Significant Accounting Policies (Policy) | 12 Months Ended |
Dec. 31, 2014 |
Significant Accounting Policies [Abstract] | |
Principles Of Consolidation And Basis Of Presentation | Principles of Consolidation and Basis of Presentation |
The consolidated financial statements include the accounts of the Company, Lumos Networks Operating Company, a wholly-owned subsidiary of the Company, and all of Lumos Networks Operating Company’s wholly-owned subsidiaries and those limited liability corporations where Lumos Networks Operating Company or certain of its subsidiaries, as managing member, exercised control. All significant intercompany accounts and transactions have been eliminated in consolidation. |
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Accounting Estimates | Accounting Estimates |
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the valuation of interest rate swap derivatives, deferred tax assets, marketable securities, asset retirement obligations and equity-based compensation; goodwill impairment assessments and reserves for employee benefit obligations and income tax uncertainties. |
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Revenue Recognition | Revenue Recognition |
The Company recognizes revenue when persuasive evidence of an arrangement exists, services are rendered or products are delivered, installed and functional, as applicable, the price to the buyer is fixed and determinable and collectability is reasonably assured. Certain services of the Company require payment in advance of service performance. In such cases, the Company records a service liability at the time of billing and subsequently recognizes revenue ratably over the service period. The Company bills customers certain transactional taxes on service revenues. These transactional taxes are not included in reported revenues as they are recognized as liabilities at the time customers are billed. |
The Company earns revenue by providing services through access to and usage of its networks. Local service revenues are recognized as services are provided. Carrier data revenues are earned by providing switched access and other switched and dedicated services, including wireless roamer management, to other carriers. Revenues for equipment sales are recognized at the point of sale. |
The Company periodically makes claims for recovery of access charges on certain minutes of use terminated by the Company on behalf of other carriers. The Company recognizes revenue in the period when it is determined that the amounts can be estimated and collection is reasonably assured. |
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Cash Equivalents And Marketable Securities | Cash Equivalents and Marketable Securities |
The Company considers its investments in all highly liquid debt instruments with an original maturity of three months or less, when purchased, to be cash equivalents. The Company’s marketable securities at December 31, 2014 and 2013 consist of debt securities not classified as cash equivalents. The Company classifies such debt securities as either held-to-maturity, when the Company has the positive intent and ability to hold the securities to maturity, or available-for-sale. Held-to-maturity debt securities are carried at amortized cost, adjusted for the amortization of premiums or accretion of discounts. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive income or loss, net of tax. All of the Company’s debt securities not classified as cash equivalents were classified as available-for-sale securities as of December 31, 2014 and 2013. |
The Company previously utilized a swingline credit facility that it had with its primary commercial bank. This swingline facility was terminated in April 2013, concurrent with the closing of the Company’s debt refinancing (see Note 5). The Company had a book overdraft related to this master cash account of $1.8 million as of December 31, 2012. The Company classified the respective changes in the book overdraft amount in cash flows from operating activities on the consolidated statements of cash flows for the years ended December 31, 2013 and 2012. |
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Restricted Cash | Restricted Cash |
During 2010, the Company received a federal broadband stimulus award to bring broadband services and infrastructure to Alleghany County, Virginia. The total project is $16.1 million, of which 50% (approximately $8 million) is being funded by a grant from the federal government. The project is expected to be completed before September 30, 2015. The Company was required to deposit 100% of its portion for the grant (approximately $8 million) into a pledged account in advance of any reimbursements, which can be drawn down ratably following the grant reimbursement approvals which are contingent on adherence to the program requirements. The Company received $0.1 million, $1.0 million and $2.3 million in the years ended December 31, 2014, 2013 and 2012, respectively, for the reimbursable portion of the qualified recoverable expenditures to date. The Company has a $1.3 million receivable for the reimbursable portion of the qualified recoverable expenditures as of December 31, 2014. At December 31, 2014, the Company’s pledged account balance was $4.2 million. This escrow account is a non-interest bearing account with the Company’s primary commercial bank. |
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Trade Accounts Receivable | Trade Accounts Receivable |
The Company sells its services to other communication carriers and to business and residential customers primarily in Virginia and West Virginia and portions of Maryland, Pennsylvania, Ohio and Kentucky. The Company has credit and collection policies to maximize collection of trade receivables and requires deposits on certain sales. The Company estimates an allowance for doubtful accounts based on a review of specific customers with large receivable balances and for the remaining customer receivables the Company uses historical results, current and expected trends and changes in credit policies. Management believes the allowance adequately covers all anticipated losses with respect to trade receivables. Actual credit losses could differ from such estimates. The Company includes bad debt expense in selling, general and administrative expense in the consolidated statements of income. The following table shows the activity in the allowance for doubtful accounts for the years ended December 31, 2014, 2013 and 2012: |
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(In thousands) | | 2014 | | 2013 | | 2012 | | | | |
Allowance for doubtful accounts, beginning | | $ | 1,485 | | $ | 1,822 | | $ | 2,822 | | | | |
Additions: | | | | | | | | | | | | | |
Charged to expense | | | 604 | | | 249 | | | 523 | | | | |
Charged to other accounts | | | -19 | | | 346 | | | 368 | | | | |
Deductions | | | -853 | | | -932 | | | -1,891 | | | | |
Allowance for doubtful accounts, ending | | $ | 1,217 | | $ | 1,485 | | $ | 1,822 | | | | |
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Property, Plant And Equipment And Other Long-Lived Assets (Excluding Goodwill And Indefinite-Lived Intangible Assets) | Property, Plant and Equipment and Other Long-Lived Assets (Excluding Goodwill and Indefinite-Lived Intangible Assets) |
Property, plant and equipment, finite-lived intangible assets and long-term deferred charges are recorded at cost and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated pursuant to the subsequent measurement guidance described in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35. Impairment is determined by comparing the carrying value of these long-lived assets to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets. If the carrying value exceeds the estimated undiscounted cash flows, the excess of the asset’s carrying value over the estimated fair value is recorded as an impairment charge. |
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The Company believes that no impairment indicators exist as of December 31, 2014 that would require it to perform impairment testing for long-lived assets, including property, plant and equipment, long-term deferred charges and finite-lived intangible assets to be held and used. |
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Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets, which the Company reviews and updates based on historical experience and future expectations. In 2012, the Company revised the useful lives of certain leasehold improvements as a result of the termination of a building lease and recognized accelerated depreciation costs of $1.4 million as a result of this change in estimate, which is included in depreciation and amortization expense for the year ended December 31, 2012. |
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Plant and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Amortization of assets held under capital leases, including certain software licenses, is included with depreciation expense. |
Intangibles with a finite life are classified as other intangibles on the consolidated balance sheets. At December 31, 2014 and 2013, other intangibles were comprised of the following: |
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(Dollars in thousands) | Estimated Life | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Customer relationships | 5 to 15 yrs | | $ | 103,108 | | $ | -88,406 | | $ | 103,108 | | $ | -79,399 |
Trademarks and franchise rights | 10 to 15 yrs | | | 2,862 | | | -1,680 | | | 3,563 | | | -2,201 |
Total | | | $ | 105,970 | | $ | -90,086 | | $ | 106,671 | | $ | -81,600 |
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The Company amortizes its finite-lived intangible assets using the straight-line method unless it determines that another systematic method is more appropriate. The amortization for certain customer relationship intangibles is being recognized using an accelerated amortization method based on the pattern of estimated earnings from these assets. |
The estimated life of amortizable intangible assets is determined from the unique factors specific to each asset and the Company reviews and updates estimated lives based on current events and future expectations. The Company capitalizes costs incurred to renew or extend the term of a recognized intangible asset and amortizes such costs over the remaining life of the asset. No such costs were incurred during the years ended December 31, 2014 or 2013. Amortization expense for the years ended December 31, 2014, 2013 and 2012 was $9.2 million, $9.8 million and $11.1 million, respectively. |
Amortization expense for the next five years is expected to be as follows: |
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(In thousands) | | Customer Relationships | | Trademarks and | | Total | | | | |
Franchise Rights | | | | |
2015 | | | 4,644 | | | 163 | | | 4,807 | | | | |
2016 | | | 2,412 | | | 163 | | | 2,575 | | | | |
2017 | | | 2,093 | | | 163 | | | 2,256 | | | | |
2018 | | | 1,781 | | | 163 | | | 1,944 | | | | |
2019 | | | 1,513 | | | 152 | | | 1,665 | | | | |
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Goodwill And Indefinite-Lived Intangible Assets | Goodwill and Indefinite-Lived Intangible Assets |
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Goodwill and franchise rights are considered to be indefinite-lived intangible assets. Indefinite-lived intangible assets are not subject to amortization but are instead tested for impairment annually or more frequently if an event indicates that the asset might be impaired. The Company’s policy is to assess the recoverability of indefinite-lived assets annually on October 1 and whenever adverse events or changes in circumstances indicate that impairment may have occurred. |
The Company first considers whether to take a qualitative approach in determining whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment test promulgated by FASB ASC Topic 350. If the Company determines that it is more likely than not that a reporting unit’s fair value is less than its carrying amount or if the Company elects to bypass the qualitative test for a specific period, the two-step process is used to test for goodwill impairment. Step one requires a determination of the fair value of each of the reporting units and, to the extent that the fair value of the reporting unit exceeds its carrying value (including goodwill), the step two calculation of implied fair value of goodwill is not required and no impairment loss is recognized. In testing for goodwill impairment, the Company utilizes a combination of a discounted cash flow model and a market approach that includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. |
As described in Note 4, the Company restructured its operating segments in 2014 and, as a result, reassigned goodwill to the new reporting units using a relative fair value allocation approach. As of December 31, 2014, goodwill was attributed to the Company’s segments as follows: |
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(In thousands) | | December 31, | | | | | | | | | | |
2014 | | | | | | | | | | |
Data | | $ | 90,561 | | | | | | | | | | |
R&SB | | | 9,736 | | | | | | | | | | |
RLEC Access | | | - | | | | | | | | | | |
Total goodwill | | $ | 100,297 | | | | | | | | | | |
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As of October 1, 2014, the Company performed its annual goodwill impairment test for each of its reporting units with goodwill, which are two of our three operating segments (data and R&SB). The Company elected to bypass the qualitative assessment due to the restructuring of its operating segments and applied step one of the quantitative test as described above. Based on the results of this annual impairment testing, the Company determined that the fair values of each of the data and R&SB reporting units substantially exceed their respective carrying amounts and that no impairment exists. |
The gross amount of goodwill was $133.7 million and the accumulated impairment loss was $33.4 million for a net carrying amount of $100.3 million as of December 31, 2014 and 2013. There was no activity in the consolidated goodwill accounts for the years ended December 31, 2014 and 2013. |
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Accounting For Asset Retirement Obligations | Accounting for Asset Retirement Obligations |
An asset retirement obligation is evaluated and recorded as appropriate on assets for which the Company has a legal obligation to retire. The Company records a liability for an asset retirement obligation and the associated asset retirement cost capitalized at the time the underlying asset is acquired. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. |
The Company enters into various facility collocation agreements and is subject to locality franchise ordinances. The Company constructs assets at these locations and, in accordance with the terms of many of these agreements, the Company is obligated to restore the premises to their original condition at the conclusion of the agreements, generally at the demand of the other party to these agreements. The Company recognizes the fair value of a liability for an asset retirement obligation and capitalizes that cost as part of the cost basis of the related asset, depreciating it over the useful life of the related asset. |
Included in certain of the franchise ordinances under which the Company’s RLECs and CLECs operate are clauses that require the removal of the RLEC’s and CLEC’s equipment at the termination of the franchise agreement. The Company has not recognized an asset retirement obligation for these liabilities as the removal of the equipment is not estimable due to an indeterminable end date and the fact that the equipment is part of the public switched telephone network and it is not reasonable to assume the jurisdictions would require its removal. |
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The following table indicates the changes to the Company’s asset retirement obligation liability, which is included in other long-term liabilities, for the years ended December 31, 2014 and 2013: |
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(In thousands) | | 2014 | | 2013 | | | | | | | |
Asset retirement obligations, beginning | | $ | 1,401 | | $ | 1,236 | | | | | | | |
Additional asset retirement obligations recorded, net of | | | | | | | | | | | | | |
adjustments in estimates | | | -19 | | | 61 | | | | | | | |
Accretion of asset retirement obligations | | | 118 | | | 104 | | | | | | | |
Asset retirement obligations, ending | | $ | 1,500 | | $ | 1,401 | | | | | | | |
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Advertising Costs | Advertising Costs |
The Company expenses advertising costs and marketing production costs as incurred (included within selling, general and administrative expenses in the consolidated statements of income). Advertising expense for the years ended December 31, 2014, 2013 and 2012 was $1.4 million, $0.8 million and $1.1 million, respectively. |
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Pension Benefits And Retirement Benefits Other Than Pensions | Pension Benefits and Retirement Benefits Other Than Pensions |
The Company sponsors a non-contributory defined benefit pension plan (“Pension Plan”) covering all employees who meet eligibility requirements and were employed prior to October 1, 2003. Pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65. The Company froze the Pension Plan effective December 31, 2012. As such, no further benefits are being accrued by participants for services rendered beyond that date. |
Sections 412 and 430 of the Internal Revenue Code and ERISA Sections 302 and 303 establish minimum funding requirements for defined benefit pension plans. The minimum required contribution is generally equal to the target normal cost plus the shortfall amortization installments for the current plan year and each of the six preceding plan years less any calculated credit balance. If plan assets (less calculated credits) are equal to or exceed the funding target, the minimum required contribution is the target normal cost reduced by the excess funding, but not below zero. The Company’s policy is to make contributions to stay at or above the threshold required in order to prevent benefit restrictions and related additional notice requirements and is intended to provide for benefits to be paid in the future. |
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The Company also provides certain health care and life insurance benefits for retired employees that meet eligibility requirements through two postretirement welfare benefit plans (the “Other Postretirement Benefit Plans”). The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan is also contributory. These obligations, along with all of the pension plans and other postretirement benefit plans, are assumed by the Company. Eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of January 5, 1994. Neither plan is eligible to employees hired after April 1993. Effective December 31, 2014, the Company terminated the health care benefits under the Other Postretirement Benefit Plans. Eligible retirees will receive partial compensation for settlement of accrued benefits through a series of supplemental pension payments. As a result, the Company recognized a curtailment gain of $10.8 million in the year ended December 31, 2014 (see Note 11.) |
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The Company sponsors a contributory defined contribution plan under Internal Revenue Code Section 401(k) for substantially all employees. The Company’s policy is to match 100% of each participant’s annual contributions for contributions up to 1% of each participant’s annual compensation and 50% of each participant’s annual contributions up to an additional 5% of each participant’s annual compensation. Company contributions vest after two years of service. |
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Operating Leases | Operating Leases |
The Company has operating leases for administrative office space and equipment, certain of which have renewal options. These leases, with few exceptions, provide for automatic renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The Company’s minimum lease term for most leases includes the initial non-cancelable term and at least one renewal period to the extent that the exercise of the related renewal option or options is reasonably assured. A renewal option or options is determined to be reasonably assured if failure to renew the leases imposes an in-substance economic penalty on the Company. Leasehold improvements are capitalized and depreciated over the shorter of the assets’ useful life or the lease term, including renewal option periods that are reasonably assured. |
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Income Taxes | Income Taxes |
Deferred income taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. The Company accrues interest and penalties related to unrecognized tax benefits in interest expense and income tax expense, respectively. |
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Equity-Based Compensation | Equity-based Compensation |
The Company accounts for share-based employee compensation plans under FASB ASC 718, Stock Compensation. Equity-based compensation expense from share-based equity awards is recorded with an offsetting increase to additional paid-in capital on the consolidated balance sheet. For equity awards with only service conditions, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award. |
The fair value of common stock options granted with service-only conditions is estimated at the respective measurement date using the Black-Scholes option-pricing model with assumptions related to risk-free interest rate, expected volatility, dividend yield and expected term. The fair value of restricted stock awards granted with service-only conditions is estimated based on the market value of the common stock on the date of grant reduced by the present value of expected dividends as applicable. Certain stock options and restricted shares granted by the Company contain vesting provisions that are conditional on achievement of a target market price for the Company’s common stock. The grant date fair value of these options and restricted shares was adjusted to reflect the probability of the achievement of the market condition based on management’s best estimate using a Monte Carlo model (see Note 9). The Company initially recognizes the related compensation cost for these awards that contain a market condition on a straight-line basis over the requisite service period as derived from the valuation model. The Company accelerates expense recognition if the market conditions are achieved prior to the end of the derived requisite service period. |
Total equity-based compensation expense related to all of the share-based awards (Note 9), including the Company’s 401(k) matching contributions, was $4.3 million, $6.8 million and $3.9 million for the years ended December 31, 2014, 2013 and 2012, respectively, which amounts are included in selling, general and administrative expenses in the consolidated statements of income. |
Future charges for equity-based compensation related to instruments outstanding at December 31, 2014 for the years 2015 through 2019 are estimated to be $3.4 million, $3.4 million, $2.3 million, $0.5 million and less than $0.1 million, respectively. |
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Fair Value Measurements | Fair Value Measurements |
Fair value is defined as the amount 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. When determining the fair value measurements for assets and liabilities required to be recorded at fair value or for certain financial instruments for which disclosure of fair value is required, the Company uses fair value techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs. |
GAAP establishes a fair value hierarchy with three levels of inputs that may be used to measure fair value: |
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• | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities. | | | | | | | | | | | | |
• | Level 2 – Unadjusted quoted prices for similar assets or liabilities in active markets, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs other than quoted prices that are observable for the asset or liability. | | | | | | | | | | | | |
• | Level 3 – Unobservable inputs for the asset or liability. | | | | | | | | | | | | |
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Recent Accounting Pronouncements | Recent Accounting Pronouncements |
In July 2013, the FASB issued ASU 2013-11, Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. ASU 2013-11 was effective prospectively for public entities for annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Prospective application applies to unrecognized tax benefits that exist at the date of adoption and those that arise after adoption. The adoption of this ASU in the first quarter of 2014 did not have a material impact on the Company’s consolidated balance sheet as of December 31, 2014. |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is still evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and disclosures. |
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