10-Q 1 twtc1q1410q.htm 10-Q TWTC 1Q14 10Q
 
 
 
 
 
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, 2014
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, 2014 was 137,926,212 shares.
 
 
 
 
 



INDEX TO FORM 10-Q
 
 
 
 
 
 
Page
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.


2


Part I. Financial Information
Item 1. Financial Statements
tw telecom inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
March 31,
2014
 
December 31,
2013
 
 
(unaudited)
 
 
 
 
(amounts in thousands, except per share amounts)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
178,839

 
$
284,419

Investments
 
176,394

 
194,576

Receivables, less allowances of $6,290 and $6,748, respectively
 
98,811

 
107,258

Prepaid expenses and other current assets
 
23,734

 
22,545

Deferred income taxes
 
54,026

 
54,026

Total current assets
 
531,804

 
662,824

Property, plant and equipment
 
4,775,473

 
4,675,335

Less accumulated depreciation
 
(3,049,210
)
 
(2,980,379
)
 
 
1,726,263

 
1,694,956

Deferred income taxes
 
88,332

 
96,087

Goodwill
 
412,694

 
412,694

Intangible assets, net of accumulated amortization
 
10,322

 
11,555

Other assets, net
 
43,129

 
44,344

Total assets
 
$
2,812,544

 
$
2,922,460

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
71,711

 
$
38,454

Deferred revenue
 
48,561

 
48,371

Accrued taxes, franchise and other fees
 
52,969

 
55,043

Accrued interest
 
28,740

 
21,606

Accrued payroll and benefits
 
42,820

 
52,604

Accrued carrier costs
 
10,997

 
25,507

Current portion debt and capital lease obligations, net
 
8,878

 
32,470

Other current liabilities
 
37,772

 
35,241

Total current liabilities
 
302,448

 
309,296

Long-term debt and capital lease obligations, net
 
1,915,081

 
1,916,775

Long-term deferred revenue
 
19,871

 
20,046

Other long-term liabilities
 
42,590

 
40,274

Commitments and contingencies (Note 7)
 


 


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, 153,760 shares issued
 
1,538

 
1,538

Additional paid-in capital
 
1,692,107

 
1,701,356

Treasury stock, 15,851 and 12,593 shares, at cost, respectively
 
(459,243
)
 
(357,974
)
Accumulated deficit
 
(701,966
)
 
(708,979
)
Accumulated other comprehensive income
 
118

 
128

Total stockholders’ equity
 
532,554

 
636,069

Total liabilities and stockholders’ equity
 
$
2,812,544

 
$
2,922,460

See accompanying notes to condensed consolidated financial statements.

3


tw telecom inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
Three Months Ended
March 31,
 
 
2014
 
2013
 
 
(amounts in thousands, except per share amounts)
Revenue:
 
 
 
 
Data and Internet services
 
$
243,671

 
$
211,721

Voice services
 
77,361

 
76,030

Network services
 
58,367

 
64,955

Service revenue
 
379,399

 
352,706

Taxes and fees
 
22,752

 
20,594

Intercarrier compensation
 
6,142

 
7,909

Total revenue
 
408,293

 
381,209

Costs and expenses (a):
 
 
 
 
Operating (exclusive of depreciation, amortization and accretion shown separately below)
 
174,039

 
161,082

Selling, general and administrative
 
106,832

 
93,562

Depreciation, amortization and accretion
 
82,456

 
74,395

Total costs and expenses
 
363,327

 
329,039

Operating income
 
44,966

 
52,170

Interest expense
 
(25,648
)
 
(28,340
)
Debt extinguishment costs
 
(1,282
)
 

Interest income
 
148

 
277

Income before income taxes
 
18,184

 
24,107

Income tax expense
 
8,393

 
10,963

Net income
 
$
9,791

 
$
13,144

Earnings per share:
 
 
 
 
Basic
 
$
0.07

 
$
0.09

Diluted
 
$
0.07

 
$
0.09

Weighted average shares outstanding:
 
 
 
 
Basic
 
138,088

 
149,129

Diluted
 
140,097

 
152,452


(a) Includes non-cash stock-based employee compensation expense (Note 6):
Operating
 
$
539

 
$
583

Selling, general and administrative
 
$
8,847

 
$
8,879


See accompanying notes to condensed consolidated financial statements.

4


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

 
 
Three Months Ended
March 31,
 
 
2014
 
2013
 
 
(amounts in thousands)
Net income
 
$
9,791

 
$
13,144

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
 
(10
)
 
8

Other comprehensive income (loss), net of tax
 
(10
)
 
8

Comprehensive income
 
$
9,781

 
$
13,152


See accompanying notes to condensed consolidated financial statements.

5


tw telecom inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Three Months Ended
March 31,
 
 
2014
 
2013
 
 
(amounts in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
9,791

 
$
13,144

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
82,456

 
74,395

Deferred income taxes
 
8,017

 
10,617

Stock-based compensation expense
 
9,386

 
9,462

Loss on debt extinguishment
 
1,282

 

Amortization of discount on debt and deferred debt issue costs
 
1,613

 
6,795

Changes in operating assets and liabilities:
 
 
 
 
Receivables, prepaid expenses and other assets
 
7,844

 
(6,952
)
Accounts payable, deferred revenue and other liabilities
 
(5,164
)
 
(25,861
)
Net cash provided by operating activities
 
115,225

 
81,600

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(101,633
)
 
(87,800
)
Purchases of investments
 
(51,703
)
 
(50,932
)
Proceeds from sale of investments
 
69,509

 
33,990

Other investing activities, net
 
4,338

 
(2,240
)
Net cash used in investing activities
 
(79,489
)
 
(106,982
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of common stock upon exercise of stock options
 
8,517

 
24,449

Taxes paid related to net share settlement of equity awards
 
(18,897
)
 
(18,291
)
Purchases of treasury stock
 
(104,170
)
 
(54,627
)
Excess tax benefits from stock-based compensation
 
412

 
601

Retirement of debt obligations
 
(24,418
)
 
(59
)
Payment of debt and capital lease obligations
 
(2,760
)
 
(1,709
)
Net cash used in financing activities
 
(141,316
)
 
(49,636
)
Decrease in cash and cash equivalents
 
(105,580
)
 
(75,018
)
Cash and cash equivalents at beginning of period
 
284,419

 
806,728

Cash and cash equivalents at end of period
 
$
178,839

 
$
731,710

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
17,083

 
$
21,631

Cash paid for income taxes, net of refunds
 
$
(76
)
 
$
(60
)
Cash paid for debt extinguishment costs
 
$
939

 
$

Non-cash investing & financing activities:
 
 
 
 
Addition of capital lease obligations
 
$
537

 
$
3,053

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, 2014
(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, 2013
 
153,760

 
$
1,538

 
(12,593
)
 
$
(357,974
)
 
$
1,701,356

 
$
(708,979
)
 
$
128

 
$
636,069

Net income
 

 

 

 

 

 
9,791

 

 
9,791

Other comprehensive loss, net of tax
 

 

 

 

 

 

 
(10
)
 
(10
)
Excess tax benefits from stock-based compensation, net
 

 

 

 

 
262

 

 

 
262

Purchases of treasury stock
 

 

 
(3,674
)
 
(112,564
)
 

 

 

 
(112,564
)
Exercise of stock options net of (withholdings) to satisfy employee tax obligations upon vesting of stock awards
 

 

 
512

 
14,635

 
(23,664
)
 
(1,351
)
 

 
(10,380
)
Stock-based compensation
 

 

 
(96
)
 
(3,340
)
 
14,153

 
(1,427
)
 

 
9,386

Balance at March 31, 2014
 
153,760

 
$
1,538

 
(15,851
)
 
$
(459,243
)
 
$
1,692,107

 
$
(701,966
)
 
$
118

 
$
532,554

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, Internet Protocol ("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, 2013 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.
Prior Year Reclassifications
Beginning January 1, 2014, the Company is reporting revenue from taxes and fees in a separate line item on the condensed consolidated statements of operations and is reporting revenue from dedicated high capacity Ethernet services in data and Internet services rather than network services. These reclassifications have been made in the prior year condensed consolidated statement of operations to conform to the current year presentation. Neither of these changes affects total revenue for the current period or prior periods. The following table provides revenue as currently reported and previously reported for the three months ended March 31, 2013:
 
 
Three months ended March 31, 2013
 
 
As Currently Reported
 
As Previously Reported
 
 
(amounts in thousands)
Revenue:
 
 
 
 
Data and Internet services
 
$
211,721

 
$
202,082

Voice services
 
76,030

 
92,355

Network services
 
64,955

 
78,863

Service revenue
 
352,706

 
373,300

Taxes and fees
 
20,594

 

Intercarrier compensation
 
7,909

 
7,909

Total revenue
 
$
381,209

 
$
381,209


8

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

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.
Accumulated Other Comprehensive Income
The balance in accumulated other comprehensive income as of March 31, 2014 and December 31, 2013 relates to the Company's investments that are classified as available-for-sale securities. The Company recognized no material changes in accumulated other comprehensive income for the three months ended March 31, 2014 or 2013. There were no significant items reclassified out of accumulated other comprehensive income for the three months ended March 31, 2014 or 2013.
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 between locations and to access external networks, including Internet access and data transport at high speeds using Ethernet protocol, local and wide-area business Ethernet and IP VPN solutions, including service enhancements that provide customers with more visibility and control over their Ethernet services, which we refer to as the "Intelligent Network". Data and Internet services also include a portfolio of managed services including the data and Internet components of converged services, which fully integrates a combination of certain communication applications including IP VPN, Internet, enterprise Session Initiation Protocol ("SIP") trunking (a VoIP solution), security and managed router service into a single managed IP solution; and the data and Internet components of integrated services, which enable customers to purchase a full array of access options that include Internet services.
Voice services are traditional voice capabilities, whether provided over Time Division Multiplexing ("TDM") or VoIP, including those provided as standalone and bundled services, long distance and toll free services. Voice services also include the voice components of managed and integrated services.
Network services are point-to-point services that transmit voice, data and images 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 generates revenue from intercarrier compensation, which 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 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 amount of such taxes and fees classified as revenue is included in "Taxes and fees" on the Company's condensed consolidated statements of operations.
The Company’s customers include enterprise organizations in a wide variety of industry segments including, among others, the financial services, technology and scientific, health care, distribution, manufacturing and professional services industries, data centers, cloud application providers, public sector entities, system integrators and communications service providers, including incumbent local exchange carriers ("ILECs"), competitive local exchange carriers ("CLECs"), wireless communications companies and cable companies.

9

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

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.
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 17% of the Company’s total revenue for both the three months ended March 31, 2014 and 2013. No customer accounted for 5% or more of total revenue for the three months ended March 31, 2014 or 2013.
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.
The following is a reconciliation of the numerators and denominators used in the basic and diluted EPS computations:
 
 
 
Three Months Ended
March 31,
 
 
2014
 
2013
 
 
(amounts in thousands, except per share amounts)
Numerator
 
 
 
 
Net income
 
$
9,791

 
$
13,144

Allocation of net income to unvested restricted stock
 
(179
)
 
(255
)
Net income allocated to common stockholders, basic
 
$
9,612

 
$
12,889

Net income allocated to common stockholders, diluted
 
$
9,612

 
$
12,889

Denominator
 
 
 
 
Basic weighted average shares outstanding
 
138,088

 
149,129

Dilutive potential common shares:
 
 
 
 
Stock options
 
384

 
1,432

Unvested restricted stock
 
1,625

 
1,891

Diluted weighted average shares outstanding
 
140,097

 
152,452

Basic earnings per share
 
$
0.07

 
$
0.09

Diluted earnings per share
 
$
0.07

 
$
0.09

 
There were no anti-dilutive shares for the three months ended March 31, 2014. Shares of common stock subject to issuance upon conversion of the Company’s 23/8% Convertible Senior Debentures due 2026 (the “Convertible Debentures”) and restricted stock awards and restricted stock units to be settled in common stock upon vesting, which were excluded from the computation of diluted weighted average shares outstanding because their inclusion would be anti-dilutive, totaled 21.0 million shares for the three months ended March 31, 2013.


10

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

3. Investments
The Company’s investments at March 31, 2014 and December 31, 2013 are summarized as follows:
 
 
 
March 31,
2014
 
December 31,
2013
 
 
(amounts in thousands)
Cash equivalents:
 
 
 
 
U.S. Treasury money market mutual funds
 
$
28,371

 
$
28,845

Commercial paper
 
19,895

 
1,335

Total cash equivalents
 
$
48,266

 
$
30,180

Investments:
 
 
 
 
Debt securities issued by the U.S. Treasury
 
$
75,019

 
$
69,628

Commercial paper
 
54,978

 
75,460

Debt securities issued by U.S. Government agencies
 
46,397

 
49,488

Total investments
 
$
176,394

 
$
194,576

Total cash equivalents and investments
 
$
224,660

 
$
224,756

At March 31, 2014 and December 31, 2013, 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 5. 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 $69.5 million and $34.0 million during the three months ended March 31, 2014 and 2013, 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, 2014 and 2013. 

4. Long-Term Debt and Capital Lease Obligations
The components of long-term debt and capital lease obligations at March 31, 2014 and December 31, 2013 were as follows:
 
 
 
Date of
 
 
 
 
 
Outstanding Balance as of
 
 
Issuance / Amendment
 
Maturity
 
Interest Payments
 
Interest Rate
 
Original Principal
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
 
 
 
 
 
(amounts in thousands)
Term Loan B
 
Apr 2013
 
Apr 2020
 
At least quarterly
 
Eurodollar rate + 2.50%
 
$
520,000

 
$
516,100

 
$
517,400

8% Senior Notes
 
Mar 2010
 
Mar 2018
 
Mar/Sept
 
8%
 
430,000

 

 
23,479

53/8% Senior Notes
 
Oct 2012
 
Oct 2022
 
Apr/Oct
 
5 3/8%
 
480,000

 
480,000

 
480,000

53/8% Senior Notes
 
Aug 2013
 
Oct 2022
 
Apr/Oct
 
5 3/8%
 
450,000

 
450,000

 
450,000

63/8% Senior Notes
 
Aug 2013
 
Sept 2023
 
Mar/Sept
 
6 3/8%
 
350,000

 
350,000

 
350,000

Capital lease obligations
 
145,894

 
147,046

Total obligations
 
1,941,994

 
1,967,925

Unamortized discounts
 
(18,035
)
 
(18,680
)
Current portion
 
(8,878
)
 
(32,470
)
Total long-term debt and capital lease obligations
 
$
1,915,081

 
$
1,916,775

 
8% Senior Notes due 2018

As of December 31, 2013, tw telecom holdings inc. ("Holdings") had outstanding $23.5 million aggregate principal amount of 8% Senior Notes due 2018 (the "2018 Notes"). During the three months ended March 31, 2014, Holdings redeemed all remaining outstanding 2018 Notes at a redemption price of 104% of the principal amount. During the three months ended

11

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

March 31, 2014, the Company recognized debt extinguishment costs of $1.3 million, comprised of $0.9 million for premiums associated with the redemption and $0.4 million for write-offs of unamortized deferred debt issuance costs and issuance discount related to the 2018 Notes.
Covenant Compliance
As of March 31, 2014, tw telecom inc. and its wholly-owned subsidiary, Holdings, were in compliance with all of their debt covenants.
5. 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 investments 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 commercial paper 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 and 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. The Company’s long-term debt has not been listed on any securities exchange or quoted on an 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 or trading levels in its long-term debt.
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, 2014 and December 31, 2013.
 

12

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

The following tables reflect assets that are measured and carried at fair value on a recurring basis at March 31, 2014 and December 31, 2013:
 
 
 
Fair Value Measurements At March 31, 2014
 
Assets
at Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
U.S. Treasury money market mutual funds
 
$
28,371

 
$

 
$

 
$
28,371

Commercial paper
 

 
19,895

 

 
19,895

Investments included in cash and cash equivalents
 
$
28,371

 
$
19,895

 
$

 
$
48,266

Debt securities issued by the U.S. Treasury
 

 
75,019

 

 
75,019

Commercial paper
 

 
54,978

 

 
54,978

Debt securities issued by U.S. Government agencies
 

 
46,397

 

 
46,397

Short-term investments
 
$

 
$
176,394

 
$

 
$
176,394

Total assets
 
$
28,371

 
$
196,289

 
$

 
$
224,660

 
 
 
Fair Value Measurements At December 31, 2013
 
Assets
at Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
U.S. Treasury money market mutual funds
 
$
28,845

 
$

 
$

 
$
28,845

Commercial paper
 

 
1,335

 

 
1,335

Investments included in cash and cash equivalents
 
$
28,845

 
$
1,335

 
$

 
$
30,180

Commercial paper
 

 
75,460

 

 
75,460

Debt securities issued by the U.S. Treasury
 

 
69,628

 

 
69,628

Debt securities issued by U.S. Government agencies
 

 
49,488

 

 
49,488

Short-term investments
 
$

 
$
194,576

 
$

 
$
194,576

Total assets
 
$
28,845

 
$
195,911

 
$

 
$
224,756

The following table summarizes the carrying amounts and estimated fair values of the Company’s long-term debt, including the current portion, at March 31, 2014 and December 31, 2013:
 
 
March 31, 2014
 
December 31, 2013
 
 
Carrying
Value
 
Fair Value
Level 2
 
Carrying
Value
 
Fair Value
Level 2
 
 
(amounts in thousands)
Term Loan B, net of discount
 
$
513,856

 
$
516,100

 
$
515,063

 
$
519,987

8% Senior Notes, net of discount
 

 

 
23,392

 
24,594

53/8% Senior Notes, issued October 2012
 
480,000

 
489,600

 
480,000

 
474,000

53/8% Senior Notes, net of discount, issued August 2013
 
434,209

 
459,000

 
433,744

 
444,375

63/8% Senior Notes
 
350,000

 
372,750

 
350,000

 
364,000

Total debt
 
$
1,778,065

 
$
1,837,450

 
$
1,802,199

 
$
1,826,956

6. Stock-Based Compensation
During the three months ended March 31, 2014, the Company granted restricted stock awards and restricted stock units with respect to 1.4 million shares and no stock options. As of March 31, 2014, the Company had 3.7 million restricted stock awards and restricted stock units that were unvested and 0.5 million stock options outstanding, of which 0.5 million were exercisable.

13

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

As of March 31, 2014, there was $86.4 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 2.7 years, and no unrecognized compensation expense related to unvested stock options.
7. 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 of the loss 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.
8. Supplemental Guarantor Information
The $480 million principal amount 53/8% Senior Notes due 2022 (the "2022 Notes"), $450 million principal amount 53/8% Senior Notes due 2022 (the "2022 Mirror Notes") and $350 million principal amount 63/8% Senior Notes due 2023 (the "2023 Notes") (collectively, the "Senior Notes") are unsecured obligations of Holdings ("Issuer") and are fully and unconditionally guaranteed by the Company (“Parent Guarantor”) and substantially all of the Issuer’s subsidiaries (“Combined Subsidiary Guarantors”). The guarantees are joint and several. The Combined Subsidiary Guarantors are directly or indirectly wholly owned by the Issuer, which is wholly owned by the Parent Guarantor. 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 Senior Notes are governed by indentures that contain certain restrictive covenants. These restrictions affect, and in many respects 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, 2014 and December 31, 2013, Condensed Consolidating Statements of Operations for the three months ended March 31, 2014 and 2013, Condensed Consolidating Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013, and Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2014 and 2013.

14

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


tw telecom inc.
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2014
(unaudited)


 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
24,546

 
$
154,293

 
$

 
$

 
$
178,839

Investments
 

 
176,394

 

 

 
176,394

Receivables, net
 

 

 
98,811

 

 
98,811

Prepaid expenses and other current assets
 

 
14,179

 
9,555

 

 
23,734

Deferred income taxes
 

 
54,006

 
20

 

 
54,026

Intercompany receivable
 
795,857

 
1,578,083

 

 
(2,373,940
)
 

Total current assets
 
820,403

 
1,976,955

 
108,386

 
(2,373,940
)
 
531,804

Property, plant and equipment, net
 

 
80,410

 
1,645,853

 

 
1,726,263

Deferred income taxes
 

 
87,848

 
484

 

 
88,332

Goodwill
 

 

 
412,694

 

 
412,694

Intangible and other assets, net
 

 
34,976

 
18,475

 

 
53,451

Total assets
 
$
820,403

 
$
2,180,189

 
$
2,185,892

 
$
(2,373,940
)
 
$
2,812,544

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

 
$
10,541

 
$
61,170

 
$

 
$
71,711

Current portion debt and capital lease obligations
 

 
5,480

 
3,398

 

 
8,878

Other current liabilities
 

 
82,682

 
139,177

 

 
221,859

Intercompany payable
 

 

 
2,373,940

 
(2,373,940
)
 

Total current liabilities
 

 
98,703

 
2,577,685

 
(2,373,940
)
 
302,448

Losses in subsidiary in excess of investment
 
288,142

 
849,208

 

 
(1,137,350
)
 

Long-term debt and capital lease obligations, net
 

 
1,772,865

 
142,216

 

 
1,915,081

Long-term deferred revenue
 

 

 
19,871

 

 
19,871

Other long-term liabilities
 

 
11,708

 
30,882

 

 
42,590

Stockholders’ equity (deficit)
 
532,261

 
(552,295
)
 
(584,762
)
 
1,137,350

 
532,554

Total liabilities and stockholders’ equity (deficit)
 
$
820,403

 
$
2,180,189

 
$
2,185,892

 
$
(2,373,940
)
 
$
2,812,544



15

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

 
tw telecom inc.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2013
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
24,546

 
$
259,873

 
$

 
$

 
$
284,419

Investments
 

 
194,576

 

 

 
194,576

Receivables, net
 

 

 
107,258

 

 
107,258

Prepaid expenses and other current assets
 

 
14,434

 
8,111

 

 
22,545

Deferred income taxes
 

 
54,006

 
20

 

 
54,026

Intercompany receivable
 
917,932

 
1,475,298

 

 
(2,393,230
)
 

Total current assets
 
942,478

 
1,998,187

 
115,389

 
(2,393,230
)
 
662,824

Property, plant and equipment, net
 

 
75,142

 
1,619,814

 

 
1,694,956

Deferred income taxes
 

 
95,603

 
484

 

 
96,087

Goodwill
 

 

 
412,694

 

 
412,694

Intangible and other assets, net
 

 
36,001

 
19,898

 

 
55,899

Total assets
 
$
942,478

 
$
2,204,933

 
$
2,168,279

 
$
(2,393,230
)
 
$
2,922,460

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

 
$
8,298

 
$
30,156

 
$

 
$
38,454

Current portion debt and capital lease obligations, net
 

 
29,008

 
3,462

 

 
32,470

Other current liabilities
 

 
87,333

 
151,039

 

 
238,372

Intercompany payable
 

 

 
2,393,230

 
(2,393,230
)
 

Total current liabilities
 

 
124,639

 
2,577,887

 
(2,393,230
)
 
309,296

Losses in subsidiary in excess of investment
 
306,440

 
858,499

 

 
(1,164,939
)
 

Long-term debt and capital lease obligations, net
 

 
1,773,607

 
143,168

 

 
1,916,775

Long-term deferred revenue
 

 

 
20,046

 

 
20,046

Other long-term liabilities
 

 
10,526

 
29,748

 

 
40,274

Stockholders’ equity (deficit)
 
636,038

 
(562,338
)
 
(602,570
)
 
1,164,939

 
636,069

Total liabilities and stockholders’ equity (deficit)
 
$
942,478

 
$
2,204,933

 
$
2,168,279

 
$
(2,393,230
)
 
$
2,922,460

 

16

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


tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2014
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Total revenue
 
$

 
$

 
$
408,293

 
$

 
$
408,293

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operating, selling, general and administrative
 

 
71,941

 
208,930

 

 
280,871

Depreciation, amortization and accretion
 

 
8,591

 
73,865

 

 
82,456

Corporate expense allocation
 

 
(80,532
)
 
80,532

 

 

Total costs and expenses
 

 

 
363,327

 

 
363,327

Operating income
 

 

 
44,966

 

 
44,966

Interest expense, net
 

 
(20,488
)
 
(5,012
)
 

 
(25,500
)
Debt extinguishment costs
 

 
(1,282
)
 

 

 
(1,282
)
Interest expense allocation
 

 
21,770

 
(21,770
)
 

 

Income before income taxes and equity in undistributed earnings of subsidiaries
 

 

 
18,184

 

 
18,184

Income tax expense
 

 
8,017

 
376

 

 
8,393

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

 
(8,017
)
 
17,808

 

 
9,791

Equity in undistributed earnings of subsidiaries
 
9,791

 
17,808

 

 
(27,599
)
 

Net income
 
$
9,791

 
$
9,791

 
$
17,808

 
$
(27,599
)
 
$
9,791




17

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

 
tw telecom inc.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2013
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Total revenue
 
$

 
$

 
$
381,209

 
$

 
$
381,209

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operating, selling, general and administrative
 

 
64,807

 
189,837

 

 
254,644

Depreciation, amortization and accretion
 

 
6,579

 
67,816

 

 
74,395

Corporate expense allocation
 

 
(71,386
)
 
71,386

 

 

Total costs and expenses
 

 

 
329,039

 

 
329,039

Operating income
 

 

 
52,170

 

 
52,170

Interest expense, net
 
(8,136
)
 
(17,878
)
 
(2,049
)
 

 
(28,063
)
Interest expense allocation
 
8,136

 
17,878

 
(26,014
)
 

 

Income before income taxes and equity in undistributed earnings of subsidiaries
 

 

 
24,107

 

 
24,107

Income tax expense
 

 
10,617

 
346

 

 
10,963

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

 
(10,617
)
 
23,761

 

 
13,144

Equity in undistributed earnings of subsidiaries
 
13,144

 
23,761

 

 
(36,905
)
 

Net income
 
$
13,144

 
$
13,144

 
$
23,761

 
$
(36,905
)
 
$
13,144




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, 2014
(unaudited)

 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Net income
 
$
9,791

 
$
9,791

 
$
17,808

 
$
(27,599
)
 
$
9,791

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Unrealized loss on available-for-sale securities
 
(10
)
 
(10
)
 

 
10

 
(10
)
Other comprehensive income (loss), net of tax
 
(10
)
 
(10
)
 

 
10

 
(10
)
Comprehensive income
 
$
9,781

 
$
9,781

 
$
17,808

 
$
(27,589
)
 
$
9,781



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, 2013
(unaudited)

 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Net income
 
$
13,144

 
$
13,144

 
$
23,761

 
$
(36,905
)
 
$
13,144

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

 
8

 

 
(8
)
 
8

Other comprehensive income, net of tax
 
8

 
8

 

 
(8
)
 
8

Comprehensive income
 
$
13,152

 
$
13,152

 
$
23,761

 
$
(36,913
)
 
$
13,152



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, 2014
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
9,791

 
$
9,791

 
$
17,808

 
$
(27,599
)
 
$
9,791

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

 
8,591

 
73,865

 

 
82,456

Deferred income taxes
 

 
8,017

 

 

 
8,017

Stock-based compensation expense
 

 

 
9,386

 

 
9,386

Extinguishment costs, amortization of discount on debt and deferred debt issue costs
 

 
2,895

 

 

 
2,895

Intercompany and equity investment changes
 
104,759

 
(112,076
)
 
(20,282
)
 
27,599

 

Changes in operating assets and liabilities
 

 
(1,304
)
 
3,984

 

 
2,680

Net cash provided by (used in) operating activities
 
114,550

 
(84,086
)
 
84,761

 

 
115,225

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 

 
(13,880
)
 
(87,753
)
 

 
(101,633
)
Purchases of investments
 

 
(51,703
)
 

 

 
(51,703
)
Proceeds from sale of investments
 

 
69,509

 

 

 
69,509

Other investing activities, net
 

 
22

 
4,316

 

 
4,338

Net cash provided by (used in) investing activities
 

 
3,948

 
(83,437
)
 

 
(79,489
)
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
 
(10,380
)
 

 

 

 
(10,380
)
Purchases of treasury stock
 
(104,170
)
 

 

 

 
(104,170
)
Excess tax benefits from stock-based compensation
 

 
412

 

 

 
412

Retirement of debt obligations
 

 
(24,418
)
 

 

 
(24,418
)
Payment of debt and capital lease obligations
 

 
(1,436
)
 
(1,324
)
 

 
(2,760
)
Net cash used in financing activities
 
(114,550
)
 
(25,442
)
 
(1,324
)
 

 
(141,316
)
Decrease in cash and cash equivalents
 

 
(105,580
)
 

 

 
(105,580
)
Cash and cash equivalents at beginning of period
 
24,546

 
259,873

 

 

 
284,419

Cash and cash equivalents at end of period
 
$
24,546

 
$
154,293

 
$

 
$

 
$
178,839


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, 2013
(unaudited)
 
 
 
Parent
Guarantor
 
Issuer
 
Combined
Subsidiary
Guarantors
 
Eliminations
 
Consolidated
 
 
(amounts in thousands)
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
13,144

 
$
13,144

 
$
23,761

 
$
(36,905
)
 
$
13,144

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

 
6,579

 
67,816

 

 
74,395

Deferred income taxes
 

 
10,617

 

 

 
10,617