cnsl_Current folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

or

 

[     ]    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-51446

 

rg_hi

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

 

 

02-0636095

 

 

(State or other jurisdiction

 

 

 

(I.R.S. Employer

 

 

of incorporation or organization)

 

 

 

Identification No.)

 

 

 

 

 

 

 

 

 

121 South 17th Street, Mattoon, Illinois

 

 

 

61938-3987

 

 

 

 

 

 

 

 

 

(Address of principal executive offices)

 

 

 

(Zip Code)

 

 

  (217) 235-3311   

(Registrant’s telephone number, including area code)

 

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   X           No ____

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes   X            No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    Accelerated filer    

 

Non-accelerated filer___   Smaller reporting company ____     Emerging growth company ____

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ____

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                No   X     

 

On July 30, 2018, the registrant had 71,252,576 shares of Common Stock outstanding.

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

 

Item 1. 

Financial Statements

 

1

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

52

 

 

 

 

Item 4. 

Controls and Procedures

 

53

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

54

 

 

 

 

Item 6. 

Exhibits

 

55

 

 

 

 

SIGNATURES 

 

56

 

 

 

 


 

Table of Contents

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

350,221

 

$

169,950

 

$

706,260

 

$

339,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation and amortization)

 

 

151,358

 

 

71,136

 

 

304,274

 

 

142,168

 

Selling, general and administrative expenses

 

 

81,128

 

 

35,986

 

 

166,746

 

 

71,884

 

Acquisition and other transaction costs

 

 

899

 

 

1,793

 

 

1,630

 

 

3,524

 

Depreciation and amortization

 

 

111,741

 

 

40,483

 

 

219,640

 

 

82,678

 

Income from operations

 

 

5,095

 

 

20,552

 

 

13,970

 

 

39,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

(32,839)

 

 

(33,918)

 

 

(65,555)

 

 

(63,589)

 

Investment income

 

 

12,535

 

 

8,196

 

 

20,324

 

 

13,474

 

Other, net

 

 

640

 

 

1,145

 

 

1,246

 

 

580

 

Loss before income taxes

 

 

(14,569)

 

 

(4,025)

 

 

(30,015)

 

 

(9,904)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

(4,009)

 

 

(1,399)

 

 

(8,257)

 

 

(3,573)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(10,560)

 

 

(2,626)

 

 

(21,758)

 

 

(6,331)

 

Less: net income attributable to noncontrolling interest

 

 

83

 

 

102

 

 

183

 

 

82

 

Net loss attributable to common shareholders

 

$

(10,643)

 

$

(2,728)

 

$

(21,941)

 

$

(6,413)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per basic and diluted common shares attributable to common shareholders

 

$

(0.15)

 

$

(0.06)

 

$

(0.32)

 

$

(0.13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.38

 

$

0.38

 

$

0.77

 

$

0.77

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,560)

 

$

(2,626)

 

$

(21,758)

 

$

(6,331)

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net actuarial loss and prior service credit, net of tax

 

 

 -

 

 

(814)

 

 

 -

 

 

(814)

 

Amortization of actuarial losses and prior service credit to earnings, net of tax

 

 

954

 

 

871

 

 

1,876

 

 

1,733

 

Derivative instruments designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of tax

 

 

3,884

 

 

(2,488)

 

 

8,621

 

 

(2,544)

 

Reclassification of realized loss to earnings, net of tax

 

 

1,066

 

 

244

 

 

1,331

 

 

449

 

Comprehensive loss

 

 

(4,656)

 

 

(4,813)

 

 

(9,930)

 

 

(7,507)

 

Less: comprehensive income attributable to noncontrolling interest

 

 

83

 

 

102

 

 

183

 

 

82

 

Total comprehensive loss attributable to common shareholders

 

$

(4,739)

 

$

(4,915)

 

$

(10,113)

 

$

(7,589)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

  

2018

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,642

 

$

15,657

 

Accounts receivable, net of allowance for doubtful accounts

 

 

122,167

 

 

121,528

 

Income tax receivable

 

 

12,391

 

 

21,846

 

Prepaid expenses and other current assets

 

 

43,727

 

 

33,318

 

Assets held for sale

 

 

20,719

 

 

21,310

 

Total current assets

 

 

209,646

 

 

213,659

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,986,318

 

 

2,037,606

 

Investments

 

 

110,105

 

 

108,858

 

Goodwill

 

 

1,035,274

 

 

1,038,032

 

Customer relationships, net

 

 

262,853

 

 

293,300

 

Other intangible assets

 

 

12,038

 

 

13,483

 

Other assets

 

 

30,578

 

 

14,188

 

Total assets

 

$

3,646,812

 

$

3,719,126

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

23,057

 

$

24,143

 

Advance billings and customer deposits

 

 

46,322

 

 

42,526

 

Dividends payable

 

 

27,602

 

 

27,418

 

Accrued compensation

 

 

55,462

 

 

49,770

 

Accrued interest

 

 

9,376

 

 

9,343

 

Accrued expense

 

 

74,112

 

 

72,041

 

Current portion of long-term debt and capital lease obligations

 

 

32,570

 

 

29,696

 

Liabilities held for sale

 

 

381

 

 

1,003

 

Total current liabilities

 

 

268,882

 

 

255,940

 

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

 

2,308,752

 

 

2,311,514

 

Deferred income taxes

 

 

211,740

 

 

209,720

 

Pension and other post-retirement obligations

 

 

318,306

 

 

334,193

 

Other long-term liabilities

 

 

24,816

 

 

33,817

 

Total liabilities

 

 

3,132,496

 

 

3,145,184

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 71,252,576 and 70,777,354 shares outstanding as of June 30, 2018 and December 31, 2017, respectively

 

 

713

 

 

708

 

Additional paid-in capital

 

 

565,961

 

 

615,662

 

Accumulated deficit

 

 

(21,941)

 

 

 —

 

Accumulated other comprehensive loss, net

 

 

(36,255)

 

 

(48,083)

 

Noncontrolling interest

 

 

5,838

 

 

5,655

 

Total shareholders’ equity

 

 

514,316

 

 

573,942

 

Total liabilities and shareholders’ equity

 

$

3,646,812

   

$

3,719,126

 

 

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

194,371

 

$

93,533

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment, net

 

 

(124,840)

 

 

(58,061)

 

Proceeds from sale of assets

 

 

1,443

 

 

101

 

Proceeds from sale of investments

 

 

233

 

 

 —

 

Net cash used in investing activities

 

 

(123,164)

 

 

(57,960)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

76,000

 

 

23,000

 

Payment of capital lease obligations

 

 

(6,027)

 

 

(2,993)

 

Payment on long-term debt

 

 

(91,176)

 

 

(27,500)

 

Share repurchases for minimum tax withholding

 

 

 —

 

 

(41)

 

Dividends on common stock

 

 

(55,019)

 

 

(39,257)

 

Net cash used in financing activities

 

 

(76,222)

 

 

(46,791)

 

Change in cash and cash equivalents

 

 

(5,015)

 

 

(11,218)

 

Cash and cash equivalents at beginning of period

 

 

15,657

 

 

27,077

 

Cash and cash equivalents at end of period

 

$

10,642

 

$

15,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Accounting

 

Consolidated Communications Holdings, Inc. (the “Company”, “we” or “our”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communication solutions to consumer, commercial and carrier customers across a 24-state service area.

 

Leveraging our advanced fiber network spanning more than 36,000 fiber route miles, we offer a wide range of communications solutions including data, voice, video, managed services, cloud computing and wireless backhaul.  As of June 30, 2018, we had approximately 941,000 voice connections, 787,000 data connections and 98,000 video connections.

 

In the opinion of management, the accompanying unaudited condensed consolidated balance sheets and related condensed consolidated statements of operations, comprehensive income (loss) and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods.  Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading.  Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2017 Annual Report on Form 10-K filed with the SEC.

 

Recent Business Developments

 

On July 3, 2017, we completed our acquisition of FairPoint Communications, Inc. (“FairPoint”), pursuant to the terms of a definitive agreement and plan of merger (as amended, the “Merger Agreement”) and acquired all of the issued and outstanding shares of FairPoint in exchange for shares of our common stock (the “Merger”).  As a result of the Merger, FairPoint became a wholly owned subsidiary of the Company.  The financial results for FairPoint have been included in our condensed consolidated financial statements as of the acquisition date.  For a more complete discussion of the transaction, refer to Note 2.

 

Revenue Recognition

 

Effective January 1, 2018, we adopted ASU No. 2014-09 (“ASU 2014-09”, “ASC 606”, or the “new standard”), Revenue from Contracts with Customers, using the modified retrospective method for open contracts.  Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting practices under ASC 605 (“legacy GAAP”).

 

The adoption of the new standard did not result in a material impact to our systems, processes or internal controls.  The largest impact of the adoption of the new standard is related to the treatment of contract acquisition costs, which were previously expensed as incurred; however, under the new standard, these costs are now deferred and amortized over the expected customer life.  The adoption also resulted in additional disclosures around the nature and timing of the Company’s performance obligations, deferred revenue contract liabilities and deferred contract cost assets, as well as practical expedients used by the Company in applying the new five-step revenue model.  During the six months ended June 30, 2018, we recorded a pre-tax cumulative effect adjustment of $4.1 million related to the adoption, which increased retained earnings.  Of this amount, $1.8 million was related to the increase in the value of our partnership interests as a result of

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the adoption of ASC 606 by our equity method partnerships.  For a more complete discussion of our investments, refer to Note 4.

 

Nature of Contracts with Customers

 

Our revenue contracts with customers may include a promise or promises to deliver services such as broadband, video or voice services.  Promised services are considered distinct as the customer can benefit from the services either on their own or together with other resources that are readily available to the customer and the Company’s promise to transfer service to the customer is separately identifiable from other promises in the contract.  The Company accounts for services as separate performance obligations.  Each service is considered a single performance obligation as it is providing a series of distinct services that are substantially the same and have the same pattern of transfer.

 

The transaction price is determined at contract inception and reflects the amount of consideration to which we expect to be entitled in exchange for transferring service to the customer.  This amount is generally equal to the market price of the services promised in the contract and may include promotional discounts.  The transaction price excludes amounts collected on behalf of third parties such as sales taxes and regulatory fees.  Conversely, nonrefundable up-front fees, such as service activation and set-up fees, are included in the transaction price.  In determining the transaction price, we consider our enforceable rights and obligations within the contract.  We do not consider the possibility of a contract being cancelled, renewed or modified.

 

The transaction price is allocated to each performance obligation based on the standalone selling price of the service, net of the related discount, as applicable.

 

Revenue is recognized when or as performance obligations are satisfied by transferring service to the customer as described below.

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the quarters and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

    

2018

    

2017

    

2018

    

2017

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and carrier:

 

 

 

 

 

 

 

 

 

 

 

 

 

Data and transport services (includes VoIP)

 

$

87,603

 

$

51,528

 

$

173,628

 

$

102,432

 

Voice services

 

 

51,322

 

 

22,199

 

 

103,483

 

 

44,225

 

Other

 

 

14,237

 

 

4,931

 

 

26,100

 

 

8,833

 

 

 

 

153,162

 

 

78,658

 

 

303,211

 

 

155,490

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband (VoIP and Data)

 

 

62,545

 

 

28,296

 

 

125,656

 

 

56,689

 

Video services

 

 

22,065

 

 

22,314

 

 

44,899

 

 

45,418

 

Voice services

 

 

51,616

 

 

12,860

 

 

103,678

 

 

25,902

 

 

 

 

136,226

 

 

63,470

 

 

274,233

 

 

128,009

 

  Subsidies

 

 

20,979

 

 

10,392

 

 

46,234

 

 

20,964

 

Network access

 

 

37,338

 

 

14,138

 

 

77,053

 

 

28,691

 

  Other products and services

 

 

2,516

 

 

3,292

 

 

5,529

 

 

6,731

 

Total operating revenues

 

$

350,221

 

$

169,950

 

$

706,260

 

$

339,885

 

 

Service revenue is recognized over time, consistent with the transfer of service, as the customer simultaneously receives and consumes the benefits provided by the Company’s performance as the Company performs.

 

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Contract Assets and Liabilities

 

The following table provides information about receivables, contract assets and contract liabilities from our revenue contracts with customers:

 

 

 

 

 

 

 

 

 

Quarter Ended

 

At

(In thousands)

    

June 30, 2018

    

Adoption

Accounts receivable, net

 

$

122,411

 

$

121,745

Contract assets

 

 

7,408

 

 

1,804

Contract liabilities

 

 

49,039

 

 

46,368

 

Contract assets include costs that are incremental to the acquisition of a contract.  Incremental costs are those that result directly from obtaining a contract or costs that would not have been incurred if the contract had not been obtained, which primarily relate to sales commissions.  These costs are deferred and amortized over the expected customer life.  We determined that the expected customer life is the expected period of benefit as the commission on the renewal contract is not commensurate with the commission on the initial contract.  During the quarter and six months ended June 30, 2018, the Company recognized expense of $0.6 million and $1.0 million, respectively, related to deferred contract acquisition costs.

 

Contract liabilities include deferred revenues related to advanced payments for services and nonrefundable, upfront service activation and set-up fees, which under the new standard are generally deferred and amortized over the expected customer life as the option to renew without paying an upfront fee provides the customer with a material right.  During the quarter and six months ended June 30, 2018, the Company recognized revenue of $83.8 million and $171.1 million, respectively, related to deferred revenues.

 

A receivable is recognized in the period the Company provides goods or services when the Company’s right to consideration is unconditional.  Payment terms on invoiced amounts are generally 30 to 60 days.

 

Performance Obligations

 

ASC 606 requires that the Company disclose the aggregate amount of the transaction price that is allocated to remaining performance obligations that are unsatisfied as of June 30, 2018.  The guidance provides certain practical expedients that limit this requirement.  The service revenue contracts of the Company meet the following practical expedients provided by ASC 606:

 

1.

The performance obligation is part of a contract that has an original expected duration of one year or less.

2.

Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18. 

 

Financial Statement Impact of Adopting ASC 606

 

As described above, the change in accounting for contract acquisition costs was the largest impact to the Company upon adoption of ASC 606.  On an ongoing basis, a significant amount of commission costs, which were historically expensed as incurred, will now be deferred and amortized over the expected customer life under the new standard.  The accretive benefit to operating income anticipated in 2018 is expected to moderate in future years as the basis of the amortization builds.  For the quarter and six months ended June 30, 2018, we recognized commission expense of $0.6 million and $1.0 million, respectively, under the new standard as compared to $3.6 million and $6.6 million, respectively, for the same periods under legacy GAAP.

 

Recent Accounting Pronouncements

 

Effective January 1, 2018, we adopted ASU 2014-09 (also known as ASC 606).  The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In addition, ASU 2014-09 requires disclosures about the nature, amount, timing and uncertainty of revenue and cash flows

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arising from contracts with customers.  For additional information on the new standard and the impact to our results of operations, refer to the Revenue Recognition section above.

 

Effective January 1, 2018, we adopted ASU No. 2017-09 (“ASU 2017-09”), Scope of Modification Accounting. ASU 2017-09 clarifies the modification accounting guidance for stock compensation included in Topic 718, Compensation – Stock Compensation. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award must be accounted for as a modification under Topic 718. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures.

 

Effective January 1, 2018, we adopted ASU No. 2017-07 (“ASU 2017-07”), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires presentation of the service cost component of net periodic benefit cost within the same income statement line item as other compensation costs arising from services rendered by relevant employees during the period, and presentation of the other cost components of net periodic benefit cost separately and outside of the income from operations subtotal. In addition, only the service cost component is eligible for capitalization. We adopted ASU 2017-07 prospectively for the capitalization of the service cost component of the net periodic benefit cost. ASU 2017-07 was applied retrospectively using the practical expedient for the presentation of the other components of net periodic benefit cost in the statement of operations and as a result, we reclassified $(0.8) million and $(0.4) million of benefit from cost of services and products and $(0.2) million and $(0.1) million of benefit from selling, general and administrative expenses into other, net within non-operating income (expense) for the quarter and six months ended June 30, 2017, respectively. See Note 9 for the amount of each component of net periodic pension and post-retirement benefit costs.

 

Effective January 1, 2018, we adopted ASU No. 2017-05 (“ASU 2017-05”), Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 provides additional guidance to (i) clarify the scope for recognizing gains and losses from the transfer of nonfinancial assets and in substance nonfinancial assets in contracts with non-customers, and (ii) clarify the accounting for partial sales of nonfinancial assets. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures.

 

Effective January 1, 2018, we adopted ASU No. 2017-04 (“ASU 2017-04”), Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the updated guidance, the goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount and an impairment charge will be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures and is not expected to have a material impact on our testing of goodwill.

 

Effective January 1, 2018, we adopted ASU No. 2017-01 (“ASU 2017-01”), Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business and establishes a screening process to determine whether an integrated set of assets and activities acquired is deemed the acquisition of a business or the acquisition of assets. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures.

 

Effective January 1, 2018, we adopted ASU No. 2016-16 (“ASU 2016-16”), Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 eliminates the existing exception prohibiting the recognition of the income tax consequences for intra-entity asset transfers until the asset has been sold to an outside party. Under ASU 2016-16, entities will be required to recognize the income tax consequences of intra-entity asset transfers other than inventory when the transfer occurs. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures.

 

Effective January 1, 2018, we adopted ASU No. 2016-15 (“ASU 2016-15”), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance concerning the classification of certain cash receipts and cash payments in the statement of cash flows. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures.

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-07 (“ASU 2018-07”), Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718,

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Compensation – Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees to align the accounting guidance for both employee and nonemployee share-based transactions. The new guidance is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU No. 2018-02 (“ASU 2018-02”), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides an option to allow reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017.   The new guidance is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures and do not expect to make the optional election for reclassification of stranded tax effects from accumulated other comprehensive income (loss) to retained earnings.

 

In August 2017, the FASB issued ASU Update No. 2017-12 (“ASU 2017-12”), Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends current guidance on accounting for hedges mainly to align more closely an entity’s risk management activities and financial reporting relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. In addition, amendments in ASU 2017-12 simplify the application of hedge accounting by allowing more time to prepare hedge documentation and allowing effectiveness assessments to be performed on a qualitative basis after hedge inception. The new guidance is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. We plan to adopt ASU 2017-12 as of January 1, 2019 and are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 establishes the new “current expected credit loss” model for measuring and recognizing credit losses on financial assets based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts. The new guidance is effective on a modified retrospective basis for annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods beginning after December 15, 2018. We have not yet made a decision on the timing of adoption and are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 establishes a new lease accounting model for leases. Lessees will be required to recognize most leases on their balance sheets but lease expense will be recognized on the income statement in a manner similar to existing requirements. ASU 2016-02 is effective on a modified retrospective basis for annual and interim periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the population of our leases and anticipate that most of our operating lease commitments will be recognized on our consolidated balance sheets. We plan to adopt this update effective January 1, 2019 and are continuing to assess the potential impact of this update on our condensed consolidated financial statements and related disclosures.

 

Reclassifications

 

Certain amounts in our 2017 condensed consolidated financial statements have been reclassified to conform to the current year presentation.  In accordance with the adoption of ASU 2017-07, as described above, certain components of net periodic benefit cost were reclassified from operating expense to non-operating income (expense) in our condensed consolidated statement of operations.

 

 

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2.  ACQUISITIONS AND DIVESTITURES

 

Acquisitions

 

FairPoint Communications, Inc.

 

On July 3, 2017, we completed the Merger with FairPoint and acquired all of the issued and outstanding shares of FairPoint in exchange for shares of our common stock.  As a result, FairPoint became a wholly-owned subsidiary of the Company.  FairPoint is an advanced communications provider to business, wholesale and residential customers within its service territory, which spans across 17 states.  FairPoint owns and operates a robust fiber-based network with more than 22,000 route miles of fiber, including 17,000 route miles of fiber in northern New England.  The acquisition reflects our strategy to diversify revenue and cash flows amongst multiple products and to expand our network to new markets.

 

At the effective time of the Merger, each share of common stock of FairPoint issued and outstanding immediately prior to the effective time of the Merger converted into and became the right to receive 0.7300 shares of common stock of Consolidated and cash in lieu of fractional shares, pursuant to the terms of the Merger Agreement.  Based on the closing price of our common stock on the last complete trading day prior to the effective date of the Merger, the total value of the consideration to be exchanged was $431.0 million, exclusive of debt of approximately $919.3 million.  On the date of the Merger, we issued an approximate aggregate total of 20.1 million shares of our common stock to the former FairPoint stockholders and we assumed approximately 2,615,153 outstanding warrants, each eligible to purchase one share of the Company’s common stock at an exercise price of $66.86 per share, subject to adjustment in accordance with the warrant agreement.  On January 24, 2018, all of the warrants expired in accordance with their terms without being exercised.

 

In connection with the Merger, we secured committed debt financing in December 2016 through a $935.0 million incremental term loan facility, as described in Note 6, that, in addition to cash on hand and other sources of liquidity, was used to repay certain existing indebtedness of FairPoint and to pay the fees and expenses in connection with the Merger.

 

The acquisition was accounted for in accordance with the acquisition method of accounting for business combinations.  The tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of the acquisition.

As of June 30, 2018, the estimated fair value of the tangible and intangible assets acquired and liabilities assumed are as follows:

 

 

 

 

 

(In thousands)

 

 

 

Cash and cash equivalents

 

$

56,980

 

Accounts receivable

 

 

72,206

 

Other current assets

 

 

22,012

 

Assets held for sale

 

 

20,843

 

Property, plant and equipment

 

 

1,047,000

 

Intangible assets

 

 

303,180

 

Other long-term assets

 

 

2,685

 

Total assets acquired

 

 

1,524,906

 

 

 

 

 

 

Current liabilities

 

 

123,109

 

Liabilities held for sale

 

 

443

 

Pension and other post-retirement obligations

 

 

219,298

 

Deferred income taxes

 

 

96,632

 

Other long-term liabilities

 

 

13,502

 

Total liabilities assumed

 

 

452,984

 

Net fair value of assets acquired

 

 

1,071,922

 

Goodwill

 

 

278,396

 

Total consideration transferred

 

$

1,350,318

 

 

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We are in the process of finalizing the valuation of the net assets acquired, most notably, the valuation of deferred income taxes.  Any changes within the measurement period to the initial estimates of the fair value of the assets acquired and liabilities assumed will be recorded to those assets and liabilities and residual amounts will be allocated to goodwill.

Goodwill recognized from the acquisition primarily relates to the expected contributions of the entity to the overall corporate strategy and the synergies expected to be realized from the acquisition.  Amortization of goodwill is not deductible for income tax purposes.

Based on the valuation analysis, the identifiable intangible assets acquired consisted of customer relationships of $300.3 million, tradenames of $1.1 million and non-compete agreements of $1.8 million.  The intangible assets were valued using an income based approach (level 3 inputs) that utilized the multi-period earnings method for customer relationships, the relief from royalty method for tradenames and the with and without method for the non-compete agreements.  The customer relationships are being amortized using an accelerated amortization method over their estimated useful lives of seven to eleven years depending on the nature of the customer.  The tradenames and non-compete agreements are amortized using the straight-line method over their estimated useful lives of six months and one year, respectively.

During the quarter ended June 30, 2018, we made certain adjustments to the fair value of the identifiable assets acquired and liabilities assumed which resulted in an increase in working capital of $0.9 million and decreases in property, plant and equipment of $6.6 million, long-term liabilities of $2.4 million and deferred income taxes of $0.9 million.  The net impact of the adjustments reduced net assets acquired and increased goodwill by $2.4 million. 

 

As discussed in the “Divestures” section below, we have committed to a formal plan to sell certain assets of FairPoint and these assets have been classified as held for sale at the acquisition date.  In connection with the classification as assets held for sale at the acquisition date, the carrying value of these assets was recorded at their estimated fair value of approximately $20.4 million, which was determined based on the estimated selling price less costs to sell.

Unaudited Pro Forma Results

 

The following unaudited pro forma information presents our results of operations as if the acquisition of FairPoint occurred on January 1, 2016.  The adjustments to arrive at the pro forma information below included adjustments for depreciation and amortization on the acquired tangible and intangible assets acquired, interest expense on the debt incurred to finance the acquisition and to repay certain existing indebtedness of FairPoint, and the exclusion of certain acquisition related costs.  Shares used to calculate the basic and diluted earnings per share were adjusted to reflect the additional shares of common stock issued to fund the acquisition.

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Unaudited; in thousands, except per share amounts)

    

2017

 

2017

 

Operating revenues

 

$

369,089

 

$

740,932

 

Income from operations

 

$

20,735

 

$

31,867

 

Net loss

 

$

(1,400)

 

$

(9,948)

 

Less: net loss attributable to noncontrolling interest

 

 

102

 

 

82

 

Net loss attributable to common stockholders

 

$

(1,502)

 

$

(10,030)

 

 

 

 

 

 

 

 

 

Net loss per common share-basic and diluted

 

$

(0.02)

 

$

(0.14)

 

 

Transaction costs related to the acquisition of FairPoint were $1.7 million and $3.2 million during the quarter and six months ended June 30, 2017, respectively, which are included in acquisition and other transaction costs in the condensed consolidated statements of operations.  These costs are considered to be non-recurring in nature and therefore pro forma adjustments have been made to exclude these costs from the pro forma results of operations.

 

The pro forma information does not purport to present the actual results that would have resulted if the acquisition had in fact occurred at the beginning of the fiscal periods presented, nor does the information project results for any future period. The pro forma information does not include the impact of any future cost savings or synergies that may be achieved as a result of the acquisition.

 

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Divestitures

 

In August 2017, we entered into a letter of intent to sell our subsidiaries Peoples Mutual Telephone Company and Peoples Mutual Long Distance Company, (collectively, “Peoples”), which were acquired as part of the acquisition of FairPoint.  Peoples operates as a local exchange carrier in Virginia and provides telecommunications services to residential and business customers.  In November 2017, the Company entered into an agreement to sell all of the issued and outstanding stock of Peoples in exchange for cash of approximately $21.0 million, subject to certain contractual adjustments.  The parties received all required regulatory approvals in July 2018 and the transaction closed on July 31, 2018. 

 

As of the FairPoint acquisition date, the net assets to be sold have been classified as held for sale in the consolidated balance sheet.  The expected sale of these assets has not been reported as discontinued operations in the condensed consolidated statements of operations as the annual revenues of these operations is less than 1% of the consolidated operating revenues. The estimated fair value of the net assets held for sale was determined based on the estimated selling price less costs to sell and was classified as Level 2 within the fair value hierarchy at June 30, 2018 and December 31, 2017.

 

The classes of assets and liabilities to be sold and classified as held for sale consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(In thousands)

    

2018

    

2017

 

Current assets

 

$

252

 

$

227

 

Property, plant and equipment

 

 

4,369

 

 

4,254

 

Goodwill

 

 

16,098

 

 

16,829

 

Total assets

 

$

20,719

 

$

21,310

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

233

 

$

701

 

Deferred taxes

 

 

148

 

 

302

 

Total liabilities

 

$

381

 

$

1,003

 

 

 

 

3.  EARNINGS (LOSS) PER SHARE

 

Basic and diluted earnings (loss) per common share (“EPS”) are computed using the two-class method, which is an earnings allocation method that determines EPS for each class of common stock and participating securities considering dividends declared and participation rights in undistributed earnings.  The Company’s restricted stock awards are considered participating securities because holders are entitled to receive non-forfeitable dividends during the vesting term. 

 

The potentially dilutive impact of the Company’s restricted stock awards is determined using the treasury stock method.  Under the treasury stock method, if the average market price during the period exceeds the exercise price, these instruments are treated as if they had been exercised with the proceeds of exercise used to repurchase common stock at the average market price during the period.  Any incremental difference between the assumed number of shares issued and repurchased is included in the diluted share computation.

 

Diluted EPS includes securities that could potentially dilute basic EPS during a reporting period.  Dilutive securities are not included in the computation of loss per share when a company reports a net loss from continuing operations as the impact would be anti-dilutive.

 

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The computation of basic and diluted EPS attributable to common shareholders computed using the two‑class method is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands, except per share amounts)

    

2018

    

2017

    

2018

    

2017

 

Net loss

 

$

(10,560)

 

$

(2,626)

 

$

(21,758)

 

$

(6,331)

 

Less: net income (loss) attributable to noncontrolling interest

 

 

83

 

 

102

 

 

183

 

 

82

 

Loss attributable to common shareholders before allocation of earnings to participating securities

 

 

(10,643)

 

 

(2,728)

 

 

(21,941)

 

 

(6,413)

 

Less: earnings allocated to participating securities

 

 

221

 

 

115

 

 

442

 

 

164

 

Net loss attributable to common shareholders, after earnings allocated to participating securities

 

$

(10,864)

 

$

(2,843)

 

$

(22,383)

 

$

(6,577)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

70,598

 

 

50,412

 

 

70,598

 

 

50,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share attributable to common shareholders - basic and diluted

 

$

(0.15)

 

$

(0.06)

 

$

(0.32)

 

$

(0.13)

 

 

Diluted EPS attributable to common shareholders for each of the quarters ended June 30, 2018 and 2017 excludes 0.7 million and 0.3 million potential common shares, respectively, that could be issued under our share-based compensation plan, because the inclusion of the potential common shares would have an antidilutive effect.  For each of the six months ended June 30, 2018 and 2017, diluted earnings (loss) per common share attributable to common shareholders excludes 0.5 million and 0.3 million potential common shares, respectively.

 

4.  INVESTMENTS

 

Our investments are as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(In thousands)

    

2018

    

2017

 

Cash surrender value of life insurance policies

 

$

2,315

 

$

2,272

 

Investments at cost:

 

 

 

 

 

 

 

GTE Mobilnet of South Texas Limited Partnership (2.34% interest)

 

 

21,450

 

 

21,450

 

Pittsburgh SMSA Limited Partnership (3.60% interest)

 

 

22,950

 

 

22,950

 

CoBank, ACB Stock

 

 

9,050

 

 

9,105

 

Other

 

 

298

 

 

343

 

Equity method investments:

 

 

 

 

 

 

 

GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)

 

 

17,344

 

 

17,375

 

Pennsylvania RSA 6(I) Limited Partnership (16.67% interest)

 

 

7,546

 

 

7,300

 

Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)

 

 

29,152

 

 

28,063

 

Totals

 

$

110,105

 

$

108,858

 

 

Investments at Cost

 

We own 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”).  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston and Beaumont, Texas metropolitan areas.  We also own 3.60% of Pittsburgh SMSA Limited Partnership, which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we account for these investments at our initial cost less any impairment because fair value is not readily available for these investments.  No factors of impairment existed for any of the investments during the quarters or six months ended June 30, 2018 or 2017.  For these investments, we adjust the carrying value for any purchases or sales of our ownership interests. We record distributions received from these investments as investment income in non-operating income (expense).  For the quarters

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ended June 30, 2018 and 2017, we received cash distributions from these partnerships totaling $6.1 million and $3.7 million, respectively. For the six months ended June 30, 2018 and 2017, we received cash distributions from these partnerships totaling $9.1 million and $5.3 million, respectively. 

 

CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers.  On an annual basis, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which has traditionally been a significant lender in the Company’s credit facility.  The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.

 

Equity Method

 

We own 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.67% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory.  Because we have significant influence over the operating and financial policies of these three entities, we account for the investments using the equity method. In connection with the adoption of ASC 606 by our equity method partnerships, the value of our combined partnership interests increased $1.8 million, which is reflected in the cumulative effect adjustment to retained earnings during the quarter and six months ended June 30, 2018.  For the quarters ended June 30, 2018 and 2017, we received cash distributions from these partnerships totaling $5.1 million and $4.1 million, respectively.  For each of the six months ended June 30, 2018 and 2017, we received cash distributions from these partnerships totaling $11.6 million and $8.1 million, respectively. 

   

The combined unaudited results of operations and financial position of our three equity investments in the cellular limited partnerships are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

    

2018

    

2017

    

2018

    

2017

 

Total revenues

 

$

85,767

 

$

89,811

 

$

167,710

 

$

169,832

 

Income from operations

 

 

25,149

 

 

24,518

 

 

49,647

 

 

45,806

 

Net income before taxes

 

 

24,837

 

 

24,145

 

 

49,041

 

 

45,042

 

Net income

 

 

24,837

 

 

24,145

 

 

49,041

 

 

45,042

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

(In thousands)

    

2018

    

2017

Current assets

 

$

76,641

 

$

78,782

Non-current assets

 

 

97,485

 

 

95,959

Current liabilities

 

 

21,455

 

 

22,472

Non-current liabilities

 

 

51,107

 

 

51,463

Partnership equity

 

 

101,564

 

 

100,806

 

 

5.  FAIR VALUE MEASUREMENTS

 

Our derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using valuation models and are categorized within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and observable market data of similar instruments.  See Note 7 for further discussion regarding our interest rate swap agreements.

 

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Our interest rate swap agreements measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Current interest rate swap assets

 

$

211

 

$

 —

 

$

211

 

$

 —

 

Long-term interest rate swap assets

 

 

10,087

 

 

 —

 

 

10,087

 

 

 —

 

Total

 

$

10,298

 

$

 —

 

$

10,298

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Long-term interest rate swap assets

 

$