Quarterly report pursuant to Section 13 or 15(d)

Business and Summary of Significant Accounting Principles

v3.2.0.727
Business and Summary of Significant Accounting Principles
 6 Months Ended
Jun. 30, 2015
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:

•
Wireless telephone services and sale of wireless telephone handsets and accessories,
•
Video services,
•
Internet access services,
•
Local and long-distance telephone service,
•
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 owned a two-third interest through February 2, 2015 when we purchased the remaining one-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.  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 February 2, 2015, we purchased Alaska Communications Systems Group, Inc.'s (“ACS”) interest in AWN ("AWN NCI Acquisition") and substantially all the assets of ACS and its affiliates related to ACS’s wireless business (“Acquired ACS Assets”) (collectively the "Wireless Acquisition"). Under the terms of the agreement, we paid ACS $293.2 million, excluding working capital adjustments and subject to possible post-closing adjustments, and agreed to terminate certain agreements related to the use of ACS network assets that were included as part of the original transaction that closed in July 2013. The Acquired ACS Assets include substantially all of ACS’s wireless subscriber assets, including subscriber contracts, and certain of ACS’s CDMA network assets, including fiber strands and associated cell site electronics and microwave facilities and associated electronics. We assumed from ACS post-closing liabilities of ACS and its affiliates under contracts assumed by us and liabilities with respect to the ownership by ACS of its equity interest in AWN to the extent accruing and related to the period after closing. All other liabilities were retained by ACS and its affiliates.

We have accounted for the AWN NCI Acquisition as the acquisition of a non-controlling interest in accordance with Accounting Standards Codification ("ASC") 810, Consolidation, and the Acquired ACS Assets as the acquisition of assets that do not constitute a business in accordance with ASC 805-50, Business Combinations - Related Issues. Total consideration transferred to ACS in the transaction consisted of the cash payment, settlement of working capital, and the fair market value of certain rights to receive future capacity as part of the Wireless Acquisition agreement. The future capacity receivable assets transferred as consideration were adjusted to fair value as of the acquisition date resulting in a gain of $1.2 million recorded in our Consolidated Statements of Operations for the six months ended June 30, 2015. We allocated the total consideration transferred to ACS between the AWN NCI Acquisition and the Acquired ACS Assets based on the relative fair values of the assets and non-controlling interest received.

The following table summarizes the allocation of total consideration transferred to ACS between the AWN NCI Acquisition and the Acquired ACS Assets (amounts in thousands):
Total consideration transfered to ACS
 
$
304,838

 
 
 
Allocation of consideration between wireless assets and non-controlling interest acquired:
 
 
AWN non-controlling interest
 
$
303,831

Property and equipment
 
746

Other intangible assets
 
261

Total consideration
 
$
304,838



We have accounted for the AWN NCI Acquisition as an equity transaction, with the carrying amount of the non-controlling interest adjusted to reflect the change in ownership of AWN. The difference between the fair value of consideration paid and the carrying amount of the non-controlling interest has been recognized as additional paid-in capital in our Consolidated Statement of Stockholders' Equity. The impact of the AWN NCI Acquisition is summarized in the following table (amounts in thousands):
Reduction of non-controlling interest
 
$
268,364

Additional paid-in capital
 
35,467

Fair value of consideration paid for acquisition of equity interest
 
$
303,831



Pursuant to the accounting guidance in ASC 805-50, we determined that the Acquired ACS Assets did not meet the criteria necessary to constitute a business combination and was therefore accounted for as an asset purchase. We recognized the assets acquired in our Consolidated Balance Sheets at their allocated cost on the day of acquisition.

In conjunction with the Wireless Acquisition, we amended certain agreements related to the right to use ACS network assets. We adjusted the related right to use asset to fair value as of the acquisition date resulting in a loss of $3.8 million recorded in our Consolidated Statements of Operations for the six months ended June 30, 2015.

(e)
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. 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, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. Early adoption is permitted for annual periods beginning December 15, 2016. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The update is in response to accounting complexity concerns, particularly from the asset management industry. ASU 2015-02 modifies the consolidation evaluation for reporting organizations that are required to determine whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including early adoption in an interim period. The adoption of this guidance is not expected to have a material effect on our financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity should apply the new guidance on a retrospective basis. We expect to adopt this guidance when effective, and do not expect this guidance to have a material effect on our financial position or results of operation, although it will change the financial statement classification of our debt issuance costs.

In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Updates. The amendments in this update cover a wide range of topics in the codification and are generally categorized as follows: Amendments Related to Differences between Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and, Minor Improvements. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, but not required; at this time we are not early adopting. As the objectives of this standard are to clarify the codification, correct unintended application of guidance, eliminate inconsistencies, and, to improve the codification’s presentation of guidance, the adoption of this standard is not expected to have a material effect on our financial position or results of operations.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. The ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. 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 (Loss) per Common Share
We compute net income (loss) attributable to GCI per share of Class A and Class B common stock using the “two class” method.  Therefore, basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common and dilutive common equivalent shares outstanding during the period.  The computation of the dilutive net income (loss) 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 (loss) 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.

We allocate undistributed earnings in periods of net income based on the contractual participation rights of Class A common shares, Class B common shares and participating securities as if the earnings for the period had been distributed. We do not allocate undistributed earnings to participating securities in periods in which we have a net loss. 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, including participating securities. 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 (loss) 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,
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
Basic net income (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) available to common stockholders
$
(14,330
)
 
(1,297
)
 
$
5,476

 
451

Less: Undistributed income allocable to participating securities
—

 
—

 
(320
)
 
—

Undistributed income (loss) allocable to common stockholders
(14,330
)
 
(1,297
)
 
5,156

 
451

Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
34,887

 
3,159

 
36,143

 
3,162

Basic net income (loss) attributable to GCI common stockholders per common share
$
(0.41
)
 
(0.41
)
 
$
0.14

 
0.14


 
Three Months Ended June 30,
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
Diluted net income per share:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Allocation of undistributed earnings (loss) for basic computation
$
(14,330
)
 
(1,297
)
 
$
5,156

 
451

Reallocation of undistributed earnings (loss) as a result of conversion of Class B to Class A shares
(1,297
)
 
—

 
451

 
—

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

 
—

 
2

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

 
—

 
(5
)
 
—

Net income (loss) adjusted for allocation of undistributed earnings and effect of contracts that may be settled in cash or shares
$
(15,627
)
 
(1,297
)
 
$
5,604

 
449

Denominator:
 

 
 

 
 

 
 

Number of shares used in basic computation
34,887

 
3,159

 
36,143

 
3,162

Conversion of Class B to Class A common shares outstanding
3,159

 
—

 
3,162

 
—

Unexercised stock options
—

 
—

 
122

 
—

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

 
—

 
26

 
—

Number of shares used in per share computation
38,046

 
3,159

 
39,453

 
3,162

Diluted net income (loss) attributable to GCI common stockholders per common share
$
(0.41
)
 
(0.41
)
 
$
0.14

 
0.14


 
Six Months Ended June 30, 2015
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
Basic net income (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) available to common stockholders
$
(32,048
)
 
(2,848
)
 
$
6,526

 
541

Less: Undistributed income allocable to participating securities
—

 
—

 
(354
)
 
—

Undistributed income (loss) allocable to common stockholders
(32,048
)
 
(2,848
)
 
6,172

 
541

Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
35,548

 
3,159

 
36,112

 
3,163

Basic net income (loss) attributable to GCI common stockholders per common share
$
(0.90
)
 
(0.90
)
 
$
0.17

 
0.17


 
Six Months Ended June 30, 2015
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
Diluted net income per share:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Allocation of undistributed earnings (loss) for basic computation
$
(32,048
)
 
(2,848
)
 
$
6,172

 
541

Reallocation of undistributed earnings (loss) as a result of conversion of Class B to Class A shares
(2,848
)
 
—

 
541

 
—

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

 
—

 
1

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

 
—

 
(2
)
 
—

Net income (loss) adjusted for allocation of undistributed earnings and effect of contracts that may be settled in cash or shares
$
(34,896
)
 
(2,848
)
 
$
6,712

 
539

Denominator:
 

 
 

 
 

 
 

Number of shares used in basic computation
35,548

 
3,159

 
36,112

 
3,163

Conversion of Class B to Class A common shares outstanding
3,159

 
—

 
3,163

 
—

Unexercised stock options
—

 
—

 
121

 
—

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

 
—

 
26

 
—

Number of shares used in per share computation
38,707

 
3,159

 
39,422

 
3,163

Diluted net income (loss) attributable to GCI common stockholders per common share
$
(0.90
)
 
(0.90
)
 
$
0.17

 
0.17



Weighted average shares associated with outstanding securities for the three and six months ended June 30, 2015 and 2014, which have been excluded from the computations of diluted EPS, because the effect of including these securities would have been anti-dilutive, consist of the following (shares, in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Derivative instruments that may be settled in cash or shares, the effect of which is anti-dilutive
612

 
—

 
486

 
—

Shares associated with anti-dilutive unexercised stock options
120

 
28

 
119

 
31

Share-based compensation that may be settled in cash or shares, the effect of which is anti-dilutive
26

 
—

 
26

 
—

Total excluded
758

 
28

 
631

 
31


 
(h)
Common Stock
Following are the changes in issued common stock for the six months ended June 30, 2015 and 2014 (shares, in thousands):
 
Class A
 
Class B
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

 
 
 
 
Balances at December 31, 2014
37,998

 
3,159

Class B shares converted to Class A
1

 
(1
)
Shares issued upon stock option exercises
38

 
—

Share awards issued
647

 
—

Shares retired
(2,331
)
 


Shares acquired to settle minimum statutory tax withholding requirements
(73
)
 
—

Balances at June 30, 2015
36,280

 
3,158



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 and Retained Earnings on our Consolidated Balance Sheets.

During the three months ended June 30, 2015, we repurchased 1.2 million shares of our Class A common stock under the stock buyback program at a cost of $19.7 million. During the six months ended June 30, 2015, we repurchased 2.3 million shares of our Class A common stock under the stock buyback program at a cost of $35.9 million. We had no common stock repurchases during the six months ended June 30, 2014. The stock was constructively retired as of June 30, 2015. Under this program we are currently authorized to make up to $96.6 million of repurchases as of June 30, 2015.  

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 believe it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.

(j)
Derivative Financial Instruments
We account for our derivative instruments in accordance with ASC 815-10, Derivatives and Hedging. ASC 815-10 establishes accounting and reporting standards requiring that derivative instruments, including derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. ASC 815-10 also requires that changes in the fair value of derivative instruments be recognized currently in results of operations unless specific hedge accounting criteria are met. We have not entered into any hedging activities to date. We recognize all derivative instruments as either assets or liabilities in our Consolidated Balance Sheets at their respective fair values. Our derivative instrument (as described in Note 5) includes stock appreciation rights, which have been recorded as a liability at fair value, and will be revalued at each reporting date, with changes in the fair value of the instrument included in our Consolidated Statements of Operations as Derivative Instrument Unrealized Loss.

(k)
Guarantee Liabilities
We offer a device trade-in program, "Upgrade Now", which provides eligible customers a specified-price trade-in right to upgrade their device. Participating customers must have purchased a financed device using an Equipment Installment Plan ("EIP") from us and have a qualifying monthly wireless service plan with us. Upon qualifying for an Upgrade Now device trade-in, the customer's remaining EIP balance is settled provided they trade in their eligible used device in good working condition and purchase a new device from us on a new EIP.

For customers who enroll in Upgrade Now, we defer the portion of equipment sales revenue which represents the estimated value of the trade-in right guarantee. The guarantee liabilities are valued based on various economic and customer behavioral assumptions, including the customer's estimated remaining EIP balance at trade-in, the expected fair value of the used handset at trade-in and the probability and timing of a trade-in. The fair value measurements used are considered Level 3 under the Fair Value Measurements framework.

We assess facts and circumstances at each reporting date to determine if we need to adjust the guarantee liability. The recognition of subsequent adjustments to the guarantee liability as a result of these assessments are recorded as adjustments to revenue. When customers upgrade their devices, the difference between the trade-in credit to the customer and the fair value of the returned devices is recorded against the guarantee liabilities.

(l)
Revenue Recognition

Wireless
We offer new and existing wireless customers the option to participate in Upgrade Now, a program that is described above in Note 1(k). Upgrade Now is a multiple-element arrangement typically consisting of the trade-in right, handset, and one month of wireless service. At the inception of the arrangement, revenue is allocated between the separate units of accounting based upon each components' relative selling price on a standalone basis. This is subject to the requirement that revenue recognized is limited to the amounts already received from the customer that are not contingent on the delivery of additional products or services to the customer in the future.

We recognize the full amount of the trade-in right’s fair value (not an allocated value) as the guarantee liability and the remaining allocable consideration is allocated to the handset and wireless service. We recognize revenue for the entire amount of the EIP receivable at the time of sale, net of the fair value of the trade-in right guarantee and imputed interest. See Note 1(k) for more information on guarantee liabilities.

Remote and Urban High Cost Support
We recorded high cost support revenue under the Universal Service Fund (“USF”) program of $16.9 million and $17.0 million for the three months ended June 30, 2015 and 2014, respectively, and $34.1 million and $33.5 million for the six months ended June 30, 2015 and 2014, respectively.  At June 30, 2015, we have $45.3 million in high cost support accounts receivable.

(m)
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, the fair value of equity method investments evaluated for impairment, our effective tax rate, imputed interest rate, purchase price allocations, deferred lease expense, asset retirement obligations, the accrual of cost of goods sold (exclusive of depreciation and amortization expense), depreciation, the derivative stock appreciation rights liability, guarantee liability, and the accrual of contingencies and litigation.  Actual results could differ from those estimates.

(n)
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 Statements of Operations.  The following are certain surcharges reported on a gross basis in our Consolidated Statements of Operations (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Surcharges reported gross
$
1,384

 
1,101

 
2,533

 
2,234



(o)
Reclassifications
Reclassifications have been made to the 2014 financial statements to make them comparable with the 2015 presentation.