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Knology Inc. Reports Operating Results (10-Q)

May 10, 2011 | About:
10qk

10qk

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Knology Inc. (KNOL) filed Quarterly Report for the period ended 2011-03-31.

Knology Inc. has a market cap of $576.3 million; its shares were traded at around $15.43 with a P/E ratio of 19.5 and P/S ratio of 1.3. Knology Inc. had an annual average earning growth of 18.3% over the past 10 years.

Highlight of Business Operations:

In connection with the CoBridge acquisition discussed above, on February 18, 2011, we entered into a debt repricing transaction that will reduce our annual interest expense by approximately $10 million. The interest rate on Term Loan A was repriced to LIBOR plus a margin ranging from 2.5% to 3.25% and the maturity was extended to February 2016. The interest rate on Term Loan B was repriced to LIBOR plus 3%, with a LIBOR floor of 1%, and the maturity was extended to August 2017. In connection with the terms of the repricing, the credit facility was amended to increase the capacity of the incremental basket from $200 million to $250 million, and the Term Loan A principal was increased $20 million with the proceeds to be used to partially fund the acquisition, as noted above.

Revenues. Operating revenues increased 16.2% from $110.1 million for the three months ended March 31, 2010, to $130.0 million for three months ended March 31, 2011. Operating revenues from video services increased 21.3% from $49.1 million for the three months ended March 31, 2010, to $55.5 million for the same period in 2011. Operating revenues from voice services increased 2.0% from $32.3 million for the three months ended March 31, 2010, to $33.0 million for the same period in 2011. Operating revenues from data services increased 20.2% from $25.7 million for the three months ended March 31, 2010, to $30.9 million for the same period in 2011. Operating revenues from other services increased 50.7% from $3.1 million for the three months ended March 31, 2010, to $4.6 million for the same period in 2011.

Direct Costs. Direct costs increased 14.5% from $36.1 million for the three months ended March 31, 2010, to $41.4 million for the three months ended March 31, 2011. Direct costs of video services increased 17.4% from $25.8 million for the three months ended March 31, 2010, to $30.3 million for the same period in 2011. Direct costs of voice services remained unchanged at $6.0 million for the three months ended March 31, 2010 and for the same period in 2011. Direct costs of data services decreased 6.2% from $2.0 million for the three months ended March 31, 2010, to $1.9 million for the same period in 2011 due to the grooming of our data circuits and capacity to handle the increasing volume of data usage. Direct costs of other services increased 65.4% from $1.1 million for the three months ended March 31, 2010, to $1.8 million for the same period in 2011. Pole attachment and other network rental expenses increased 12.6% from $1.2 million for the three months ended March 31, 2010 to $1.4 million for the same period in 2011. We expect our cost of services to increase as we add more connections. The increase in direct costs of video services are primarily due to programming costs increases, which have been increasing over the last several years on an aggregate basis due to an increase in subscribers and on a per subscriber basis due to an increase in costs per program channel. Further, local commercial television broadcast stations are charging retransmission fees similar to fees charged by other program providers. We expect the trend of annual increases to continue and we may not be able to pass these higher costs on to customers because of competitive factors, which could adversely affect our cash flow and gross profit. We expect increases in voice, data and other direct costs of services with the additions of leased facilities used to backhaul our traffic to our switching facilities as connections and data capacity requirements increase. At the same time, we are constantly looking for ways to reduce these expenses with less expensive facilities and better design of the network connectivity as we experienced in data services.

On October 15, 2010, the Company entered into a new Credit Agreement that provided for a $770.0 million second credit facility with proceeds used to partially fund the $165.0 million Sunflower acquisition purchase price, refinance the companys existing credit facility, and pay related transaction costs. The new Credit Agreement includes a $50.0 million revolving credit facility, a $175.0 million Term Loan A and a $545.0 million Term Loan B. The Term Loan A bore interest at LIBOR plus a margin ranging from 3.5% to 4.25% and had a term of five years with annual amortization of $8.75 million, $8.75 million, $17.5 million and $26.25 million in 2012, 2013, 2014 and 2015, respectively, with the balance due at maturity. The Term Loan B bore interest at LIBOR plus 4%, with a LIBOR floor of 1.5%, and had a term of six years with 1% principal amortization annually with the balance due at maturity. On November 25, 2009, the Company entered into an interest rate swap contract to mitigate interest rate risk on an initial notional amount of $400.0 million. The swap agreement, which became effective July 3, 2010 and ends April 3, 2012, fixed $382.6 million of the floating rate debt at 1.98% as of March 31, 2011. This interest rate instrument was not designated as a hedge and therefore did not utilize hedge accounting. Changes in the fair value of the swap agreement were recorded as Gain (loss) on interest rate swaps in the Other income (expense) section of the statement of operations and the swap in variable to fixed interest rate was recorded as Interest expense on the statement of operations when the interest was incurred.

expenditures, $15.0 million for the purchase of certificates of deposit and other short term investments, and $342,000 in payments of MDU signing bonuses offset by $15.0 million proceeds from certificates of deposit. Investing activities for the three months ended March 31, 2011 consisted primarily of $26.0 million of capital expenditures, $1.1 million for an additional investment in TowerCloud, Inc., and $234,000 in payments of MDU signing bonuses offset by $105,000 proceeds from certificates of deposit.

Net cash used by our financing activities was $12.3 million for the three months ended March 31, 2010 and net cash provided by financing activities was $14.4 million for the three months ended March 31, 2011. Financing activities for the three months ended March 31, 2010, consisted of $12.9 million in principal payments on debt offset by proceeds of $558,000 from the exercise of stock options. For the three months ended March 31, 2011, financing activities consisted of $20.0 million of proceeds from long term debt and $562,000 from the exercise of stock options offset by $4.9 million of expenditure related to the modification of the long term debt and $1.2 million in principal payments on debt.

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