UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
September 30,☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission File Number 1-8519
CINCINNATI BELL INC.
Ohio | 31-1056105 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
221 East Fourth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
(513) 397-9900
(Registrant’s telephone number, including area code)
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Common Shares ($0.01 par value) | CBB | New York Stock Exchange | ||
Depositary Shares, each representing 1/20 interest in a Share of 6 ¾% Cumulative Convertible Preferred Stock, without par value | CBB.PB | New York Stock Exchange |
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files). YesIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):
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
Securities Registered Pursuant to be filed by Section 12, 13 or 15(d)12(b) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
At October 31, 2018,2019, there were 50,166,17850,420,700 common shares outstanding.
TABLE OF CONTENTS
Description | Page | |||
Item 1. | Financial Statements | |||
1 | ||||
2 | ||||
3 | ||||
Condensed Consolidated Balance Sheets (Unaudited) September 30, | 4 | |||
5 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 6 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | ||
Item 3. | 42 | |||
Item 4. | 42 | |||
PART II. Other Information | ||||
Item 1. | 43 | |||
Item 1A. | 43 | |||
Item 2. | 43 | |||
Item 3. | 43 | |||
Item 4. | 43 | |||
Item 5. | 43 | |||
Item 6. | 44 | |||
45 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Revenue |
| $ | 382.5 |
|
| $ | 386.7 |
|
| $ | 1,146.3 |
|
| $ | 979.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and products, excluding items below |
|
| 194.7 |
|
|
| 197.7 |
|
|
| 587.9 |
|
|
| 499.4 |
|
Selling, general and administrative, excluding items below |
|
| 88.0 |
|
|
| 85.7 |
|
|
| 261.3 |
|
|
| 220.2 |
|
Depreciation and amortization |
|
| 75.5 |
|
|
| 75.5 |
|
|
| 229.1 |
|
|
| 177.6 |
|
Restructuring and severance related charges |
|
| 1.3 |
|
|
| - |
|
|
| 6.4 |
|
|
| 4.9 |
|
Transaction and integration costs |
|
| 0.2 |
|
|
| 13.3 |
|
|
| 3.8 |
|
|
| 18.2 |
|
Total operating costs and expenses |
|
| 359.7 |
|
|
| 372.2 |
|
|
| 1,088.5 |
|
|
| 920.3 |
|
Operating income |
|
| 22.8 |
|
|
| 14.5 |
|
|
| 57.8 |
|
|
| 58.9 |
|
Interest expense |
|
| 35.0 |
|
|
| 33.7 |
|
|
| 105.0 |
|
|
| 96.3 |
|
Loss on extinguishment of debt |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1.3 |
|
Other components of pension and postretirement benefit plans expense |
|
| 2.8 |
|
|
| 3.0 |
|
|
| 8.4 |
|
|
| 9.5 |
|
Other expense (income), net |
|
| 0.5 |
|
|
| (1.2 | ) |
|
| (0.4 | ) |
|
| (2.4 | ) |
Loss before income taxes |
|
| (15.5 | ) |
|
| (21.0 | ) |
|
| (55.2 | ) |
|
| (45.8 | ) |
Income tax benefit |
|
| (1.9 | ) |
|
| (3.3 | ) |
|
| (9.2 | ) |
|
| (6.0 | ) |
Net loss |
|
| (13.6 | ) |
|
| (17.7 | ) |
|
| (46.0 | ) |
|
| (39.8 | ) |
Preferred stock dividends |
|
| 2.6 |
|
|
| 2.6 |
|
|
| 7.8 |
|
|
| 7.8 |
|
Net loss applicable to common shareowners |
| $ | (16.2 | ) |
| $ | (20.3 | ) |
| $ | (53.8 | ) |
| $ | (47.6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
| $ | (0.32 | ) |
| $ | (0.41 | ) |
| $ | (1.07 | ) |
| $ | (1.06 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue | $ | 386.7 | $ | 255.5 | $ | 979.2 | $ | 764.5 | |||||||
Costs and expenses | |||||||||||||||
Cost of services and products, excluding items below | 197.7 | 127.0 | 499.4 | 380.0 | |||||||||||
Selling, general and administrative, excluding items below | 85.7 | 53.2 | 220.2 | 162.3 | |||||||||||
Depreciation and amortization | 75.5 | 47.3 | 177.6 | 140.1 | |||||||||||
Restructuring and severance related charges | — | — | 4.9 | 29.2 | |||||||||||
Transaction and integration costs | 13.3 | 12.1 | 18.2 | 14.4 | |||||||||||
Total operating costs and expenses | 372.2 | 239.6 | 920.3 | 726.0 | |||||||||||
Operating income | 14.5 | 15.9 | 58.9 | 38.5 | |||||||||||
Interest expense | 33.7 | 18.8 | 96.3 | 54.9 | |||||||||||
Loss on extinguishment of debt | — | — | 1.3 | — | |||||||||||
Other components of pension and postretirement benefit plans expense | 3.0 | 3.0 | 9.5 | 9.4 | |||||||||||
Gain on sale of Investment in CyrusOne | — | — | — | (117.7 | ) | ||||||||||
Other (income) expense, net | (1.2 | ) | 4.5 | (2.4 | ) | 3.5 | |||||||||
(Loss) income before income taxes | (21.0 | ) | (10.4 | ) | (45.8 | ) | 88.4 | ||||||||
Income tax (benefit) expense | (3.3 | ) | 0.6 | (6.0 | ) | 36.5 | |||||||||
Net (loss) income | (17.7 | ) | (11.0 | ) | (39.8 | ) | 51.9 | ||||||||
Preferred stock dividends | 2.6 | 2.6 | 7.8 | 7.8 | |||||||||||
Net (loss) income applicable to common shareowners | $ | (20.3 | ) | $ | (13.6 | ) | $ | (47.6 | ) | $ | 44.1 | ||||
Basic net (loss) earnings per common share | $ | (0.41 | ) | $ | (0.32 | ) | $ | (1.06 | ) | $ | 1.05 | ||||
Diluted net (loss) earnings per common share | $ | (0.41 | ) | $ | (0.32 | ) | $ | (1.06 | ) | $ | 1.04 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in millions)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net loss |
| $ | (13.6 | ) |
| $ | (17.7 | ) |
| $ | (46.0 | ) |
| $ | (39.8 | ) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain |
|
| (1.0 | ) |
|
| 1.7 |
|
|
| 2.1 |
|
|
| (2.6 | ) |
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on cash flow hedges arising during the period, net of tax of ($0.9), $0.3, ($4.2), ($0.1) |
|
| (3.0 | ) |
|
| 1.1 |
|
|
| (13.9 | ) |
|
| (0.4 | ) |
Reclassification adjustment for net losses included in net income, net of tax of $0.2, $0.2, $0.3, $0.2 |
|
| 0.4 |
|
|
| 0.5 |
|
|
| 0.8 |
|
|
| 0.5 |
|
Defined benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit arising from remeasurement during the period, net of tax of $0.0 |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
Amortization of prior service benefits included in net income, net of tax of ($0.2), ($0.1), ($0.5), ($0.5) |
|
| (0.4 | ) |
|
| (0.6 | ) |
|
| (1.4 | ) |
|
| (1.8 | ) |
Amortization of net actuarial loss included in net income, net of tax of $1.0, $1.1, $2.7, $3.5 |
|
| 2.9 |
|
|
| 4.1 |
|
|
| 8.9 |
|
|
| 12.3 |
|
Total other comprehensive (loss) income |
|
| (1.1 | ) |
|
| 6.8 |
|
|
| (3.4 | ) |
|
| 8.0 |
|
Total comprehensive loss |
| $ | (14.7 | ) |
| $ | (10.9 | ) |
| $ | (49.4 | ) |
| $ | (31.8 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net (loss) income | $ | (17.7 | ) | $ | (11.0 | ) | $ | (39.8 | ) | $ | 51.9 | ||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Unrealized gains on Investment in CyrusOne, net of tax of $4.4 | — | — | — | 8.3 | |||||||||||
Reclassification adjustment for gain on sale of Investment in CyrusOne included in net income, net of tax of ($41.3) | — | — | — | (76.4 | ) | ||||||||||
Foreign currency translation gain (loss) | 1.7 | 0.1 | (2.6 | ) | 0.1 | ||||||||||
Unrealized gain on cash flow hedge arising during the period, net of tax of $0.5, $0.1 | 1.6 | — | 0.1 | — | |||||||||||
Defined benefit plans: | |||||||||||||||
Amortization of prior service benefits included in net income, net of tax of ($0.1), ($0.4), ($0.5), ($1.2) | (0.6 | ) | (0.8 | ) | (1.8 | ) | (2.2 | ) | |||||||
Amortization of net actuarial loss included in net income, net of tax of $1.1, $1.9, $3.5, $5.9 | 4.1 | 3.6 | 12.3 | 10.7 | |||||||||||
Total other comprehensive income (loss) | 6.8 | 2.9 | 8.0 | (59.5 | ) | ||||||||||
Total comprehensive loss | $ | (10.9 | ) | $ | (8.1 | ) | $ | (31.8 | ) | $ | (7.6 | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share amounts)millions)
(Unaudited)
|
| 6 3/4 % Cumulative Convertible Preferred Shares |
|
| Common Shares |
|
| Additional Paid-in |
|
| Accumulated |
|
| Accumulated Other Comprehensive |
|
|
|
|
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Loss |
|
| Total |
| ||||||||
Balance at June 30, 2019 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.4 |
|
| $ | 0.5 |
|
| $ | 2,677.4 |
|
| $ | (2,741.8 | ) |
| $ | (177.8 | ) |
| $ | (112.3 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13.6 | ) |
|
| — |
|
|
| (13.6 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.1 | ) |
|
| (1.1 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.0 |
|
|
| — |
|
|
| — |
|
|
| 2.0 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
Balance at September 30, 2019 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.4 |
|
| $ | 0.5 |
|
| $ | 2,676.8 |
|
| $ | (2,755.4 | ) |
| $ | (178.9 | ) |
| $ | (127.6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 42.4 |
|
| $ | 0.4 |
|
| $ | 2,561.0 |
|
| $ | (2,661.7 | ) |
| $ | (172.5 | ) |
| $ | (143.4 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17.7 | ) |
|
| — |
|
|
| (17.7 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6.8 |
|
|
| 6.8 |
|
Shares issued under employee plans |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares purchased under employee plans and other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.9 |
|
|
| — |
|
|
| — |
|
|
| 1.9 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
Stock consideration for acquisition of Hawaiian Telcom |
|
| — |
|
|
| — |
|
|
| 7.7 |
|
|
| 0.1 |
|
|
| 121.1 |
|
|
| — |
|
|
| — |
|
|
| 121.2 |
|
Balance at September 30, 2018 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.2 |
|
| $ | 0.5 |
|
| $ | 2,681.3 |
|
| $ | (2,679.4 | ) |
| $ | (165.7 | ) |
| $ | (33.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6 3/4 % Cumulative Convertible Preferred Shares |
|
| Common Shares |
|
| Additional Paid-in |
|
| Accumulated |
|
| Accumulated Other Comprehensive |
|
|
|
|
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Loss |
|
| Total |
| ||||||||
Balance at December 31, 2018 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.2 |
|
| $ | 0.5 |
|
| $ | 2,680.0 |
|
| $ | (2,709.4 | ) |
| $ | (175.5 | ) |
| $ | (75.0 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (46.0 | ) |
|
| — |
|
|
| (46.0 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3.4 | ) |
|
| (3.4 | ) |
Shares issued under employee plans |
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares purchased under employee plans and other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5.4 |
|
|
| — |
|
|
| — |
|
|
| 5.4 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
Balance at September 30, 2019 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.4 |
|
| $ | 0.5 |
|
| $ | 2,676.8 |
|
| $ | (2,755.4 | ) |
| $ | (178.9 | ) |
| $ | (127.6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 42.2 |
|
| $ | 0.4 |
|
| $ | 2,565.6 |
|
| $ | (2,639.6 | ) |
| $ | (173.7 | ) |
| $ | (117.9 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (39.8 | ) |
|
| — |
|
|
| (39.8 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8.0 |
|
|
| 8.0 |
|
Shares issued under employee plans |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares purchased under employee plans and other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.1 | ) |
|
| — |
|
|
| — |
|
|
| (2.1 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4.5 |
|
|
| — |
|
|
| — |
|
|
| 4.5 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
Stock consideration for acquisition of Hawaiian Telcom |
|
| — |
|
|
| — |
|
|
| 7.7 |
|
|
| 0.1 |
|
|
| 121.1 |
|
|
| — |
| �� |
| — |
|
|
| 121.2 |
|
Balance at September 30, 2018 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.2 |
|
| $ | 0.5 |
|
| $ | 2,681.3 |
|
| $ | (2,679.4 | ) |
| $ | (165.7 | ) |
| $ | (33.9 | ) |
September 30, | December 31, | ||||||
2018 | 2017 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 10.6 | $ | 17.8 | |||
Restricted cash | — | 378.7 | |||||
Receivables, less allowances of $9.8 and $10.4 | 286.0 | 239.8 | |||||
Inventory, materials and supplies | 44.7 | 44.3 | |||||
Prepaid expenses | 27.2 | 22.2 | |||||
Other current assets | 10.7 | 7.6 | |||||
Total current assets | 379.2 | 710.4 | |||||
Property, plant and equipment, net | 1,831.0 | 1,129.0 | |||||
Goodwill | 158.0 | 151.0 | |||||
Intangible assets, net | 173.9 | 132.3 | |||||
Deferred income tax assets | 60.6 | 12.2 | |||||
Other noncurrent assets | 56.8 | 52.7 | |||||
Total assets | $ | 2,659.5 | $ | 2,187.6 | |||
Liabilities and Shareowners’ Deficit | |||||||
Current liabilities | |||||||
Current portion of long-term debt | $ | 18.3 | $ | 18.4 | |||
Accounts payable | 281.7 | 185.6 | |||||
Unearned revenue and customer deposits | 55.7 | 36.3 | |||||
Accrued taxes | 22.6 | 21.2 | |||||
Accrued interest | 25.0 | 29.9 | |||||
Accrued payroll and benefits | 44.0 | 28.7 | |||||
Other current liabilities | 27.6 | 37.2 | |||||
Total current liabilities | 474.9 | 357.3 | |||||
Long-term debt, less current portion | 1,909.4 | 1,729.3 | |||||
Pension and postretirement benefit obligations | 225.3 | 177.5 | |||||
Deferred income tax liabilities | 11.4 | 11.2 | |||||
Other noncurrent liabilities | 72.4 | 30.2 | |||||
Total liabilities | 2,693.4 | 2,305.5 | |||||
Shareowners’ deficit | |||||||
Preferred stock, 2,357,299 shares authorized, 155,250 shares (3,105,000 depositary shares) of 6 3/4% Cumulative Convertible Preferred Stock issued and outstanding at September 30, 2018 and December 31, 2017; liquidation preference $1,000 per share ($50 per depositary share) | 129.4 | 129.4 | |||||
Common shares, $.01 par value; 96,000,000 shares authorized; 50,165,394 and 42,197,965 shares issued and outstanding at September 30, 2018 and December 31, 2017 | 0.5 | 0.4 | |||||
Additional paid-in capital | 2,681.3 | 2,565.6 | |||||
Accumulated deficit | (2,679.4 | ) | (2,639.6 | ) | |||
Accumulated other comprehensive loss | (165.7 | ) | (173.7 | ) | |||
Total shareowners’ deficit | (33.9 | ) | (117.9 | ) | |||
Total liabilities and shareowners’ deficit | $ | 2,659.5 | $ | 2,187.6 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)millions, except share amounts)
(Unaudited)
|
| September 30, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 6.5 |
|
| $ | 15.4 |
|
Receivables, less allowances of $14.3 and $13.0 |
|
| 253.2 |
|
|
| 342.8 |
|
Inventory, materials and supplies |
|
| 49.6 |
|
|
| 46.5 |
|
Prepaid expenses |
|
| 29.3 |
|
|
| 30.7 |
|
Other current assets |
|
| 11.0 |
|
|
| 10.5 |
|
Total current assets |
|
| 349.6 |
|
|
| 445.9 |
|
Property, plant and equipment, net |
|
| 1,796.1 |
|
|
| 1,844.0 |
|
Operating lease right-of-use assets |
|
| 35.9 |
|
|
| - |
|
Goodwill |
|
| 159.6 |
|
|
| 157.0 |
|
Intangible assets, net |
|
| 158.2 |
|
|
| 168.1 |
|
Deferred income tax assets |
|
| 59.5 |
|
|
| 47.5 |
|
Other noncurrent assets |
|
| 60.1 |
|
|
| 67.7 |
|
Total assets |
| $ | 2,619.0 |
|
| $ | 2,730.2 |
|
Liabilities and Shareowners’ Deficit |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | 23.4 |
|
| $ | 20.2 |
|
Accounts payable |
|
| 248.7 |
|
|
| 331.9 |
|
Unearned revenue and customer deposits |
|
| 50.8 |
|
|
| 55.9 |
|
Accrued taxes |
|
| 22.8 |
|
|
| 24.8 |
|
Accrued interest |
|
| 24.6 |
|
|
| 26.8 |
|
Accrued payroll and benefits |
|
| 49.5 |
|
|
| 42.9 |
|
Other current liabilities |
|
| 44.5 |
|
|
| 39.2 |
|
Total current liabilities |
|
| 464.3 |
|
|
| 541.7 |
|
Long-term debt, less current portion |
|
| 1,904.0 |
|
|
| 1,909.6 |
|
Operating lease liabilities |
|
| 32.2 |
|
|
| - |
|
Pension and postretirement benefit obligations |
|
| 220.1 |
|
|
| 230.6 |
|
Pole license agreement obligation |
|
| 38.3 |
|
|
| 39.1 |
|
Deferred income tax liability |
|
| 12.2 |
|
|
| 11.4 |
|
Other noncurrent liabilities |
|
| 75.5 |
|
|
| 72.8 |
|
Total liabilities |
|
| 2,746.6 |
|
|
| 2,805.2 |
|
Shareowners’ deficit |
|
|
|
|
|
|
|
|
Preferred stock, 2,357,299 shares authorized, 155,250 shares (3,105,000 depositary shares) of 6 3/4% Cumulative Convertible Preferred Stock issued and outstanding at September 30, 2019 and December 31, 2018; liquidation preference $1,000 per share ($50 per depositary share) |
|
| 129.4 |
|
|
| 129.4 |
|
Common shares, $.01 par value; 96,000,000 shares authorized; 50,420,449 and 50,184,114 shares issued and outstanding at September 30, 2019 and December 31, 2018 |
|
| 0.5 |
|
|
| 0.5 |
|
Additional paid-in capital |
|
| 2,676.8 |
|
|
| 2,680.0 |
|
Accumulated deficit |
|
| (2,755.4 | ) |
|
| (2,709.4 | ) |
Accumulated other comprehensive loss |
|
| (178.9 | ) |
|
| (175.5 | ) |
Total shareowners’ deficit |
|
| (127.6 | ) |
|
| (75.0 | ) |
Total liabilities and shareowners’ deficit |
| $ | 2,619.0 |
|
| $ | 2,730.2 |
|
Nine Months Ended | |||||||
September 30, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities | |||||||
Net (loss) income | $ | (39.8 | ) | $ | 51.9 | ||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 177.6 | 140.1 | |||||
Loss on extinguishment of debt | 1.3 | — | |||||
Gain on sale of Investment in CyrusOne | — | (117.7 | ) | ||||
Provision for loss on receivables | 5.2 | 5.6 | |||||
Noncash portion of interest expense | 3.7 | 1.5 | |||||
Deferred income taxes | (7.9 | ) | 36.1 | ||||
Pension and other postretirement payments (in excess of) less than expense | (7.4 | ) | 2.1 | ||||
Stock-based compensation | 4.5 | 5.2 | |||||
Other, net | (3.3 | ) | 1.1 | ||||
Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||
(Increase) decrease in receivables | (20.2 | ) | 20.8 | ||||
Decrease (increase) in inventory, materials, supplies, prepaid expenses and other current assets | 1.5 | (1.7 | ) | ||||
Increase in accounts payable | 16.4 | 2.4 | |||||
(Decrease) increase in accrued and other current liabilities | (7.7 | ) | 11.1 | ||||
(Increase) decrease in other noncurrent assets | (1.1 | ) | 1.0 | ||||
Decrease in other noncurrent liabilities | — | (2.7 | ) | ||||
Net cash provided by operating activities | 122.8 | 156.8 | |||||
Cash flows from investing activities | |||||||
Capital expenditures | (140.7 | ) | (148.2 | ) | |||
Proceeds from sale of Investment in CyrusOne | — | 140.7 | |||||
Acquisitions of businesses, net of cash acquired | (216.8 | ) | (9.6 | ) | |||
Other, net | (0.1 | ) | 0.3 | ||||
Net cash used in investing activities | (357.6 | ) | (16.8 | ) | |||
Cash flows from financing activities | |||||||
Net increase (decrease) in corporate credit and receivables facilities with initial maturities less than 90 days | 194.2 | (89.5 | ) | ||||
Repayment of debt | (324.3 | ) | (6.4 | ) | |||
Debt issuance costs | (11.0 | ) | (1.3 | ) | |||
Dividends paid on preferred stock | (7.8 | ) | (7.8 | ) | |||
Other, net | (2.1 | ) | (1.0 | ) | |||
Net cash used in financing activities | (151.0 | ) | (106.0 | ) | |||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (0.1 | ) | — | ||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (385.9 | ) | 34.0 | ||||
Cash, cash equivalents and restricted cash at beginning of period | 396.5 | 9.7 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 10.6 | $ | 43.7 | |||
Noncash investing and financing transactions: | |||||||
Stock consideration for merger of Hawaiian Telcom | $ | 121.2 | $ | — | |||
Acquisition of property by assuming debt and other noncurrent liabilities | $ | 6.8 | $ | 16.7 | |||
Acquisition of property on account | $ | 36.6 | $ | 19.8 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
|
| Nine Months Ended September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net loss |
| $ | (46.0 | ) |
| $ | (39.8 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 229.1 |
|
|
| 177.6 |
|
Loss on extinguishment of debt |
|
| — |
|
|
| 1.3 |
|
Provision for loss on receivables |
|
| 9.1 |
|
|
| 5.2 |
|
Noncash portion of interest expense |
|
| 4.8 |
|
|
| 3.7 |
|
Deferred income taxes |
|
| (8.4 | ) |
|
| (7.9 | ) |
Pension and other postretirement payments in excess of expense |
|
| (0.2 | ) |
|
| (7.4 | ) |
Stock-based compensation |
|
| 5.4 |
|
|
| 4.5 |
|
Other, net |
|
| (3.4 | ) |
|
| (3.3 | ) |
Changes in operating assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|
Decrease (increase) in receivables |
|
| 82.4 |
|
|
| (20.2 | ) |
(Increase) decrease in inventory, materials, supplies, prepaid expenses and other current assets |
|
| (0.6 | ) |
|
| 1.5 |
|
(Decrease) increase in accounts payable |
|
| (76.4 | ) |
|
| 16.4 |
|
Decrease in accrued and other current liabilities |
|
| (12.1 | ) |
|
| (7.7 | ) |
Decrease (increase) in other noncurrent assets |
|
| 7.7 |
|
|
| (1.1 | ) |
Decrease in other noncurrent liabilities |
|
| (2.5 | ) |
|
| - |
|
Net cash provided by operating activities |
|
| 188.9 |
|
|
| 122.8 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (167.3 | ) |
|
| (140.7 | ) |
Acquisitions of businesses, net of cash acquired |
|
| — |
|
|
| (216.8 | ) |
Other, net |
|
| 0.3 |
|
|
| (0.1 | ) |
Net cash used in investing activities |
|
| (167.0 | ) |
|
| (357.6 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net (decrease) increase in corporate credit and receivables facilities with initial maturities less than 90 days |
|
| (8.1 | ) |
|
| 194.2 |
|
Repayment of debt |
|
| (13.4 | ) |
|
| (324.3 | ) |
Debt issuance costs |
|
| (0.8 | ) |
|
| (11.0 | ) |
Dividends paid on preferred stock |
|
| (7.8 | ) |
|
| (7.8 | ) |
Other, net |
|
| (0.8 | ) |
|
| (2.1 | ) |
Net cash used in financing activities |
|
| (30.9 | ) |
|
| (151.0 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| 0.1 |
|
|
| (0.1 | ) |
Net decrease in cash, cash equivalents and restricted cash |
|
| (8.9 | ) |
|
| (385.9 | ) |
Cash, cash equivalents and restricted cash at beginning of period |
|
| 15.4 |
|
|
| 396.5 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 6.5 |
|
| $ | 10.6 |
|
Noncash investing and financing transactions: |
|
|
|
|
|
|
|
|
Stock consideration for merger of Hawaiian Telcom |
| $ | — |
|
| $ | 121.2 |
|
Acquisition of property by assuming debt and other noncurrent liabilities |
| $ | 13.4 |
|
| $ | 6.8 |
|
Acquisition of property on account |
| $ | 26.1 |
|
| $ | 36.6 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of Business and Accounting Policies
Description of Business —
Cincinnati Bell Inc. and its consolidated subsidiaries ("Cincinnati Bell", "we", "our", "us" or the "Company") provide diversified telecommunications and technology services. The Company generates a large portion of its revenue by serving customers in Cincinnati, Ohio, Dayton, Ohio and the islands of Hawaii. An economic downturn or natural disaster occurring in these, or a portion of these, limited operating territories could have a disproportionate effect on our business, financial condition, results of operations and cash flows compared to similar companies of a national scope and similar companies operating in different geographic areas.The Company had receivables with General Electric Company that1 customer, Verizon Communications Inc., which made up 10%18% of the outstanding accounts receivable balance as ofat December 31, 2017. As of2018. At September 30, 2018, the Company has receivables with Verizon Communications Inc. that make up 12%2019, 0 individual customer exceeded 10% of the outstanding accounts receivable balance. Revenue derived from foreign operations iswas approximately 5% of consolidated revenue for the three and nine months ended September 30, 2019. Revenue derived from foreign operations was approximately 5% and 6% of consolidated revenue for the three and nine months ended September 30, 2018, respectively.
Basis of Presentation —
The Condensed Consolidated Financial Statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair presentation of the results of operations, other comprehensive income, financial position and cash flows for each period presented.The adjustments referred to above are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules and regulations for interim reporting.
The Condensed Consolidated Balance Sheet as of December 31, 20172018 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 20172018 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 20182019 are not necessarily indicative of the results expected for the full year or any other interim period.
Use of Estimates —
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. In the normal course of business, the Company is subject to various regulatory and tax proceedings, lawsuits, claims and other matters. The Company believes adequate provision has been made for all such asserted and unasserted claims in accordance with U.S. GAAP. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.Business Combinations — In accounting for business combinations, we apply the accounting requirements of Accounting Standards Codification ("ASC") 805, “Business Combinations,” which requires the recording of net assets of acquired businesses at fair value. In developing fair value estimates for acquired assets and assumed liabilities, management analyzes a variety of factors including market data, estimated future cash flows of the acquired operations, industry growth rates, current replacement cost for fixed assets, and market rate assumptions for contractual obligations. Such a valuation requires management to make significant estimates and assumptions, particularly with respect to the intangible assets. The Company reports in CyrusOne —
Leases - The Company determines if an arrangement is a lease at inception based on the facts and circumstances present. In the first quarter of 2017,lease transactions where the Company sold its remaining 2.8 million sharesacts as the lessor, the lease component is accounted for in accordance with ASC 842, and the non-lease component is accounted for in accordance with ASC 606. Although separation of CyrusOne Inc. common stocklease and non-lease components is required, certain practical expedients are available that release the Company from this requirement. Adoption of the practical expedient allows the Company to account for net proceeds totaling $140.7 millioneach lease component and the related non-lease component together as a single component provided that resultedthe timing and patterns of revenue recognition for the components are the same and the combined, single unit of account would be classified as an operating lease. The Company's operating leases for certain services that include Customer Premise Equipment, including handsets and set-top boxes, have lease and non-lease components. In these arrangements, management has concluded that the non-lease components are the predominant characteristic, and, as a result, the Company has elected to account for these arrangements as one single non-lease component recorded as "Revenue" on the Condensed Consolidated Statements of Operations in accordance with ASC 606.
Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
The Company's lease terms include options to extend, terminate or buyout the lease when it is reasonably certain that we will exercise that option. Leases that have contract prices based on variable factors, such as power usage, are recognized as variable lease expense in the period in which the obligation for those payments are incurred. Lease expense for variable lease payments is recognized on a realized gain of $117.7 million. As of March 31, 2017, we no longer had an investment in CyrusOne Inc.
Income and Operating Taxes
Income taxes —
Operating taxes —
The Company elected to record certain operating taxes such as property, sales, use, and gross receipts taxes including telecommunications surcharges as expenses, primarily within cost of services and products. These taxes are not included in income tax expense because the amounts to be paid are not dependent on our level of income. Liabilities for audit exposures are established based on management's assessment of the probability of payment. The provision for such liabilities is recognized as either property, plant and equipment, operating tax expense, or depreciation expense depending on the nature of the audit exposure. Upon resolution of an audit, any remaining liability not paid is released against the account in which it was originally recorded. Certain telecommunication taxes and surcharges that are collected from customers are also recorded as revenue; however, in accordance withDerivative Financial Instruments —
The Company accounts for derivative financial instruments by recognizing derivative instruments as either assets or liabilities in the Condensed Consolidated Balance Sheets at fair value and recognizing the resulting gains or losses as adjustments to the Condensed Consolidated Statements of Operations or "Accumulated Other ComprehensiveFor derivative instruments that hedge the exposure to variability in expected future cash flows that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of "Accumulated Other Comprehensive Income (Loss)"Loss" in stockholder's equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. Derivatives that do not qualify as hedges are adjusted to fair value through earnings in the current period.
Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”("FASB") issued ASUAccounting Standards Update ("ASU") 2018-15, Intangibles-Goodwill and Other-Internal-Use Software, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the requirements in ASUASC 350-40 for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted in any interim period after issuance of the update. The Company is in the process of evaluating the timing of adoption and the impact of this ASU on the Company’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which represents a wholesale change to lease accounting. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02 but did not change the core principal. The standard introduces a lessee model that brings most leases ononto the balance sheet, as well as aligns certain underlying principles of the new lessor model with those in ASC 606. The ASU is effective for public entities for fiscal years beginning after December 15, 2018. As issued,The Company adopted the standard requires lessors and lessees to use aall subsequent amendments effective January 1, 2019, using the modified retrospective transition method, which did not require the Company to adjust comparative periods.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition to the package of practical expedients, the Company elected the practical expedients of using hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets as well as not to assess whether existing or expired land easements that were not previously accounted for existing leases.as leases under ASC 840 are or contain a lease under ASC 842.
Upon adoption of this standard, the Company recognized operating lease right-of-use assets of $38.3 million and operating lease liabilities of $46.2 million in the Condensed Consolidated Balance Sheets. The Company elected the practical expedient outlined in ASU 2018-11 allowing entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The adoption of ASU 2016-02 was amended in January 2018 by the provisions of ASU 2018-01, “Land Easement Practical Expedient for Transitionhad no impact to Topic 842,” and in July 2018 by the provisions of ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU 2018-11, “Targeted Improvements.” We plan to adopt ASU 2016-02, as amended, effective January 1, 2019.accumulated deficit.
The Company has substantially completed procedures to identify the existing lease population to which the new standard is applicable. The Company is also in the process of implementing changes to accounting policies, processes, systems,implemented internal controls and internal controls. The Company procured a third-party lease accounting software solution to facilitate the ongoing accounting and financial reporting requirements of the ASU. The new standard will result in increases to the assets and liabilities on the Company’s consolidated balance sheets. The Company is currently evaluating the full impact of adopting the new standard.
Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s condensed consolidated financial statements upon adoption.
2. Earnings Per Common Share
Basic earnings per common share (“EPS”) is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur upon issuance of common shares for awards under stock-based compensation plans or conversion of preferred stock, but only to the extent that they are considered dilutive.
The following table shows the computation of basic and diluted EPS:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in millions, except per share amounts) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (13.6 | ) |
| $ | (17.7 | ) |
| $ | (46.0 | ) |
| $ | (39.8 | ) |
Preferred stock dividends |
|
| 2.6 |
|
|
| 2.6 |
|
|
| 7.8 |
|
|
| 7.8 |
|
Net loss applicable to common shareowners - basic and diluted |
| $ | (16.2 | ) |
| $ | (20.3 | ) |
| $ | (53.8 | ) |
| $ | (47.6 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic |
|
| 50.4 |
|
|
| 50.1 |
|
|
| 50.4 |
|
|
| 45.0 |
|
Stock-based compensation arrangements |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Weighted average common shares outstanding - diluted |
|
| 50.4 |
|
|
| 50.1 |
|
|
| 50.4 |
|
|
| 45.0 |
|
Basic and diluted net loss per common share |
| $ | (0.32 | ) |
| $ | (0.41 | ) |
| $ | (1.07 | ) |
| $ | (1.06 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(in millions, except per share amounts) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Numerator: | |||||||||||||||
Net (loss) income | $ | (17.7 | ) | $ | (11.0 | ) | $ | (39.8 | ) | $ | 51.9 | ||||
Preferred stock dividends | 2.6 | 2.6 | 7.8 | 7.8 | |||||||||||
Net (loss) income applicable to common shareowners - basic and diluted | $ | (20.3 | ) | $ | (13.6 | ) | $ | (47.6 | ) | $ | 44.1 | ||||
Denominator: | |||||||||||||||
Weighted average common shares outstanding - basic | 50.1 | 42.2 | 45.0 | 42.1 | |||||||||||
Stock-based compensation arrangements | — | — | — | 0.2 | |||||||||||
Weighted average common shares outstanding - diluted | 50.1 | 42.2 | 45.0 | 42.3 | |||||||||||
Basic net (loss) earnings per common share | $ | (0.41 | ) | $ | (0.32 | ) | $ | (1.06 | ) | $ | 1.05 | ||||
Diluted net (loss) earnings per common share | $ | (0.41 | ) | $ | (0.32 | ) | $ | (1.06 | ) | $ | 1.04 |
For the three and nine months ended September 30, 2019 and 2018, the Company had a net loss available to common shareholders and, as a result, all common stock equivalents were excluded from the computation of diluted EPS as their inclusion would have been anti-dilutive. For the three months ended September 30, 2017, the Company had a net loss available to common shareholders and, as a result, all common stock equivalents were excluded from the computation of diluted EPS as their inclusion would have been anti-dilutive. For the nine months ended September 30, 2017, awards under the Company's stock-based compensation plans for common shares of 0.2 million were excluded from the computation of diluted EPS as the inclusion would have been anti-dilutive. For all periods presented, preferred stock convertible into 0.9 million common shares was excluded as it was anti-dilutive.
3. Revenue
The Entertainment and Communications segment provides products and services to both consumerresidential and enterprisecommercial customers that can be categorized as either Fioptics in Cincinnati or Consumer/SMB in Hawaii (collectively, "Consumer/SMB"), Enterprise Fiber or Legacy. The products and services within these three categories can be further categorized as either Data, Voice, Video or Other. Consumer/SMB and Legacy revenue include both consumerresidential and enterprisecommercial customers. Enterprise Fiber revenue includes ethernet and dedicated internet access services that are provided to enterprise customers, as well as revenue associated with the trans-Pacific submarine cable ("SEA-US"). Consumer
Residential customers have implied month-to-month contracts, while enterprisecontracts. Commercial customers, with the exception of contracts associated with the SEA-US, typically have contracts with a duration of one to five years and automatically renew on a month to monthmonth-to-month basis. Customers are invoiced on a monthly basis for services rendered. Contracts for projects that are included within the Other revenue stream are typically short in duration and less than one year.
The IT Services and Hardware segment provides a full range of Information Technology ("IT") solutions, including Communications, Cloud and Consulting services. IT Services and Hardware customers enter into contracts that have a typical duration of one to five years, with varied renewal options at the end of the term. Customers are invoiced on a monthly basis for services rendered. The IT Services and Hardware segment also provides enterprise customers with Infrastructure Solutions, which includes the sale of hardware and maintenance contracts. These contracts are typically satisfied in less than twelve months and revenue is recognized at a point in time.
The Company has elected the practical expedient described in ASC 606-10-32-18 that allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects that the period of time between the transfer of a promised good or service to the customer and when the customer pays for such good or service will be one year or less. Customers are typically billed immediately upon the rendering of services or the delivery of products. Payment terms for customers are between 30 and 180 days. Subsequent to the mergeracquisition of Hawaiian Telcom Holdco., Inc. ("Hawaiian Telcom"), the Company began recognizing a financing component associated with the up-front payments for services to be delivered under indefeasible right of use ("IRU") contracts for fiber circuit capacity. The IRU contracts are primarily associated with the SEA-US. The IRU contracts typically have a duration ranging from 15 to 25 years.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, or a series of distinct goods or services, and is the unit of account defined in ASC Topic 606. A contract'sThe transaction price identified in the contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Contract modifications for changes to services provided are routine throughout the term of our contracts. In most instances, contract modifications are for the addition or reduction of services that are distinct, and price changes are based on the stand-alone selling price of the service and, as such, are accounted for on a prospective basis as a new contract.
Goods and services are sold individually, or a contract may include multiple goods or services. For contracts with multiple goods and services, the contract's transaction price identified in the contract is allocated to each performance obligation using the stand-alone selling price of each distinct good or service in the contract.
Certain customers of the Company may receive cash-based rebates based on volume of sales, which are accounted for as variable consideration. Potential rebates are considered at contract inception in our estimate of transaction price based on the forecasted volumeestimated projection of sales.sales volume. Estimates are reassessed quarterly.
Performance obligations are satisfied either over time as services are performed or at a point in time. Substantially all of our service revenue is recognized over time. For services transferred over time, the Company has elected the practical expedient to recognize revenue based on amounts invoiced to the customer as the Company has concluded that the invoice amount directly corresponds with the value of services provided to the customer. Management considers this a faithful depiction of the transfer of control as services are provided evenly over the month and are substantially the same over the life of the contract. As the Company has elected the practical expedients detailed at ASC 606-10-50-13, revenue for these unsatisfied performance obligations that will be billed in future periods has not been disclosed.
As of September 30, 2018,2019, our estimated revenue, including a financing component, expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially unsatisfied) is $29.8$38.1 million. Approximately 80% of this revenue is related to IRU contracts associated with the SEA-US (see Note 9).SEA-US. Certain IRU contracts extend for periods of up to 30 years and are invoiced at the beginning of the contract term. The revenue from such contracts is recognized over time as services are provided over the contract term. The expected revenue to be recognized for existing IRU contracts is as follows:
(dollars in millions) |
|
|
|
|
Three months ended December 31, 2019 |
| $ | 0.8 |
|
2020 |
|
| 2.6 |
|
2021 |
|
| 2.5 |
|
2022 |
|
| 2.6 |
|
2023 |
|
| 2.5 |
|
Thereafter |
|
| 27.1 |
|
(dollars in millions) | ||||
Three months ended December 31, 2018 | $ | 0.4 | ||
2019 | 1.5 | |||
2020 | 1.5 | |||
2021 | 1.5 | |||
2022 | 1.6 | |||
Thereafter | 23.3 | |||
Total | $ | 29.8 |
Entertainment and Communications
The Company has identified four distinct performance obligations in the Entertainment and Communications segment, namely Data, Voice, Video and Other. For each of the Data, Voice and Video services, service is delivered to the customer continuously and in a substantially similar manner for each period of the agreement, the customer takes full control over the services as the service is delivered, and as such Data, Voice and Video are identified to be a series of distinct services. Services provided by the Entertainment and Communications segment can be categorized into three main categories that include Consumer/SMB, Enterprise Fiber and Legacy, each of which may include one or more of the aforementioned performance obligations. Data services include high-speed internet access, digital subscriber lines, ethernet, routed network services, SONET (Synchronous Optical Network), dedicated internet access, wavelength, digital signal and IRU revenue. Voice services include traditional and fiber voice lines, switched access, digital trunking and consumer long distance calling. Video services are offered through our fiber network to consumerresidential and enterprisecommercial customers based on various standard plans with the opportunity to add premium channels. To receive video services, customers are required to use the Company's set top boxes that are billed as part of the monthly recurring service. Set top boxes are not considered a separate performance obligation from video because the equipment is necessary for the service to operate and the customer has no alternative use for the equipment.
Services and products not included in Data, Voice or Video are included in Other revenue and are comprised of wire care, wire time and materials projects and advertising. Transfer of control of these services and products is evaluated on an individual project basis and can occur over time or at a point in time.
The Company uses multiple methods to determine stand-alone selling prices in the Entertainment and Communications segment. For Data, Video and Voice products in Consumer/SMB, market rate is the primary method used to determine stand-alone selling prices. For Data performance obligations under the Enterprise Fiber category, and Voice, Data and Other performance obligations under the Legacy category, stand-alone selling prices are determined based on a list price, discount off of list price, a tariff rate, a margin percentage range, or a minimum margin percentage.
IT Services and Hardware
The Company has identified four distinct performance obligations in the IT Services and Hardware segment. These performance obligations are Communications, Cloud, Consulting and Infrastructure Solutions. Communications services are monthly services that include data and VoIP services, tailored solutions that include converged IP communications of data, voice, video and mobility applications, enterprise long distance, MPLS (Multi-Protocol Label Switching) and conferencing services. Cloud services include storage, backup, disaster recovery, SLA-based monitoring and management, cloud computing and cloud consulting. Consulting services provide customers with IT staffing, consulting and emerging technology solutions and installation projects.solutions. Infrastructure Solutions includes the sale of hardware and maintenance contracts.
For the sale of hardware, the Company evaluated whether it is the principal or the agent. The Company has concluded it acts as an agent because it does not control the inventory before it is transferred to customers, it does not have the ability to direct the product to anyone besides the purchasing customer, and it does not integrate the hardware with any of its own goods or services. Based on this assessment, the performance obligation is to arrange a sale of hardware between the manufacturer and the customer. In the instance where there is an issue with the hardware, the Company coordinates with the manufacturer to facilitate a return in accordance with the standard manufacturer warranty. Hardware returns are not significant to the Company.
Within the IT Services and Hardware segment, stand-alone selling prices for the four performance obligations wereare determined based on either a margin percentage range, minimum margin percentage or standard price list.
For hardware sales, revenue is recognized net of the cost of product. For hardware sales within Infrastructure Solutions, revenueproduct and is recognized when the hardware is shipped.either shipped or delivered in accordance with the terms of the contract. For certain projects within Communications and Consulting, revenue is recognized when the customer communicates acceptance of the services performed. For contracts with freight on board shipping terms, management has elected to account for shipping and handling as activities to fulfill the promise to transfer the good, and therefore, has not evaluated whether shipping and handling activities are promised services to its customers.
Contract Balances
The Company recognizes incremental fulfillment costs as an asset when installation expenses are incurred as part of performing the agreement for Voice, Video and Data product offerings in the Entertainment and Communications segment in which the contract life is longer than one year. These fulfillment costs are amortized ratably over the expected life of the customer, which is representative of the expected period of benefit of the asset capitalized. The expected life of the customer is determined utilizing the average churn rate for each product. The Company calculates average churn based on the historical average customer life. We also recognize an asset for incremental fulfillment costs for certain Communications services in the IT Services and Hardware segment that require us to incur installation and provisioning expenses. The asset recognized for Communication services is amortized over the average contract life. Churn rates and average contract life are reviewed on an annual basis. Fulfillment costs are capitalized to “Other noncurrent assets.” The related amortization expense is recorded to “Cost of services and products.”
The Company recognizes an asset for the incremental costs of acquiring a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs related to Voice, Video, Data and certain Communications and Cloud services meet the requirements to be capitalized. The contract asset established for the costs of acquiring a contract areis recorded to “Other noncurrent assets.” Sales incentives are amortized ratably over the period that services are delivered using either an average churn rate or average contract term, both representative of the expected period of benefit of the asset capitalized. Customer churn rates and average contract term assumptions are reviewed on an annual basis. The related amortization expense is recorded to “Selling, general and administrative.”
Management has elected to use the practical expedient detailed in ASC 340-40-25-4 to expense any costs to fulfill a contract and costs to obtain a contract as they are incurred when the amortization period would have been one year or less. This practical expedient has been applied to fulfillment costs that include installation costs associated with wiring projects and certain Cloud services. In addition, this practical expedient has been applied to acquisition costs associated with revenue from certain Communications projects.
The following table presents the activity for the Company’s contract assets:
|
| Fulfillment Costs |
|
| Cost of Acquisition |
|
| Total Contract Assets |
| |||||||||||||||||||||||||||
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Total Company |
|
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Total Company |
|
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Total Company |
| |||||||||
Balance as of December 31, 2018 |
| $ | 14.5 |
|
| $ | 2.5 |
|
| $ | 17.0 |
|
| $ | 13.0 |
|
| $ | 2.0 |
|
| $ | 15.0 |
|
| $ | 27.5 |
|
| $ | 4.5 |
|
| $ | 32.0 |
|
Additions |
|
| 0.9 |
|
|
| 0.7 |
|
|
| 1.6 |
|
|
| 2.5 |
|
|
| 0.4 |
|
|
| 2.9 |
|
|
| 3.4 |
|
|
| 1.1 |
|
|
| 4.5 |
|
Amortization |
|
| (2.9 | ) |
|
| (0.4 | ) |
|
| (3.3 | ) |
|
| (2.1 | ) |
|
| (0.3 | ) |
|
| (2.4 | ) |
|
| (5.0 | ) |
|
| (0.7 | ) |
|
| (5.7 | ) |
Balance as of March 31, 2019 |
|
| 12.5 |
|
|
| 2.8 |
|
|
| 15.3 |
|
|
| 13.4 |
|
|
| 2.1 |
|
|
| 15.5 |
|
|
| 25.9 |
|
|
| 4.9 |
|
|
| 30.8 |
|
Additions |
|
| 0.9 |
|
|
| 0.9 |
|
|
| 1.8 |
|
|
| 2.5 |
|
|
| 0.6 |
|
|
| 3.1 |
|
|
| 3.4 |
|
|
| 1.5 |
|
|
| 4.9 |
|
Amortization |
|
| (3.3 | ) |
|
| (0.4 | ) |
|
| (3.7 | ) |
|
| (1.5 | ) |
|
| (0.3 | ) |
|
| (1.8 | ) |
|
| (4.8 | ) |
|
| (0.7 | ) |
|
| (5.5 | ) |
Balance as of June 30, 2019 |
|
| 10.1 |
|
|
| 3.3 |
|
|
| 13.4 |
|
|
| 14.4 |
|
|
| 2.4 |
|
|
| 16.8 |
|
|
| 24.5 |
|
|
| 5.7 |
|
|
| 30.2 |
|
Additions |
|
| 0.9 |
|
|
| 1.1 |
|
|
| 2.0 |
|
|
| 2.5 |
|
|
| 0.3 |
|
|
| 2.8 |
|
|
| 3.4 |
|
|
| 1.4 |
|
|
| 4.8 |
|
Amortization |
|
| (1.7 | ) |
|
| (0.5 | ) |
|
| (2.2 | ) |
|
| (2.6 | ) |
|
| (0.3 | ) |
|
| (2.9 | ) |
|
| (4.3 | ) |
|
| (0.8 | ) |
|
| (5.1 | ) |
Balance as of September 30, 2019 |
| $ | 9.3 |
|
| $ | 3.9 |
|
| $ | 13.2 |
|
| $ | 14.3 |
|
| $ | 2.4 |
|
| $ | 16.7 |
|
| $ | 23.6 |
|
| $ | 6.3 |
|
| $ | 29.9 |
|
Fulfillment Costs | Cost of Acquisition | Total Contract Assets | |||||||||||||||||||||||||||||||||
(dollars in millions) | Entertainment and Communications | IT Services and Hardware | Total Company | Entertainment and Communications | IT Services and Hardware | Total Company | Entertainment and Communications | IT Services and Hardware | Total Company | ||||||||||||||||||||||||||
Balance as of December 31, 2017 | $ | 17.5 | $ | 2.0 | $ | 19.5 | $ | 11.6 | $ | 1.3 | $ | 12.9 | $ | 29.1 | $ | 3.3 | $ | 32.4 | |||||||||||||||||
Additions | 3.1 | 0.4 | 3.5 | 1.6 | 0.4 | 2.0 | 4.7 | 0.8 | 5.5 | ||||||||||||||||||||||||||
Amortization | (3.3 | ) | (0.3 | ) | (3.6 | ) | (1.7 | ) | (0.2 | ) | (1.9 | ) | (5.0 | ) | (0.5 | ) | (5.5 | ) | |||||||||||||||||
Balance as of March 31, 2018 | 17.3 | 2.1 | 19.4 | 11.5 | 1.5 | 13.0 | 28.8 | 3.6 | 32.4 | ||||||||||||||||||||||||||
Additions | 3.0 | 0.4 | 3.4 | 1.8 | 0.3 | 2.1 | 4.8 | 0.7 | 5.5 | ||||||||||||||||||||||||||
Amortization | (3.3 | ) | (0.3 | ) | (3.6 | ) | (1.6 | ) | (0.2 | ) | (1.8 | ) | (4.9 | ) | (0.5 | ) | (5.4 | ) | |||||||||||||||||
Balance as of June 30, 2018 | 17.0 | 2.2 | 19.2 | 11.7 | 1.6 | 13.3 | 28.7 | 3.8 | 32.5 | ||||||||||||||||||||||||||
Additions | 3.2 | 0.6 | 3.8 | 2.3 | 0.6 | 2.9 | 5.5 | 1.2 | 6.7 | ||||||||||||||||||||||||||
Amortization | (3.2 | ) | (0.4 | ) | (3.6 | ) | (1.6 | ) | (0.3 | ) | (1.9 | ) | (4.8 | ) | (0.7 | ) | (5.5 | ) | |||||||||||||||||
Balance as of September 30, 2018 | $ | 17.0 | $ | 2.4 | $ | 19.4 | $ | 12.4 | $ | 1.9 | $ | 14.3 | $ | 29.4 | $ | 4.3 | $ | 33.7 |
The Company recognizes a liability for cash received upfront for IRU contracts. At September 30, 2019 and December 31, 2018, $1.5 million and $1.4 million, respectively, of contract liabilities were included in "Other current liabilities"liabilities." At September 30, 2019 and $28.3December 31, 2018, $27.1 million and $28.0 million, respectively, of contract liabilities were included in "Other noncurrent liabilities."
Disaggregated Revenue
The following table presents revenues disaggregated by product and service lines.lines:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Data |
| $ | 119.5 |
|
| $ | 116.0 |
|
| $ | 356.5 |
|
| $ | 285.3 |
|
Video |
|
| 50.2 |
|
|
| 52.4 |
|
|
| 153.5 |
|
|
| 131.3 |
|
Voice |
|
| 70.7 |
|
|
| 76.8 |
|
|
| 215.4 |
|
|
| 169.8 |
|
Other |
|
| 8.1 |
|
|
| 8.2 |
|
|
| 23.9 |
|
|
| 15.1 |
|
Total Entertainment and Communications |
|
| 248.5 |
|
|
| 253.4 |
|
|
| 749.3 |
|
|
| 601.5 |
|
Consulting |
|
| 37.6 |
|
|
| 35.9 |
|
|
| 114.6 |
|
|
| 100.7 |
|
Cloud |
|
| 22.6 |
|
|
| 26.2 |
|
|
| 69.8 |
|
|
| 71.8 |
|
Communications |
|
| 51.3 |
|
|
| 47.0 |
|
|
| 147.0 |
|
|
| 129.1 |
|
Infrastructure Solutions |
|
| 29.0 |
|
|
| 32.0 |
|
|
| 85.6 |
|
|
| 95.4 |
|
Total IT Services and Hardware |
|
| 140.5 |
|
|
| 141.1 |
|
|
| 417.0 |
|
|
| 397.0 |
|
Intersegment revenue |
|
| (6.5 | ) |
|
| (7.8 | ) |
|
| (20.0 | ) |
|
| (19.3 | ) |
Total revenue |
| $ | 382.5 |
|
| $ | 386.7 |
|
| $ | 1,146.3 |
|
| $ | 979.2 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Data | $ | 116.0 | $ | 85.3 | $ | 285.3 | $ | 259.8 | |||||||
Video | 52.4 | 37.7 | 131.3 | 110.5 | |||||||||||
Voice | 76.8 | 48.9 | 169.8 | 151.1 | |||||||||||
Other | 8.2 | 3.1 | 15.1 | 9.7 | |||||||||||
Total Entertainment and Communications | 253.4 | 175.0 | 601.5 | 531.1 | |||||||||||
Consulting | 42.1 | 16.1 | 120.0 | 49.3 | |||||||||||
Cloud | 26.2 | 17.4 | 71.8 | 57.5 | |||||||||||
Communications | 47.0 | 43.9 | 129.1 | 120.7 | |||||||||||
Infrastructure Solutions | 25.8 | 9.6 | 76.1 | 25.3 | |||||||||||
Total IT Services and Hardware | 141.1 | 87.0 | 397.0 | 252.8 | |||||||||||
Intersegment revenue | (7.8 | ) | (6.5 | ) | (19.3 | ) | (19.4 | ) | |||||||
Total revenue | $ | 386.7 | $ | 255.5 | $ | 979.2 | $ | 764.5 |
In the first quarter of 2019, the Company determined that certain revenue in the IT Services and Hardware segment associated with nonrecurring projects is better aligned with Infrastructure Solutions, rather than Consulting, where it was previously reported. As a result, the Company reclassed revenue of $6.2 million and $19.3 million from Consulting to Infrastructure Solutions for the three and nine months ended September 30, 2018, respectively. This reclassification of revenue had no impact on the Condensed Consolidated Statements of Operations.
The following table presents revenues disaggregated by contract type.type:
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||||
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Intersegment revenue elimination |
|
| Total |
| ||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Products and Services transferred at a point in time |
| $ | 7.7 |
|
| $ | 7.9 |
|
| $ | 33.5 |
|
| $ | 33.0 |
|
| $ | - |
|
| $ | - |
|
| $ | 41.2 |
|
| $ | 40.9 |
|
Products and Services transferred over time |
|
| 235.5 |
|
|
| 239.0 |
|
|
| 105.8 |
|
|
| 106.8 |
|
|
| - |
|
|
| - |
|
|
| 341.3 |
|
|
| 345.8 |
|
Intersegment revenue |
|
| 5.3 |
|
|
| 6.5 |
|
|
| 1.2 |
|
|
| 1.3 |
|
|
| (6.5 | ) |
|
| (7.8 | ) |
|
| - |
|
|
| - |
|
Total revenue |
| $ | 248.5 |
|
| $ | 253.4 |
|
| $ | 140.5 |
|
| $ | 141.1 |
|
| $ | (6.5 | ) |
| $ | (7.8 | ) |
| $ | 382.5 |
|
| $ | 386.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Intersegment revenue elimination |
|
| Total |
| ||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Products and Services transferred at a point in time |
| $ | 23.6 |
|
| $ | 18.3 |
|
| $ | 95.2 |
|
| $ | 100.4 |
|
| $ | - |
|
| $ | - |
|
| $ | 118.8 |
|
| $ | 118.7 |
|
Products and Services transferred over time |
|
| 709.2 |
|
|
| 566.8 |
|
|
| 318.3 |
|
|
| 293.7 |
|
|
| - |
|
|
| - |
|
|
| 1,027.5 |
|
|
| 860.5 |
|
Intersegment revenue |
|
| 16.5 |
|
|
| 16.4 |
|
|
| 3.5 |
|
|
| 2.9 |
|
|
| (20.0 | ) |
|
| (19.3 | ) |
|
| - |
|
|
| - |
|
Total revenue |
| $ | 749.3 |
|
| $ | 601.5 |
|
| $ | 417.0 |
|
| $ | 397.0 |
|
| $ | (20.0 | ) |
| $ | (19.3 | ) |
| $ | 1,146.3 |
|
| $ | 979.2 |
|
Three Months Ended September 30, | |||||||||||||||||||||||||||||||
(dollars in millions) | Entertainment and Communications | IT Services and Hardware | Intersegment revenue elimination | Total | |||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Products and Services transferred at a point in time | $ | 7.9 | $ | 5.6 | $ | 33.0 | $ | 18.4 | $ | — | $ | — | $ | 40.9 | $ | 24.0 | |||||||||||||||
Products and Services transferred over time | 239.0 | 164.0 | 106.8 | 67.5 | — | — | 345.8 | 231.5 | |||||||||||||||||||||||
Intersegment revenue | 6.5 | 5.4 | 1.3 | 1.1 | (7.8 | ) | (6.5 | ) | — | — | |||||||||||||||||||||
Total revenue | $ | 253.4 | $ | 175.0 | $ | 141.1 | $ | 87.0 | $ | (7.8 | ) | $ | (6.5 | ) | $ | 386.7 | $ | 255.5 |
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(dollars in millions) | Entertainment and Communications | IT Services and Hardware | Intersegment revenue elimination | Total | |||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Products and Services transferred at a point in time | $ | 18.3 | $ | 15.8 | $ | 100.4 | $ | 42.7 | $ | — | $ | — | $ | 118.7 | $ | 58.5 | |||||||||||||||
Products and Services transferred over time | 566.8 | 499.2 | 293.7 | 206.8 | — | — | 860.5 | 706.0 | |||||||||||||||||||||||
Intersegment revenue | 16.4 | 16.1 | 2.9 | 3.3 | (19.3 | ) | (19.4 | ) | — | — | |||||||||||||||||||||
Total revenue | $ | 601.5 | $ | 531.1 | $ | 397.0 | $ | 252.8 | $ | (19.3 | ) | $ | (19.4 | ) | $ | 979.2 | $ | 764.5 |
4. Mergers and Acquisitions
Acquisition of Hawaiian Telcom Holdco, Inc.
On July 2, 2018, the Company acquired Hawaiian Telcom Holdco, Inc. for cash consideration of $218.3 million, stock consideration of $121.2 million and debt repayments, including accrued interest, of $318.2 million. Hawaiian Telcom is the ILEC for the State of Hawaii and the largest full service provider of communication services and products in the state. With the merger,acquisition, the Company gains access to both Honolulu, a well-developed, fiber-rich city, as well as the growing neighboringneighbor islands. The companies' combined fiber networks are nearly 16,000approximately 17,000 fiber route miles.
The purchase price for Hawaiian Telcom consisted of the following:
(dollars in millions) |
|
|
|
|
Cash consideration plus debt assumed |
| $ | 536.5 |
|
Cincinnati Bell Inc. stock issued |
|
| 121.2 |
|
Debt repayment |
|
| (318.2 | ) |
Total purchase price |
| $ | 339.5 |
|
In order to fund the merger,acquisition, the Company utilized proceeds of $350.0 million from the 8% Senior Notes due 2025 ("8% Notes"), $16.5 million of the cash that was previously restricted to fund interest payments on the 8% Notes, drew $35.0 million on the Revolvingrevolving credit facility and $154.0 million on the accounts receivable securitization facility (see Note 6).facility. In conjunction with the merger,acquisition, the Company issued 7.7 million Common Shares at a price of $15.70 per share as stock consideration. The Company recorded a total of $23.6$28.1 million in acquisition expenses related to the mergeracquisition of Hawaiian Telcom, of which $13.3 million and $16.9 million were recorded in the three and nine months ended September 30, 2018, respectively and $5.3 million and $5.7 million were recorded in the three and nine months ended September 30, 2017, respectively. These expenses are recorded in "Transaction and integration costs" on the Condensed Consolidated Statements of Operations.
(dollars in millions) | |||
Cash consideration plus debt assumed | $ | 241.2 | |
Debt repayment | (77.6 | ) | |
Working capital adjustment | 2.8 | ||
Total purchase price | $ | 166.4 |
Purchase Price Allocation and Other Items
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed is incompletefinal for the Hawaiian Telcom transaction. The purchase price allocations, based on fair value estimates, may change in future periods as customary post-closing reviews are concluded during the measurement period, and the fair value estimates of assets and liabilities and certain tax aspects of the transaction are finalized.
(dollars in millions) |
| Hawaiian Telcom |
| |
Assets acquired |
|
|
|
|
Cash |
| $ | 4.3 |
|
Receivables |
|
| 24.8 |
|
Inventory, materials and supplies |
|
| 6.7 |
|
Prepaid expenses and other current assets |
|
| 5.9 |
|
Property, plant and equipment |
|
| 697.6 |
|
Goodwill |
|
| 10.2 |
|
Intangible assets |
|
| 52.0 |
|
Deferred income tax asset |
|
| 45.6 |
|
Other noncurrent assets |
|
| 2.1 |
|
Total assets acquired |
|
| 849.2 |
|
Liabilities assumed |
|
|
|
|
Accounts payable |
|
| 60.0 |
|
Current portion of long-term debt |
|
| 10.2 |
|
Unearned revenue and customer deposits |
|
| 13.5 |
|
Accrued expenses and other current liabilities |
|
| 21.8 |
|
Long-term debt, less current portion |
|
| 304.5 |
|
Pension and postretirement benefit obligations |
|
| 68.9 |
|
Other noncurrent liabilities |
|
| 30.8 |
|
Total liabilities assumed |
|
| 509.7 |
|
Net assets acquired |
| $ | 339.5 |
|
(dollars in millions) | Hawaiian Telcom | OnX | |||||
Assets acquired | |||||||
Cash | $ | 4.3 | $ | 6.5 | |||
Receivables | 25.7 | 69.9 | |||||
Inventory, materials and supplies | 6.9 | 9.0 | |||||
Prepaid expenses and other current assets | 5.9 | 2.8 | |||||
Property, plant and equipment | 701.8 | 11.6 | |||||
Goodwill | 7.6 | 133.1 | |||||
Intangible assets | 52.0 | 134.0 | |||||
Deferred income tax asset | 44.3 | 1.4 | |||||
Other noncurrent assets | 2.1 | 1.8 | |||||
Total assets acquired | 850.6 | 370.1 | |||||
Liabilities assumed | |||||||
Accounts payable | 58.0 | 63.6 | |||||
Current portion of long-term debt | 10.2 | 1.3 | |||||
Unearned revenue and customer deposits | 13.5 | — | |||||
Accrued expenses and other current liabilities | 21.6 | 18.3 | |||||
Deferred income tax liabilities | — | 42.3 | |||||
Long-term debt, less current portion | 304.5 | 76.7 | |||||
Pension and postretirement benefit obligations | 68.9 | — | |||||
Other noncurrent liabilities | 34.4 | 1.5 | |||||
Total liabilities assumed | 511.1 | 203.7 | |||||
Net assets acquired | $ | 339.5 | $ | 166.4 |
During the first quarter of 2018,2019, the Company recorded a purchase price allocation adjustmentimmaterial measurement period adjustments for OnX in the amount of $0.2 million to "Goodwill" related to the payment of the working capital adjustment. Also in the first quarter of 2018, the Company recorded purchase price allocation adjustments of $0.1 million to "Deferred income tax liabilities" and $0.4 million to "Other noncurrent liabilities" related to the finalization of certain tax aspects of the OnX acquisition.Hawaiian Telcom. The offset of these adjustments were recorded as an increaseincreases to "Goodwill."
The estimated fair value of identifiable intangible assets and their estimated useful lives are as follows:
|
| Hawaiian Telcom | ||||
(dollars in millions) |
| Fair Value |
|
| Useful Lives | |
Customer relationships |
| $ | 26.0 |
|
| 15 years |
Trade name |
|
| 26.0 |
|
| 15 years |
Total identifiable intangible assets |
| $ | 52.0 |
|
|
|
Hawaiian Telcom | OnX | |||||||||||
(dollars in millions) | Fair Value | Useful Lives | Fair Value | Useful Lives | ||||||||
Customer relationships | $ | 26.0 | 15 years | $ | 108.0 | 15 years | ||||||
Trade name | 26.0 | 15 years | 16.0 | 10 years | ||||||||
Technology | — | — | 10.0 | 10 years | ||||||||
Total identifiable intangible assets | $ | 52.0 | $ | 134.0 |
Identifiable intangible assets are amortized over their useful lives based on a number of assumptions including the estimated period of economic benefit and utilization. The weighted-average amortization period for identifiable intangible assets acquired in the OnX acquisition and Hawaiian Telcom merger is 14.3 years.
Pro Forma Information (Unaudited)
The following table provides the unaudited pro forma results of operations for the three and nine months ended September 30, 2018 and 2017 as if the acquisition of OnX, and the merger of Hawaiian Telcom had taken place as of the beginning of fiscal year 2016 and 2017, respectively.2017. These proformapro forma results include adjustments related to the financing of the acquisitions,acquisition, an increase to depreciation and amortization associated with the higher values of property, plant and equipment and intangible assets, an increase to interest expense for the additional debt incurred to complete the acquisitions,acquisition, and reflects theother various related income tax effect and change in tax status. Revenue has been retrospectively adjusted for the adoption of ASC 606 to reflect hardware revenue in the Infrastructure Solutions category net of related cost of products. ASC 606 was not applied to the year ended December 31, 2017 for Hawaiian Telcom results because they utilized the modified retrospective method of adoption. Reported amounts for 2017 could be materially different if Hawaiian Telcom had adopted the standard using the full retrospective method of adoption.
The pro forma information does not necessarily reflect the actual results of operations had the merger or acquisition been consummated at the beginning of the annual reporting period indicated, nor is it necessarily indicative of future operating results. The pro forma information does not include any (i) potential revenue enhancements, cost synergies or other operating efficiencies that could result from the merger or acquisition or (ii) transaction or integration costs relating to the merger or acquisition.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
(dollars in millions, except per share amounts) |
| September 30, 2018 |
|
| September 30, 2018 |
| ||
Revenue |
| $ | 386.7 |
|
| $ | 1,157.5 |
|
Net loss applicable to common shareholders |
|
| (20.3 | ) |
|
| (57.0 | ) |
Earnings per share: |
|
|
|
|
|
|
|
|
Basic and diluted loss per common share |
| $ | (0.41 | ) |
| $ | (1.27 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions, except per share amounts) | |||||||||||||||
Revenue | $ | 386.7 | $ | 397.2 | $ | 1,157.5 | $ | 1,194.6 | |||||||
Net loss applicable to common shareholders | (20.3 | ) | (100.9 | ) | (57.0 | ) | (62.8 | ) | |||||||
Earnings per share: | |||||||||||||||
Basic and diluted loss per common share | $ | (0.41 | ) | $ | (2.02 | ) | $ | (1.27 | ) | $ | (1.26 | ) |
5. Goodwill and Intangible Assets
Goodwill
The changes in the Company's goodwill consisted of the following:
(dollars in millions) |
| IT Services and Hardware |
|
| Entertainment and Communications |
|
| Total Company |
| |||
Goodwill, balance as of December 31, 2018 |
| $ | 146.0 |
|
| $ | 11.0 |
|
| $ | 157.0 |
|
Activity during the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to prior year acquisitions |
|
| - |
|
|
| 1.4 |
|
|
| 1.4 |
|
Currency translations |
|
| 1.2 |
|
|
| - |
|
|
| 1.2 |
|
Goodwill, balance as of September 30, 2019 |
| $ | 147.2 |
|
| $ | 12.4 |
|
| $ | 159.6 |
|
IT Services and Hardware | Entertainment and Communications | Total Company | ||||||||||
(dollars in millions) | ||||||||||||
Goodwill, balance as of December 31, 2017 | $ | 148.8 | $ | 2.2 | $ | 151.0 | ||||||
Activity during the year | ||||||||||||
Adjustments to prior year acquisitions | 0.7 | — | 0.7 | |||||||||
Mergers | — | 7.6 | 7.6 | |||||||||
Currency translations | (1.3 | ) | — | (1.3 | ) | |||||||
Goodwill, balance as of September 30, 2018 | $ | 148.2 | $ | 9.8 | $ | 158.0 |
NaN impairment losses were recognized in goodwill for the three and nine months ended September 30, 20182019 and 2017.
Intangible Assets
The Company’s intangible assets consisted of the following:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||
|
| Gross Carrying |
|
| Accumulated |
|
| Net |
|
| Gross Carrying |
|
| Accumulated |
|
| Net |
| ||||||
(dollars in millions) |
| Amount (a) |
|
| Amortization |
|
| Amount |
|
| Amount (a) |
|
| Amortization |
|
| Amount |
| ||||||
Customer relationships |
| $ | 140.1 |
|
| $ | (25.7 | ) |
| $ | 114.4 |
|
| $ | 139.4 |
|
| $ | (17.8 | ) |
| $ | 121.6 |
|
Trade names |
|
| 41.1 |
|
|
| (5.2 | ) |
|
| 35.9 |
|
|
| 40.7 |
|
|
| (2.8 | ) |
|
| 37.9 |
|
Technology |
|
| 9.9 |
|
|
| (2.0 | ) |
|
| 7.9 |
|
|
| 9.9 |
|
|
| (1.3 | ) |
|
| 8.6 |
|
Total |
| $ | 191.1 |
|
| $ | (32.9 | ) |
| $ | 158.2 |
|
| $ | 190.0 |
|
| $ | (21.9 | ) |
| $ | 168.1 |
|
(a) | Change in gross carrying amounts is due to foreign currency translation on certain intangible assets. |
September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
Gross Carrying | Accumulated | Net | Gross Carrying | Accumulated | Net | |||||||||||||||||||
(dollars in millions) | Amount (a) | Amortization | Amount | Amount (a) | Amortization | Amount | ||||||||||||||||||
Customer relationships | $ | 140.9 | $ | (15.3 | ) | $ | 125.6 | $ | 116.0 | $ | (8.9 | ) | $ | 107.1 | ||||||||||
Trade names | 41.3 | (1.9 | ) | 39.4 | 15.9 | (0.4 | ) | 15.5 | ||||||||||||||||
Technology | 9.9 | (1.0 | ) | 8.9 | 9.9 | (0.2 | ) | 9.7 | ||||||||||||||||
Total | $ | 192.1 | $ | (18.2 | ) | $ | 173.9 | $ | 141.8 | $ | (9.5 | ) | $ | 132.3 |
Amortization expense for intangible assets subject to amortizationwas $3.7 million and $11.0 million for the three and nine months ended September 30, 2019, respectively. Amortization expense for intangible assets was $3.8 million and $8.7 million for the three and nine months ended September 30, 2018, respectively. Amortization expense for the three and nine months ended September 30, 2017 was insignificant. NoNaN impairment losses were recognized for the three and nine months ended September 30, 20182019 and 2017.
The estimated useful lives for each intangible asset class are as follows:
Customer relationships | 8 | to | 15 | years | |
Trade names | 10 | to | 15 | years | |
Technology | 10 | years |
Customer relationships | 8 to 15 years | |
Trade names | 10 to 15 years | |
Technology | 10 years |
The annual estimated amortization expense for future years is as follows:
(dollars in millions) |
|
|
|
|
Three months ended December 31, 2019 |
| $ | 3.7 |
|
2020 |
|
| 14.4 |
|
2021 |
|
| 14.2 |
|
2022 |
|
| 13.9 |
|
2023 |
|
| 13.5 |
|
Thereafter |
|
| 98.5 |
|
Total |
| $ | 158.2 |
|
(dollars in millions) | ||||
Three months ended December 31, 2018 | $ | 3.7 | ||
2019 | 14.8 | |||
2020 | 14.5 | |||
2021 | 14.3 | |||
2022 | 14.0 | |||
Thereafter | 112.6 | |||
Total | $ | 173.9 |
6. Debt and Other Financing Arrangements
The Company’s debt consists of the following:
|
| September 30, |
|
| December 31, |
| ||
(dollars in millions) |
| 2019 |
|
| 2018 |
| ||
Current portion of long-term debt: |
|
|
|
|
|
|
|
|
Credit Agreement - Tranche B Term Loan due 2024 |
| $ | 6.0 |
|
| $ | 6.0 |
|
Other financing arrangements |
|
| 2.0 |
|
|
| 0.8 |
|
Finance lease liabilities |
|
| 15.4 |
|
|
| 13.4 |
|
Current portion of long-term debt |
|
| 23.4 |
|
|
| 20.2 |
|
Long-term debt, less current portion: |
|
|
|
|
|
|
|
|
Receivables Facility |
|
| 141.5 |
|
|
| 176.6 |
|
Credit Agreement - Revolving Credit Facility |
|
| 45.0 |
|
|
| 18.0 |
|
Credit Agreement - Tranche B Term Loan due 2024 |
|
| 588.0 |
|
|
| 592.5 |
|
7 1/4% Senior Notes due 2023 |
|
| 22.3 |
|
|
| 22.3 |
|
7% Senior Notes due 2024 |
|
| 625.0 |
|
|
| 625.0 |
|
8% Senior Notes due 2025 |
|
| 350.0 |
|
|
| 350.0 |
|
Various Cincinnati Bell Telephone notes |
|
| 87.9 |
|
|
| 87.9 |
|
Other financing arrangements |
|
| 3.4 |
|
|
| 2.3 |
|
Finance lease liabilities |
|
| 63.5 |
|
|
| 60.5 |
|
|
|
| 1,926.6 |
|
|
| 1,935.1 |
|
Net unamortized premium |
|
| 1.4 |
|
|
| 1.7 |
|
Unamortized note issuance costs |
|
| (24.0 | ) |
|
| (27.2 | ) |
Long-term debt, less current portion |
|
| 1,904.0 |
|
|
| 1,909.6 |
|
Total debt |
| $ | 1,927.4 |
|
| $ | 1,929.8 |
|
September 30, | December 31, | ||||||
(dollars in millions) | 2018 | 2017 | |||||
Current portion of long-term debt: | |||||||
Credit Agreement - Tranche B Term Loan due 2024 | $ | 6.0 | $ | 6.0 | |||
Capital lease obligations and other debt | 12.3 | 12.4 | |||||
Current portion of long-term debt | 18.3 | 18.4 | |||||
Long-term debt, less current portion: | |||||||
Receivable Facility | 144.2 | — | |||||
Credit Agreement - Tranche B Term Loan due 2024 | 594.0 | 594.0 | |||||
Credit Agreement - Revolving Credit Facility | 50.0 | — | |||||
7 1/4% Senior Notes due 2023 | 22.3 | 22.3 | |||||
7% Senior Notes due 2024 | 625.0 | 625.0 | |||||
8% Senior Notes due 2025 | 350.0 | 350.0 | |||||
Cincinnati Bell Telephone Notes | 87.9 | 87.9 | |||||
Capital lease obligations and other debt | 62.5 | 70.5 | |||||
1,935.9 | 1,749.7 | ||||||
Net unamortized premium | 1.7 | 1.9 | |||||
Unamortized note issuance costs | (28.2 | ) | (22.3 | ) | |||
Long-term debt, less current portion | 1,909.4 | 1,729.3 | |||||
Total debt | $ | 1,927.7 | $ | 1,747.7 |
Credit Agreement
The Company had $50.0$45.0 million of outstanding borrowings on the Revolving Credit Agreement's revolving credit facility,Facility, leaving $150.0$155.0 million available for borrowings as of September 30, 2018. This revolving credit facility2019. The Credit Agreement expires in October 2022.
Accounts Receivable Securitization Facility
As of September 30, 2018,2019, the Company had $144.2$141.5 million in borrowings and $7.1$10.1 million of letters of credit outstanding under the accounts receivable securitization facility ("Receivables Facility"Facility”), leaving $6.3 million0 remaining availability fromon the total borrowing capacity of $157.6$151.6 million. In the second quarter of 2018,2019, the Company executed an amendment ofamendments to its Receivables Facility, which replaced, amended and added certain provisions and definitions to increase the credit availability and renew the facility, which is subject to renewal every364 days, until May 2019.2020. The amended Receivables Facility extends thefacility’s termination date tois May 2021 and includes an option to sell certain receivables on a non-recourse basis. Aswas not changed by these amendments. The maximum borrowing limit for loans and letters of September 30, 2018, the Company has not exercised its option to sell such accounts receivable. In the eventcredit under the Receivables Facility is not renewed,$225.0 million in the Company has the ability to refinance any outstanding borrowings with borrowings under the Credit Agreement. Under the terms of the Receivables Facility, the Company could obtain up to $250.0 million dependingaggregate. The available borrowing capacity is calculated monthly based on the quantity and quality of outstanding accounts receivable. receivable, and thus may be lower than the maximum borrowing limit.
Under thisthe agreement, certain U.S. and Canadian subsidiaries, as originators, sell their respective trade receivables on a continuous basis to Cincinnati Bell Funding LLC (“CBF”) or Cincinnati Bell Funding Canada Ltd. ("CBFC")., wholly-owned consolidated subsidiaries of the Company. Although CBF and CBFC are wholly-owned consolidated subsidiaries of the Company, CBF and CBFC are legally separate from the Company and each of the Company’s other subsidiaries. Upon and after the sale or contribution of the accounts receivable to CBF or CBFC, such accounts receivable are legally assets of CBF and CBFC and, as such, are not available to creditors of other subsidiaries or the parent company.
Other Installment Financing Arrangements
The Company has other installment financing arrangements that are recorded in "Other current liabilities" and "Other noncurrent liabilities" in the Condensed Consolidated Balance Sheets.
The IT Services and Hardware segment entered into a lease in June 2018 for a building to use in its data center operations. Structural improvements were made to thesethe leased facilitiesfacility in excess of normal tenant improvements and, as such, we arethe Company was deemed the accounting owner of these facilities.this facility. As of September 30, 2019 and December 31, 2018, the liability related to thesethis financing arrangementsarrangement was $5.2$4.4 million which was recognized withinand $4.5 million, respectively, and is included in "Other noncurrent liabilities" in the Condensed Consolidated Balance Sheets.
Prior to the acquisition of Hawaiian Telcom in July 2018, Hawaiian Telcom had an open dispute related to jointly-owned utility poles. In October 2018, the Company entered into the Pole License Agreement that provided for the transfer of the Company's ownership responsibility of the utility poles to Hawaiian Electric Company (“HEC”) and for the Company to pay a fixed annual fee to HEC for continued use of the poles. Due to the continuing involvement by the Company, this transaction did not meet the requirements to be accounted for as a sale-leaseback, and therefore it has been treated as a financing obligation. As of September 30, 2019, the Company has a liability recorded of $39.3 million, of which $1.0 million is included in "Other current liabilities” in the Condensed Consolidated Balance Sheets. As of December 31, 2018, the Company has a liability recorded of $40.1 million, of which $1.0 million is included in "Other current liabilities" in the Condensed Consolidated Balance Sheets.
7. Leases
Lessee Disclosures
The Company primarily leases real estate for offices, retail stores and central offices, as well as equipment, cell towers and fleet vehicles. The Company leases its real estate for terms between 1 and55 years, its equipment for terms between 2 and 6 years, its cell towers for terms between 4 and 21 years and its vehicles for terms of 5 years. Our leases have various expiration dates through 2066, some of which include options to extend the leases for up to 15 years, and some of which include options to terminate the leases within one year.
Upon adoption, the Company elected not to recognize leases with terms of one-year or less on the balance sheet. The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Supplemental unaudited balance sheet information related to the Company's leases was as follows:
(dollars in millions) | Balance Sheet Location |
| September 30, 2019 |
| |
Operating lease assets, net of amortization | Operating lease right-of-use assets |
| $ | 35.9 |
|
Finance lease assets, net of amortization | Property, plant and equipment, net |
|
| 35.1 |
|
Operating lease liabilities: |
|
|
|
|
|
Current operating lease liabilities | Other current liabilities |
|
| 11.0 |
|
Noncurrent operating lease liabilities | Operating lease liabilities |
|
| 32.2 |
|
Total operating lease liabilities |
|
|
| 43.2 |
|
Finance lease liabilities: |
|
|
|
|
|
Current finance lease liabilities | Current portion of long-term debt |
|
| 15.4 |
|
Noncurrent finance lease liabilities | Long-term debt, less current portion |
|
| 63.5 |
|
Total finance lease liabilities |
|
| $ | 78.9 |
|
The components of lease expense were as follows:
(dollars in millions) |
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||
Operating lease cost |
| $ | 3.4 |
|
| $ | 9.8 |
|
Short-term lease cost |
|
| 0.1 |
|
|
| 0.2 |
|
Variable lease cost |
|
| 0.5 |
|
|
| 1.6 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
Depreciation on leased assets |
|
| 2.6 |
|
|
| 6.3 |
|
Interest on lease liabilities |
|
| 1.4 |
|
|
| 3.9 |
|
Total lease cost |
| $ | 8.0 |
|
| $ | 21.8 |
|
Under ASC 840, the Company recorded lease expense of $5.0 million and $13.1 million for the three and nine months ended September 30, 2018, respectively.
Other information related to leases was as follows:
(dollars in millions) |
| Nine Months Ended September 30, 2019 |
| |
Supplemental Cash Flows Information |
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows from finance leases |
| $ | 3.9 |
|
Operating cash flows from operating leases |
| $ | 8.3 |
|
Financing cash flows from finance leases |
| $ | 8.2 |
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
New operating leases |
| $ | 5.1 |
|
New finance leases |
| $ | 13.4 |
|
Weighted Average Remaining Lease Term |
|
|
|
|
Operating leases |
| 7.92 years |
| |
Finance leases |
| 7.16 years |
| |
Weighted Average Discount Rate |
|
|
|
|
Operating leases |
|
| 7.01 | % |
Finance leases |
|
| 6.97 | % |
Future minimum lease payments under non-cancellable leases as of Contents
(dollars in millions) |
| Operating Leases |
|
| Finance Leases |
| ||
Three months ended December 31, 2019 |
| $ | 3.3 |
|
| $ | 5.5 |
|
2020 |
|
| 12.7 |
|
|
| 18.3 |
|
2021 |
|
| 7.7 |
|
|
| 14.1 |
|
2022 |
|
| 5.4 |
|
|
| 9.8 |
|
2023 |
|
| 4.5 |
|
|
| 8.0 |
|
Thereafter |
|
| 23.9 |
|
|
| 47.2 |
|
Total future minimum lease payments |
|
| 57.5 |
|
|
| 102.9 |
|
Less imputed interest |
|
| (14.3 | ) |
|
| (24.0 | ) |
Total |
| $ | 43.2 |
|
| $ | 78.9 |
|
Lessor Disclosures
The Company has operating leases related to its dark fiber arrangements for terms between 3 and 30 years. Our leases have various expiration dates through 2048, some of which include options to extend the lease. The Company recorded $0.8 million and $2.4 million in lease income related to operating lease payments during the three and nine months ended September 30, 2019, respectively.
The Company owns the underlying assets associated with its operating leases and records them in "Property, plant and equipment, net" on the Condensed Consolidated Balance Sheets.
Future minimum lease payments to be received under non-cancellable leases as of September 30, 2019 are as follows:
(dollars in millions) |
| Operating Leases |
| |
Three months ended December 31, 2019 |
| $ | 0.7 |
|
2020 |
|
| 2.7 |
|
2021 |
|
| 2.3 |
|
2022 |
|
| 1.7 |
|
2023 |
|
| 1.7 |
|
Thereafter |
|
| 18.8 |
|
Total future minimum lease payments |
|
| 27.9 |
|
Less imputed interest |
|
| (10.2 | ) |
Total |
| $ | 17.7 |
|
8. Financial Instruments and Fair Value Measurements
Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements, the Company uses a three-level hierarchy that prioritizes the use of observable inputs. The three levels are:
Level 1 — Quoted market prices for identical instruments in an active market;
Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
Level 3 — Unobservable inputs that reflect management's determination of assumptions that market participants
The determination of where an asset or liability falls in the hierarchy requires significant judgment.
Interest Rate Swaps
The Company uses interest rate swap agreements to minimize its exposure to interest rate fluctuations on variable rate debt borrowings. Interest rate swaps involve the exchange of fixed and variable rate interest payments and do not represent an actual exchange of the underlying notional amounts between parties. The
In the second quarter of 2018, the Company hasentered into one forward starting non-amortizing interest rate swap with a total notional amount of $300.0 million to convert variable rate debt to fixed rate debt. The interest rate swap became effective in June 2018 and expires in June 2023. The interest rate swap results in interest payments based on an average fixed rate of 2.938% plus the applicable margin per the requirements in the Credit Agreement (see Note 6). Agreement.
In the first quarter of 2019, the Company entered into three forward starting non-amortizing interest rate swaps, with a notional amount of $89.0 million each, to convert variable rate debt to fixed rate debt. The interest rate swaps became effective in March 2019 and expire in March 2024. The interest rate swaps result in interest payments based on an average fixed rate per swap of 2.275%, 2.244% and 2.328% plus the applicable margin per the requirements in the Credit Agreement.
During the next twelve months, the Company estimates that $1.0$5.6 million will be reclassified as an increase to interest expense.
The fair value of the Company's interest rate swaps are impacted by the credit risk of both the Company and its counterparties. The Company has agreements with its derivative financial instrument counter-partiescounterparties that contain provisions providing that if the Company defaults on the indebtedness associated with its derivative financial instruments, then the Company could also be declared in default on its derivative financial instrumentinstruments obligations. TheIn addition, the Company minimizes thisnonperformance risk on its derivative instruments by evaluating the creditworthiness of our counter-parties,its counterparties, which are limited to major banks and financial institutions.
Upon inception, the interest rate swap wasswaps were designated as a cash flow hedgehedges under ASC 815, with gains and losses, net of tax, measured on an ongoing basis recorded in accumulated other comprehensive income (loss).loss. The fair value of the interest rate swap isswaps are categorized as Level 2 in the fair value hierarchy as it isthey are based on well-recognized financial principles and available market data.
As of September 30, 2018,2019, the fair value of the interest rate swapswaps was $0.2$22.0 million and is recorded in the Condensed Consolidated Balance Sheets as of September 30, 2019 as follows:
(dollars in millions) |
| Balance Sheet Location |
| September 30, 2019 |
|
| Quoted Prices in active markets Level 1 |
|
| Significant observable inputs Level 2 |
|
| Significant unobservable inputs Level 3 |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap |
| Other current liabilities |
| $ | 5.3 |
|
| $ | - |
|
| $ | 5.3 |
|
| $ | - |
|
Interest Rate Swap |
| Other noncurrent liabilities |
| $ | 16.7 |
|
| $ | - |
|
| $ | 16.7 |
|
| $ | - |
|
As of December 31, 2018, the fair value of the interest rate swap liability was $5.0 million and is recorded in the Condensed Consolidated Balance Sheets as of December 31, 2018 as follows:
(dollars in millions) |
| Balance Sheet Location |
| December 31, 2018 |
|
| Quoted Prices in active markets Level 1 |
|
| Significant observable inputs Level 2 |
|
| Significant unobservable inputs Level 3 |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap |
| Other current liabilities |
| $ | 1.2 |
|
| $ | - |
|
| $ | 1.2 |
|
| $ | - |
|
Interest Rate Swap |
| Other noncurrent liabilities |
| $ | 3.8 |
|
| $ | - |
|
| $ | 3.8 |
|
| $ | - |
|
September 30, 2018 | |||||||||||||||||
(dollars in millions) | Balance Sheet Location | September 30, 2018 | Quoted Prices in active markets Level 1 | Significant observable inputs Level 2 | Significant unobservable inputs Level 3 | ||||||||||||
Assets: | |||||||||||||||||
Interest Rate Swap | Other noncurrent assets | $ | 1.2 | $ | — | $ | 1.2 | $ | — | ||||||||
Liabilities: | |||||||||||||||||
Interest Rate Swap | Other current liabilities | $ | 1.0 | $ | — | $ | 1.0 | $ | — |
The amount of (losses) gains recognized in Accumulated Other Comprehensive Income ("AOCI") net of reclassifications into earnings is as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Interest Rate Swap |
| $ | (3.3 | ) |
| $ | 2.1 |
|
| $ | (17.0 | ) |
| $ | 0.2 |
|
Three Months Ended | |||
September 30, | |||
(dollars in millions) | 2018 | ||
Interest Rate Swap | $ | 2.1 |
The amount of losses reclassified from AOCI into earnings is as follows:
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| Statement of Operations Location |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Interest Rate Swap |
| Interest expense |
| $ | (0.6 | ) |
| $ | (0.6 | ) |
| $ | (1.1 | ) |
| $ | (0.6 | ) |
Three Months Ended | |||
September 30, | |||
(dollars in millions) | 2018 | ||
Interest Rate Swap | $ | (0.6 | ) |
Disclosure on Financial Instruments
The carrying values of the Company's financial instruments approximate the estimated fair values as of
September 30,
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
(dollars in millions) |
| Carrying Value |
|
| Fair Value |
|
| Carrying Value |
|
| Fair Value |
| ||||
Long-term debt, including current portion* |
| $ | 1,867.1 |
|
| $ | 1,779.8 |
|
| $ | 1,880.0 |
|
| $ | 1,673.6 |
|
Other installment financing arrangements |
|
| 43.7 |
|
|
| 45.3 |
|
|
| 44.6 |
|
|
| 43.6 |
|
September 30, 2018 | December 31, 2017 | ||||||||||||||
(dollars in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||
Long-term debt, including current portion* | $ | 1,881.1 | $ | 1,802.6 | $ | 1,687.1 | $ | 1,687.5 | |||||||
Other financing arrangements | 5.2 | 5.4 | — | — | |||||||||||
*Excludes capital leases and note issuance costs. |
*Excludes capital leases, other financing arrangements and note issuance costs.
The fair value of our long-term debt was based on closing or estimated market prices of the Company’s debt at September 30, 20182019 and December 31, 2017,2018, which is considered Level 2 of the fair value hierarchy. The fair value of the other installmentfinancing arrangements was calculated using a discounted cash flow model that incorporates current borrowing rates for obligations of similar duration, which is considered Level 3 of the fair value hierarchy. As of September 30, 2018,2019, the current borrowing rate was estimated by applying the Company's credit spread to the risk-free rate for a similar duration borrowing.
9. Pension and Equipment
September 30, | December 31, | |||||||
(dollars in millions) | 2018 | 2017 | ||||||
Land and rights-of-way | $ | 117.3 | $ | 4.3 | ||||
Buildings and leasehold improvements | 304.3 | 179.1 | ||||||
Network equipment | 3,849.3 | 3,339.4 | ||||||
Office software, furniture, fixtures and vehicles | 210.8 | 162.5 | ||||||
Construction in process | 48.5 | 14.7 | ||||||
Gross value | 4,530.2 | 3,700.0 | ||||||
Accumulated depreciation | (2,699.2 | ) | (2,571.0 | ) | ||||
Property, plant and equipment, net | $ | 1,831.0 | $ | 1,129.0 |
As of September 30, 2018 and December 31, 2017, the Company had $112.1 million and $112.0 million, respectively, of assets accounted for as capital leases including network equipment, office software, furniture, fixtures, vehicles, buildings and building equipment. Depreciation of capital lease assets is included in "Depreciation and amortization" in the Condensed Consolidated Statements of Operations.
(dollars in millions) | ||||
Three months ended December 31, 2018 | $ | 2.3 | ||
2019 | 7.9 | |||
2020 | 6.4 | |||
2021 | 4.2 | |||
2022 | 3.2 | |||
Thereafter | 24.2 | |||
Total | $ | 48.2 |
September 30, | |||
(dollars in millions) | 2018 | ||
Balance, beginning of period | $ | 2.3 | |
Liabilities assumed in purchase accounting | 6.6 | ||
Accretion expense | 0.1 | ||
Balance, end of period | $ | 9.0 |
In accordance with ASC 715, only the service cost component of net benefit cost is eligible for capitalization, which was immaterial for the three and nine months ended September 30, 2019 and 2018.
For the three and nine months ended September 30, 2019 and 2018, pension and postretirement costs (benefits) were as follows:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
(dollars in millions) |
| Pension Benefits |
|
| Postretirement and Other Benefits |
| ||||||||||
Service cost |
| $ | - |
|
| $ | - |
|
| $ | 0.2 |
|
| $ | 0.3 |
|
Other components of pension and postretirement benefit plans expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation |
|
| 5.9 |
|
|
| 5.9 |
|
|
| 1.3 |
|
|
| 1.3 |
|
Expected return on plan assets |
|
| (7.7 | ) |
|
| (8.7 | ) |
|
| - |
|
|
| - |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit |
|
| - |
|
|
| - |
|
|
| (0.6 | ) |
|
| (0.7 | ) |
Actuarial loss |
|
| 3.5 |
|
|
| 4.2 |
|
|
| 0.4 |
|
|
| 1.0 |
|
Total amortization |
|
| 3.5 |
|
|
| 4.2 |
|
|
| (0.2 | ) |
|
| 0.3 |
|
Pension / postretirement costs |
| $ | 1.7 |
|
| $ | 1.4 |
|
| $ | 1.3 |
|
| $ | 1.9 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
(dollars in millions) |
| Pension Benefits |
|
| Postretirement and Other Benefits |
| ||||||||||
Service cost |
| $ | - |
|
| $ | - |
|
| $ | 0.5 |
|
| $ | 0.4 |
|
Other components of pension and postretirement benefit plans expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation |
|
| 17.9 |
|
|
| 14.2 |
|
|
| 3.8 |
|
|
| 2.9 |
|
Expected return on plan assets |
|
| (23.0 | ) |
|
| (21.1 | ) |
|
| - |
|
|
| - |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit |
|
| - |
|
|
| - |
|
|
| (1.9 | ) |
|
| (2.3 | ) |
Actuarial loss |
|
| 10.3 |
|
|
| 12.7 |
|
|
| 1.3 |
|
|
| 3.1 |
|
Total amortization |
|
| 10.3 |
|
|
| 12.7 |
|
|
| (0.6 | ) |
|
| 0.8 |
|
Pension / postretirement costs |
| $ | 5.2 |
|
| $ | 5.8 |
|
| $ | 3.7 |
|
| $ | 4.1 |
|
Amortizations of prior service benefit and actuarial loss represent reclassifications from accumulated other comprehensive income.
Based on current assumptions, contributions are expected to be approximately $3 million to both the Cincinnati qualified and non-qualified pension plans in 2018 are expected to be approximately $4 million and $3 million, respectively, and contributions to the Hawaii qualified pension plans in 2018 are expected to be approximately $5 million.2019. Management expects to make cash payments of approximately $8 million related to the Cincinnatiits postretirement health plan of approximately $9plans in 2019.
For the nine months ended September 30, 2019, contributions to the pension plans were $4.4 million and cash payments of approximately $0.8 millioncontributions to the Hawaii postretirement plan in 2018.
Three Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions) | Pension Benefits | Postretirement and Other Benefits | |||||||||||||
Service cost | $ | — | $ | — | $ | 0.1 | $ | 0.1 | |||||||
Other components of pension and postretirement benefit plans expense: | |||||||||||||||
Interest cost on projected benefit obligation | 4.2 | 4.9 | 0.8 | 0.8 | |||||||||||
Expected return on plan assets | (6.2 | ) | (6.5 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Prior service benefit | — | — | (0.7 | ) | (1.2 | ) | |||||||||
Actuarial loss | 4.2 | 4.3 | 1.0 | 1.2 | |||||||||||
Total amortization | 4.2 | 4.3 | 0.3 | — | |||||||||||
Pension / postretirement costs | $ | 2.2 | $ | 2.7 | $ | 1.2 | $ | 0.9 |
Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions) | Pension Benefits | Postretirement and Other Benefits | |||||||||||||
Service cost | $ | — | $ | — | $ | 0.2 | $ | 0.2 | |||||||
Other components of pension and postretirement benefit plans expense: | |||||||||||||||
Interest cost on projected benefit obligation | 12.5 | 14.6 | 2.4 | 2.4 | |||||||||||
Expected return on plan assets | (18.6 | ) | (19.5 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Prior service benefit | — | — | (2.3 | ) | (3.4 | ) | |||||||||
Actuarial loss | 12.7 | 13.1 | 3.1 | 3.5 | |||||||||||
Total amortization | 12.7 | 13.1 | 0.8 | 0.1 | |||||||||||
Pension / postretirement costs | $ | 6.6 | $ | 8.2 | $ | 3.4 | $ | 2.7 |
Pension Benefits | Postretirement and Other Benefits | ||||
2018 | 2018 | ||||
Discount rate | 4.14 | % | 4.22 | % |
Three Months Ended September 30, 2018 | |||||||
(dollars in millions) | Pension Benefits | Postretirement and Other Benefits | |||||
Service cost | $ | — | $ | 0.2 | |||
Other components of pension and postretirement benefit plans expense: | |||||||
Interest cost on projected benefit obligation | 1.7 | 0.5 | |||||
Expected return on plan assets | (2.5 | ) | — | ||||
Pension / postretirement costs | $ | (0.8 | ) | $ | 0.7 |
10. Restructuring and Severance
Liabilities have been established for employee separations and lease abandonment. A summary of activity in the restructuring and severance liability is shown below:
(dollars in millions) |
| Employee Separation |
|
| Lease Abandonment |
|
| Total |
| |||
Balance as of December 31, 2018 |
| $ | 9.5 |
|
| $ | 0.7 |
|
| $ | 10.2 |
|
Hawaiian Telcom opening balance sheet adjustment |
|
| 0.1 |
|
|
| - |
|
|
| 0.1 |
|
Charges |
|
| 3.3 |
|
|
| - |
|
|
| 3.3 |
|
Utilizations |
|
| (6.7 | ) |
|
| (0.1 | ) |
|
| (6.8 | ) |
Balance as of March 31, 2019 |
|
| 6.2 |
|
|
| 0.6 |
|
|
| 6.8 |
|
Charges |
|
| 1.8 |
|
|
| - |
|
|
| 1.8 |
|
Utilizations |
|
| (3.9 | ) |
|
| (0.1 | ) |
|
| (4.0 | ) |
Balance as of June 30, 2019 |
|
| 4.1 |
|
|
| 0.5 |
|
|
| 4.6 |
|
Charges |
|
| 1.3 |
|
|
| - |
|
|
| 1.3 |
|
Utilizations |
|
| (2.3 | ) |
|
| (0.1 | ) |
|
| (2.4 | ) |
Balance as of September 30, 2019 |
| $ | 3.1 |
|
| $ | 0.4 |
|
| $ | 3.5 |
|
(dollars in millions) | Employee Separation | Lease Abandonment | Total | ||||||||
Balance as of December 31, 2017 | $ | 14.4 | $ | 0.1 | $ | 14.5 | |||||
Charges | 0.3 | — | 0.3 | ||||||||
Utilizations | (7.3 | ) | — | (7.3 | ) | ||||||
Balance as of March 31, 2018 | 7.4 | 0.1 | 7.5 | ||||||||
Charges | 3.8 | 0.8 | 4.6 | ||||||||
Utilizations | (0.9 | ) | — | (0.9 | ) | ||||||
Balance as of June 30, 2018 | 10.3 | 0.9 | 11.2 | ||||||||
Hawaiian Telcom opening balance sheet adjustment | 3.8 | — | 3.8 | ||||||||
Charges | — | — | — | ||||||||
Utilizations | (6.4 | ) | (0.1 | ) | (6.5 | ) | |||||
Balance as of September 30, 2018 | $ | 7.7 | $ | 0.8 | $ | 8.5 |
Restructuring and severance charges of $4.1 million were recorded in each of the nine months ended September 30, 2018 and are related to costs incurred in order to recognize future synergies as the Company continues to identify efficiencies with the integrationfirst three quarters of OnX. In addition, a restructuring charge associated with lease abandonment of $0.8 million was recorded in the second quarter of 2018 related to an office space that will no longer be utilized. During the three and nine months ended September 30, 2018, the Company made severance payments related to employee separations associated with initiatives to reduce costs within our legacy copper network2019 in the Entertainment and Communications segment are related to a severance program for certain management employees as the Company continues its efforts to realize synergies that can be achieved due to the acquisition of Hawaiian Telcom. Restructuring and severance charges recorded in the IT Services and Hardware segment in the second and third quarters of 2019 are associated with initiatives to reduce and contain costs as well as headcount reductions inas a result of insourcing initiatives by one of our IT Services and Hardware segment related to the integration with OnX.
Lease abandonment costs represent future minimum lease obligations, net of expected sublease income, for abandoned facilities. Lease payments on abandoned facilities will continue through 2020.
A summary of restructuring activity by business segment is presented below:
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Corporate |
|
| Total |
| ||||
Balance as of December 31, 2018 |
| $ | 8.6 |
|
| $ | 1.3 |
|
| $ | 0.3 |
|
| $ | 10.2 |
|
Hawaiian Telcom opening balance sheet adjustment |
|
| 0.1 |
|
|
| - |
|
|
| - |
|
|
| 0.1 |
|
Charges |
|
| 3.3 |
|
|
| - |
|
|
| - |
|
|
| 3.3 |
|
Utilizations |
|
| (6.3 | ) |
|
| (0.5 | ) |
|
| - |
|
|
| (6.8 | ) |
Balance as of March 31, 2019 |
|
| 5.7 |
|
|
| 0.8 |
|
|
| 0.3 |
|
|
| 6.8 |
|
Charges |
|
| 0.9 |
|
|
| 0.9 |
|
|
| - |
|
|
| 1.8 |
|
Utilizations |
|
| (2.8 | ) |
|
| (1.0 | ) |
|
| (0.2 | ) |
|
| (4.0 | ) |
Balance as of June 30, 2019 |
|
| 3.8 |
|
|
| 0.7 |
|
|
| 0.1 |
|
|
| 4.6 |
|
Charges |
|
| 0.7 |
|
|
| 0.6 |
|
|
| - |
|
|
| 1.3 |
|
Utilizations |
|
| (1.6 | ) |
|
| (0.7 | ) |
|
| (0.1 | ) |
|
| (2.4 | ) |
Balance as of September 30, 2019 |
| $ | 2.9 |
|
| $ | 0.6 |
|
| $ | - |
|
| $ | 3.5 |
|
(dollars in millions) | Entertainment and Communications | IT Services and Hardware | Total | ||||||||
Balance as of December 31, 2017 | $ | 12.3 | $ | 2.2 | $ | 14.5 | |||||
Charges | — | 0.3 | 0.3 | ||||||||
Utilizations | (5.7 | ) | (1.6 | ) | (7.3 | ) | |||||
Balance as of March 31, 2018 | 6.6 | 0.9 | 7.5 | ||||||||
Charges | — | 4.6 | 4.6 | ||||||||
Utilizations | (0.3 | ) | (0.6 | ) | (0.9 | ) | |||||
Balance as of June 30, 2018 | 6.3 | 4.9 | 11.2 | ||||||||
Hawaiian Telcom opening balance sheet adjustment | 3.8 | — | 3.8 | ||||||||
Charges | — | — | — | ||||||||
Utilizations | (3.4 | ) | (3.1 | ) | (6.5 | ) | |||||
Balance as of September 30, 2018 | $ | 6.7 | $ | 1.8 | $ | 8.5 |
At September 30, 2018 and December 31, 2017, $6.52019, $3.5 million and $12.0 million, respectively, of the restructuring liabilities were includedrecorded in “Other current liabilities.”liabilities” in the Condensed Consolidated Balance Sheets. At September 30, 2018 and December 31, 2017, $2.02018, $9.6 million and $2.5 million, respectively, were included in "Other noncurrent liabilities."
11. Shareowners' Deficit
Accumulated Other Comprehensive Loss
For the three and nine months ended September 30, 2019 and 2018, the changes in accumulated other comprehensive loss by component were as follows:
(dollars in millions) |
| Unrecognized Net Periodic Pension and Postretirement Benefit Cost |
|
|
| Unrealized (Loss) Gain on Cash Flow Hedges, Net |
|
|
| Foreign Currency Translation Loss |
|
| Total |
| ||||
Balance as of June 30, 2019 |
| $ | (159.4 | ) |
|
| $ | (14.4 | ) |
|
| $ | (4.0 | ) |
| $ | (177.8 | ) |
Reclassifications, net |
|
| 2.5 |
| (a) |
|
| 0.4 |
| (b) |
|
| — |
|
|
| 2.9 |
|
Unrealized loss on cash flow hedges arising during the period, net |
|
| — |
|
|
|
| (3.0 | ) | (c) |
|
| — |
|
|
| (3.0 | ) |
Foreign currency loss |
|
| — |
|
|
|
| — |
|
|
|
| (1.0 | ) |
|
| (1.0 | ) |
Balance as of September 30, 2019 |
| $ | (156.9 | ) |
|
| $ | (17.0 | ) |
|
| $ | (5.0 | ) |
| $ | (178.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018 |
| $ | (166.1 | ) |
|
| $ | (1.5 | ) |
|
| $ | (4.9 | ) |
| $ | (172.5 | ) |
Reclassifications, net |
|
| 3.5 |
| (a) |
|
| 0.5 |
| (b) |
|
| — |
|
|
| 4.0 |
|
Unrealized gain on cash flow hedge arising during the period, net |
|
| — |
|
|
|
| 1.1 |
| (c) |
|
| — |
|
|
| 1.1 |
|
Foreign currency gain |
|
| — |
|
|
|
| — |
|
|
|
| 1.7 |
|
| �� | 1.7 |
|
Balance as of September 30, 2018 |
| $ | (162.6 | ) |
|
| $ | 0.1 |
|
|
| $ | (3.2 | ) |
| $ | (165.7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
| Unrecognized Net Periodic Pension and Postretirement Benefit Cost |
|
|
| Unrealized (Loss) Gain on Cash Flow Hedges, Net |
|
|
| Foreign Currency Translation Loss |
|
| Total |
| ||||
Balance as of December 31, 2018 |
| $ | (164.5 | ) |
|
| $ | (3.9 | ) |
|
| $ | (7.1 | ) |
| $ | (175.5 | ) |
Remeasurement of benefit obligations |
|
| 0.1 |
|
|
|
| — |
|
|
|
| — |
|
|
| 0.1 |
|
Reclassifications, net |
|
| 7.5 |
| (a) |
|
| 0.8 |
| (b) |
|
| — |
|
|
| 8.3 |
|
Unrealized loss on cash flow hedges arising during the period, net |
|
| — |
|
|
|
| (13.9 | ) | (c) |
|
| — |
|
|
| (13.9 | ) |
Foreign currency gain |
|
| — |
|
|
|
| — |
|
|
|
| 2.1 |
|
|
| 2.1 |
|
Balance as of September 30, 2019 |
| $ | (156.9 | ) |
|
| $ | (17.0 | ) |
|
| $ | (5.0 | ) |
| $ | (178.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017 |
| $ | (173.1 | ) |
|
| $ | — |
|
|
| $ | (0.6 | ) |
| $ | (173.7 | ) |
Reclassifications, net |
|
| 10.5 |
| (a) |
|
| 0.5 |
| (b) |
|
| — |
|
|
| 11.0 |
|
Unrealized loss on cash flow hedge arising during the period, net |
|
| — |
|
|
|
| (0.4 | ) | (c) |
|
| — |
|
|
| (0.4 | ) |
Foreign currency loss |
|
| — |
|
|
|
| — |
|
|
|
| (2.6 | ) |
|
| (2.6 | ) |
Balance as of September 30, 2018 |
| $ | (162.6 | ) |
|
| $ | 0.1 |
|
|
| $ | (3.2 | ) |
| $ | (165.7 | ) |
(dollars in millions) | Unrecognized Net Periodic Pension and Postretirement Benefit Cost | Unrealized Gain on Cash Flow Hedge | Foreign Currency Translation Loss | Total | |||||||||||
Balance as of December 31, 2017 | $ | (173.1 | ) | $ | — | $ | (0.6 | ) | $ | (173.7 | ) | ||||
Reclassifications, net | 10.5 | (a) | — | — | 10.5 | ||||||||||
Unrealized gain on cash flow hedge arising during the period, net | — | 0.1 | (b) | — | 0.1 | ||||||||||
Foreign currency loss | — | — | (2.6 | ) | (2.6 | ) | |||||||||
Balance as of September 30, 2018 | $ | (162.6 | ) | $ | 0.1 | $ | (3.2 | ) | $ | (165.7 | ) |
(a) | These reclassifications are included in the other components of net periodic pension and postretirement benefit plans expense and represent amortization of prior service benefit and actuarial loss, net of tax. The other components of net periodic pension and postretirement benefit plans expense are recorded in "Other components of pension and postretirement benefit plans expense" on the Condensed Consolidated Statements of Operations. See Note |
(b) | These reclassifications are reported within "Interest expense" on the Condensed Consolidated Statements of Operations when the hedged transactions impact earnings. |
(c) | The unrealized (loss) gain, net on cash flow |
12. Business Segment Information
The Company’s segments are strategic business units that offer distinct products and services and are aligned with the Company's internal management structure and reporting. The Company operates 2 business segments identified as Entertainment and Communications and IT Services and Hardware.
The Entertainment and Communications segment provides products and services that can be categorized as Data, Video, Voice or Other. Data products include high-speed internet access, digital subscriber lines, ethernet, SONET, dedicated internet access, wavelength, digital signal and IRU. These products are used to transport large amounts of data over private networks. Video services provide our Fioptics customers access to over 400 entertainment channels, over 140 high-definition channels, parental controls, HD DVR, Video On-Demand and access to a Fioptics live TV streaming application. Voice represents traditional voice lines as well as fiber voice lines, consumer long distance, switched access and digital trunking. Other services consists of revenue generated from wiring projects for enterprise customers, advertising, directory assistance, maintenance and information services.
The IT Services and Hardware segment provides end-to-end solutions from consulting to implementation to ongoing optimization. These solutions include Cloud, Communications and Consulting services along with the sale, installation and maintenance of major branded Telecom and IT hardware reported as Infrastructure Solutions.
Certain corporate administrative expenses have been allocated to the segments based upon the nature of the expense and the relative size of the segment. Intercompany transactions between segments have been eliminated.
Selected financial data for the Company’s business segment information is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 248.5 |
|
| $ | 253.4 |
|
| $ | 749.3 |
|
| $ | 601.5 |
|
IT Services and Hardware |
|
| 140.5 |
|
|
| 141.1 |
|
|
| 417.0 |
|
|
| 397.0 |
|
Intersegment |
|
| (6.5 | ) |
|
| (7.8 | ) |
|
| (20.0 | ) |
|
| (19.3 | ) |
Total revenue |
| $ | 382.5 |
|
| $ | 386.7 |
|
| $ | 1,146.3 |
|
| $ | 979.2 |
|
Intersegment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 5.3 |
|
| $ | 6.5 |
|
| $ | 16.5 |
|
| $ | 16.4 |
|
IT Services and Hardware |
|
| 1.2 |
|
|
| 1.3 |
|
|
| 3.5 |
|
|
| 2.9 |
|
Total intersegment revenue |
| $ | 6.5 |
|
| $ | 7.8 |
|
| $ | 20.0 |
|
| $ | 19.3 |
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 27.7 |
|
| $ | 25.0 |
|
| $ | 81.2 |
|
| $ | 79.1 |
|
IT Services and Hardware |
|
| 0.6 |
|
|
| 7.3 |
|
|
| (5.1 | ) |
|
| 8.5 |
|
Corporate |
|
| (5.5 | ) |
|
| (17.8 | ) |
|
| (18.3 | ) |
|
| (28.7 | ) |
Total operating income |
| $ | 22.8 |
|
| $ | 14.5 |
|
| $ | 57.8 |
|
| $ | 58.9 |
|
Expenditures for long-lived assets* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 51.3 |
|
| $ | 276.3 |
|
| $ | 150.3 |
|
| $ | 335.7 |
|
IT Services and Hardware |
|
| 5.4 |
|
|
| 7.4 |
|
|
| 16.9 |
|
|
| 21.8 |
|
Corporate |
|
| - |
|
|
| - |
|
|
| 0.1 |
|
|
| - |
|
Total expenditures for long-lived assets |
| $ | 56.7 |
|
| $ | 283.7 |
|
| $ | 167.3 |
|
| $ | 357.5 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 64.4 |
|
| $ | 65.6 |
|
| $ | 190.5 |
|
| $ | 147.5 |
|
IT Services and Hardware |
|
| 11.1 |
|
|
| 9.9 |
|
|
| 38.5 |
|
|
| 30.0 |
|
Corporate |
|
| - |
|
|
| - |
|
|
| 0.1 |
|
|
| 0.1 |
|
Total depreciation and amortization |
| $ | 75.5 |
|
| $ | 75.5 |
|
| $ | 229.1 |
|
| $ | 177.6 |
|
* | Includes cost of acquisitions |
|
| September 30, |
|
| December 31, |
| ||
(dollars in millions) |
| 2019 |
|
| 2018 |
| ||
Assets |
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 1,859.2 |
|
| $ | 1,898.8 |
|
IT Services and Hardware |
|
| 485.3 |
|
|
| 468.1 |
|
Corporate and eliminations |
|
| 274.5 |
|
|
| 363.3 |
|
Total assets |
| $ | 2,619.0 |
|
| $ | 2,730.2 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Revenue | |||||||||||||||
Entertainment and Communications | $ | 253.4 | $ | 175.0 | $ | 601.5 | $ | 531.1 | |||||||
IT Services and Hardware | 141.1 | 87.0 | 397.0 | 252.8 | |||||||||||
Intersegment | (7.8 | ) | (6.5 | ) | (19.3 | ) | (19.4 | ) | |||||||
Total revenue | $ | 386.7 | $ | 255.5 | $ | 979.2 | $ | 764.5 | |||||||
Intersegment revenue | |||||||||||||||
Entertainment and Communications | $ | 6.5 | $ | 5.4 | $ | 16.4 | $ | 16.1 | |||||||
IT Services and Hardware | 1.3 | 1.1 | 2.9 | 3.3 | |||||||||||
Total intersegment revenue | $ | 7.8 | $ | 6.5 | $ | 19.3 | $ | 19.4 | |||||||
Operating income (loss) | |||||||||||||||
Entertainment and Communications | $ | 25.0 | $ | 28.7 | $ | 79.1 | $ | 63.2 | |||||||
IT Services and Hardware | 7.3 | 3.9 | 8.5 | 3.3 | |||||||||||
Corporate | (17.8 | ) | (16.7 | ) | (28.7 | ) | (28.0 | ) | |||||||
Total operating income | $ | 14.5 | $ | 15.9 | $ | 58.9 | $ | 38.5 | |||||||
Expenditures for long-lived assets* | |||||||||||||||
Entertainment and Communications | $ | 276.3 | $ | 38.8 | $ | 335.7 | $ | 131.1 | |||||||
IT Services and Hardware | 7.4 | 4.2 | 21.8 | 26.7 | |||||||||||
Total expenditures for long-lived assets | $ | 283.7 | $ | 43.0 | $ | 357.5 | $ | 157.8 | |||||||
Depreciation and amortization | |||||||||||||||
Entertainment and Communications | $ | 65.6 | $ | 41.2 | $ | 147.5 | $ | 121.0 | |||||||
IT Services and Hardware | 9.9 | 6.1 | 30.0 | 19.0 | |||||||||||
Corporate | — | — | 0.1 | 0.1 | |||||||||||
Total depreciation and amortization | $ | 75.5 | $ | 47.3 | $ | 177.6 | $ | 140.1 | |||||||
* Includes cost of acquisitions | |||||||||||||||
September 30, | December 31, | ||||||||||||||
(dollars in millions) | 2018 | 2017 | |||||||||||||
Assets | |||||||||||||||
Entertainment and Communications | $ | 1,898.6 | $ | 1,111.4 | |||||||||||
IT Services and Hardware | 450.9 | 482.7 | |||||||||||||
Corporate and eliminations | 310.0 | 593.5 | |||||||||||||
Total assets | $ | 2,659.5 | $ | 2,187.6 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements regarding future events and results that are subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “predicts,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” or variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, anticipated growth and trends in businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned these forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially and adversely from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A, and those discussed in other documents the Company filed with the Securities and Exchange Commission (“SEC”). Actual results may differ materially and adversely from those expressed in any forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements for any reason.
Introduction
This Management’s Discussion and Analysis section provides an overview of Cincinnati Bell Inc.'s financial condition as of
September 30,Executive Summary
Segment results described in the Executive Summary and Consolidated Results of Operations sections are net of intercompany eliminations.
Cincinnati Bell Inc. and its consolidated subsidiaries ("Cincinnati Bell", "we", "our", "us" or the "Company") providesprovide integrated communications and IT solutions that keep consumer and enterprise customers connected with each other and with the world. Through its Entertainment and Communications segment, the Company provides Data, Video, and Voice solutions to consumer and enterprise customers over an expanding fiber network and a legacy copper network. In addition, enterprise customers across the United States, Canada and Europe rely on the IT Services and Hardware segment for the sale and service of efficient, end-to-end communications and IT systems and solutions.
On July 2, 2018, the Company acquired Hawaiian Telcom Holdco, Inc. ("Hawaiian Telcom"). The UCaaS,Unified Communications as a Service ("UCaaS"), hardware, and enterprise long distance products and services provided by the Hawaiian Telcom business are included within the IT Services and Hardware Segment. The Entertainment and Communications segment includes products delivered by Hawaiian Telcom such as high-speed internet access, digital subscriber lines, ethernet, dedicated internet access, IRU,indefeasible right of use ("IRU") contracts, video, traditional voice lines, consumer long distance and digital trunking.
Consolidated revenue totaling $386.7 million and $979.2 million for the three and nine months ended September 30, 2018, respectively, increased $131.2 million and $214.7 million compared to the same periods in 2017 primarily due to the merger and acquisitions completed in 2018 and 2017, respectively. The merger of Hawaiian Telcom contributed $87.1 million of revenue in the three months ended September 30, 2018. The acquisition of OnX Holdings LLC ("OnX") in 2017 contributed $49.3 million and $139.9 million of revenue in the three and nine months ended September 30, 2018, respectively. In addition to revenue growth from these merger and acquisition transactions, an increase in revenue due to the demand for our fiber offerings was offset by a decline in Legacy revenue. Fioptics revenue increased $7.3 million and $24.9 million for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017. Legacy revenue in Cincinnati decreased $9.1 million and $31.5 million for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017.
Consolidated revenue totaling $1,146.3 million for the nine months ended September 30, 2018, up $20.42019 increased $167.1 million compared to the same period in 2017the prior year primarily due to athe acquisition of Hawaiian Telcom. The acquisition of Hawaiian Telcom contributed $260.1 million and $87.1 million of revenue in the nine months ended September 30, 2019 and 2018, respectively. Revenue growth from the acquisition was partially offset by the decline in restructuring and severance related charges. Restructuring and severance related charges were incurredLegacy revenue exceeding the growth in revenue from our fiber offerings in Cincinnati as well as the decline of higher margin revenue contributed by General Electric Company (“GE”) of $15.2 million in the Cloud practice. Fioptics revenue in Cincinnati increased $10.0 million while Legacy revenue in Cincinnati decreased $19.6 million in the nine months ended September 30, 2019 compared to the same period in the prior year.
Operating income was $22.8 million for the three months ended March 31, 2017September 30, 2019, up $8.3 million compared to the same period in orderthe prior year. The increase in operating income was primarily due to reduce fieldlower transaction and network costsintegration charges incurred in the third quarter of 2019 compared to the same period in 2018 that were incurred as a result of the Company’s acquisitions and continued integration of Hawaiian Telcom and OnX Holdings LLC (“OnX”). Operating income was $57.8 million for the nine months ended September 30, 2019, down $1.1 million compared to the same period in 2018. The contribution from Hawaiian Telcom in addition to the decrease in transaction and integration charges associated with our legacy copper network.
Loss before income taxes totaled $21.0 million and $45.8 $15.5million for the three and nine months ended September 30, 2018, respectively,2019, resulting in an increasea decrease in the loss as compared to the comparable periods. Theperiod in 2018 primarily due to the increase in operating income. For the nine months ended September 30, 2019, loss before income taxes totaled $55.2 million resulting in an increase in the loss compared to the same period in 2018. In addition to the items impacting operating income, the increased loss before income taxes in both periods is primarily due to increased interest expense related to additional debt acquired to fund the acquisition of OnXHawaiian Telcom.
Consolidated Results of Operations
Revenue
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 243.2 |
|
| $ | 246.9 |
|
| $ | (3.7 | ) |
|
| (1 | )% |
| $ | 732.8 |
|
| $ | 585.1 |
|
| $ | 147.7 |
|
|
| 25 | % |
IT Services and Hardware |
|
| 139.3 |
|
|
| 139.8 |
|
|
| (0.5 | ) |
|
| 0 | % |
|
| 413.5 |
|
|
| 394.1 |
|
|
| 19.4 |
|
|
| 5 | % |
Total revenue |
| $ | 382.5 |
|
| $ | 386.7 |
|
| $ | (4.2 | ) |
|
| (1 | )% |
| $ | 1,146.3 |
|
| $ | 979.2 |
|
| $ | 167.1 |
|
|
| 17 | % |
Entertainment and Communications revenue decreased for the three months ended September 30, 2019 as the growth in October 2017,Consumer/SMB revenue was more than offset by the declines experienced in Legacy revenue. IT Services and the merger of Hawaiian Telcom in July 2018. In addition, a gain on the sale of our investment in CyrusOne of $117.7 million was recordedHardware revenue decreased due to lower revenue in the first quarterCloud and Infrastructure Solutions practices more than offsetting increases in the Communications and Consulting practices. Cloud revenue decline is primarily due to lower revenue contributed by GE of 2017, contributing$6.5 million due to the $134.2 million decrease forGE insourcing certain cloud services.
Entertainment and Communications revenue increased in the nine months ended September 30, 2018 as compared2019 primarily due to the same periodacquisition of Hawaiian Telcom. Hawaiian Telcom contributed revenue of $230.6 million and $77.5 million in 2017.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | $ Change | % Change | 2018 | 2017 | $ Change | % Change | |||||||||||||||||||||
Revenue | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 246.9 | $ | 169.6 | $ | 77.3 | 46 | % | $ | 585.1 | $ | 515.0 | $ | 70.1 | 14 | % | |||||||||||||
IT Services and Hardware | 139.8 | 85.9 | 53.9 | 63 | % | 394.1 | 249.5 | 144.6 | 58 | % | |||||||||||||||||||
Total revenue | $ | 386.7 | $ | 255.5 | $ | 131.2 | 51 | % | $ | 979.2 | $ | 764.5 | $ | 214.7 | 28 | % |
Operating Costs
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||||||
Cost of services and products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 110.2 |
|
| $ | 117.5 |
|
| $ | (7.3 | ) |
|
| (6 | )% |
| $ | 334.8 |
|
| $ | 271.7 |
|
| $ | 63.1 |
|
|
| 23 | % |
IT Services and Hardware |
|
| 84.5 |
|
|
| 80.2 |
|
|
| 4.3 |
|
|
| 5 | % |
|
| 253.1 |
|
|
| 227.7 |
|
|
| 25.4 |
|
|
| 11 | % |
Total cost of services and products |
| $ | 194.7 |
|
| $ | 197.7 |
|
| $ | (3.0 | ) |
|
| (2 | )% |
| $ | 587.9 |
|
| $ | 499.4 |
|
| $ | 88.5 |
|
|
| 18 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | $ Change | % Change | 2018 | 2017 | $ Change | % Change | |||||||||||||||||||||
Cost of services and products | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 117.5 | $ | 74.4 | $ | 43.1 | 58 | % | $ | 271.7 | $ | 225.8 | $ | 45.9 | 20 | % | |||||||||||||
IT Services and Hardware | 80.2 | 52.6 | 27.6 | 52 | % | 227.7 | 154.2 | 73.5 | 48 | % | |||||||||||||||||||
Total cost of services and products | $ | 197.7 | $ | 127.0 | $ | 70.7 | 56 | % | $ | 499.4 | $ | 380.0 | $ | 119.4 | 31 | % |
Entertainment and Communications costs increaseddecreased for the three months ended September 30, 2019 compared to the same periodsperiod in the prior year as a result of the merger of Hawaiian Telcom as well as increases in video content costs due to higher rates charged by our content providers. Increases in both comparable periods are partially offset by lower payroll related costs and benefits costs related to Cincinnati-based operations. Additionally, there was a reduction in costs due to the one-time project that was recorded in the second quarter of the prior year.contract services costs. Lower payroll and benefitsrelated costs are related to headcount reductions made during restructuring initiatives that were executed in 2017.2017 and 2018 in addition to efficiencies realized in the installation process. IT Services and Hardware costs primarily increased for the three months ended September 30, 2019 compared to the comparable period in 2018 due to higherincreases in payroll related costs for additional headcount and regulatory fees which were partially offset by lower contractor costs.
Entertainment and Communications costs increased for the nine months ended September 30, 2019 primarily due to the acquisition of Hawaiian Telcom which contributed costs of $113.4 million and $40.9 million in the nine months ended September 30, 2019 and 2018, respectively. The increased costs as a result of the acquisition are partially offset by lower payroll related costs and contract services costs. IT Services and Hardware costs increased due to increased payroll related and contractor costs associated with resources utilized to support the revenue growth in the Communications and Consulting practices for the nine months ended September 30, 2019 as compared to the same period in the prior year. In addition, Hawaiian Telcom contributed $16.4 million and $4.7 million to cost of OnX,services and to a lesser extent,products in the merger of Hawaiian Telcom.nine months ended September 30, 2019 and 2018, respectively.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 44.2 |
|
| $ | 44.0 |
|
| $ | 0.2 |
|
|
| 0 | % |
| $ | 133.9 |
|
| $ | 100.1 |
|
| $ | 33.8 |
|
|
| 34 | % |
IT Services and Hardware |
|
| 38.5 |
|
|
| 37.3 |
|
|
| 1.2 |
|
|
| 3 | % |
|
| 113.0 |
|
|
| 109.8 |
|
|
| 3.2 |
|
|
| 3 | % |
Corporate |
|
| 5.3 |
|
|
| 4.4 |
|
|
| 0.9 |
|
|
| 20 | % |
|
| 14.4 |
|
|
| 10.3 |
|
|
| 4.1 |
|
|
| 40 | % |
Total selling, general and administrative |
| $ | 88.0 |
|
| $ | 85.7 |
|
| $ | 2.3 |
|
|
| 3 | % |
| $ | 261.3 |
|
| $ | 220.2 |
|
| $ | 41.1 |
|
|
| 19 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | $ Change | % Change | 2018 | 2017 | $ Change | % Change | |||||||||||||||||||||
Selling, general and administrative | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 44.0 | $ | 29.5 | $ | 14.5 | 49 | % | $ | 100.1 | $ | 90.6 | $ | 9.5 | 10 | % | |||||||||||||
IT Services and Hardware | 37.3 | 19.0 | 18.3 | 96 | % | 109.8 | 58.2 | 51.6 | 89 | % | |||||||||||||||||||
Corporate | 4.4 | 4.7 | (0.3 | ) | (6 | )% | 10.3 | 13.5 | (3.2 | ) | (24 | )% | |||||||||||||||||
Total selling, general and administrative | $ | 85.7 | $ | 53.2 | $ | 32.5 | 61 | % | $ | 220.2 | $ | 162.3 | $ | 57.9 | 36 | % |
Entertainment and Communications SG&A costs increased in the three and nine months ended September 30, 20182019 compared to the same periodscomparable period in the prior year primarily due to the mergeracquisition of Hawaiian Telcom, which contributed SG&A expense of $47.6 million and $16.0 million in the nine months ended September 30, 2019 and 2018, respectively. In addition, SG&A costs also increased due to an increase in advertising expense and the bad debt reserve for certain receivables with a wholesale customer that filed for bankruptcy in the first quarter of 2019 whose collectability is uncertain. IT Services and Hardware SG&A costs increased compared to the prior year due to additional expense contributed by Hawaiian Telcom. Hawaiian Telcom contributed SG&A expensecosts of $16.0$7.2 million and $2.9 million in both comparable periods.the nine months ended September 30, 2019 and 2018, respectively. This increase was partially offset by lower payroll costs in Cincinnati that are a result ofthe nine months ended September 30, 2019 resulting from headcount reductions from restructuring initiatives that were executedcarried out in 2017 and 2016. IT Services and Hardware SG&A costs were up primarily due to OnX and Hawaiian Telcom contributing additional headcount, as well as other costs such as rent and professional fees.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||||||
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 64.4 |
|
| $ | 65.6 |
|
| $ | (1.2 | ) |
|
| (2 | )% |
| $ | 190.5 |
|
| $ | 147.5 |
|
| $ | 43.0 |
|
|
| 29 | % |
IT Services and Hardware |
|
| 11.1 |
|
|
| 9.9 |
|
|
| 1.2 |
|
|
| 12 | % |
|
| 38.5 |
|
|
| 30.0 |
|
|
| 8.5 |
|
|
| 28 | % |
Corporate |
|
| - |
|
|
| - |
|
|
| - |
|
| n/m |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| - |
|
|
| 0 | % | |
Total depreciation and amortization expense |
| $ | 75.5 |
|
| $ | 75.5 |
|
| $ | 0.0 |
|
|
| 0 | % |
| $ | 229.1 |
|
| $ | 177.6 |
|
| $ | 51.5 |
|
|
| 29 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | $ Change | % Change | 2018 | 2017 | $ Change | % Change | |||||||||||||||||||||
Depreciation and amortization expense | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 65.6 | $ | 41.2 | $ | 24.4 | 59 | % | $ | 147.5 | $ | 121.0 | $ | 26.5 | 22 | % | |||||||||||||
IT Services and Hardware | 9.9 | 6.1 | 3.8 | 62 | % | 30.0 | 19.0 | 11.0 | 58 | % | |||||||||||||||||||
Corporate | — | — | — | n/m | 0.1 | 0.1 | — | — | % | ||||||||||||||||||||
Total depreciation and amortization expense | $ | 75.5 | $ | 47.3 | $ | 28.2 | 60 | % | $ | 177.6 | $ | 140.1 | $ | 37.5 | 27 | % |
Entertainment and Communications depreciation and amortization expense increased in both comparable periods as a result of expanding our fiber-based network, as well asthe nine months ended September 30, 2019 compared to the same period in 2018 due to increased property, plant, and equipment and intangible assets obtained in the mergeracquisition of Hawaiian Telcom. The increase in IT Services and Hardware depreciation and amortization expense in both comparable periods is primarily related to accelerated depreciation for certain network assets that were determined in the amortizationfirst quarter of intangible assets acquired as part of the SunTel and OnX acquisitions, as well as2019 to have a shorter useful life due to a change in customer requirements. Hawaiian Telcom also contributed $3.1 million to depreciation expense related to the property, plant and equipment obtained in these acquisitions.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | $ Change | % Change | 2018 | 2017 | $ Change | % Change | |||||||||||||||||||||
Other operating costs | |||||||||||||||||||||||||||||
Restructuring and severance related charges | $ | — | $ | — | $ | — | n/m | $ | 4.9 | $ | 29.2 | $ | (24.3 | ) | (83 | )% | |||||||||||||
Transaction and integration costs | 13.3 | 12.1 | 1.2 | 10 | % | 18.2 | 14.4 | 3.8 | 26 | % | |||||||||||||||||||
Total other operating costs | $ | 13.3 | $ | 12.1 | $ | 1.2 | 10 | % | $ | 23.1 | $ | 43.6 | $ | (20.5 | ) | (47 | )% |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||||||
Other operating costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and severance related charges |
| $ | 1.3 |
|
| $ | - |
|
| $ | 1.3 |
|
| n/m |
|
| $ | 6.4 |
|
| $ | 4.9 |
|
| $ | 1.5 |
|
|
| 31 | % | |
Transaction and integration costs |
|
| 0.2 |
|
|
| 13.3 |
|
|
| (13.1 | ) |
|
| (98 | )% |
|
| 3.8 |
|
|
| 18.2 |
|
|
| (14.4 | ) |
|
| (79 | )% |
Total other operating costs |
| $ | 1.5 |
|
| $ | 13.3 |
|
| $ | (11.8 | ) |
|
| (89 | )% |
| $ | 10.2 |
|
| $ | 23.1 |
|
| $ | (12.9 | ) |
|
| (56 | )% |
Restructuring and severance charges recorded in the three and nine months ended September 30, 2019 in the Entertainment and Communications segment are related to a severance program for certain management employees as the Company continues its efforts to realize synergies that can be achieved due to the acquisition of Hawaiian Telcom. Restructuring and severance charges in the IT Services and Hardware segment recorded in the second and third quarters of 2019 are associated with initiatives to reduce and contain costs incurredas well as headcount reductions as a result of insourcing initiatives by one of our significant customers. In the second quarter of 2018, the Company recorded restructuring and severance charges of $3.8 million in order to recognize future synergies as the Company continues to identify efficiencies with the integration of OnX. In addition,
Transaction and integration costs incurred in 2019, recorded as a restructuring charge associated with lease abandonmentCorporate expense, are primarily due to the continued integration of $0.8 million wasHawaiian Telcom. Transaction and integration costs incurred in 2018, recorded in the second quarter of 2018 related to an office space that will no longer be utilized. Restructuring and severance-related charges incurred by both segments in 2017 relate to company initiated reorganizations of the business in order to more appropriately align the Company for future growth. Additionally, restructuring and severance-related charges incurred by the Entertainment and Communications segment during the nine months ended September 30, 2017 were related toas a voluntary severance program for certain bargained employees to reduce field and network costs associated with our legacy copper network.
Non-operating Costs
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
| ||||||||
Non-operating costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| $ | 35.0 |
|
| $ | 33.7 |
|
| $ | 1.3 |
|
|
| 4 | % |
| $ | 105.0 |
|
| $ | 96.3 |
|
| $ | 8.7 |
|
|
| 9 | % |
Loss on extinguishment of debt |
|
| - |
|
|
| - |
|
|
| - |
|
| n/m |
|
|
| - |
|
|
| 1.3 |
|
|
| (1.3 | ) |
| n/m |
| ||
Other components of pension and postretirement benefit plans expense |
|
| 2.8 |
|
|
| 3.0 |
|
|
| (0.2 | ) |
|
| (7 | )% |
|
| 8.4 |
|
|
| 9.5 |
|
|
| (1.1 | ) |
|
| (12 | )% |
Other expense (income), net |
|
| 0.5 |
|
|
| (1.2 | ) |
|
| 1.7 |
|
| n/m |
|
|
| (0.4 | ) |
|
| (2.4 | ) |
|
| 2.0 |
|
|
| (83 | )% | |
Income tax benefit |
|
| (1.9 | ) |
|
| (3.3 | ) |
|
| 1.4 |
|
|
| (42 | )% |
|
| (9.2 | ) |
|
| (6.0 | ) |
|
| (3.2 | ) |
|
| 53 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | $ Change | % Change | 2018 | 2017 | $ Change | % Change | |||||||||||||||||||||
Non-operating costs | |||||||||||||||||||||||||||||
Interest expense | $ | 33.7 | $ | 18.8 | $ | 14.9 | 79 | % | $ | 96.3 | $ | 54.9 | $ | 41.4 | 75 | % | |||||||||||||
Loss on extinguishment of debt | — | — | — | n/m | 1.3 | — | 1.3 | n/m | |||||||||||||||||||||
Other components of pension and postretirement benefit plans expense | 3.0 | 3.0 | — | — | % | 9.5 | 9.4 | 0.1 | 1 | % | |||||||||||||||||||
Gain on sale of Investment in CyrusOne | — | — | — | n/m | — | (117.7 | ) | 117.7 | n/m | ||||||||||||||||||||
Other (income) expense, net | (1.2 | ) | 4.5 | (5.7 | ) | n/m | (2.4 | ) | 3.5 | (5.9 | ) | n/m | |||||||||||||||||
Income tax (benefit) expense | (3.3 | ) | 0.6 | (3.9 | ) | n/m | (6.0 | ) | 36.5 | (42.5 | ) | n/m |
Interest expense increased for the three and nine months ended September 30, 20182019 compared to the same periodsperiod in the prior year due to the Company entering into the $600.0 million Tranche B Term Loan due 2024, as well as issuing $350.0 million 8% Senior Notes in the fourth quarter of 2017. The Company repaid the remaining $315.8 million Tranche B Term Loan due 2020 outstanding under its old Corporate Credit Agreement with the proceeds from the $600.0 million Tranche B Term Loan due 2024.
Income tax benefit decreased for the three months ended September 30, 2017 related2019 compared to an equity method investment.
Entertainment and Communications
The Entertainment and Communications segment provides products and services that can be categorized as either Fioptics in Cincinnati or Consumer/SMB Fiber in Hawaii (collectively, "Consumer/SMB"SMB Fiber"), Enterprise Fiber or Legacy. Cincinnati Bell Telephone Company LLC ("CBT"), a subsidiary of the Company, is the incumbent local exchange carrier ("ILEC") for a geography that covers a radius of approximately 25 miles around Cincinnati, Ohio, and includes parts of northern Kentucky and southeastern Indiana. CBT has operated in this territory for over 145 years. Voice and data services in the Enterprise Fiber and Legacy categories that are delivered beyond the Company's ILEC territory, particularly in Dayton and Mason, Ohio, are provided through the operations of Cincinnati Bell Extended Territories LLC ("CBET"), a subsidiary of CBT. On July 2, 2018, the Company acquired Hawaiian Telcom. Hawaiian Telcom is the ILEC for the State of Hawaii and the largest full service provider of communications services and products in the state. Originally incorporated in Hawaii in 1883 as Mutual Telephone Company, Hawaiian Telcom has a strong heritage of over 135 years as Hawaii’s communications carrier. Its services are offered on all of Hawaii’s major islands, except its video service, which currently is only available on the island of Oahu.
Consumer/SMB Fiber products include high-speed internet access, voice lines and video. The Company is able to deliver speeds of up to 30 megabits or more to approximately 73%75% of Greater Cincinnati and up to 65%20 megabits or more to approximately 50% of the island of Oahu.
Enterprise Fiber products include metro-ethernet, dedicated internet access, wavelength, IRU contracts, and small cell. As enterprise customers migrate from legacy products and copper-based technology, our metro-ethernet product becomes the preferred method of transport due to its ability to support multiple applications on a single physical connection.
Legacy products include traditional voice lines, consumer long distance, switched access, digital trunking, DSL, DS0, DS1, DS3 and other value-added services such as caller identification, voicemail, call waiting and call return.
Three Months Ended September 30, | Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change |
| 2019 |
|
| 2018 |
|
| Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| Change |
|
| % Change |
| |||||||||||||||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Data | $ | 116.0 | $ | 85.3 | $ | 30.7 | 36 | % | $ | 285.3 | $ | 259.8 | $ | 25.5 | 10 | % |
| $ | 119.5 |
|
| $ | 116.0 |
|
| $ | 3.5 |
|
|
| 3 | % |
| $ | 356.5 |
|
| $ | 285.3 |
|
| $ | 71.2 |
|
|
| 25 | % | |||||||||||||
Video | 52.4 | 37.7 | 14.7 | 39 | % | 131.3 | 110.5 | 20.8 | 19 | % |
|
| 50.2 |
|
|
| 52.4 |
|
|
| (2.2 | ) |
|
| (4 | )% |
|
| 153.5 |
|
|
| 131.3 |
|
|
| 22.2 |
|
|
| 17 | % | |||||||||||||||||||
Voice | 76.8 | 48.9 | 27.9 | 57 | % | 169.8 | 151.1 | 18.7 | 12 | % |
|
| 70.7 |
|
|
| 76.8 |
|
|
| (6.1 | ) |
|
| (8 | )% |
|
| 215.4 |
|
|
| 169.8 |
|
|
| 45.6 |
|
|
| 27 | % | |||||||||||||||||||
Other | 8.2 | 3.1 | 5.1 | n/m | 15.1 | 9.7 | 5.4 | 56 | % |
|
| 8.1 |
|
|
| 8.2 |
|
|
| (0.1 | ) |
|
| (1 | )% |
|
| 23.9 |
|
|
| 15.1 |
|
|
| 8.8 |
|
|
| 58 | % | ||||||||||||||||||||
Total Revenue | 253.4 | 175.0 | 78.4 | 45 | % | 601.5 | 531.1 | 70.4 | 13 | % |
|
| 248.5 |
|
|
| 253.4 |
|
|
| (4.9 | ) |
|
| (2 | )% |
|
| 749.3 |
|
|
| 601.5 |
|
|
| 147.8 |
|
|
| 25 | % | |||||||||||||||||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Cost of services and products | 118.8 | 75.7 | 43.1 | 57 | % | 274.8 | 229.7 | 45.1 | 20 | % |
|
| 111.5 |
|
|
| 118.8 |
|
|
| (7.3 | ) |
|
| (6 | )% |
|
| 338.8 |
|
|
| 274.8 |
|
|
| 64.0 |
|
|
| 23 | % | |||||||||||||||||||
Selling, general and administrative | 44.0 | 29.4 | 14.6 | 50 | % | 100.1 | 90.5 | 9.6 | 11 | % |
|
| 44.2 |
|
|
| 44.0 |
|
|
| 0.2 |
|
|
| 0 | % |
|
| 133.9 |
|
|
| 100.1 |
|
|
| 33.8 |
|
|
| 34 | % | |||||||||||||||||||
Depreciation and amortization | 65.6 | 41.2 | 24.4 | 59 | % | 147.5 | 121.0 | 26.5 | 22 | % |
|
| 64.4 |
|
|
| 65.6 |
|
|
| (1.2 | ) |
|
| (2 | )% |
|
| 190.5 |
|
|
| 147.5 |
|
|
| 43.0 |
|
|
| 29 | % | |||||||||||||||||||
Restructuring and severance charges | — | — | — | n/m | — | 26.7 | (26.7 | ) | n/m |
|
| 0.7 |
|
|
| — |
|
|
| 0.7 |
|
| n/m |
|
|
| 4.9 |
|
|
| — |
|
|
| 4.9 |
|
| n/m |
| ||||||||||||||||||||||
Total operating costs and expenses | 228.4 | 146.3 | 82.1 | 56 | % | 522.4 | 467.9 | 54.5 | 12 | % |
|
| 220.8 |
|
|
| 228.4 |
|
|
| (7.6 | ) |
|
| (3 | )% |
|
| 668.1 |
|
|
| 522.4 |
|
|
| 145.7 |
|
|
| 28 | % | |||||||||||||||||||
Operating income | $ | 25.0 | $ | 28.7 | $ | (3.7 | ) | (13 | )% | $ | 79.1 | $ | 63.2 | $ | 15.9 | 25 | % |
| $ | 27.7 |
|
| $ | 25.0 |
|
| $ | 2.7 |
|
|
| 11 | % |
| $ | 81.2 |
|
| $ | 79.1 |
|
| $ | 2.1 |
|
|
| 3 | % | ||||||||||||
Operating margin | 9.9 | % | 16.4 | % | (6.5) pts | 13.2 | % | 11.9 | % | 1.3 pts |
|
| 11.1 | % |
|
| 9.9 | % |
|
|
|
|
| 1.2pts |
|
|
| 10.8 | % |
|
| 13.2 | % |
|
|
|
|
| (2.4) pts |
| |||||||||||||||||||||
Capital expenditures | $ | 62.3 | $ | 38.8 | $ | 23.5 | 61 | % | $ | 121.7 | $ | 131.1 | $ | (9.4 | ) | (7 | )% |
| $ | 51.3 |
|
| $ | 62.3 |
|
|
| (11.0 | ) |
|
| (18 | )% |
| $ | 150.3 |
|
| $ | 121.7 |
|
|
| 28.6 |
|
|
| 24 | % |
Entertainment and Communications, continued
|
| September 30, |
| |||||||||||||
Metrics information (in thousands): |
| 2019 |
|
| 2018 |
|
| Change |
|
| % Change |
| ||||
Cincinnati |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fioptics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet FTTP* |
|
| 214.6 |
|
|
| 196.8 |
|
|
| 17.8 |
|
|
| 9 | % |
Internet FTTN* |
|
| 32.5 |
|
|
| 39.8 |
|
|
| (7.3 | ) |
|
| (18 | )% |
Total Fioptics Internet |
|
| 247.1 |
|
|
| 236.6 |
|
|
| 10.5 |
|
|
| 4 | % |
Video |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video FTTP* |
|
| 113.5 |
|
|
| 115.6 |
|
|
| (2.1 | ) |
|
| (2 | )% |
Video FTTN* |
|
| 23.0 |
|
|
| 25.9 |
|
|
| (2.9 | ) |
|
| (11 | )% |
Total Fioptics Video |
|
| 136.5 |
|
|
| 141.5 |
|
|
| (5.0 | ) |
|
| (4 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fioptics Voice Lines |
|
| 108.0 |
|
|
| 107.0 |
|
|
| 1.0 |
|
|
| 1 | % |
Fioptics Units Passed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units passed FTTP* |
|
| 482.0 |
|
|
| 459.1 |
|
|
| 22.9 |
|
|
| 5 | % |
Units passed FTTN* |
|
| 138.6 |
|
|
| 139.5 |
|
|
| (0.9 | ) |
|
| (1 | )% |
Total Fioptics units passed |
|
| 620.6 |
|
|
| 598.6 |
|
|
| 22.0 |
|
|
| 4 | % |
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethernet Bandwidth (Gb) |
|
| 5,006 |
|
|
| 4,331 |
|
|
| 675 |
|
|
| 16 | % |
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSL |
|
| 65.9 |
|
|
| 74.1 |
|
|
| (8.2 | ) |
|
| (11 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Voice Lines |
|
| 202.9 |
|
|
| 232.7 |
|
|
| (29.8 | ) |
|
| (13 | )% |
September 30, | ||||||||||||
Metrics information (in thousands): | 2018 | 2017 | Change | % Change | ||||||||
Cincinnati | ||||||||||||
Fioptics | ||||||||||||
Data | ||||||||||||
Internet FTTP* | 196.8 | 174.2 | 22.6 | 13 | % | |||||||
Internet FTTN* | 39.8 | 47.0 | (7.2 | ) | (15 | )% | ||||||
Total Fioptics Internet | 236.6 | 221.2 | 15.4 | 7 | % | |||||||
Video | ||||||||||||
Video FTTP | 115.6 | 113.5 | 2.1 | 2 | % | |||||||
Video FTTN | 25.9 | 30.0 | (4.1 | ) | (14 | )% | ||||||
Total Fioptics Video | 141.5 | 143.5 | (2.0 | ) | (1 | )% | ||||||
Voice | ||||||||||||
Fioptics Voice Lines | 107.0 | 104.7 | 2.3 | 2 | % | |||||||
Fioptics Units Passed | ||||||||||||
Units passed FTTP | 459.1 | 423.6 | 35.5 | 8 | % | |||||||
Units passed FTTN | 139.5 | 141.1 | (1.6 | ) | (1 | )% | ||||||
Total Fioptics units passed | 598.6 | 564.7 | 33.9 | 6 | % | |||||||
Enterprise Fiber | ||||||||||||
Data | ||||||||||||
Ethernet Bandwidth (Gb) | 4,331 | 3,733 | 598 | 16 | % | |||||||
Legacy | ||||||||||||
Data | ||||||||||||
DSL | 74.1 | 86.7 | (12.6 | ) | (15 | )% | ||||||
Voice | ||||||||||||
Legacy Voice Lines | 232.7 | 271.6 | (38.9 | ) | (14 | )% | ||||||
*Fiber to the Premise (FTTP), Fiber to the Node (FTTN) |
*Fiber-to-the-Premise (FTTP), Fiber-to-the-Node (FTTN)
Entertainment and Communications, continued
|
| September 30, |
| |||||||||||||
Metrics information (in thousands): |
| 2019 |
|
| 2018 |
|
| Change |
|
| % Change |
| ||||
Hawaii |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet FTTP* |
|
| 54.6 |
|
|
| 49.5 |
|
|
| 5.1 |
|
|
| 10 | % |
Internet FTTN* |
|
| 13.2 |
|
|
| 14.5 |
|
|
| (1.3 | ) |
|
| (9 | )% |
Total Consumer / SMB Fiber Internet |
|
| 67.8 |
|
|
| 64.0 |
|
|
| 3.8 |
|
|
| 6 | % |
Video |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video FTTP* |
|
| 31.8 |
|
|
| 33.3 |
|
|
| (1.5 | ) |
|
| (5 | )% |
Video FTTN* |
|
| 13.2 |
|
|
| 15.3 |
|
|
| (2.1 | ) |
|
| (14 | )% |
Total Consumer / SMB Fiber Video |
|
| 45.0 |
|
|
| 48.6 |
|
|
| (3.6 | ) |
|
| (7 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber Voice Lines |
|
| 30.1 |
|
|
| 29.9 |
|
|
| 0.2 |
|
|
| 1 | % |
Consumer / SMB Fiber Units Passed ** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units passed FTTP* |
|
| 170.6 |
|
|
| 163.6 |
|
|
| 7.0 |
|
|
| 4 | % |
Units passed FTTN* |
|
| 72.8 |
|
|
| 73.3 |
|
|
| (0.5 | ) |
|
| (1 | )% |
Total Consumer / SMB Fiber units passed |
|
| 243.4 |
|
|
| 236.9 |
|
|
| 6.5 |
|
|
| 3 | % |
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethernet Bandwidth (Gb) |
|
| 3,424 |
|
|
| 1,948 |
|
|
| 1,476 |
|
|
| 76 | % |
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSL |
|
| 44.3 |
|
|
| 50.4 |
|
|
| (6.1 | ) |
|
| (12 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Voice Lines |
|
| 183.0 |
|
|
| 203.4 |
|
|
| (20.4 | ) |
|
| (10 | )% |
* | Fiber-to-the-Premise (FTTP), Fiber-to-the-Node (FTTN) |
** | ||
Includes units passed for both consumer and business on Oahu and neighboring islands. |
Entertainment and Communications, continued
Revenue
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
| $ | 39.3 |
|
| $ | 8.0 |
|
| $ | 47.3 |
|
| $ | 36.0 |
|
| $ | 6.3 |
|
| $ | 42.3 |
|
Video |
|
| 39.5 |
|
|
| 10.7 |
|
|
| 50.2 |
|
|
| 40.7 |
|
|
| 11.7 |
|
|
| 52.4 |
|
Voice |
|
| 9.2 |
|
|
| 2.7 |
|
|
| 11.9 |
|
|
| 9.4 |
|
|
| 2.7 |
|
|
| 12.1 |
|
Other |
|
| 0.4 |
|
|
| 0.2 |
|
|
| 0.6 |
|
|
| 0.3 |
|
|
| 0.1 |
|
|
| 0.4 |
|
|
|
| 88.4 |
|
|
| 21.6 |
|
|
| 110.0 |
|
|
| 86.4 |
|
|
| 20.8 |
|
|
| 107.2 |
|
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 21.6 |
|
|
| 9.9 |
|
|
| 31.5 |
|
|
| 21.0 |
|
|
| 8.7 |
|
|
| 29.7 |
|
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 26.1 |
|
|
| 14.6 |
|
|
| 40.7 |
|
|
| 27.5 |
|
|
| 16.5 |
|
|
| 44.0 |
|
Voice |
|
| 31.5 |
|
|
| 27.3 |
|
|
| 58.8 |
|
|
| 35.0 |
|
|
| 29.7 |
|
|
| 64.7 |
|
Other |
|
| 3.2 |
|
|
| 4.3 |
|
|
| 7.5 |
|
|
| 3.8 |
|
|
| 4.0 |
|
|
| 7.8 |
|
|
|
| 60.8 |
|
|
| 46.2 |
|
|
| 107.0 |
|
|
| 66.3 |
|
|
| 50.2 |
|
|
| 116.5 |
|
Total Entertainment and Communications revenue |
| $ | 170.8 |
|
| $ | 77.7 |
|
| $ | 248.5 |
|
| $ | 173.7 |
|
| $ | 79.7 |
|
| $ | 253.4 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
| $ | 115.5 |
|
| $ | 23.8 |
|
| $ | 139.3 |
|
| $ | 106.0 |
|
| $ | 6.3 |
|
| $ | 112.3 |
|
Video |
|
| 120.3 |
|
|
| 33.2 |
|
|
| 153.5 |
|
|
| 119.6 |
|
|
| 11.7 |
|
|
| 131.3 |
|
Voice |
|
| 27.6 |
|
|
| 8.2 |
|
|
| 35.8 |
|
|
| 28.0 |
|
|
| 2.7 |
|
|
| 30.7 |
|
Other |
|
| 1.1 |
|
|
| 0.5 |
|
|
| 1.6 |
|
|
| 0.9 |
|
|
| 0.1 |
|
|
| 1.0 |
|
|
|
| 264.5 |
|
|
| 65.7 |
|
|
| 330.2 |
|
|
| 254.5 |
|
|
| 20.8 |
|
|
| 275.3 |
|
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 63.8 |
|
|
| 29.3 |
|
|
| 93.1 |
|
|
| 62.8 |
|
|
| 8.7 |
|
|
| 71.5 |
|
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 78.4 |
|
|
| 45.7 |
|
|
| 124.1 |
|
|
| 85.0 |
|
|
| 16.5 |
|
|
| 101.5 |
|
Voice |
|
| 96.3 |
|
|
| 83.3 |
|
|
| 179.6 |
|
|
| 109.4 |
|
|
| 29.7 |
|
|
| 139.1 |
|
Other |
|
| 10.2 |
|
|
| 12.1 |
|
|
| 22.3 |
|
|
| 10.1 |
|
|
| 4.0 |
|
|
| 14.1 |
|
|
|
| 184.9 |
|
|
| 141.1 |
|
|
| 326.0 |
|
|
| 204.5 |
|
|
| 50.2 |
|
|
| 254.7 |
|
Total Entertainment and Communications revenue |
| $ | 513.2 |
|
| $ | 236.1 |
|
| $ | 749.3 |
|
| $ | 521.8 |
|
| $ | 79.7 |
|
| $ | 601.5 |
|
Three Months Ended September 30, | |||||||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||||||
Cincinnati | Hawaii | Total | Cincinnati | Hawaii | Total | ||||||||||||||||||||||
Revenue | |||||||||||||||||||||||||||
Consumer / SMB Fiber * | |||||||||||||||||||||||||||
Data | $ | 36.0 | $ | 6.3 | $ | 42.3 | $ | 32.5 | $ | — | $ | 32.5 | |||||||||||||||
Video | 40.7 | 11.7 | 52.4 | 37.7 | — | 37.7 | |||||||||||||||||||||
Voice | 9.4 | 2.7 | 12.1 | 8.6 | — | 8.6 | |||||||||||||||||||||
Other | 0.3 | 0.1 | 0.4 | 0.3 | — | 0.3 | |||||||||||||||||||||
86.4 | 20.8 | 107.2 | 79.1 | — | 79.1 | ||||||||||||||||||||||
Enterprise Fiber | |||||||||||||||||||||||||||
Data | 21.0 | 8.7 | 29.7 | 20.5 | — | 20.5 | |||||||||||||||||||||
Legacy | |||||||||||||||||||||||||||
Data | 27.5 | 16.5 | 44.0 | 32.3 | — | 32.3 | |||||||||||||||||||||
Voice | 35.0 | 29.7 | 64.7 | 40.3 | — | 40.3 | |||||||||||||||||||||
Other | 3.8 | 4.0 | 7.8 | 2.8 | — | 2.8 | |||||||||||||||||||||
66.3 | 50.2 | 116.5 | 75.4 | — | 75.4 | ||||||||||||||||||||||
Total Entertainment and Communications revenue | $ | 173.7 | $ | 79.7 | $ | 253.4 | $ | 175.0 | $ | — | $ | 175.0 | |||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||||||
Cincinnati | Hawaii | Total | Cincinnati | Hawaii | Total | ||||||||||||||||||||||
Revenue | |||||||||||||||||||||||||||
Consumer / SMB Fiber * | |||||||||||||||||||||||||||
Data | $ | 106.0 | $ | 6.3 | $ | 112.3 | $ | 93.4 | $ | — | $ | 93.4 | |||||||||||||||
Video | 119.6 | 11.7 | 131.3 | 110.5 | — | 110.5 | |||||||||||||||||||||
Voice | 28.0 | 2.7 | 30.7 | 24.8 | — | 24.8 | |||||||||||||||||||||
Other | 0.9 | 0.1 | 1.0 | 0.9 | — | 0.9 | |||||||||||||||||||||
254.5 | 20.8 | 275.3 | 229.6 | — | 229.6 | ||||||||||||||||||||||
Enterprise Fiber | |||||||||||||||||||||||||||
Data | 62.8 | 8.7 | 71.5 | 65.5 | — | 65.5 | |||||||||||||||||||||
Legacy | |||||||||||||||||||||||||||
Data | 85.0 | 16.5 | 101.5 | 100.9 | — | 100.9 | |||||||||||||||||||||
Voice | 109.4 | 29.7 | 139.1 | 126.3 | — | 126.3 | |||||||||||||||||||||
Other | 10.1 | 4.0 | 14.1 | 8.8 | — | 8.8 | |||||||||||||||||||||
204.5 | 50.2 | 254.7 | 236.0 | — | 236.0 | ||||||||||||||||||||||
Total Entertainment and Communications revenue | $ | 521.8 | $ | 79.7 | $ | 601.5 | $ | 531.1 | $ | — | $ | 531.1 | |||||||||||||||
* Represents Fioptics in Cincinnati. |
* | ||
Represents Fioptics in Cincinnati |
Entertainment and Communications, continued
Cincinnati Fioptics Cincinnati and Hawaii Consumer/SMB HawaiiFiber (collectively, "Consumer/SMB"SMB Fiber")
Consumer/SMB Fiber revenue increased by $28.1$2.8 million for the three months ended September 30, 2018,2019 compared to the same period ain the prior year ago, primarily due to revenue contributed by Hawaiian Telcom of $20.8 million. Hawaiian Telcom adds 48,600 video subscribers, 64,000 internet subscribers and 29,900 voice subscribers. The remaining revenuean increase is due to increases in the subscriber base for internet. The internet subscriber base continues to increase as we focus our attention on growing the internet FTTP subscriber base. In addition, the Average Revenue Per User (“ARPU”) for the three months ended September 30, 2019 increased for internet and voice subscriber base, as well as rate favorability across all products in Cincinnati. The subscriber base of internet and voicevideo in Cincinnati increased by 7%5% and 2%, respectively, and Average Revenue Per User ("ARPU") on a year to date basis increased for internet voice, and videoin Hawaii by 3%17%, 6% and 5%, respectively, compared to the prior year.same period in 2018 partially offsetting the decline in video subscribers in both Cincinnati and Hawaii. ARPU increases are related to price increases for internet voice, and video as well as the change in the mix of subscribers for video.
Consumer/SMB Fiber revenue increased by $45.7$54.9 million for the nine months ended September 30, 2018,2019 compared to the same period in the prior year asprimarily due to increased revenue contributed by Hawaiian Telcom of $44.9 million. Hawaiian Telcom adds 45,000 video subscribers, 67,800 internet subscribers and 30,100 voice subscribers to the existing base of subscribers. The increase is also a result of the same trends impactinggrowing internet FTTP subscriber base and ARPU increases for internet and video in Cincinnati of 4% and 5%, respectively, for the quarter.
Enterprise Fiber
Enterprise Fiber revenue increased year over year primarily due to incrementalincreased revenue of $8.7$20.6 million from Hawaiian Telcom, which includes revenue from SEA-US cable, metro-ethernet and dedicated internet access. The increase in revenue contributed by Hawaiian Telcom for the nine months ended September 30, 20182019 compared to the nine months ended September 30, 2017 was partially offset due to a one-time project that was completed in the second quarter of 2017 in the amount of $5.4 million. Offsetting the decline from the one-time projectsame period in the prior year are increases inyear. Hawaiian Telcom Enterprise Fiber includes revenue related tofrom the SEA-US cable, metro-ethernet and dedicated internet access. In addition, enterprise customers are migrating from legacy product offerings to higher bandwidth fiber solutions, as evidenced by the 16% increaseand 76% increases in Ethernet Bandwidth in Cincinnati.
Legacy
Legacy revenue increased in bothdecreased for the three and nine months ended September 30, 20182019 compared to the same periodsperiod in the prior year due to incremental revenue from Hawaiian Telcom of $50.2 million. Hawaiian Telcom adds 50,400 DSL subscribers and 203,400 voice subscribers. Increased revenue generated by Hawaiian Telcom was partially offsetthe decline in both comparable periods due to declines in both voice lines and DSL subscribers. Voice lines declined 13% and 10% in Cincinnati have declined 14% compared to the three months ended September 30, 2017,and Hawaii, respectively, as the traditional voice lines become less relevant. DSL subscribers decreased by 11% and 12% in Cincinnati have decreased by 15%and Hawaii, respectively, as subscribers demand the higher speeds that can be provided by fiber. In addition, declines in DS0, DS1, DS3 and digital trunking have contributed to the revenue decline for these products in both comparable periods2019 compared to the same period in the prior year as customers migrate away from these solutions to fiber-based solutions. Switched access also continues to decline in part due to the Federal Communications Commission mandated reductions in rates for terminating switched access.
Legacy revenue increased $43.1 million and $45.1 million in the three and nine months ended September 30, 2018, respectively, compared to the prior year comparable periods. Hawaiian Telcom contributed $40.9 million to cost of services and products in both the three and nine months ended September 30, 2018. The remaining increase after considering the impact of the merger is $2.2 million for the three months ended September 30, 2018 and $4.2 million for the nine months ended September 30, 2018. These increases are primarily2019 compared to the same period a year ago due to higher programming costsincreased revenue from Hawaiian Telcom of $2.6$90.9 million. Hawaiian Telcom adds 44,300 DSL subscribers and 183,000 voice subscribers to the existing base of subscribers. Increased revenue generated by Hawaiian Telcom was partially offset by declines in revenue from both voice lines and DSL subscribers in addition to declines in DS1, DS3 and digital trunking as customers migrate away from these solutions to fiber-based solutions.
Operating Costs and Expenses
Cost of services and products decreased $7.3 million forin the three months ended September 30, 2018 and $11.4 million for the nine months ended September 30, 2018. Higher programming costs are the result of higher rates charged by content providers. The increase in programming costs was partially offset by lower payroll costs. Payroll related costs decreased $1.2 million and $5.5 million in the three and nine months ended September 30, 2018, respectively,2019 compared to the same periodsperiod in the prior year. Payroll relatedyear primarily due to a decrease in contract services costs are downand lower payroll costs due to reduced headcount and lower overtime driven by lower activations as well as efficiencies in the installation process. The reduced headcount is a result of the restructuring that took place in the firstprior two years.
Cost of services and products increased for the nine months ended September 30, 2019 compared to the same period in 2018 primarily due to the acquisition of Hawaiian Telcom. Hawaiian Telcom contributed $113.5 million and $40.9 million to cost of services and products in the nine months ended September 30, 2019 and 2018, respectively. Excluding the increase associated with the acquisition of Hawaiian Telcom, cost of services and products decreased by $8.6 million for the nine months ended September 30, 2019 due to the same trends impacting the quarter as well as savings realized associated with the Company’s call center.
SG&A expenses for the three months ended September 30, 2019 were nearly flat compared to the same period in the prior year as the segment continues to focus on cost containment and realizing synergies with Hawaiian Telcom. SG&A expense increased $33.8 million in the nine months ended September 30, 2019 compared to the same period in the prior year primarily due to the acquisition of 2017. Additionally,Hawaiian Telcom. Hawaiian Telcom contributed $47.6 million and $16.0 million of SG&A expense in the nine months ended September 30, 2019 and 2018, respectively. The remaining increase to SG&A expense in the nine months ended September 30, 2019 is primarily due to increases in bad debt expense and advertising expense. The increase in bad debt expense is primarily due to a reserve for certain receivables with a wholesale customer that filed for bankruptcy in the first quarter of 2017,2019. The increase in advertising expense is due to additional media spending. These increases were partially offset by savings in software development costs related to synergies realized as a result of the acquisition of Hawaiian Telcom.
Entertainment and Communications, continued
Depreciation and amortization expense decreased $1.2 million in the three months ended September 30, 2019 compared to the same period in the prior year due to certain property, plant and equipment reaching the end of its useful life. Depreciation and amortization expense increased for the nine months ended September 30, 2019 as compared to the same period in the prior year due to the acquisition of Hawaiian Telcom. Hawaiian Telcom contributed $68.4 million and $23.9 million of depreciation and amortization expense in the nine months ended September 30, 2019 and 2018, respectively. Excluding the increase associated with a large one-time project were recognized, further offsetting the year over year increase in programming charges.
Restructuring and $9.6 millionseverance charges recorded in the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year. Hawaiian Telcom contributed $16.0 million in both the three and nine months ended September 30, 2018. The increase contributed by Hawaiian Telcom was offset by decreased payroll related costs as a result of the restructuring that took place in the first quarter of 2017. Payroll related costs were down $0.8 million and $4.6 million in the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year. Bad debt expense was also down by $0.3 million and $1.1 million in the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year due to a stricter credit policy.
Capital Expenditures
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Consumer / SMB Fiber capital expenditures * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
| $ | 4.8 |
|
| $ | 2.4 |
|
| $ | 7.2 |
|
| $ | 10.1 |
|
| $ | 2.1 |
|
| $ | 12.2 |
|
Installation |
|
| 10.7 |
|
|
| 3.4 |
|
|
| 14.1 |
|
|
| 15.8 |
|
|
| 7.7 |
|
|
| 23.5 |
|
Other |
|
| 2.9 |
|
|
| 0.8 |
|
|
| 3.7 |
|
|
| 2.7 |
|
|
| 0.6 |
|
|
| 3.3 |
|
Total Consumer / SMB Fiber |
|
| 18.4 |
|
|
| 6.6 |
|
|
| 25.0 |
|
|
| 28.6 |
|
|
| 10.4 |
|
|
| 39.0 |
|
Enterprise Fiber |
|
| 4.9 |
|
|
| 2.1 |
|
|
| 7.0 |
|
|
| 3.9 |
|
|
| 3.2 |
|
|
| 7.1 |
|
Other |
|
| 10.4 |
|
|
| 8.9 |
|
|
| 19.3 |
|
|
| 8.9 |
|
|
| 7.3 |
|
|
| 16.2 |
|
Total Entertainment and Communications capital expenditures |
| $ | 33.7 |
|
| $ | 17.6 |
|
| $ | 51.3 |
|
| $ | 41.4 |
|
| $ | 20.9 |
|
| $ | 62.3 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Consumer / SMB Fiber capital expenditures * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
| $ | 21.4 |
|
| $ | 6.2 |
|
| $ | 27.6 |
|
| $ | 25.5 |
|
| $ | 2.1 |
|
| $ | 27.6 |
|
Installation |
|
| 36.8 |
|
|
| 11.5 |
|
|
| 48.3 |
|
|
| 33.3 |
|
|
| 7.7 |
|
|
| 41.0 |
|
Other |
|
| 7.2 |
|
|
| 2.1 |
|
|
| 9.3 |
|
|
| 7.9 |
|
|
| 0.6 |
|
|
| 8.5 |
|
Total Consumer / SMB Fiber |
|
| 65.4 |
|
|
| 19.8 |
|
|
| 85.2 |
|
|
| 66.7 |
|
|
| 10.4 |
|
|
| 77.1 |
|
Enterprise Fiber |
|
| 8.4 |
|
|
| 5.4 |
|
|
| 13.8 |
|
|
| 11.6 |
|
|
| 3.2 |
|
|
| 14.8 |
|
Other |
|
| 24.8 |
|
|
| 26.5 |
|
|
| 51.3 |
|
|
| 22.5 |
|
|
| 7.3 |
|
|
| 29.8 |
|
Total Entertainment and Communications capital expenditures |
| $ | 98.6 |
|
| $ | 51.7 |
|
| $ | 150.3 |
|
| $ | 100.8 |
|
| $ | 20.9 |
|
| $ | 121.7 |
|
* | Represents Fioptics in Cincinnati |
Three Months Ended September 30, | |||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
Cincinnati | Hawaii | Total | Cincinnati | Hawaii | Total | ||||||||||||||||||
Consumer / SMB Fiber capital expenditures * | |||||||||||||||||||||||
Construction | $ | 10.1 | $ | 2.1 | $ | 12.2 | $ | 12.5 | $ | — | $ | 12.5 | |||||||||||
Installation | 15.8 | 7.7 | 23.5 | 11.1 | — | 11.1 | |||||||||||||||||
Other | 2.7 | 0.6 | 3.3 | 1.6 | — | 1.6 | |||||||||||||||||
Total Consumer / SMB Fiber | 28.6 | 10.4 | 39.0 | 25.2 | — | 25.2 | |||||||||||||||||
Enterprise Fiber | 3.9 | 3.2 | 7.1 | 3.7 | — | 3.7 | |||||||||||||||||
Other | 8.9 | 7.3 | 16.2 | 9.9 | — | 9.9 | |||||||||||||||||
Total Entertainment and Communications capital expenditures | $ | 41.4 | $ | 20.9 | $ | 62.3 | $ | 38.8 | $ | — | $ | 38.8 | |||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
Cincinnati | Hawaii | Total | Cincinnati | Hawaii | Total | ||||||||||||||||||
Consumer / SMB Fiber capital expenditures * | |||||||||||||||||||||||
Construction | $ | 25.5 | $ | 2.1 | $ | 27.6 | $ | 43.9 | $ | — | $ | 43.9 | |||||||||||
Installation | 33.3 | 7.7 | 41.0 | 39.5 | — | 39.5 | |||||||||||||||||
Other | 7.9 | 0.6 | 8.5 | 8.1 | — | 8.1 | |||||||||||||||||
Total Consumer / SMB Fiber | 66.7 | 10.4 | 77.1 | 91.5 | — | 91.5 | |||||||||||||||||
Enterprise Fiber | 11.6 | 3.2 | 14.8 | 12.4 | — | 12.4 | |||||||||||||||||
Other | 22.5 | 7.3 | 29.8 | 27.2 | — | 27.2 | |||||||||||||||||
Total Entertainment and Communications capital expenditures | $ | 100.8 | $ | 20.9 | $ | 121.7 | $ | 131.1 | $ | — | $ | 131.1 | |||||||||||
* Represents Fioptics in Cincinnati |
Capital expenditures in Cincinnati are incurred to expand our Fioptics product suite, upgrade and increase capacity for our networks, and to extend the life of our fiber and copper networks. In the third quarter of 2018,2019, we passed an additional 9,8001,900 FTTP addresses in Cincinnati. As of September 30, 2018,2019, the Company is able to providedeliver its Fioptics services with speeds of up to 598,600 consumer30 megabits or more to 620,600 residential and enterprisecommercial addresses, or 73%approximately 75% of our operating territory in Cincinnati. Cincinnati construction capital expenditures decreased $2.4$5.3 million and $18.4$4.1 million in the three and nine months ended September 30, 2018,2019, respectively, compared to the same periods in 20172018 due to passing fewer addresses with Fioptics, as well asin 2019 and the timing of expenditures.capital expenditures, which does not necessarily coincide with the timing of when addresses become available. Cincinnati installation capital expenditures increased $4.7 million inare primarily related to the timing of expenditures for customer premise equipment utilized for installations. In the three months ended September 30, 20182019, Cincinnati installation capital expenditures decreased $5.1 million compared to the same period in 2017 due to the timing of expenditures.2018 while Cincinnati installation capital expenditures decreased $6.2increased $3.5 million forin the nine months ended September 30, 20182019 compared to the same period in 2017 due to fewer activations in 2018.
Enterprise Fiber capital expenditures in Cincinnati are related to success-based fiber builds, including associated equipment, for enterprise and carrier projects to provide ethernet services. Other capital expenditures are related to IT projects, cable and equipment maintenance and capacity additions, real estate upgrades and maintenance, plus other minor capital purchases.
Hawaii construction capital expenditures in Hawaiiincreased $0.3 million and $4.1 million for the three and nine months ended September 30, 2018 were $20.9 million. The Construction capital of $2.1 million relates2019, respectively, compared to the same periods in the prior year due to building out 4,4771,300 new doors.addresses in the third quarter of 2019, primarily in rural areas and on the neighbor islands, and 2,900 new addresses in the nine months ended September 30, 2019. Hawaii installation capital expenditures decreased $4.3 million due to less video and internet installations in the three months ended September 30, 2019 compared to the same period in the prior year. Installation capital expenditures in Hawaii increased in the nine months ended September 30, 2019, compared to the same period in the prior year which only includes three months of $7.7 million primarily relatesactivity subsequent to new video installations.the acquisition close date. Enterprise fiber capital includes $0.6 million for light-up fees of additional SEA-US cable bandwidth, and the remainingin Hawaii is forprimarily driven by new ethernet customers. CapitalHawaii capital expenditures classified as Otherother include IT projects, real estate projects, road jobs or plant damage projects, and network upgrades or optimization projects.
IT Services and Hardware
The IT Services and Hardware segment provides end-to-end IT solutions ranging from consulting to implementation to ongoing optimization.optimization of existing technology. These solutions include Cloud, Communications and Consulting services along with the sale and maintenance of major branded Telecom and IT hardware reported as Infrastructure Solutions. These services and products are provided through the Company's subsidiaries in various geographic areas throughout the United States, Canada and Europe. By offering a full range of equipment and strategic services in conjunction with the Company’s fiber and copper networks, the IT Services and Hardware segment provides our customers personalized solutions designed to meet their business objectives.
Cloud services include the design, implementation and on-going management of the customer’s infrastructure. This includes on-premise, public cloud and private cloud solutions. The Company assists customers with the risk assessment phase through an in-depth understanding of the customer’s business as well as building and designing a solution, using either the customer's existing infrastructure or new cloud based options that transformtransforms the way that the customer does business.
Communications solutions help to transform the way our customers do business by connecting employees, customers, and business partners. By upgrading legacy technologies through customized build projects and reducing customer costs, the Company helps to transform the customer’s business. These services include Unified Communications as a Service ("UCaaS"), Software-Defined WANWide Area Network ("SD-WAN"), Network as a Service ("NaaS"), Contact Center and Collaboration.
Using our experience and expertise, Infrastructure Solutions are tailored to our customers’ organizational goals. We offer a complete portfolio of services that provide customers with efficient and optimized IT solutions that are agile and responsive to their business and are integrated, simplified and manageable. Through consulting with customers, the Company will build a solution using standard manufacturer equipment to meet our customers’ specific requirements. Prior to the adoption of Accounting Standards Codification Topic ("ASC") 606, the Company recorded hardware revenue on a gross basis. Effective January 1, 2018 with the adoption of ASC 606, the Company now considers ourselves an agent in the sale of hardware and records hardware revenue on a net basis. Prior periods have been restated for comparability.
Consulting services help customers assess their business and technology needs and provide the talent needed to ensure success. The Company is a premier provider of application services and IT staffing.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
|
| Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| Change |
|
| % Change |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting |
| $ | 37.6 |
|
| $ | 35.9 |
|
| $ | 1.7 |
|
|
| 5 | % |
| $ | 114.6 |
|
| $ | 100.7 |
|
| $ | 13.9 |
|
|
| 14 | % |
Cloud |
|
| 22.6 |
|
|
| 26.2 |
|
|
| (3.6 | ) |
|
| (14 | )% |
|
| 69.8 |
|
|
| 71.8 |
|
|
| (2.0 | ) |
|
| (3 | )% |
Communications |
|
| 51.3 |
|
|
| 47.0 |
|
|
| 4.3 |
|
|
| 9 | % |
|
| 147.0 |
|
|
| 129.1 |
|
|
| 17.9 |
|
|
| 14 | % |
Infrastructure Solutions |
|
| 29.0 |
|
|
| 32.0 |
|
|
| (3.0 | ) |
|
| (9 | )% |
|
| 85.6 |
|
|
| 95.4 |
|
|
| (9.8 | ) |
|
| (10 | )% |
Total revenue |
|
| 140.5 |
|
|
| 141.1 |
|
|
| (0.6 | ) |
|
| 0 | % |
|
| 417.0 |
|
|
| 397.0 |
|
|
| 20.0 |
|
|
| 5 | % |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and products |
|
| 89.4 |
|
|
| 86.4 |
|
|
| 3.0 |
|
|
| 3 | % |
|
| 268.3 |
|
|
| 243.1 |
|
|
| 25.2 |
|
|
| 10 | % |
Selling, general and administrative |
|
| 38.8 |
|
|
| 37.5 |
|
|
| 1.3 |
|
|
| 3 | % |
|
| 113.8 |
|
|
| 110.5 |
|
|
| 3.3 |
|
|
| 3 | % |
Depreciation and amortization |
|
| 11.1 |
|
|
| 9.9 |
|
|
| 1.2 |
|
|
| 12 | % |
|
| 38.5 |
|
|
| 30.0 |
|
|
| 8.5 |
|
|
| 28 | % |
Restructuring and severance related charges |
|
| 0.6 |
|
|
| - |
|
|
| 0.6 |
|
| n/m |
|
|
| 1.5 |
|
|
| 4.9 |
|
|
| (3.4 | ) |
|
| (69 | )% | |
Total operating costs and expenses |
|
| 139.9 |
|
|
| 133.8 |
|
|
| 6.1 |
|
|
| 5 | % |
|
| 422.1 |
|
|
| 388.5 |
|
|
| 33.6 |
|
|
| 9 | % |
Operating income (loss) |
| $ | 0.6 |
|
| $ | 7.3 |
|
| $ | (6.7 | ) |
|
| (92 | )% |
| $ | (5.1 | ) |
| $ | 8.5 |
|
| $ | (13.6 | ) |
| n/m |
| |
Operating margin |
|
| 0.4 | % |
|
| 5.2 | % |
|
|
|
|
| (4.8) pts |
|
|
| (1.2 | )% |
|
| 2.1 | % |
|
|
|
|
| (3.3) pts |
| ||
Capital expenditures |
| $ | 5.4 |
|
| $ | 7.4 |
|
| $ | (2.0 | ) |
|
| (27 | )% |
| $ | 16.9 |
|
| $ | 19.0 |
|
| $ | (2.1 | ) |
|
| (11 | )% |
| September 30, |
| |||||||||||||
Metrics information (in thousands): | 2019 |
|
| 2018 |
|
| Change |
|
| % Change |
| ||||
Consulting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billable Resources |
| 1,007 |
|
|
| 999 |
|
|
| 8 |
|
|
| 1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NaaS Locations |
| 3,492 |
|
|
| 1,101 |
|
|
| 2,391 |
|
| n/m |
| |
SD - WAN Locations |
| 1,849 |
|
|
| 488 |
|
|
| 1,361 |
|
| n/m |
| |
Hosted UCaaS Profiles* |
| 270,335 |
|
|
| 223,311 |
|
|
| 47,024 |
|
|
| 21 | % |
* | Includes Hawaii Hosted UCaaS Profiles |
IT Services and Hardware, continued
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | |||||||||||||||||||||
Revenue: | |||||||||||||||||||||||||||||
Consulting | $ | 42.1 | $ | 16.1 | $ | 26.0 | n/m | $ | 120.0 | $ | 49.3 | $ | 70.7 | n/m | |||||||||||||||
Cloud | 26.2 | 17.4 | 8.8 | 51 | % | 71.8 | 57.5 | 14.3 | 25 | % | |||||||||||||||||||
Communications | 47.0 | 43.9 | 3.1 | 7 | % | 129.1 | 120.7 | 8.4 | 7 | % | |||||||||||||||||||
Infrastructure Solutions | 25.8 | 9.6 | 16.2 | n/m | 76.1 | 25.3 | 50.8 | n/m | |||||||||||||||||||||
Total revenue | 141.1 | 87.0 | 54.1 | 62 | % | 397.0 | 252.8 | 144.2 | 57 | % | |||||||||||||||||||
Operating costs and expenses: | |||||||||||||||||||||||||||||
Cost of services and products | 86.4 | 57.6 | 28.8 | 50 | % | 243.1 | 169.0 | 74.1 | 44 | % | |||||||||||||||||||
Selling, general and administrative | 37.5 | 19.4 | 18.1 | 93 | % | 110.5 | 59.0 | 51.5 | 87 | % | |||||||||||||||||||
Depreciation and amortization | 9.9 | 6.1 | 3.8 | 62 | % | 30.0 | 19.0 | 11.0 | 58 | % | |||||||||||||||||||
Restructuring and severance related charges | — | — | — | n/m | 4.9 | 2.5 | 2.4 | 96 | % | ||||||||||||||||||||
Total operating costs and expenses | 133.8 | 83.1 | 50.7 | 61 | % | 388.5 | 249.5 | 139.0 | 56 | % | |||||||||||||||||||
Operating income | $ | 7.3 | $ | 3.9 | $ | 3.4 | 87 | % | $ | 8.5 | $ | 3.3 | $ | 5.2 | n/m | ||||||||||||||
Operating margin | 5.2 | % | 4.5 | % | 0.7 pts | 2.1 | % | 1.3 | % | 0.8 pts | |||||||||||||||||||
Capital expenditures | $ | 7.4 | $ | 4.2 | $ | 3.2 | 76 | % | $ | 19.0 | $ | 17.1 | $ | 1.9 | 11 | % |
Metrics information: (as of September 30, 2018) | Communications | Communications | Communications | Consulting | |||
Hosted UCaaS Profiles* | NaaS Locations | SD - WAN Locations | Billable Resources | ||||
223,311 | 1,101 | 488 | 999 | ||||
* Includes 23,700 profiles from Hawaii |
Revenue
IT Services and Hardware segment revenue decreased $0.6 million for the three months ended September 30, 2019 as compared to the same period in the prior year. Communications revenue increased $54.1as a result of customers migrating to newer technologies which has increased the Company’s Hosted UCaaS profiles, NaaS locations and SD - WAN locations. This increase was partially offset by the decline in one-time Communications projects. In addition, Consulting revenue increased compared to the prior year due to obtaining significant new customers and projects throughout 2018. These increases were more than offset by the decline in Cloud and Infrastructure Solutions revenue. Cloud revenue decreased due to lower revenue contributed by GE of $6.5 million due to GE insourcing certain cloud services partially offset with increased revenue from one-time projects.
IT Services and Hardware revenue increased $20.0 million for the nine months ended September 30, 2019 as compared to the same period in the prior year. Consulting and Communications are the main contributors to this revenue increase in 2019. Consulting revenue increased compared to the prior year due to obtaining significant new customers and projects throughout 2018. Communications revenue increased primarily due to the acquisition of Hawaiian Telcom, which contributed $17.6 million and $144.2$5.6 million of revenue in the nine months ended September 30, 2019 and 2018, respectively. In addition to the contribution from Hawaiian Telcom, similar trends impacting the revenue increase in Communications for the quarter also impacted the nine months ended September 30, 2019. Cloud revenue decreased compared to the prior year as increased revenue from one-time projects was more than offset by lower revenue contributed by GE of $15.2 million. In addition, Infrastructure Solutions revenue decreased due to a decline in one-time projects and hardware sales.
Operating Costs and Expenses
IT Services and Hardware cost of services and products increased $3.0 million for the three months ended September 30, 2019 as compared to the same period in the prior year due to increases in payroll related costs and regulatory fees. The increase in payroll related costs is primarily due to increased internal headcount to support the communications and consulting practices partially offset by a decline in contractor costs.
Cost of services and products increased $25.2 million for the nine months ended September 30, 2019 as compared to the same period in 2018. Hawaiian Telcom contributed $22.4 million and $6.9 million of expense to cost of services and products in the nine months ended September 30, 2019 and 2018, respectively. The remaining increase in cost of services and products is primarily due to payroll and contractor costs associated with additional headcount to support the incremental communications and consulting revenue in the nine months ended September 30, 2019.
SG&A expenses increased $1.3 million for the three months ended September 30, 2019, as compared to the same period in 2018 primarily due to increased bonus and employee benefit related costs. SG&A expenses increased $3.3 million for the nine months ended September 30, 2019, as compared to the same period in the prior year, primarily driven by the acquisition of Hawaiian Telcom. Hawaiian Telcom contributed $7.2 million and $2.9 million of SG&A expense in the nine months ended September 30, 2019 and 2018, respectively. This increase was partially offset by lower payroll related costs as a result of the restructuring that took place in the prior two years.
Depreciation and amortization expenses increased $1.2 million and $8.5 million for the three and nine months ended September 30, 2018,2019, respectively, as compared to the comparablesame periods in 2017. Consulting and Infrastructure Solutions are the main contributors to this revenue increase, primarily due the acquisition of OnX. OnX contributed $27.8 million in Consulting revenue and $14.6 million in Infrastructure Solutions revenue for the three months ended September 30, 2018 and contributed $77.4 million in Consulting revenue and $42.6 million in Infrastructure Solutions revenue for the nine months ended September 30, 2018. Additionally, Hawaiian Telcom contributed $9.7 million in revenue for the three and nine months ended September 30, 2018, predominantly in Cloud and Communications. Increased revenue generated by OnX and Hawaiian Telcom was partially offset by declines in Consulting and Cloud for the nine months ended September 30, 2018 as compared to the comparable period in the prior year, primarily due to one significant customer in-sourcing more work rather than outsourcing itaccelerated depreciation expense for certain network assets designated for use by a specific customer. The network assets for which accelerated depreciation expense was incurred were determined to have a shorter useful life due to a change in the customer's requirements in the first quarter of 2019. In addition to the Company. These declines were offset by increases in Infrastructure and growth in UCaaS.
Restructuring and severance related charges of OnX contributed an increase of $16.5$0.6 million for the three months ended September 30, 2018 and $53.6 million for the nine months ended September 30, 2018. The merger of Hawaiian Telcom contributed an increase of $2.9$1.5 million for the three and nine months ended September 30, 2018.
Capital Expenditures
Capital expenditures are dependent on the timing of success-based projects. The increase in capitalCapital expenditures of $3.2 million infor the three and nine months ended September 30, 20182019, were primarily related to projects supporting the Cloud and $1.9Communications practices. In addition to success-based projects, the Company incurred $1.1 million for implementation work associated with internal software projects in the second quarter of 2019 contributing to capital expenditures for the nine months ended September 30, 2018 is due to more of these types of projects in 2018 as compared to 2017.
Financial Condition, Liquidity, and Capital Resources
As of September 30, 2018, the2019, Company had $1,927.7$1,927.4 million of outstanding indebtedness and an accumulated deficit of $2,679.4$2,755.4 million. A significant amount of the Company's accumulated deficit resulted from the purchase and operation of a national broadband business, which was sold in 2003.
The Company’s primary source of cash is generated by operations. The Company generated $122.8$188.9 million and $156.8$122.8 million of cash flows from operations during the nine months ended September 30, 20182019 and 2017,2018, respectively. As of September 30, 2018,2019, the Company had $166.9$161.5 million of short-term liquidity, comprised of $10.6$6.5 million of cash and cash equivalents $150.0and $155.0 million of undrawn capacity on our CorporateRevolving Credit Agreement, and $6.3 million available under the Receivables Facility.
The Receivables Facility permits maximum borrowings of up to $250.0$225.0 million and is subject to annual renewal. As of September 30, 2018,2019, the Company had borrowings of $144.2$141.5 million and $7.1$10.1 million of letters of credit outstanding under the Receivables Facility on a borrowing capacity of $157.6$151.6 million. While we expect to continue to renew this facility, we would be required to use cash, our Revolving Credit Facility, or other sources to repay any outstanding balance on the Receivables Facility if it was not renewed.
The Company’s primary uses of cash are for capital expenditures and debt service and, to a lesser extent, to fund pension and retiree medical obligations and preferred stock dividends. In 2017 and 2018, cash was also utilized to fund merger and acquisition activity. The Company believes that its cash on hand, cash generated from operations, and available funding under its credit facilities will be adequate to meet its cash requirements for the next twelve months. In addition, management expects that the Company will continue to have access to the capital markets to refinance debt and other obligations should such a need arise in the near future.
Cash Flows
Cash provided by operating activities during the nine months ended September 30, 20182019 totaled $122.8$188.9 million, a decreasean increase of $34.0$66.1 million compared to the same period in 2017.2018. Hawaiian Telcom contributed operating cash flow of approximately $62.0 million in the nine months ended September 30, 2019 compared to $1.0 million in the three months September 30, 2018, subsequent to the acquisition date. The decreaseremaining increase in operating cash flows is due primarily to higher interest payments of $48.0 million, including the payoff of Hawaiian Telcom accrued interest, higher transaction and integration payments of $20.5 million, and a contribution of $5.0 million to the Hawaiian Telcom pension plan required by the Hawaii Public Utility Commission in order to complete the merger. The aforementioned increases in the use of cash flows were partially offset by lower restructuring and severance related payments, of $12.3 million, as well aslower cash interest payments and improved working capital.
Cash flows used in investing activities during the nine months ended September 30, 20182019 totaled $357.6$167.0 million, an increasea decrease of $340.8$190.6 million compared to the same period in 2017.2018. The increasedecrease in cash flows used byin investing activities was largelyprimarily driven by the cash payment for the mergeracquisition of Hawaiian Telcom of $214.0 millionthat closed in the third quarter of 2018. In addition,2018 partially offset by the prior year included $140.7 million of cash proceeds receivedincrease in the first quarter of 2017 from the sale of the Company's investment in CyrusOne.
Cash flows used in financing activities during the nine months ended September 30, 20182019 totaled $151.0$30.9 million, asa decrease of $120.1 million compared to $106.0 million ofthe same period in the prior year. The decrease in cash flows used in financing activities was primarily due to the prior year. Indebt repayments, including accrued interest, of $318.2 million as part of the first quarter of 2017,consideration to acquire Hawaiian Telcom. Debt repayments were partially offset by the Company repaid $89.5 millionincrease in borrowings on the Credit Agreement and the Receivables Facility as compared to a draw on the Credit and Receivables Facilities of $194.2 million in 2018, causing a year over year increase in cash of $283.7 million. The draw on the Credit and Receivable Facilities waswhich were also used to partially fund the cash portion of the mergeracquisition of Hawaiian Telcom. This increase in cash flow was offset by the repayment of debt of $324.3 million in 2018, which included the payoff of the Hawaiian Telcom debt of $314.7 million.
Indentures
The Company’s Senior Notes are governed by indentures which contain covenants that, among other things, limit the Company’s ability to incur additional debt or liens, pay dividends or make other restricted payments, sell, transfer, lease or dispose of assets and make investments or merge with another company. The Company is in compliance with all of its debt indentures as of September 30, 2018.
Share Repurchase Plan
In 2010, the Board of Directors approved a plan for the repurchase of the Company's outstanding common stock in an amount up to $150.0 million. In prior years, the Company repurchased and retired a total of 1.7 million shares at a total cost of $25.6 million dollars. As of September 30, 2018,2019, the Company has the authority to repurchase its common stock with a value of up to $124.4 million under the plan approved by its Board of Directors, subject to satisfaction of the requirements under its bond indentures.
Regulatory Matters
Universal Service
At its August 2018, bidding concluded in2019 meeting, the Federal Communications Commission’s Connect America Fund Phase II auction. Under this reverse auctionFCC opened a proceeding under which it proposes to distribute up to $2$20.4 billion in high cost support overunder a 10-year period was available to expand fixed broadband service into previouslynewly created Rural Digital Opportunity Fund (“RDOF”). The funds would be distributed via two reverse auctions targeting areas that remain unserved areasat the conclusion of the country. There were 103 winning bidders andCAF II price cap support program. Because the total amount of support that will be providedPhase I auction likely would not conclude prior to these bidders over the 10-year term is $1.5 billion. Winning bidders must build out their broadband networks within the winning geographic areas (specific census block groups covering 713,176 locations in 45 states) within the first six yearsend of the CAF II price cap support term.at year end 2020, the proposal also contemplates the possibility of a mechanism whereby price cap carrier support might be extended until the RDOF awards begin. The outcome of this proceeding may present opportunities for both Cincinnati Bell and Hawaiian Telcom were both winning bidders.Telcom.
Special Access/Business Data Services
In July 2019, the FCC adopted an Order in response to the US Court of Appeals for the Eighth Circuit’s 2018 remand of the FCC’s Business Data Services Order relative to the ex ante deregulation of DS1 and DS3 transport services. In its latest Order, the FCC reaffirmed its previous conclusion that DS1 and DS3 transport services are competitive nationwide. As a result, Cincinnati Bell will receive $1.1 millionprice cap carriers must remove these services from their Special Access tariffs by August 1, 2020.
Unbundled Network Elements
Under rules adopted pursuant to extend its broadbandthe Telecommunications Act of 1996, ILECs have been required to unbundle the components of their network and provide the unbundled network elements ("UNE's") to requesting competitive local exchange carriers at cost-based rates set by state public utility commissions in the 1990’s. The rules also required ILECs to resell their voice service to 342 unserved locationsrequesting competitive carriers at wholesale rates set by state regulators. In May 2018, USTelecom – The Broadband Association (“USTelecom”) filed a petition with the FCC seeking forbearance from the unbundling and Hawaiian Telcomresale rules for all ILECs. On July 10, 2019, the FCC granted the requested forbearance for unbundled DS1 and DS3 transport and on August 2, 2019, it granted forbearance from UNE loop and resale requirements. Specifically, it granted forbearance from the unbundling requirements for DS1 and DS3 transport along routes where competitive fiber is present within a half mile of the ILEC wire center endpoints that trigger the unbundling obligation. As it relates to UNE loops and resale, forbearance was granted for analog voice-grade copper loops and the avoided-cost resale requirements. While Cincinnati Bell’s ILECs may benefit from the ability to charge competitive commercially negotiated prices for these facilities and services following the three-year transition period required by the Order, the Company’s competitive carrier operations will receive $18.1 millionlikely see increased prices for such facilities currently purchased from other ILECs. As a result, the Company is reviewing its current UNE purchases to builddetermine where to 3,936 unserved locations.
Hawaii Voice Services Regulatory Relief
In May 2019, the Hawaii State Legislature granted nearly full pricing flexibility to telecommunications carriers for intrastate telecommunications services. Rate changes for retail telecommunications services no longer need to be filed with and approved by the Hawaii Public Utilities Commission (“HPUC”) except for any price increase greater than $6.50 on an annual basis for basic exchange services in counties with a population of less than 500,000. In addition, the traditional cost-of-service regulatory framework that required cost support for retail telecommunications service offerings and pricing above a service’s long run incremental cost are no longer applicable; however, the HPUC retains the ability to investigate any offering. The legislation also eliminated the requirements for providers of fully competitive retail telecommunications services to obtain HPUC approval for financing and the sale or encumbrance of regulated property and assets, except when such sale or encumbrance occurs as part of a merger or consolidation with any other public utility. Additional relief was also granted on reporting affiliated transactions and accidents. Based on these regulatory reforms, the Company can now compete more effectively in Hawaii by making decisions based on marketplace dynamics and other economic information.
Refer to the Company’s Annual Report on Form 10-K for the year ended 20172018 for a complete description of regulatory matters.
Contingencies
In the normal course of business, the Company is subject to various regulatory and tax proceedings, lawsuits, claims and other matters. The Company believes adequate provision has been made for all such asserted and unasserted claims in accordance with accounting principles generally accepted in the United States. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.
Future Operating Trends
Refer to the Company’s Annual Report on Form 10-K for the year ended 20172018 for a complete description of future operating trends for our business.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements and information available as of the date of the financial statements. As this information changes, the financial statements could reflect different estimates or judgments.
Recently Issued Accounting Standards
Refer to Note 1 of the Condensed Consolidated Financial Statements for further information on recently issued accounting standards and the impact to the Condensed Consolidated Financial Statements as a result of adopting ASU 2014-09 and ASU 2017-072016-02 effective January 1, 2018.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Refer to the Company’s Annual Report on Form 10-K for the year ended
December 31,Item 4.Controls and Procedures
(a) |
Evaluation of disclosure controls and procedures. |
Cincinnati Bell Inc.’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, Cincinnati Bell Inc.’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective.
(b) | Changes in internal control over financial reporting. |
Cincinnati Bell Inc.’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the thirdsecond quarter of 20182019 and have concluded that there were no changes to Cincinnati Bell Inc.’s internal control over financial reporting during the thirdsecond quarter of 20182019 that materially affect, or are reasonably likely to materially affect, Cincinnati Bell Inc.’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Cincinnati Bell and its subsidiaries are involved in a number of legal proceedings. Liabilities are established for legal claims when losses associated with the claims are judged to be probable and the loss can be reasonably estimated. In many lawsuits and arbitrations, including most class action lawsuits, it is not possible to determine whether a liability has been incurred or to estimate the amount of the liability until the case is close to resolution, in which case a liability will not be recognized until that time. Based on information currently available, consultation with counsel, available insurance coverage and recognized liabilities, the Company believes that the eventual outcome of all claims will not, individually or in the aggregate, have a material effect on the Company’s financial position or results of operations.
Item 1A. Risk Factors
Refer to the Company’s Annual Report on Form 10-K for the year ended
December 31,Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine month period ended
September 30,Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosure
None.
Item 5. Other Information
No reportable items.
Item 6.Exhibits
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Exhibit Number |
Exhibit Description |
Form |
Filing Date |
Exhibit No. |
SEC File No. | Filed Herewith | |||||
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Amended and Restated Articles of Incorporation of Cincinnati Bell Inc.
| 8-K | 4/30/2008 | 3.1 | 1-8519 |
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Amendment to the Amended and Restated Articles of Incorporation of Cincinnati Bell Inc.
| 8-K | 10/5/2016 | 3.1 | 1-8519 |
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Amended and Restated Regulations of Cincinnati Bell Inc.
| 10-Q | 8/8/2018 | 3.3 | 1-8519 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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101 | The following financial statements from Cincinnati Bell Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 were formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Shareholders’ Deficit, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.
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104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
The Company's reports on Form 10-K, 10-Q, and 8-K are available free of charge in the Investor Relations section of the Company's website: http://www.cincinnatibell.com. The Company will furnish any other exhibit at cost.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cincinnati Bell Inc. | ||||
Date: | November | /s/ Andrew R. Kaiser | ||
Andrew R. Kaiser | ||||
Chief Financial Officer | ||||
Date: | November | /s/ | Suzanne E. Maratta | |
Suzanne E. Maratta | ||||
Chief Accounting Officer |
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