XNAS:TWTC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number 1-34243

tw telecom inc.
(Exact name of Registrant as specified in its charter)
 
 
 
 
Delaware
 
84-1500624
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
10475 Park Meadows Drive
Littleton, Colorado
 
80124
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (303) 566-1000
 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of tw telecom inc.’s common stock as of April 30, 2012 was 150,505,504 shares.
 
 
 
 
 



INDEX TO FORM 10-Q
 
 
 
 
 
 
Page
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 4.
Item 6.


2


Part I. Financial Information
Item 1. Financial Statements
tw telecom inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
March 31,
2012
 
December 31,
2011
 
 
(unaudited)
 
 
 
 
(amounts in thousands, except per share amounts)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
352,131

 
$
353,394

Investments
 
134,536

 
131,525

Receivables, less allowances of $8,649 and $8,192, respectively
 
91,421

 
96,182

Prepaid expenses and other current assets
 
18,334

 
17,340

Deferred income taxes
 
65,008

 
65,008

Total current assets
 
661,430

 
663,449

Property, plant and equipment
 
4,080,835

 
4,026,134

Less accumulated depreciation
 
(2,641,851
)
 
(2,598,922
)
 
 
1,438,984

 
1,427,212

Deferred income taxes
 
148,432

 
162,535

Goodwill
 
412,694

 
412,694

Intangible assets, net of accumulated amortization
 
16,335

 
17,742

Other assets, net
 
23,875

 
24,594

Total assets
 
$
2,701,750

 
$
2,708,226

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
56,142

 
$
52,739

Deferred revenue
 
42,923

 
42,253

Accrued taxes, franchise and other fees
 
65,840

 
66,880

Accrued interest
 
7,488

 
13,934

Accrued payroll and benefits
 
29,969

 
44,284

Accrued carrier costs
 
25,154

 
32,760

Current portion debt and capital lease obligations
 
108,482

 
7,733

Other current liabilities
 
31,132

 
31,361

Total current liabilities
 
367,130

 
291,944

Long-term debt and capital lease obligations, net
 
1,257,779

 
1,352,820

Long-term deferred revenue
 
22,041

 
22,296

Other long-term liabilities
 
35,784

 
35,445

Commitments and contingencies (Note 8)
 


 


Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value, 20,000 shares authorized, no shares issued and outstanding
 

 

Common stock, $0.01 par value, 439,800 shares authorized and 151,953 shares issued
 
1,520

 
1,520

Additional paid-in capital
 
1,821,987

 
1,823,856

Treasury stock, 1,579 and 2,909 shares, at cost, respectively
 
(29,669
)
 
(53,156
)
Accumulated deficit
 
(774,833
)
 
(766,518
)
Accumulated other comprehensive income
 
11

 
19

Total stockholders’ equity
 
1,019,016

 
1,005,721

Total liabilities and stockholders’ equity
 
$
2,701,750

 
$
2,708,226

See accompanying notes to condensed consolidated financial statements.

3


tw telecom inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
(amounts in thousands, except per share amounts)
Revenue:
 
 
 
 
Data and Internet services
 
$
176,851

 
$
152,187

Voice services
 
89,621

 
83,024

Network services
 
84,804

 
89,511

Intercarrier compensation
 
7,649

 
7,820

Total revenue
 
358,925

 
332,542

Costs and expenses (a):
 
 
 
 
Operating (exclusive of depreciation, amortization and accretion shown separately below)
 
149,193

 
139,729

Selling, general and administrative
 
86,090

 
78,815

Depreciation, amortization and accretion
 
68,394

 
69,736

Total costs and expenses
 
303,677

 
288,280

Operating income
 
55,248

 
44,262

Interest expense
 
(21,581
)
 
(21,972
)
Interest income
 
104

 
143

Income before income taxes
 
33,771

 
22,433

Income tax expense
 
14,439

 
9,814

Net income
 
$
19,332

 
$
12,619

Earnings per share:
 
 
 
 
Basic
 
$
0.13

 
$
0.08

Diluted
 
$
0.13

 
$
0.08

Weighted average shares outstanding:
 
 
 
 
Basic
 
146,967

 
147,565

Diluted
 
149,090

 
149,694


(a) Includes non-cash stock-based employee compensation expense (Note 7):
Operating
 
$
500

 
$
588

Selling, general and administrative
 
$
7,628

 
$
6,860


See accompanying notes to condensed consolidated financial statements.

4


tw telecom inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
(amounts in thousands)
Net income
 
$
19,332

 
$
12,619

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain on cash flow hedging activities
 

 
519

Unrealized (loss) gain on available-for-sale securities
 
(8
)
 
45

Other comprehensive income (loss), net of tax
 
(8
)
 
564

Comprehensive income
 
$
19,324

 
$
13,183


See accompanying notes to condensed consolidated financial statements.

5


tw telecom inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
(amounts in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
19,332

 
$
12,619

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
68,394

 
69,736

Deferred income taxes
 
14,030

 
9,486

Stock-based compensation expense
 
8,128

 
7,448

Amortization of discount on debt and deferred debt issue costs and other
 
6,121

 
5,695

Changes in operating assets and liabilities:
 
 
 
 
Receivables, prepaid expenses and other assets
 
4,588

 
(2,111
)
Accounts payable, deferred revenue and other liabilities
 
(26,232
)
 
(3,823
)
Net cash provided by operating activities
 
94,361

 
99,050

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(76,783
)
 
(79,276
)
Purchases of investments
 
(40,102
)
 
(42,735
)
Proceeds from sale of investments
 
36,474

 
43,286

Proceeds from sale of assets and other investing activities, net
 
301

 
(1,591
)
Net cash used in investing activities
 
(80,110
)
 
(80,316
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of common stock upon exercise of stock options
 
7,360

 
2,541

Taxes paid related to net share settlement of equity awards
 
(9,925
)
 
(5,268
)
Purchases of treasury stock
 
(11,519
)
 
(8,859
)
Excess tax benefits from stock-based compensation
 
448

 

Payment of debt and capital lease obligations
 
(1,878
)
 
(1,855
)
Net cash used in financing activities
 
(15,514
)
 
(13,441
)
(Decrease) increase in cash and cash equivalents
 
(1,263
)
 
5,293

Cash and cash equivalents at beginning of period
 
353,394

 
356,922

Cash and cash equivalents at end of period
 
$
352,131

 
$
362,215

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
22,361

 
$
24,345

Cash paid for income taxes, net of refunds
 
$
(24
)
 
$
(31
)
Addition of capital lease obligation
 
$
2,326

 
$

See accompanying notes to condensed consolidated financial statements.

6


tw telecom inc.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Three months ended March 31, 2012
(Unaudited)
 
 
 
Common Stock
 
Treasury Stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income
 
Total
stockholders’
equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
(amounts in thousands)
Balance at December 31, 2011
 
151,953

 
$
1,520

 
(2,909
)
 
$
(53,156
)
 
$
1,823,856

 
$
(766,518
)
 
$
19

 
$
1,005,721

Net income
 

 

 

 

 

 
19,332

 

 
19,332

Unrealized loss on available-for-sale securities, net of tax
 

 

 

 

 

 

 
(8
)
 
(8
)
Excess tax benefits (shortfalls) from stock-based compensation
 

 

 

 

 
(73
)
 

 

 
(73
)
Purchases of treasury stock
 

 

 
(521
)
 
(11,519
)
 

 

 

 
(11,519
)
Exercise of stock options net of withholdings to satisfy employee tax obligations upon vesting of stock awards
 

 

 
675

 
12,006

 
(12,578
)
 
(1,993
)
 

 
(2,565
)
Stock-based compensation
 

 

 
1,176

 
23,000

 
10,782

 
(25,654
)
 

 
8,128

Balance at March 31, 2012
 
151,953

 
$
1,520

 
(1,579
)
 
$
(29,669
)
 
$
1,821,987

 
$
(774,833
)
 
$
11

 
$
1,019,016

See accompanying notes to condensed consolidated financial statements.

7


tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Description of Business and Capital Structure
tw telecom inc. (together with its wholly-owned subsidiaries, the “Company”) is a leading national provider of managed network services, specializing in business Ethernet, data networking, converged, IP based virtual private network or "IP VPN", Internet access, voice, including voice over Internet Protocol or “VoIP”, and network security services to enterprise organizations, including public sector entities, and carriers throughout the United States, including their global locations.
The Company has one class of common stock outstanding with one vote per share. The Company also is authorized to issue shares of preferred stock. The Company’s Board of Directors has the authority to establish voting powers, preferences, and special rights for the preferred stock. No shares of preferred stock have been issued.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These condensed consolidated financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC. The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include all adjustments of a normal, recurring nature that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented. The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard update that eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this accounting standard update in the three months ended March 31, 2012. This update affected presentation and disclosure, but did not affect the Company’s consolidated financial position, results of operations or cash flows. 
In September 2011, the FASB issued an accounting standard update intended to simplify goodwill impairment testing. Entities will have the option to perform a qualitative assessment on goodwill impairment to determine if a quantitative assessment is necessary. The accounting standard update is effective for fiscal years beginning after December 15, 2011. The Company adopted the new guidance effective January 1, 2012. This update affects testing steps only and therefore adoption will not affect the Company’s consolidated financial position, results of operations or cash flows.
Revenue
The Company’s revenue is derived primarily from business communications services comprised of the following:
Data and Internet services include services that enable customers to connect their internal computer networks and to access external networks, including Internet access at high speeds using Ethernet protocol, metropolitan and wide-area business Ethernet, and IP VPN solutions.
Voice services include traditional and next generation voice capabilities, including voice services provided as stand alone and bundled services, long distance, toll free services and VoIP.

8

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Network services are point-to-point services that transmit voice, data and images as well as enable transmission for storage using state-of-the-art fiber optics, and collocation services that provide secure space with controlled climate and power where customers can locate their equipment to connect to the Company’s network in facilities equipped for enterprise information technology environmental requirements.
The Company also provides converged services, which fully integrate a combination of certain communication applications including IP VPN, voice, Internet, security and managed router service into a single managed IP solution. The various components of converged services are classified into the pertinent service categories in the condensed consolidated statements of operations.
The Company also generates revenue from intercarrier compensation. Intercarrier compensation is comprised of switched access services and reciprocal compensation. Switched access represents the compensation from another carrier for the delivery of traffic from a long distance carrier’s point of presence to an end-user’s premises provided through the Company’s switching facilities. The Federal Communications Commission ("FCC") and state public utility commissions regulate switched access rates in their respective jurisdictions. Reciprocal compensation represents compensation from local exchange carriers (“LECs”) for local exchange traffic originated on another LEC’s facilities and terminated on the Company’s facilities.
The Company’s customers include, among others, enterprise organizations in the distribution, health care, finance, service and manufacturing industries, state, local and federal government entities, system integrators, and communication service providers, including incumbent local exchange carriers ("ILECs"), competitive local exchange carriers ("CLECs"), wireless communications companies and cable companies.
Revenue for network, data and Internet, and the majority of voice services is generally billed in advance on a monthly fixed rate basis and recognized over the period the services are provided. Revenue for the majority of intercarrier compensation and certain components of voice services, such as long distance, is generally billed on a transactional basis in arrears based on a customer’s actual usage; therefore, estimates are used to recognize revenue in the period earned.
The Company evaluates whether receivables are reasonably assured of collection based on certain factors, including the likelihood of billing being disputed by customers. If there is a billing dispute with a customer, revenue generally is not recognized until the dispute is resolved. The Company does not recognize revenue associated with contract termination charges until cash is received.
The Company classifies certain taxes and fees billed to customers and remitted to government authorities on a gross versus net basis in revenue and expense. In making this determination, the Company assesses, among other things, whether the Company is the primary obligor or principal taxpayer for the taxes and fees assessed in each jurisdiction where the Company does business. In jurisdictions where the Company determines that it is the principal taxpayer, the Company records the taxes and fees on a gross basis, including the taxes and fees in revenue and expense. In jurisdictions where the Company determines that it is merely a collection agent for the government authority, the Company records the taxes on a net basis. The total amounts classified as revenue, primarily included in voice services, associated with such taxes and fees were approximately $19.7 million and $15.1 million for the three months ended March 31, 2012 and 2011, respectively.
Significant Customers
The Company has substantial business relationships with a few large customers, including major telecommunications carriers. The Company’s 10 largest customers accounted for an aggregate of 19% of the Company’s total revenue in each of the three months ended March 31, 2012 and 2011. No customer accounted for 10% or more of total revenue for the three months ended March 31, 2012 or 2011. The Company’s largest customer (AT&T Inc., a carrier) represented 4% of the Company’s total revenue in each of the three months ended March 31, 2012 and 2011.
2. Earnings per Common Share and Potential Common Share
Basic earnings per common share (“EPS”) is measured as the income allocated to common stockholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (such as convertible securities and stock options) as if they had been converted to shares at the beginning of the period presented. Potential common shares that have an anti-dilutive effect (e.g., those that increase income per share) are excluded from diluted EPS.

9

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following is a reconciliation of the numerators and denominators used in the basic and diluted EPS computations:
 
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
(amounts in thousands, except per share amounts)
Numerator
 
 
 
 
Net income
 
$
19,332

 
$
12,619

Allocation of net income to unvested restricted stock awards
 
(404
)
 
(225
)
Net income allocated to common stockholders, basic
 
$
18,928

 
$
12,394

Net income allocated to common stockholders, diluted
 
$
18,928

 
$
12,394

Denominator
 
 
 
 
Basic weighted average shares outstanding
 
146,967

 
147,565

Dilutive potential common shares:
 
 
 
 
Stock options
 
1,504

 
1,624

Unvested restricted stock units
 
619

 
505

Diluted weighted average shares outstanding
 
149,090

 
149,694

Basic earnings per share
 
$
0.13

 
$
0.08

Diluted earnings per share
 
$
0.13

 
$
0.08

 
Options to purchase shares of the Company’s common stock, restricted stock awards, restricted stock units to be settled in common stock upon vesting and shares of common stock subject to issuance upon conversion of the Company’s Convertible Senior Debentures due 2026 (“Convertible Debentures”), which were excluded from the computation of diluted weighted average shares outstanding because their inclusion would be anti-dilutive, totaled 24.6 million shares and 28.0 million shares for the three months ended March 31, 2012 and 2011, respectively.
3. Investments
The Company’s investments at March 31, 2012 and December 31, 2011 are summarized as follows:
 
 
 
March 31,
2012
 
December 31,
2011
 
 
(amounts in thousands)
Cash equivalents:
 
 
 
 
U.S. Treasury money market mutual funds
 
$
269,846

 
$
291,746

Commercial paper
 
7,898

 
8,497

Corporate debt securities
 
3,004

 

Certificates of deposit
 

 
5,201

International government securities
 

 
1,401

Total cash equivalents
 
280,748

 
306,845

Investments:
 
 
 
 
Corporate debt securities
 
103,755

 
99,132

Debt securities issued by U.S. Government agencies
 
27,777

 
27,885

Debt securities issued by the U.S. Treasury
 
3,004

 
3,008

Commercial paper
 

 
1,500

Total investments
 
134,536

 
131,525

Total cash equivalents and investments
 
$
415,284

 
$
438,370


10

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

At March 31, 2012 and December 31, 2011, the carrying values of investments included in cash and cash equivalents approximated fair value. The aggregate fair value of available-for-sale securities by major security type is included in Note 6. The amortized cost basis of the available-for-sale securities was not materially different from the aggregate fair value. The contractual maturities of the Company’s available-for-sale securities are all within one year.
Proceeds from the sale and maturity of available-for-sale securities were $36.5 million and $43.3 million during the three months ended March 31, 2012 and 2011, respectively. Gains and losses on investments are calculated using the specific identification method and are recognized during the period the investment is sold. The Company recognized no material unrealized or realized net gains or losses during the three months ended March 31, 2012 or 2011. 

4. Long-Term Debt and Capital Lease Obligations
The components of long-term debt and capital lease obligations at March 31, 2012 and December 31, 2011 were as follows:
 
 
 
March 31,
2012
 
December 31,
2011
 
 
(amounts in thousands)
Term Loan B - January 2013 tranche, due 2013
 
$
101,787

 
$
102,055

Term Loan B - extended tranche, due 2016
 
466,713

 
467,946

8% Senior Notes, due 2018
 
430,000

 
430,000

2 3/8% Convertible Senior Debentures, due 2026 (1)
 
373,744

 
373,744

Capital lease obligations
 
18,178

 
16,251

Total obligations
 
1,390,422

 
1,389,996

Unamortized discounts
 
(24,161
)
 
(29,443
)
Current portion
 
(108,482
)
 
(7,733
)
Total long-term debt and capital lease obligations
 
$
1,257,779

 
$
1,352,820

 
(1)
The Convertible Debentures are redeemable in whole or in part at the Company’s option at any time on or after April 6, 2013 at a redemption price equal to 100% of the principal amount of the debentures to be redeemed, plus accrued and unpaid interest. Holders of the Convertible Debentures have the option to require the Company to purchase all or part of the Convertible Debentures on April 1, 2013, April 1, 2016, or April 1, 2021, at 100% of the principal and unpaid interest, or at any time prior to April 1, 2026, to convert the debentures into shares of the Company’s common stock. Upon conversion, the Company will have the right to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of common stock.
As of March 31, 2012, tw telecom inc. and its wholly-owned subsidiary, tw telecom holdings inc. (“Holdings”), were in compliance with all of their debt covenants.
5. Derivative Instruments
Holdings’ variable rate Term Loan B due 2013 and 2016 (the “Term Loan”) exposes the Company to variability in interest payments due to changes in interest rates. In order to mitigate interest rate fluctuations on the Term Loan, Holdings has in the past entered into derivative instruments, specifically interest rate swap agreements. The interest rate swap agreements effectively converted a portion of Holdings’ floating-rate debt to a fixed-rate for the term of the agreement, which reduces the impact of interest rate changes on future interest expense. Historically, the Company has designated its interest rate swap agreements as cash flow hedges. During the year ended December 31, 2011, the Company's remaining interest rate swap agreement expired.
If certain correlation and risk reduction criteria are met, the derivative is deemed to be highly effective in offsetting the changes in cash flows of the hedged item on a retrospective and prospective basis, and may be specifically designated as a hedge of exposure to changes in cash flow. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income or loss. Amounts excluded from the assessment of hedge effectiveness, if any, as well as the ineffective portion of the gain or loss, are reported in results of operations immediately. The Company performs a quarterly assessment to determine whether each derivative instrument is highly effective in offsetting changes in cash flows of the hedged item. If the derivative instrument is determined to be not highly effective as a hedge, or if a derivative instrument ceases to be a highly effective hedge, hedge accounting is discontinued prospectively with respect to that derivative instrument. 

11

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

There were no unrecognized losses for the interest rate swap agreement included in accumulated other comprehensive income at March 31, 2012 or December 31, 2011. The effect of the interest rate swap on the condensed consolidated statements of operations was as follows for the three months ended March 31, 2012 and 2011:
 
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
(amounts in thousands)
Loss recognized in other comprehensive income/(loss) (effective portion)
 
$

 
$
(53
)
Loss reclassified from accumulated other comprehensive loss into interest expense (effective portion)
 
$

 
$
(674
)
Gain/(Loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)
 
$

 
$

6. Fair Value Measurements
Fair value, as defined by relevant accounting standards, is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would complete a transaction and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
 
Fair Value Hierarchy
Relevant accounting standards set forth a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Relevant accounting standards establish three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities. Level 1 assets that are measured at fair value on a recurring basis consist of the Company’s investment in U.S. Treasury money market mutual funds that are traded in an active market with sufficient volume and frequency of transactions, and are included as a component of cash and cash equivalents in the condensed consolidated balance sheets.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets that are measured at fair value on a recurring basis consist of the Company’s investments in certificates of deposit, commercial paper, corporate debt securities, international government securities, and debt securities issued by the U.S. Treasury and other U.S. government agencies using observable inputs in less active markets and are included as a component of cash equivalents and investments in the condensed consolidated balance sheets. Level 2 liabilities that are measured, but not carried, at fair value on a recurring basis include the Company’s long-term debt. Although the Company’s long-term debt has not been listed on any securities exchange or inter-dealer automated quotation system, the Company has estimated the fair value of its long-term debt based on indicative pricing published by certain investment banks.
Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The Company did not have any Level 3 assets or liabilities that were measured at fair value at March 31, 2012 and December 31, 2011.
 

12

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table reflects assets and liabilities that are measured and carried at fair value on a recurring basis at March 31, 2012 and December 31, 2011:
 
 
 
Fair Value Measurements At March 31, 2012
 
Assets
at Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
U.S. Treasury money market mutual funds
 
$
269,846

 
$

 
$

 
$
269,846

Commercial paper
 

 
7,898

 

 
7,898

Corporate debt securities
 

 
3,004

 

 
3,004

Investments included in cash and cash equivalents
 
269,846

 
10,902

 

 
280,748

Corporate debt securities
 

 
103,755

 

 
103,755

Debt securities issued by U.S. Government agencies
 

 
27,777

 

 
27,777

Debt securities issued by the U.S. Treasury
 

 
3,004

 

 
3,004

Short-term investments
 

 
134,536

 

 
134,536

Total assets
 
$
269,846

 
$
145,438

 
$

 
$
415,284

 
 
 
Fair Value Measurements At December 31, 2011
 
Assets
at Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
U.S. Treasury money market mutual funds
 
$
291,746

 
$

 
$

 
$
291,746

Commercial paper
 

 
8,497

 

 
8,497

Certificates of deposit
 

 
5,201

 

 
5,201

International government securities
 

 
1,401

 

 
1,401

Investments included in cash and cash equivalents
 
291,746

 
15,099

 

 
306,845

Corporate debt securities
 

 
99,132

 

 
99,132

Debt securities issued by U.S. Government agencies
 

 
27,885

 

 
27,885

Debt securities issued by the U.S. Treasury
 

 
3,008

 

 
3,008

Commercial paper
 

 
1,500

 

 
1,500

Short-term investments
 

 
131,525

 

 
131,525

Total assets
 
$
291,746

 
$
146,624

 
$

 
$
438,370

The following table summarizes the carrying amounts and estimated fair values of the Company’s long-term debt, including the current portion:
 
 
March 31, 2012
 
December 31, 2011
 
 
Carrying
Value
 
Fair Value
Level 2
 
Carrying
Value
 
Fair Value
Level 2
 
 
(amounts in thousands)
Term Loan B - January 2013 tranche
 
$
101,787

 
$
101,787

 
$
102,055

 
$
101,673

Term Loan B - Extended tranche, due 2016
 
466,713

 
467,880

 
467,946

 
464,435

8% Senior Notes, net of discount
 
427,711

 
470,850

 
427,614

 
460,100

  3/8% Convertible Senior Debentures, net of discount
 
351,872

 
463,443

 
346,687

 
444,288

Total debt
 
$
1,348,083

 
$
1,503,960

 
$
1,344,302

 
$
1,470,496



13

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7. Stock-Based Compensation
During the three months ended March 31, 2012, the Company granted restricted stock awards and restricted stock units with respect to 1.8 million shares and no stock options. As of March 31, 2012, the Company had 4.6 million restricted stock awards and restricted stock units that were unvested and 6.0 million options outstanding, of which 5.3 million were exercisable.
As of March 31, 2012, there was $73.5 million of total unrecognized compensation expense related to unvested restricted stock awards and restricted stock units, which is expected to be recognized over a weighted-average period of 2.9 years and $3.4 million of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.3 years.
8. Commitments and Contingencies
Management routinely reviews the Company’s exposure to liabilities incurred in the normal course of its business operations. Where a probable contingency exists and the amount can be reasonably estimated, the Company records the estimated liability. Considerable judgment is required in analyzing and recording such liabilities and actual results may vary from the estimates.
The Company’s pending legal proceedings are limited to litigation incidental to its business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial statements.
9. Supplemental Guarantor Information
In March 2010, Holdings (“Issuer”) issued 8% Senior Notes due 2018 (the “2018 Notes”) with a principal amount of $430 million. The 2018 Notes are unsecured obligations of the Issuer and are guaranteed by tw telecom inc. (“Parent Guarantor”) and substantially all of the Issuer’s subsidiaries (“Combined Subsidiary Guarantors”). The guarantees are joint and several. A significant amount of the Issuer’s cash flow is generated by the Combined Subsidiary Guarantors. As a result, funds necessary to meet the Issuer’s debt service obligations are provided in large part by distributions or advances from the Combined Subsidiary Guarantors. The 2018 Notes are governed by an indenture that contains certain restrictive covenants. These restrictions affect, and in many respects significantly limit or prohibit, among other things, the ability of the Parent Guarantor, the Issuer and its subsidiaries to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock of subsidiaries, create liens, sell assets, and engage in mergers and consolidations.
The following information sets forth the Company’s Condensed Consolidating Balance Sheets as of March 31, 2012 and December 31, 2011, Condensed Consolidating Statements of Operations for the three months ended March 31, 2012 and 2011, Condensed Consolidating Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011, and Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2012 and 2011.

14

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


tw telecom inc.
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2012
(unaudited)


 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
24,543

 
$
327,588

 
$

 
$

 
$
352,131

Investments
 

 
134,536

 

 

 
134,536

Receivables, net
 

 

 
91,421

 

 
91,421

Prepaid expenses and other current assets
 

 
10,108

 
8,226

 

 
18,334

Deferred income taxes
 

 
64,988

 
20

 

 
65,008

Total current assets
 
24,543

 
537,220

 
99,667

 

 
661,430

Property, plant and equipment, net
 

 
52,671

 
1,386,313

 

 
1,438,984

Deferred income taxes
 

 
147,947

 
485

 

 
148,432

Goodwill
 

 

 
412,694

 

 
412,694

Intangible and other assets, net
 
1,098

 
13,039

 
26,073

 

 
40,210

Total assets
 
$
25,641

 
$
750,877

 
$
1,925,232

 
$

 
$
2,701,750

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$

 
$
9,101

 
$
47,041

 
$

 
$
56,142

Current portion debt and capital lease obligations
 

 
107,231

 
1,251

 

 
108,482

Other current liabilities
 
4,438

 
33,257

 
164,811

 

 
202,506

Intercompany payable (receivable)
 
(1,830,618
)
 
(585,077
)
 
2,415,695

 

 

Total current liabilities
 
(1,826,180
)
 
(435,488
)
 
2,628,798

 

 
367,130

Losses in subsidiary in excess of investment
 
480,960

 
945,454

 

 
(1,426,414
)
 

Long-term debt and capital lease obligations, net
 
351,872

 
890,252

 
15,655

 

 
1,257,779

Long-term deferred revenue
 

 

 
22,041

 

 
22,041

Other long-term liabilities
 

 
7,132

 
28,652

 

 
35,784

Stockholders’ equity (deficit)
 
1,018,989

 
(656,473
)
 
(769,914
)
 
1,426,414

 
1,019,016

Total liabilities and stockholders’ equity (deficit)
 
$
25,641

 
$
750,877

 
$
1,925,232

 
$

 
$
2,701,750



15

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
tw telecom inc.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2011
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
24,543

 
$
328,851

 
$

 
$

 
$
353,394

Investments
 

 
131,525

 

 

 
131,525

Receivables, net
 

 

 
96,182

 

 
96,182

Prepaid expenses and other current assets
 

 
10,521

 
6,819

 

 
17,340

Deferred income taxes
 

 
64,988

 
20

 

 
65,008

Total current assets
 
24,543

 
535,885

 
103,021

 

 
663,449

Property, plant and equipment, net
 

 
56,720

 
1,370,492

 

 
1,427,212

Deferred income taxes
 

 
162,050

 
485

 

 
162,535

Goodwill
 

 

 
412,694

 

 
412,694

Intangible and other assets, net
 
1,373

 
13,287

 
27,676

 

 
42,336

Total assets
 
$
25,916

 
$
767,942

 
$
1,914,368

 
$

 
$
2,708,226

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$

 
$
9,649

 
$
43,090

 
$

 
$
52,739

Current portion debt and capital lease obligations
 

 
6,505

 
1,228

 

 
7,733

Other current liabilities
 
2,219

 
57,028

 
172,225

 

 
231,472

Intercompany payable (receivable)
 
(1,836,254
)
 
(600,773
)
 
2,437,027

 

 

Total current liabilities
 
(1,834,035
)
 
(527,591
)
 
2,653,570

 

 
291,944

Losses in subsidiary in excess of investment
 
507,643

 
971,457

 

 
(1,479,100
)
 

Long-term debt and capital lease obligations, net
 
346,687

 
992,490

 
13,643

 

 
1,352,820

Long-term deferred revenue
 

 

 
22,296

 

 
22,296

Other long-term liabilities
 

 
7,310

 
28,135

 

 
35,445

Stockholders’ equity (deficit)
 
1,005,621

 
(675,724
)
 
(803,276
)
 
1,479,100

 
1,005,721

Total liabilities and stockholders’ equity (deficit)
 
$
25,916

 
$
767,942

 
$
1,914,368

 
$

 
$
2,708,226

 

16

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2012
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Total revenue
 
$

 
$

 
$
358,925

 
$

 
$
358,925

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operating, selling, general and administrative
 

 
53,004

 
182,279

 

 
235,283

Depreciation, amortization and accretion
 

 
4,792

 
63,602

 

 
68,394

Corporate expense allocation
 

 
(57,796
)
 
57,796

 

 

Total costs and expenses
 

 

 
303,677

 

 
303,677

Operating income
 

 

 
55,248

 

 
55,248

Interest expense, net
 
(7,678
)
 
(12,012
)
 
(1,787
)
 

 
(21,477
)
Interest expense allocation
 
7,678

 
12,012

 
(19,690
)
 

 

Income before income taxes and equity in undistributed earnings of subsidiaries
 

 

 
33,771

 

 
33,771

Income tax expense
 

 
14,030

 
409

 

 
14,439

Net income (loss) before equity in undistributed earnings of subsidiaries
 

 
(14,030
)
 
33,362

 

 
19,332

Equity in undistributed earnings of subsidiaries
 
19,332

 
33,362

 

 
(52,694
)
 

Net income
 
$
19,332

 
$
19,332

 
$
33,362

 
$
(52,694
)
 
$
19,332




17

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2011
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Total revenue
 
$

 
$

 
$
332,542

 
$

 
$
332,542

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operating, selling, general and administrative
 

 
52,975

 
165,569

 

 
218,544

Depreciation, amortization and accretion
 

 
4,949

 
64,787

 

 
69,736

Corporate expense allocation
 

 
(57,924
)
 
57,924

 

 

Total costs and expenses
 

 

 
288,280

 

 
288,280

Operating income
 

 

 
44,262

 

 
44,262

Interest expense, net
 
(7,257
)
 
(10,664
)
 
(3,908
)
 

 
(21,829
)
Interest expense allocation
 
7,257

 
10,664

 
(17,921
)
 

 

Income before income taxes and equity in undistributed earnings of subsidiaries
 

 

 
22,433

 

 
22,433

Income tax expense
 

 
9,489

 
325

 

 
9,814

Net income before equity in undistributed earnings of subsidiaries
 

 
(9,489
)
 
22,108

 

 
12,619

Equity in undistributed earnings of subsidiaries
 
12,619

 
22,108

 

 
(34,727
)
 

Net income
 
$
12,619

 
$
12,619

 
$
22,108

 
$
(34,727
)
 
$
12,619




18

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2012
(unaudited)

 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Net income
 
$
19,332

 
$
19,332

 
$
33,362

 
$
(52,694
)
 
$
19,332

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Unrealized loss on available-for-sale securities
 
(8
)
 
(8
)
 

 
8

 
(8
)
Other comprehensive income (loss), net of tax
 
(8
)
 
(8
)
 

 
8

 
(8
)
Comprehensive income
 
$
19,324

 
$
19,324

 
$
33,362

 
$
(52,686
)
 
$
19,324



19

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2011
(unaudited)

 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Net income
 
$
12,619

 
$
12,619

 
$
22,108

 
$
(34,727
)
 
$
12,619

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Unrealized gain on cash flow hedging activities
 
519

 
519

 

 
(519
)
 
519

Unrealized gain on available-for-sale securities
 
45

 
45

 

 
(45
)
 
45

Other comprehensive income, net of tax
 
564

 
564

 

 
(564
)
 
564

Comprehensive income
 
$
13,183

 
$
13,183

 
$
22,108

 
$
(35,291
)
 
$
13,183



20

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2012
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
19,332

 
$
19,332

 
$
33,362

 
$
(52,694
)
 
$
19,332

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and accretion
 

 
4,792

 
63,602

 

 
68,394

Deferred income taxes
 

 
14,030

 

 

 
14,030

Intercompany and equity investment changes
 
(12,927
)
 
(10,307
)
 
(29,460
)
 
52,694

 

Amortization of discount on debt and deferred debt issue costs and other
 
5,460

 
661

 

 

 
6,121

Stock-based compensation expense
 

 

 
8,128

 

 
8,128

Changes in operating assets and liabilities
 
2,219

 
(24,241
)
 
378

 

 
(21,644
)
Net cash provided by operating activities
 
14,084

 
4,267

 
76,010

 

 
94,361

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 

 
(1,839
)
 
(74,944
)
 

 
(76,783
)
Purchases of investments
 

 
(40,102
)
 

 

 
(40,102
)
Proceeds from sale of investments
 

 
36,474

 

 

 
36,474

Proceeds from sale of assets and other investing activities, net
 

 
1,097

 
(796
)
 

 
301

Net cash used in investing activities
 

 
(4,370
)
 
(75,740
)
 

 
(80,110
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
Net proceeds (tax withholdings) from issuance of common stock upon exercise of stock options and vesting of restricted stock awards and units
 
(2,565
)
 

 

 

 
(2,565
)
Purchases of treasury stock
 
(11,519
)
 

 

 

 
(11,519
)
Excess tax benefits from stock-based compensation
 

 
448

 

 

 
448

Payment of debt and capital lease obligations
 

 
(1,608
)
 
(270
)
 

 
(1,878
)
Net cash used in financing activities
 
(14,084
)
 
(1,160
)
 
(270
)
 

 
(15,514
)
Increase (decrease) in cash and cash equivalents
 

 
(1,263
)
 

 

 
(1,263
)
Cash and cash equivalents at beginning of period
 
24,543

 
328,851

 

 

 
353,394

Cash and cash equivalents at end of period
 
$
24,543

 
$
327,588

 
$

 
$

 
$
352,131




21

tw telecom inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2011
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
12,619

 
$
12,619

 
$
22,108

 
$
(34,727
)
 
$
12,619

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and accretion
 

 
4,949

 
64,787

 

 
69,736

Deferred income taxes
 

 
9,486

 

 

 
9,486

Intercompany and equity investment changes
 
(8,291
)
 
(12,121
)
 
(14,315
)
 
34,727

 

Amortization of discount on debt and deferred debt issue costs and other
 
5,039

 
656

 

 

 
5,695

Stock-based compensation expense
 

 

 
7,448

 

 
7,448

Changes in operating assets and liabilities