WOW(WOW) - 2022 Q3 - Quarterly Report

PART I. Financial Information Item 1: Financial Statements (Unaudited) This section details WideOpenWest, Inc.'s unaudited condensed consolidated financial statements, highlighting asset and liability changes, net income reduction, and a shift in operating cash flow due to asset sales Condensed Consolidated Balance Sheets | Metric | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | Change (in millions) | | :-------------------------------- | :------------------------- | :------------------------- | :------------------- | | Total Assets | $1,747.0 | $1,906.7 | $(159.7) | | Cash and cash equivalents | $45.3 | $193.2 | $(147.9) | | Total Liabilities | $1,154.0 | $1,335.9 | $(181.9) | | Accrued liabilities and other | $59.4 | $218.7 | $(159.3) | | Long-term debt and finance lease obligations, net | $718.0 | $723.5 | $(5.5) | | Total Stockholders' Equity | $593.0 | $570.8 | $22.2 | Condensed Consolidated Statements of Operations | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Revenue | $173.7 | $184.0 | $524.4 | $547.4 | | Income from operations | $9.9 | $3.5 | $24.8 | $1.7 | | Interest expense | $(10.5) | $(22.4) | $(25.8) | $(82.6) | | Income (loss) from continuing operations before tax | $0.9 | $(17.0) | $14.7 | $(78.5) | | Income (loss) from continuing operations | $0.5 | $(21.2) | $10.2 | $(66.4) | | Income from discontinued operations, net of tax | — | $539.1 | — | $606.3 | | Net income | $0.5 | $517.9 | $10.2 | $539.9 | | Basic EPS - continuing operations | $0.01 | $(0.26) | $0.12 | $(0.80) | | Diluted EPS - continuing operations | $0.01 | $(0.26) | $0.12 | $(0.80) | | Basic EPS - discontinued operations | — | $6.50 | — | $7.34 | | Diluted EPS - discontinued operations | — | $6.50 | — | $7.34 | | Basic EPS | $0.01 | $6.24 | $0.12 | $6.54 | | Diluted EPS | $0.01 | $6.24 | $0.12 | $6.54 | Condensed Consolidated Statements of Comprehensive Income | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net income | $0.5 | $517.9 | $10.2 | $539.9 | | Unrealized gain on derivative instrument, net of tax | — | — | — | $6.5 | | Comprehensive income | $0.5 | $517.9 | $10.2 | $546.4 | Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | Jan 1, 2022 (in millions) | Sep 30, 2022 (in millions) | Change (in millions) | | :-------------------------- | :------------------------ | :------------------------ | :------------------- | | Total Stockholders' Equity | $570.8 | $593.0 | $22.2 | | Stock-based compensation | — | $19.0 (YTD) | $19.0 | | Net income | — | $10.2 (YTD) | $10.2 | | Purchase of shares | — | $(7.0) (YTD) | $(7.0) | Condensed Consolidated Statements of Cash Flows | Metric | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | Change (in millions) | | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :------------------- | | Net cash (used in) provided by operating activities | $(12.8) | $239.5 | $(252.3) | | Net cash (used in) provided by investing activities | $(113.2) | $946.4 | $(1,059.6) | | Net cash used in financing activities | $(21.9) | $(1,138.7) | $1,116.8 | | (Decrease) increase in cash and cash equivalents | $(147.9) | $47.2 | $(195.1) | | Cash and cash equivalents, end of period | $45.3 | $59.6 | $(14.3) | | Capital expenditures | $(114.5) | $(167.4) | $52.9 | | Proceeds from sale of Ohio markets, net | — | $1,112.5 | $(1,112.5) | | Cash paid for interest | $24.3 | $81.9 | $(57.6) | | Cash paid for income taxes, net | $142.7 | $2.2 | $140.5 | Notes to the Condensed Consolidated Financial Statements - The company operates as one reportable segment, offering high-speed data (HSD), cable television (Video), and digital telephony (Telephony) services in 14 U.S. markets[21][22] - The 2021 sales of Cleveland, Columbus, Chicago, Evansville, and Baltimore markets are presented as discontinued operations, significantly impacting prior year's financial results[28][105] - Revenue from contracts with customers is primarily from monthly recurring subscription fees, accounting for 93% of total revenue for the nine months ended September 30, 2022 and 2021[85] - Long-term debt was refinanced in December 2021, consisting of a $730.0 million Term Loan B and a $250.0 million revolving credit commitment, secured by substantially all company assets[46] - Stock-based compensation expense for the nine months ended September 30, 2022, was $18.5 million, up from $11.6 million in the prior year[57] - The company is vigorously defending against a Sprint patent infringement claim related to VoIP services, with trial scheduled for April 24, 2023[71] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations WOW is pursuing a 'broadband first' strategy with network expansion, experiencing decreased revenue from continuing operations but improved operating income due to expense reductions and debt refinancing Overview - WOW is a leading broadband services provider offering HSD, Video, and Telephony services to residential and business customers in 14 U.S. markets[75] - The core strategy is 'broadband first,' with approximately 99% of the network offering HSD speeds up to 1 GIG, and a recently launched 1.2 GIG HSD tier[77][78] - The company is experiencing strong demand for HSD service, with approximately 88% of new connections being HSD-only and 76% of HSD-only new connections purchasing 500MB or higher speeds in Q3 2022, a 24% increase year-over-year[78] - Focus is on greenfield initiatives to expand the network into new, non-adjacent locations, including Seminole County and Orange County, Florida, and Greenville County, South Carolina[79] Key Transactions Impacting Operating Results and Financial Condition - The company completed the sale of Cleveland and Columbus, Ohio markets on September 1, 2021, and Chicago, Illinois, Evansville, Indiana, and Baltimore, Maryland markets on November 1, 2021[80] - The majority of the $1.8 billion net proceeds were utilized to pay down outstanding debt and refinance the credit agreement in December 2021[80] - These divestitures strengthened the financial position and will accelerate the broadband-first strategy, including investments in edge-outs, greenfield initiatives, and commercial services[80] - Term B Loans and Revolving Credit Facility were refinanced on December 20, 2021, with a new $730.0 million Term Loan B and a $250.0 million revolving credit commitment[81] Homes Passed and Subscribers | Metric | Sep 30, 2022 | Dec 31, 2021 | Change (Absolute) | Change (%) | | :---------------- | :----------- | :----------- | :---------------- | :--------- | | Homes passed | 1,886,000 | 1,882,100 | 3,900 | 0.21% | | Total subscribers | 538,100 | 532,900 | 5,200 | 0.98% | | HSD RGUs | 518,600 | 511,700 | 6,900 | 1.35% | | Video RGUs | 129,900 | 150,600 | (20,700) | -13.75% | | Telephony RGUs | 92,900 | 100,000 | (7,100) | -7.10% | | Total RGUs | 741,400 | 762,300 | (20,900) | -2.74% | | Edge-out Metric | Sep 30, 2022 | Dec 31, 2021 | Change (Absolute) | Change (%) | | :---------------------- | :----------- | :----------- | :---------------- | :--------- | | Edge-out Homes passed | 79,100 | 78,200 | 900 | 1.15% | | Edge-out Total subscribers | 19,800 | 19,300 | 500 | 2.59% | | Edge-out HSD RGUs | 19,700 | 19,200 | 500 | 2.60% | Financial Statement Presentation - Operating revenue primarily derives from monthly recurring charges for HSD, Video, Telephony, and other business services[84] - Subscription fees accounted for 93% of total revenue for both the nine months ended September 30, 2022 and 2021[85] - Key expenses include operating (programming, data, network, customer service), selling, general and administrative (salaries, marketing), and depreciation and amortization[86][87][88][89] - Programming expenses are expected to continue increasing per Video subscriber due to broadcaster demands and media consolidation, which the company cannot fully pass on to customers[90] Results of Operations - Continuing Operations | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | Change (%) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | Change (%) | | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :--------- | :---------------------------------------- | :---------------------------------------- | :--------- | | Total Revenue | $173.7 | $184.0 | -5.60% | $524.4 | $547.4 | -4.20% | | Residential subscription revenue | $132.7 | $142.6 | -6.94% | $402.4 | $424.6 | -5.23% | | Business subscription revenue | $27.7 | $27.7 | 0.00% | $83.2 | $82.3 | 1.09% | | Operating expenses (excl. D&A) | $79.1 | $93.4 | -15.31% | $249.4 | $286.9 | -13.00% | | Selling, general and administrative | $39.7 | $44.8 | -11.40% | $117.3 | $132.8 | -11.67% | | Depreciation and amortization | $45.0 | $42.3 | 6.38% | $132.9 | $126.0 | 5.48% | | Income from operations | $9.9 | $3.5 | 182.86% | $24.8 | $1.7 | 1358.82% | | Interest expense | $(10.5) | $(22.4) | -53.12% | $(25.8) | $(82.6) | -68.77% | | Other income, net | $1.5 | $1.9 | -21.05% | $15.7 | $2.4 | 554.17% | | Net income (loss) | $0.5 | $(21.2) | 102.36% | $10.2 | $(66.4) | 115.36% | - Subscription revenue decreased due to a $39.8 million shift in service offering mix (reduction in Video and Telephony RGUs) for the nine months ended September 30, 2022, partially offset by a $13.3 million increase in ARPU from HSD customers purchasing higher speed tiers and rate increases[94] - Operating expenses decreased primarily due to a $25.7 million reduction in programming expenses, aligning with the decline in Video RGUs[97][99] - Interest expense decreased significantly due to a lower outstanding principal balance from the December 2021 debt refinancing and the expiration of interest rate swap agreements in May 2021[103] - Other income increased for the nine-month period primarily due to providing nine months of transition services in 2022 compared to one month in 2021, following the asset sales[104] Results of Operations - Discontinued Operations | Metric | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Revenue | $83.7 | $293.9 | | Operating (excluding D&A) | $28.9 | $106.1 | | Selling, general and administrative | $5.2 | $10.7 | | Depreciation and amortization | — | $41.0 | | Income from operations | $49.6 | $136.1 | | Gain on sale of assets, net | $689.9 | $690.1 | | Income tax expense | $(200.4) | $(220.4) | | Net income | $539.1 | $606.3 | | Discontinued Revenue by Service | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :------------------------------ | :---------------------------------------- | :---------------------------------------- | | Residential subscription | $71.5 | $253.0 | | Business subscription | $8.0 | $27.1 | | Total subscription services revenue | $79.5 | $280.1 | - The company entered into transition services agreements with buyers of the divested markets, providing services like IT, network, and business support for up to 12 months with optional extensions[106] - Income earned under these agreements is presented in other income, net, in continuing operations[32] Use of Incremental Contribution - Incremental contribution is a non-GAAP metric defined as subscription services revenue less costs directly incurred from third parties for providing such services[111] - It is used by management to assess financial performance and understand cash flow generation from subscription services[111] - Incremental contribution from continuing operations increased by $0.1 million for the three months ended September 30, 2022, and by $12.0 million (3%) for the nine months ended September 30, 2022, compared to the corresponding periods in 2021[98] - The increase is primarily related to a decrease in programming expense, which fell from $137.4 million to $111.7 million for the nine-month period, attributable to the decline in Video RGUs[99] | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Incremental contribution (Continuing) | $122.4 | $122.3 | $363.0 | $351.0 | | Incremental contribution (Total) | $122.4 | $179.5 | $363.0 | $547.0 | Liquidity and Capital Resources - As of September 30, 2022, outstanding consolidated debt was $736.1 million, with $18.1 million classified as current[115] - Cash and cash equivalents were $45.3 million, and available borrowing capacity under the Revolving Credit Facility was $245.6 million[115] - Management believes existing cash, borrowing capacity, and operating cash flows will provide sufficient resources for the next 12 months[115] - Net cash used in operating activities was $12.8 million for the nine months ended September 30, 2022, compared to $239.5 million provided in the prior year, primarily due to income tax payments from asset sales[119] - Net cash used in investing activities was $113.2 million for the nine months ended September 30, 2022, compared to $946.4 million provided in the prior year, mainly due to the absence of proceeds from asset sales[120] - Capital expenditures for continuing operations decreased by $11.7 million to $114.5 million for the nine months ended September 30, 2022, driven by reductions in network enhancement and CPE expenditures, offset by increases in line extensions and greenfield initiatives[121][123] | Capital Expenditure Category | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | Change (in millions) | | :--------------------------- | :---------------------------------------- | :---------------------------------------- | :------------------- | | Customer premise equipment | $48.1 | $55.2 | $(7.1) | | Scalable infrastructure | $23.8 | $30.3 | $(6.5) | | Line extensions | $16.7 | $11.5 | $5.2 | | Support capital and other | $25.9 | $29.2 | $(3.3) | | Total Capital Expenditures (Continuing) | $114.5 | $126.2 | $(11.7) | | Edge-outs | $3.4 | $3.2 | $0.2 | | Greenfields | $10.8 | — | $10.8 | Item 3: Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk stems from fluctuating interest rates on variable rate debt, with a 100 basis point SOFR increase impacting annual interest expense by $7.2 million - Primary market risk is from fluctuating interest rates on variable rate debt under the Senior Secured Credit Facility[126] - As of September 30, 2022, Term B Loans bear interest at SOFR + 3.00%, and Revolving Credit Facility at SOFR + 2.75%[126] - A hypothetical 100 basis point (1%) change in SOFR would result in an annual interest expense change of approximately $7.2 million[126] Item 4: Controls and Procedures Management confirmed the effectiveness of disclosure controls and procedures as of September 30, 2022, with no changes in internal control over financial reporting during Q3 2022 - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022[129] - No changes in internal control over financial reporting occurred during the third quarter of 2022[130] PART II. Other Information Item 1: Legal Proceedings The company faces ongoing legal proceedings, including a Sprint patent infringement claim, but management anticipates no material adverse impact on financial position or operations - Sprint Communications Company L.P. filed a patent infringement claim against the company (and others) related to VoIP services on March 7, 2018[71] - The company is vigorously defending against the claims and pursuing indemnification from equipment providers; trial is scheduled for April 24, 2023[71] - Management believes the ultimate resolution of all pending legal matters will not have a material adverse effect on the company's financial position, results of operations, or cash flows[73] Item 1A: Risk Factors No material changes were reported to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2021[134] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2022, WOW repurchased 56,282 shares at an average of $18.03 per share, mainly for tax payments on vested restricted stock awards | Period | Number of Shares Purchased (1) | Average Price Paid per Share | | :---------------- | :----------------------------- | :--------------------------- | | July 1 - 31, 2022 | 2,203 | $18.54 | | August 1 - 31, 2022 | 46,940 | $19.56 | | September 1 - 30, 2022 | 7,139 | $13.99 | | Total Q3 2022 | 56,282 | $18.03 (weighted avg) | - Shares purchased represent shares withheld from employees for the payment of taxes upon the vesting of restricted stock awards[135] Item 3: Defaults Upon Senior Securities The company reported no defaults on its senior securities - No defaults upon senior securities[136] Item 4: Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[137] Item 5: Other Information No other information was reported for this item - None[138] Item 6: Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, CEO/CFO certifications, and iXBRL financial information - Includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[140] - Financial information is formatted in iXBRL (inline eXtensible Business Reporting Language)[140]