10-Q 1 hcom-20180331x10q.htm 10-Q hcom_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                

 

Commission File Number: 001-34686

 

Hawaiian Telcom Holdco, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

16-1710376

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1177 Bishop Street

Honolulu, Hawaii  96813

(Address of principal executive offices)

 

808-546-4511

(Registrant's telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate 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 definition 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 [X]

 

Non-Accelerated Filer [  ]

(Do not check if smaller
reporting company)

 

Smaller reporting company [  ]

Emerging Growth Company [  ]

 

 

 

 

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]  No [X]

 

As of May 10, 2018, 11,667,205 shares of the registrant’s common stock were outstanding.

 

 

 

 


 


 

PART I — FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statements of Income (Loss)

(Unaudited, dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

    

2018

    

2017

    

 

Operating revenues

 

$

89,222

 

$

94,510

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation and amortization)

 

 

42,088

 

 

41,191

 

 

Selling, general and administrative

 

 

27,625

 

 

29,632

 

 

Depreciation and amortization

 

 

23,333

 

 

21,269

 

 

Total operating expenses

 

 

93,046

 

 

92,092

 

 

Operating income (loss)

 

 

(3,824)

 

 

2,418

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,136)

 

 

(3,993)

 

 

Retirement plan

 

 

710

 

 

(1,763)

 

 

Total other expense

 

 

(3,426)

 

 

(5,756)

 

 

Loss before income tax benefit

 

 

(7,250)

 

 

(3,338)

 

 

Income tax benefit

 

 

(1,514)

 

 

(1,386)

 

 

Net loss

 

$

(5,736)

 

$

(1,952)

 

 

Net loss per common share -

 

 

 

 

 

 

 

 

Basic

 

$

(0.49)

 

$

(0.17)

 

 

Diluted

 

$

(0.49)

 

$

(0.17)

 

 

Weighted average shares used to compute net loss per common share -

 

 

 

 

 

 

 

 

Basic

 

 

11,597,918

 

 

11,529,046

 

 

Diluted

 

 

11,597,918

 

 

11,529,046

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2018

    

2017

 

Net loss

 

$

(5,736)

 

$

(1,952)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Retirement plan gain (loss)

 

 

(120)

 

 

21,142

 

Income tax benefit (provision) on other comprehensive income (loss)

 

 

31

 

 

(8,080)

 

Other comprehensive income (loss), net of tax

 

 

(89)

 

 

13,062

 

Comprehensive income (loss)

 

$

(5,825)

 

$

11,110

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,191

 

$

40,759

 

Receivables, net

 

 

24,119

 

 

32,229

 

Material and supplies

 

 

6,805

 

 

6,810

 

Prepaid expenses

 

 

4,187

 

 

4,899

 

Other current assets

 

 

3,639

 

 

1,328

 

Total current assets

 

 

57,941

 

 

86,025

 

Property, plant and equipment, net

 

 

607,087

 

 

608,298

 

Intangible assets, net

 

 

30,699

 

 

31,026

 

Goodwill

 

 

12,104

 

 

12,104

 

Other assets

 

 

6,512

 

 

2,053

 

Total assets

 

$

714,343

 

$

739,506

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

10,250

 

$

10,250

 

Accounts payable

 

 

53,290

 

 

56,874

 

Accrued expenses

 

 

11,832

 

 

11,736

 

Advance billings and customer deposits

 

 

9,349

 

 

14,807

 

Other current liabilities

 

 

3,934

 

 

6,774

 

Total current liabilities

 

 

88,655

 

 

100,441

 

Long-term debt

 

 

294,804

 

 

299,066

 

Employee benefit obligations

 

 

78,036

 

 

79,953

 

Deferred income taxes, net

 

 

910

 

 

910

 

Other liabilities

 

 

33,638

 

 

38,927

 

Total liabilities

 

 

496,043

 

 

519,297

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 11,635,116 and 11,587,963 shares issued and outstanding at March 31, 2018 and  December 31, 2017, respectively

 

 

116

 

 

116

 

Additional paid-in capital

 

 

182,546

 

 

182,689

 

Accumulated other comprehensive loss

 

 

(16,053)

 

 

(15,964)

 

Retained earnings

 

 

51,691

 

 

53,368

 

Total stockholders’ equity

 

 

218,300

 

 

220,209

 

Total liabilities and stockholders’ equity

 

$

714,343

 

$

739,506

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(5,736)

 

$

(1,952)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23,333

 

 

21,269

 

Deferred financing amortization

 

 

301

 

 

529

 

Employee retirement benefits

 

 

(2,037)

 

 

1,410

 

Provision for uncollectible receivables

 

 

1,004

 

 

950

 

Stock based compensation

 

 

572

 

 

567

 

Deferred income taxes

 

 

(1,395)

 

 

(1,251)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

55

 

 

1,050

 

Material and supplies

 

 

 5

 

 

619

 

Prepaid expenses and other current assets

 

 

698

 

 

(217)

 

Accounts payable and accrued expenses

 

 

(947)

 

 

(3,162)

 

Advance billings and customer deposits

 

 

1,466

 

 

954

 

Other current liabilities

 

 

(51)

 

 

340

 

Other

 

 

(166)

 

 

(839)

 

Net cash provided by operating activities

 

 

17,102

 

 

20,267

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(24,336)

 

 

(27,242)

 

Net cash used in investing activities

 

 

(24,336)

 

 

(27,242)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowing

 

 

 —

 

 

6,000

 

Repayment of capital lease and installment financing

 

 

(9,056)

 

 

(1,051)

 

Repayment of borrowings

 

 

(4,563)

 

 

(750)

 

Refinancing costs

 

 

 —

 

 

(2,071)

 

Taxes paid related to net share settlement of equity awards

 

 

(715)

 

 

(495)

 

Net cash provided by (used in) financing activities

 

 

(14,334)

 

 

1,633

 

Net change in cash, cash equivalents and restricted cash

 

 

(21,568)

 

 

(5,342)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

41,009

 

 

21,146

 

Cash, cash equivalents and restricted cash, end of period

 

$

19,441

 

$

15,804

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited, dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Earnings

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

11,587,963

 

$

116

 

$

182,689

 

$

(15,964)

 

$

53,368

 

$

220,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of adoption of new accounting standard for revenue and related cost recognition, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,059

 

 

4,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 —

 

 

 —

 

 

572

 

 

 —

 

 

 —

 

 

572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes

 

47,153

 

 

 —

 

 

(715)

 

 

 —

 

 

 —

 

 

(715)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,736)

 

 

(5,736)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 —

 

 

 —

 

 

 —

 

 

(89)

 

 

 —

 

 

(89)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

11,635,116

 

$

116

 

$

182,546

 

$

(16,053)

 

$

51,691

 

$

218,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

11,513,279

 

$

115

 

$

179,958

 

$

(35,218)

 

$

160,059

 

$

304,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of adoption of new accounting standard for stock compensation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

550

 

 

550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 —

 

 

 —

 

 

567

 

 

 —

 

 

 —

 

 

567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes

 

74,684

 

 

 1

 

 

(96)

 

 

 —

 

 

 —

 

 

(95)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,952)

 

 

(1,952)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

13,062

 

 

 —

 

 

13,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

 

11,587,963

 

$

116

 

$

180,429

 

$

(22,156)

 

$

158,657

 

$

317,046

 

 

See accompanying notes to condensed consolidated financial statements.

7


 

Hawaiian Telcom Holdco, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Description of Business

 

Business Description

 

Hawaiian Telcom Holdco, Inc. and subsidiaries (the “Company”) is the incumbent local exchange carrier for the State of Hawaii with an integrated telecommunications network. The Company offers a variety of telecommunication services to residential and business customers in Hawaii including local telephone, network access and data transport, television, Internet, long distance and wireless phone service. The Company also provides communications equipment sales and maintenance, data center colocation and network managed services.

 

Proposed Merger

 

On July 9, 2017, Hawaiian Telcom Holdco, Inc. (“Holdco”), a Delaware corporation, Cincinnati Bell Inc.  (“Cincinnati Bell”), an Ohio corporation, Twin Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Cincinnati Bell (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Holdco and Holdco will be the surviving corporation (the “Merger”).

 

Pursuant to the Merger Agreement and as consideration for the Merger, Holdco shareholders will have the option to elect either $30.75 in cash, 1.6305 shares of Cincinnati Bell common stock, or a mix of $18.45 in cash and 0.6522 shares of Cincinnati Bell common stock for each Holdco share.  The final distribution to Holdco shareholders is subject to proration such that the aggregate consideration to be paid to Holdco stockholders will be 60 percent cash and 40 percent Cincinnati Bell common stock.  Such distribution will be made upon closing of the Merger.

 

The completion of this transaction is subject to closing conditions including the receipt of regulatory approvals from, among others, the Federal Communications Commission which is pending and the Hawaii Public Utilities Commission which was received on April 30, 2018, and approval by the Holdco shareholders which occurred on November 7, 2017.  The Merger Agreement contains certain termination rights for Holdco and Cincinnati Bell.  The Merger Agreement stipulates that in the event of a termination of the Merger Agreement under specified circumstances, primarily related to if the Company receives and favors a competing merger offer, the Company will be required to pay Cincinnati Bell a fee of $11.9 million.

 

In connection with the Merger Agreement with Cincinnati Bell, the Company incurred professional fees related to the transaction of $0.2 million during the three months ended March 31, 2018.

 

Organization

 

The Company has one direct wholly-owned subsidiary, Hawaiian Telcom Communications, Inc. which has two direct wholly-owned subsidiaries – Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc.  Hawaiian Telcom, Inc. operates the regulated local exchange carrier and Hawaiian Telcom Services Company, Inc. operates all other businesses.

 

8


 

Other Developments

 

The Company incurred a loss for the quarter ended March 31, 2018 of $5.7 million.  In addition, the Company has experienced a decline in its reported earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in its primary debt facility and used for covenant compliance.  During the quarter ended March 31, 2018, the Company’s cash balance declined by $21.6 million in part because of payments of debt.  As disclosed in Note 6, while the Company was in compliance with the financial covenants on its primary credit facility as of March 31, 2018, the margin of compliance for the leverage ratio was relatively narrow and necessitated, in part, the payments of debt to assure such compliance. The Company has evaluated these factors on its future liquidity with a focus on its cash balance and financial debt covenant compliance for one year from issuance of these condensed consolidated financial statements.  This included consideration of the need to amend the maximum allowed debt service coverage covenant.  While the Company presently anticipates that the merger with Cincinnati Bell will close in the second or third quarter of 2018, the Company has assessed its covenant compliance and liquidity on a stand-alone basis.

 

Management of the Company has developed plans in response to the matters identified in the preceding paragraph.  Such plans include the Company’s ability to scale its expenses to align to its revenue volume in particular related to low margin businesses, the ability to adjust its capital spending to defer or avoid expenditures that will not significantly impact its ability to sell and deliver services, and its ability to sell certain excess capacity on its existing terrestrial and undersea networks.  On May 7, 2018, as more fully discussed in Note 6, the Company obtained an amendment to the 2018 third and fourth quarter maximum leverage ratio covenant in its primary credit facility to provide for a greater margin of compliance on its leverage ratio on a prospective basis.  The Company will also consider making additional payments of debt to facilitate compliance with the leverage ratio covenant while still maintaining sufficient liquidity for operating purposes.

 

Management believes that it is probable that the Company will continue to comply with its debt covenants at each quarterly test date and maintain adequate liquidity for the following year. 

 

2. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and pursuant to rules and regulations of the U.S. Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted and condensed. In the opinion of the Company’s management, all adjustments have been made to present fairly the results of operations, comprehensive income, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2017.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and money market accounts with maturities at acquisition of three months or less.  The majority of cash balances at March 31, 2018 are held in one bank in demand deposit accounts.  

 

Supplemental Non-Cash Investing and Financing Activities

 

Accounts payable included $24.8 million and $21.9 million at March 31, 2018 and 2017, respectively, for additions to property, plant and equipment.

 

9


 

Revenue Recognition

 

Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives.  The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.  The prices for certain services are filed in tariffs with the regulatory body that exercises jurisdiction over the services.

 

The majority of data services, voice services, hosted and managed services, video services, internet services regardless of channel are billed one month in advance.  Revenue for these services is recognized in the month services are rendered. The portion of advance-billed services associated with services that will be delivered in a subsequent period is deferred.  To the extent that the advance billing has been collected as of period end or is unconditional because of contract provisions, then the advance billing is recorded as a liability in advance billings and customer deposits.

 

Charges for service activation are generally deferred and recognized in revenue over the contract term.

 

Revenues for providing usage based services, such as per-minute long-distance service included in voice services, access charges billed to long-distance companies for originating and terminating long-distance calls on the Company’s network included in other revenue and video on demand included in video services, are billed in arrears. Revenues for these services are based on actual rated usage and, where necessary, historical usage patterns, and are recognized in the month services are rendered.

 

Included in wholesale carrier data is revenue for long-term indefeasible right of use, or IRU, contracts for fiber circuit capacity.  The Company may receive up-front payments for these services to be delivered for a period of up to 25 years. In these situations, the Company defers the revenue and amortizes it on a straight-line basis to earnings over the term of the contract.  The Company recognizes a related financing component for the advance payment which is amortized to interest expense using the effective interest method also over the term of the contract.

 

Universal Service revenue subsidies included in other revenue, including those related to Connect America Fund Phase II, are government-sponsored support received in association with providing service in mostly rural, high-cost areas. These revenues are typically calculated by the government agency responsible for administering the support program. These revenues are recognized as granted by the government agency.

 

Equipment and related services for telecommunication systems and structured cabling project revenues are recognized as delivered. Maintenance services are recorded when the service is provided.  With respect to arrangements with multiple performance obligations, the Company allocates the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct good or service promised in the contract. If a standalone selling price is not observable, the Company estimates it.  Revenue is recognized for each performance obligation as delivered or as the service is performed depending on the nature of the performance obligation.

 

The Company presents taxes and surcharges collected from customers and remitted to governmental authorities on a gross basis when such taxes and surcharges are being imposed on the Company and the Company is not merely acting as an agent for the government.  Such amounts are included in the Company’s reported operating revenues and selling, general and administrative expenses and amounted to $2.1 million and $2.2 million for the three months ended March 31, 2018 and 2017, respectively.

 

Costs to obtain a contract, which are selling commissions, are deferred and recognized over the expected contract term.  Costs to fulfill a contract are generally accounted for under other accounting standards.  For example, they are capitalized if related to installation of an asset.

 

10


 

Earnings per Share

 

Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing earnings by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing earnings, adjusted for the effect, if any, from assumed conversion of all potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. The denominator used to compute basic and diluted earnings per share was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2018

    

2017

 

Basic earnings per share - weighted average shares

 

11,597,918

 

11,529,046

 

Effect of dilutive securities:

 

 

 

 

 

Employee and director restricted stock units

 

 —

 

 —

 

Diluted earnings per share - weighted average shares

 

11,597,918

 

11,529,046

 

 

The computation of weighted average dilutive shares outstanding excluded grants of restricted stock units convertible into 388,101 shares and 278,701 shares of common stock for the three months ended March 31, 2018 and 2017, respectively.  For the three months ended March 31, 2018 and 2017 the Company incurred a net loss so the restricted stock units are anti-dilutive to the computation of diluted net loss per share.  

 

Recently Adopted Accounting Pronouncement for Revenue Recognition

 

Effective January 1, 2018, the Company adopted a new accounting standard issued by the Financial Accounting Standard Board (“FASB”) which provides guidance for revenue recognition.  The new accounting standard supersedes existing revenue recognition requirements and most industry-specific guidance.  The standard’s core principal is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods and services.  The Company selected the modified retrospective method of adoption which requires a cumulative effect adjustment to retained earnings as of the adoption date.  The initial application of the new standard was limited to contracts not yet completed as of the effective date.  The details of significant changes in the Company’s revenue recognition and the quantitative impact are provided below.

 

Prior to 2018, the Company recognized revenue for telecommunication and structured cabling project revenues on a percentage of completion basis, generally based on the relative portion of costs incurred to total estimated costs of a project, except for short duration projects which were recognized upon completion of the project.  Beginning in 2018, revenue is recognized on all projects as completed as the Company concluded it retains primary control of the project assets during the installation process.  In addition, beginning in 2018, the Company began recognizing a financing component to the up-front payments for services to be delivered under indefeasible right of use contracts for fiber circuit capacity. 

 

Beginning in 2018, Company began deferring costs to obtain a contract, on all existing contracts, which are selling commissions, and is recognizing such costs over the expected contract term.  Prior to 2018, the Company had deferred certain costs related to activation in an amount that approximated the related revenue and recognized such costs over the expected customer life.  The Company has concluded that such costs are accounted for under other accounting standards such as those related to capitalization in conjunction with installation of an asset. 

 

The new accounting standard also provides guidance on presentation of contract assets and liabilities in the consolidated balance sheet.  The standard provides specific guidance on presentation of advance billings.  Beginning in 2018, a liability is recognized for advance billings where cash has been received in advance of delivery of goods or services, or when payment is due and the contract is non-cancellable.  Prior to 2018, a liability was recognized when the related goods or services were invoiced in advance of delivery of goods or services.

 

11


 

The cumulative effect of application of the new accounting standard as of January 1, 2018, net of tax, was to increase retained earnings by $4.1 million.  The impacts on the Company’s condensed consolidated financial statements as of March 31, 2018 and for the three months then ended are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Without

 

 

 

 

 

 

 

 

Adoption of

 

 

As Reported

    

Adjustments

    

New Standard

Statement of income data:

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

89,222

 

$

(214)

 

$

89,008

Operating expenses

 

 

93,046

 

 

207

 

 

93,253

Operating income (loss)

 

 

(3,824)

 

 

(421)

 

 

(4,245)

Interest expense

 

 

(4,136)

 

 

367

 

 

(3,769)

Loss before income tax benefit

 

 

(7,250)

 

 

(54)

 

 

(7,304)

Income tax benefit

 

 

(1,514)

 

 

1,395

 

 

(119)

Net loss

 

 

(5,736)

 

 

(1,449)

 

 

(7,185)

 

 

 

 

 

 

 

 

 

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

Receivables, net

 

$

24,119

 

$

6,850

 

$

30,969

Other current assets

 

 

3,639

 

 

(2,292)

 

 

1,347

Total current assets

 

 

57,941

 

 

4,558

 

 

62,499

Other assets

 

 

6,512

 

 

(4,046)

 

 

2,466

Total assets

 

 

714,343

 

 

512

 

 

714,855

Advance billings and customer deposits

 

 

9,349

 

 

7,039

 

 

16,388

Total current liabilities

 

 

88,655

 

 

7,039

 

 

95,694

Other liabilities

 

 

33,638

 

 

(989)

 

 

32,649

Total liabilities

 

 

496,043

 

 

6,050

 

 

502,093

Accumulated other comprehensive loss

 

 

(16,053)

 

 

(31)

 

 

(16,084)

Retained earnings

 

 

51,691

 

 

(5,507)

 

 

46,184

Total stockholders' equity

 

 

218,300

 

 

(5,538)

 

 

212,762

Total liabilities and stockholders' equity

 

 

714,343

 

 

512

 

 

714,855

 

 

 

 

 

 

 

 

 

 

Statement of cash flow data:

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,736)

 

$

(1,449)

 

$

(7,185)

Deferred income taxes

 

 

(1,395)

 

 

1,395

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 Receivables

 

 

55

 

 

202

 

 

257

 Prepaid expenses and other current assets

 

 

698

 

 

(4)

 

 

694

 Advance billings and customer deposits

 

 

1,466

 

 

(202)

 

 

1,264

Other

 

 

(166)

 

 

58

 

 

(108)

Net cash provided by operating activities

 

 

17,102

 

 

 —

 

 

17,102

 

Recently Adopted Accounting Pronouncement for Retirement Plan Costs

 

Effective January 1, 2018, the Company adopted a new accounting standard that amends the income statement presentation of net periodic benefit cost for defined benefit and other postretirement plans.  The new standard requires that the current service costs component be disaggregated from the other components of net benefit cost.  The other components must be presented elsewhere in the income statement outside of income from operations.  In addition, only the service-cost component of net benefit cost is eligible for capitalization related to self-constructed assets.  The presentation requirements were adopted on a retrospective basis resulting in a reclassification of retirement plan expense of $1.8 million for the three months ended March 31, 2017 from selling, general and administrative expense to other income and expense.  The change in capitalization methodology required is being applied on a prospective basis.

 

12


 

Recently Issued Accounting Pronouncements

 

New accounting pronouncements are issued periodically that affect the Company’s current and future operations. See the Company’s audited consolidated financial statements as of and for the year ended December 31, 2017 for further information.  No new standards impacting the Company were released subsequent to issuance of those consolidated financial statements. As more fully discussed in the Company’s audited consolidated financial statements, in February 2018, the FASB amended the accounting rules to allow for a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cut and Jobs Act.  In the first quarter of 2018, the Company concluded it will not adopt the optional provisions of the amendment.  

 

 

 

3. Contracts with Customers

 

Revenue from contracts by customer channel and by major product line is summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2018

    

2017

 

Business

 

 

 

 

 

 

 

Data services

 

$

14,846

 

$

15,617

 

Voice services

 

 

19,652

 

 

21,258

 

Hosted and managed services

 

 

1,599

 

 

1,532

 

Equipment and related services

 

 

3,029

 

 

5,443

 

 

 

 

39,126

 

 

43,850

 

Consumer

 

 

 

 

 

 

 

Video services

 

 

11,225

 

 

10,594

 

Internet services

 

 

7,105

 

 

6,681

 

Voice services

 

 

15,272

 

 

16,986

 

 

 

 

33,602

 

 

34,261

 

Wholesale carrier data

 

 

13,932

 

 

12,828

 

Other

 

 

2,562

 

 

3,571

 

 

 

$

89,222

 

$

94,510

 

 

The majority of revenue from all channels and product lines, except for equipment and related services, is recognized over time as the data, voice or video service is made available to the customer.  The majority of revenue from equipment and related services is recognized at a point in time as the equipment is delivered or when installation is complete.  Installation may occur in phases.  We recognize revenue of an individual phase when completed if it represents a stand-alone component that can operate independent of other components.

 

Contract Balances

 

Receivables consisted of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

Customers and other

 

$

27,930

 

$

36,118

 

Allowance for doubtful accounts

 

 

(3,811)

 

 

(3,889)

 

 

 

$

24,119

 

$

32,229

 

 

 

 

13


 

Contract liabilities consisted of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

 Current presented as advance billings

 

$

9,349

 

$

14,807

 

 Noncurrent deferred revenue included in other liabilities

 

 

28,554

 

 

28,036

 

 

 

$

37,903

 

$

42,843

 

 

Revenue recognized in the period that was included in the contract liability balances at the beginning of the period amounted to $2.8 million for the three months ended March 31, 2018.

 

Performance Obligations

 

The Company generally delivers telecommunication services ratably over the contract term.  The majority of services are invoiced in advance and balances are due within 30 days of issuance of an invoice or statement to the customer.  Many customers are on a month-to-month contract that can be cancelled at any time or within short notice.  Even for those customers on long term contracts, the Company will generally invoice the customer based on services provided during the month either at the beginning or end of the monthly service period.  For business equipment and related services, the Company will generally invoice upon delivery or project completion.  Certain large projects with installation periods of up to one year may be invoiced at set milestones.  Invoices are also due within 30 days of issuance.

 

Certain IRU contracts for extended periods of up to 25 years 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 is as follows (dollars in thousands):

 

 

 

 

 

 

Year ended December 31,

    

 

 

 

2018 (remaining months)

    

$

2,015

 

2019

 

 

2,686

 

2020

 

 

2,686

 

2021

 

 

2,686

 

2022

 

 

2,686

 

Thereafter

 

 

30,112

 

 

 

$

42,871

 

 

Costs to Obtain Contracts

 

Costs to obtain contracts representing sales commissions on certain products have been deferred and recognized over the expected contract term.  Total costs deferred amounted to $7.2 million at March 31, 2018.  Costs amortized to expense amounted to $0.7 million for the three months ended March 31, 2018.

 

4. Long-Lived Assets

 

Property, plant and equipment consisted of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

Property, plant and equipment cost

 

$

1,151,184

 

$

1,131,271

 

Less accumulated depreciation

 

 

(544,097)

 

 

(522,973)

 

 

 

$

607,087

 

$

608,298

 

 

Depreciation expense amounted to $23.0 million and $20.8 million for the three months ended March 31, 2018 and 2017, respectively. 

14


 

 

The gross carrying amount and accumulated amortization of identifiable intangible assets are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

    

Gross

    

 

 

    

Net

    

Gross

    

 

 

    

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

 

Subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

21,709

 

$

18,310

 

$

3,399

 

$

21,709

 

$

17,983

 

$

3,726

 

Trade name and other

 

 

320

 

 

320

 

 

 —

 

 

320

 

 

320

 

 

 —

 

 

 

 

22,029

 

 

18,630

 

 

3,399

 

 

22,029

 

 

18,303

 

 

3,726

 

Not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brand name

 

 

27,300

 

 

 —

 

 

27,300

 

 

27,300

 

 

 —

 

 

27,300

 

 

 

 

27,300

 

 

 —

 

 

27,300

 

 

27,300

 

 

 —

 

 

27,300

 

 

 

$

49,329

 

$

18,630

 

$

30,699

 

$

49,329

 

$

18,303

 

$

31,026

 

 

As of March 31, 2018, the Company had goodwill of $12.1 million.  As further discussed in Note 14, the Company has concluded it has only one segment and one reporting unit.  As such, the Company classifies all goodwill in the one segment.

 

Amortization expense amounted to $0.3 million and $0.4 million for the three months ended March 31, 2018 and 2017, respectively.  Estimated amortization expense for the next five years and thereafter is as follows (dollars in thousands):