment sales and a change in
the allocation of network maintenance costs. The increase in roaming costs is
due to the end of free network service as discussed above in the General
Overview section of this Item 2 and an increase in data usage by our
customers. The increase in handset sales is due to an increased number of
premium wireless smartphone handsets which have higher costs and an increased
number of handsets issued to new customers and those extending their
service. This increase in smartphones resulted in an increase in data usage. The
change in allocation of network maintenance costs resulted in an increase to our
Consumer segment and a decrease to our Network Access, Commercial and Managed
Broadband segments.
Consumer Segment Adjusted EBITDA
The decrease in Adjusted EBITDA is due to a decrease in revenue as described
above in "Consumer Segment Revenues" and increased Cost of Goods Sold as
described above in "Consumer Segment Cost of Goods Sold" and an increase in the
selling, general and administrative expense that was allocated to our Consumer
segment due to an increase in consolidated selling, general and administrative
expense.
40--------------------------------------------------------------------------------
Network Access Segment Overview
Network access segment revenue represented 15% of 2012 consolidated revenues.
The components of Network Access segment revenue are as follows (amounts in
thousands):
Percentage
2012 2011 Change
Voice $ 17,190 18,124 (5 %)
Data 41,858 47,135 (11 %)
Wireless 19,632 14,456 36 %
Total Network Access segment revenue $ 78,680 79,715 (1 %)
Network Access segment Cost of Goods Sold represented 10% of 2012 consolidated
Cost of Goods Sold. The components of Network Access segment Cost of Goods Sold
are as follows (amounts in thousands):
Percentage
2012 2011 Change
Voice $ 6,990 9,841 (29 %)
Data 10,387 12,055 (14 %)
Wireless 1,026 876 17 %
Total Network Access segment Cost of Goods Sold $ 18,403 22,772 (19 %)
Network Access segment Adjusted EBITDA, representing 24% of 2012 consolidated
Adjusted EBITDA, is as follows (amounts in thousands):
Percentage
2012 2011 Change
Network Access segment Adjusted EBITDA $ 41,235 37,953 9 %
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Network Access Segment Revenues
The decrease in data revenue is primarily due to:
· A $2.3 million decrease from loss of a certain customer which had been leasing
capacity to service a specific end-user. This end-user's service is now
provided as a SchoolAccess® customer and its revenue is now reported in our
Managed Broadband segment, and
· Absence in 2012 of $1.9 million in revenue for special project work for a new
customer recognized in 2011.
Network Access Segment Cost of Goods Sold
The decrease in voice Cost of goods Sold is primarily due to Intrastate Access
Reform which eliminated the ILECs' ability to bill long distance carriers for
certain intrastate line charges.
Network Access Segment Adjusted EBITDA
The Adjusted EBITDA increase is primarily due to decreased Cost of Goods Sold as
described above in "Network Access Segment Cost of Goods Sold." This change is
partially offset by decreased revenue as described above in "Network Access
Segment Revenues" and an increase in the selling, general and administrative
expense that was allocated to our Network Access segment primarily due to an
increase in the consolidated selling, general and administrative expense.
41
--------------------------------------------------------------------------------
Commercial Segment Overview
Commercial segment revenue represented 20% of 2012 consolidated revenues.
Commercial segment data revenue is comprised of monthly recurring charges for
data services and charges billed on a time and materials basis largely for
personnel providing on-site customer support. This latter category can vary
significantly based on project activity. The components of Commercial segment
revenue are as follows (amounts in thousands):
Percentage
2012 2011 Change
Voice $ 20,786 22,050 (6 %)
Video 9,498 8,606 10 %
Data 67,376 63,653 6 %
Wireless 7,355 7,308 1 %
Total Commercial segment revenue $ 105,015 101,617 3 %
Commercial segment Cost of Goods Sold represented 27% of 2012 consolidated Cost
of Goods Sold. The components of Commercial segment Cost of Goods Sold are as
follows (amounts in thousands):
Percentage
2012 2011 Change
Voice $ 7,568 10,514 (28 %)
Video 1,476 1,581 (7 %)
Data 34,051 33,660 1 %
Wireless 4,714 3,275 44 %
Total Commercial segment Cost of Goods Sold $ 47,809 49,030 (2 %)
Commercial segment Adjusted EBITDA, representing 15% of 2012 consolidated
Adjusted EBITDA, is as follows (amounts in thousands):
Percentage
2012 2011 Change
Commercial segment Adjusted EBITDA $ 26,958 23,180 16 %
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Commercial Segment Cost of Goods Sold
The decrease in voice Cost of Goods Sold is primarily due to Intrastate Access
Reform which eliminated the ILECs' ability to bill long distance carriers for
certain intrastate line charges.
Commercial Segment Adjusted EBITDA
The Adjusted EBITDA increase is primarily due to increased revenue and decreased
Cost of Goods Sold as described above in "Commercial Segment Cost of Goods
Sold." These changes were partially offset by an increase in the selling,
general and administrative expense that was allocated to our Commercial segment
primarily due to an increase in the consolidated selling, general and
administrative expense.
Managed Broadband Segment Overview
Managed Broadband segment revenue, Cost of Goods sold and Adjusted EBITDA
represented 12%, 8% and 19% of 2012 consolidated revenues, Cost of Goods Sold
and Adjusted EBITDA, respectively.
Managed Broadband Segment Revenues
Managed Broadband segment revenue, which includes data products only, increased
38% to $63.4 million in 2012 as compared to 2011. The increase is primarily due
to:
· A $13.8 million increase in monthly contract revenue due to new ConnectMD® and
SchoolAccess® customers and increased data network capacity purchased by our
existing ConnectMD® and SchoolAccess® customers. This revenue increase
includes $2.3 million earned from a new customer previously purchasing service
from another vendor. This vendor was a Network Access customer therefore this
revenue increase is off-set by a corresponding decrease in our Network Access
segment,
· A $2.0 million increase in product sales to our customers, and
· Recognition of $1.6 million in previously denied funding from the USAC for one
ConnectMD® customer for the funding year July 2008 to June 2009. We had
appealed the funding denial and received notice during the second quarter of
2012 that our appeal was successful and the funding was reinstated.
42--------------------------------------------------------------------------------
Managed Broadband Segment Adjusted EBITDA
Managed Broadband segment Adjusted EBITDA increased 61% to $32.6 million in 2012
primarily due to an increase in revenue as described above in "Managed Broadband
Segment Revenues," partially offset by an increase in the Cost of Goods Sold and
an increase in the selling, general and administrative expense that was
allocated to our Managed Broadband segment. The increase in selling, general and
administrative expense is primarily due to an increase in the 2011 segment
margin upon which the selling, general and administrative expense allocation is
based.
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income taxes.
Regulated Operations Segment Overview
Regulated Operations segment revenue, Cost of Goods Sold and Adjusted EBITDA
represented 3%, 3% and 2% of 2012 consolidated revenues, Cost of Goods Sold and
Adjusted EBITDA, respectively.
Regulated Operations Segment Revenues
Regulated Operations segment revenues decreased from $17.0 million in 2011 to
$16.3 million in 2012.
Regulated Operations Segment Cost of Goods Sold
Regulated Operations segment Cost of Goods Sold increased from $4.1 million in
2011 to $4.9 million in 2012.
Regulated Operations Segment Adjusted EBITDA
Regulated Operations segment Adjusted EBITDA increased from $3.0 million in 2011
to $3.2 million in 2012 primarily due to a decrease in the selling, general and
administrative expense which was almost entirely offset by a decrease in revenue
and an increase in Cost of Goods Sold. The decrease in selling, general and
administrative expense is primarily due to non-capitalizable TERRA-SW expenses
recorded in 2011.
See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements"
included in Part I of this quarterly report on Form 10-Q for a reconciliation of
consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated
income before income tax expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6% to $181.3 million in
2012. Individually significant items contributing to the increase include:
· A $4.3 million increase in labor costs,
· $2.5 million in transaction costs related to the transactions described in the
Wireless Agreement as discussed in the General Overview section of this Item
2,
· A $960,000 increase in contribution expense related to donated services to the
University of Alaska, and
· An $880,000 increase in employer-paid payroll taxes primarily due to a large
number of restricted stock awards that vested in 2012 and increased labor
costs.
As a percentage of total revenues, selling, general and administrative expense
was 34% in 2011 and 2012.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 5% to $97.9 million in 2012
primarily due to new assets placed in service in 2011 and through September 2012
partially offset by assets which became fully depreciated during 2012.
Other Expense, Net
Other expense, net of other income, decreased 16% to $50.7 million in 2012
primarily due to the absence of a $9.1 million loss on extinguishment of
debt. On May 23, 2011, GCI, Inc., our wholly owned subsidiary, completed an
offering of $325.0 million in aggregate principal amount of 6.75% Senior Notes
due 2021 ("2021 Notes"). We used the net proceeds from this offering to repay
and retire all of our outstanding senior unsecured notes due 2014.
43
--------------------------------------------------------------------------------
Income Tax Expense
Income tax expense totaled $10.4 million and $7.3 million in 2012 and 2011,
respectively. Our effective income tax rate increased from 53% in 2011 to 55% in
2012, primarily due to an increase in the amount of estimated permanent tax
differences as compared to our estimated net income before income tax expense in
2012 as compared to 2011.
Liquidity and Capital Resources
Our principal sources of current liquidity are cash and cash equivalents. We
believe, but can provide no assurances, that we will be able to meet our current
and long-term liquidity, capital requirements and fixed charges through our cash
flows from operating activities, existing cash, cash equivalents, credit
facilities, and other external financing and equity sources. Should operating
cash flows be insufficient to support additional borrowings and principal
payments scheduled under our existing credit facilities, capital expenditures
will likely be reduced, which would likely reduce future revenues.
As discussed in the General Overview section of this Item 2 we entered into a
Wireless Agreement with ACS. Under the terms of the Wireless Agreement, we
agreed to purchase certain wireless network assets from ACS and its affiliates
for $100.0 million and we will contribute the purchased assets, our wireless
network assets and certain IRU capacity to AWN. We have also agreed to provide
AWN a $50.0 million working capital line of credit. We expect to finance the
asset purchase and working capital line of credit by refinancing our Senior
Credit Facility.
ACS Member will be entitled to receive preferential cash distributions totaling
$190.0 million over the first four years of AWN's operations and we will be
entitled to all remaining cash distributions during that period. We anticipate
that the $190.0 million preferential distributions to ACS will constitute
approximately $60.0 million in excess of the distributions otherwise
attributable to their ownership percentage during such period. Following the
initial four year period, we and ACS Member will receive distributions
proportional to our ownership interests.
We will manage AWN and receive a management fee of 4% of free cash flow as
defined in the Wireless Agreement in the first two years of operations. The
management fee will increase to 6% in the third and fourth years of the
agreement and 8% after the fourth year of the agreement. The management fee will
be paid before distributions to the owners.
In July 2012, we received payment for the sale of a $4.5 million Indefeasible
Right to Use ("IRU").
As discussed in the General Overview section of this Item 2 the FCC published
the High Cost Order in November 2011. The program changes will impact our
liquidity minimally in 2012 and we are evaluating the impact the program changes
will have on our liquidity in later years as the FCC considers successor funding
mechanisms.
In February 2012 the FCC released reforms to the USF's Lifeline program. The
reforms include a rate change and a requirement for annual recertification of
all Lifeline subscribers enrolled as of June 1, 2012, to be completed by the end
of 2012. We have made significant progress toward completing the recertification
process and expect that these Lifeline program changes will result in decreased
revenue and liquidity in the range of $850,000 to $950,000 for the year ending
December 31, 2012, as compared to the year ended December 31, 2011, and in the
range of $2.5 million to $3.0 million for the year ending December 31, 2013, as
compared to the year ending December 31, 2012.
On August 30, 2011, we entered into a financing arrangement under the NMTC
program that provided $16.5 million in net cash to help fund the extension of
terrestrial broadband service for the first time to rural Northwestern Alaska
communities via a high capacity hybrid fiber optic and microwave network. When
completed, the project, called TERRA-NW, will connect to our TERRA-SW network
and provide a high capacity backbone connection from the served communities to
the Internet. The net cash received is recorded as Restricted Cash on our
Consolidated Balance Sheets. We have used $6.1 million of Restricted Cash to
fund TERRA-NW capital expenditures through September 30, 2012.
44
--------------------------------------------------------------------------------
In September 2011, the RCA approved our application for a $5.3 million grant to
help fund TERRA-NW. The grant was increased to $6.3 million in January 2012. We
have received $1.5 million in grant funds during 2012. The NMTC arrangement
discussed above and this grant award partially fund backbone network facilities
that we would not otherwise be able to construct within our return-on-investment
requirements. We plan to fund an additional $12.7 million for TERRA-NW and began
construction in 2012 and expect to complete the project in 2014 or earlier if
possible.
On October 3, 2012, the FCC announced our winning bids in the Mobility Fund I
auction for a $3.2 million grant to partially fund expansion of our 3G wireless
network to locations in Alaska where we would not otherwise be able to construct
within our return-on-investment requirements. Upon review we accepted $2.3
million and plan to begin construction in 2012 and expect to complete the
project in 2013.
On October 3, 2012, we entered into a second arrangement under the NMTC program
that provided $12.9 million in net cash to help fund Phase 3 of our TERRA-NW
project. Phase 3 of our TERRA-NW project continues the extension of terrestrial
broadband service to additional rural Northwestern Alaska communities. We plan
to begin construction on Phase 3 of TERRA-NW in 2013 and expect to complete the
project in 2014.
We have a remaining non-cancelable agreement to purchase wireless equipment of
$4.1 million and $8.1 million during the years ending December 31, 2013 and
2014, respectively.
While our short-term and long-term financing abilities are believed to be
adequate as a supplement to internally generated cash flows to fund capital
expenditures and acquisitions as opportunities arise, turmoil in the global
financial markets may negatively impact our ability to further access the
capital markets in a timely manner and on attractive terms, which may have a
negative impact on our ability to grow our business.
We monitor the third-party depository institutions that hold our cash and cash
equivalents. Our emphasis is primarily on safety of principal and secondarily on
maximizing yield on those funds.
Our net cash flows provided by and (used for) operating, investing and financing
activities, as reflected in the Consolidated Statements of Cash Flows for 2012
and 2011, are summarized as follows (amounts in thousands):
2012 2011
Operating activities $ 105,166 96,526
Investing activities (97,135 ) (99,442 )
Financing activities (9,863 ) 4,480Net increase (decrease) in cash and cash equivalents $ (1,832 ) 1,564
Operating Activities
The increase in cash flows provided by operating activities is due primarily to
increases in accrued interest due to timing of payments and in long-term
deferred revenue primarily due to the IRU sale discussed above.
Investing Activities
Net cash used in investing activities consists primarily of cash paid for
capital expenditures. Our most significant recurring investing activity has been
capital expenditures and we expect that this will continue in the future. A
significant portion of our capital expenditures is based on the level of
customer growth and the technology being deployed.
Our cash expenditures for property and equipment, including construction in
progress, totaled $104.4 million and $126.9 million during 2012 and 2011,
respectively. Our capital expenditures decreased in 2012 primarily due to
completion of our TERRA-SW project which was placed in service in December
2011. We expect our 2012 expenditures for property and equipment for our core
operations, including construction in progress, to total $145.0 million to
$150.0 million, depending on available opportunities and the amount of cash flow
we generate during 2012.
Under our TERRA-SW Rural Utilities Service ("RUS") award, we had total available
grant funds of $44.0 million. We have received $3.9 million in grant funds in
2012 for a total receipt of $39.0 million in grant funds under this award
through September 30, 2012, leaving $5.0 million remaining grant funds available
as of September 30, 2012. We have a $1.1 million grant fund receivable recorded
as of September 30, 2012.
45--------------------------------------------------------------------------------
Under our TERRA-NW RCA award, we had total available grant funds of $6.3
million. We have received $1.5 million in grant funds in 2012 for a total
receipt of $1.5 million in grant funds under this award through September 30,
2012, leaving $4.8 million remaining grant funds available as of September 30,
2012. We have a $2.0 million grant fund receivable recorded as of September 30,
2012.
Financing Activities
Net cash used by financing activities in 2012 consists primarily of repayment of
the revolving portion of our Senior Credit Facility, other long-term debt and
capital lease obligations and repurchases of GCI common stock. These activities
were partially offset by proceeds from borrowings on the term and revolving
portions of our Senior Credit Facility and other long-term debt.
Available Borrowings Under Senior Credit Facility
We have a facility which includes an $80.0 million term loan and a $75.0 million
revolving credit facility with a $25.0 million sublimit for letters of credit
("Senior Credit Facility"). The term loan is fully drawn at September 30,
2012. Under the revolving portion of the Senior Credit Facility we have $349,000
of letters of credit outstanding, which leaves $74.7 million available for
borrowing as of September 30, 2012. A total of $80.0 million is outstanding as
of September 30, 2012.
Available TERRA-SW Borrowings Under RUS
Under our TERRA-SW RUS award, we had total available loan funds of $44.2
million. We have borrowed $4.0 million in loan funds in 2012 for a total
borrowing of $39.2 million in loan funds under this award through September 30,
2012, leaving $5.0 million remaining loan funds available as of September 30,
2012.
Debt Covenants
We are subject to covenants and restrictions applicable to our 2021 Notes, our
$425.0 million in aggregate principal amount of 8.63% Senior Notes due 2019, our
Senior Credit Facility, our RUS loans, and our CoBank loans. We are in
compliance with the covenants, and we believe that neither the covenants nor the
restrictions in our indentures or loan documents will limit our ability to
operate our business.
Share Repurchases
GCI's Board of Directors has authorized a common stock buyback program for the
repurchase of GCI Class A and Class B common stock in order to reduce the
outstanding shares of Class A and Class B common stock. Under this program, we
are currently authorized to make up to $99.8 million of repurchases as of
September 30, 2012. We are authorized to increase our repurchase limit $5.0
million per quarter indefinitely and to use stock option exercise proceeds to
repurchase additional shares. If stock repurchases are less than the total
approved quarterly amount the difference may be carried forward and applied
against future stock repurchases. During 2012 we repurchased 980,000 shares of
GCI common stock under the stock buyback program at a cost of $10.0 million. The
common stock buyback program is expected to continue for an indefinite period
dependent on leverage, liquidity, company performance, and market conditions and
subject to continued oversight by GCI's Board of Directors. The open market
repurchases have and will continue to comply with the restrictions of SEC Rule
10b-18.
Critical Accounting Policies and Estimates
Our accounting and reporting policies comply with GAAP. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions. The financial position and results of operations can
be affected by these estimates and assumptions, which are integral to
understanding reported results. Critical accounting policies are those policies
that management believes are the most important to the portrayal of our
financial condition and results, and require management to make estimates that
are difficult, subjective or complex. Most accounting policies are not
considered by management to be critical accounting policies. Several factors are
considered in determining whether or not a policy is critical in the preparation
of financial statements. These factors include, among other things, whether the
estimates are significant to the financial statements, the nature of the
estimates, the ability to readily validate the estimates with other information
including third party information or available prices, and sensitivity of the
estimates to changes in economic conditions and whether alternative accounting
methods may be utilized under GAAP. For all of these policies, management
cautions that future events rarely develop exactly as forecast, and the best
estimates routinely require adjustment. Management has discussed the development
and the selection of critical accounting policies with our Audit Committee.
46--------------------------------------------------------------------------------
Those policies considered to be critical accounting policies for 2012 are
revenue recognition related to revenues from the Remote high cost, rural health
and schools and libraries USF programs, the allowance for doubtful receivables,
impairment and useful lives of intangible assets, accruals for unbilled costs,
and the valuation allowance for net operating loss deferred tax assets. A
complete discussion of our critical accounting policies can be found in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", in our December 31, 2011 annual report on Form 10-K.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. A complete discussion of our
significant accounting policies can be found in note 1 in the accompanying
"Condensed Notes to Interim Consolidated Financial Statements" and in Part II of
our December 31, 2011 annual report on Form 10-K.
[ Back To TMCnet.com's Homepage ]
|
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
