0001564590-20-021317.txt : 20200505 0001564590-20-021317.hdr.sgml : 20200505 20200505164959 ACCESSION NUMBER: 0001564590-20-021317 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 79 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200505 DATE AS OF CHANGE: 20200505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINCINNATI BELL INC CENTRAL INDEX KEY: 0000716133 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 311056105 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08519 FILM NUMBER: 20849681 BUSINESS ADDRESS: STREET 1: 221 E FOURTH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 513-397-9900 MAIL ADDRESS: STREET 1: P O BOX 2301 CITY: CINCINNATI STATE: OH ZIP: 45201 FORMER COMPANY: FORMER CONFORMED NAME: BROADWING INC DATE OF NAME CHANGE: 20000512 FORMER COMPANY: FORMER CONFORMED NAME: CINCINNATI BELL INC /OH/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CBI INC DATE OF NAME CHANGE: 19830814 10-Q 1 cbb-10q_20200331.htm 10-Q cbb-10q_20200331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

For the Quarterly Period Ended March 31, 2020

 

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 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       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       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 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     No  

Securities Registered Pursuant to Section 12(b) of the Act:

 

At April 30, 2020, there were 50,564,267 common shares outstanding.

 

 


 

TABLE OF CONTENTS

 

PART I. Financial Information

 

 

 

 

 

 

 

 

 

Description

 

 

 

Page

Item 1.

 

Financial Statements

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, 2020 and 2019

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) Three Months Ended March 31, 2020 and 2019

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareowners' Deficit (Unaudited) Three Months Ended March 31, 2020 and 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) March 31, 2020 and December 31, 2019

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

Item 2.

 

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

 

21

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

 

PART II. Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

 

Item 3.

 

Default upon Senior Securities

 

42

 

 

 

 

 

Item 4.

 

Mine Safety Disclosure

 

42

 

 

 

 

 

Item 5.

 

Other Information

 

42

 

 

 

 

 

Item 6.

 

Exhibits

 

43

 

 

 

 

 

 

 

Signatures

 

44

 

 

 


 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

380.0

 

 

$

379.6

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

Cost of services and products, excluding items below

 

 

193.7

 

 

 

197.7

 

Selling, general and administrative, excluding items below

 

 

88.0

 

 

 

86.1

 

Depreciation and amortization

 

 

74.2

 

 

 

79.4

 

Restructuring and severance related charges

 

 

15.2

 

 

 

3.3

 

Transaction and integration costs

 

 

29.1

 

 

 

3.0

 

Total operating costs and expenses

 

 

400.2

 

 

 

369.5

 

Operating (loss) income

 

 

(20.2

)

 

 

10.1

 

Interest expense

 

 

33.7

 

 

 

35.1

 

Other components of pension and postretirement benefit plans expense

 

 

2.6

 

 

 

2.6

 

Other income, net

 

 

(0.8

)

 

 

(1.0

)

Loss before income taxes

 

 

(55.7

)

 

 

(26.6

)

Income tax (benefit) expense

 

 

(21.7

)

 

 

0.3

 

Net loss

 

 

(34.0

)

 

 

(26.9

)

Preferred stock dividends

 

 

2.6

 

 

 

2.6

 

Net loss applicable to common shareowners

 

$

(36.6

)

 

$

(29.5

)

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.72

)

 

$

(0.59

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

1


 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(34.0

)

 

$

(26.9

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(6.9

)

 

 

1.6

 

Cash flow hedges:

 

 

 

 

 

 

 

 

Unrealized loss on cash flow hedges arising during the period, net of tax of ($3.0), ($1.0)

 

 

(10.1

)

 

 

(3.1

)

Reclassification adjustment for net losses included in net income, net of tax of $0.3, $0.1

 

 

1.1

 

 

 

0.2

 

Defined benefit plans:

 

 

 

 

 

 

 

 

Amortization of prior service benefits included in net income, net of tax of ($0.1), ($0.1)

 

 

(0.5

)

 

 

(0.5

)

Amortization of net actuarial loss included in net income, net of tax of $1.0, $0.8

 

 

3.7

 

 

 

3.0

 

Total other comprehensive (loss) income

 

 

(12.7

)

 

 

1.2

 

Total comprehensive loss

 

$

(46.7

)

 

$

(25.7

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

2


 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' DEFICIT

(Dollars in 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 December 31, 2019

 

 

3.1

 

 

$

129.4

 

 

 

50.4

 

 

$

0.5

 

 

$

2,676.2

 

 

$

(2,776.0

)

 

$

(170.1

)

 

$

(140.0

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34.0

)

 

 

 

 

 

(34.0

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12.7

)

 

 

(12.7

)

Shares issued under employee plans

 

 

 

 

 

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares purchased under employee plans and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1.1

)

 

 

 

 

 

 

 

 

(1.1

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.7

 

 

 

 

 

 

 

 

 

1.7

 

Dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.6

)

 

 

 

 

 

 

 

 

(2.6

)

Balance at March 31, 2020

 

 

3.1

 

 

$

129.4

 

 

 

50.6

 

 

$

0.5

 

 

$

2,674.2

 

 

$

(2,810.0

)

 

$

(182.8

)

 

$

(188.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26.9

)

 

 

 

 

 

(26.9

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.2

 

 

 

1.2

 

Shares issued under employee plans

 

 

 

 

 

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares purchased under employee plans and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.8

)

 

 

 

 

 

 

 

 

(0.8

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.8

 

 

 

 

 

 

 

 

 

1.8

 

Dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.6

)

 

 

 

 

 

 

 

 

(2.6

)

Balance at March 31, 2019

 

 

3.1

 

 

$

129.4

 

 

 

50.4

 

 

$

0.5

 

 

$

2,678.4

 

 

$

(2,736.3

)

 

$

(174.3

)

 

$

(102.3

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3


 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except share amounts)

(Unaudited)  

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10.6

 

 

$

11.6

 

Receivables, less allowances of $16.7 and $14.3

 

 

270.0

 

 

 

307.7

 

Inventory, materials and supplies

 

 

43.3

 

 

 

44.6

 

Prepaid expenses

 

 

31.5

 

 

 

28.3

 

Other current assets

 

 

9.0

 

 

 

11.6

 

Total current assets

 

 

364.4

 

 

 

403.8

 

Property, plant and equipment, net

 

 

1,761.1

 

 

 

1,780.8

 

Operating lease right-of-use assets

 

 

34.1

 

 

 

35.8

 

Goodwill

 

 

156.8

 

 

 

160.5

 

Intangible assets, net

 

 

148.4

 

 

 

155.4

 

Deferred income tax assets

 

 

80.5

 

 

 

59.3

 

Other noncurrent assets

 

 

54.3

 

 

 

58.2

 

Total assets

 

$

2,599.6

 

 

$

2,653.8

 

Liabilities and Shareowners’ Deficit

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

21.8

 

 

$

22.3

 

Accounts payable

 

 

274.5

 

 

 

284.6

 

Unearned revenue and customer deposits

 

 

54.1

 

 

 

59.1

 

Accrued taxes

 

 

19.2

 

 

 

29.1

 

Accrued interest

 

 

24.6

 

 

 

26.8

 

Accrued payroll and benefits

 

 

43.5

 

 

 

49.0

 

Other current liabilities

 

 

51.6

 

 

 

52.6

 

Total current liabilities

 

 

489.3

 

 

 

523.5

 

Long-term debt, less current portion

 

 

1,927.2

 

 

 

1,901.3

 

Operating lease liabilities

 

 

31.2

 

 

 

32.1

 

Pension and postretirement benefit obligations

 

 

211.1

 

 

 

215.5

 

Pole license agreement obligation

 

 

37.7

 

 

 

38.0

 

Deferred income tax liabilities

 

 

10.7

 

 

 

11.7

 

Other noncurrent liabilities

 

 

81.1

 

 

 

71.7

 

Total liabilities

 

 

2,788.3

 

 

 

2,793.8

 

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 March 31, 2020 and December 31, 2019; liquidation preference $1,000 per share ($50 per depositary share)

 

 

129.4

 

 

 

129.4

 

Common shares, $.01 par value; 96,000,000 shares authorized; 50,564,267 and 50,420,700 shares issued and outstanding at March 31, 2020 and December 31, 2019

 

 

0.5

 

 

 

0.5

 

Additional paid-in capital

 

 

2,674.2

 

 

 

2,676.2

 

Accumulated deficit

 

 

(2,810.0

)

 

 

(2,776.0

)

Accumulated other comprehensive loss

 

 

(182.8

)

 

 

(170.1

)

Total shareowners’ deficit

 

 

(188.7

)

 

 

(140.0

)

Total liabilities and shareowners’ deficit

 

$

2,599.6

 

 

$

2,653.8

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(34.0

)

 

$

(26.9

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

74.2

 

 

 

79.4

 

Provision for loss on receivables

 

 

4.5

 

 

 

2.9

 

Noncash portion of interest expense

 

 

1.4

 

 

 

1.9

 

Deferred income taxes

 

 

(20.3

)

 

 

0.5

 

Pension and other postretirement payments in excess of expense

 

 

(0.2

)

 

 

(0.3

)

Stock-based compensation

 

 

1.7

 

 

 

1.8

 

Other, net

 

 

0.4

 

 

 

(1.3

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in receivables

 

 

29.0

 

 

 

82.3

 

(Increase) decrease in inventory, materials, supplies, prepaid expenses and other current assets

 

 

(0.5

)

 

 

7.5

 

Decrease in accounts payable

 

 

(5.3

)

 

 

(74.8

)

Decrease in accrued and other current liabilities

 

 

(25.1

)

 

 

(17.9

)

Decrease in other noncurrent assets

 

 

2.7

 

 

 

2.3

 

Increase (decrease) in other noncurrent liabilities

 

 

0.6

 

 

 

(0.6

)

Net cash provided by operating activities

 

 

29.1

 

 

 

56.8

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(50.9

)

 

 

(56.5

)

Other, net

 

 

 

 

 

(0.1

)

Net cash used in investing activities

 

 

(50.9

)

 

 

(56.6

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase (decrease) in corporate credit and receivables facilities with initial maturities less than 90 days

 

 

31.1

 

 

 

(3.8

)

Repayment of debt

 

 

(6.2

)

 

 

(4.5

)

Debt issuance costs

 

 

 

 

 

(0.1

)

Dividends paid on preferred stock

 

 

(2.6

)

 

 

(2.6

)

Other, net

 

 

(1.1

)

 

 

(0.8

)

Net cash provided by (used in) financing activities

 

 

21.2

 

 

 

(11.8

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(0.4

)

 

 

0.1

 

Net decrease in cash and cash equivalents

 

 

(1.0

)

 

 

(11.5

)

Cash and cash equivalents at beginning of period

 

 

11.6

 

 

 

15.4

 

Cash and cash equivalents at end of period

 

$

10.6

 

 

$

3.9

 

Noncash investing and financing transactions:

 

 

 

 

 

 

 

 

Acquisition of property by assuming debt and other noncurrent liabilities

 

$

0.3

 

 

$

9.8

 

Acquisition of property on account

 

$

25.6

 

 

$

33.2

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

5


 

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 has receivables with one customer, Verizon Communications Inc., which make up 13% and 25% of the outstanding accounts receivable balance at March 31, 2020 and December 31, 2019, respectively. Revenue derived from foreign operations was approximately 5% of consolidated revenue for the three months ended March 31, 2020 and 2019, 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, 2019 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 2019 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2020 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.

On March 13, 2020, in response to the COVID-19 pandemic, Federal Communications Commission (“FCC”) called on broadband and telephone service providers to keep Americans connected as the country reacts to the serious disruptions caused by the coronavirus outbreak. Cincinnati Bell, on behalf of all of its affiliates, including Hawaiian Telecom, signed on to the Keep Americans Connected Pledge and committed to waive late fees for, and not terminate service to, any of our consumer or small business customers who did not pay their bills timely due to an inability to pay caused by the COVID-19 crisis. As of March 31, 2020, our allowance for credit losses considered the current and potential future impacts caused by COVID-19 on each of the segments based on available information to date. It is reasonably possible that, as the economic factors and impacts of COVID-19 continue to evolve, the estimate could change and the effect could be material depending on the duration of the stay at home orders and social distancing mandates communicated by the local, state and federal governments. In the three months ended March 31, 2020, the incremental increase to the allowance for doubtful accounts resulted in bad debt expense of $1.6 million. With the exception of the incremental increase to the allowance for doubtful accounts, the Company is not aware of any other specific events or circumstances that would require updates to the Company’s estimates and judgements, or revisions to the carrying value of its assets or liabilities as of the date of issuance of these financial statements. These estimates may change, as new events occur and additional information is obtained, and such change requires an update in the consolidated financial statements. Actual results could differ from those estimates and any such differences may be material to the financial statements.

 

Accounting Policies The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

Income and Operating Taxes

Income taxes — In accordance with ASC 740-270, the Company’s income tax provision for interim periods is determined through the use of an estimated annual effective tax rate applied to year-to-date ordinary income/loss plus or minus the tax effects of discrete items. The Company’s estimated annual effective tax rate benefit is lower than statutory rates as a result of permanent items such as meals and entertainment expenses that are not fully deductible for tax. The net effect of several discrete items recorded in the quarter increased the tax benefit. Most significantly, the Company released a $14.4 million valuation allowance that was previously recorded on deferred tax assets related to interest expense for which the tax deduction was limited. The release of this valuation allowance was driven by the enactment of the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020, which contains provisions that increase the Company’s ability to deduct interest expense. Discrete tax benefits were offset, in part, by the $6.5 million tax effect of nondeductible transaction costs.

6


 

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 with ASC 606, revenue associated with these charges is excluded from the transaction price. In the first quarter of 2020, the Company released $2.3 million of sales and use tax reserve due to favorable audit results in the quarter.

Derivative 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 Comprehensive Loss." The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

For 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 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 March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. These amendments are effective as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating our contracts and the optional expedients provided by the new standard.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires a company to estimate credit losses expected over the life of the financial assets based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. This standard is effective for public entities for fiscal years beginning after December 15, 2019. The standard requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 was amended in November 2018 by the provisions of ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019 by the provisions of ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, in May 2019 by the provisions of ASU 2019-05, Financial Instruments – Credit Loses (Topic 326), and in November 2019 by the provisions of ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The Company adopted this ASU and all subsequent amendments effective January 1, 2020. The adoption of this standard, as amended, did not have a material effect on the Company’s condensed consolidated financial statements.

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.

7


 

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

March  31,

 

(in millions, except per share amounts)

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(34.0

)

 

$

(26.9

)

Preferred stock dividends

 

 

2.6

 

 

 

2.6

 

Net loss applicable to common shareowners - basic and diluted

 

$

(36.6

)

 

$

(29.5

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

50.5

 

 

 

50.3

 

Stock-based compensation arrangements

 

 

-

 

 

 

-

 

Weighted average common shares outstanding - diluted

 

 

50.5

 

 

 

50.3

 

Basic and diluted net loss per common share

 

$

(0.72

)

 

$

(0.59

)

 

For the three months ended March 31, 2020 and 2019, 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 all periods presented, preferred stock convertible into 0.9 million common shares was excluded as it was anti-dilutive.

 

3. Mergers and Acquisitions

 

Pending Acquisition by MIP

 

On December 21, 2019, the Company entered into an Agreement and Plan of Merger (as amended from time to time, the “Brookfield Merger Agreement”) with affiliates of the Brookfield Infrastructure Group (“Brookfield”), the infrastructure investment division of Brookfield Asset Management, which was subsequently amended. Pursuant to the amended Brookfield Merger Agreement, the Company would be acquired by an affiliate of Brookfield for $14.50 per Common Share (the “proposed Brookfield merger”).

On March 13, 2020, the Company terminated the Brookfield Merger Agreement and entered into an Agreement and Plan of Merger (the “MIP Merger Agreement”) pursuant to which the Company will be acquired by an affiliate of Macquarie Infrastructure Partners V (“MIP”), a fund managed by Macquarie Infrastructure and Real Assets (the “MIP Merger”). At the effective time of the MIP Merger (the “Effective Time”), each of our issued and outstanding Common Shares will be converted into the right to receive $15.50 in cash per Common Share, without interest, and the 6 3/4% Cumulative Convertible Preferred Shares will remain issued and outstanding as 6 3/4% Cumulative Convertible Preferred Shares of the Company, without par value, following the Effective Time.  

In connection with the termination of the Brookfield Merger Agreement, the Company paid to an affiliate of Brookfield a termination fee of $24.8 million as required by the terms of the Brookfield Merger Agreement. The termination fee is recorded in “Transaction and integration costs” on the Condensed Consolidated Statements of Operations.

The consummation of the MIP Merger is subject to customary closing conditions, including (i) the adoption of the MIP Merger Agreement by the affirmative vote of the holders of at least two-thirds of all outstanding Common Shares and 6 3/4% Cumulative Convertible Preferred Shares, voting as a single class; (ii) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the receipt of any required consents or approvals from (a) the Committee on Foreign Investment in the United States, (b) the Federal Communications Commission, (c) state public service and state public utility commissions and (d) local regulators in connection with the provision of telecommunications and media services; and (iv) the absence of any legal restraint preventing the consummation of the MIP Merger. 

The MIP Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature. 

The MIP Merger is expected to close in the first half of 2021, although there can be no assurance that the MIP Merger will occur by that date. As a result of the MIP Merger at the Effective Time, the Company will cease to be a publicly traded company.

8


 

4.    Revenue

The Entertainment and Communications segment provides products and services to both residential and commercial 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 residential and commercial 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").

Residential customers have implied month-to-month contracts. 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-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. Contracts associated with the SEA-US typically range from 15 to 25 years and payment is prepaid.

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 acquisition 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. The 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 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 estimated projection of 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.

9


 

As of March 31, 2020, 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 $36.8 million. Approximately 80% of this revenue is related to IRU contracts associated with the 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)

 

 

 

 

Nine months ended December 31, 2020

 

$

2.1

 

2021

 

 

2.5

 

2022

 

 

2.6

 

2023

 

 

2.5

 

2024

 

 

2.6

 

Thereafter

 

 

24.5

 

 

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 Data, Voice and Video, 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 residential and commercial 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, 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. Infrastructure Solutions includes the sale of hardware and maintenance contracts as well as installation projects.

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 an