UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
☒
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
OR
|
| |
☐
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-38385
GCI LIBERTY, INC.
(Exact name of Registrant as specified in its charter)
|
| | | | |
| Delaware | | 92-0072737 | |
| (State or other jurisdiction of | | (I.R.S Employer | |
| incorporation or organization) | | Identification No.) | |
|
| | | | | |
| 12300 Liberty Boulevard | | | |
| Englewood, | Colorado | | 80112 | |
| (Address of principal executive offices) | | (Zip Code) | |
Registrant’s telephone number, including area code: (720) (720) 875-5900
Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
Title of each class | | Trading Symbols | | Name of exchange on which registered |
Series A Common Stock, par value $0.01 per share | | GLIBA | | The Nasdaq Stock Market LLC |
Series A Cumulative Redeemable preferred stock, par value $0.01 per share | | GLIBP | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
|
| | | | |
Large accelerated filer ☐ | ☒ | | Accelerated filer ☒ | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's classes of common stock as of October 31, 20182019 was:
103,518,705101,211,995 shares of Series A common stock; and
4,441,6094,439,093 shares of Series B common stock
TABLE OF CONTENTS
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| Item 1. | | |
| | | |
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| | | |
| | | |
| | | |
| | | |
| | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| Item 1. | | |
| Item 2. | | |
| Item 6. | | |
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| |
| | GCI LIBERTY, INC. AND SUBSIDIARIES | Condensed Consolidated Balance Sheets | (unaudited) | | | | | | | |
| September 30, |
| December 31, | September 30, | | December 31, |
| 2018 |
| 2017 | 2019 | | 2018 |
| amounts in thousands | amounts in thousands |
Assets |
|
|
|
| |
|
Current assets: | |
| | | | |
Cash and cash equivalents | $ | 689,562 |
|
| 573,210 |
| $ | 410,130 |
| | 491,257 |
|
Trade and other receivables, net of allowance for doubtful accounts of $3,725 thousand and $0, respectively | 243,734 |
|
| 6,803 |
| |
Trade and other receivables, net of allowance for doubtful accounts of $18,248 and $7,555, respectively | | 190,779 |
| | 182,600 |
|
Current portion of tax sharing receivable | 28,529 |
|
| — |
| 7,813 |
| | 36,781 |
|
Other current assets | 40,795 |
|
| 1,265 |
| 43,222 |
| | 40,100 |
|
Total current assets | 1,002,620 |
|
| 581,278 |
| 651,944 |
| | 750,738 |
|
Investments in equity securities (note 7) | 1,751,210 |
|
| 1,803,064 |
| |
Investments in affiliates, accounted for using the equity method (note 8) | 174,134 |
|
| 114,655 |
| |
Investment in Liberty Broadband measured at fair value (note 8) | 3,598,079 |
|
| 3,634,786 |
| |
|
|
|
|
|
| |
Investments in equity securities (note 5) | | 2,213,589 |
| | 1,533,517 |
|
Investments in affiliates, accounted for using the equity method (note 6) | | 168,839 |
| | 177,030 |
|
Investment in Liberty Broadband measured at fair value (note 6) | | 4,467,508 |
| | 3,074,373 |
|
Property and equipment, net | 1,197,988 |
|
| 624 |
| 1,110,080 |
| | 1,184,606 |
|
Intangible assets not subject to amortization |
|
|
|
|
| |
Goodwill (note 10) | 967,687 |
|
| 25,569 |
| |
Intangible assets not subject to amortization: | |
|
| |
|
|
Goodwill | | 855,837 |
| | 855,837 |
|
Cable certificates | 370,000 |
|
| — |
| 305,000 |
| | 305,000 |
|
Wireless licenses | 190,000 |
|
| — |
| 191,697 |
| | 190,000 |
|
Other | 16,525 |
|
| 4,000 |
| 16,500 |
| | 16,500 |
|
| 1,544,212 |
|
| 29,569 |
| 1,369,034 |
| | 1,367,337 |
|
Intangible assets subject to amortization, net (note 10) | 480,559 |
|
| 4,237 |
| |
Intangible assets subject to amortization, net (note 7) | | 399,043 |
| | 436,006 |
|
Tax sharing receivable | 83,052 |
|
| — |
| 76,812 |
| | 65,701 |
|
Other assets, at cost, net of accumulated amortization | 48,603 |
|
| 4,000 |
| |
Other assets, net | | 188,454 |
| | 71,514 |
|
Total assets | $ | 9,880,457 |
|
| 6,172,213 |
| $ | 10,645,303 |
| | 8,660,822 |
|
| | | | | | |
| | | (Continued) | | | (Continued) |
See accompanying notes to interim condensed consolidated financial statements. |
| | GCI LIBERTY, INC. AND SUBSIDIARIES | Condensed Consolidated Balance Sheets | (unaudited) | | | September 30, | | December 31, | September 30, | | December 31, |
| 2018 | | 2017 | 2019 | | 2018 |
| amounts in thousands, except share amounts | amounts in thousands, except share amounts |
Liabilities and Equity |
|
|
|
| |
|
Current liabilities: |
|
|
|
| |
|
Accounts payable and accrued liabilities | $ | 97,330 |
|
| 718 |
| $ | 83,959 |
| | 100,334 |
|
Deferred revenue | 33,865 |
|
| — |
| 28,520 |
| | 31,743 |
|
Current portion of debt, net of deferred financing costs (note 8) | | 902,368 |
| | 900,759 |
|
Other current liabilities | 70,982 |
|
| 9,747 |
| 71,679 |
| | 47,958 |
|
Total current liabilities | 202,177 |
|
| 10,465 |
| 1,086,526 |
| | 1,080,794 |
|
Long-term debt, net, including $527 million and $0 measured at fair value (note 11) | 3,049,547 |
|
| — |
| |
Obligations under capital leases and tower obligation, excluding current portion | 125,541 |
|
| — |
| |
Long-term debt, net, including $579,291 and $462,336 measured at fair value, respectively (note 8) | | 2,088,015 |
| | 1,985,275 |
|
Obligations under finance leases and tower obligations, excluding current portion (note 9) | | 99,158 |
| | 122,245 |
|
Long-term deferred revenue | 66,753 |
|
| 130 |
| 59,136 |
| | 65,954 |
|
Deferred income tax liabilities | 1,010,021 |
|
| 643,426 |
| 1,272,302 |
| | 793,696 |
|
Taxes payable | — |
|
| 1,198,315 |
| |
Preferred stock (note 12) | 175,016 |
|
| — |
| |
Indemnification obligation (note 6) | 99,858 |
|
| — |
| |
Preferred stock (note 10) | | 177,532 |
| | 177,103 |
|
Derivative instrument | | 78,061 |
| | — |
|
Indemnification obligation (note 4) | | 136,833 |
| | 78,522 |
|
Other liabilities | 52,470 |
|
| 95,841 |
| 140,971 |
| | 50,543 |
|
Total liabilities | 4,781,383 |
|
| 1,948,177 |
| 5,138,534 |
| | 4,354,132 |
|
Equity |
|
|
|
|
|
|
| |
|
|
Stockholders’ equity: |
|
|
|
|
|
|
| |
|
|
Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 104,071,332 shares at September 30, 2018 | 1,041 |
|
| — |
| |
Series B common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,443,855 shares at September 30, 2018 | 44 |
|
| — |
| |
Series C common stock, $.01 par value. Authorized 1,040,000,000 shares; no issued and outstanding shares at September 30, 2018 | — |
|
| — |
| |
Parent's investment | — |
|
| 2,305,440 |
| |
Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 101,211,071 shares at September 30, 2019 and 102,058,816 shares at December 31, 2018 | | 1,012 |
| | 1,021 |
|
Series B common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,439,460 shares at September 30, 2019 and 4,441,609 shares at December 31, 2018 | | 44 |
| | 44 |
|
Series C common stock, $.01 par value. Authorized 1,040,000,000 shares; no shares issued | | — |
| | — |
|
Additional paid-in capital | 3,345,980 |
|
| — |
| 3,225,883 |
| | 3,251,957 |
|
Accumulated other comprehensive earnings (loss), net of taxes | (18,537 | ) | | — |
| (489 | ) | | 168 |
|
Retained earnings | 1,760,596 |
|
| 1,914,963 |
| 2,270,837 |
| | 1,043,933 |
|
Total stockholders' equity | 5,089,124 |
|
| 4,220,403 |
| 5,497,287 |
| | 4,297,123 |
|
Non-controlling interests | 9,950 |
|
| 3,633 |
| 9,482 |
| | 9,567 |
|
Total equity | 5,099,074 |
|
| 4,224,036 |
| 5,506,769 |
| | 4,306,690 |
|
Commitments and contingencies |
|
|
|
| |
Commitments and contingencies (note 13) | |
| |
|
|
Total liabilities and equity | $ | 9,880,457 |
|
| 6,172,213 |
| $ | 10,645,303 |
| | 8,660,822 |
|
| | | | | | |
See accompanying notes to interim condensed consolidated financial statements. |
| | GCI LIBERTY, INC. AND SUBSIDIARIES | Condensed Consolidated Statements of Operations | (Unaudited) | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | Three months ended | | Nine months ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 |
| 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands, except per share amounts | amounts in thousands, except per share amounts |
Revenue | $ | 210,146 |
| | 5,493 |
| | 504,840 |
| | 15,639 |
| $ | 227,044 |
| | 210,146 |
| | 662,346 |
| | 504,840 |
|
Operating costs and expenses: |
|
| |
|
| | | | | | | | |
|
| |
|
|
Operating expense (exclusive of depreciation and amortization shown separately below) | 64,684 |
| | 2,798 |
| | 153,797 |
| | 8,395 |
| 72,637 |
| | 64,684 |
| | 209,962 |
| | 153,797 |
|
Selling, general and administrative, including stock-based compensation (note 4) | 102,483 |
| | 12,341 |
| | 235,617 |
| | 38,283 |
| |
Selling, general and administrative, including stock-based compensation (note 12) | | 93,597 |
| | 102,483 |
| | 305,184 |
| | 235,617 |
|
Insurance proceeds and restructuring, net | | (1,482 | ) | | — |
| | 236 |
| | — |
|
Depreciation and amortization expense | 62,848 |
| | 823 |
| | 143,257 |
| | 2,398 |
| 66,466 |
| | 62,848 |
| | 200,035 |
| | 143,257 |
|
| 230,015 |
| | 15,962 |
| | 532,671 |
| | 49,076 |
| 231,218 |
| | 230,015 |
| | 715,417 |
| | 532,671 |
|
Operating income (loss) | (19,869 | ) | | (10,469 | ) | | (27,831 | ) | | (33,437 | ) | (4,174 | ) | | (19,869 | ) | | (53,071 | ) | | (27,831 | ) |
Other income (expense): |
|
| |
|
| | | | | | | | |
|
| |
|
|
Interest expense (including amortization of deferred loan fees) | (37,614 | ) | | — |
| | (81,304 | ) | | — |
| (38,353 | ) | | (37,614 | ) | | (116,357 | ) | | (81,304 | ) |
Share of earnings (losses) of affiliates, net (note 8) | 10,856 |
| | 1,648 |
| | 18,714 |
| | 4,971 |
| |
Realized and unrealized gains (losses) on financial instruments, net (note 6) | 495,509 |
| | 472,763 |
| | (4,328 | ) | | 1,270,764 |
| |
Share of earnings (losses) of affiliates, net (note 6) | | 1,921 |
| | 10,856 |
| | (2,443 | ) | | 18,714 |
|
Realized and unrealized gains (losses) on financial instruments, net (note 4) | | 156,165 |
| | 495,509 |
| | 1,844,863 |
| | (4,328 | ) |
Tax sharing agreement | | 2,362 |
| | 2,492 |
| | 18,895 |
| | (25,456 | ) |
Other, net | (834 | ) | | 328 |
| | (982 | ) | | 1,073 |
| (540 | ) | | (834 | ) | | 13,824 |
| | (982 | ) |
| 467,917 |
| | 474,739 |
| | (67,900 | ) | | 1,276,808 |
| 121,555 |
| | 470,409 |
| | 1,758,782 |
| | (93,356 | ) |
Earnings (loss) before income taxes | 448,048 |
| | 464,270 |
| | (95,731 | ) | | 1,243,371 |
| 117,381 |
| | 450,540 |
| | 1,705,711 |
| | (121,187 | ) |
Income tax (expense) benefit | (130,792 | ) | | (176,980 | ) | | (61,224 | ) | | (473,826 | ) | (28,087 | ) | | (133,284 | ) | | (478,887 | ) | | (35,768 | ) |
Net earnings (loss) | 317,256 |
| | 287,290 |
| | (156,955 | ) | | 769,545 |
| 89,294 |
| | 317,256 |
| | 1,226,824 |
| | (156,955 | ) |
Less net earnings (loss) attributable to the non-controlling interests | (127 | ) | | (72 | ) | | (320 | ) | | (73 | ) | (28 | ) | | (127 | ) | | (85 | ) | | (320 | ) |
Net earnings (loss) attributable to GCI Liberty, Inc. shareholders | $ | 317,383 |
| | 287,362 |
| | (156,635 | ) | | 769,618 |
| $ | 89,322 |
| | 317,383 |
| | 1,226,909 |
| | (156,635 | ) |
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 5) | $ | 2.95 |
| | 2.64 |
| | (1.45 | ) | | 7.06 |
| |
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 5) | $ | 2.91 |
| | 2.64 |
| | (1.45 | ) | | 7.06 |
| |
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 3) | | $ | 0.85 |
| | 2.95 |
| | 11.71 |
| | (1.45 | ) |
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 3) | | $ | 0.84 |
| | 2.91 |
| | 11.60 |
| | (1.45 | ) |
| | | | | | | | | | | | | | |
See accompanying notes to interim condensed consolidated financial statements. |
| | GCI LIBERTY, INC. AND SUBSIDIARIES | Condensed Consolidated Statements of Comprehensive Earnings (Loss) | (Unaudited) | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | Three months ended | | Nine months ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands | amounts in thousands |
Net earnings (loss) | $ | 317,256 |
| | 287,290 |
| | (156,955 | ) | | 769,545 |
| $ | 89,294 |
| | 317,256 |
| | 1,226,824 |
| | (156,955 | ) |
Other comprehensive earnings (loss), net of taxes: | | | | | | | | | | | | | | |
Comprehensive earnings (loss) attributable to debt credit risk adjustments | (5,419 | ) | | — |
| | (18,537 | ) | | — |
| (5,477 | ) | | (5,419 | ) | | (657 | ) | | (18,537 | ) |
Comprehensive earnings (loss) | 311,837 |
| | 287,290 |
| | (175,492 | ) | | 769,545 |
| 83,817 |
| | 311,837 |
| | 1,226,167 |
| | (175,492 | ) |
Less comprehensive earnings (loss) attributable to the non-controlling interests | (127 | ) | | (72 | ) | | (320 | ) | | (73 | ) | (28 | ) | | (127 | ) | | (85 | ) | | (320 | ) |
Comprehensive earnings (loss) attributable to GCI Liberty, Inc. shareholders | $ | 311,964 |
| | 287,362 |
| | (175,172 | ) | | 769,618 |
| $ | 83,845 |
| | 311,964 |
| | 1,226,252 |
| | (175,172 | ) |
| | | | | | | | | | | | | | |
See accompanying notes to interim condensed consolidated financial statements. |
|
| | | | | | |
GCI LIBERTY, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Cash Flows |
(Unaudited) |
|
| Nine Months Ended |
| September 30, |
| 2018 |
| 2017 |
| amounts in thousands |
Cash flows from operating activities: | | | |
Net earnings (loss) | $ | (156,955 | ) | | 769,545 |
|
Adjustments to reconcile net earnings (loss) to net cash from operating activities: |
|
| |
|
|
Depreciation and amortization | 143,257 |
| | 2,398 |
|
Stock-based compensation expense | 20,926 |
| | 10,968 |
|
Share of (earnings) losses of affiliates, net | (18,714 | ) | | (4,971 | ) |
Realized and unrealized (gains) losses on financial instruments, net | 4,328 |
| | (1,270,764 | ) |
Deferred income tax expense (benefit) | 36,347 |
| | 473,826 |
|
Intergroup tax payments | — |
| | 231,114 |
|
Other, net | 10,121 |
| | 698 |
|
Change in operating assets and liabilities: |
|
| |
|
|
Current and other assets | (73,601 | ) | | 1,856 |
|
Payables and other liabilities | 72,854 |
| | 2,320 |
|
Net cash provided (used) by operating activities | 38,563 |
| | 216,990 |
|
Cash flows from investing activities: |
|
| |
|
|
GCI Holdings cash and restricted cash acquired in consolidation | 147,958 |
| | — |
|
Capital expended for property and equipment | (89,376 | ) | | (2,686 | ) |
Purchases of investments | (48,581 | ) |
| (76,815 | ) |
Sales of investments | — |
| | 1,606 |
|
Other investing activities, net | 2,699 |
|
| — |
|
Net cash provided (used) by investing activities | 12,700 |
| | (77,895 | ) |
Cash flows from financing activities: |
|
| |
|
|
Borrowings of debt | 1,527,250 |
| | — |
|
Repayment of debt, capital lease, and tower obligations | (88,543 | ) | | — |
|
Contributions from (distributions to) parent, net | (1,122,189 | ) | | (113,837 | ) |
Distribution to non-controlling interests | (3,273 | ) | | — |
|
Indemnification payment to Qurate Retail | (132,725 | ) | | — |
|
Derivative payments | (80,001 | ) | | — |
|
Repurchases of GCI Liberty common stock | (23,893 | ) |
| — |
|
Other financing activities, net | (11,684 | ) | | (512 | ) |
Net cash provided (used) by financing activities | 64,942 |
| | (114,349 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 116,205 |
| | 24,746 |
|
Cash, cash equivalents and restricted cash at beginning of period | 574,148 |
| | 488,127 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 690,353 |
| | 512,873 |
|
|
| | | | | | |
GCI LIBERTY, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Cash Flows |
(Unaudited) |
|
| Nine months ended |
| September 30, |
| 2019 |
| 2018 |
| amounts in thousands |
Cash flows from operating activities: | | | |
Net earnings (loss) | $ | 1,226,824 |
| | (156,955 | ) |
Adjustments to reconcile net earnings (loss) to net cash from operating activities: |
|
| |
|
|
Depreciation and amortization | 200,035 |
| | 143,257 |
|
Stock-based compensation expense | 18,153 |
| | 20,926 |
|
Share of (earnings) losses of affiliates, net | 2,443 |
| | (18,714 | ) |
Realized and unrealized (gains) losses on financial instruments, net | (1,844,863 | ) | | 4,328 |
|
(Gain) loss on lease modification | (6,468 | ) | | — |
|
Deferred income tax expense (benefit) | 478,850 |
| | 36,347 |
|
Other, net | 3,625 |
| | 10,121 |
|
Change in operating assets and liabilities: |
|
| |
|
|
Current and other assets | 39,289 |
| | (73,601 | ) |
Payables and other liabilities | (35,774 | ) | | 72,854 |
|
Net cash provided (used) by operating activities | 82,114 |
| | 38,563 |
|
Cash flows from investing activities: |
|
| |
|
|
Cash and restricted cash from acquisition of GCI Holdings | — |
| | 147,958 |
|
Capital expended for property and equipment | (108,633 | ) | | (89,376 | ) |
Purchase of investments | — |
|
| (48,581 | ) |
Proceeds from derivative instrument | 105,866 |
| | — |
|
Settlement of derivative instrument | (105,866 | ) | | — |
|
Other, net | 6,340 |
|
| 2,699 |
|
Net cash provided (used) by investing activities | (102,293 | ) | | 12,700 |
|
Cash flows from financing activities: |
|
| |
|
|
Borrowings of debt | 325,000 |
| | 1,527,250 |
|
Repayment of debt, finance lease, and tower obligations | (334,275 | ) | | (88,543 | ) |
Repurchases of GCI Liberty common stock | (43,910 | ) |
| (23,893 | ) |
Contributions from (distributions to) parent, net | — |
| | (1,122,189 | ) |
Indemnification payment to Qurate Retail | — |
| | (132,725 | ) |
Derivative payments | — |
| | (80,001 | ) |
Other financing activities, net | (7,802 | ) | | (14,957 | ) |
Net cash provided (used) by financing activities | (60,987 | ) | | 64,942 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash | (81,166 | ) | | 116,205 |
|
Cash, cash equivalents and restricted cash at beginning of period | 492,032 |
| | 574,148 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 410,866 |
| | 690,353 |
|
The following table reconciles cash and cash equivalents and restricted cash reported in the accompanying condensed consolidated balance sheets to the total amount presented in the accompanying condensed consolidated statement of cash flows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
GCI LIBERTY, INC. AND SUBSIDIARIES |
Condensed Consolidated Statement of Equity |
Nine Months Ended September 30, 2018 |
(Unaudited) |
| | | | | | | | | | | | | | | |
| Series A common stock | | Series B common stock | | Parent's investment | | Additional paid-in capital | | Accumulated other comprehensive earnings (loss) | | Retained earnings | | Non-controlling interest in equity of subsidiaries | | Total equity |
| amounts in thousands |
Balances at January 1, 2018 | $ | — |
| | — |
| | 2,305,440 |
| | — |
| | — |
| | 1,914,963 |
| | 3,633 |
| | 4,224,036 |
|
Net earnings (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (156,635 | ) | | (320 | ) | | (156,955 | ) |
Other comprehensive earnings (loss) | — |
| | — |
| | — |
| | — |
| | (18,537 | ) | | — |
| | — |
| | (18,537 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | 18,766 |
| | — |
| | — |
| | — |
| | 18,766 |
|
Series A GCI Liberty stock repurchases | — |
| | — |
| | — |
| | (23,893 | ) | | — |
| | — |
| | — |
| | (23,893 | ) |
Contribution of taxes in connection with HoldCo Split-Off | — |
| | — |
| | 1,343,834 |
| | — |
| | — |
| | — |
| | — |
| | 1,343,834 |
|
Contributions from (distributions to) former parent, net | — |
| | — |
| | (1,122,189 | ) | | (2,014 | ) | | — |
| | 2,014 |
| | — |
| | (1,122,189 | ) |
Change in Capitalization in connection with HoldCo Split-Off | 1,041 |
| | 44 |
| | (2,527,085 | ) | | 2,526,000 |
| | — |
| | — |
| | 7,000 |
| | 7,000 |
|
Issuance of GCI Liberty Stock in connection with the Transactions | — |
| | — |
| | — |
| | 1,111,206 |
| | — |
| | — |
| | — |
| | 1,111,206 |
|
Issuance of Indemnification Agreement | — |
| | — |
| | — |
| | (281,255 | ) | | — |
| | — |
| | — |
| | (281,255 | ) |
Distribution to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,273 | ) | | (3,273 | ) |
Other | — |
| | — |
| | — |
| | (2,830 | ) | | — |
| | 254 |
| | 2,910 |
| | 334 |
|
Balances at September 30, 2018 | $ | 1,041 |
| | 44 |
| | — |
| | 3,345,980 |
| | (18,537 | ) | | 1,760,596 |
| | 9,950 |
| | 5,099,074 |
|
| | | | | | | | | | | | | | | |
See accompanying notes to interim condensed consolidated financial statements. |
|
| | | | | | |
| September 30, | | December 31, |
| 2019 | | 2018 |
| amounts in thousands |
Cash and cash equivalents | $ | 410,130 |
| | 491,257 |
|
Restricted cash included in other current assets | 736 |
| | 775 |
|
Total cash and cash equivalents and restricted cash at end of period | $ | 410,866 |
| | 492,032 |
|
| | | |
See accompanying notes to condensed consolidated financial statements. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
GCI LIBERTY, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Equity |
(Unaudited) |
| Series A common stock | | Series B common stock | | Parent's Investment | | Additional paid-in capital | | Accumulated other comprehensive earnings (loss) | | Retained earnings | | Non-controlling interest in equity of subsidiaries | | Total equity |
| amounts in thousands |
Balances at January 1, 2019 | $ | 1,021 |
| | 44 |
| | — |
| | 3,251,957 |
| | 168 |
| | 1,043,933 |
| | 9,567 |
| | 4,306,690 |
|
Net earnings (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 1,226,909 |
| | (85 | ) | | 1,226,824 |
|
Other comprehensive earnings (loss) | — |
| | — |
| | — |
| | — |
| | (657 | ) | | — |
| | — |
| | (657 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | 19,539 |
| | — |
| | — |
| | — |
| | 19,539 |
|
Repurchases of GCI Liberty common stock | (10 | ) | | — |
| | — |
| | (43,900 | ) | | — |
| | — |
| | — |
| | (43,910 | ) |
Issuance of common stock upon exercise of stock options | 1 |
| | — |
| | — |
| | 1,696 |
| | — |
| | — |
| | — |
| | 1,697 |
|
Withholding taxes on net share settlements of stock-based compensation | — |
| | — |
| | — |
| | (3,501 | ) | | — |
| | — |
| | — |
| | (3,501 | ) |
Other | — |
| | — |
| | — |
| | 92 |
| | — |
| | (5 | ) | | — |
| | 87 |
|
Balances at September 30, 2019 | $ | 1,012 |
| | 44 |
| | — |
| | 3,225,883 |
| | (489 | ) | | 2,270,837 |
| | 9,482 |
| | 5,506,769 |
|
| | | | | | | | | | | | | | | |
Balances at July 1, 2019 | $ | 1,012 |
| | 44 |
| | — |
| | 3,219,710 |
| | 4,988 |
| | 2,181,515 |
| | 9,510 |
| | 5,416,779 |
|
Net earnings (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 89,322 |
| | (28 | ) | | 89,294 |
|
Other comprehensive earnings (loss) | — |
| | — |
| | — |
| | — |
| | (5,477 | ) | | — |
| | — |
| | (5,477 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | 5,775 |
| | — |
| | — |
| | — |
| | 5,775 |
|
Issuance of common stock upon exercise of stock options | — |
| | — |
| | — |
| | 391 |
| | — |
| | — |
| | — |
| | 391 |
|
Withholding taxes on net share settlements of stock-based compensation | — |
| | — |
| | — |
| | (70 | ) | | — |
| | — |
| | — |
| | (70 | ) |
Other | — |
| | — |
| | — |
| | 77 |
| | — |
| | — |
| | — |
| | 77 |
|
Balances at September 30, 2019 | $ | 1,012 |
| | 44 |
| | — |
| | 3,225,883 |
| | (489 | ) | | 2,270,837 |
| | 9,482 |
| | 5,506,769 |
|
| | | | | | | | | | | | | | | |
Balances at January 1, 2018 | $ | — |
| | — |
| | 2,305,440 |
| | — |
| | — |
| | 1,914,963 |
| | 3,633 |
| | 4,224,036 |
|
Net earnings (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (156,635 | ) | | (320 | ) | | (156,955 | ) |
Other comprehensive earnings (loss) | — |
| | — |
| | — |
| | — |
| | (18,537 | ) | | — |
| | — |
| | (18,537 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | 18,766 |
| | — |
| | — |
| | — |
| | 18,766 |
|
Series A GCI Liberty stock repurchases | — |
| | — |
| | — |
| | (23,893 | ) | | — |
| | — |
| | — |
| | (23,893 | ) |
Contribution of taxes in connection with HoldCo Split-Off | — |
| | — |
| | 1,343,834 |
| | — |
| | — |
| | — |
| | — |
| | 1,343,834 |
|
Contributions from (distributions to) former parent, net | — |
| | — |
| | (1,122,189 | ) | | (2,014 | ) | | — |
| | 2,014 |
| | — |
| | (1,122,189 | ) |
Change in Capitalization in connection with HoldCo Split-Off | 1,041 |
| | 44 |
| | (2,527,085 | ) | | 2,526,000 |
| | — |
| | — |
| | 7,000 |
| | 7,000 |
|
Issuance of GCI Liberty Stock in connection with the Transactions | — |
| | — |
| | — |
| | 1,111,206 |
| | — |
| | — |
| | — |
| | 1,111,206 |
|
Issuance of Indemnification Agreement | — |
| | — |
| | — |
| | (281,255 | ) | | — |
| | — |
| | — |
| | (281,255 | ) |
Distribution to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,273 | ) | | (3,273 | ) |
Other | — |
| | — |
| | — |
| | (2,830 | ) | | — |
| | 254 |
| | 2,910 |
| | 334 |
|
Balances at September 30, 2018 | $ | 1,041 |
| | 44 |
| | — |
| | 3,345,980 |
| | (18,537 | ) | | 1,760,596 |
| | 9,950 |
| | 5,099,074 |
|
| | | | | | | | | | | | | | | |
Balances at July 1, 2018 | $ | 1,046 |
| | 44 |
| | — |
| | 3,367,534 |
| | (13,118 | ) | | 1,441,199 |
| | 7,167 |
| | 4,803,872 |
|
Net earnings (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 317,383 |
| | (127 | ) | | 317,256 |
|
Other comprehensive earnings (loss) | — |
| | — |
| | — |
| | — |
| | (5,419 | ) | | — |
| | — |
| | (5,419 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | 6,881 |
| | — |
| | — |
| | — |
| | 6,881 |
|
Series A GCI Liberty stock repurchases | — |
| | — |
| | — |
| | (23,893 | ) | | — |
| | — |
| | — |
| | (23,893 | ) |
Contribution of taxes in connection with HoldCo Split-Off | — |
| | — |
| | (2,383 | ) | | — |
| | — |
| | — |
| | — |
| | (2,383 | ) |
Contributions from (distributions to) former parent, net | — |
| | — |
| | 2,471 |
| | (2,014 | ) | | — |
| | 2,014 |
| | — |
| | 2,471 |
|
Change in Capitalization in connection with HoldCo Split-Off | (5 | ) | | — |
| | (88 | ) | | 93 |
| | — |
| | — |
| | — |
| | — |
|
Other | — |
| | — |
| | — |
| | (2,621 | ) | | — |
| | — |
| | 2,910 |
| | 289 |
|
Balances at September 30, 2018 | $ | 1,041 |
| | 44 |
| | — |
| | 3,345,980 |
| | (18,537 | ) | | 1,760,596 |
| | 9,950 |
| | 5,099,074 |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
See accompanying notes to interim condensed consolidated financial statements. |
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with General Communication, Inc. ("GCI"), an Alaska corporation and parent company of GCI Holdings, LLC ("GCI Holdings"), and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly‑owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group (the “reattribution”))Group), were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.
The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.
Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax‑free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split‑Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed for one1 share of GCI Liberty Class A common stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for one1 share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.
On May 10, 2018, pursuant to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delaware by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty or the Company prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.
The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
These notes to the condensed consolidated financial statements refer to the combination of GCI Holdings, non‑controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as "GCI Liberty", the "Company", "us", "we" and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, these financial statements present all periods as consolidated by the
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company, through its ownership of interests in subsidiaries and other companies, is primarily engaged in providing a full range of wireless, data, video, voice, and managed services to residential customers, businesses, governmental entities, and educational and medical institutions primarily in Alaska.
The Company holds investments that are accounted for using the equity method. The Company does not control the decision making process or business management practices of these affiliates. Accordingly, the Company relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that the Company uses in the application of the equity method. In addition, the Company relies on audit reports that are provided by the affiliates' independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on its condensed consolidated financial statements.
Split‑Off from Qurate Retail
Following the HoldCo Split‑Off, Qurate Retail and GCI Liberty operate as separate, publicly traded companies, and neither have any stock ownership, beneficial or otherwise, in the other. In connection with the HoldCo Split‑Off, Qurate Retail, Liberty Media Corporation ("Liberty Media") (or its subsidiary) and GCI Liberty entered into certain agreements in order to govern certain of the ongoing relationships among the companies after the HoldCo Split‑Off and to provide for an orderly transition. These agreements include an indemnification agreement, a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.
The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Transactions and certain conditions to and provisions governing the relationship between GCI Liberty and Qurate Retail (for accounting purposes a related party of GCI Liberty) with respect to and resulting from the Transactions. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and GCI Liberty and other agreements related to tax matters. Pursuant to the tax sharing agreement, GCI Liberty has agreed to indemnify Qurate Retail for taxes and tax-related losses resulting from the Holdco Split-Off to the extent such taxes or tax-related losses (i) result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by GCI Liberty (applicable to actions or failures to act by GCI Liberty and its subsidiaries following the completion of the Holdco Split-Off), or (ii) result from Section 355(e) of the Internal Revenue Code applying to the Holdco Split-Off as a result of the Holdco Split-Off being part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-percent or greater interest (measured by vote or value) in the stock of GCI Liberty (or any successor corporation). Pursuant to the services agreement, Liberty Media provides GCI Liberty with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement, GCI Liberty shares office space with Qurate Retail and Liberty Media and related amenities at theirits corporate headquarters. GCI Liberty reimburses Liberty Media for direct, out‑of‑pocket expenses incurred by Liberty Media in providing these services and for costs that will be negotiated semi‑annually. Liberty Media is a related party of GCI Liberty for accounting purposes as a result of the services agreement. Under these agreements, amounts reimbursable to Liberty Media were approximately $2.3 million and $2.1 million for the three months ended September 30, 2019 and 2018, and $6.8 million and $6.0 million was reimbursable to Liberty Media for the three and nine months ended September 30, 2019 and 2018, respectively.
In addition, Qurate Retail and GCI Liberty have agreed to indemnify each other with respect to certain potential losses in respect of the HoldCo Split‑Off. See note 64 for information related to the indemnification agreement.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance replaced most existing revenue recognition guidance in GAAP. The Company adopted the new guidance, which established Accounting Standards Codification Topic 606 ("ASC 606"), effective January 1, 2018, under the modified retrospective transition method. The impact of the new guidance on Evite was not material to the condensed consolidated financial statements. GCI Holdings adopted the new guidance prior to its acquisition by HoldCo. As a result, there was no impact to the Company’s condensed consolidated financial statements related to GCI Holdings’ adoption of the new guidance.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income, and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. As the Company has historically measured its investments in equity securities with readily determinable fair values at fair value, the new guidance had no impact on the accounting for these instruments. The Company has elected the measurement alternative for its equity securities without readily determinable fair values and will perform a qualitative assessment of these instruments to identify potential impairments. See note 7 for information related to the Company’s equity securities.
In November 2016, the FASB issued a new accounting standard which requires that the statement of cash flows include restricted cash and cash equivalents when reconciling beginning and ending cash. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this new guidance effective January 1, 2018. Upon adoption, the Company added restricted cash to the reconciliation of beginning and ending cash and cash equivalents and included a reconciliation of total cash and cash equivalents and restricted cash to the balance sheet for each period presented in the condensed consolidated statements of cash flows. The following table reconciles cash and cash equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:
|
| | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
| amounts in thousands |
Cash and cash equivalents | $ | 689,562 |
| | 573,210 |
|
Restricted cash included in other current assets | 791 |
| | 938 |
|
Total cash and cash equivalents and restricted cash at end of period | $ | 690,353 |
| | 574,148 |
|
New Accounting Pronouncements Not Yet Adopted
In August 2018, the FASBFinancial Accounting Standards Board ("FASB") issued new guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance will be effective for the Company in the first quarter of 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance on lease accounting. This guidance requires a company to recognize lease assets and lease liabilities arising from operating leases in the statement of financial position. Additionally, the criteria for classifying a lease as a finance lease versus an operating lease are substantially the same as the previous guidance. In January 2018, the FASB issued an additional amendment that provides a practical expedient that gives companies the option to not evaluate existing or expired land easements that were not previously accounted for as leases under the current leases guidance. The amendments in these updates are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company plans to adopt this guidance on January 1, 2019. The Company expects to adopt using the optional transitional method that allows for a cumulative effect adjustment in the period of adoption without adjusting the comparative periods presented. Additionally, we currently expect to elect certain optional practical expedients under the transition guidance. We continue to assess the impact of the new lease guidance with respect to our current operating and capital leases and specifically are reviewing the impact of a previous failed sale and leaseback tower transaction in order to determine the appropriate treatment upon transition to the new lease guidance. The Company has identified a technology solution to use for managing the population of leases identified and for making the necessary calculations. The Company continues to work with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the population of leases and collecting lease data.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) Acquisition
The Company accounted for the Transactions contemplated under the reorganization agreement using the acquisition method of accounting. Under this method, HoldCo is the acquirer of GCI Liberty. The acquisition price was $1.1 billion (level 1). The application of the acquisition method resulted in the assignment of purchase price to the GCI Liberty assets acquired and liabilities assumed based on our preliminary estimates of their acquisition date fair values (primarily level 3). The assets acquired and liabilities assumed, and as discussed within this note, are those assets and liabilities of GCI Liberty prior to the completion of the Transactions. The determination of the fair values of the acquired assets and liabilities (and the determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
The preliminary acquisition price allocation for GCI Liberty is as follows (amounts in thousands):
|
| | | | |
| | |
Cash and cash equivalents including restricted cash | | $ | 147,957 |
|
Receivables | | 171,014 |
|
Property and equipment | | 1,211,392 |
|
Goodwill | | 966,044 |
|
Intangible assets not subject to amortization | | 572,500 |
|
Intangible assets subject to amortization | | 468,737 |
|
Other assets | | 83,422 |
|
Deferred revenue | | (92,561 | ) |
Debt, including capital leases | | (1,707,002 | ) |
Other liabilities | | (251,692 | ) |
Deferred income tax liabilities | | (276,683 | ) |
Preferred stock | | (174,922 | ) |
Non-controlling interest | | (7,000 | ) |
| | $ | 1,111,206 |
|
|
| | | | |
| | |
Cash and cash equivalents | | $ | 132,563 |
|
Receivables | | 171,014 |
|
Property and equipment | | 1,211,392 |
|
Goodwill | | 942,118 |
|
Intangible assets not subject to amortization | | 572,500 |
|
Intangible assets subject to amortization | | 503,737 |
|
Other assets | | 97,279 |
|
Deferred revenue | | (92,561 | ) |
Debt, including capital leases | | (1,707,002 | ) |
Other liabilities | | (251,692 | ) |
Deferred income tax liabilities | | (286,220 | ) |
Preferred stock | | (174,922 | ) |
Non-controlling interest | | (7,000 | ) |
| | $ | 1,111,206 |
|
Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and non-contractual relationships. Amortizable intangible assets of $503.7$468.7 million were acquired and are comprised of a tradename with an estimated useful life of approximately 810 years, customer relationships with a weighted average useful life of approximately 1316 years and right-to-use assets with a weighted average useful life of 8 years. Approximately $170.0 million of the acquired goodwill will be deductible for income tax purposes. As of September 30, 2018, theThe determination of the estimated acquisition date fair value of the acquired assets and assumed liabilities is preliminary and subject to revision. The primary areas of our acquisition price allocation that changed from the initial allocation relate to a decrease in receivables of $13.7 million, an increase in property and equipment of $16.3 million, an increase to intangible assets not subject to amortization of $9.5 million, a decrease to intangible assets subject to amortization of $40.2 million, an increase in deferred revenue of $15.6 million, a decrease in other liabilities of $21.4 million, a decrease in deferred income tax liabilities of $6.1 million, and an increase to goodwill of $17.5 million. The primary estimated acquisition date fair values that are not yet finalized are related to certain property and equipment, intangible assets, liabilities and tax balances.final.
Since the date of the acquisition, included in net earnings (loss) attributable to GCI Liberty shareholders for the three and nine months ended September 30, 2018 is $40.4 million and $35.9 million in losses related to GCI Holdings, respectively. The unaudited pro forma revenue, net earnings and basic and diluted net earnings per common share of GCI Liberty, prepared utilizing the historical financial statements of HoldCo, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the acquisition discussed above occurred on January 1, 2017, are as follows:
|
| | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2018 |
| | amounts in thousands, except per share amounts |
Revenue | | $ | 220,737 |
| | 664,287 |
|
Net earnings (loss) | | $ | 327,046 |
| | (157,678 | ) |
Net earnings (loss) attributable to GCI Liberty shareholders | | $ | 327,173 |
| | (157,242 | ) |
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share | | $ | 3.04 |
| | (1.46 | ) |
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share | | $ | 3.00 |
| | (1.46 | ) |
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | amounts in thousands, except per share amounts |
Revenue | | $ | 220,737 |
| | 227,860 |
| | 664,287 |
| | 685,911 |
|
Net earnings (loss) | | $ | 327,046 |
| | 277,315 |
| | (157,678 | ) | | 722,803 |
|
Net earnings (loss) attributable to GCI Liberty shareholders | | $ | 327,173 |
| | 277,505 |
| | (157,242 | ) | | 723,229 |
|
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share | | $ | 3.04 |
| | 2.55 |
| | (1.46 | ) | | 6.63 |
|
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share | | $ | 3.00 |
| | 2.55 |
| | (1.46 | ) | | 6.63 |
|
The pro forma results include adjustments directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, revenue, interest expense, stock-based compensation, and the exclusion of transaction related costs;costs. These results also include the impact of the Federal Communications Commission's decision to reduce rates paid to us under the Rural Health Care Program;Program and the new revenue standard. The pro forma information is not representative of the Company’s future results of operations nor does it reflect what the Company’s results of operations would have been if the acquisition had occurred previously and the Company consolidated the results of GCI Liberty during the periods presented.
Revenue Recognition
Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Substantially all of the Company's revenue is earned from services transferred over time. If at contract inception we determine the time period between when we transfer a promised good or service to a customer and when the customer pays us for that good or service is one year or less, we do not adjust the promised amount of consideration for the effects of a significant financing component.
Taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction that are collected by the Company from a customer, are excluded from revenue from contracts with customers.
Nature of Services and Products
Wireless
Wireless revenue is generated by providing access to, and usage of the Company's network, as well as the sale of equipment. In general, access revenue is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Equipment sales revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and control transfers to the customer. Consideration received from the customer is allocated to the service and products based on stand-alone selling prices when purchased together.
New and existing wireless customers have the option to participate in Upgrade Now, a program that provides eligible customers with the ability to purchase certain wireless devices in installments over a period of up to 24 months. Participating customers have the right to trade-in the original equipment for a new device after making the equivalent of 12 monthly installment payments, provided their handset is in good working condition. Upon upgrade, the outstanding balance of the wireless equipment installment plan is exchanged for the used handset. The Company accounts for this upgrade option as a right of return with a reduction of Revenue and Operating expense for handsets expected to be upgraded based on historical data.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Data
Data revenue is generated by providing data network access, high-speed internet services, and product sales. Monthly service revenue for data network access and high-speed internet services is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Internet service excess usage revenue is recognized when the services are provided. The Company recognizes revenue for product sales when a customer takes possession of the equipment. The Company provides telecommunications engineering services on a time and materials basis. Revenue is recognized for these services as-invoiced.
Video
Video revenue is generated primarily from residential and business customers that subscribe to the Company's cable video plans. Video revenue is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer.
Voice
Voice revenue is for fixed monthly fees for voice plans as well as usage based fees for long-distance service usage. Voice plan fees are billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Usage based fees are recognized as services are provided.
Arrangements with Multiple Performance Obligations
Contracts with customers may include multiple performance obligations as customers purchase multiple services and products within those contracts. For such arrangements, revenue is allocated to each performance obligation based on the relative standalone selling price for each service or product within the contract. Standalone selling prices are generally determined based on the prices charged to customers.
Significant Judgments
Some contracts with customers include variable consideration, and may require significant judgment to determine the total transaction price, which impacts the amount and timing of revenue recognized. The Company uses historical customer data to estimate the amount of variable consideration included in the total transaction price and reassess its estimate at each reporting period. Any change in the total transaction price due to a change in the estimated variable consideration is allocated to the performance obligations on the same basis as at contract inception. Any portion of a change in transaction price that is allocated to a satisfied or partially satisfied performance obligation is recognized as revenue (or a reduction in revenue) in the period of the transaction price change. Variable consideration has been constrained to reduce the likelihood of a significant revenue reversal.
Often contracts with customers include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Judgment is required to determine the standalone selling price for each distinct performance obligation. Services and products are generally sold separately, and help establish standalone selling price for services and products the Company provides.
Remaining Performance Obligations
The Company expects to recognize revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018 of $56.0 million in the remainder of 2018, $221.2 million in 2019, $199.5 million in 2020, $124.2 million in 2021 and $107.5 million in 2022 and thereafter.
The Company applies certain practical expedients as permitted under ASC 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, information about
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
revenue remaining from usage based performance obligations that are recognized over time as-invoiced, or variable consideration allocated to wholly unsatisfied performance obligations.
Contract Balances
The Company had receivables of $243.4 million and deferred revenue of $27.3 million at September 30, 2018 from contracts with customers, which amounts exclude receivables and deferred revenue that are out of the scope of ASC 606. Our customers generally pay for services in advance of the performance obligation and therefore these prepayments are recorded as deferred revenue. The deferred revenue is recognized as revenue in the accompanying condensed consolidated statements of operations as the services are provided. Changes in the contract liability balance for the Company during the three and nine months ended September 30, 2018 were not materially impacted by other factors.
Assets Recognized from the Costs to Obtain a Contract with a Customer
Management expects that incremental commission fees paid to intermediaries as a result of obtaining customer contracts are recoverable and therefore the Company capitalizes them as contract costs.
Capitalized commission fees are amortized based on the transfer of goods or services to which the assets relate which typically range from two to five years, and are included in Selling, general, and administrative expenses.
The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in Selling, general, and administrative expenses.
Revenue from contracts with customers, classified by customer type and significant service offerings follows: |
| | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 |
| amounts in thousands |
GCI Holdings | | | |
Consumer Revenue | | | |
Wireless | $ | 25,584 |
| | 62,312 |
|
Data | 39,652 |
| | 88,921 |
|
Video | 22,272 |
| | 50,180 |
|
Voice | 4,368 |
| | 10,246 |
|
Business Revenue | | | |
Wireless | 18,071 |
| | 44,889 |
|
Data | 59,585 |
| | 154,239 |
|
Video | 4,927 |
| | 9,436 |
|
Voice | 6,361 |
| | 14,282 |
|
Evite | 5,100 |
| | 15,221 |
|
Lease, grant, and revenue from subsidies | 24,226 |
| | 55,114 |
|
Total | $ | 210,146 |
| | 504,840 |
|
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| |
(4) | Stock-Based Compensation |
GCI Liberty has granted to certain directors, employees and employees of its subsidiaries, restricted shares (“RSAs”), restricted stock units (“RSUs”) and options to purchase shares of GCI Liberty’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options, RSAs and RSUs) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Included in Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $7.8 million and $4.4 million of stock based compensation during the three months ended September 30, 2018 and 2017, respectively, and $20.9 million and $11.0 million during the nine months ended September 30, 2018 and 2017, respectively.
During the nine months ended September 30, 2018, GCI Liberty granted(3) Earnings Attributable to GCI Liberty directors five thousand options to purchase shares of GCI Liberty Series A common stock. Such options had a weighted average GDFV of $13.36 per share and vest on December 12, 2018.Stockholders Per Common Share
Also during the nine months ended September 30, 2018, and in connection with our current CEO's employment agreement, GCI Liberty granted 143 thousand options to purchase shares of GCI Liberty Series B common stock to our current CEO. Such options had a weighted average GDFV of $16.55 per share and vest on December 31, 2018.
The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of GCI Liberty's stock and the implied volatility of publicly traded GCI Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.
GCI Liberty-Outstanding Awards
The following tables present the number and weighted average exercise price ("WAEP") of the Awards to purchase GCI Liberty common stock granted to certain officers, employees and directors of the Company. The options outstanding as of January 1, 2018 reflect Qurate Retail's Series A and Series B Liberty Ventures common stock. On March 9, 2018, Qurate Retail redeemed each outstanding share of Qurate Retail's Series A and Series B Liberty Ventures common stock for the corresponding class of GCI Liberty common stock using a one-for-one ratio. |
| | | | | | | | | | | | | | |
| | Series A |
| | | | | | Weighted | | Aggregate |
| | | | | | average | | intrinsic |
| | Awards | | | | remaining | | value |
| | (000's) | | WAEP | | life | | (millions) |
Outstanding at January 1, 2018 | | 1,670 |
| | $ | 47.12 |
| | | | | |
Granted | | 5 |
| | $ | 42.99 |
| | | | | |
Exercised | | (23 | ) | | $ | 16.61 |
| | | | | |
Forfeited/Cancelled | | (3 | ) | | $ | 56.13 |
| | | | | |
Outstanding at September 30, 2018 | | 1,649 |
| | $ | 47.52 |
| | 1.9 | years | | $ | 11 |
|
Exercisable at September 30, 2018 | | 1,296 |
| | $ | 47.80 |
| | 1.4 | years | | $ | 9 |
|
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | | |
| | Series B |
| | | | | | Weighted | | Aggregate |
| | | | | | average | | intrinsic |
| | Awards | | | | remaining | | value |
| | (000's) | | WAEP | | life | | (millions) |
Outstanding at January 1, 2018 | | 1,080 |
| | $ | 56.38 |
| | | | | |
Granted | | 143 |
| | $ | 54.01 |
| | | | | |
Exercised | | — |
| | $ | — |
| | | | | |
Forfeited/Cancelled | | — |
| | $ | — |
| | | | | |
Outstanding at September 30, 2018 | | 1,223 |
| | $ | 56.10 |
| | 4.3 | years | | $ | — |
|
Exercisable at September 30, 2018 | | 443 |
| | $ | 56.38 |
| | 5.0 | years | | $ | — |
|
As of September 30, 2018, the total unrecognized compensation cost related to unvested options and RSAs was approximately $12 million and $15 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.9 years and 1.5 years, respectively.
As of September 30, 2018, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.6 million shares of GCI Liberty Series A common stock and 1.2 million shares of GCI Liberty Series B common stock.
As of September 30, 2018, GCI Liberty had approximately 1.2 million and 32 thousand unvested RSAs and RSUs, respectively, of GCI Liberty common stock and preferred stock held by certain directors, officers and employees of the Company. These Series A common stock, Series B common stock and Series A Cumulative Redeemable Preferred unvested RSAs, along with the Series A common stock unvested RSUs of GCI Liberty had a weighted average GDFV of $46.77 per share.
The aggregate fair value of all restricted shares of GCI Liberty common and preferred stock that vested during the nine months ended September 30, 2018 was $2.5 million.
| |
(5) | Earnings Attributable to GCI Liberty Stockholders Per Common Share |
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding ("WASO") for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.
The total number of Series A and Series B common shares outstanding on March 9, 2018, 109,004,250, is being used in the calculation of both basic and diluted earnings per share for all periods prior to the date of the HoldCo Split-Off.
Series A and Series B Common Stock
|
| | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| number of shares in thousands |
Basic WASO | 104,819 |
| | 107,631 |
| | 104,800 |
| | 107,693 |
|
Diluted WASO | 105,850 |
| | 109,061 |
| | 105,798 |
| | 107,693 |
|
Antidilutive shares excluded from diluted WASO | — |
| | — |
| | — |
| | 1,499 |
|
|
| | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| number of shares in thousands |
Basic WASO | 107,631 |
| | 107,693 |
|
Diluted WASO | 109,061 |
| | 107,693 |
|
Antidilutive shares excluded from diluted WASO | — |
| | 1,499 |
|
| |
(6) | Assets and Liabilities Measured at Fair Value |
(4) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.
The Company’s assets and liabilities measured at fair value are as follows: |
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Description | | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) |
| | amounts in thousands |
Cash equivalents | | $ | 363,026 |
| | 363,026 |
| | — |
| | 384,071 |
| | 384,071 |
| | — |
|
Equity securities | | $ | 2,208,304 |
| | 2,208,304 |
| | — |
| | 1,529,901 |
| | 1,529,901 |
| | — |
|
Investment in Liberty Broadband | | $ | 4,467,508 |
| | 4,467,508 |
| | — |
| | 3,074,373 |
| | 3,074,373 |
| | — |
|
Derivative instrument | | $ | 78,061 |
| | — |
| | 78,061 |
| | 20,340 |
| | — |
| | 20,340 |
|
Indemnification obligation | | $ | 136,833 |
| | — |
| | 136,833 |
| | 78,522 |
| | — |
| | 78,522 |
|
Exchangeable senior debentures | | $ | 579,291 |
| | — |
| | 579,291 |
| | 462,336 |
| | — |
| | 462,336 |
|
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
Description | | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) |
| | amounts in thousands |
Cash equivalents | | $ | 638,999 |
| | 638,999 |
| | — |
| | 570,526 |
| | 570,526 |
| | — |
|
Equity securities | | $ | 1,749,132 |
| | 1,749,132 |
| | — |
| | 1,800,208 |
| | 1,800,208 |
| | — |
|
Investment in Liberty Broadband | | $ | 3,598,079 |
| | 3,598,079 |
| | — |
| | 3,634,786 |
| | 3,634,786 |
| | — |
|
Variable forward | | $ | 26,980 |
| | — |
| | 26,980 |
| | 94,807 |
| | — |
| | 94,807 |
|
Indemnification obligation | | $ | 99,858 |
| | — |
| | 99,858 |
| | — |
| | — |
| | — |
|
Exchangeable senior debentures | | $ | 527,361 |
| | — |
| | 527,361 |
| | — |
| | — |
| | — |
|
On June 6, 2017, Qurate Retail purchased 450,000 LendingTree shares and executed a 2‑year variable forward with respect to 642,850 LendingTree shares. The variable forward was executed at the LendingTree closing price on June 6, 2017 of $170.70 per share and hashad a floor price of $128.03 per share and a cap price of $211.67 per share. The liability associated with this instrument is included in the Other current liabilities line item in the condensed consolidated balance sheets. The fair value of the variable forward was derived from a Black‑Scholes‑Merton model using observable market data as the significant inputs. On April 29, 2019, the Company terminated its variable forward and entered into a new 3-year variable forward with respect to 642,850 LendingTree shares. The variable forward was executed at the LendingTree closing price on April 29, 2019 of $376.35 per share and has a floor price of 0 and has a cap price of $254.00 per share. The fair value of the variable forward was derived from a Black-Scholes-Merton model using observable market data as the significant inputs.
Pursuant to an indemnification agreement, GCI Liberty has agreed to indemnify LI LLC for certain payments made to a holder of LI LLC's 1.75% exchangeable debentures due 2046 (the "1.75% Exchangeable Debentures"). An indemnity obligation in the amount of $281.3 million was recorded upon completion of the HoldCo Split-Off. Within six months of the HoldCo Split‑Off, Qurate Retail, LI LLC and GCI Liberty agreed to cooperate, and reasonably assist each other, with respect to the commencement and consummation of one or more privately negotiated transactions, a tender offer or other purchase transactions (each, a "Purchase Offer") whereby LI LLC would offer to purchase the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty would indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in a Purchase Offer for an amount by which the purchase price for such debenture exceeds the amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture net of certain tax benefits, if any, attributable to such 1.75% Exchangeable Debenture. In June 2018, Qurate Retail repurchased 417,759 bonds of the 1.75% Exchangeable Debentures for approximately $457 million, including accrued interest, and the Company made a payment under the indemnification agreement to Qurate Retail in the amount of $133 million.
Following the initial six month period, the The remaining indemnification liability due to LI LLC for certain payments made to a holder of the 1.75% Exchangeable Debentures pertains to the holder’s ability to exercise its exchange right according to the terms of the debentures1.75% Exchangeable Debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification obligation recorded in the accompanying condensed consolidated balance sheets as of September 30, 20182019 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on observable market data as significant inputs (Level 2). As of September 30, 2018,2019, a holder of the 1.75% Exchangeable Debentures does not have the ability to exchange and, accordingly, such indemnification obligation is included as a long-term liability in ourthe accompanying condensed
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
consolidated balance sheets. Additionally, as of September 30, 2018,2019, 332,241 bonds of the 1.75% Exchangeable Debentures remain outstanding.
Realized and Unrealized Gains (Losses) on Financial Instruments, net
Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
|
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | amounts in thousands |
Equity securities | | $ | 90,770 |
| | 175,359 |
| | 683,808 |
| | (53,681 | ) |
Investment in Liberty Broadband | | 19,207 |
| | 366,211 |
| | 1,393,135 |
| | (36,706 | ) |
Derivative instruments | | 60,640 |
| | (3,223 | ) | | (57,721 | ) | | 69,329 |
|
Indemnification obligation | | (3,485 | ) | | (14,937 | ) | | (58,311 | ) | | 48,671 |
|
Exchangeable senior debentures | | (10,967 | ) | | (27,901 | ) | | (116,048 | ) | | (31,941 | ) |
| | $ | 156,165 |
| | 495,509 |
| | 1,844,863 |
| | (4,328 | ) |
|
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | amounts in thousands |
Equity securities | | $ | 175,359 |
| | 143,158 |
| | (53,681 | ) | | 405,655 |
|
Investment in Liberty Broadband | | 366,211 |
| | 364,930 |
| | (36,706 | ) | | 906,136 |
|
Variable forward | | (3,223 | ) | | (35,325 | ) | | 69,329 |
| | (41,027 | ) |
Indemnification obligation | | (14,937 | ) | | — |
| | 48,671 |
| | — |
|
Exchangeable senior debentures | | (27,901 | ) | | — |
| | (31,941 | ) | | — |
|
| | $ | 495,509 |
| | 472,763 |
| | (4,328 | ) | | 1,270,764 |
|
The Company has elected to account for its exchangeable debt using the fair value option. Accordingly, a portion of the unrealized gain (loss) recognized on the Company’s exchangeable debt is now presented in other comprehensive income as it relates to instrument specific credit risk and any other changes in fair value are presented in the accompanying condensed consolidated statements of operations.
| |
(7) | Investments in Equity Securities |
(5) Investments in Equity Securities
Investments in equity securities, the majority of which are carried at fair value, are summarized as follows:
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | |
| | | September 30, | | December 31, |
| | | 2018 | | 2017 |
| | | amounts in thousands |
Charter (a) | | | $ | 1,746,196 |
| | 1,800,208 |
|
Other investments (b) | | | 5,014 |
| | 2,856 |
|
| | | $ | 1,751,210 |
| | 1,803,064 |
|
|
| | | | | | | | |
| | | September 30, | | December 31, |
| | | 2019 | | 2018 |
| | | amounts in thousands |
Charter (a) | | | $ | 2,208,304 |
| | 1,526,984 |
|
Other investments (b) | | | 5,285 |
| | 6,533 |
|
| | | $ | 2,213,589 |
| | 1,533,517 |
|
(a) A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with the indemnification agreement. See note 64 for additional discussion of the indemnification agreement.
(b) The Company has elected the measurement alternative for a portion of these securities.
| |
(8) | (6) Investments in Affiliates Accounted for Using the Equity Method |
Investment in LendingTree
The Company has various investments accounted for using the equity method. The following table includes the Company’s carrying amount and percentage ownership of the more significant investments in affiliates at September 30, 20182019 and the carrying amount at December 31, 2017:
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2018:
| | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
| Percentage ownership | | Market value | | Carrying amount | | Carrying amount | Percentage ownership | | Market value | | Carrying amount | | Carrying amount |
| | | dollars in thousands | | | dollars in thousands |
LendingTree (a) | 25.05 | % | | $ | 792,462 |
| | $ | 171,027 |
| | 114,655 |
| 26.6 | % | | $ | 1,069,118 |
| | $ | 166,819 |
| | 174,002 |
|
Other | various |
| | NA |
| | 3,107 |
| | — |
| various |
| | NA |
| | 2,020 |
| | 3,028 |
|
| | | | | $ | 174,134 |
| | 114,655 |
| | | | | $ | 168,839 |
| | 177,030 |
|
| | | | | | | | | | | | | | |
(a) Both our ownership interest in LendingTree and our share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of September 30, 2018 and includes an additional 220,000 shares of LendingTree that were purchased during the three months ended September 30, 2018. | |
(a) Both the Company's ownership interest in LendingTree and the Company's share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of September 30, 2019. | | (a) Both the Company's ownership interest in LendingTree and the Company's share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of September 30, 2019. |
The Company’s share of LendingTree’s earnings (losses) was $10.2$2.0 million and $1.7$10.2 million for the three months ended September 30, 20182019 and 2017,2018, respectively. The Company's share of LendingTree's earnings (losses) was $15.5$(1.4) million and $5.0$15.5 million for the nine months ended September 30, 20182019 and 2017,2018, respectively.
Investment in Liberty Broadband
On May 18, 2016, Qurate Retail completed a $2.4 billion investment in Liberty Broadband Series C non-voting shares (for accounting purposes a related party of the Company) in connection with the merger of Charter and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company, Charter, of the combined enterprises. Qurate Retail, along with third party investors, all of whom invested on the same terms as Qurate Retail, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband’s net assets on a sum‑of‑the parts basis at the time the investment agreements were executed (May 2015). Qurate Retail, as part of the merger described above, exchanged, in a tax‑free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a one‑1‑for‑one basis, and Qurate Retail granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Qurate Retail following the exchange, which proxy and right of first refusal was assigned to GCI Liberty in connection with the completion of the Transactions.
As of September 30, 2018,2019, the Company has a 23.5% economic ownership interest in Liberty Broadband. Due to overlapping boards of directors and management, the Company has been deemed to have significant influence over Liberty Broadband for accounting purposes, even though the Company does not have any voting rights. The Company has elected to apply the fair value option for its investment in Liberty Broadband (Level 1) as it is believed that investors value this
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
investment based on the trading price of Liberty Broadband. The Company recognizes changes in the fair value of its investment in Liberty Broadband in realized and unrealized gains (losses) on financial instruments, net in the accompanying condensed consolidated statements of operations. Summarized financial information for Liberty Broadband is as follows:
| | | | September 30, | | December 31, | | September 30, | | December 31, |
| | 2018 | | 2017 | | 2019 | | 2018 |
| | amounts in thousands | | amounts in thousands |
Current assets | | $ | 95,478 |
| | 84,054 |
| | $ | 94,951 |
| | 84,574 |
|
Investment in Charter, accounted for using the equity method | | 11,977,368 |
| | 11,835,613 |
| | 12,067,329 |
| | 12,004,376 |
|
Other assets | | 9,828 |
| | 12,122 |
| | 9,767 |
| | 9,487 |
|
Total assets | | 12,082,674 |
| | 11,931,789 |
| | 12,172,047 |
| | 12,098,437 |
|
Long-term debt, including current portion | | 522,617 |
| | 497,370 |
| |
Long-term debt | | | 572,619 |
| | 522,928 |
|
Deferred income tax liabilities | | 961,835 |
| | 932,593 |
| | 972,005 |
| | 965,829 |
|
Other liabilities | | 12,927 |
| | 14,925 |
| | 15,251 |
| | 11,062 |
|
Equity | | 10,585,295 |
| | 10,486,901 |
| | 10,612,172 |
| | 10,598,618 |
|
Total liabilities and shareholders' equity | | $ | 12,082,674 |
| | 11,931,789 |
| | $ | 12,172,047 |
| | 12,098,437 |
|
20 |
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | amounts in thousands |
Revenue | | $ | 3,713 |
| | 3,518 |
| | 10,918 |
| | 18,680 |
|
Operating expenses, net | | (11,301 | ) | | (7,614 | ) | | (31,873 | ) | | (25,601 | ) |
Operating income (loss) | | (7,588 | ) | | (4,096 | ) | | (20,955 | ) | | (6,921 | ) |
Share of earnings (losses) of affiliates | | 61,633 |
| | 84,739 |
| | 141,882 |
| | 126,952 |
|
Gain (loss) on dilution of investment in affiliate | | (11,219 | ) | | (3,203 | ) | | (68,944 | ) | | (35,165 | ) |
Realized and unrealized gains (losses) on financial instruments, net | | (433 | ) | | 5,678 |
| | (433 | ) | | 3,659 |
|
Other income (expense), net | | (5,773 | ) | | (5,717 | ) | | (17,829 | ) | | (16,371 | ) |
Income tax benefit (expense) | | (9,124 | ) | | (17,762 | ) | | (8,474 | ) | | (17,005 | ) |
Net earnings (loss) | | $ | 27,496 |
| | 59,639 |
| | 25,247 |
| | 55,149 |
|
(7) Intangible Assets
Intangible Assets Subject to Amortization
|
| | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Gross | | | | Net | | Gross | | | | Net |
| carrying | | Accumulated | | carrying | | carrying | | Accumulated | | carrying |
| amount | | amortization | | amount | | amount | | amortization | | amount |
| amounts in thousands |
Customer relationships | $ | 408,267 |
| | (85,229 | ) | | 323,038 |
| | 408,267 |
| | (55,417 | ) | | 352,850 |
|
Other amortizable intangibles | 131,830 |
| | (55,825 | ) | | 76,005 |
| | 122,759 |
| | (39,603 | ) | | 83,156 |
|
Total | $ | 540,097 |
| | (141,054 | ) | | 399,043 |
| | 531,026 |
| | (95,020 | ) | | 436,006 |
|
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | amounts in thousands |
Revenue | | $ | 3,518 |
| | 3,430 |
| | 18,680 |
| | 9,643 |
|
Operating expenses, net | | (7,614 | ) | | (9,217 | ) | | (25,601 | ) | | (29,125 | ) |
Operating income (loss) | | (4,096 | ) | | (5,787 | ) | | (6,921 | ) | | (19,482 | ) |
Share of earnings (losses) of affiliates | | 84,739 |
| | (5,280 | ) | | 126,952 |
| | 25,109 |
|
Gain (loss) on dilution of investment in affiliate | | (3,203 | ) | | (3,718 | ) | | (35,165 | ) | | (42,515 | ) |
Realized and unrealized gains (losses) on financial instruments, net | | 5,678 |
| | 2,675 |
| | 3,659 |
| | 5,026 |
|
Other income (expense), net | | (5,717 | ) | | (5,087 | ) | | (16,371 | ) | | (13,669 | ) |
Income tax benefit (expense) | | (17,762 | ) | | 7,333 |
| | (17,005 | ) | | 18,245 |
|
Net earnings (loss) | | $ | 59,639 |
| | (9,864 | ) | | 55,149 |
| | (27,286 | ) |
| |
(9) | Variable Interest Entities |
New Markets Tax Credit Entities
GCI entered into several arrangements under the New Markets Tax Credit ("NMTC") program with US Bancorp to help fund various projects that extended terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.
Each of the transactions has an investment fund, which is a special purpose entity created to effect the financing arrangement. In each of the transactions, we loaned money to the investment fund and US Bancorp invested money in the investment fund. The investment fund would then contribute the funds from our loan and US Bancorp's investment to a CDE. The CDE, in turn, would loan the funds to our wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.
US Bancorp is entitled to substantially all of the benefits derived from the NMTCs. All of the loan proceeds to Unicom, net of syndication and arrangement fees, were restricted for use on the projects. Restricted cash of $0.8 million was held by Unicom at September 30, 2018 and is included in our condensed consolidated balance sheets. We completed construction of the projects partially funded by these transactions.
These transactions include put/call provisions whereby we may be obligated or entitled to repurchase US Bancorp’s interest in each investment fund for a nominal amount. We believe that US Bancorp will exercise the put options at the end of the compliance periods for each of the transactions. The NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code of 1986, as amended. We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements. Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp. We have agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as our obligation to deliver tax benefits is relieved. There have been no credit recaptures as of September 30, 2018. The value attributed to the put/calls is nominal.
The Company has determined that each of the investment funds are variable interest entities ("VIEs"). The consolidated financial statements of each of the investment funds include the CDEs. The ongoing activities of the VIEs – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIEs. Management considered the contractual arrangements that obligate us to deliver tax benefits and provide various other guarantees to US Bancorp; US Bancorp’s lack of a material interest in the underlying economics of the project; and the fact that we are obligated to absorb
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
losses of the VIEs. The Company concluded that it is the primary beneficiary of each and consolidated the VIEs in accordance with the accounting standard for consolidation.
On September 14, 2018, US Bancorp exercised its put option for the NMTC #1 transaction that we entered into on August 30, 2011 resulting in the Company obtaining ownership of the investment fund. Upon obtaining control of the investment fund, the Company settled the loans and dissolved the VIEs associated with the August 30, 2011 NMTC transaction.
The assets and liabilities of the consolidated VIEs were $89.0 million and $63.0 million, respectively, as of September 30, 2018.
The assets of the VIEs serve as the sole source of repayment for the debt issued by these entities. US Bank does not have recourse to us or our other assets, with the exception of customary representations and indemnities we have provided. The Company is not required and does not currently intend to provide additional financial support to these VIEs. While these subsidiaries are included in its consolidated financial statements, these subsidiaries are separate legal entities and their assets are legally owned by them and not available to the Company's creditors.
The following table summarizes the key terms of each of the NMTC transactions:
|
| | | | | | | | | |
Financing Arrangement | Investment Funds | Transaction Date | Loan Amount | Interest Rate on Loan to Investment Fund | Maturity Date | US Bancorp Investment | Loan to Unicom | Interest Rate on Loan(s) to Unicom | Expected Put Option Exercise |
NMTC #2 | TIF 2 & TIF 2-USB | October 3, 2012 | $37.7 million | 1% | October 2, 2042 | $17.5 million | $52.0 million | 0.71% to 0.77% | October 2019 |
NMTC #3 | TIF 3 | December 11, 2012 | $8.2 million | 1% | December 10, 2042 | $3.8 million | $12.0 million | 1.35% | December 2019 |
NMTC #4 | TIF 4 | March 21, 2017 | $6.7 million | 1% | March 21, 2040 | $3.3 million | $9.8 million | 0.73% | March 2024 |
NMTC #5 | TIF 5-1 and TIF 5-2 | December 22, 2017 | $10.4 million | 1% | December 22, 2047 | $5.1 million | $14.7 million | 0.67% to 1.24% | December 2024 |
| |
(10) | Intangible Assets and Goodwill |
Goodwill
|
| | | | | | | | | | |
| | GCI Holdings | | Corporate and other | | Total |
| | amounts in thousands |
Balance at January 1, 2018 | | $ | — |
| | 25,569 |
| | 25,569 |
|
Acquisitions | | 942,118 |
| | — |
| | 942,118 |
|
Balance at September 30, 2018 | | $ | 942,118 |
| | 25,569 |
| | 967,687 |
|
Intangible Assets Subject to Amortization
|
| | | | | | | | | | |
| | September 30, 2018 |
| | Gross | | | | Net |
| | carrying | | Accumulated | | carrying |
| | amount | | amortization | | amount |
| | amounts in thousands |
Customer relationships | | $ | 443,267 |
| | (46,981 | ) | | 396,286 |
|
Other amortizable intangibles | | 117,482 |
| | (33,209 | ) | | 84,273 |
|
Total | | $ | 560,749 |
| | (80,190 | ) | | 480,559 |
|
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Amortization expense for intangible assets with finite useful lives was $17.1$15.2 million and $0.8$17.1 million for the three months ended September 30, 20182019 and 2017,2018, respectively. Amortization expense for intangible assets with finite useful lives was $38.7$46.5 million and $2.3$38.7 million for the nine months ended September 30, 20182019 and 2017,2018, respectively. Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):
|
| | | |
Remainder of 2019 | $ | 15,448 |
|
2020 | $ | 52,633 |
|
2021 | $ | 42,250 |
|
2022 | $ | 36,496 |
|
2023 | $ | 33,603 |
|
|
| | | |
Remainder of 2018 | $ | 16,994 |
|
2019 | $ | 59,357 |
|
2020 | $ | 51,358 |
|
2021 | $ | 45,754 |
|
2022 | $ | 41,656 |
|
(8) Debt
Debt is summarized as follows:
|
| | | | | | | | | | | |
| | Outstanding | | |
| | principal | | Carrying value |
| | September 30, | | September 30, | | December 31, |
| | 2019 | | 2019 | | 2018 |
| | amounts in thousands |
Margin Loan Facility | | $ | 900,000 |
| | 900,000 |
| | 900,000 |
|
Exchangeable senior debentures | | 477,250 |
| | 579,291 |
| | 462,336 |
|
Senior notes | | 775,000 |
| | 796,985 |
| | 803,287 |
|
Senior credit facility | | 713,280 |
| | 713,280 |
| | 715,124 |
|
Wells Fargo note payable | | 7,197 |
| | 7,197 |
| | 7,554 |
|
Deferred financing costs | | — |
| | (6,370 | ) | | (2,267 | ) |
Total debt | | $ | 2,872,727 |
| | 2,990,383 |
| | 2,886,034 |
|
Debt classified as current (included in other current liabilities) | | | | (902,368 | ) | | (900,759 | ) |
Total long-term debt | | | | $ | 2,088,015 |
| | 1,985,275 |
|
|
| | | | | | | | | | | |
| | Outstanding | | |
| | Principal | | Carrying Value |
| | September 30, | | September 30, | | December 31, |
| | 2018 | | 2018 | | 2017 |
| | amounts in thousands |
Margin Loan Facility | | $ | 1,000,000 |
| | 1,000,000 |
| | — |
|
Exchangeable senior debentures | | 477,250 |
| | 527,361 |
| | NA |
|
Senior notes | | 775,000 |
| | 804,450 |
| | NA |
|
Senior credit facility | | 715,739 |
| | 715,739 |
| | NA |
|
Wells Fargo note payable | | 7,673 |
| | 7,675 |
| | NA |
|
Deferred financing costs | | — |
| | (2,719 | ) | | — |
|
Total debt | | $ | 2,975,662 |
| | 3,052,506 |
| | — |
|
Debt classified as current (included in other current liabilities) | | | | (2,959 | ) | | — |
|
Total long-term debt | | | | $ | 3,049,547 |
| | — |
|
Margin Loan
On December 29, 2017, Broadband Holdco, LLC ("Broadband Holdco"), a wholly owned subsidiary of, at such time, Qurate Retail, and now the Company, entered into a margin loan agreement with various lender parties consisting of a term loan in an aggregate principal amount of $1 billion (the “Margin Loan”). Approximately 42.7 million42,681,842 shares of Liberty Broadband Series C common stock with a value of $3.6$4.5 billion were pledged by Broadband Holdco, LLC as collateral for the loan as of September 30, 2018.2019. This Margin Loan has a term of two years and bearswith an interest at a rate of LIBOR plus 1.85% and contains an undrawn commitment fee of up to 1.0%0.75% per annum. Deferred financing costs incurred on the Margin Loan are reflected in Long-termcurrent portion of debt, net in the accompanying condensed consolidated balance sheet. In connection with the completion of the Transactions, Broadband Holdco borrowed the full principal amount of the Margin Loan. A portion of the proceeds of the Margin Loan was used to make a distribution to Qurate Retail of $1.1 billion to be used within one year for the repurchase of QVC Group stock (now the Qurate Retail common stock) or to pay down certain debt at Qurate Retail, and for the payment of fees and other costs and expenses, in each case, pursuant to the terms of the reorganization agreement. The distributed loan proceeds constituted a portion of the cash reattributed to the QVC Group.
On October 5, 2018 (the “Closing Date”), Broadband Holdco entered into Amendment No. 1 (the “Amendment”) to the Margin Loan (the “Margin Loan Agreement”). Pursuant to the Amendment, lenders under the Margin Loan have agreed to, among other things, provide commitments (the “Revolving Commitments”) for a new revolving credit facility in an aggregate principal amount of up to $200.0 million (the “Revolving Credit Facility” and, the loans thereunder, the “Revolving Loans”). The Revolving Credit Facility established under the Margin Loan Agreement is in addition to the
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
existing term loan credit facility under the Margin Loan Agreement (the “Term Loan Facility” and, together with Revolving Credit Facility, the “Margin Loan Facility” and the loans thereunder, the “Loans”). After giving effect to the initial borrowing of Revolving Loans and Term
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Loan Prepayment (as defined below) on the Closing Date, $800.0 million of loans under the Term Loan Facility were outstanding and $200.0 million of Revolving Loans were outstanding. Subsequent to the Closing Date, the Company repaid $100.0 million of the Revolving Credit Facility. The Amendment also amends certain covenants in the Margin Loan to permit, among other things, a designated GCI Liberty subsidiary to enter into a subordinated revolving note with GCI Liberty and certain additional investments.
Broadband Holdco is permitted to use the proceeds of the Revolving Loans for any purpose not prohibited under the Margin Loan, including, without limitation, (i) to make dividends and distributions, (ii) for the purchase of margin stock, (iii) to make investments not prohibited under the Margin Loan, (iv) to repay an intercompany loan to GCI Liberty, and/or (v) otherwise for general corporate purposes, including, without limitation, for payment of interest and fees and other costs and expenses. On the Closing Date, Broadband Holdco drew down on the full amount of the commitments under the Revolving Credit Facility and applied all of the proceeds to prepay, on the Closing Date, a portion of the loans outstanding under the Term Loan Facility (the “Term Loan Prepayment”).
The Loans will mature on December 29, 2019 (the “maturity date”) and accrue interest at a rate equal to the 3-month LIBOR rate plus a per annum spread of 1.85%, subject to certain conditions and exceptions. Undrawn Revolving Commitments shall be available to Broadband Holdco from the Closing Date to but excluding the earlier of (i) the date that is one month prior to the maturity date and (ii) the date of the termination of such Revolving Commitments pursuant to the terms of the Margin Loan. The obligations under the Revolving Credit Facility, together with the obligations under Term Loan Facility, are secured by first priority liens on the shares of Liberty Broadband owned by Broadband Holdco and certain other cash collateral provided by Broadband Holdco. In addition, the Revolving Credit Facility and the Term Loan Facility are subject to the same affirmative and negative covenants and events of default.
Exchangeable Senior Debentures
On June 18, 2018, GCI Liberty issued 1.75% exchangeable senior debentures due 2046 ("Exchangeable Senior Debentures"). Upon an exchange of debentures, GCI Liberty, at its option, may deliver Charter Class A common stock, cash or a combination of Charter Class A common stock and cash. Initially, 2.6989 shares of Charter Class A common stock are attributable to each $1,000 principal amount of debentures, representing an initial exchange price of approximately $370.52 for each share of Charter Class A common stock. A total of 1,288,051 shares of Charter Class A common stock are attributable to the debentures. Interest is payable quarterly on March 31, June 30, September 30 and December 31 of each year, commencing September 30, 2018.year. The debentures may be redeemed by GCI Liberty, in whole or in part, on or after October 5, 2023. Holders of debentures also have the right to require GCI Liberty to purchase their debentures on October 5, 2023. The redemption and purchase price will generally equal 100% of the adjusted principal amount of the debentures plus accrued and unpaid interest.
Senior Notes
Interest onOn June 6, 2019, GCI, LLC issued $325 million of 6.625% Senior Notes due 2024 at par ("2024 Notes"). The 2024 Notes are unsecured and the net proceeds were used to fund the redemption of $325 million aggregate outstanding principal amount of 6.75% Senior Notes due 2021 (the "2021 Notes")2021. Interest on the 2024 Notes and the 6.875% Senior Notes due 2025, both of which were issued by GCI, Inc., which is now GCI, LLC (collectively, the “Senior Notes”), is payable semi-annually in arrears. The Senior Notes are redeemable at ourthe Company's option, in whole or in part, at a redemption price defined in the respective indentures, and accrued and unpaid interest (if any) to the date of redemption. The Senior Notes are stated net of an aggregate unamortized premium of $29.5$22.0 million at September 30, 2018.2019. Such premium is being amortized to interest expense in the accompanying condensed consolidated statements of operations. As of September 30, 2018,2019, GCI, LLC did not meetexceeded the maximum leverage threshold, as measured by the terms of its Senior Notes, and therefore does not haveNotes. Accordingly, the Company, can only access to any additional funding under the revolving portion of the Senior Credit Facility (as defined below) so long as defined below.we are in compliance with the Senior Credit Facility covenants after giving effect to any additional borrowings.
Senior Credit Facility
On December 27, 2018, GCI, LLC, and GCI Holdings, each of which area wholly-owned subsidiariessubsidiary of the Company, are party to a Seventhamended and restated the Fifth Amended and Restated Credit Agreement whichdated as of March 9, 2018 and refinanced the revolving credit facility and term loan A with a new revolving credit facility, leaving the existing Term Loan B in place (the "Senior Credit Facility"). The Senior Credit Facility provides a $245.9$240.7 million term loan B ("Term Loan B"), $215.0 million term loan A ("Term Loan A") and a $300.0$550.0 million revolving credit facility (collectively, the "Senior Credit Facility"). GCI, LLC is the borrower under the Senior Credit Facility.facility.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Under the Senior Credit Facility, the interest rate for the Term Loan A is LIBOR plus margin based on the Company's leverage ratio and ranges from 2.00% to 3.00%. OurGCI, LLC's Senior Credit Facility Total Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 5.956.50 to one;one and the Secured Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 3.504.00 to one;one.
The revolving credit facility borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.50% and 2.75% depending on the Company's Interest Coverage Ratio (as defined in the Senior Credit Facility) must not be less than 2.50 to one at any time.total leverage ratio. The full principal amount of our Term Loan A and revolving credit facility included in the Senior Credit Facility will mature on November 17,December 27, 2023 or August 6, 2021 or December 3, 2020 if our 2021 Notes arethe Term Loan B is not refinanced or repaid in full prior to such date.
The interest rate for the Term Loan B is LIBOR plus 2.25%. The Term Loan B requires principal payments of 0.25% of the original principal amount on the last day of each calendar quarter with the full amount maturing on February 2, 2022 or December 3, 2020 if our 2021 Notes are not refinanced prior to such date.2022.
The terms of the Senior Credit Facility include customary representations and warranties, customary affirmative and negative covenants and customary events of default. At any time after the occurrence of an event of default under the Senior Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Senior Credit Facility immediately due and payable and terminate any commitment to make further loans under the Senior Credit Facility. The obligations under the Senior Credit Facility are secured by a security interest on substantially all of the assets of GCI Holdings and the subsidiary guarantors, as defined in the Senior Credit Facility, and on the stock of GCI Holdings.
As of September 30, 2018,2019, there is $240.7$238.3 million outstanding under the Term Loan B, $215.0 million outstanding under the Term Loan A, $260.0$475.0 million outstanding under the revolving portion of the Senior Credit Facility and $10.1$8.1 million in letters of credit under the Senior Credit Facility, which leaves $29.9$66.9 million available for borrowing when GCI, LLC meetsso long as we are in compliance with the maximum leverage threshold, as measured by the terms of its Senior Notes.debt covenants after giving effect to any additional borrowings.
Wells Fargo Note Payable
GCI Holdings issued a note to Wells Fargo that matures on July 15, 2029 and is payable in monthly installments of principal and interest (the "Wells Fargo Note Payable"). The interest rate is variable at one month LIBOR plus 2.25%.
The note is subject to similar affirmative and negative covenants as the Senior Credit Facility. The obligations under the note are secured by a security interest and lien on the building purchased with the note.
Debt Covenants
GCI, LLC is subject to covenants and restrictions under its Senior Notes and Senior Credit Facility. The Company and GCI, LLC are in compliance with all debt maintenance covenants as of September 30, 2018.2019.
Fair Value of Debt
The fair value of the Senior Notes was $792.6$828.5 million at September 30, 2018.2019.
Due to the variable rate nature of the Margin Loan, Senior Credit Facility and Wells Fargo Note Payable, the Company believes that the carrying amount approximates fair value at September 30, 2018.2019.
(9) Leases
In February 2016 and subsequently, the FASB issued new guidance which revises the accounting for leases (“ASC 842”). Under the new guidance, entities that lease assets are required to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases regardless of whether they are classified as finance or operating leases. In addition, new disclosures are required to meet the objective of enabling users of the financial statements to better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance on January 1, 2019 and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.
The Company elected certain of the available transition practical expedients, including those that permit it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. The most significant impact of the new guidance was the recognition of right-of-use ("ROU") assets and lease liabilities for operating leases. In addition, the Company elected the practical expedient to account for the lease and non-lease components as a single lease component and will not recognize ROU assets or lease liabilities for short-term leases, which are those leases with a term of twelve months or less at the lease commencement date.
The Company recognized $107 million of ROU assets, $28 million of short-term operating lease liabilities and $79 million of long-term operating lease liabilities in the accompanying condensed consolidated balance sheet upon the adoption of the new standard.
In 2016 and 2017, GCI Holdings sold certain tower sites and entered into a master lease agreement in which it leased back space on those tower sites. At the time, GCI Holdings determined that it was precluded from applying sales-leaseback accounting. Upon adoption of ASC 842, GCI Holdings considered whether this transaction would have resulted in a completed sale-leaseback transaction and concluded that the transaction did not meet the criteria and should continue to be accounted for in the same manner as previously determined.
The Company has entered into finance lease agreements with satellite providers for transponder capacity to transmit voice and data traffic in rural Alaska. The Company is also party to finance lease agreements for an office building and certain retail store locations. The Company also leases office space, land for towers and communication facilities, satellite transponders, fiber capacity, and equipment. These leases are classified as operating leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate at the commencement date of the lease. During the nine months ended September 30, 2019, the Company amended its lease agreement with a satellite provider that resulted in a $22.5 million reduction to the finance lease liability and a $16.0 million reduction to fixed assets, resulting in a gain of $6.5 million that is included in Other, net on the condensed consolidated statements of operations.
Our leases have remaining lease terms of less than one year to 31 years, some of which may include the option to extend for up to 40 years, and some of which include options to terminate the leases within 18 years.
The components of lease cost during the three and nine months ended September 30, 2019 were as follows:
|
| | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2019 | | September 30, 2019 |
| | amounts in thousands |
Operating lease cost (1) | | $ | 12,806 |
| | 33,515 |
|
| | | | |
Finance lease cost | | | | |
Depreciation of leased assets | | $ | 722 |
| | 4,321 |
|
Interest on lease liabilities | | 91 |
| | 908 |
|
Total finance lease cost | | $ | 813 |
| | 5,229 |
|
(1) Included within operating lease costs were short-term lease costs and variable lease costs, which were not material to the financial statements.
For the three months ended September 30, 2018, the Company recorded depreciation expense on finance leases (previously referred to as capital leases) and operating lease expense of $2.2 million and $13.3 million, respectively. For the nine months ended September 30, 2018, the Company recorded depreciation expense on finance leases (previously referred to as capital leases) and operating lease expense of $5.0 million and $30.1 million, respectively.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The remaining weighted-average lease term and the weighted average discount rate were as follows:
|
| | | |
(12) | Preferred Stock | Nine months ended |
| | September 30, 2019 |
Weighted-average remaining lease term (years): | | |
Finance leases | | 3.6 |
|
Operating leases | | 4.9 |
|
Weighted-average discount rate: | | |
Finance leases | | 5.1 | % |
Operating leases | | 5.0 | % |
Supplemental balance sheet information related to leases was as follows:
|
| | | | |
| | September 30, |
| | 2019 |
| | amounts in thousands |
Operating leases: | | |
Operating lease ROU assets, net (1) | | $ | 132,769 |
|
| | |
Current operating lease liabilities (2) | | $ | 40,638 |
|
Operating lease liabilities (3) | | 88,931 |
|
Total operating lease liabilities | | $ | 129,569 |
|
| | |
Finance Leases: | | |
Property and equipment, at cost | | $ | 18,102 |
|
Accumulated depreciation | | (4,574 | ) |
Property and equipment, net | | $ | 13,528 |
|
| | |
Current obligations under finance leases (4) | | $ | 4,894 |
|
Obligations under finance leases | | 8,614 |
|
Total finance lease liabilities | | $ | 13,508 |
|
(1) Operating lease ROU assets, net are included within the other assets, net line item in the accompanying condensed consolidated balance sheets.
(2) Current operating lease liabilities are included within the other current liabilities line item in the accompanying condensed consolidated balance sheets.
(3) Operating lease liabilities are included within the other liabilities line item in the accompanying condensed consolidated balance sheets.
(4) Current obligations under finance leases are included within the other current liabilities line item in the accompanying condensed consolidated balance sheets.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Supplemental cash flow information related to leases was as follows:
|
| | | | |
| | Nine months ended |
| | September 30, 2019 |
| | amounts in thousands |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 33,710 |
|
Operating cash flows from finance leases | | $ | 983 |
|
Financing cash flows from finance leases | | $ | 6,405 |
|
ROU assets obtained in exchange for lease obligations | | |
Operating leases | | $ | 39,178 |
|
Finance leases | | $ | — |
|
Future lease payments under finance leases, operating leases and tower obligations with initial terms of one year or more at September 30, 2019 consisted of the following:
|
| | | | | | | | | |
| Finance Leases | | Operating Leases | | Tower Obligations |
| amounts in thousands |
Remainder of 2019 | $ | 1,373 |
| | 12,059 |
| | 1,932 |
|
2020 | 5,491 |
| | 44,512 |
| | 7,797 |
|
2021 | 4,076 |
| | 35,435 |
| | 7,953 |
|
2022 | 1,973 |
| | 21,683 |
| | 8,112 |
|
2023 | 678 |
| | 14,552 |
| | 8,274 |
|
Thereafter | 1,734 |
| | 23,185 |
| | 142,825 |
|
Total lease payments | 15,325 |
| | 151,426 |
| | 176,893 |
|
Less: imputed interest | (1,817 | ) | | (21,857 | ) | | (85,247 | ) |
Total lease liabilities | $ | 13,508 |
| | 129,569 |
| | 91,646 |
|
(10) Preferred Stock
GCI Liberty Series A Cumulative Redeemable Preferred Stock (the "Preferred Stock") was issued as a result of the auto conversion that occurred on March 8, 2018. The Company is required to redeem all outstanding shares of Preferred Stock out of funds legally available, at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date through the redemption date, on the first business day following the twenty-first anniversary of the March 8, 2018 auto conversion. There were 7,500,000 shares of Preferred Stock authorized and 7,248,3277,211,759 shares issued and outstanding at September 30, 2018.2019. An additional 42,500,000 shares of preferred stock of the Company are authorized and are undesignated as to series. The Preferred Stock is accounted for as a liability in the accompanying condensed consolidated balance sheets because it is mandatorily redeemable. As a result, all dividends paid on the Preferred Stock are recorded as interest expense in the accompanying condensed consolidated statements of operations.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The liquidation price is measured per share and shall mean the sum of (i) $25, plus (ii) an amount equal to all unpaid dividends (whether or not declared) accrued with respect to such share have been added to and then remain part of the liquidation price as of such date.
The holders of shares of Preferred Stock are entitled to receive, when and as declared by the GCI Liberty Board of Directors, out of legally available funds, preferential dividends that accrue and cumulate as provided in the restated GCI Liberty certificate of incorporation.
Dividends on each share of Preferred Stock accrued on a daily basis at an initial rate of 5.00% per annum of the liquidation price, and increased to 7.00% per annum of the liquidation price effective July 16, 2018 as a result of the Reincorporation Merger in the State of Delaware in May 2018.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accrued dividends are payable quarterly on each dividend payment date, which is January 15, April 15, July 15, and October 15 of each year, commencing on the first such date following the auto conversion, which occurred immediately after the market closed on March 8, 2018. If GCI Liberty fails to pay cash dividends on the Preferred Stock in full for any four4 consecutive or non-consecutive dividend periods then the dividend rate shall increase by 2.00% per annum of the liquidation price until cured. The Company paid a special cash dividend of approximately $0.13 per share of Preferred Stock on May 3, 2018 and a cash dividend of approximately $0.31 per share of Preferred Stock on July 16, 2018. On September 19, 2018,16, 2019, the Company announced that it declared a quarterly cash dividend of approximately $0.44 per share of Preferred Stock which was paid on October 15, 20182019 to shareholders of record of the Preferred Stock at the close of business on October 1, 2018.September 30, 2019.
| |
(13) | Information About the Company's Operating Segments |
(11) Variable Interest Entities
New Markets Tax Credit Entities
GCI entered into several arrangements under the New Markets Tax Credit ("NMTC") program with US Bancorp to help fund various projects that extended terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.
Each of the transactions has an investment fund, which is a special purpose entity created to effect the financing arrangement. In each of the transactions, the Company loaned money to the investment fund and US Bancorp invested money in the investment fund. The investment fund would then contribute the funds from the Company's loan and US Bancorp's investment to a CDE. The CDE, in turn, would loan the funds to the Company's wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.
US Bancorp is entitled to substantially all of the benefits derived from the NMTCs. All of the loan proceeds to Unicom, net of syndication and arrangement fees, were restricted for use on the projects. Restricted cash of $0.7 million was held by Unicom at September 30, 2019 and is included in the accompanying condensed consolidated balance sheets. The Company completed construction of the projects partially funded by these transactions.
These transactions include put/call provisions whereby the Company may be obligated or entitled to repurchase US Bancorp’s interest in each investment fund for a nominal amount. The Company believes that US Bancorp will exercise the put options at the end of the compliance periods for each of the transactions. The NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code of 1986, as amended. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements. Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp. The Company has agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as its obligation to deliver tax benefits is relieved. There have been no credit recaptures as of September 30, 2019. The value attributed to the put/calls is nominal.
The Company has determined that each of the investment funds are variable interest entities ("VIEs"). The consolidated financial statements of each of the investment funds include the CDEs. The ongoing activities of the VIEs – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIEs. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to US Bancorp; US Bancorp’s lack of a material interest in the underlying economics of the project; and the fact that the Company is obligated to absorb losses of the VIEs. The Company concluded that it is the primary beneficiary of each and consolidated the VIEs in accordance with the accounting standard for consolidation.
The assets and liabilities of the consolidated VIEs were $89 million and $63 million, respectively, as of September 30, 2019.
The assets of the VIEs serve as the sole source of repayment for the debt issued by these entities. US Bank does not have recourse to us or our other assets, with the exception of customary representations and indemnities the Company has provided. The Company is not required and does not currently intend to provide additional financial support to these VIEs.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
While these subsidiaries are included in the Company's consolidated financial statements, these subsidiaries are separate legal entities and their assets are legally owned by them and not available to the Company's creditors.
The following table summarizes the key terms of each of the NMTC transactions:
|
| | | | | | | | | |
Financing Arrangement | Investment Funds | Transaction Date | Loan Amount | Interest Rate on Loan to Investment Fund | Maturity Date | US Bancorp Investment | Loan to Unicom | Interest Rate on Loan(s) to Unicom | Expected Put Option Exercise |
NMTC #2 | TIF 2 & TIF 2-USB | October 3, 2012 | $37.7 million | 1% | October 2, 2042 | $17.5 million | $52.0 million | 0.71% to 0.77% | October 2019 |
NMTC #3 | TIF 3 | December 11, 2012 | $8.2 million | 1% | December 10, 2042 | $3.8 million | $12.0 million | 1.35% | December 2019 |
NMTC #4 | TIF 4 | March 21, 2017 | $6.7 million | 1% | March 21, 2040 | $3.3 million | $9.8 million | 0.73% | March 2024 |
NMTC #5 | TIF 5-1 and TIF 5-2 | December 22, 2017 | $10.4 million | 1% | December 22, 2047 | $5.1 million | $14.7 million | 0.67% to 1.24% | December 2024 |
(12) Stock-Based Compensation
GCI Liberty has granted to certain directors, employees and employees of its subsidiaries, restricted shares (“RSAs”), restricted stock units (“RSUs”) and options to purchase shares of GCI Liberty’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options, RSAs and RSUs) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $5.8 million and $7.8 million of stock based compensation during the three months ended September 30, 2019 and 2018, respectively, and $18.2 million and $20.9 million during the nine months ended September 30, 2019 and 2018, respectively.
During the nine months ended September 30, 2019, and in connection with our CEO's employment agreement, GCI Liberty granted 22 thousand options to purchase shares of GCI Liberty Series B common stock and 51 thousand performance-based RSUs of GCI Liberty Series B common stock to our CEO. Such options had a GDFV of $18.27 per share. The RSUs had a GDFV of $53.78 per share at the time they were granted. The options cliff vested immediately upon grant, and the RSUs cliff vest in one year from the month of grant, subject to the satisfaction of certain performance objectives. Performance objectives, which are subjective, are considered in determining the timing and amount of the compensation expense recognized. When the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The probability of satisfying the performance objectives is assessed at the end of each reporting period.
The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of GCI Liberty's stock and the implied volatility of publicly traded GCI Liberty options. The Company uses a 0 dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.
GCI Liberty-Outstanding Awards
The following tables present the number and weighted average exercise price ("WAEP") of Awards to purchase GCI Liberty common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | | |
| | Series A |
| | | | | | Weighted | | Aggregate |
| | | | | | average | | intrinsic |
| | Awards | | | | remaining | | value |
| | (000's) | | WAEP | | life | | (millions) |
Outstanding at January 1, 2019 | | 1,650 |
| | $ | 47.61 |
| | | | | |
Granted | | — |
| | $ | — |
| | | | | |
Exercised | | (275 | ) | | $ | 24.66 |
| | | | | |
Forfeited/Cancelled | | (49 | ) | | $ | 55.65 |
| | | | | |
Outstanding at September 30, 2019 | | 1,326 |
| | $ | 52.08 |
| | 1.1 | years | | $ | 13 |
|
Exercisable at September 30, 2019 | | 1,053 |
| | $ | 54.02 |
| | 0.6 | years | | $ | 8 |
|
|
| | | | | | | | | | | | | | |
| | Series B |
| | | | | | Weighted | | Aggregate |
| | | | | | average | | intrinsic |
| | Awards | | | | remaining | | value |
| | (000's) | | WAEP | | life | | (millions) |
Outstanding at January 1, 2019 | | 1,223 |
| | $ | 56.10 |
| | | | | |
Granted | | 22 |
| | $ | 58.11 |
| | | | | |
Exercised | | — |
| | $ | — |
| | | | | |
Forfeited/Cancelled | | — |
| | $ | — |
| | | | | |
Outstanding at September 30, 2019 | | 1,245 |
| | $ | 56.14 |
| | 3.3 | years | | $ | 8 |
|
Exercisable at September 30, 2019 | | 926 |
| | $ | 56.05 |
| | 3.7 | years | | $ | 6 |
|
As of September 30, 2019, the total unrecognized compensation cost related to unvested options and RSA/RSUs was approximately $4 million and $20 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.4 years and 2.5 years, respectively.
As of September 30, 2019, GCI Liberty had 485 thousand RSUs outstanding.
As of September 30, 2019, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.3 million shares of GCI Liberty Series A common stock and 1.2 million shares of GCI Liberty Series B common stock.
(13) Commitments and Contingencies
Rural Health Care (“RHC”) Program
Subsidiaries of GCI Holdings receive support from various Universal Service Fund ("USF") programs including the RHC Program. The USF programs are subject to change by regulatory actions taken by the Federal Communications Commission ("FCC") or legislative actions. The following paragraphs describe certain separate matters related to the RHC Program that impact or could impact the revenue earned by the Company.
On November 30, 2018, a subsidiary of GCI Holdings received multiple funding denial notices from Universal Service Administrative Company ("USAC"), denying requested funding from the RHC Program operated by a rural health customer (the "Customer") for the funding year that ended on June 30, 2018. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts a subsidiary of GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019 and made a supplemental filing on March 12, 2019.
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On May 6, 2019, the Customer received a letter from USAC that denied the Customer’s appeal for all requested funding on the basis that the Customer failed to indicate that it had received, and failed to submit copies of, the responses or bids received, when it originally sought funding from the RHC Program under the 2 service contracts that a subsidiary of GCI Holdings has with the Customer. The Customer appealed USAC’s decision to the Wireline Competition Bureau of the FCC on July 5, 2019 but resolution and the timing of the appeal are unknown at this time. As of March 31, 2019, GCI Holdings had accounts receivable of approximately $21.3 million outstanding associated with these 2 service contracts, which is dependent upon receipt of funding from USAC. Given that USAC has denied the Customer’s appeal as specifically outlined in the May 6, 2019 letter received by the Customer, it is probable that GCI Holdings has incurred a loss and an accounts receivable reserve has been recorded in the amount of $21.3 million and an associated bad debt expense has been recorded during the first quarter of 2019, and included within selling, general, and administrative expense in the condensed consolidated statements of operations. Additionally, because of the uncertainty of the Customer's future appeals process and uncertainty relating to our ability to recover payment directly from the Customer, we no longer believe revenue associated with the two service contracts should be recognized due to the unpredictability surrounding the collection of consideration under these two service contracts currently being denied by USAC. Revenue has not been recognized beyond the first quarter of 2019 and will not be recognized until an adequate level of clarity is reached on the matter and the applicable revenue recognition criteria are met.
(14) Information About the Company's Operating Segments
The Company, through its interests in subsidiaries and other companies, is primarily engaged in the broadband communications services industry. The Company identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA (as defined below) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of the Company’s annual pre‑tax earnings. The segment presentation for prior periods has been conformed to the current period segment presentation.
The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue, Adjusted OIBDA (as defined below), and subscriber metrics.
The Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock‑based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock‑based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.
For the three and nine months ended September 30, 20182019, the Company has identified the following subsidiary as a reportable segment:
GCI Holdings-provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska.
For presentation purposes the Company is providing financial information for Liberty Broadband. While the Company’s equity method investment in Liberty Broadband does not meet the reportable segment threshold defined above, the Company believes that the inclusion of such information is relevant to users of these financial statements.
Liberty Broadband-an equity method affiliate of the Company, accounted for at fair value, has a non‑controlling interest in Charter, and a wholly‑owned subsidiary, Skyhook Wireless, Inc. ("Skyhook"). Charter is the second
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
largest cable operator in the United States and a leading broadband communications services company providing video, Internet and voice services. Skyhook provides a Wi‑Fi based location platform focused on providing positioning technology and contextual location intelligence solutions.
The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the consolidated subsidiaries included in the segments are the same as those described in the Company’s summarySummary of significant accounting policies.Significant Accounting Policies in note 2 to the accompanying consolidated financial statements to the Annual Report on Form 10-K for the year ended December 31, 2018.
Performance Measures
|
| | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| Revenue | | Adjusted OIBDA | | Revenue | | Adjusted OIBDA |
| amounts in thousands |
GCI Holdings | $ | 205,047 |
| | 57,945 |
| | — |
| | — |
|
Liberty Broadband | 3,518 |
| | (2,198 | ) | | 3,430 |
| | (3,346 | ) |
Corporate and other | 5,099 |
| | (7,205 | ) | | 5,493 |
| | (5,277 | ) |
| 213,664 |
| | 48,542 |
| | 8,923 |
| | (8,623 | ) |
Eliminate Liberty Broadband | (3,518 | ) | | 2,198 |
| | (3,430 | ) | | 3,346 |
|
| $ | 210,146 |
| | 50,740 |
| | 5,493 |
| | (5,277 | ) |
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| Revenue | | Adjusted OIBDA | | Revenue | | Adjusted OIBDA |
| amounts in thousands |
GCI Holdings | $ | 489,620 |
| | 156,608 |
| | — |
| | — |
|
Liberty Broadband | 18,680 |
| | (414 | ) | | 9,643 |
| | (12,262 | ) |
Corporate and other | 15,220 |
| | (20,256 | ) | | 15,639 |
| | (20,071 | ) |
| 523,520 |
| | 135,938 |
| | 25,282 |
| | (32,333 | ) |
Eliminate Liberty Broadband | (18,680 | ) | | 414 |
| | (9,643 | ) | | 12,262 |
|
| $ | 504,840 |
| | 136,352 |
| | 15,639 |
| | (20,071 | ) |
Other Information
|
| | | | | | | | | | |
| | September 30, 2018 |
| | Total | | Investments | | Capital |
| | assets | | in affiliates | | expenditures |
| | amounts in thousands |
GCI Holdings | | $ | 3,561,569 |
| | — |
| | 86,977 |
|
Liberty Broadband | | 12,082,674 |
| | 11,977,368 |
| | 35 |
|
Corporate and other | | 6,318,888 |
| | 174,134 |
| | 2,399 |
|
| | 21,963,131 |
| | 12,151,502 |
| | 89,411 |
|
Eliminate Liberty Broadband | | (12,082,674 | ) | | (11,977,368 | ) | | (35 | ) |
Consolidated | | $ | 9,880,457 |
| | 174,134 |
| | 89,376 |
|
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Performance Measures
Revenue by segment from contracts with customers, classified by customer type and significant service offerings follows:
|
| | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands |
GCI Holdings | | | | | | | |
Consumer Revenue | | | | | | | |
Wireless | $ | 29,509 |
| | 25,584 |
| | 84,506 |
| | 62,312 |
|
Data | 42,920 |
| | 39,652 |
| | 125,555 |
| | 88,921 |
|
Video | 21,194 |
| | 22,272 |
| | 63,255 |
| | 50,180 |
|
Voice | 4,051 |
| | 4,368 |
| | 12,833 |
| | 10,246 |
|
Business Revenue | | | | | | | |
Wireless | 20,060 |
| | 18,071 |
| | 57,837 |
| | 44,889 |
|
Data | 69,960 |
| | 59,585 |
| | 201,803 |
| | 154,239 |
|
Video | 4,115 |
| | 4,927 |
| | 11,928 |
| | 9,436 |
|
Voice | 6,747 |
| | 6,361 |
| | 19,587 |
| | 14,282 |
|
Lease, grant, and revenue from subsidies | 22,472 |
| | 24,226 |
| | 67,914 |
| | 55,114 |
|
Total GCI Holdings | 221,028 |
| | 205,046 |
| | 645,218 |
| | 489,619 |
|
Corporate and other | 6,016 |
| | 5,100 |
| | 17,128 |
| | 15,221 |
|
Total | $ | 227,044 |
| | 210,146 |
| | 662,346 |
| | 504,840 |
|
Liberty Broadband revenue totaled $3.7 million and $3.5 million for the three months ended September 30, 2019 and 2018, respectively and $10.9 million and $18.7 million for the nine months ended September 30, 2019 and 2018, respectively.
The Company had gross receivables of $216 million and deferred revenue of $38 million at September 30, 2019 from contracts with customers, which amounts exclude receivables and deferred revenue arising from leases, grants, and subsidies. Our customers generally pay for services in advance of the performance obligation and therefore these prepayments are recorded as deferred revenue. The deferred revenue is recognized as revenue in the accompanying condensed consolidated statements of operations as the services are provided. Changes in the contract liability balance for the Company during the nine months ended September 30, 2019 were not materially impacted by other factors.
The Company expects to recognize revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) of approximately $63 million in the remainder of 2019, $233 million in 2020, $164 million in 2021, $112 million in 2022 and $97 million in 2023 and thereafter.
The Company applies certain practical expedients as permitted under ASC 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, information about revenue remaining from usage based performance obligations that are recognized over time as-invoiced, or variable consideration allocated to wholly unsatisfied performance obligations.
For segment reporting purposes, the Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock‑based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its businesses by identifying those items that are not directly a reflection of each business' performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock‑based compensation, separately reported litigation settlements, insurance proceeds and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in
GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.
Adjusted OIBDA is summarized as follows:
|
| | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands |
GCI Holdings | $ | 71,960 |
| | 57,945 |
| | 182,552 |
| | 156,608 |
|
Liberty Broadband | (4,586 | ) | | (2,198 | ) | | (11,877 | ) | | (414 | ) |
Corporate and other | (5,382 | ) | | (7,205 | ) | | (17,199 | ) | | (20,256 | ) |
| 61,992 |
| | 48,542 |
| | 153,476 |
| | 135,938 |
|
Eliminate Liberty Broadband | 4,586 |
| | 2,198 |
| | 11,877 |
| | 414 |
|
| $ | 66,578 |
| | 50,740 |
| | 165,353 |
| | 136,352 |
|
Other Information
|
| | | | | | | | | | |
| | September 30, 2019 |
| | Total | | Investments | | Capital |
| | assets | | in affiliates | | expenditures |
| | amounts in thousands |
GCI Holdings | | $ | 3,346,168 |
| | 580 |
| | 107,431 |
|
Liberty Broadband | | 12,172,047 |
| | 12,067,329 |
| | 75 |
|
Corporate and other | | 7,299,135 |
| | 168,259 |
| | 1,202 |
|
Eliminate Liberty Broadband | | (12,172,047 | ) | | (12,067,329 | ) | | (75 | ) |
Consolidated | | $ | 10,645,303 |
| | 168,839 |
| | 108,633 |
|
The following table provides a reconciliation of segment Adjusted OIBDA to operating income (loss) and earnings (loss) from continuing operations before income taxes:
|
| | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands |
Adjusted OIBDA | $ | 66,578 |
| | 50,740 |
| | 165,353 |
| | 136,352 |
|
Stock‑based compensation | (5,768 | ) | | (7,761 | ) | | (18,153 | ) | | (20,926 | ) |
Depreciation and amortization | (66,466 | ) | | (62,848 | ) | | (200,035 | ) | | (143,257 | ) |
Insurance proceeds and restructuring, net | 1,482 |
| | — |
| | (236 | ) | | — |
|
Operating income (loss) | (4,174 | ) | | (19,869 | ) | | (53,071 | ) | | (27,831 | ) |
Interest expense | (38,353 | ) | | (37,614 | ) | | (116,357 | ) | | (81,304 | ) |
Share of earnings (loss) of affiliates, net | 1,921 |
| | 10,856 |
| | (2,443 | ) | | 18,714 |
|
Realized and unrealized gains (losses) on financial instruments, net | 156,165 |
| | 495,509 |
| | 1,844,863 |
| | (4,328 | ) |
Tax Sharing Agreement | 2,362 |
| | 2,492 |
| | 18,895 |
| | (25,456 | ) |
Other, net | (540 | ) | | (834 | ) | | 13,824 |
| | (982 | ) |
Earnings (loss) from continuing operations before income taxes | $ | 117,381 |
| | 450,540 |
| | 1,705,711 |
| | (121,187 | ) |
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| amounts in thousands |
Consolidated segment Adjusted OIBDA | $ | 50,740 |
| | (5,277 | ) | | 136,352 |
| | (20,071 | ) |
Stock‑based compensation | (7,761 | ) | | (4,369 | ) | | (20,926 | ) | | (10,968 | ) |
Depreciation and amortization | (62,848 | ) | | (823 | ) | | (143,257 | ) | | (2,398 | ) |
Operating income (loss) | (19,869 | ) | | (10,469 | ) | | (27,831 | ) | | (33,437 | ) |
Interest expense | (37,614 | ) | | — |
| | (81,304 | ) | | — |
|
Share of earnings (loss) of affiliates, net | 10,856 |
| | 1,648 |
| | 18,714 |
| | 4,971 |
|
Realized and unrealized gains (losses) on financial instruments, net | 495,509 |
| | 472,763 |
| | (4,328 | ) | | 1,270,764 |
|
Other, net | (834 | ) | | 328 |
| | (982 | ) | | 1,073 |
|
Earnings (loss) from continuing operations before income taxes | $ | 448,048 |
| | 464,270 |
| | (95,731 | ) | | 1,243,371 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our anticipatedthe recoverability of the Company's goodwill and other long-lived assets; the Company's projected sources and uses of cash; fluctuations in interest rates and stock prices; future Universal Service Fund program related revenue; the implementationRural Healthcare Program; the impact of new systems;the Alaskan recession and the anticipated impact of accounting pronouncements, economic conditions in Alaska and certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors (as they relate to our consolidated subsidiaries and equity affiliates) that could cause actual results or events to differ materially from those anticipated:
The ability of GCI Liberty, Inc. (the "Company") to successfully integrate and recognize anticipated efficiencies and benefits from the Transactions (as defined below);
customer demand for the Company's products and services and the Company's ability to adapt to changes in demand;
competitor responses to the Company's and its businesses' products and services;
the levels of online traffic to the Company's businesses' websites and its ability to convert visitors into consumers or contributors;
uncertainties inherent in the development and integration of new business lines and business strategies;
future financial performance, including availability, terms and deployment of capital;
the ability of suppliers and vendors to deliver products, equipment, software and services;
the outcome of any pending or threatened litigation;
availability of qualified personnel;
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission (the "FCC"), and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors;
domestic and international economic and business conditions and industry trends;trends, specifically the state of the Alaska economy;
consumer spending levels, including the availability and amount of individual consumer debt;
rapid technological changes;
failure to protect the security of personal information about the Company's and its businesses' customers, subjecting the Company and its businesses to potentially costly government enforcement actions or private litigation and reputational damage; and
the regulatory and competitive environment of the industries in which the Company operates.
For additional risk factors, please see Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2018 and Part II, Item 1A. Risk Factors of our1A in the Quarterly Report on Form 10-Q for the quarterthree months ended March 31, 2018.June 30, 2019. Any forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto.
Overview
On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement"and the transactions contemplated thereby, the "Transactions") with General Communication, Inc. ("GCI"), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group (the “reattribution”))Group) were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband
Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in
exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.
The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.
Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split-Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.
On May 10, 2018, pursuant to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delaware by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty or the Company prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.
We refer to the combination of GCI Holdings, LLC ("GCI Holdings"), non controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as "GCI Liberty", the "Company", "us", "we"and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, the accompanying financial statements and the following discussion present all periods as consolidated by the Company.
Update on Economic Conditions
GCI Holdings offers wireless and wireline telecommunication services, data services, video services, and managed services to customers primarily throughout Alaska. Because of this geographic concentration, growth of GCI Holdings' business and operations depends upon economic conditions in Alaska. The economy of Alaska is dependent upon the oil industry, state government spending, United States military spending, investment earnings and tourism. Prolonged periods of low oil prices adversely impacts the Alaska economy, which in turn can have an adverse impact on the demand for GCI Holdings' products and services and on its results of operations and financial condition.
Low oil prices have put significant pressure on the Alaska state government budget since the majority of its revenue comes from the oil industry. While the Alaska state government has significant reserves that GCI Holdings believes will help fund the state government for the next couple of years, major structural budgetary reforms will need to be implemented in order to offset the impact of low oil prices.
The Alaska economy is in a recession that started in late 2015. While it is difficult for GCI Holdings to predict the future impact of the continuing recession on its business, these conditions have had an adverse impact on its business and could continue to adversely affect the affordability of and demand for some of its products and services and cause customers to shift to lower priced products and services or to delay or forgo purchases of its products and services. Additionally, GCI Holdings' customers may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to GCI Holdings. If that were to occur, GCI Holdings could be required to increase its allowance for doubtful accounts, and the number of days outstanding for its accounts receivable could increase. If the recession continues, it could continue to negatively affect GCI Holdings' business including its financial position, results of operations, or liquidity, as well as its ability to service debt, pay other obligations and enhance shareholder returns.
Rural Health Care (“RHC”) Program
WeSubsidiaries of GCI Holdings receive support from various Universal Service Fund ("USF") programs including the RHC Program. The USF programs are subject to change by regulatory actions taken by the FCC, interpretations of or
compliance with USF program rules, or legislative actions. The following paragraphs describe certain separate matters related to the RHC Program that impact or could impact the revenue earned by the Company.
The Company disclosed the following items related to its involvement in the RHC Program in its Annual Report on Form 10-K for the year ended December 31, 2018:
In November 2017,The FCC reduced the rates charged to RHC customers by approximately 26%.
The Company's participating subsidiary received a letter of inquiry and request from the Enforcement Bureau of the FCC in March 2018.
The Company's participating subsidiary received multiple funding denial notices from Universal Service Administrative Company ("USAC") requested further information in support of, denying the rural rates charged to a number of our RHC customers in connection with the funding requests forthat had been submitted by a rural health customer.
The Company has no new information regarding the yearitems noted above except with respect to the multiple funding denial notices that runs July 1, 2017 through Junewere received in which USAC denied funding requests that had been submitted by a rural health customer (the “Customer”).
On November 30, 2018. On October 10, 2018, wea subsidiary of GCI Holdings received a lettermultiple funding denial notices from USAC, denying requested funding from the FCC's Wireline Competition Bureau notifying us of their decision to reduce the rural rates charged to RHC customers for the 2017 funding year by approximately 26% resulting in a reduction of total support payments of $27.8 million. The FCC also informed us that the same cost methodology used for the 2017 funding year would be applied to rates charged to RHC customers in subsequent funding years. Although we intend to appeal the FCC's decision, we recorded a $19.1 million reduction (including approximately $6 million discussed in prior quarters) in our receivables balance as part of our acquisition accounting and recorded a reduction in revenue in the current period for the 2017 funding year of approximately $8.6 million. We expect to reduce future RHC Program revenueoperated by a similar rate as the 2017 funding year, which based on a current run rate would approximate $7 million per quarter (including the quarter ended September 30, 2018) until we can reach a final resolution with the FCC regarding the funding amounts.
On March 15, 2018, USAC announced that the funding requestsCustomer for the year that runs July 1, 2017 through June 30, 2018 exceeded the funding available for the RHC Program. Since that time, on June 25, 2018, the FCC issued an order resulting in an increase of the annual RHC Program funding cap from $400 million to $571 million and applied it to the funding year that ended on June 30, 2018. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts a subsidiary of GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The FCC also determinedCustomer filed an appeal with USAC on January 29, 2019 and made a supplemental filing on March 12, 2019.
On May 6, 2019, the Customer received a letter from USAC that denied the Customer’s appeal for all requested funding on the basis that the Customer failed to indicate that it would annually adjusthad received, and failed to submit copies of, the responses or bids received, when it originally sought funding from the RHC Program funding cap for inflation, beginningunder the two service contracts that a subsidiary of GCI Holdings has with the funding year ending on June 30, 2019 and carry-forward unused funds from past funding years for use in future funding years. As a result, aggregate funding is availableCustomer. The Customer appealed USAC’s decision to pay in full any approved funding under the RHC program for the 2017 funding year.
In addition, on March 23, 2018, we received a separate letter of inquiry and request for information from the EnforcementWireline Competition Bureau of the FCC toon July 5, 2019 but resolution and the timing of the appeal are unknown at this time. As of March 31, 2019, GCI Holdings had accounts receivable of approximately $21.3 million outstanding associated with these two service contracts, which we areis dependent upon receipt of funding from USAC. Given that USAC has denied the Customer’s appeal as specifically outlined in the May 6, 2019 letter received by the Customer, it is probable that GCI Holdings has incurred a loss and an accounts receivable reserve has been recorded in the amount of $21.3 million and an associated bad debt expense has been recorded during the first quarter of 2019 and included within selling, general, and administrative expense in the condensed consolidated statements of operations. Additionally, because of the uncertainty of the Customer’s future appeals process and uncertainty relating to our ability to recover payment directly from the Customer, we no longer believe revenue associated with the two service contracts should be recognized due to the unpredictability surrounding the collection of responding. This inquiry intoconsideration under these two service contracts currently being denied by USAC. Historical annual revenue associated with the rates charged by ustwo service contracts was approximately $12 million in total and was expected to be the same in future periods. Revenue has not been recognized beyond the first quarter of 2019 and will not be recognized until an adequate level of clarity is still pending,reached on the matter and we presentlythe applicable revenue recognition criteria are unable to assess the ultimate resolution of this matter. The ongoing uncertainty in program funding could have an adverse effect on our business, financial position, results of operations or liquidity.met.
Results of Operations - Consolidated
General. We provide in the tables below information regarding our consolidated operating results and other income and expenses, as well as information regarding the contribution to those items from our reportable segments. The "Corporate and other" category consists of those assets or businesses which do not qualify as a separate reportable segment. For a more detailed discussion and analysis of the financial results of our principal reportable segment see "Results of Operations-GCI Holdings" below.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands | amounts in thousands |
Revenue | | | | | | | | | | | | | | |
GCI Holdings | $ | 205,047 |
| | — |
| | 489,620 |
| | — |
| $ | 221,028 |
| | 205,047 |
| | 645,218 |
| | 489,620 |
|
Corporate and other | 5,099 |
| | 5,493 |
| | 15,220 |
| | 15,639 |
| 6,016 |
| | 5,099 |
| | 17,128 |
| | 15,220 |
|
Consolidated | $ | 210,146 |
| | 5,493 |
| | 504,840 |
| | 15,639 |
| $ | 227,044 |
| | 210,146 |
| | 662,346 |
| | 504,840 |
|
| | | | | | | | | | | | | | |
Operating Income (Loss) | | | | | | | | | | | | | | |
GCI Holdings | $ | (8,859 | ) | | — |
| | 4,661 |
| | — |
| $ | 3,663 |
| | (8,859 | ) | | (27,516 | ) | | 4,661 |
|
Corporate and other | (11,010 | ) | | (10,469 | ) | | (32,492 | ) | | (33,437 | ) | (7,837 | ) | | (11,010 | ) | | (25,555 | ) | | (32,492 | ) |
Consolidated | $ | (19,869 | ) | | (10,469 | ) | | (27,831 | ) | | (33,437 | ) | $ | (4,174 | ) | | (19,869 | ) | | (53,071 | ) | | (27,831 | ) |
| | | | | | | | | | | | | | |
Adjusted OIBDA | | | | | | | | | | | | | | |
GCI Holdings | $ | 57,945 |
| | — |
| | 156,608 |
| | — |
| $ | 71,960 |
| | 57,945 |
| | 182,552 |
| | 156,608 |
|
Corporate and other | (7,205 | ) | | (5,277 | ) | | (20,256 | ) | | (20,071 | ) | (5,382 | ) | | (7,205 | ) | | (17,199 | ) | | (20,256 | ) |
Consolidated | $ | 50,740 |
| | (5,277 | ) | | 136,352 |
| | (20,071 | ) | $ | 66,578 |
| | 50,740 |
| | 165,353 |
| | 136,352 |
|
Revenue. Our consolidated revenue increased $204.7$16.9 million and $489.2$157.5 million duringfor the three and nine months ended September 30, 2018, respectively,2019 as compared to the corresponding periods in the prior year.year, respectively. The increase duringfor the three andmonth period is due to a $16.0 million increase at GCI Holdings for the same period. The increase for the nine months ended September 30, 2018month period is primarily due to an increase of $205.0$155.6 million and $489.6 million,
respectively, at GCI Holdings for the same periods as a result of the acquisition of GCI Holdings on March 9, 2018.2018, which resulted in a partial quarter of activity for the first quarter of 2018 and a full quarter of activity for the first quarter of 2019. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.
Operating Income (Loss). Our consolidated operating loss increased $9.4decreased $15.7 million and decreased $5.6increased $25.2 million duringfor the three and nine months ended September 30, 2018, respectively,2019 as compared to the corresponding periods in the prior year.year, respectively. The increasedecrease in the operating loss for the three months ended September 30, 2018 as compared to the correspondingmonth period in the prior year is primarily due to an $8.9a $12.5 million decrease in the operating loss for GCI Holdings. The increase in the operating loss for the nine month period is primarily due to a $32.2 million increase in the operating loss at GCI Holdings as a result of the acquisition of GCI Holdings on March 9, 2018. The decrease for the nine months ended September 30, 2018 as compared to the corresponding period in the prior year is primarily due to $4.7 million of operating income at GCI Holdingsand associated depreciation and amortization as a result of the acquisition of GCI Holdings on March 9, 2018.accounting. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.
Operating losses for corporate and other decreased $3.2 million and $6.9 million for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods in the prior year due to a decrease in costs associated with the Transactions.
Stock-based compensation. Stock based compensation includes compensation related to restricted shares of GCI Liberty's common stock and preferred stock, restricted stock units with respect to GCI Liberty's common stock, and options to purchase shares of GCI Liberty's common stock granted to certain of the Company's directors, employees, and employees of its subsidiaries. We recorded $7.8$5.8 million and $4.4$7.8 million of stock compensation expense for the three months ended September 30, 2019 and 2018, respectively, and 2017, respectively. We recorded $20.9$18.2 million and $11.0$20.9 million of stock compensation expense for the nine months ended September 30, 20182019 and 2017,2018, respectively. The increasedecrease of $2.0 million and $2.7 million for the three and nine months ended September 30, 2018 as compared to the corresponding prior year periods is2019, respectively, was primarily due to decreases in stock compensation at Corporate and other of $1.3 million and $3.7 million for the acquisition ofthree and nine month periods, respectively, and a decrease at GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below$0.7 million and an increase of $1.0 million for a more complete discussion of the results of operations of GCI Holdings.three and nine month periods, respectively. As of September 30, 2018,2019, the total unrecognized compensation cost related to unvested options and RSAs was approximately $12$4 million and $15$20 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.91.4 years and 1.52.5 years, respectively.
Adjusted OIBDA. To provide investors with additional information regarding our financial results, the Company also discloses Adjusted OIBDA, which is a non-GAAP financial measure. The Company defines Adjusted OIBDA as revenue less costoperating income (loss) plus depreciation and amortization, stock-based compensation, separately reported litigation settlements, restructuring, acquisition and other related costs and impairment charges. The Company's chief operating decision maker and
management team use this measure of sales, operating expenses,performance in conjunction with other measures to evaluate our businesses and selling, general and administrative expenses (excluding stock based compensation).make decisions about allocating resources among our businesses. The Company believes this measure is an important indicator of the operational strength and performance of its businesses includingby identifying those items that are not directly a reflection of each business’s ability to service debt and fund capital expenditures.business' performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results, and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 13 to the accompanying condensed consolidated financial statements for U.S. generally accepted accounting principles. The following table providesa reconciliation of Adjusted OIBDA to operating income (loss) and earnings (loss) from continuing operations before income taxes.to Adjusted OIBDA:
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | amounts in thousands |
Operating income (loss) | | $ | (4,174 | ) | | (19,869 | ) | | (53,071 | ) | | (27,831 | ) |
Depreciation and amortization | | 66,466 |
| | 62,848 |
| | 200,035 |
| | 143,257 |
|
Stock-based compensation | | 5,768 |
| | 7,761 |
| | 18,153 |
| | 20,926 |
|
Insurance proceeds and restructuring, net | | (1,482 | ) | | — |
| | 236 |
| | — |
|
Adjusted OIBDA | | $ | 66,578 |
| | 50,740 |
| | 165,353 |
| | 136,352 |
|
Consolidated Adjusted OIBDA increased $56.0$15.8 million and $156.4$29.0 million duringfor the three and nine months ended September 30, 2018, respectively,2019 as compared to the corresponding periods in the prior year, respectively. The increase for the three month period is primarily due to an increase in revenue at GCI Holdings. The increase for the nine month period is primarily due to the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.
Other Income and Expense
Components of Other income (expense) are presented in the table below. | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands | amounts in thousands |
Interest expense | | | | | | | | | | | | | | |
GCI Holdings | $ | (21,266 | ) | | — |
| | (47,455 | ) | | — |
| $ | (22,765 | ) | | (21,266 | ) | | (68,248 | ) | | (47,455 | ) |
Corporate and other | (16,348 | ) | | — |
| | (33,849 | ) | | — |
| (15,588 | ) | | (16,348 | ) | | (48,109 | ) | | (33,849 | ) |
Consolidated | $ | (37,614 | ) | | — |
| | (81,304 | ) | | — |
| $ | (38,353 | ) | | (37,614 | ) | | (116,357 | ) | | (81,304 | ) |
| | | | | | | | | | | | | | |
Share of earnings (losses) of affiliates, net | | | | | | | | | | | | | | |
GCI Holdings | $ | (36 | ) | | — |
| | (86 | ) | | — |
| $ | (28 | ) | | (36 | ) | | (139 | ) | | (86 | ) |
Corporate and other | 10,892 |
| | 1,648 |
| | 18,800 |
| | 4,971 |
| 1,949 |
| | 10,892 |
| | (2,304 | ) | | 18,800 |
|
Consolidated | $ | 10,856 |
| | 1,648 |
| | 18,714 |
| | 4,971 |
| $ | 1,921 |
| | 10,856 |
| | (2,443 | ) | | 18,714 |
|
| | | | | | | | | | | | | | |
Realized and unrealized gains (losses) on financial instruments, net | | | | | | | | | | | | | | |
GCI Holdings | $ | — |
| | — |
| | — |
| | — |
| $ | — |
| | — |
| | 1,669 |
| | — |
|
Corporate and other | 495,509 |
| | 472,763 |
| | (4,328 | ) | | 1,270,764 |
| 156,165 |
| | 495,509 |
| | 1,843,194 |
| | (4,328 | ) |
Consolidated | $ | 495,509 |
| | 472,763 |
| | (4,328 | ) | | 1,270,764 |
| $ | 156,165 |
| | 495,509 |
| | 1,844,863 |
| | (4,328 | ) |
| | | | | | | | | | | | | | |
Tax sharing agreement | | | | | | | | |
GCI Holdings | | $ | — |
| | — |
| | — |
| | — |
|
Corporate and other | | 2,362 |
| | 2,492 |
| | 18,895 |
| | (25,456 | ) |
Consolidated | | $ | 2,362 |
| | 2,492 |
| | 18,895 |
| | (25,456 | ) |
| | | | | | | | |
Other, net | | | | | | | | | | | | | | |
GCI Holdings | $ | (198 | ) | | — |
| | 620 |
| | — |
| $ | 319 |
| | (198 | ) | | 13,081 |
| | 620 |
|
Corporate and other | (636 | ) | | 328 |
| | (1,602 | ) | | 1,073 |
| (859 | ) | | (636 | ) | | 743 |
| | (1,602 | ) |
Consolidated | $ | (834 | ) | | 328 |
| | (982 | ) | | 1,073 |
| $ | (540 | ) | | (834 | ) | | 13,824 |
| | (982 | ) |
Interest Expense. Consolidated interest expense increased $37.6$0.7 million and $81.3$35.1 million duringfor the three and nine months ended September 30, 2018, respectively,2019 as compared to the corresponding periods in the prior year, respectively. The increase for the three month period was primarily due to higher interest rates partially offset by a decrease in amounts owed under the Senior Credit Facility and Margin Loan (each as defined in note 8 of the accompanying condensed consolidated financial statements). The increase for the nine month period was primarily due to the acquisition of GCI Holdings on March 9, 2018, the Margin Loan and the $1.0 billion margin loan. The CompanyExchangeable Senior Debentures (as defined in note 8 of the accompanying condensed consolidated financial statements) that were issued exchangeable senior debentures on June 18, 2018 that is expected to result in increased interest expense in future periods.2018.
Share of earnings (losses) of affiliates, net. Share of earnings (losses) of affiliates, net increased $9.2decreased $8.9 million and $13.7$21.2 million duringfor the three and nine months ended September 30, 2018, respectively,2019 as compared to the corresponding periods in the prior year, respectively, due to increasesa decrease in LendingTree's results.earnings by our affiliates.
Realized and unrealized gains (losses) on financial instruments, net. Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following: | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
| | amounts in thousands | | amounts in thousands |
Equity securities | | $ | 175,359 |
| | 143,158 |
| | (53,681 | ) | | 405,655 |
| | $ | 90,770 |
| | 175,359 |
| | 683,808 |
| | (53,681 | ) |
Investment in Liberty Broadband | | 366,211 |
| | 364,930 |
| | (36,706 | ) | | 906,136 |
| | 19,207 |
| | 366,211 |
| | 1,393,135 |
| | (36,706 | ) |
Variable forward | | (3,223 | ) | | (35,325 | ) | | 69,329 |
| | (41,027 | ) | |
Derivative instruments | | | 60,640 |
| | (3,223 | ) | | (57,721 | ) | | 69,329 |
|
Indemnification obligation | | (14,937 | ) | | — |
| | 48,671 |
| | — |
| | (3,485 | ) | | (14,937 | ) | | (58,311 | ) | | 48,671 |
|
Exchangeables senior debentures | | (27,901 | ) | | — |
| | (31,941 | ) | | — |
| |
Exchangeable senior debentures | | | (10,967 | ) | | (27,901 | ) | | (116,048 | ) | | (31,941 | ) |
| | $ | 495,509 |
| | 472,763 |
| | (4,328 | ) | | 1,270,764 |
| | $ | 156,165 |
| | 495,509 |
| | 1,844,863 |
| | (4,328 | ) |
The changes in these accounts are primarily due to market factors and changes in the fair value of the underlying stocks or financial instruments to which these related. The increasedecrease for the three months ended September 30, 2019 as compared to the corresponding period in the prior year was primarily driven by a decrease in the unrealized gain for our investment in Liberty Broadband and Charter. The increase for the nine months ended September 30, 20182019 as
compared to the corresponding period in the prior periodyear was primarily driven by an unrealized gain in our investmentinvestments in CharterLiberty Broadband and Charter.
Tax sharing agreement. The change in the tax sharing receivable due from Qurate Retail resulted in gains of $2.4 million and $2.5 million for the three months ended September 30, 2019 and 2018, respectively, and a reductiongain of the unrealized$18.9 million and a loss for the variable forward. The decreaseof $25.5 million for the nine months ended September 30, 2019 and 2018, as compared torespectively. The change in the corresponding prior periodtax sharing receivable for 2019 was primarily driven bythe result of the tax effect of the movement in the fair value of Qurate Retail’s 1.75% exchangeable senior debentures due 2046. The change in the tax sharing receivable for 2018 was primarily the result of the tax effect of the movement in the fair value of Qurate Retail's 1.75% exchangeable senior debentures due 2046 and an unrealizedincrease in the valuation allowance recorded against Qurate Retail's Colorado net operating loss deferred tax asset as a result of a Colorado tax law change in our investmentthe second quarter of 2018.
Other, net. The change in Liberty Broadband and Charter.
Income taxes. The Company had earnings before income taxes of $448.0 million and income tax expense of $130.8 million during the three months ended September 30, 2018 and losses before income taxes of $95.7 million and income tax expense of $61.2 million duringOther, net at GCI Holdings for the nine months ended September 30, 2018.2019 is primarily due to a $6.5 million gain for an amendment made to a finance lease and a $3.2 million gain for the write-off of the premium recorded for the senior notes that were refinanced during the second quarter of 2019. The change in Other, net at Corporate and other for the three and nine months ended September 30, 2019 is primarily due to investment gains or losses.
Income taxes. Earnings (losses) before income taxes and income tax (expense) benefit are as follows:
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | amounts in thousands |
Earnings (loss) before income taxes | | $ | 117,381 |
| | 450,540 |
| | 1,705,711 |
| | (121,187 | ) |
Income tax (expense) benefit | | $ | (28,087 | ) | | (133,284 | ) | | (478,887 | ) | | (35,768 | ) |
Effective income tax rate | | 24 | % | | 30 | % | | 28 | % | | 30 | % |
The Company recognized income tax expense in excess of expected federal tax expense for the three and nine months ended September 30, 2019, primarily due to state income tax expense.
The Company recognized additional income tax expense in the three months ended September 30, 2018, primarily due to the effect of state income taxes.tax expense.
The Company recognized additional income tax expense in the nine months ended September 30, 2018 primarily related to an increase in the Company’sCompany's state effective tax rate used to measure deferred taxes resulting from the HoldCo Split-Off in March 2018, partially offset by a decrease in the Company’sCompany's state effective tax rate used to measure deferred taxes resulting from a state law change during the second quarter and the effect of additional state income tax benefits.
The Company had earnings before income taxes of $464.3 million and income tax expense of $177.0 million during the three months ended September 30, 2017 and earnings before income taxes of $1,243.4 million and income tax expense of $473.8 million during the nine months ended September 30, 2017. The Company recognized additional income tax expense in the three and nine months ended September 30, 2017 primarily due to the effect of state income taxes.
Net earnings (loss). The Company had net earnings of $317.3$89.3 million and $287.3$317.3 million for the three months ended September 30, 20182019 and 2017,2018, respectively. The Company had net earnings of $1,226.8 million and a net loss of $157.0 million and net earnings of $769.5 million
for the nine months ended September 30, 20182019 and 2017,2018, respectively. The change in net earnings was the result of the above-described fluctuations in our revenue, expenses, and other income and expenses.
Liquidity and Capital Resources
As of September 30, 2018,2019, substantially all of our cash and cash equivalents were invested in U.S. Treasury securities, securities of other government agencies, AAA rated money market funds and other highly rated financial and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, proceeds from asset sales, monetization of our investments, outstanding or anticipated debt facilities, and debt and equity issuances. The available sources of liquidity discussed above provide the Company adequate options to address the Margin Loan prior to maturity. As of September 30, 2019, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of its Senior Notes. Accordingly, the Company can only access additional funding under the revolving portion of the Senior Credit Facility so long as we are in compliance with the Senior Credit Facility covenants after giving effect to any additional borrowings. We believe we have sufficient cash from operating activities and cash on hand to fund our business.
As of September 30, 2018,2019, the Company had a cash and cash equivalents balance of $689.6$410.1 million.
| | | | Nine Months Ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
| | amounts in thousands | | amounts in thousands |
Cash flow information | | | | | | | | |
Net cash provided (used) by operating activities | | $ | 38,563 |
| | 216,990 |
| | $ | 82,114 |
| | 38,563 |
|
Net cash provided (used) by investing activities | | 12,700 |
| | (77,895 | ) | | (102,293 | ) | | 12,700 |
|
Net cash provided (used) by financing activities | | 64,942 |
| | (114,349 | ) | | (60,987 | ) | | 64,942 |
|
| | $ | 116,205 |
| | 24,746 |
| | $ | (81,166 | ) | | 116,205 |
|
During the nine months ended September 30, 2018,2019, the Company’s primary uses of cash included a $1.1 billion distribution to its former parent in connection with the Transactions, repayments of debt, an indemnification payment to Qurate Retail,capital expenditures and repurchases of GCI Liberty Series A common stock, and a derivative payment.stock. The Company’s primary sources of cash included cash from operations, borrowing $1.5 billion under the Company's margin loan and exchangeable senior debentures, and cash from the acquisition of GCI Holdings on March 9, 2018.
Net cash used for investing activities consists primarily of cash paid for capital expenditures and investments. Our significant recurring investing activity has been capital expenditures and the purchase of investments. We expect that this willis expected to continue in the future. A significant portion of our capital expenditures are based on the level of customer growth and the technology being deployed. Purchasesupdated technology. The Company’s primary sources of investments are basedcash included cash from operations and cash on what we believe are good opportunities for growth.hand.
Proceeds from borrowings fluctuate from year to year based on our liquidity needs. We may use excess cash to make optional repayments on our debt or repurchase our common stock depending on various factors, such as market conditions.
The projected uses of the Company's cash for the remainder of 20182019 are capital expenditures of approximately $66.7$33 million, approximately $34.6$48 million for interest payments on outstanding debt, approximately $3.2 millionpayments for preferred stock dividends, repurchases of GCI Liberty Series A common stock under the approved share buyback program, and potential additional investments in existing or new businesses. As of September 30, 2018, GCI, LLC did not meet the maximum leverage threshold, as measured by the terms of its Senior Notes, and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility. We believe we have sufficient cash from operating activities and cash on hand to fund our business.
Results of Operations - GCI Holdings, LLC
GCI Holdings provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska. We have seen a general decrease in subscriber metrics primarily due to the recession in Alaska as discussed in the Overview section. The following table highlights selected key performance indicators used in evaluating GCI Holdings.Holdings as of September 30, 2019 and 2018.
| | | September 30, | September 30, |
| 2018 | | 2017 | 2019 | | 2018 |
Consumer | | | | | | |
Wireless: | | | | | | |
Wireless lines in service1 | 197,800 |
| | 200,900 |
| 188,400 |
| | 197,800 |
|
Data: | | | | | | |
Cable modem subscribers2 | 125,300 |
| | 125,400 |
| 124,600 |
| | 125,300 |
|
Video: | | | | | | |
Basic subscribers3 | 90,300 |
| | 99,800 |
| 82,200 |
| | 90,300 |
|
Homes passed | 253,400 |
| | 251,600 |
| 253,400 |
| | 253,400 |
|
Voice: | | | | | | |
Total local access lines in service4 | 45,800 |
| | 50,200 |
| 40,800 |
| | 45,800 |
|
Business | | | | | | |
Wireless: | | | | | | |
Wireless lines in service1 | 22,000 |
| | 22,800 |
| 21,100 |
| | 22,000 |
|
Data: | | | | | | |
Cable modem subscribers2 | 9,200 |
| | 10,000 |
| 9,000 |
| | 9,200 |
|
Voice: | | | | | | |
Total local access lines in service4 | 36,600 |
| | 39,600 |
| 34,800 |
| | 36,600 |
|
| | | | | | |
1 A wireless line in service is defined as a revenue generating wireless device. On January 1, 2018, we transferred 600 small business wireless lines from Business to Consumer. | |
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. On January 1, 2018, we transferred 700 small business cable modem subscribers from Business to Consumer. | |
3 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. On January 1, 2018, we transferred 100 small business basic subscribers from Business to Consumer. | |
4 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network. On January 1, 2018, we transferred 1,600 small business local access lines from Business to Consumer. | |
1 A wireless line in service is defined as a revenue generating wireless device. | | 1 A wireless line in service is defined as a revenue generating wireless device. |
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. | | 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 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 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. |
4 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network. | | 4 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network. |
As described in notes 1 and 2 to the accompanying condensed consolidated financial statements, for accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution. Although GCI Holdings’ results are only included in the Company’s results beginning on March 9, 2018, we believe a discussion of GCI Holdings’ results for all periods presented promotes a better understanding of the overall results of its business. For comparison and discussion purposes we are presenting the pro forma results of GCI Holdings for the full three and nine months ended September 30, 2018, and 2017, inclusive of acquisition accounting adjustments. The pro forma financial information was prepared based on the historical financial information of GCI Holdings and assuming the acquisition of GCI Holdings took place on January 1, 2017. The acquisition price allocation related to the GCI Holdings business combination is preliminary. Accordingly, the pro forma
adjustments are based on this preliminary allocation and have been made solely for the purpose of providing comparative pro forma financial information. We have made pro forma adjustments to the results for the three and nine months ended September 30, 2017 for the impact of the new revenue standard (as described in note 1) to assist in the comparability of the three and nine months ended September 30, 2018. We have made pro forma adjustments to the results for the three and nine months ended September 30, 2018 and 2017 to reflect the impact of the FCC's decision in regards to RHC funding as described above in the Overview section. The financial information below is presented for illustrative purposes only and does not purport to represent what the results of operations of GCI Holdings would actually have been had the business combination occurred on January 1, 2017, or to project the results of operations of the CompanyGCI Holdings for any future periods. The pro forma adjustments are based on available information and certain assumptions that the Company's management believes are reasonable. The pro forma adjustments are directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, interest expense, stock-based compensation, and the exclusion of transaction related costs; RHC funding as described above; and the new revenue standard and are expected to have a continuing impact on the results of operations of the Company.
GCI Holdings’ operating results for the three and nine months ended September 30, 2019 and pro forma operating results for the three and nine months ended September 30, 2018 were as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands | amounts in thousands |
Revenue | $ | 215,637 |
| | 222,367 |
| | 649,066 |
| | 670,271 |
| $ | 221,028 |
| | 215,636 |
| | 645,218 |
| | 649,066 |
|
Operating expenses (excluding stock-based compensation included below): | | | | | | | | | | | | | | |
Operating expense | (61,201 | ) | | (66,717 | ) | | (190,020 | ) | | (202,624 | ) | (67,722 | ) | | (61,201 | ) | | (195,666 | ) | | (190,020 | ) |
Selling, general and administrative expenses | (86,044 | ) | | (83,189 | ) | | (253,400 | ) | | (248,192 | ) | (81,346 | ) | | (86,044 | ) | | (267,000 | ) | | (253,400 | ) |
Adjusted OIBDA | 68,392 |
| | 72,461 |
| | 205,646 |
| | 219,455 |
| 71,960 |
| | 68,391 |
| | 182,552 |
| | 205,646 |
|
Stock-based compensation | (1,667 | ) | | (4,132 | ) | | (5,010 | ) | | (12,465 | ) | (4,017 | ) | | (1,667 | ) | | (11,940 | ) | | (5,010 | ) |
Legal settlement | — |
| | — |
| | (3,600 | ) | | — |
| — |
| | — |
| | — |
| | (3,600 | ) |
Insurance proceeds and restructuring, net | | 1,482 |
| | — |
| | (236 | ) | | — |
|
Depreciation and amortization | (62,081 | ) | | (60,400 | ) | | (178,743 | ) | | (179,807 | ) | (65,762 | ) | | (62,081 | ) | | (197,892 | ) | | (178,743 | ) |
Operating income | $ | 4,644 |
| | 7,929 |
| | 18,293 |
| | 27,183 |
| |
Operating income (loss) | | $ | 3,663 |
| | 4,643 |
| | (27,516 | ) | | 18,293 |
|
Pro forma revenueRevenue
The components of pro forma revenue for the three and nine months ended September 30, 2019 and 2018, and 2017respectively, are as follows: | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| amounts in thousands | amounts in thousands |
Consumer | | | | | | | | | | | | | | |
Wireless | $ | 38,552 |
| | 42,667 |
| | 121,477 |
| | 123,880 |
| $ | 41,929 |
| | 38,552 |
| | 121,751 |
| | 121,477 |
|
Data | 39,652 |
| | 36,991 |
| | 117,957 |
| | 108,497 |
| 42,920 |
| | 39,652 |
| | 125,555 |
| | 117,957 |
|
Video | 22,276 |
| | 24,991 |
| | 66,903 |
| | 74,867 |
| 21,198 |
| | 22,276 |
| | 63,268 |
| | 66,903 |
|
Voice | 4,898 |
| | 5,449 |
| | 15,586 |
| | 16,492 |
| 4,275 |
| | 4,897 |
| | 13,306 |
| | 15,586 |
|
Business | | | | | | | | | | | | | | |
Wireless | 24,392 |
| | 26,952 |
| | 72,680 |
| | 77,226 |
| 24,393 |
| | 24,392 |
| | 70,876 |
| | 72,680 |
|
Data | 69,592 |
| | 68,633 |
| | 208,167 |
| | 218,042 |
| 70,813 |
| | 69,592 |
| | 204,476 |
| | 208,167 |
|
Video | 4,927 |
| | 4,364 |
| | 12,100 |
| | 13,280 |
| 4,115 |
| | 4,927 |
| | 11,928 |
| | 12,100 |
|
Voice | 11,348 |
| | 12,320 |
| | 34,196 |
| | 37,987 |
| 11,385 |
| | 11,348 |
| | 34,058 |
| | 34,196 |
|
Total pro forma revenue | $ | 215,637 |
| | 222,367 |
| | 649,066 |
| | 670,271 |
| |
Total | | $ | 221,028 |
| | 215,636 |
| | 645,218 |
| | 649,066 |
|
Pro forma consumerConsumer wireless revenue decreased $4.1 increased $3.4 million and $2.4$0.3 million for the three and nine months ended September 30, 2018, respectively, as compared to the corresponding periods in the prior year. The decrease was partially due to
a $3.0 million and $2.6 million decrease in wireless plan fee revenue for the three and nine months ended September 30, 20182019 as compared to the corresponding periods in the prior year, respectively, whichrespectively. The increase in revenue during the three and nine month periods was primarily due to increased plan fee revenue of $3.9 million and $4.2 million, respectively, driven by a decreasethe absence in the number2019 of subscribers and the forgiveness of a month of service for ourthe Company's wireless customers.customers, which occurred in 2018, and subscribers' selection of plans with higher recurring monthly charges that offer higher usage limits. During the third quarter of 2018, we converted tothe Company implemented a new third-party billing system. The billing system implementationthat included a transition of wireless customers from billing in arrears to billing in advance. To ease the transition for our customers, we chose to forgivethe Company forgave one month of service for those customers who would have otherwise received an invoice for two months of service. Additionally, thereThe increase in revenue for the three and nine month periods was partially offset by a decrease in the number of $0.9 million and $2.8 millionsubscribers, a decrease in USF high cost support ("High Cost Support") for the threeof $0.6 million and nine months ended September 30, 2018 as compared to the corresponding periods in the prior year,$1.8 million, respectively, due to a scheduled decrease in cash received for High Cost Support for urban areas. Asthe previously disclosed end of High Cost Support for urban areas ends as of December 31, 2018. We expect High Cost Support to decrease by $4.1 million in 2019 as compared to 2018 due to the end of High Cost Support provided for urban areas. The decreases discussed above were partially offset byand a $1.2$0.3 million and $4.4$1.1 million increasedecrease in wireless equipment revenuethe subsidy for Lifeline subscribers for the three and nine months ended September 30, 2018 as comparedmonth periods, respectively, due to a reduction of the corresponding periods insubsidy provided by the prior year, respectively, which was primarily driven by an increase in the numberState of higher priced wireless devices sold.Alaska.
Consumer data revenue increased $2.7$3.3 million and $9.5$7.6 million for the three and nine months ended September 30, 20182019 as compared to the corresponding periods in the prior year, respectively. The increases were primarily attributable to a $3.5 million and $10.0 million increase in cable modem plan fee revenue due towas driven by subscribers' selection of plans with higher recurring monthly charges that offer higher speeds and higher usage limits. The increase was partially offset by a decrease indriven by the overall numberloss of subscribers.
Pro forma consumerConsumer video revenue decreased for the three and nine months ended September 30, 2018 as compared to the corresponding periods in the prior year. The decrease was primarily due to a 10% decrease in the number of subscribers.
Pro forma consumer voice revenue decreased $0.6$1.1 million and $0.9$3.6 million for the three and nine months ended September 30, 20182019 as compared to the corresponding periods in the prior year, respectively. The decrease was primarily due to a 9% decrease in the number of subscribers partially offset by customers choosing plans with higher recurring monthly charges that offer more channels.
Consumer voice revenue decreased $0.6 million and $2.3 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively. The decreases were primarily due to a $0.3 million and $1.0 million decrease in High Cost Support due to a scheduled decrease in funding for urban areas for the three and nine months ended September 30, 2019, respectively, and a decrease in long distance plan fee revenue driven by a reduction in the number of customers.
Business wireless revenuewas flat and decreased $1.8 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively. The decrease in the nine month period is primarily due to wholesale customers removing backhaul circuits from our network.
Business data revenue increased $1.2 million and decreased $3.7 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively. The increase for the three month period is due to a $2.2 million increase in data and transport revenue driven by an increase in the price of business cable modems and higher sales to school and medical customers. The increase for the three month period was partially offset by a $0.9 million decrease in professional services revenue driven by a decrease in special project work and a reduction of revenue from a healthcare customer whose funding was denied as discussed in the Overview section above. The decrease for the nine month period is primarily due to a reduction of revenue from a healthcare customer whose funding was denied as discussed in the Overview section above partially offset by increased revenue from school and medical customers and the increase in business cable modem prices.
Business video revenue decreased $0.8 million and $0.2 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively. The decrease for three and nine month periods is primarily due to a decrease in political advertising revenue.
Business voice revenue was relatively flat for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively.
Operating expensesincreased $6.5 million and $5.6 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively. The increase for the three month period was primarily due to a $2.6 million increase in wireless network and roaming costs, a $2.0 million increase in costs to operate our satellite network driven by a transition from accounting for satellite transponders as operating leases instead of finance leases, and a $1.2 million increase in video costs driven by increases in what we pay content producers. The increase for the nine month period was primarily due to a $1.3 million increase in wireless network and roaming costs, a $3.0 million increase in costs to operate our satellite network driven by a transition from accounting for satellite transponders as operating leases instead of finance leases, and a $1.3 million increase in video costs driven by an increase in contractual costs for video customer premise equipment.
Selling, general and administrative expenses decreased $4.7 million and increased $13.6 million for the three and nine months ended September 30, 2019, as compared to the corresponding periods in the prior year, respectively. The decrease for the three months ended September 30, 2018month period was primarily due to a $0.9decrease in labor expense driven by the Company's cost cutting efforts. The increase for the nine month period was driven by a $21.3 million increase in the allowance for receivables as a result of USAC denying an appeal from one of our customers, which was partially offset by a $6.3 million decrease in long distance revenuelabor and a $0.3 million decreasecontract labor costs. See Rural Health Care Program in High Cost Support due to a scheduled decrease in fundingthe Overview section above for urban areas. The decrease for the nine months ended September 30, 2018 was primarily due to a $0.9 million decrease in High Cost Support due to a scheduled decrease in funding for urban areas and a $0.7 million decrease in long distance revenue.more information.
Pro forma business wireless revenuedecreased $2.6Stock based compensation increased $2.4 million and $4.5$6.9 million for the three and nine months ended September 30, 20182019 as compared to the corresponding periods in the prior year, respectively. The decrease isrespectively, due to wholesale customers moving backhaul circuits from our networkawards granted in the fourth quarter of 2018 and a reductionfirst quarter of roaming traffic due to a wholesale customer's construction of its own facilities.2019.
Pro forma business data revenue
Depreciation and amortization increased $1.0$3.7 million and decreased $9.9$19.1 million or 6% and 11% for the three and nine months ended September 30, 20182019 as compared to the corresponding periods in the prior year, respectively. The increase for the three months ended September 30, 2018 is primarily due to a $0.8 million increase in professional services revenue due to an increase in special project work. The decrease for the nine months ended September 30, 2018 was primarily due to a $7.3 million decrease in data and transport services. The decrease in data and transport services is primarily due to the reduction from the RHC Program as discussed above in the Overview section.
Pro forma business video revenue increased $0.6 million and decreased $1.2 million for the three and nine months ended September 30, 2018 as compared to the corresponding periods in the prior year, respectively. The increase for three months ended September 30, 2018 is primarily due to an increase in political advertising revenue. The decrease for the nine months ended September 30, 2018 is primarily due to a decrease in advertising revenue due to a decrease in the number of ads placed.
Pro forma business voice revenuedecreased $1.0 million and $3.8 million for the three and nine months ended September 30, 2018 as compared to the corresponding periods in the prior year, respectively. The decrease for the three months ended September 30, 2018 is primarily due to a $0.3 million decrease in long distance revenue as a result of decreased long distance traffic and rate compression and a $0.7 million decrease in local voice revenue as a result of a decrease in access lines in service. The decrease for the nine months ended September 30, 2018 is primarily due to a $1.3 million decrease in long distance revenue as a result of decreased long distance traffic and rate compression and a $2.5 million decrease in local voice revenue as a result of a decrease in access lines in service.
Pro forma Operating expensesdecreased $5.5 million and $12.6 million for the three and nine months ended September 30, 2018 as compared to the corresponding periods in the prior year, respectively. The decrease for the three months ended September 30, 2018 was primarily due to a $2.5 million decrease in costs to distribute wireless traffic as a result of moving traffic from third party networks to our network; a $1.7 million decrease in video distribution and programming costs primarily due to a decrease in the number of video subscribers; and a $1.0 million decrease in data and transport costs. These decreases were partially offset by a $1.7 million increase in time and material costs for special project work. The decrease for the nine months ended September 30, 2018 was primarily due to a $4.2 million decrease in video distribution and programming costs primarily due to a decrease in the number of video subscribers; a $3.8 million decrease in wireless costs due to a decrease in wireless distribution costs; and a $2.4 million decrease in voice costs due to the decrease in long distance traffic and a reduction of local access lines in service.
Pro forma Selling, general and administrative expenses increased $2.9 million and $5.2 million for the three and nine months ended September 30, 2018, as compared to the corresponding periods in the prior year, respectively. The increase for the three months ended September 30, 2018 was primarily due to an increase in labor costs. The increase for the nine months ended September 30, 2018 was primarily due to an increase in software contracts.
Pro forma Stock based compensation decreased $2.5 million and $7.5 million for the three and nine months ended September 30, 2018 as compared to the corresponding periods in the prior year, respectively, due to awards for which the expense was completely recognized during 2017.
Pro forma Depreciation and amortization increased $1.7 million or 3% during the three months ended September 30, 2018 as compared to the corresponding period in the prior year and was relatively flat for the nine months ended September 30, 2018 when compared to the same period in the prior year. The increase during the three months ended September 30, 20182019 was primarily due to new assets placed in service since March 9, 2018.2018, partially offset by assets which became fully depreciated since March 9, 2018 and lower amortization expense because of an accelerated recognition pattern for amortizing intangibles.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We areThe Company is exposed to market risk in the normal course of business due to ourits ongoing investing and financial activities. Market risk refers to the risk of loss arising from adverse changes in stock prices and interest rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We haveThe Company has established policies, procedures and internal processes governing ourits management of market risks and the use of financial instruments to manage ourits exposure to such risks.
We areThe Company is exposed to changes in interest rates primarily as a result of ourits borrowing and investment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of ourits long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We manage ourThe Company manages its exposure to interest rates by maintaining what we believeit believes is an appropriate mix of fixed and variable rate debt. We believeThe Company believes this best protects usit from interest rate risk. We haveThe Company has achieved this mix by (i) issuing fixed rate debt that we believeit believes has a low stated interest rate and significant term to maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and (iii) entering into interest rate swap arrangements when we deemit deems appropriate.
As of September 30, 2018, our2019, the Company's debt is comprised of the following amounts:
| | | Variable rate debt | | Fixed rate debt | Variable rate debt | | Fixed rate debt |
| Principal amount | | Weighted average interest rate | | Principal amount | | Weighted average interest rate | Principal amount | | Weighted average interest rate | | Principal amount | | Weighted average interest rate |
| dollar amounts in thousands | dollar amounts in thousands |
GCI Holdings | $ | 723,412 |
| | 4.65 | % | | $ | 775,000 |
| | 6.8 | % | $ | 720,477 |
| | 4.7 | % | | $ | 775,000 |
| | 6.8 | % |
Corporate and other | $ | 1,000,000 |
| | 4.2 | % | | $ | 477,250 |
| | 1.8 | % | $ | 900,000 |
| | 4.0 | % | | $ | 477,250 |
| | 1.8 | % |
We areThe Company is exposed to changes in stock prices primarily as a result of ourits significant holdings in publicly traded securities. WeThe Company continually monitormonitors changes in stock markets, in general, and changes in the stock prices of ourits holdings, specifically. We believeThe Company believes that changes in stock prices can be expected to vary as a result of general market conditions, technological changes, specific industry changes and other factors. WeThe Company periodically useuses equity collars and other financial instruments to manage market risk associated with certain investment positions. These instruments are recorded at fair value based on option pricing models.
At September 30, 2018,2019, the fair value of ourthe Company's equity securities was $1.8$2.2 billion. Had the market price of such securities been 10% lower at September 30, 2018,2019, the aggregate value of such securities would have been $174.6$221 million lower. At
September 30, 2018,2019, the fair value of our investment in Liberty Broadband was $3.6$4.5 billion. Had the market price of such security been 10% lower at September 30, 2018,2019, the fair value of such security would have been $359.8$447 million lower.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.report. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2018 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (the "SEC") rules and forms.
In March 2018, GCI Liberty completed the Transactions, pursuant to which the contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with GAAP. The Transactions resulted in changes to the management2019 because of the Company. As a result of the Transactions, the Company and new members of management are re-evaluating the internal controls of the legacy GCI Liberty operating business and are making appropriate changes as deemed necessary. The Company also notes that, although Qurate Retail had previously certified the effectiveness of internal controls with respect to the HoldCo assets that were contributed to the Company prior to the completion of the Transactions, the effectiveness of such internal control has not previously been certified to by HoldCo.
On August 4, 2018 we transferredmaterial weaknesses in our customer billing systems for business and consumer voice, data, video, and wireless services to a new third-party billing system to better meet GCI Holdings’ evolving needs. The implementation of the new system has resulted in certain changes to our processes and procedures affecting internal control over financial reporting. We have committed substantial internal and external resourcesreporting as discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”). Management has continued to revise and document processes and related internal controls.
Due to the complexities of implementing a new billing system across customer types and products and the recent timing of implementation, we expect to experience a period of continued process improvement for several months. Although there are inherent risks involved withmonitor the implementation of any new system, we believe we have the appropriate processes, oversight and resourcesremediation plan described in place to manage this transition. Exceptthe 2018 Form 10-K, as described above,below.
Changes in Internal Control Over Financial Reporting
During the third quarter of 2019, we continued to review the design of our controls, made adjustments and continued implementing controls to alleviate the noted control deficiencies. Other than these items, there has been no change in the Company’sCompany's internal control over financial reporting that occurred during the three months ended September 30, 20182019 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Remediation Plan for Material Weaknesses in Internal Control Over Financial Reporting
In response to the material weaknesses identified in Management’s Report on Internal Control Over Financial Reporting as set forth in Part II, Item 9A in the 2018 Form 10-K, the Company, with oversight from the Audit Committee of the Board of Directors, developed a plan to remediate the material weaknesses at GCI Holdings. The remediation actions included the following:
Improvement of the design and operation of control activities and procedures associated with user access to the affected IT systems, including removing all inappropriate IT system access associated with the material weakness and ensuring no inappropriate activity occurred during the period.
Enhance management’s risk assessment to emphasize and evaluate the interdependencies of business processes, automated control activities, and effective ITGCs.
Enhance controls related to the review of payroll changes and of payroll calculations after payroll is processed by the third-party processing company, but before payments are disbursed to employees.
The Company believes the foregoing efforts remediated the technical components of the two material weaknesses disclosed in the 2018 Form 10-K after the assessment date and prior to the filing of the 2018 Form 10-K. However, because the reliability of the internal control process requires repeatable execution, the successful on-going remediation of these material weaknesses will require on-going training, continued monitoring, additional control enhancements and evidence of effectiveness prior to concluding that the controls are effective.
Additionally, the Company and GCI Holdings intend to continue to monitor information system access and the assessment of process level risks to determine whether additional adjustments should be made to ensure controls are effective in the future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time in the normal course of business. Management believes there are no proceedings from asserted and unasserted claims which if determined adversely would have a material adverse effect on our financial position, results of operations or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Programs
On March 9, 2018, the board of directors authorized a share repurchase program for $650 million of GCI Liberty Class A and Class B common stock. On June 25, 2018, the board of directors of GCI Liberty reapproved such repurchase program with respect to GCI Liberty's Series A and Series B (or Class A or Class B) common stock. A summary of the repurchase activity for the three months ended September 30, 2018 is as follows:
|
| | | | | | | | | | | |
| GCI Liberty Series A Common Stock |
Period | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs |
July 1 - 31, 2018 | — |
| | $ | — |
| | — |
| | $650.0 million |
August 1 - 31, 2018 | 169,084 |
| | $ | 48.49 |
| | 169,084 |
| | $641.8 million |
September 1 - 30, 2018 | 320,479 |
| | $ | 48.97 |
| | 320,479 |
| | $626.1 million |
Total | 489,563 |
| | |
| | 489,563 |
| | |
There were no repurchases of GCI Liberty Series B commoncapital stock under the authorized share repurchase program during the three months ended September 30, 2018.2019.
1,202 shares of GCI Liberty Series A common stock and 509 shares of GCI Liberty Preferred Stock were surrendered by our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock and restricted stock units during the three months ended September 30, 2018.
Item 6. Exhibits
Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
|
| | | |
Exhibit No. | Description |
4.1 | Form of Amendment No. 1 to Margin Loan Agreement, dated as of October 5, 2018, by and among Broadband Holdco, LLC, as Borrower, Various Lenders, JPMorgan Chase Bank, N.A., London Branch, as Administrative Agent, and JPMorgan Chase Bank, N.A., London Branch, as calculation agent.* |
31.1 | |
31.2 | |
32 | |
101101.INS | Inline XBRL Instance Document* - The following materials from GCI Liberty, Inc.'s Quarterly Report on Form 10-Q forinstance document does not appear in the quarter ended September 30, 2018, formatted ininteractive data file because its XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Earnings; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statement of Equity; and (vi) Notes to Condensed Consolidated Financial Statements * |
tags are embedded within the inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Extension Schema Document* |
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document* |
101.LAB | Inline XBRL Taxonomy Label Linkbase Document* |
101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document* |
101.DEF | Inline XBRL Taxonomy Definition Document* |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).* |
| | | |
* | Filed herewith. | | |
** | Furnished herewith | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GCI Liberty, Inc.
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| | | | |
Signature | | Title | | Date |
| | | | |
| | | | |
/s/ Gregory B. Maffei | | President and Chief Executive Officer | | November 8, 201812, 2019 |
Gregory B. Maffei | | (Principal Executive Officer) | | |
| | | | |
/s/ Mark D. CarletonBrian J. Wendling | | ChiefSenior Vice President, Controller and Principal Financial Officer | | November 8, 201812, 2019 |
Mark D. CarletonBrian J. Wendling | | (Principal Financial Officer and Principal Accounting Officer) | | |