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MEDIACOM LLC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our unaudited
consolidated financial statements as of, and for the three and nine months
ended, September 30, 2012 and 2011, and with our annual report on Form 10-K for
the year ended December 31, 2011.
Overview
We are a wholly-owned subsidiary of Mediacom Communications Corporation ("MCC"),
the nation's eighth largest cable company based on the number of video
customers. As of September 30, 2012, we served approximately 452,000 video
customers, 408,000 HSD customers and 166,000 phone customers, aggregating
1.03 million primary service units ("PSUs").
Through our interactive broadband network, we provide our residential and
commercial customers with a wide variety of products and services, including our
primary services of video, high-speed data ("HSD") and phone, which we refer to
as our "triple play bundle." We also provide network and transport services to
medium and large sized businesses in our service areas, including cell tower
backhaul for wireless telephone providers, and sell advertising time we receive
under our programming license agreements to local, regional and national
advertisers.
Our performance has been affected by general economic conditions and by the
competition we face. We believe high unemployment levels and weakness in the
housing sector and consumer spending have, in part, contributed to lower connect
activity for all of our services and negatively impacted our residential
customer and revenue growth. While we expect improvement as the economy
recovers, a continuation or broadening of such effects may adversely impact our
results of operations, cash flows and financial position.
Our residential video service principally competes with direct broadcast
satellite ("DBS") providers, who offer video programming substantially similar
to ours. For the past several years, DBS competitors have deployed aggressive
marketing campaigns, including deeply discounted promotional packages, which we
believe has contributed to video customer losses in our markets. Our programming
costs, particularly for sports and local broadcast programming, have risen well
in excess of the inflation rate in recent years, a trend we expect to continue.
Given these factors, we have generally limited our offering of discounted
pricing for video-only customers, as we believe it has become uneconomic to
offer a low-priced, low-margin video-only product in an attempt to match the
competition's pricing. While the reduction of discounted pricing has positively
impacted per-unit video revenues, we believe that it, along with weak economic
conditions, has contributed to further video customer losses and, if such losses
were to continue, we may experience future annual declines in video revenues. We
expect to partially offset such declines through higher average unit pricing and
greater penetration of our advanced video services, including video-on-demand
("VOD"), high-definition television ("HDTV") and digital video recorders
("DVRs").
Our residential HSD service competes primarily with local telephone companies,
such as AT&T, CenturyLink, Frontier and Verizon. Such companies compete with our
HSD product by offering digital subscriber line ("DSL") services. In our
markets, widely-available DSL service is typically limited to downstream speeds
ranging from 1.5Mbps to 3Mbps, compared to our downstream speeds ranging from
3Mbps to 105Mbps. We believe we will continue to increase HSD revenues through
future growth in residential HSD customers and customers taking higher speed
tiers.
Our residential phone service competes with local telephone companies that offer
a product substantially similar to ours, and with cellular phone services
offered by national wireless providers. We expect to face pricing pressure for
our phone service, which may partially or fully offset greater revenues
resulting from continuing growth of residential phone customers.
Certain local telephone companies, including AT&T and Verizon, have deployed
fiber-based networks which allow for a triple play bundle that is comparable to
ours. As of September 30, 2012, based on internal estimates, approximately 10%
of our cable systems actively competed with these local telephone companies.
Our commercial video, HSD and phone services face similar competition to our
comparable residential services. Historically, local telephone companies have
been in a better position to offer HSD services to businesses, as their networks
tend to be more developed in commercial areas. However, we have recently
increased our efforts to offer and market a more complete array of products and
services suited to businesses, and continue to extend our distribution network
further into business districts in the cities and towns we serve. Our enterprise
networks business faces competition from local telephone companies and other
carriers, such as metro and regional fiber providers. We believe we will
continue to increase business services revenues through increasing our
commercial HSD, phone and, to a lesser extent, video customer base, and
continued growth of our enterprise networks business, including fees for cell
tower backhaul.
We face significant competition in our advertising business from a wide range of
national, regional and local competitors. We compete for advertising revenues
principally against local broadcast stations, national cable and broadcast
networks, radio, newspapers, magazines, outdoor display and Internet companies.
Advertising revenues are sensitive to the political election cycle, and we
believe advertising revenues will increase for the full year 2012, as this is an
election year.
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Recent Developments
New Financing
On February 7, 2012, we issued 71/4% senior notes due February 2022 (the "71/4%
Notes") in the aggregate principal amount of $250.0 million (the "financing").
After giving effect to $5.0 million of financing costs, net proceeds of $245.0
million, together with borrowings under our revolving credit commitments, were
used to repay the entire outstanding amount under Term Loan D under our bank
credit facility (the "credit facility"). See Note 6 in our Notes to Consolidated
Financial Statements.
Sale and Acquisition of Cable Systems, Net
In May 2012, we sold a non-strategic cable system that served approximately
3,000 video and 1,200 HSD customers. We received proceeds of approximately $11.0
million, yielding a gain on sale of cable systems, net of $5.2 million which was
recorded in our statements of operations for the nine months ended September 30,
2012. In June 2012, we acquired certain cable assets serving about 600 video,
400 HSD and 600 phone customers for approximately $1.2 million.
Revenues
Video
Video revenues primarily represent monthly subscription fees charged to our
residential video customers, which vary according to the level of service and
equipment taken, and revenue from the sale of VOD content and pay-per-view
events. Video revenues also include installation, reconnection and wire
maintenance fees, franchise and late payment fees, and other ancillary revenues.
HSD
HSD revenues primarily represent monthly subscription fees charged to our
residential HSD customers, which vary according to the level of HSD service
taken.
Phone
Phone revenues primarily represent monthly subscription fees charged to our
residential phone customers for our phone service.
Business Services
Business services revenues primarily represent monthly fees charged to our
commercial video, HSD and phone customers, which vary according to the level of
service taken, and fees charged to large sized businesses, including large
wireless providers for cell tower backhaul requirements, for our scalable,
fiber-based enterprise networks products and services.
Advertising
Advertising revenues primarily represent revenues received from selling
advertising time we receive under our programming license agreements to local,
regional and national advertisers for the placement of commercials on channels
offered on our video services.
Costs and Expenses
Service Costs
Service costs consist of the costs related to providing and maintaining services
to our customers. Significant service costs are for: video programming; HSD
service, including bandwidth connectivity; phone service, including leased
circuits and long distance; our enterprise networks business; technical
personnel who maintain our cable network, perform customer installation
activities and provide customer support; our network operations center;
utilities, including pole rental; and field operations, including outside
contractors, vehicle fuel and maintenance and leased fiber for our regional
fiber networks.
Programming costs, which are generally paid on a per video customer basis, have
historically represented our single largest expense. In recent years, we have
experienced substantial increases in the per-unit cost of our programming, which
we believe will continue to grow due to the increasing contractural rates and
retransmission consent fees demanded by large programmers and independent
broadcasters. Our HSD and phone service costs fluctuate depending on the level
of investments we make in our cable systems and the resulting operational
efficiencies. In June 2011, we completed a transition to an internal phone
service platform, which greatly reduced our phone service expenses. Our other
service costs generally rise as a result of customer growth and inflationary
cost increases for personnel, outside vendors and other expenses. Personnel and
related support costs may increase as the percentage of expenses that we
capitalize declines due to lower levels of new service installations. We
anticipate that our service costs, with the exception of programming expenses,
will remain fairly consistent as a percentage of our revenues.
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Selling, General and Administrative Expenses
Significant selling, general and administrative expenses are for: our call
center, customer service, marketing, business services, support and
administrative personnel; franchise fees and other taxes; bad debt; billing;
marketing; advertising; and general office administration. These expenses
generally rise due to customer growth and inflationary cost increases for
personnel, outside vendors and other expenses. We anticipate that our selling,
general and administrative expenses will remain fairly consistent as a
percentage of our revenues.
Service costs and selling, general and administrative expenses exclude
depreciation and amortization, which is presented separately.
Management Fee Expense
Management fee expense reflects compensation paid to MCC for the performance of
services it provides our operating subsidiaries in accordance with management
agreements between MCC and our operating subsidiaries.
Use of Non-GAAP Financial Measures
"OIBDA" is not a financial measure calculated in accordance with generally
accepted accounting principles ("GAAP") in the United States. We define OIBDA as
operating income before depreciation and amortization. OIBDA has inherent
limitations as discussed below.
OIBDA is one of the primary measures used by management to evaluate our
performance and to forecast future results. We believe OIBDA is useful for
investors because it enables them to assess our performance in a manner similar
to the methods used by management, and provides a measure that can be used to
analyze value and compare the companies in the cable industry. A limitation of
OIBDA, however, is that it excludes depreciation and amortization, which
represents the periodic costs of certain capitalized tangible and intangible
assets used in generating revenues in our business. Management uses a separate
process to budget, measure and evaluate capital expenditures. In addition, OIBDA
may not be comparable to similarly titled measures used by other companies,
which may have different depreciation and amortization policies.
OIBDA should not be regarded as an alternative to operating income or net income
(loss) as an indicator of operating performance, or to the statement of cash
flows as a measure of liquidity, nor should it be considered in isolation or as
a substitute for financial measures prepared in accordance with GAAP. We believe
that operating income is the most directly comparable GAAP financial measure to
OIBDA.
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Actual Results of Operations
Three Months Ended September 30, 2012 compared to Three Months Ended
September 30, 2011
The table below sets forth our consolidated statements of operations and OIBDA
for the three months ended September 30, 2012 and 2011 (dollars in thousands and
percentage changes that are not meaningful are marked NM):
Three Months Ended
September 30,
2012 2011 $ Change % Change
Revenues $ 170,554 $ 170,586 $ (32 ) (0.0 %)
Costs and expenses:
Service costs (exclusive of depreciation
and amortization) 74,662 73,636 1,026 1.4 %
Selling, general and administrative
expenses 29,539 29,601 (62 ) (0.2 %)
Management fee expense 2,650 2,644 6 0.2 %
Depreciation and amortization 28,653 29,506 (853 ) (2.9 %)
Operating income 35,050 35,199 (149 ) (0.4 %)
Interest expense, net (23,752 ) (24,193 ) 441 (1.8 %)
Loss on derivatives, net (61 ) (16,983 ) 16,922 NM
Investment income from affiliate 4,500 4,500 - NM
Other expense, net (653 ) (504 ) (149 ) NM
Net income $ 15,084 $ (1,981 ) $ 17,065 NM
OIBDA $ 63,703 $ 64,705 $ (1,002 ) (1.5 %)
The table below represents a reconciliation of OIBDA to operating income, which
is the most directly comparable GAAP measure (dollars in thousands):
Three Months Ended
September 30,
2012 2011 $ Change % Change
OIBDA $ 63,703 $ 64,705 $ (1,002 ) (1.5 %)
Depreciation and amortization (28,653 ) (29,506 ) 853 (2.9 %)
Operating income $ 35,050 $ 35,199 $ (149 ) (0.4 %)
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Revenues
The tables below set forth our revenues and selected customer and average
monthly revenue statistics as of, and for the three months ended, September 30,
2012 and 2011 (dollars in thousands, except per customer and per unit data):
Three Months Ended
September 30,
2012 2011 $ Change % Change
Video $ 89,149 $ 94,293 $ (5,144 ) (5.5 %)
HSD 46,667 44,202 2,465 5.6 %
Phone 15,502 15,623 (121 ) (0.8 %)
Business services 14,938 12,481 2,457 19.7 %
Advertising 4,298 3,987 311 7.8 %
Total $ 170,554 $ 170,586 $ (32 ) (0.0 %)
September 30, Increase/
2012 2011 (Decrease) % Change
Video customers 452,000 488,000 (36,000 ) (7.4 %)
HSD customers 408,000 383,000 25,000 6.5 %
Phone customers 166,000 159,000 7,000 4.4 %
Primary service units (PSUs) 1,026,000 1,030,000 (4,000 ) (0.4 %)
Digital customers 299,000 300,000 (1,000 ) (0.3 %)
Revenue generating units 1,325,000 1,330,000 (5,000 ) (0.4 %)
Average total monthly revenue per
video customer (1) $ 124.95 $ 114.53 $ 10.42 9.1 %
Average total monthly revenue per
PSU (2) $ 55.38 $ 54.73 $ 0.65 1.2 %
(1) Represents average total monthly revenues for the period divided by average
video customers for such period.
(2) Represents average total monthly revenues for the period divided by average
PSUs for such period.
Revenues were essentially unchanged from the prior year period, as lower video
revenues were mostly offset by greater HSD and business services revenues.
Average total monthly revenue per video customer increased 9.1% to $124.95, and
average total monthly revenue per PSU increased 1.2% to $55.38.
Video revenues declined 5.5%, mainly due to residential video customer losses,
offset in part by higher unit pricing. During the three months ended
September 30, 2012, we lost 6,000 video customers, compared to 17,000 in the
prior year period. As of September 30, 2012, we served 452,000 video customers,
or 34.8% of our estimated homes passed. As of the same date, 66.2% of our video
customers were digital customers, and 52.7% of our digital customers were taking
our DVR and/or HDTV services.
HSD revenues grew 5.6%, principally due to a greater residential HSD customer
base and, to a lesser extent, higher unit pricing. During the three months ended
September 30, 2012, we gained 7,000 HSD customers, compared to a loss of 2,000
in the prior year period. As of September 30, 2012, we served 408,000 HSD
customers, or 31.4% of our estimated homes passed.
Phone revenues were 0.8% lower, largely a result of lower unit pricing, mostly
offset by a greater residential phone customer base. During the three months
ended September 30, 2012, we lost 2,000 phone customers, compared to an increase
of 1,000 in the prior year period. As of September 30, 2012, we served 166,000
phone customers, or 12.8% of our estimated homes passed.
Business services revenues rose 19.7%, primarily due to an increase in
commercial HSD and phone customers and, to a lesser extent, greater revenues
from our enterprise networks business.
Advertising revenues increased 7.8%, principally due to greater levels of
automotive and political advertising.
Costs and Expenses
Service costs increased 1.4%, primarily due to greater field operating and
employee expenses, offset in part by lower HSD service, utilities and
programming costs. Field operating costs were 17.0% higher, largely as a result
of a greater use of outside contractors and, to a lesser extent, increased fiber
lease and equipment maintenance expenses, offset in part by lower vehicle fuel
costs. Employee costs grew 7.9%, primarily due to greater staffing levels. HSD
service costs decreased 12.4%, principally due to lower connectivity costs.
Utilities expenses declined 6.3%, primarily due to a reduction in electric
utility and pole rental expenses. Programming costs
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decreased 0.5%, mainly due to a lower video customer base, mostly offset by
higher contractual rates charged by our programming vendors and greater
retransmission consent fees. Service costs as a percentage of revenues were
43.8% and 43.2% for the three months ended September 30, 2012 and 2011,
respectively.
Selling, general and administrative expenses decreased 0.2%, mainly due to lower
employee costs, taxes and fees and bad debt expense, mostly offset by higher
marketing costs. Employee costs declined 2.5%, reflecting reduced levels of
administrative and call center headcount, offset in part by greater business
services marketing staffing levels. Taxes and fees decreased 5.9%, mainly due to
a decline in property taxes and franchise fees. Bad debt fell 6.3%, primarily
due to a lower number of written-off accounts. Marketing costs increased 15.0%,
primarily due to greater spending on internet and direct mail advertising.
Selling, general and administrative expenses as a percentage of revenues were
17.3% and 17.4% for the three months ended September 30, 2012 and 2011,
respectively.
Management fee expense was 0.2% higher, reflecting increased overhead costs
charged by MCC. Management fee expense as a percentage of revenues was 1.6% and
1.5% for the three months ended September 30, 2012 and 2011, respectively.
Depreciation and amortization decreased 2.9%, largely as a result of certain
assets becoming fully depreciated, mostly offset by the depreciation of
shorter-lived customer premise equipment and certain investments related to our
internal phone service platform.
OIBDA
OIBDA declined 1.5%, primarily due to the increase in service costs.
Operating Income
Operating income was 0.4% lower due to the decline in depreciation and
amortization and, to a lesser extent, the decline in OIBDA.
Interest Expense, Net
Interest expense, net, decreased 1.8%, due to lower average outstanding
indebtedness, mostly offset by a higher average cost of debt.
Loss on Derivatives, Net
As of September 30, 2012, we had interest rate exchange agreements (which we
refer to as "interest rate swaps") with an aggregate notional amount of $1.3
billion, of which $600 million were forward-starting interest rate swaps. These
interest rate swaps have not been designated as hedges for accounting purposes,
and the changes in their mark-to-market values are derived primarily from
changes in market interest rates and the decrease in their time to maturity. As
a result of changes to the mark-to-market valuation of these interest rate
swaps, based upon information provided by our counterparties, we recorded a net
loss on derivatives of $0.1 million for the three months ended September 30,
2012, compared to a net loss on derivatives of $17.0 million for the three
months ended September 30, 2011.
Investment Income from Affiliate
Investment income from affiliate was $4.5 million for each of the three months
ended September 30, 2012 and 2011. This amount represents the investment income
on our $150.0 million preferred equity investment in Mediacom Broadband. See
Note 8 in our Notes to Consolidated Financial Statements.
Other Expense, Net
Other expense, net, was $0.7 million and $0.5 million for the three months ended
September 30, 2012 and 2011, respectively. During the three months ended
September 30, 2012, other expense, net, consisted of $0.4 million of revolving
credit facility commitment fees and $0.3 million of other fees. During the three
months ended September 30, 2011, other expense, net, consisted of $0.4 million
of revolving credit facility commitment fees and $0.1 million of other fees.
Net Income (Loss)
As a result of the factors described above, we recognized net income of $15.1
million for the three months ended September 30, 2012, compared to a net loss of
$2.0 million for the three months ended September 30, 2011.
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Actual Results of Operations
Nine Months Ended September 30, 2012 compared to Nine Months Ended September 30,
2011
The table below sets forth our consolidated statements of operations and OIBDA
for the nine months ended September 30, 2012 and 2011 (dollars in thousands and
percentage changes that are not meaningful are marked NM):
Nine Months Ended
September 30,
2012 2011 $ Change % Change
Revenues $ 509,905 $ 507,648 $ 2,257 0.4 %
Costs and expenses:
Service costs (exclusive of depreciation
and amortization) 222,871 224,651 (1,780 ) (0.8 %)
Selling, general and administrative
expenses 85,530 85,795 (265 ) (0.3 %)
Management fee expense 8,985 8,573 412 4.8 %
Depreciation and amortization 86,729 88,214 (1,485 ) (1.7 %)
Operating income 105,790 100,415 5,375 5.4 %
Interest expense, net (72,256 ) (73,627 ) 1,371 (1.9 %)
Gain (loss) on derivatives, net 441 (18,110 ) 18,551 NM
Gain on sale of cable systems, net 5,202 - 5,202 NM
Loss on early extinguishment of debt (6,468 ) - (6,468 ) NM
Investment income from affiliate 13,500 13,500 - NM
Other expense, net (1,551 ) (1,597 ) 46 (2.9 %)
Net income $ 44,658 $ 20,581 $ 24,077 117.0 %
OIBDA $ 192,519 $ 188,629 $ 3,890 2.1 %
The table below represents a reconciliation of OIBDA to operating income, which
is the most directly comparable GAAP measure (dollars in thousands):
Nine Months Ended
September 30,
2012 2011 $ Change % Change
OIBDA $ 192,519 $ 188,629 $ 3,890 2.1 %
Depreciation and amortization (86,729 ) (88,214 ) 1,485 (1.7 %)
Operating income $ 105,790 $ 100,415 $ 5,375 5.4 %
Revenues
The table below sets forth our revenues for the nine months ended, September 30,
2012 and 2011 (dollars in thousands):
Nine Months Ended
September 30,
2012 2011 $ Change % Change
Video $ 271,261 $ 286,840 $ (15,579 ) (5.4 %)
HSD 139,113 128,303 10,810 8.4 %
Phone 45,731 45,619 112 0.2 %
Business services 41,878 35,611 6,267 17.6 %
Advertising 11,922 11,275 647 5.7 %
Total $ 509,905 $ 507,648 $ 2,257 0.4 %
Revenues increased 0.4%, primarily due to greater HSD revenues and, to a lesser
extent, business services revenues, mostly offset by lower video revenues.
Average total monthly revenue per video customer increased 10.5% to $122.50, and
average total monthly revenue per PSU increased 3.2% to $55.52.
Video revenues declined 5.4%, mainly due to residential video customer losses,
offset in part by higher unit pricing. During the nine months ended
September 30, 2012, we lost 18,600 video customers, excluding the net effect of
an acquisition and a disposition, compared to 42,000 in the prior year period.
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HSD revenues grew 8.4%, largely as a result of higher unit pricing and, to a
lesser extent, a greater residential HSD customer base. During the nine months
ended September 30, 2012, we gained 25,800 HSD customers, excluding the net
effect of an acquisition and a disposition, compared to an increase of 4,000 in
the prior year period.
Phone revenues were 0.2% higher, as higher unit pricing was mostly offset by a
lower residential phone customer base. During the nine months ended
September 30, 2012, we gained 6,400 phone customers, excluding the effect of an
acquisition, compared to an increase of 2,000 in the prior year period.
Business services revenues rose 17.6%, primarily due to an increase in
commercial HSD and phone customers and, to a lesser extent, greater revenues
from our enterprise networks business.
Advertising revenues grew 5.7%, principally due to increased levels of political
and automotive advertising.
Costs and Expenses
Service costs declined 0.8%, primarily due to lower phone and, to a lesser
extent, HSD service costs and programming expenses, offset in part by greater
field operating and employee costs. Phone service costs fell 25.1%,
substantially due to cost savings resulting from our transition from a
third-party provider to an internal phone service platform. HSD service costs
decreased 16.7%, principally due to lower connectivity costs, offset in part by
higher bandwidth and maintenance expenses. Programming expenses declined 0.7%,
largely as a result of a lower video customer base, mostly offset by higher
contractual rates charged by our programming vendors and greater retransmission
consent fees. Field operating costs grew 14.9%, largely as a result of a greater
use of outside contractors and, to a lesser extent, higher fiber lease expenses
and cable location costs, offset in part by a reduction in vehicle fuel
expenses. Employee costs increased 4.7%, principally due to greater staffing
levels. Service costs as a percentage of revenues were 43.7% and 44.3% for the
nine months ended September 30, 2012 and 2011, respectively.
Selling, general and administrative expenses decreased 0.3%, mainly due to lower
bad debt expense and taxes and fees, mostly offset by higher marketing costs.
Bad debt fell 10.4%, principally due to a lower number of written off accounts.
Taxes and fees decreased 5.5%, mainly due to a decline in franchise fees and
property taxes. Marketing costs rose 14.2%, primarily due to greater spending on
printed mail and internet advertising and costs related to our rebranding.
Selling, general and administrative expenses as a percentage of revenues were
16.8% and 16.9% for the nine months ended September 30, 2012 and 2011,
respectively.
Management fee expense was 4.8% higher, reflecting greater overhead charges
costs charged by MCC. Management fee expense as a percentage of revenues was
1.8% and 1.7% for the nine months ended September 30, 2012 and 2011,
respectively.
Depreciation and amortization decreased 1.7%, largely as a result of certain
assets becoming fully depreciated, mostly offset by the depreciation of
investments in shorter-lived customer premise equipment and our internal phone
service platform.
OIBDA
OIBDA increased 2.1%, primarily due to greater revenues and lower service costs.
Operating Income
Operating income grew 5.4% due to the growth in OIBDA and, to a lesser extent,
lower depreciation and amortization.
Interest Expense, Net
Interest expense, net, decreased 1.9%, primarily due to lower average
outstanding indebtedness.
Gain (Loss) on Derivatives, Net
As a result of changes to the mark-to-market valuation of our interest rate
swaps, based upon information provided by our counterparties, we recorded a net
gain on derivatives of $0.4 million for the nine months ended September 30,
2012, compared to a net loss on derivatives of $18.1 million for the nine months
ended September 30, 2011.
Gain on Sale of Cable Systems, Net
We recorded a gain on sale of cable systems, net of $5.2 million in our
statements of operations for the nine months ended September 30, 2012.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $6.5 million for the nine months
ended September 30, 2012. This amount represents the write-off of deferred
financing costs as a result of the repayment of Term Loan D under the credit
facility.
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Investment Income from Affiliate
Investment income from affiliate was $13.5 million for each of the nine months
ended September 30, 2012 and 2011. This amount represents the investment income
on our $150.0 million preferred equity investment in Mediacom Broadband. See
Note 8 in our Notes to Consolidated Financial Statements.
Other Expense, Net
Other expense, net, was $1.6 million for each the nine months ended
September 30, 2012 and 2011. During the nine months ended September 30, 2012,
other expense, net, consisted of $1.0 million of revolving credit facility
commitment fees and $0.6 million of other fees. During the nine months ended
September 30, 2011, other expense, net, consisted of $1.4 million of revolving
credit facility commitment fees and $0.2 million of other fees.
Net Income
As a result of the factors described above, we recognized net income of $44.7
million for the nine months ended September 30, 2012, compared to $20.6 million
for the nine months ended September 30, 2011.
Liquidity and Capital Resources
Our net cash flows provided by operating activities are primarily used to fund
investments in the capacity and reliability of our network and the further
expansion of our products and services, as well as scheduled repayments of our
indebtedness and periodic contributions to MCC. As of September 30, 2012, our
near-term liquidity requirements included scheduled term loan amortization of
$2.3 million during the remainder of 2012 and $9.0 million in each of the years
ending December 31, 2013 and 2014.
As of September 30, 2012, our sources of liquidity included $20.7 million of
cash and $215.7 million of unused and available commitments under our revolving
credit commitments (the "revolver"). As of the same date, after giving effect to
a $96.0 million capital distribution to our parent, MCC, made on October 15,
2012 (the "capital distribution"), our sources of liquidity would have included
$10.0 million of cash and $130.4 million of unused and available commitments
under the revolver. For more information regarding the capital distribution, see
Note 13 in our Notes to Consolidated Financial Statements. We believe that cash
generated by or available to us will meet our anticipated capital and liquidity
needs for the foreseeable future.
In the longer term, specifically 2015 and beyond, we do not expect to generate
sufficient net cash flows from operations to fund our maturing term loans and
senior notes. If we are unable to obtain sufficient future financing on similar
terms as we currently experience, or at all, we may need to take other actions
to conserve or raise capital that we would not take otherwise. However, we have
accessed the debt markets for significant amounts of capital in the past, and
expect to continue to be able to access these markets in the future as
necessary.
Net Cash Flows Provided by Operating Activities
Net cash flows provided by operating activities were $119.9 million for the nine
months ended September 30, 2012, primarily due to OIBDA of $192.5 million and,
to a much lesser extent, investment income from affiliate of $13.5 million,
offset in part by interest expense of $72.3 million and, to a lesser extent, the
$14.9 million net change in our operating assets and liabilities. The net change
in our operating assets and liabilities was primarily due to an increase in
accounts receivable, net, of $12.1 million and an increase in prepaid expenses
and other assets of $4.9 million, offset in part by an increase in accounts
payable, accrued expenses and other current liabilities of $1.2 million and an
increase in deferred revenue of $1.0 million.
Net cash flows provided by operating activities were $112.9 million for the nine
months ended September 30, 2011, primarily due to OIBDA of $188.6 million and,
to a much lesser extent, investment income from affiliate of $13.5 million,
offset in part by interest expense of $73.6 million and, to a much lesser
extent, the net change in operating assets and liabilities of $16.9 million. The
net change in operating assets and liabilities was largely the result of a net
decline in accounts payable, accrued expenses and other current liabilities of
$14.6 million, which included a $29.5 million reduction in accounts payable to
affiliate, and a decrease in accounts receivable, net, of $2.6 million.
Net Cash Flows Used in Investing Activities
Capital expenditures continue to be our primary use of capital resources and the
majority of our net cash flows used in investing activities. Net cash flows used
in investing activities were $72.4 million for the nine months ended
September 30, 2012, compared to $65.7 million in the prior year period. The $6.7
million increase in net cash flows used in investing activities was primarily
due to a $8.9 million redemption of restricted cash and cash equivalents in the
prior year period and, to a lesser extent, a $5.2 million increase in capital
expenditures, a $2.5 million decrease in accrued plant, property and equipment
and a $1.2 million acquisition of certain cable assets, offset by $11.0 million
of proceeds from the sale of cable systems. The growth in capital expenditures
largely reflects spending on the expansion of our fiber network and customer
premise equipment, offset in part by reduced outlays for investments in our
phone service platform.
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Net Cash Flows Used in Financing Activities
Net cash flows used in financing activities were $39.2 million for the nine
months ended September 30, 2012, principally due to net repayments of $376.0
million under the credit facility and, to a much lesser extent, capital
distributions to MCC of $18.0 million and financing costs of $5.0 million,
mostly offset by the $250.0 million issuance of new senior notes and $111.0
million of capital contributions from MCC. On October 15, 2012, we made a
capital distribution to MCC of $96.0 million. See Note 13 in our Notes to
Consolidated Financial Statements.
Net cash flows used in financing activities were $58.0 million for the nine
months ended September 30, 2011, primarily due to capital distributions to MCC
of $141.2 million, offset in part by net borrowings of $84.0 million under the
credit facility. The capital distributions to MCC included a distribution to
partially fund the Going Private Transaction. See Note 7 in our Notes to
Consolidated Financial Statements.
Capital Structure
As of September 30, 2012, our total indebtedness was $1.457 billion, of which
approximately 89% was at fixed interest rates or subject to interest rate
protection. During the nine months ended September 30, 2012, we paid cash
interest of $72.7 million, net of capitalized interest.
Bank Credit Facility
As of September 30, 2012, we maintained a $1.082 billion bank credit facility,
comprising $857.0 million of term loans with maturities ranging from January
2015 to October 2017, and a $225.2 million revolver, which is scheduled to
expire on December 31, 2014. As of the same date, we had no outstanding balance
under the revolver and $215.7 million of unused commitments, all of which were
available to be borrowed and used for general corporate purposes, after giving
effect to $9.5 million of letters of credit issued thereunder to various parties
as collateral. As of September 30, 2012, after giving effect to the $96.0
million capital distribution to MCC, we would have had $130.4 million of unused
commitments under the revolver, all of which were available to be borrowed and
used for general corporate purposes, after giving effect to $85.3 million of
outstanding loans and $9.5 million of letters of credit.
The credit facility is collateralized by our ownership interests in our
operating subsidiaries, and is guaranteed by us on a limited recourse basis to
the extent of such ownership interests. As of September 30, 2012, the credit
agreement governing the credit facility required us to maintain a total leverage
ratio (as defined) of no more than 5.5 to 1.0 and an interest coverage ratio (as
defined) of no less than 2.0 to 1.0. The total leverage ratio covenant was
reduced to 5.0 to 1.0 on October 1, 2012.
Interest Rate Exchange Agreements
We use interest exchange agreements (which we refer to as "interest rate swaps")
in order to fix the variable portion of debt under the credit facility to reduce
the potential volatility in our interest expense that would otherwise result
from changes in market interest rates. As of September 30, 2012, we had interest
rate swaps with various banks pursuant to which the rate on $700 million of
floating rate debt was fixed at a weighted average rate of 3.0%. As of the same
date, we also had $600 million of forward starting interest rate swaps with a
weighted average fixed rate of approximately 2.9%.
Including the effects of these interest rate swaps, the average interest rates
on outstanding debt under the credit facility as of September 30, 2012 and 2011
were 4.7% and 4.8%, respectively.
Senior Notes
As of September 30, 2012, we had $600.0 million of outstanding senior notes, of
which $350.0 million and $250.0 million mature in August 2019 and February 2022,
respectively. Our senior notes are unsecured obligations, and the indenture
governing our senior notes limits the incurrence of additional indebtedness
based upon a maximum debt to operating cash flow ratio (as defined) of 8.5 to
1.0. See Note 6 in our Notes to Consolidated Financial Statements.
Covenant Compliance and Debt Ratings
For all periods through September 30, 2012, we were in compliance with all of
the covenants under the credit facility and senior note arrangements. We do not
believe that we will have any difficulty complying with any of the applicable
covenants in the near future.
Our future access to the debt markets and the terms and conditions we receive
are influenced by our debt ratings. MCC's corporate credit rating is B1, with a
stable outlook, by Moody's, and B+, with a stable outlook, by Standard and
Poor's. Our senior unsecured
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credit rating is B3 by Moody's, with a stable outlook, and B-, with a stable
outlook, by Standard and Poor's. We cannot assure you that Moody's and Standard
and Poor's will maintain their ratings on MCC and us. A negative change to these
credit ratings could result in higher interest rates on future debt issuance
than we currently experience, or adversely impact our ability to raise
additional funds.
Contractual Obligations and Commercial Commitments
There have been no material changes to our contractual obligations and
commercial commitments as previously disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2011 and our quarterly report on Form 10-Q for
the quarterly period ended March 31, 2012.
Critical Accounting Policies
The preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities.
Periodically, we evaluate our estimates, including those related to doubtful
accounts, long-lived assets, capitalized costs and accruals. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable. Actual results may differ from these estimates under
different assumptions or conditions. We believe that the application of the
critical accounting policies requires significant judgments and estimates on the
part of management. For a summary of our critical accounting policies, please
refer to our annual report on Form 10-K for the year ended December 31, 2011.
Goodwill and Other Intangible Assets
In accordance with the Financial Accounting Standards Board's Accounting
Standards Codification No. 350 Intangibles - Goodwill and Other ("ASC 350"), the
amortization of goodwill and indefinite-lived intangible assets is prohibited
and requires such assets to be tested annually for impairment, or more
frequently if impairment indicators arise. We have determined that our cable
franchise rights and goodwill are indefinite-lived assets and therefore not
amortizable.
In accordance with Accounting Standards Update 2010-28 ("ASU 2010-28") - When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force),
we have evaluated the qualitative factors surrounding our Mediacom LLC reporting
unit, which has negative equity carrying value. We do not believe that it is
"more likely than not" that a goodwill impairment exists. As such, we have not
performed Step 2 of the goodwill impairment test.
The economic conditions currently affecting the U.S. economy and the long-term
impact on the fundamentals of our business may have a negative impact on the
fair values of the assets in our reporting units. This may result in the
recognition of an impairment loss in the future.
Because we believe there has not been a meaningful change in the long-term
fundamentals of our business during the first nine months of 2012, we have
determined that there has been no triggering event under ASC 350, and as such,
no interim impairment test was required as of September 30, 2012.
Inflation and Changing Prices
Our costs and expenses are subject to inflation and price fluctuations. Such
changes in costs and expenses can generally be passed through to customers.
Programming costs have historically increased at rates in excess of inflation
and are expected to continue to do so. We believe that under the Federal
Communications Commission's existing cable rate regulations we may increase
rates for cable television services to more than cover any increases in
programming. However, competitive conditions and other factors in the
marketplace may limit our ability to increase our rates.
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