Quarterly report pursuant to Section 13 or 15(d)

Business and Summary of Significant Accounting Policies

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Business and Summary of Significant Accounting Policies
 6 Months Ended
Jun. 30, 2014
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Business and Summary of Significant Accounting Principles
Business and Summary of Significant Accounting Principles
In the following discussion, GCI and its direct and indirect subsidiaries are referred to as “we,” “us” and “our.”

(a)
Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the following services primarily in Alaska:

•
Postpaid and prepaid wireless services and sale of wireless handsets and accessories,
•
Video services, including broadcast television,
•
Internet access services,
•
Wholesale wireless, including postpaid and prepaid wireless plans for resale by other carriers and roaming for certain wireless carriers,
•
Local and long-distance voice services,
•
Data network services,
•
Broadband services, including our SchoolAccess® offering to rural school districts, our ConnectMD® offering to rural hospitals and health clinics, and managed video conferencing,
•
Managed services to certain commercial customers,
•
Sales and service of dedicated communications systems and related equipment, and
•
Lease, service arrangements and maintenance of capacity on our fiber optic cable systems used in the transmission of services within Alaska and between Alaska and the remaining United States and foreign countries.
(b)
Principles of Consolidation
Our consolidated financial statements include the consolidated accounts of GCI and its wholly owned subsidiaries, The Alaska Wireless Network, LLC ("AWN") of which we own a two-third interest and four variable interest entities (“VIEs”) for which we are the primary beneficiary after providing certain loans and guarantees.  These VIEs are Terra GCI Investment Fund, LLC (“TIF”), Terra GCI 2 Investment Fund, LLC (“TIF 2”), Terra GCI 2-USB Investment Fund, LLC (“TIF 2-USB”) and Terra GCI 3 Investment Fund, LLC (“TIF 3”).  We also include in our consolidated financial statements non-controlling interests in consolidated subsidiaries for which our ownership is less than 100 percent.  We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. We use the cost method to account for our investments in entities where we hold a non-controlling interest and do not have the ability to exercise significant influence over operating and financial policies.

All significant intercompany transactions between non-regulated affiliates of our company are eliminated.  Intercompany transactions generated between regulated and non-regulated affiliates of our company are not eliminated in consolidation.

(c)
Non-controlling Interests
Non-controlling interests represent the equity ownership interests in consolidated subsidiaries not owned by us.  Non-controlling interests are adjusted for contributions, distributions, and income and loss attributable to the non-controlling interest partners of the consolidated entities.  Income and loss is allocated to the non-controlling interests based on the respective governing documents.

(d)
Acquisition
On July 22, 2013, we closed the transactions for our two-thirds ownership interest in AWN. Alaska Communications Systems Group, Inc. ("ACS") owns the other one-third ownership interest in AWN.

The following table summarizes the purchase price and the estimated fair value of ACS’s assets acquired and liabilities assumed, effective July 23, 2013 (amounts in thousands):
Purchase price:
 
Previously Reported
Adjustments
Final Purchase Price Allocation
Cash consideration paid
 
$
100,000

—

100,000

Fair value of the one-third ownership interest of AWN
 
267,642

(2,131
)
265,511

Total purchase price
 
$
367,642

(2,131
)
365,511

 
 
 
 
 
Assets acquired and liabilities assumed:
 
 
 
 
Acquired assets
 
 
 
 
Current assets
 
$
16,952

11

16,963

Property and equipment, including construction in progress
 
82,473

138

82,611

Goodwill
 
140,081

8,867

148,948

Wireless licenses
 
65,433

(5,053
)
60,380

Rights to use capacity
 
52,636

(7,298
)
45,338

Other assets
 
16,078

1,204

17,282

Fair value of liabilities assumed
 
(6,011
)
—

(6,011
)
Total fair value of assets acquired and liabilities assumed
 
$
367,642

(2,131
)
365,511



Unaudited pro forma financial information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on January 1, 2013, nor is it necessarily indicative of the future revenue of the combined company as it includes estimates of the acquired entity revenue. The following unaudited pro forma financial information is presented as if the acquisition occurred on January 1, 2013 (amounts in thousands):
 
(unaudited)
 
(unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2013
 
2013
Pro forma consolidated revenue
$
227,132

 
445,230



Supplemental pro forma earnings have not been provided as it would be impracticable due to the nature of GCI's and ACS's respective wireless operations prior to the business combination. GCI and ACS were unable to disaggregate the components of expenses related to their wireless operations contributed to AWN and thus the amounts would require estimates so significant that the resulting information would not be meaningful.

(e)
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations.

(f)
Regulatory Accounting
We account for our regulated operations in accordance with the accounting principles for regulated enterprises.  These accounting principles recognize the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities.  Accordingly, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years.  Our cost studies and depreciation rates for our regulated operations are subject to periodic audits that could result in a change to recorded revenues.

(g) Earnings per Common Share
We compute net income attributable to GCI per share of Class A and Class B common stock using the “two class” method.  Therefore, basic net income per share is computed by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period.  The computation of the dilutive net income per share of Class A common stock assumes the conversion of Class B common stock to Class A common stock, while the dilutive net income per share of Class B common stock does not assume the conversion of those shares. Additionally, in applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities. Our restricted stock grants are entitled to dividends and meet the criteria of a participating security.

Undistributed earnings for each year are allocated based on the contractual participation rights of Class A and Class B common shares as if the earnings for the year had been distributed.  In accordance with our Articles of Incorporation, if and when dividends are declared on our common stock in accordance with Alaska corporate law, equivalent dividends shall be paid with respect to the shares of Class A and Class B common stock. Both classes of common stock have identical dividend rights and would therefore share equally in our net assets in the event of liquidation. As such, we have allocated undistributed earnings on a proportionate basis.

Earnings per common share (“EPS”) and common shares used to calculate basic and diluted EPS consist of the following (amounts in thousands, except per share amounts):
 
Three Months Ended June 30,
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class B
Basic net income per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
7,534

 
621

 
$
3,862

 
318

Denominator:
 

 
 

 
 

 
 

Weighted average common shares
  outstanding
38,383

 
3,162

 
37,979

 
3,132

Basic net income attributable to GCI
  common stockholders per common share
$
0.20

 
0.20

 
$
0.10

 
0.10


Diluted net income per share:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Allocation of undistributed earnings for
  basic computation
$
7,534

 
621

 
$
3,862

 
318

Reallocation of undistributed earnings as a
  result of conversion of Class B to Class A
  shares
621

 
—

 
318

 
—

Reallocation of undistributed earnings as a
  result of conversion of dilutive securities
—

 
(3
)
 
—

 
(6
)
Effect of share based compensation that may be
  settled in cash or shares
$
(9
)
 
—

 
$
(60
)
 
—

Net income adjusted for allocation of
  undistributed earnings and effect of
  share based compensation that may be settled
  in cash or shares
$
8,146

 
618

 
$
4,120

 
312

Denominator:
 

 
 

 
 

 
 

Number of shares used in basic computation
38,383

 
3,162

 
37,979

 
3,132

Conversion of Class B to Class A common
  shares outstanding
3,162

 
—

 
3,132

 
—

Unexercised stock options
122

 
—

 
164

 
—

Effect of share based compensation that may be
  settled in cash or shares
26

 
—

 
90

 
—

Number of shares used in per share computation
41,693

 
3,162

 
41,365

 
3,132

Diluted net income attributable to GCI
  common stockholders per common share
$
0.20

 
0.20

 
$
0.10

 
0.10


 
Six Months Ended June 30,
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class B
Basic net income per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
9,490

 
786

 
$
6,855

 
569

Denominator:
 
 
 
 
 
 
 
Weighted average common shares
  outstanding
38,186

 
3,163

 
38,117

 
3,167

Basic net income attributable to GCI
  common stockholders per common share
$
0.25

 
0.25

 
$
0.18

 
0.18


Diluted net income per share:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Allocation of undistributed earnings for
  basic computation
$
9,490

 
786

 
$
6,855

 
569

Reallocation of undistributed earnings as a
  result of conversion of Class B to Class A
  shares
786

 
—

 
569

 
—

Reallocation of undistributed earnings as a
  result of conversion of dilutive securities
—

 
(3
)
 
—

 
(10
)
Effect of share based compensation that may be
  settled in cash or shares
$
(2
)
 
—

 
$
(94
)
 
—

Net income adjusted for allocation of
  undistributed earnings and effect of
  share based compensation that may be settled
  in cash or shares
$
10,274

 
783

 
$
7,330

 
559

Denominator:
 

 
 

 
 

 
 

Number of shares used in basic computation
38,186

 
3,163

 
38,117

 
3,167

Conversion of Class B to Class A common
  shares outstanding
3,162

 
—

 
3,167

 
—

Unexercised stock options
121

 
—

 
168

 
—

Effect of share based compensation that may be
  settled in cash or shares
26

 
—

 
90

 
—

Number of shares used in per share computation
41,495

 
3,163

 
41,542

 
3,167

Diluted net income attributable to GCI
  common stockholders per common share
$
0.25

 
0.25

 
$
0.18

 
0.18



Weighted average shares associated with outstanding share awards for the three and six months ended June 30, 2014 and 2013, which have been excluded from the computations of diluted EPS, because the effect of including these share awards would have been anti-dilutive, consist of the following (shares, in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Shares associated with anti-dilutive unexercised
  stock options
28

 
88

 
31

 
88



There were no shares associated with contingent awards for the three and six months ended June 30, 2014. There were 50,000 shares associated with contingent awards for the three and six months ended June 30, 2013, which have been excluded from the computation of diluted EPS because the contingencies of these awards were not met at June 30, 2013.
 
(h) Common Stock
Following are the changes in issued common stock for the six months ended June 30, 2014 and 2013 (shares, in thousands):
 
Class A
 
Class B
Balances at December 31, 2012
38,534

 
3,169

Class B shares converted to Class A
2

 
(2
)
Shares issued upon stock option exercises
51

 
—

Share awards issued
664

 
—

Shares retired
(1,538
)
 
—

Shares acquired to settle minimum statutory tax
  withholding requirements
(17
)
 
—

Other
(2
)
 
—

Balances at June 30, 2013
37,694

 
3,167

 
 
 
 
Balances at December 31, 2013
37,299

 
3,165

Class B shares converted to Class A
3

 
(3
)
Shares issued upon stock option exercises
20

 
—

Share awards issued
1,187

 
—

Shares retired
(29
)
 
—

Shares acquired to settle minimum statutory tax
  withholding requirements
(25
)
 
—

Balances at June 30, 2014
38,455

 
3,162



GCI’s Board of Directors has authorized a common stock buyback program for the repurchase of GCI’s Class A and Class B common stock in order to reduce the outstanding shares of Class A and Class B common stock.  We are authorized to increase our repurchase limit $5.0 million per quarter indefinitely and to use stock option exercise proceeds to repurchase additional shares.  If stock repurchases are less than the total approved quarterly amount the difference may be carried forward and used to repurchase additional shares in future quarters.  The cost of the repurchased common stock reduced Common Stock on our Consolidated Balance Sheets.

Except for shares acquired to satisfy minimum statutory withholding requirements upon vesting of restricted stock, we had no common stock repurchases during the six months ended June 30, 2014. During the three and six months ended June 30, 2013, we repurchased 0.7 million and 1.5 million shares, respectively, of our Class A common stock under the stock buyback program at a cost of $6.3 million and $12.9 million, respectively. Under this program we are currently authorized to make up to $116.1 million of repurchases as of June 30, 2014.  The stock repurchased during the six months ended June 30, 2013 was constructively retired as of June 30, 2013.

We expect to continue the repurchases for an indefinite period dependent on leverage, liquidity, company performance, and market conditions and subject to continued oversight by GCI’s Board of Directors.

(i) Accounts Receivable and Allowance for Doubtful Receivables
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful receivables is our best estimate of the amount of probable credit losses in our existing accounts receivable. We base our estimates on the aging of our accounts receivable balances, financial health of specific customers, regional economic data, changes in our collections process, regulatory requirements and our customers’ compliance with Universal Service Administrative Company rules. We review our allowance for doubtful receivables methodology at least annually.

Depending upon the type of account receivable our allowance is calculated using a pooled basis with an allowance for all accounts greater than 120 days past due or a specific identification method.  When a specific identification method is used, potentially uncollectible accounts due to bankruptcy or other issues are reviewed individually for collectability.  Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.

(j) Revenue Recognition
We recorded high cost support revenue under the Universal Service Fund (“USF”) program of $17.0 million and $10.5 million for the three months ended June 30, 2014 and 2013, respectively, and $33.5 million and $21.1 million for the six months ended June 30, 2014 and 2013, respectively.  At June 30, 2014, we have $47.4 million in high cost support accounts receivable.

(k) Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant items subject to estimates and assumptions include the allowance for doubtful receivables, unbilled revenues, accrual of the USF high cost Remote area program support, share-based compensation, inventory at lower of cost or market, reserve for future customer credits, liability for incurred but not reported medical insurance claims, valuation allowances for deferred income tax assets, depreciable and amortizable lives of assets, the carrying value of long-lived assets including goodwill, cable certificates, wireless licenses,and broadcast licenses, our effective tax rate, purchase price allocations, deferred lease expense, asset retirement obligations, the accrual of cost of goods sold (exclusive of depreciation and amortization expense) (“Cost of Goods Sold”), depreciation and the accrual of contingencies and litigation.  Actual results could differ from those estimates.

(l) Classification of Taxes Collected from Customers
We report sales, use, excise, and value added taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between us and a customer on a net basis in our Consolidated Income Statements.  The following are certain surcharges reported on a gross basis in our Consolidated Income Statements (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Surcharges reported gross
$
1,101

 
1,205

 
2,234

 
2,432



(m) Income Taxes
Income taxes were computed using an effective tax rate, which is subject to ongoing review and evaluation. Our effective tax rate for the three and six months ended June 30, 2014 is lower than the U.S. statutory rate due primarily to the inclusion of income attributable to the non-controlling interest in AWN in income before income tax expense and the exclusion of income taxes on income attributable to the non-controlling interest in AWN.

(n)
Reclassifications
Reclassifications have been made to the 2013 financial statements to make them comparable with the 2014 presentation.