UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
September 30,☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission File Number 1-8519
CINCINNATI BELL INC.
Ohio | 31-1056105 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
221 East Fourth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
(513) 397-9900
(Registrant’s telephone number, including area code)
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | |||||
Common Shares ($0.01 par value) | CBB | New York Stock Exchange | |||||
Depositary Shares, each representing 1/20 interest in a Share of 6 ¾% Cumulative | CBB.PB | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (
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
Securities Registered Pursuant to Section 12(b) of the Act:
At October 31, 2017,2020, there were 42,185,51450,680,605 common shares outstanding.
TABLE OF CONTENTS
Description | Page | |||
Item 1. | Financial Statements | |||
1 | ||||
2 | ||||
3 | ||||
Condensed Consolidated Balance Sheets (Unaudited) September 30, | 4 | |||
5 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 6 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||
Item 3. | 40 | |||
Item 4. | 40 | |||
PART II. Other Information | ||||
Item 1. | 41 | |||
Item 1A. | 41 | |||
Item 2. | 48 | |||
Item 3. | 48 | |||
Item 4. | 48 | |||
Item 5. | 48 | |||
Item 6. | 49 | |||
50 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Revenue |
| $ | 389.5 |
|
| $ | 382.5 |
|
| $ | 1,149.5 |
|
| $ | 1,146.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and products, excluding items below |
|
| 203.9 |
|
|
| 194.7 |
|
|
| 591.0 |
|
|
| 587.9 |
|
Selling, general and administrative, excluding items below |
|
| 86.0 |
|
|
| 88.0 |
|
|
| 255.3 |
|
|
| 261.3 |
|
Depreciation and amortization |
|
| 71.9 |
|
|
| 75.5 |
|
|
| 220.8 |
|
|
| 229.1 |
|
Restructuring and severance related charges |
|
| 0.8 |
|
|
| 1.3 |
|
|
| 16.4 |
|
|
| 6.4 |
|
Transaction and integration costs |
|
| 2.2 |
|
|
| 0.2 |
|
|
| 33.8 |
|
|
| 3.8 |
|
Total operating costs and expenses |
|
| 364.8 |
|
|
| 359.7 |
|
|
| 1,117.3 |
|
|
| 1,088.5 |
|
Operating income |
|
| 24.7 |
|
|
| 22.8 |
|
|
| 32.2 |
|
|
| 57.8 |
|
Interest expense |
|
| 33.4 |
|
|
| 35.0 |
|
|
| 100.6 |
|
|
| 105.0 |
|
Other components of pension and postretirement benefit plans expense |
|
| 2.6 |
|
|
| 2.8 |
|
|
| 9.0 |
|
|
| 8.4 |
|
Other (income) expense, net |
|
| (0.2 | ) |
|
| 0.5 |
|
|
| (1.2 | ) |
|
| (0.4 | ) |
Loss before income taxes |
|
| (11.1 | ) |
|
| (15.5 | ) |
|
| (76.2 | ) |
|
| (55.2 | ) |
Income tax benefit |
|
| (2.9 | ) |
|
| (1.9 | ) |
|
| (26.2 | ) |
|
| (9.2 | ) |
Net loss |
|
| (8.2 | ) |
|
| (13.6 | ) |
|
| (50.0 | ) |
|
| (46.0 | ) |
Preferred stock dividends |
|
| 2.6 |
|
|
| 2.6 |
|
|
| 7.8 |
|
|
| 7.8 |
|
Net loss applicable to common shareowners |
| $ | (10.8 | ) |
| $ | (16.2 | ) |
| $ | (57.8 | ) |
| $ | (53.8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
| $ | (0.21 | ) |
| $ | (0.32 | ) |
| $ | (1.14 | ) |
| $ | (1.07 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue | |||||||||||||||
Services | $ | 244.3 | $ | 246.7 | $ | 734.8 | $ | 733.1 | |||||||
Products | 44.9 | 65.7 | 126.6 | 167.4 | |||||||||||
Total revenue | 289.2 | 312.4 | 861.4 | 900.5 | |||||||||||
Costs and expenses | |||||||||||||||
Cost of services, excluding items below | 129.0 | 127.7 | 381.2 | 375.7 | |||||||||||
Cost of products sold, excluding items below | 33.6 | 56.1 | 101.6 | 141.6 | |||||||||||
Selling, general and administrative, excluding items below | 54.5 | 55.5 | 166.6 | 164.9 | |||||||||||
Depreciation and amortization | 47.3 | 46.5 | 140.1 | 134.7 | |||||||||||
Restructuring and severance related charges | — | — | 29.2 | — | |||||||||||
Transaction and integration costs | 12.1 | — | 14.4 | — | |||||||||||
Other | — | 1.1 | — | 1.1 | |||||||||||
Total operating costs and expenses | 276.5 | 286.9 | 833.1 | 818.0 | |||||||||||
Operating income | 12.7 | 25.5 | 28.3 | 82.5 | |||||||||||
Interest expense | 18.8 | 17.9 | 54.9 | 58.1 | |||||||||||
Loss on extinguishment of debt, net | — | 11.4 | — | 14.2 | |||||||||||
Gain on sale of Investment in CyrusOne | — | (33.3 | ) | (117.7 | ) | (151.9 | ) | ||||||||
Other expense (income), net | 4.5 | (0.1 | ) | 3.5 | (1.2 | ) | |||||||||
(Loss) income before income taxes | (10.6 | ) | 29.6 | 87.6 | 163.3 | ||||||||||
Income tax expense | 0.6 | 10.8 | 36.3 | 59.9 | |||||||||||
Net (loss) income | (11.2 | ) | 18.8 | 51.3 | 103.4 | ||||||||||
Preferred stock dividends | 2.6 | 2.6 | 7.8 | 7.8 | |||||||||||
Net (loss) income applicable to common shareowners | $ | (13.8 | ) | $ | 16.2 | $ | 43.5 | $ | 95.6 | ||||||
Basic net (loss) earnings per common share | $ | (0.33 | ) | $ | 0.39 | $ | 1.03 | $ | 2.28 | ||||||
Diluted net (loss) earnings per common share | $ | (0.33 | ) | $ | 0.38 | $ | 1.03 | $ | 2.27 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net loss |
| $ | (8.2 | ) |
| $ | (13.6 | ) |
| $ | (50.0 | ) |
| $ | (46.0 | ) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss) |
|
| 2.0 |
|
|
| (1.0 | ) |
|
| (2.1 | ) |
|
| 2.1 |
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges arising during the period, net of tax of ($0.1), $(0.9), ($3.3), ($4.2) |
|
| (0.5 | ) |
|
| (3.0 | ) |
|
| (11.3 | ) |
|
| (13.9 | ) |
Reclassification adjustment for net losses included in net income, net of tax of $0.5, $0.2, $1.4, $0.3 |
|
| 1.8 |
|
|
| 0.4 |
|
|
| 4.6 |
|
|
| 0.8 |
|
Defined benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) arising from remeasurement during the period, net of tax of $1.0, ($3.4), $0.0 |
|
| 3.2 |
|
|
| 0 |
|
|
| (11.5 | ) |
|
| 0.1 |
|
Amortization of prior service benefits included in net income, net of tax of ($0.1), ($0.2), ($0.4), ($0.5) |
|
| (0.5 | ) |
|
| (0.4 | ) |
|
| (1.5 | ) |
|
| (1.4 | ) |
Amortization of net actuarial loss included in net income, net of tax of $1.1, $1.0, $3.3, $2.7 |
|
| 3.7 |
|
|
| 2.9 |
|
|
| 11.1 |
|
|
| 8.9 |
|
Reclassification adjustment for pension settlement charges included in net income, net of tax of $0.2 |
|
| 0 |
|
|
| 0 |
|
|
| 0.9 |
|
|
| 0 |
|
Total other comprehensive income (loss) |
|
| 9.7 |
|
|
| (1.1 | ) |
|
| (9.8 | ) |
|
| (3.4 | ) |
Total comprehensive income (loss) |
| $ | 1.5 |
|
| $ | (14.7 | ) |
| $ | (59.8 | ) |
| $ | (49.4 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net (loss) income | $ | (11.2 | ) | $ | 18.8 | $ | 51.3 | $ | 103.4 | ||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Unrealized gains on Investment in CyrusOne, net of tax of $4.4 | — | — | 8.3 | — | |||||||||||
Reclassification adjustment for gain on sale of Investment in CyrusOne included in net income, net of tax of ($41.3) | — | — | (76.4 | ) | — | ||||||||||
Foreign currency translation gain (loss) | 0.1 | — | 0.1 | (0.1 | ) | ||||||||||
Defined benefit plans: | |||||||||||||||
Amortization of prior service benefits included in net income, net of tax of ($0.4), ($1.2), ($1.2), ($3.9) | (0.8 | ) | (2.4 | ) | (2.2 | ) | (7.1 | ) | |||||||
Amortization of net actuarial loss included in net income, net of tax of $1.9, $2.1, $5.9, $6.4 | 3.6 | 3.8 | 10.7 | 11.6 | |||||||||||
Total other comprehensive income (loss) | 2.9 | 1.4 | (59.5 | ) | 4.4 | ||||||||||
Total comprehensive (loss) income | $ | (8.3 | ) | $ | 20.2 | $ | (8.2 | ) | $ | 107.8 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share amounts)millions)
(Unaudited)
|
| 6 3/4 % Cumulative Convertible Preferred Shares |
|
| Common Shares |
|
| Additional Paid-in |
|
| Accumulated |
|
| Accumulated Other Comprehensive |
|
|
|
|
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Loss |
|
| Total |
| ||||||||
Balance at June 30, 2020 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.7 |
|
| $ | 0.5 |
|
| $ | 2,672.9 |
|
| $ | (2,817.8 | ) |
| $ | (189.6 | ) |
| $ | (204.6 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8.2 | ) |
|
| — |
|
|
| (8.2 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9.7 |
|
|
| 9.7 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.2 |
|
|
| — |
|
|
| — |
|
|
| 1.2 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
Balance at September 30, 2020 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.7 |
|
| $ | 0.5 |
|
| $ | 2,671.5 |
|
| $ | (2,826.0 | ) |
| $ | (179.9 | ) |
| $ | (204.5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.4 |
|
| $ | 0.5 |
|
| $ | 2,677.4 |
|
| $ | (2,741.8 | ) |
| $ | (177.8 | ) |
| $ | (112.3 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13.6 | ) |
|
| — |
|
|
| (13.6 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.1 | ) |
|
| (1.1 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.0 |
|
|
| — |
|
|
| — |
|
|
| 2.0 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
|
| — |
|
|
| — |
|
|
| (2.6 | ) |
Balance at September 30, 2019 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.4 |
|
| $ | 0.5 |
|
| $ | 2,676.8 |
|
| $ | (2,755.4 | ) |
| $ | (178.9 | ) |
| $ | (127.6 | ) |
|
| 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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50.0 | ) |
|
| — |
|
|
| (50.0 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9.8 | ) |
|
| (9.8 | ) |
Shares issued under employee plans |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares purchased under employee plans and other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.1 | ) |
|
| — |
|
|
| — |
|
|
| (1.1 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4.2 |
|
|
| — |
|
|
| — |
|
|
| 4.2 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
Balance at September 30, 2020 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.7 |
|
| $ | 0.5 |
|
| $ | 2,671.5 |
|
| $ | (2,826.0 | ) |
| $ | (179.9 | ) |
| $ | (204.5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.2 |
|
| $ | 0.5 |
|
| $ | 2,680.0 |
|
| $ | (2,709.4 | ) |
| $ | (175.5 | ) |
| $ | (75.0 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (46.0 | ) |
|
| — |
|
|
| (46.0 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3.4 | ) |
|
| (3.4 | ) |
Shares issued under employee plans |
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares purchased under employee plans and other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
|
| — |
|
|
| — |
|
|
| (0.8 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5.4 |
|
|
| — |
|
|
| — |
|
|
| 5.4 |
|
Dividends on preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
|
| — |
|
|
| — |
|
|
| (7.8 | ) |
Balance at September 30, 2019 |
|
| 3.1 |
|
| $ | 129.4 |
|
|
| 50.4 |
|
| $ | 0.5 |
|
| $ | 2,676.8 |
|
| $ | (2,755.4 | ) |
| $ | (178.9 | ) |
| $ | (127.6 | ) |
September 30, 2017 | December 31, 2016 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 43.7 | $ | 9.7 | |||
Receivables, less allowances of $10.3 and $9.9 | 170.0 | 178.6 | |||||
Inventory, materials and supplies | 19.8 | 22.7 | |||||
Prepaid expenses | 17.7 | 15.0 | |||||
Other current assets | 6.6 | 3.9 | |||||
Total current assets | 257.8 | 229.9 | |||||
Property, plant and equipment, net | 1,112.8 | 1,085.5 | |||||
Investment in CyrusOne | — | 128.0 | |||||
Goodwill | 18.6 | 14.3 | |||||
Deferred income taxes, net | 50.4 | 64.5 | |||||
Other noncurrent assets | 17.7 | 18.8 | |||||
Total assets | $ | 1,457.3 | $ | 1,541.0 | |||
Liabilities and Shareowners’ Deficit | |||||||
Current liabilities | |||||||
Current portion of long-term debt | $ | 12.0 | $ | 7.5 | |||
Accounts payable | 109.0 | 105.9 | |||||
Unearned revenue and customer deposits | 32.6 | 36.3 | |||||
Accrued taxes | 19.2 | 12.9 | |||||
Accrued interest | 13.4 | 12.7 | |||||
Accrued payroll and benefits | 35.3 | 25.7 | |||||
Other current liabilities | 31.2 | 31.9 | |||||
Total current liabilities | 252.7 | 232.9 | |||||
Long-term debt, less current portion | 1,120.8 | 1,199.1 | |||||
Pension and postretirement benefit obligations | 186.3 | 197.7 | |||||
Other noncurrent liabilities | 31.0 | 33.0 | |||||
Total liabilities | 1,590.8 | 1,662.7 | |||||
Shareowners’ deficit | |||||||
Preferred stock, 2,357,299 shares authorized, 155,250 shares (3,105,000 depositary shares) of 6 3/4% Cumulative Convertible Preferred Stock issued and outstanding at September 30, 2017 and December 31, 2016; liquidation preference $1,000 per share ($50 per depositary share) | 129.4 | 129.4 | |||||
Common shares, $.01 par value; 96,000,000 shares authorized; 42,182,031 and 42,056,237 shares issued; 42,182,031 and 42,056,237 shares outstanding at September 30, 2017 and December 31, 2016 | 0.4 | 0.4 | |||||
Additional paid-in capital | 2,567.3 | 2,570.9 | |||||
Accumulated deficit | (2,680.8 | ) | (2,732.1 | ) | |||
Accumulated other comprehensive loss | (149.8 | ) | (90.3 | ) | |||
Total shareowners’ deficit | (133.5 | ) | (121.7 | ) | |||
Total liabilities and shareowners’ deficit | $ | 1,457.3 | $ | 1,541.0 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)millions, except share amounts)
(Unaudited)
|
| September 30, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 8.8 |
|
| $ | 11.6 |
|
Receivables, less allowances of $20.2 and $14.3 |
|
| 280.1 |
|
|
| 307.7 |
|
Inventory, materials and supplies |
|
| 28.7 |
|
|
| 44.6 |
|
Prepaid expenses |
|
| 30.8 |
|
|
| 28.3 |
|
Other current assets |
|
| 13.2 |
|
|
| 11.6 |
|
Total current assets |
|
| 361.6 |
|
|
| 403.8 |
|
Property, plant and equipment, net |
|
| 1,732.5 |
|
|
| 1,780.8 |
|
Operating lease right-of-use assets |
|
| 34.1 |
|
|
| 35.8 |
|
Goodwill |
|
| 159.3 |
|
|
| 160.5 |
|
Intangible assets, net |
|
| 143.4 |
|
|
| 155.4 |
|
Deferred income tax assets |
|
| 86.2 |
|
|
| 59.3 |
|
Other noncurrent assets |
|
| 46.7 |
|
|
| 58.2 |
|
Total assets |
| $ | 2,563.8 |
|
| $ | 2,653.8 |
|
Liabilities and Shareowners’ Deficit |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | 21.6 |
|
| $ | 22.3 |
|
Accounts payable |
|
| 223.6 |
|
|
| 284.6 |
|
Unearned revenue and customer deposits |
|
| 50.3 |
|
|
| 59.1 |
|
Accrued taxes |
|
| 20.4 |
|
|
| 29.1 |
|
Accrued interest |
|
| 24.5 |
|
|
| 26.8 |
|
Accrued payroll and benefits |
|
| 62.8 |
|
|
| 49.0 |
|
Other current liabilities |
|
| 46.9 |
|
|
| 52.6 |
|
Total current liabilities |
|
| 450.1 |
|
|
| 523.5 |
|
Long-term debt, less current portion |
|
| 1,936.4 |
|
|
| 1,901.3 |
|
Operating lease liabilities |
|
| 30.9 |
|
|
| 32.1 |
|
Pension and postretirement benefit obligations |
|
| 216.9 |
|
|
| 215.5 |
|
Pole license agreement obligation |
|
| 37.1 |
|
|
| 38.0 |
|
Deferred income tax liability |
|
| 10.8 |
|
|
| 11.7 |
|
Other noncurrent liabilities |
|
| 86.1 |
|
|
| 71.7 |
|
Total liabilities |
|
| 2,768.3 |
|
|
| 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 September 30, 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; 50,680,605 and 50,420,700 shares issued and outstanding at September 30, 2020 and December 31, 2019 |
|
| 0.5 |
|
|
| 0.5 |
|
Additional paid-in capital |
|
| 2,671.5 |
|
|
| 2,676.2 |
|
Accumulated deficit |
|
| (2,826.0 | ) |
|
| (2,776.0 | ) |
Accumulated other comprehensive loss |
|
| (179.9 | ) |
|
| (170.1 | ) |
Total shareowners’ deficit |
|
| (204.5 | ) |
|
| (140.0 | ) |
Total liabilities and shareowners’ deficit |
| $ | 2,563.8 |
|
| $ | 2,653.8 |
|
Nine Months Ended | |||||||
September 30, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 51.3 | $ | 103.4 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 140.1 | 134.7 | |||||
Loss on extinguishment of debt, net | — | 14.2 | |||||
Gain on sale of Investment in CyrusOne | (117.7 | ) | (151.9 | ) | |||
Provision for loss on receivables | 5.6 | 7.2 | |||||
Noncash portion of interest expense | 1.5 | 2.4 | |||||
Deferred income taxes | 35.9 | 59.3 | |||||
Pension and other postretirement payments less than (in excess of) expense | 2.1 | (3.9 | ) | ||||
Stock-based compensation | 5.2 | 4.8 | |||||
Other, net | 1.1 | (3.1 | ) | ||||
Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||
Decrease (increase) in receivables | 20.8 | (11.0 | ) | ||||
Increase in inventory, materials, supplies, prepaid expenses and other current assets | (1.7 | ) | (6.0 | ) | |||
Increase (decrease) in accounts payable | 2.4 | (3.9 | ) | ||||
Increase (decrease) in accrued and other current liabilities | 11.1 | (3.9 | ) | ||||
Decrease (increase) in other noncurrent assets | 1.8 | (2.1 | ) | ||||
(Decrease) increase in other noncurrent liabilities | (2.7 | ) | 1.4 | ||||
Net cash provided by operating activities | 156.8 | 141.6 | |||||
Cash flows from investing activities | |||||||
Capital expenditures | (148.2 | ) | (188.8 | ) | |||
Increase in restricted cash | — | (90.7 | ) | ||||
Proceeds from sale of Investment in CyrusOne | 140.7 | 181.2 | |||||
Acquisitions of businesses | (9.6 | ) | — | ||||
Dividends received from Investment in CyrusOne | — | 6.2 | |||||
Other, net | 0.3 | (0.8 | ) | ||||
Net cash used in investing activities | (16.8 | ) | (92.9 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from issuance of long-term debt | — | 425.0 | |||||
Net (decrease) increase in corporate credit and receivables facilities with initial maturities less than 90 days | (89.5 | ) | 5.9 | ||||
Repayment of debt | (6.4 | ) | (461.0 | ) | |||
Debt issuance costs | (1.3 | ) | (8.4 | ) | |||
Dividends paid on preferred stock | (7.8 | ) | (7.8 | ) | |||
Common stock repurchase | — | (4.8 | ) | ||||
Other, net | (1.0 | ) | 3.5 | ||||
Net cash used in financing activities | (106.0 | ) | (47.6 | ) | |||
Net increase in cash and cash equivalents | 34.0 | 1.1 | |||||
Cash and cash equivalents at beginning of period | 9.7 | 7.4 | |||||
Cash and cash equivalents at end of period | $ | 43.7 | $ | 8.5 | |||
Noncash investing and financing transactions: | |||||||
Accrual of CyrusOne dividends | $ | — | $ | 1.2 | |||
Acquisition of property by assuming debt and other noncurrent liabilities | $ | 16.7 | $ | 10.9 | |||
Acquisition of property on account | $ | 19.8 | $ | 43.0 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
|
| Nine Months Ended September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net loss |
| $ | (50.0 | ) |
| $ | (46.0 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 220.8 |
|
|
| 229.1 |
|
Provision for loss on receivables |
|
| 11.6 |
|
|
| 9.1 |
|
Noncash portion of interest expense |
|
| 4.1 |
|
|
| 4.8 |
|
Deferred income taxes |
|
| (26.4 | ) |
|
| (8.4 | ) |
Pension and other postretirement payments less than (in excess of) expense |
|
| 0.3 |
|
|
| (0.2 | ) |
Stock-based compensation |
|
| 4.2 |
|
|
| 5.4 |
|
Other, net |
|
| (0.7 | ) |
|
| (3.4 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease in receivables |
|
| 14.8 |
|
|
| 82.4 |
|
Decrease (increase) in inventory, materials, supplies, prepaid expenses and other current assets |
|
| 12.2 |
|
|
| (0.6 | ) |
Decrease in accounts payable |
|
| (56.6 | ) |
|
| (76.4 | ) |
Decrease in accrued and other current liabilities |
|
| (12.2 | ) |
|
| (12.1 | ) |
Decrease in other noncurrent assets |
|
| 9.9 |
|
|
| 7.7 |
|
Increase (decrease) in other noncurrent liabilities |
|
| 6.9 |
|
|
| (2.5 | ) |
Net cash provided by operating activities |
|
| 138.9 |
|
|
| 188.9 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (159.2 | ) |
|
| (167.3 | ) |
Other, net |
|
| (1.6 | ) |
|
| 0.3 |
|
Net cash used in investing activities |
|
| (160.8 | ) |
|
| (167.0 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in corporate credit and receivables facilities with initial maturities less than 90 days |
|
| 48.0 |
|
|
| (8.1 | ) |
Repayment of debt |
|
| (19.3 | ) |
|
| (13.4 | ) |
Debt issuance costs |
|
| (0.5 | ) |
|
| (0.8 | ) |
Dividends paid on preferred stock |
|
| (7.8 | ) |
|
| (7.8 | ) |
Other, net |
|
| (1.1 | ) |
|
| (0.8 | ) |
Net cash provided by (used in) financing activities |
|
| 19.3 |
|
|
| (30.9 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (0.2 | ) |
|
| 0.1 |
|
Net decrease in cash and cash equivalents |
|
| (2.8 | ) |
|
| (8.9 | ) |
Cash and cash equivalents at beginning of period |
|
| 11.6 |
|
|
| 15.4 |
|
Cash and cash equivalents at end of period |
| $ | 8.8 |
|
| $ | 6.5 |
|
Noncash investing and financing transactions: |
|
|
|
|
|
|
|
|
Acquisition of property by assuming debt and other noncurrent liabilities |
| $ | 4.0 |
|
| $ | 13.4 |
|
Acquisition of property on account |
| $ | 23.7 |
|
| $ | 26.1 |
|
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")The Company has receivables with one large1 customer, General Electric Company, that makesVerizon Communications Inc., which make up 14%11% and 21%25% of the outstanding accounts receivable balance at September 30, 20172020 and December 31, 2016,2019, respectively. This same customer represented 12%Revenue derived from foreign operations was approximately 5% of consolidated revenue for the three and nine months ended September 30, 2016.
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, 20162019 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 20162019 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 20172020 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 CyrusOne —
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, 2016, "Investment in CyrusOne" on the Condensed Consolidated Balance Sheets was recorded at fair value, which was determined based on closing market price of CyrusOne Inc. at December 31, 2016. This investment is classified as Level 1 in the fair value hierarchy. Unrealized gains and losses on our investment in CyrusOne are included in "Accumulated other comprehensive loss", net of taxes on the Condensed Consolidated Balance Sheets.
Income and Operating Taxes
Income taxes —
Operating taxes — The Company elected to record certain operating taxes such as property, sales, use, and gross receipts taxes including telecommunications surcharges as expenses, primarily within cost of services and products. These taxes are not included in income tax expense because the amounts to be paid are not dependent on our level of income. Liabilities for audit exposures are established based on management's assessment of the probability of payment. The provision for such liabilities is recognized as either property, plant and equipment, operating tax expense, or depreciation expense depending on the nature of the audit exposure. Upon resolution of an additional $10.2 million from "Deferred income taxes, net" to "Receivables." Inaudit, any remaining liability not paid is released against the second quarter of 2017,account in which it was originally recorded. During the three and nine months ended September 30, 2020, the Company received $14.5had net releases of $0.3 million and $4.7 million, respectively, of payments relatedsales and use tax reserve due primarily to favorable audit results. 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.
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 2016 AMT tax credits. AccelerationCondensed Consolidated Statements of the AMT refundable tax credits was the result of the Company's decision to make an election on its 2016 federal income tax return to claim the credits in lieu of claiming bonus depreciation. New tax legislation enacted in 2015 increased the amount of AMT credits that can be claimed beginning with the 2016 tax year.Operations or "Accumulated Other Comprehensive Loss." The Company plansdoes not hold or issue derivative financial instruments for trading or speculative purposes.
For derivative instruments that hedge the exposure to makevariability 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 electionperiod 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 its 2017 federal income tax return.
Recently Issued Accounting Standards
In May 2017,August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation2020-06, Debt - Stock Compensation, which amendsDebt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The ASU reduces the scopenumber of modification accounting models for share-based payment arrangements.convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As compared with current U.S. GAAP, more convertible debt instruments will be reported as a single liability instrument and the interest rate of more convertible debt instruments will be closer to the coupon interest rate. In addition, the ASU increases information related to disclosures for convertible instruments and aligns the consistency of diluted Earnings Per Share ("EPS") calculations for convertible instruments by requiring that (1) an entity use the if-converted method and (2) share settlement be included in the diluted EPS calculation for both convertible instruments and equity contracts when those contracts include an option of cash settlement or share settlement. The ASU is effective for public business entities for annual periodsfiscal years beginning after December 15, 2017. The Company plans to prospectively adopt the standard effective January 1, 2018 and will apply the amended guidance to any awards modified on or after this date.
In March 2020, the FASB issued 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 January 1, 2017as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 and will applymay 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 guidance when performingoptional expedients provided by the annual impairment test in the fourth quarter of 2017.new standard.
In NovemberJune 2016, the FASB issued ASU 2016-16, Statement of Cash Flow - Restricted Cash,2016-13, Financial Instruments – Credit Losses (Topic 326), which amends ASC 230 to require that a statement of cash flows explainreplaces the change during the period in total cash, cash equivalents, and amounts described as restricted cash. As a result, amounts classified as restricted cash will now be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company plans to early adopt the standard effective December 31, 2017. The adoption of this standard will not result in a prior period adjustment for the twelve months ended December 31, 2016.
Other accounting standards that have reached conclusions on our key accounting assessments related to the standard and are finalizing our accounting policies. Based on our initial assessment, we believe the timing of revenue recognition for our Entertainment and Communications segment, and certain revenue streams within our IT Services and Hardware segment, will not materially change. However, we are continuing to assess the potential impact of the standard on the treatment of Telecom and IT hardware revenue and our current practice of recording hardware revenue on a gross basis versus net. As a part of this assessment, we are analyzing ASU 2016-08,
2. Earnings Per Common Share
Basic earnings per common share (“EPS”)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 the issuance of common shares for awards under stock-based compensation plans the exercise of warrants or the conversion of preferred stock, but only to the extent that they are considered dilutive.
The following table shows the computation of basic and diluted EPS:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in millions, except per share amounts) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (8.2 | ) |
| $ | (13.6 | ) |
| $ | (50.0 | ) |
| $ | (46.0 | ) |
Preferred stock dividends |
|
| 2.6 |
|
|
| 2.6 |
|
|
| 7.8 |
|
|
| 7.8 |
|
Net loss applicable to common shareowners - basic and diluted |
| $ | (10.8 | ) |
| $ | (16.2 | ) |
| $ | (57.8 | ) |
| $ | (53.8 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic |
|
| 50.7 |
|
|
| 50.4 |
|
|
| 50.6 |
|
|
| 50.4 |
|
Stock-based compensation arrangements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Weighted average common shares outstanding - diluted |
|
| 50.7 |
|
|
| 50.4 |
|
|
| 50.6 |
|
|
| 50.4 |
|
Basic and diluted net loss per common share |
| $ | (0.21 | ) |
| $ | (0.32 | ) |
| $ | (1.14 | ) |
| $ | (1.07 | ) |
Three Months Ended | |||||||
September 30, | |||||||
(in millions, except per share amounts) | 2017 | 2016 | |||||
Numerator: | |||||||
Net (loss) income | $ | (11.2 | ) | $ | 18.8 | ||
Preferred stock dividends | 2.6 | 2.6 | |||||
Net (loss) income applicable to common shareowners - basic and diluted | $ | (13.8 | ) | $ | 16.2 | ||
Denominator: | |||||||
Weighted average common shares outstanding - basic | 42.2 | 42.0 | |||||
Stock-based compensation arrangements | — | 0.1 | |||||
Weighted average common shares outstanding - diluted | 42.2 | 42.1 | |||||
Basic (loss) earnings per common share | $ | (0.33 | ) | $ | 0.39 | ||
Diluted (loss) earnings per common share | $ | (0.33 | ) | $ | 0.38 |
Nine Months Ended | |||||||
September 30, | |||||||
(in millions, except per share amounts) | 2017 | 2016 | |||||
Numerator: | |||||||
Net income | $ | 51.3 | $ | 103.4 | |||
Preferred stock dividends | 7.8 | 7.8 | |||||
Net income applicable to common shareowners - basic and diluted | $ | 43.5 | $ | 95.6 | |||
Denominator: | |||||||
Weighted average common shares outstanding - basic | 42.1 | 42.0 | |||||
Stock-based compensation arrangements | 0.2 | 0.1 | |||||
Weighted average common shares outstanding - diluted | 42.3 | 42.1 | |||||
Basic earnings per common share | $ | 1.03 | $ | 2.28 | |||
Diluted earnings per common share | $ | 1.03 | $ | 2.27 |
For the three and nine months ended September 30, 2017,2020 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 the nine months ended September 30, 2017, awards under the Company's stock-based compensation plans for common shares of 0.2 million were excluded from the computation of diluted EPS as the inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2016, awards under the Company's stock-based compensation plans for common shares of 0.2 million and 0.4 million, respectively, were excluded from the computation of diluted EPS as the inclusion would have been anti-dilutive. For all periods presented, preferred stock convertible into 0.9 million common shares was excluded as it was anti-dilutive.
3. 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.
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 Contents
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. On May 7, 2020, the shareholders of the Company adopted the MIP Merger Agreement at a virtual special meeting of shareholders.
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. At the Effective Time, the Company will cease to be a publicly traded company as a result of the completion of the MIP Merger.
Consent Solicitation for 7.000% Senior Notes due 2024 and 8.000% Senior Notes due 2025
On June 15, 2020, the Company announced that it had commenced consent solicitations (the “Consent Solicitations”) with respect to certain proposed amendments to the (i) indenture, dated as of September 22, 2016 (as supplemented and amended, the “2024 Notes Indenture”) governing its 7.000% Senior Notes due 2024 (the “2024 Notes”) and (ii) indenture, dated as of October 6, 2017 (as supplemented and amended, the “2025 Notes Indenture,” and together with the 2024 Notes Indenture, the “Indentures”) governing its 8.000% Senior Notes due 2025 (the “2025 Notes,” and together with the 2024 Notes, the “Notes”).
Upon the terms and subject to the conditions described in the consent solicitation statement, dated June 15, 2020 (as supplemented by the Company's press release, dated June 22, 2020, the Company's press release, dated June 25, 2020, the supplement to the consent solicitation statement, dated June 25, 2020 and the Company's press release, dated June 30, 2020, the “Consent Solicitation Statement”), the Company solicited consents in order to (i) amend the definition of “Change of Control” in the Indentures so that the MIP Merger would not constitute a Change of Control and (ii) add a definition of, and designate certain persons, including MIP and its affiliates and Ares Management Corporation and its affiliates as, “Permitted Holders” (collectively, the “Proposed Amendments”).
On July 2, 2020 (the “Effective Date”), following receipt of the requisite consents from holders of the Notes pursuant to the Consent Solicitations to amend certain provisions of the Indentures, which Consent Solicitations expired at 5:00 p.m., New York City time on July 2, 2020, the Company, certain of the Company’s subsidiaries, as guarantors, and Regions Bank, as trustee, entered into a sixth supplemental indenture, dated as of July 2, 2020 (the “Sixth Supplemental Indenture”) to the 2024 Notes Indenture and a second supplemental indenture, dated as of July 2, 2020 to the 2025 Notes Indenture (the “Second Supplemental Indenture”, and, together with the Sixth Supplemental Indenture, the “Supplemental Indentures”).
Subject to the terms and conditions in the Consent Solicitation Statement (including the consummation of the MIP Merger), holders who validly delivered (and did not validly revoke) their consents on or prior to the Effective Date are eligible to receive (i) with respect to the 2024 Notes, an aggregate cash payment of $2,812,500, on a pro rata basis (based on aggregate principal amount of 2024 Notes for which consents have been validly delivered and not revoked), and (ii) with respect to the 2025 Notes, an aggregate cash payment of $1,050,000, on a pro rata basis (based on aggregate principal amount of 2025 Notes for which consents have been validly delivered and not revoked). The Company expects to make this cash payment substantially concurrently with the consummation of the MIP Merger.
The Supplemental Indentures became effective upon execution thereof, but the Proposed Amendments will only become operative upon the occurrence of certain conditions described in the Supplemental Indentures, including payment of the consent fees pursuant to the Consent Solicitations. If the conditions described in the Supplemental Indentures are not satisfied, the Indentures will revert to the form in effect immediately prior to the Effective Date. In addition, subject to the terms and conditions described in the Consent Solicitation Statement and upon satisfaction or waiver of such conditions, including the consummation of the MIP Merger, the Company will secure the Notes and the related guarantees on a pari passu basis (subject to certain exceptions) with the new senior secured credit facilities expected to be entered into in connection with the MIP Merger (the “Collateral”). Any Collateral granted by the Company (but not its subsidiaries) to secure the Notes will also secure the Issuer’s 7.25% Senior Notes due 2023 and any Collateral granted by the Company’s subsidiary Cincinnati Bell Telephone Company LLC (“CBT”) to secure the Notes will also secure CBT’s 6.30% Senior Notes due 2028, in each case on an equal and ratable basis.
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 includes 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 120 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.
As of September 30, 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 $35.5 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) |
|
|
|
|
Three months ended December 31, 2020 |
| $ | 0.8 |
|
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 the Data, Voice and Video services, service is delivered to the customer continuously and in a substantially similar manner for each period of the agreement, the customer takes full control over the services as the service is delivered, and as such Data, Voice and Video are identified to be a series of distinct services. Services provided by the Entertainment and Communications segment can be categorized into three main categories that include Consumer/SMB, Enterprise Fiber and Legacy, each of which may include one or more of the aforementioned performance obligations. Data services include high-speed internet access, digital subscriber lines, ethernet, routed network services, SONET (Synchronous Optical Network), dedicated internet access, wavelength, digital signal and IRU revenue. Voice services include traditional and fiber voice lines, switched access, digital trunking and consumer long distance calling. Video services are offered through our fiber network to 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 anyone besides the purchasing customer, and it does not integrate the hardware with any of its own goods or services. Based on this assessment, the performance obligation is to arrange a sale of hardware between the vendor and the customer. In the instance where there is an issue with the hardware, the Company coordinates with the manufacturer to facilitate a return in accordance with the standard manufacturer warranty. Hardware returns are not significant to the Company.
Within the IT Services and Hardware segment, stand-alone selling prices for the four performance obligations are determined based on either a margin percentage range, minimum margin percentage or standard price list.
For hardware sales, revenue is recognized net of the cost of product and is recognized when the hardware is either shipped or delivered in accordance with the terms of the contract. For certain projects within Communications and Consulting, revenue is recognized when the customer communicates acceptance of the services performed. For contracts with freight on board shipping terms, management has elected to account for shipping and handling as activities to fulfill the promise to transfer the good, and therefore has not evaluated whether shipping and handling activities are promised services to its customers.
Contract Balances
The Company recognizes incremental fulfillment costs as an asset when installation expenses are incurred as part of performing the agreement for Voice, Video and Data product offerings in the Entertainment and Communications segment in which the contract life is longer than one year. These fulfillment costs are amortized ratably over the expected life of the customer, which is representative of the expected period of benefit of the asset capitalized. The expected life of the customer is determined utilizing the average churn rate for each product. The Company calculates average churn based on the historical average customer life. We also recognize an asset for incremental fulfillment costs for certain Communications services in the IT Services and Hardware segment that require us to incur installation and provisioning expenses. The asset recognized for Communication services is amortized over the average contract life. Churn rates and average contract life are reviewed on an annual basis. Fulfillment costs are capitalized to “Other noncurrent assets.” The related amortization expense is recorded to “Cost of services and products.”
The Company recognizes an asset for the incremental costs of acquiring a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs related to Voice, Video, Data and certain Communications and Cloud services meet the requirements to be capitalized. The contract asset established for the costs of acquiring a contract is recorded to “Other noncurrent assets.” Sales incentives are amortized ratably over the period that services are delivered using either an average churn rate or average contract term, both representative of the expected period of benefit of the asset capitalized. Customer churn rates and average contract term assumptions are reviewed on an annual basis. The related amortization expense is recorded to “Selling, general and administrative.”
Management has elected to use the practical expedient detailed in ASC 340-40-25-4 to expense any costs to fulfill a contract and costs to obtain a contract as they are incurred when the amortization period would have been one year or less. This practical expedient has been applied to fulfillment costs that include installation costs associated with wiring projects and certain Cloud services. In addition, this practical expedient has been applied to acquisition costs associated with revenue from certain Communications projects.
The following table presents the activity for the Company’s contract assets:
|
| Fulfillment Costs |
|
| Cost of Acquisition |
|
| Total Contract Assets |
| |||||||||||||||||||||||||||
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Total Company |
|
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Total Company |
|
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Total Company |
| |||||||||
Balance as of December 31, 2019 |
| $ | 8.0 |
|
| $ | 4.1 |
|
| $ | 12.1 |
|
| $ | 14.8 |
|
| $ | 2.3 |
|
| $ | 17.1 |
|
| $ | 22.8 |
|
| $ | 6.4 |
|
| $ | 29.2 |
|
Additions |
|
| 0.9 |
|
|
| 0.5 |
|
|
| 1.4 |
|
|
| 2.3 |
|
|
| 0.3 |
|
|
| 2.6 |
|
|
| 3.2 |
|
|
| 0.8 |
|
|
| 4.0 |
|
Amortization |
|
| (2.1 | ) |
|
| (0.6 | ) |
|
| (2.7 | ) |
|
| (2.0 | ) |
|
| (0.4 | ) |
|
| (2.4 | ) |
|
| (4.1 | ) |
|
| (1.0 | ) |
|
| (5.1 | ) |
Balance as of March 31, 2020 |
|
| 6.8 |
|
|
| 4.0 |
|
|
| 10.8 |
|
|
| 15.1 |
|
|
| 2.2 |
|
|
| 17.3 |
|
|
| 21.9 |
|
|
| 6.2 |
|
|
| 28.1 |
|
Additions |
|
| 0.9 |
|
|
| 0.4 |
|
|
| 1.3 |
|
|
| 2.2 |
|
|
| 0.3 |
|
|
| 2.5 |
|
|
| 3.1 |
|
|
| 0.7 |
|
|
| 3.8 |
|
Amortization |
|
| (2.0 | ) |
|
| (0.6 | ) |
|
| (2.6 | ) |
|
| (2.0 | ) |
|
| (0.4 | ) |
|
| (2.4 | ) |
|
| (4.0 | ) |
|
| (1.0 | ) |
|
| (5.0 | ) |
Balance as of June 30, 2020 |
|
| 5.7 |
|
|
| 3.8 |
|
|
| 9.5 |
|
|
| 15.3 |
|
|
| 2.1 |
|
|
| 17.4 |
|
|
| 21.0 |
|
|
| 5.9 |
|
|
| 26.9 |
|
Additions |
|
| 0.9 |
|
|
| 0.6 |
|
|
| 1.5 |
|
|
| 2.3 |
|
|
| 0.1 |
|
|
| 2.4 |
|
|
| 3.2 |
|
|
| 0.7 |
|
|
| 3.9 |
|
Amortization |
|
| (2.0 | ) |
|
| (0.6 | ) |
|
| (2.6 | ) |
|
| (2.1 | ) |
|
| (0.3 | ) |
|
| (2.4 | ) |
|
| (4.1 | ) |
|
| (0.9 | ) |
|
| (5.0 | ) |
Balance as of September 30, 2020 |
|
| 4.6 |
|
|
| 3.8 |
|
|
| 8.4 |
|
|
| 15.5 |
|
|
| 1.9 |
|
|
| 17.4 |
|
|
| 20.1 |
|
|
| 5.7 |
|
|
| 25.8 |
|
The Company recognizes a liability for cash received upfront for IRU contracts. At September 30, 2020 and December 31, 2019, $1.6 million and $1.5 million, respectively, of contract liabilities were included in "Other current liabilities." At September 30, 2020 and December 31, 2019, $26.6 million and $27.1 million, respectively, of contract liabilities were included in "Other noncurrent liabilities."
Disaggregated Revenue
The following table presents revenues disaggregated by product and service lines:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Data |
| $ | 119.8 |
|
| $ | 119.5 |
|
| $ | 358.8 |
|
| $ | 356.5 |
|
Video |
|
| 48.1 |
|
|
| 50.2 |
|
|
| 145.1 |
|
|
| 153.5 |
|
Voice |
|
| 65.5 |
|
|
| 70.7 |
|
|
| 197.6 |
|
|
| 215.4 |
|
Other |
|
| 7.6 |
|
|
| 8.1 |
|
|
| 23.0 |
|
|
| 23.9 |
|
Total Entertainment and Communications |
|
| 241.0 |
|
|
| 248.5 |
|
|
| 724.5 |
|
|
| 749.3 |
|
Consulting |
|
| 49.4 |
|
|
| 37.6 |
|
|
| 138.5 |
|
|
| 114.6 |
|
Cloud |
|
| 21.1 |
|
|
| 22.6 |
|
|
| 63.0 |
|
|
| 69.8 |
|
Communications |
|
| 53.9 |
|
|
| 51.3 |
|
|
| 160.3 |
|
|
| 147.0 |
|
Infrastructure Solutions |
|
| 30.8 |
|
|
| 29.0 |
|
|
| 82.7 |
|
|
| 85.6 |
|
Total IT Services and Hardware |
|
| 155.2 |
|
|
| 140.5 |
|
|
| 444.5 |
|
|
| 417.0 |
|
Intersegment revenue |
|
| (6.7 | ) |
|
| (6.5 | ) |
|
| (19.5 | ) |
|
| (20.0 | ) |
Total revenue |
| $ | 389.5 |
|
| $ | 382.5 |
|
| $ | 1,149.5 |
|
| $ | 1,146.3 |
|
The following table presents revenues disaggregated by contract type:
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||||
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Intersegment revenue elimination |
|
| Total |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Products and Services transferred at a point in time |
| $ | 6.6 |
|
| $ | 7.7 |
|
| $ | 34.1 |
|
| $ | 33.5 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 40.7 |
|
| $ | 41.2 |
|
Products and Services transferred over time |
|
| 229.5 |
|
|
| 235.5 |
|
|
| 119.3 |
|
|
| 105.8 |
|
|
| 0 |
|
|
| 0 |
|
|
| 348.8 |
|
|
| 341.3 |
|
Intersegment revenue |
|
| 4.9 |
|
|
| 5.3 |
|
|
| 1.8 |
|
|
| 1.2 |
|
|
| (6.7 | ) |
|
| (6.5 | ) |
|
| — |
|
|
| — |
|
Total revenue |
| $ | 241.0 |
|
| $ | 248.5 |
|
| $ | 155.2 |
|
| $ | 140.5 |
|
| $ | (6.7 | ) |
| $ | (6.5 | ) |
| $ | 389.5 |
|
| $ | 382.5 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Intersegment revenue elimination |
|
| Total |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Products and Services transferred at a point in time |
| $ | 19.1 |
|
| $ | 23.6 |
|
| $ | 93.2 |
|
| $ | 95.2 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 112.3 |
|
| $ | 118.8 |
|
Products and Services transferred over time |
|
| 690.6 |
|
|
| 709.2 |
|
|
| 346.6 |
|
|
| 318.3 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,037.2 |
|
|
| 1,027.5 |
|
Intersegment revenue |
|
| 14.8 |
|
|
| 16.5 |
|
|
| 4.7 |
|
|
| 3.5 |
|
|
| (19.5 | ) |
|
| (20.0 | ) |
|
| — |
|
|
| — |
|
Total revenue |
| $ | 724.5 |
|
| $ | 749.3 |
|
| $ | 444.5 |
|
| $ | 417.0 |
|
| $ | (19.5 | ) |
| $ | (20.0 | ) |
| $ | 1,149.5 |
|
| $ | 1,146.3 |
|
5. Goodwill and Intangible Assets
Goodwill
The changes in the Company's goodwill consisted of the following:
(dollars in millions) |
| IT Services and Hardware |
|
| Entertainment and Communications |
|
| Total Company |
| |||
Goodwill, balance as of December 31, 2019 |
| $ | 148.1 |
|
| $ | 12.4 |
|
| $ | 160.5 |
|
Activity during the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Currency translations |
|
| (1.2 | ) |
|
| 0 |
|
|
| (1.2 | ) |
Goodwill, balance as of September 30, 2020 |
| $ | 146.9 |
|
| $ | 12.4 |
|
| $ | 159.3 |
|
NaN impairment losses were recognized in goodwill for the three and nine months ended September 30, 2020 and 2019.
Intangible Assets
The Company’s intangible assets consisted of the following:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||
|
| Gross Carrying |
|
| Accumulated |
|
| Net |
|
| Gross Carrying |
|
| Accumulated |
|
| Net |
| ||||||
(dollars in millions) |
| Amount (a) |
|
| Amortization |
|
| Amount |
|
| Amount (a) |
|
| Amortization |
|
| Amount |
| ||||||
Customer relationships |
| $ | 140.0 |
|
| $ | (36.0 | ) |
| $ | 104.0 |
|
| $ | 140.8 |
|
| $ | (28.4 | ) |
| $ | 112.4 |
|
Trade names |
|
| 40.9 |
|
|
| (8.4 | ) |
|
| 32.5 |
|
|
| 41.3 |
|
|
| (6.0 | ) |
|
| 35.3 |
|
Technology |
|
| 9.8 |
|
|
| (2.9 | ) |
|
| 6.9 |
|
|
| 9.9 |
|
|
| (2.2 | ) |
|
| 7.7 |
|
Total |
| $ | 190.7 |
|
| $ | (47.3 | ) |
| $ | 143.4 |
|
| $ | 192.0 |
|
| $ | (36.6 | ) |
| $ | 155.4 |
|
(a) | Change in gross carrying amounts is due to foreign currency translation on certain intangible assets. |
Amortization expense for intangible assets was $3.6 million and $10.8 million for the three and nine months ended September 30, 2020, respectively. Amortization expense for intangible assets was $3.7 million and $11.0 million for the three and nine months ended September 30, 2019, respectively. In addition to amortization expense, the changes in definite-lived intangible assets from December 31, 2019 to September 30, 2020 are due to foreign currency translation. NaN impairment losses were recognized for the three and nine months ended September 30, 2020 and 2019.
The estimated useful lives for each intangible asset class are as follows:
Customer relationships | 8 to 15 years | |
Trade names | 10 to 15 years | |
Technology | 10 years |
The annual estimated amortization expense for future years is as follows:
(dollars in millions) |
|
|
|
|
Three months ended December 31, 2020 |
| $ | 3.6 |
|
2021 |
|
| 14.1 |
|
2022 |
|
| 13.9 |
|
2023 |
|
| 13.5 |
|
2024 |
|
| 13.3 |
|
Thereafter |
|
| 85.0 |
|
Total |
| $ | 143.4 |
|
During the third quarter of 2020, the Company participated in Auction 105 conducted by the FCC for Priority Access Licenses of the Citizens Band Radio Service Spectrum (“CBRS”). In September 2020, the FCC announced that the Company was the winning bidder of 56 wireless spectrum licenses for an aggregate price of $6.2 million. Prior to the inception of Auction 105 in June 2020, the Company deposited $1.7 million with the FCC. The deposit is included in “Other current assets” as of September 30, 2020 in the Condensed Consolidated Balance Sheets. On October 1, 2020, the Company paid the FCC the remaining $4.5 million of the purchase price for the licenses won in the auction. The Company expects the licenses to be transferred in the fourth quarter of 2020.
6. Debt
The Company’s debt consists of the following:
|
| September 30, |
|
| December 31, |
| ||
(dollars in millions) |
| 2020 |
|
| 2019 |
| ||
Current portion of long-term debt: |
|
|
|
|
|
|
|
|
Credit Agreement - Tranche B Term Loan due 2024 |
| $ | 6.0 |
|
| $ | 6.0 |
|
Other financing arrangements |
|
| 2.0 |
|
|
| 2.0 |
|
Finance lease liabilities |
|
| 13.6 |
|
|
| 14.3 |
|
Current portion of long-term debt |
|
| 21.6 |
|
|
| 22.3 |
|
Long-term debt, less current portion: |
|
|
|
|
|
|
|
|
Receivables Facility |
|
| 179.5 |
|
|
| 131.5 |
|
Credit Agreement - Revolving Credit Facility |
|
| 57.0 |
|
|
| 57.0 |
|
Credit Agreement - Tranche B Term Loan due 2024 |
|
| 582.0 |
|
|
| 586.5 |
|
7 1/4% Senior Notes due 2023 |
|
| 22.3 |
|
|
| 22.3 |
|
7% Senior Notes due 2024 |
|
| 625.0 |
|
|
| 625.0 |
|
8% Senior Notes due 2025 |
|
| 350.0 |
|
|
| 350.0 |
|
Various Cincinnati Bell Telephone notes |
|
| 87.9 |
|
|
| 87.9 |
|
Other financing arrangements |
|
| 1.3 |
|
|
| 3.2 |
|
Finance lease liabilities |
|
| 50.3 |
|
|
| 59.5 |
|
|
|
| 1,955.3 |
|
|
| 1,922.9 |
|
Net unamortized premium |
| �� | 1.1 |
|
|
| 1.3 |
|
Unamortized note issuance costs |
|
| (20.0 | ) |
|
| (22.9 | ) |
Long-term debt, less current portion |
|
| 1,936.4 |
|
|
| 1,901.3 |
|
Total debt |
| $ | 1,958.0 |
|
| $ | 1,923.6 |
|
(dollars in millions) | September 30, 2017 | December 31, 2016 | |||||
Current portion of long-term debt: | |||||||
Capital lease obligations and other debt | $ | 12.0 | $ | 7.5 | |||
Current portion of long-term debt | 12.0 | 7.5 | |||||
Long-term debt, less current portion: | |||||||
Receivables Facility | — | 89.5 | |||||
Corporate Credit Agreement - Tranche B Term Loan | 315.8 | 315.8 | |||||
7 1/4% Senior Notes due 2023 | 22.3 | 22.3 | |||||
7% Senior Notes due 2024 | 625.0 | 625.0 | |||||
Cincinnati Bell Telephone Notes | 87.9 | 87.9 | |||||
Capital lease obligations and other debt | 72.4 | 62.0 | |||||
1,123.4 | 1,202.5 | ||||||
Net unamortized premium | 8.0 | 8.5 | |||||
Unamortized note issuance costs | (10.6 | ) | (11.9 | ) | |||
Long-term debt, less current portion | 1,120.8 | 1,199.1 | |||||
Total debt | $ | 1,132.8 | $ | 1,206.6 |
Credit Agreement
The Company had $57.0 million of outstanding borrowings on the CorporateRevolving Credit Agreement's revolving credit facility,Facility, leaving $150.0$143.0 million available for borrowings as of September 30, 2017. On October 2, 2017, the Company entered into a new Credit Agreement (the “Credit Agreement”) and Revolving Credit Facility that terminated the existing Corporate Credit Agreement.
Accounts Receivable Securitization Facility
As of
September 30,Under this agreement,the Receivables Facility, certain U.S. and Canadian subsidiaries, oras originators, sell their respective trade receivables on a continuous basis to Cincinnati Bell Funding LLC (“CBF”). or Cincinnati Bell Funding Canada Ltd. ("CBFC"), wholly-owned consolidated subsidiaries of the Company. Although CBF is aand CBFC are wholly-owned consolidated subsidiarysubsidiaries of the Company, CBF isand CBFC are legally separate from the Company and each of the Company’s other subsidiaries. Upon and after the sale or contribution of the accounts receivable to CBF or CBFC, such accounts receivable are legally assets of CBF and CBFC and, as such, are not available to creditors of the Company's other subsidiaries or the Company.
7. Leases
Lessee Disclosures
The Company primarily leases real estate for offices, retail stores and central offices, as well as equipment, cell towers and fleet vehicles.Upon adoption of ASC 842, the Company elected not to recognize leases with terms of one-year or less on the balance sheet.
Supplemental balance sheet information related to the Company's leases is as follows:
(dollars in millions) |
| Balance Sheet Location |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Operating lease assets, net of amortization |
| Operating lease right-of-use assets |
| $ | 34.1 |
|
| $ | 35.8 |
|
Finance lease assets, net of amortization |
| Property, plant and equipment, net |
|
| 25.8 |
|
|
| 33.2 |
|
Operating lease liabilities: |
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities |
| Other current liabilities |
|
| 9.2 |
|
|
| 10.9 |
|
Noncurrent operating lease liabilities |
| Operating lease liabilities |
|
| 30.9 |
|
|
| 32.1 |
|
Total operating lease liabilities |
|
|
|
| 40.1 |
|
|
| 43.0 |
|
Finance lease liabilities: |
|
|
|
|
|
|
|
|
|
|
Current finance lease liabilities |
| Current portion of long-term debt |
|
| 13.6 |
|
|
| 14.3 |
|
Noncurrent finance lease liabilities |
| Long-term debt, less current portion |
|
| 50.3 |
|
|
| 59.5 |
|
Total finance lease liabilities |
|
|
| $ | 63.9 |
|
| $ | 73.8 |
|
.
Supplemental cash flow information related to leases is as follows:
(dollars in millions) |
| Nine Months Ended September 30, 2020 |
|
| Nine Months Ended September 30, 2019 |
| ||
Supplemental Cash Flows Information |
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows from finance leases |
| $ | 3.3 |
|
| $ | 3.9 |
|
Operating cash flows from operating leases |
| $ | 9.5 |
|
| $ | 8.3 |
|
Financing cash flows from finance leases |
| $ | 13.9 |
|
| $ | 8.2 |
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
New operating leases |
| $ | 6.8 |
|
| $ | 5.1 |
|
New finance leases |
| $ | 4.0 |
|
| $ | 13.4 |
|
8. Financial Instruments and Fair Value Measurements
Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements, the Company uses a three-level hierarchy that prioritizes the use of observable inputs. The three levels are:
Level 1 — Quoted market prices for identical instruments in an active market;
Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and
Level 3 — Unobservable inputs that reflect management's determination of assumptions that market participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including our own data.
The determination of where an Ohio corporationasset or liability falls in the hierarchy requires significant judgment.
Interest Rate Swaps
The Company uses interest rate swap agreements to minimize its exposure to interest rate fluctuations on variable rate debt borrowings. Interest rate swaps involve the exchange of fixed and wholly owned subsidiaryvariable rate interest payments and do not represent an actual exchange of Cincinnati Bell Inc., closed the private offeringunderlying notional amounts between parties.
In the second quarter of $350 million aggregate principal2018, the Company entered into one forward starting non-amortizing interest rate swap with a notional amount of 8% senior notes due 2025 (the “8% Senior Notes”) at par.$300.0 million to convert variable rate debt to fixed rate debt. The 8% Senior Notes were issued pursuantinterest rate swap became effective in June 2018 and expires in June 2023. The interest rate swap results in interest payments based on an average fixed rate of 2.938% plus the applicable margin per the requirements in the Credit Agreement.
In the first quarter of 2019, the Company entered into three forward starting non-amortizing interest rate swaps, with a notional amount of $89.0 million each, to convert variable rate debt to fixed rate debt. The interest rate swaps became effective in March 2019 and expire in March 2024. The interest rate swaps result in interest payments based on an indenture, datedaverage fixed rate per swap of 2.275%, 2.244% and 2.328% plus the applicable margin per the requirements in the Credit Agreement.
During the next twelve months, the Company estimates that $9.3 million will be reclassified as of October 6, 2017 (the “Indenture”), between the Issuer and Regions Bank, as trustee.
The fair value of the offering, the Issuer entered into an escrow agreement (the “Escrow Agreement”) pursuant to which the initial purchasers of the 8% Senior Notes on behalf (and at the direction) of the Issuer, deposited the gross proceeds of the offering into an escrow account. The Issuer deposited into the escrow account an additional amount of cash that will be sufficient to pay allCompany's interest that would accrue on the Notes up to, but not including, October 9, 2018.
Upon inception, the interest rate swaps were designated as cash flow hedges under ASC 815, with gains and losses, net of tax, measured on an ongoing basis recorded in accumulated other comprehensive loss. The fair value of the Issuer’s failure to timely deposit cash intointerest rate swaps are categorized as Level 2 in the escrow account equal tofair value hierarchy as they are based on well-recognized financial principles and available market data.
As of September 30, days2020, the fair value of the interest that would accrue onrate swap liability was $27.6 million and is recorded in the 8% Senior Notes to deposit suchCondensed Consolidated Balance Sheets as follows:
(dollars in millions) |
| Balance Sheet Location |
| September 30, 2020 |
|
| Quoted Prices in active markets Level 1 |
|
| Significant observable inputs Level 2 |
|
| Significant unobservable inputs Level 3 |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap |
| Other current liabilities |
| $ | 9.3 |
|
| $ | 0 |
|
| $ | 9.3 |
|
| $ | 0 |
|
Interest Rate Swap |
| Other noncurrent liabilities |
| $ | 18.3 |
|
| $ | 0 |
|
| $ | 18.3 |
|
| $ | 0 |
|
As of December 31, 2019, the fair value of the interest rate swap liability was $19.0 million and is recorded in the Condensed Consolidated Balance Sheets as follows:
(dollars in millions) |
| Balance Sheet Location |
| December 31, 2019 |
|
| Quoted Prices in active markets Level 1 |
|
| Significant observable inputs Level 2 |
|
| Significant unobservable inputs Level 3 |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap |
| Other current liabilities |
| $ | 5.7 |
|
| $ | 0 |
|
| $ | 5.7 |
|
| $ | 0 |
|
Interest Rate Swap |
| Other noncurrent liabilities |
| $ | 13.3 |
|
| $ | 0 |
|
| $ | 13.3 |
|
| $ | 0 |
|
The amount of cash within five business days after receiptgains (losses) recognized in Accumulated Other Comprehensive Income ("AOCI") net of such notice, the Issuer will be required to redeem allreclassifications into earnings is as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Interest Rate Swap |
| $ | 1.7 |
|
| $ | (3.3 | ) |
| $ | (8.6 | ) |
| $ | (17.0 | ) |
The amount of losses reclassified from AOCI into earnings is as follows:
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| Statement of Operations Location |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Interest Rate Swap |
| Interest expense |
| $ | (2.3 | ) |
| $ | (0.6 | ) |
| $ | (6.0 | ) |
| $ | (1.1 | ) |
Disclosure on Financial Instruments
The carrying values of the 8% Senior Notes at a redemption price equal to 100%Company's financial instruments approximate the estimated fair values as of September 30, 2020 and December 31, 2019, except for the Company's long-term debt and other installment financing arrangements. The carrying and fair values of these items are as follows:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||||||||
(dollars in millions) |
| Carrying Value |
|
| Fair Value |
|
| Carrying Value |
|
| Fair Value |
| ||||
Long-term debt, including current portion* |
| $ | 1,910.8 |
|
| $ | 1,945.4 |
|
| $ | 1,867.5 |
|
| $ | 1,921.5 |
|
Other installment financing arrangements |
|
| 42.2 |
|
|
| 52.4 |
|
|
| 43.5 |
|
|
| 55.5 |
|
* | Excludes finance leases, other financing arrangements and note issuance costs. |
The fair value of our long-term debt was based on closing or estimated market prices of the initial issue price, plus accruedCompany’s debt at September 30, 2020 and unpaid interest to, but excluding, the redemption date.
9. Pension and October 1, respectively. Postretirement Plans
As of September 30, 2020, the Company sponsors three noncontributory defined benefit plans and a postretirement health and life insurance plan in Cincinnati (collectively the "Cincinnati Plans"), and one noncontributory defined benefit plan for union employees, one cash balance pension plan for nonunion employees, and two postretirement health and life insurance plans for Hawaiian Telcom employees (collectively the "Hawaii Plans").
In the three and nine months ended September 30, 2020, Hawaiian Telcom’s defined benefit plans made lump sum payments of $3.4 million and $10.8 million, respectively, resulting in a reduction of the benefit obligation of $10.8 million. The 8% Senior Notes will mature on October 15, 2025.Company recorded a pension settlement cost of $1.1 million in the nine months ended September 30, 2020 as a result of the lump sum payments to the plan participants exceeding the sum of the service cost and the interest cost component of the net pension cost.
In accordance with ASC 715, only the service cost component of net benefit cost is eligible for capitalization, which was immaterial for the three and nine months ended September 30, 2020 and 2019.
For the three and nine months ended September 30, 2020 and 2019, pension and postretirement costs (benefits) were as follows:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
(dollars in millions) |
| Pension Benefits |
|
| Postretirement and Other Benefits |
| ||||||||||
Service cost |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0.1 |
|
| $ | 0.2 |
|
Other components of pension and postretirement benefit plans expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation |
|
| 4.6 |
|
|
| 5.9 |
|
|
| 0.9 |
|
|
| 1.3 |
|
Expected return on plan assets |
|
| (7.1 | ) |
|
| (7.7 | ) |
|
| 0 |
|
|
| 0 |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit |
|
| 0 |
|
|
| 0 |
|
|
| (0.6 | ) |
|
| (0.6 | ) |
Actuarial loss |
|
| 4.5 |
|
|
| 3.5 |
|
|
| 0.3 |
|
|
| 0.4 |
|
Pension / postretirement costs |
| $ | 2.0 |
|
| $ | 1.7 |
|
| $ | 0.7 |
|
| $ | 1.3 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
(dollars in millions) |
| Pension Benefits |
|
| Postretirement and Other Benefits |
| ||||||||||
Service cost |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0.3 |
|
| $ | 0.5 |
|
Other components of pension and postretirement benefit plans expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation |
|
| 14.2 |
|
|
| 17.9 |
|
|
| 2.8 |
|
|
| 3.8 |
|
Expected return on plan assets |
|
| (21.6 | ) |
|
| (23.0 | ) |
|
| 0 |
|
|
| 0 |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit |
|
| 0 |
|
|
| 0 |
|
|
| (1.9 | ) |
|
| (1.9 | ) |
Actuarial loss |
|
| 13.5 |
|
|
| 10.3 |
|
|
| 0.9 |
|
|
| 1.3 |
|
Pension settlement charges |
|
| 1.1 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Pension / postretirement costs |
| $ | 7.2 |
|
| $ | 5.2 |
|
| $ | 2.1 |
|
| $ | 3.7 |
|
Based on current assumptions, contributions are expected to be approximately $5 million and $3 million to the qualified and non-qualified plans in 2020, respectively. Management expects to make cash payments of approximately $8 million related to its postretirement health plans in 2020.
For the nine months ended September 30, 2020, contributions to the pension plans were $4.8 million and contributions to the postretirement plans were $4.3 million. For the nine months ended September 30, 2019, contributions to the pension plans were $4.4 million and contributions to the postretirement plans were $4.6 million.
10. Restructuring and Severance
Liabilities have been established for employee separations and lease abandonment. A summary of activity in the restructuring and severance liability is shown below:
(dollars in millions) |
| Employee Separation |
|
| Lease Abandonment |
|
| Total |
| |||
Balance as of December 31, 2019 |
| $ | 2.6 |
|
| $ | 0.3 |
|
| $ | 2.9 |
|
Charges |
|
| 15.2 |
|
|
| 0 |
|
|
| 15.2 |
|
Utilizations |
|
| (8.2 | ) |
|
| (0.1 | ) |
|
| (8.3 | ) |
Balance as of March 31, 2020 |
|
| 9.6 |
|
|
| 0.2 |
|
|
| 9.8 |
|
Charges |
|
| 0.4 |
|
|
| 0 |
|
|
| 0.4 |
|
Utilizations |
|
| (3.4 | ) |
|
| (0.1 | ) |
|
| (3.5 | ) |
Balance as of June 30, 2020 |
|
| 6.6 |
|
|
| 0.1 |
|
|
| 6.7 |
|
Charges |
|
| 0.8 |
|
|
| 0 |
|
|
| 0.8 |
|
Utilizations |
|
| (2.4 | ) |
|
| (0.1 | ) |
|
| (2.5 | ) |
Balance as of September 30, 2020 |
| $ | 5.0 |
|
| $ | 0 |
|
| $ | 5.0 |
|
(dollars in millions) | Employee Separation | Lease Abandonment | Total | ||||||||
Balance as of December 31, 2016 | $ | 11.0 | $ | 0.2 | $ | 11.2 | |||||
Charges | 25.6 | — | 25.6 | ||||||||
Utilizations | (12.7 | ) | — | (12.7 | ) | ||||||
Balance as of March 31, 2017 | 23.9 | 0.2 | 24.1 | ||||||||
Charges | 3.6 | — | 3.6 | ||||||||
Utilizations | (4.4 | ) | — | (4.4 | ) | ||||||
Balance as of June 30, 2017 | 23.1 | 0.2 | 23.3 | ||||||||
Charges | — | — | — | ||||||||
Utilizations | (9.8 | ) | (0.1 | ) | (9.9 | ) | |||||
Balance as of September 30, 2017 | $ | 13.3 | $ | 0.1 | $ | 13.4 |
Restructuring and severance charges recorded in each of the first three quarters of 2020 in the third quarter of 2017. In the second quarter of 2017, the Company initiated reorganizations within both segments of the business in orderIT Services and Hardware segment are associated with initiatives to more appropriately align the Company for future growth. As a result, head count reductions were made resulting in a $3.6 million severance charge.reduce and contain costs. In the first quarter of 2017, 2020, the Company finalized a voluntary severance program in Cincinnati and Hawaii for certain bargained and management employees relatedin an effort to an initiativecontinue to reduce costs associated with our copper field and network costs within our legacy copper network.operations. As a result, a severance charge of $25.6$14.5 million was recorded toin the Entertainment and Communications segment. The Company made severance payments during the nine months ended September 30, 2017 for employee separations associated with the previously discussed initiatives.
Lease abandonment costs represent future minimum lease obligations, net of expected sublease income, for abandoned facilities. Lease payments on abandoned facilities will continue through 2019.were completed in the third quarter of 2020.
A summary of restructuring activity by business segment is presented below:
(dollars in millions) |
| Entertainment and Communications |
|
| IT Services and Hardware |
|
| Corporate |
|
| Total |
| ||||
Balance as of December 31, 2019 |
| $ | 2.4 |
|
| $ | 0.5 |
|
| $ | 0 |
|
| $ | 2.9 |
|
Charges |
|
| 14.8 |
|
|
| 0.4 |
|
|
| 0 |
|
|
| 15.2 |
|
Utilizations |
|
| (7.6 | ) |
|
| (0.7 | ) |
|
| 0 |
|
|
| (8.3 | ) |
Balance as of March 31, 2020 |
|
| 9.6 |
|
|
| 0.2 |
|
|
| 0 |
|
|
| 9.8 |
|
Charges |
|
| 0 |
|
|
| 0.3 |
|
|
| 0.1 |
|
|
| 0.4 |
|
Utilizations |
|
| (3.1 | ) |
|
| (0.4 | ) |
|
| 0 |
|
|
| (3.5 | ) |
Balance as of June 30, 2020 |
|
| 6.5 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 6.7 |
|
Charges |
|
| 0 |
|
|
| 0.8 |
|
|
| 0 |
|
|
| 0.8 |
|
Utilizations |
|
| (1.6 | ) |
|
| (0.9 | ) |
|
| 0 |
|
|
| (2.5 | ) |
Balance as of September 30, 2020 |
| $ | 4.9 |
|
| $ | 0 |
|
| $ | 0.1 |
|
| $ | 5.0 |
|
(dollars in millions) | Entertainment and Communications | IT Services and Hardware | Corporate | Total | |||||||||||
Balance as of December 31, 2016 | $ | 7.5 | $ | 3.0 | $ | 0.7 | $ | 11.2 | |||||||
Charges | 25.6 | — | — | 25.6 | |||||||||||
Utilizations | (9.8 | ) | (2.3 | ) | (0.6 | ) | (12.7 | ) | |||||||
Balance as of March 31, 2017 | 23.3 | 0.7 | 0.1 | 24.1 | |||||||||||
Charges | 1.3 | 2.3 | — | 3.6 | |||||||||||
Utilizations | (3.6 | ) | (0.8 | ) | — | (4.4 | ) | ||||||||
Balance as of June 30, 2017 | 21.0 | 2.2 | 0.1 | 23.3 | |||||||||||
Charges | — | — | — | — | |||||||||||
Utilizations | (8.1 | ) | (1.7 | ) | (0.1 | ) | (9.9 | ) | |||||||
Balance as of September 30, 2017 | $ | 12.9 | $ | 0.5 | $ | — | $ | 13.4 |
At September 30, 20172020 and December 31, 2016, $4.72019, $5.0 million and $7.4$2.9 million, respectively, of the restructuring and severance liabilities were included in “Other current liabilities.” At September 30, 2017 and December 31, 2016, $8.7 million and $3.8 million was included in "Other noncurrent liabilities," respectively.
September 30, 2017 | December 31, 2016 | ||||||||||||||
(dollars in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||
Long-term debt, including current portion* | $ | 1,059.1 | $ | 1,041.0 | $ | 1,149.2 | $ | 1,177.9 | |||||||
*Excludes capital leases and note issuance costs. |
11. Shareowners' Deficit
Accumulated Other Comprehensive Loss
For the three and nine months ended September 30, 2017, approximately 13% of the costs were capitalized as a component of property, plant2020 and equipment related to construction of our copper and fiber networks. For the three and nine months ended September 30, 2016, approximately 10% of the costs were capitalized as a component of property, plant and equipment related to construction of our copper and fiber networks.
Three Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(dollars in millions) | Pension Benefits | Postretirement and Other Benefits | |||||||||||||
Service cost | $ | — | $ | — | $ | 0.1 | $ | 0.1 | |||||||
Interest cost on projected benefit obligation | 4.9 | 4.9 | 0.8 | 0.8 | |||||||||||
Expected return on plan assets | (6.5 | ) | (6.9 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Prior service cost (benefit) | — | 0.1 | (1.2 | ) | (3.7 | ) | |||||||||
Actuarial loss | 4.3 | 4.7 | 1.2 | 1.2 | |||||||||||
Total amortization | 4.3 | 4.8 | — | (2.5 | ) | ||||||||||
Pension / postretirement costs (benefits) | $ | 2.7 | $ | 2.8 | $ | 0.9 | $ | (1.6 | ) |
Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(dollars in millions) | Pension Benefits | Postretirement and Other Benefits | |||||||||||||
Service cost | $ | — | $ | — | $ | 0.2 | $ | 0.2 | |||||||
Interest cost on projected benefit obligation | 14.6 | 14.5 | 2.4 | 2.5 | |||||||||||
Expected return on plan assets | (19.5 | ) | (20.5 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Prior service cost (benefit) | — | 0.1 | (3.4 | ) | (11.1 | ) | |||||||||
Actuarial loss | 13.1 | 14.3 | 3.5 | 3.7 | |||||||||||
Total amortization | 13.1 | 14.4 | 0.1 | (7.4 | ) | ||||||||||
Pension / postretirement costs (benefits) | $ | 8.2 | $ | 8.4 | $ | 2.7 | $ | (4.7 | ) |
(dollars in millions) |
| Unrecognized Net Periodic Pension and Postretirement Benefit Cost |
|
|
| Unrealized Loss on Cash Flow Hedges, Net |
|
|
| Foreign Currency Translation Loss |
|
| Total |
| ||||
Balance as of June 30, 2020 |
| $ | (159.4 | ) |
|
| $ | (22.7 | ) |
|
| $ | (7.5 | ) |
| $ | (189.6 | ) |
Remeasurement of benefit obligations |
|
| 3.2 |
|
|
|
| — |
|
|
|
| — |
|
|
| 3.2 |
|
Reclassifications, net |
|
| 3.2 |
| (a) |
|
| 1.8 |
| (b) |
|
| — |
|
|
| 5.0 |
|
Unrealized loss on cash flow hedges arising during the period, net |
|
| — |
|
|
|
| (0.5 | ) | (c) |
|
| — |
|
|
| (0.5 | ) |
Foreign currency gain |
|
| — |
|
|
|
| — |
|
|
|
| 2.0 |
|
|
| 2.0 |
|
Balance as of September 30, 2020 |
| $ | (153.0 | ) |
|
| $ | (21.4 | ) |
|
| $ | (5.5 | ) |
| $ | (179.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019 |
| $ | (159.4 | ) |
|
| $ | (14.4 | ) |
|
| $ | (4.0 | ) |
| $ | (177.8 | ) |
Reclassifications, net |
|
| 2.5 |
| (a) |
|
| 0.4 |
| (b) |
|
| — |
|
|
| 2.9 |
|
Unrealized loss on cash flow hedges arising during the period, net |
|
| — |
|
|
|
| (3.0 | ) | (c) |
|
| — |
|
|
| (3.0 | ) |
Foreign currency loss |
|
| — |
|
|
|
| — |
|
|
|
| (1.0 | ) |
|
| (1.0 | ) |
Balance as of September 30, 2019 |
| $ | (156.9 | ) |
|
| $ | (17.0 | ) |
|
| $ | (5.0 | ) |
| $ | (178.9 | ) |
(dollars in millions) |
| Unrecognized Net Periodic Pension and Postretirement Benefit Cost |
|
|
| Unrealized Loss on Cash Flow Hedges, Net |
|
|
| Foreign Currency Translation Loss |
|
| Total |
| ||||
Balance as of December 31, 2019 |
| $ | (152.0 | ) |
|
| $ | (14.7 | ) |
|
| $ | (3.4 | ) |
| $ | (170.1 | ) |
Remeasurement of benefit obligations |
|
| (11.5 | ) |
|
|
| — |
|
|
|
| — |
|
|
| (11.5 | ) |
Reclassifications, net |
|
| 10.5 |
| (a) |
|
| 4.6 |
| (b) |
|
| — |
|
|
| 15.1 |
|
Unrealized loss on cash flow hedges arising during the period, net |
|
| — |
|
|
|
| (11.3 | ) | (c) |
|
| — |
|
|
| (11.3 | ) |
Foreign currency loss |
|
| — |
|
|
|
| — |
|
|
|
| (2.1 | ) |
|
| (2.1 | ) |
Balance as of September 30, 2020 |
| $ | (153.0 | ) |
|
| $ | (21.4 | ) |
|
| $ | (5.5 | ) |
| $ | (179.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018 |
| $ | (164.5 | ) |
|
| $ | (3.9 | ) |
|
| $ | (7.1 | ) |
| $ | (175.5 | ) |
Remeasurement of benefit obligations |
|
| 0.1 |
|
|
|
| — |
|
|
|
| — |
|
|
| 0.1 |
|
Reclassifications, net |
|
| 7.5 |
| (a) |
|
| 0.8 |
| (b) |
|
| — |
|
|
| 8.3 |
|
Unrealized loss on cash flow hedges arising during the period, net |
|
| — |
|
|
|
| (13.9 | ) | (c) |
|
| — |
|
|
| (13.9 | ) |
Foreign currency gain |
|
| — |
|
|
|
| — |
|
|
|
| 2.1 |
|
|
| 2.1 |
|
Balance as of September 30, 2019 |
| $ | (156.9 | ) |
|
| $ | (17.0 | ) |
|
| $ | (5.0 | ) |
| $ | (178.9 | ) |
(dollars in millions) | Unrecognized Net Periodic Pension and Postretirement Benefit Cost | Unrealized gain on Investment in CyrusOne | Foreign Currency Translation Loss | Total | |||||||||||
Balance as of December 31, 2016 | $ | (157.6 | ) | $ | 68.1 | $ | (0.8 | ) | $ | (90.3 | ) | ||||
Unrealized gain on Investment in CyrusOne, net | — | 8.3 | (a) | — | 8.3 | ||||||||||
Reclassifications, net | 8.5 | (b) | (76.4 | ) | (c) | — | (67.9 | ) | |||||||
Foreign currency gain | $ | — | $ | — | $ | 0.1 | $ | 0.1 | |||||||
Balance as of September 30, 2017 | $ | (149.1 | ) | $ | — | $ | (0.7 | ) | $ | (149.8 | ) |
(a) |
These reclassifications are included in the other components of net periodic pension and postretirement benefit |
(b) | These reclassifications are reported within |
(c) | ||
The unrealized loss, net on cash flow hedges represents the change in the fair value of the derivative instruments that occurred during the period, net of tax. The unrealized loss on cash flow hedges is recorded in "Other current liabilities" and "Other noncurrent liabilities" on the Condensed Consolidated Balance Sheets. See Note 8 for further disclosures. |
12. Business Segment Information
The Company’s segments are strategic business units that offer distinct products and services and are aligned with itsthe Company's internal management structure and reporting. The Company operates 2 business segments identified as Entertainment and Communications and IT Services and Hardware.
The Entertainment and Communications segment provides products and services suchthat can be categorized as data transport,Data, Video, Voice or Other. Data products include high-speed internet video, localaccess, digital subscriber lines, ethernet, SONET, dedicated internet access, wavelength, digital signal and IRU. Video services provide our customers access to over 400 entertainment channels, over 150 high-definition channels, parental controls, HD DVR, Video On-Demand and access to a live TV streaming application. Voice represents traditional voice lines as well as fiber voice lines, consumer long distance, voice over internet protocol ("VoIP")switched access and otherdigital trunking. Other services consist of revenue generated from wiring projects for enterprise customers, advertising, directory assistance, maintenance and information services.
The IT Services and Hardware segment provides a range of fully managedend-to-end solutions from consulting to implementation to ongoing optimization. These solutions include Cloud, Communications and outsourced IT and telecommunicationsConsulting services along with the sale, installation and maintenance of major branded Telecom and IT hardware.
Certain corporate administrative expenses have been allocated to the segments based upon the nature of the expense and the relative size of the segment. Intercompany transactions between segments have been eliminated.
Selected financial data for the Company’s business segment information is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 241.0 |
|
| $ | 248.5 |
|
| $ | 724.5 |
|
| $ | 749.3 |
|
IT Services and Hardware |
|
| 155.2 |
|
|
| 140.5 |
|
|
| 444.5 |
|
|
| 417.0 |
|
Intersegment |
|
| (6.7 | ) |
|
| (6.5 | ) |
|
| (19.5 | ) |
|
| (20.0 | ) |
Total revenue |
| $ | 389.5 |
|
| $ | 382.5 |
|
| $ | 1,149.5 |
|
| $ | 1,146.3 |
|
Intersegment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 4.9 |
|
| $ | 5.3 |
|
| $ | 14.8 |
|
| $ | 16.5 |
|
IT Services and Hardware |
|
| 1.8 |
|
|
| 1.2 |
|
|
| 4.7 |
|
|
| 3.5 |
|
Total intersegment revenue |
| $ | 6.7 |
|
| $ | 6.5 |
|
| $ | 19.5 |
|
| $ | 20.0 |
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 27.2 |
|
| $ | 27.7 |
|
| $ | 69.8 |
|
| $ | 81.2 |
|
IT Services and Hardware |
|
| 4.6 |
|
|
| 0.6 |
|
|
| 11.5 |
|
|
| (5.1 | ) |
Corporate |
|
| (7.1 | ) |
|
| (5.5 | ) |
|
| (49.1 | ) |
|
| (18.3 | ) |
Total operating income |
| $ | 24.7 |
|
| $ | 22.8 |
|
| $ | 32.2 |
|
| $ | 57.8 |
|
Expenditures for long-lived assets * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 57.6 |
|
| $ | 51.3 |
|
| $ | 144.2 |
|
| $ | 150.3 |
|
IT Services and Hardware |
|
| 3.9 |
|
|
| 5.4 |
|
|
| 16.7 |
|
|
| 16.9 |
|
Corporate |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0.1 |
|
Total expenditures for long-lived assets |
| $ | 61.5 |
|
| $ | 56.7 |
|
| $ | 160.9 |
|
| $ | 167.3 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 61.6 |
|
| $ | 64.4 |
|
| $ | 190.0 |
|
| $ | 190.5 |
|
IT Services and Hardware |
|
| 10.2 |
|
|
| 11.1 |
|
|
| 30.7 |
|
|
| 38.5 |
|
Corporate |
|
| 0.1 |
|
|
| 0 |
|
|
| 0.1 |
|
|
| 0.1 |
|
Total depreciation and amortization |
| $ | 71.9 |
|
| $ | 75.5 |
|
| $ | 220.8 |
|
| $ | 229.1 |
|
*Includes deposit for the purchase of wireless licenses
(dollars in millions) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 1,788.0 |
|
| $ | 1,840.0 |
|
IT Services and Hardware |
|
| 447.5 |
|
|
| 500.7 |
|
Corporate and eliminations |
|
| 328.3 |
|
|
| 313.1 |
|
Total assets |
| $ | 2,563.8 |
|
| $ | 2,653.8 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Revenue | |||||||||||||||
Entertainment and Communications | $ | 196.2 | $ | 193.0 | $ | 592.9 | $ | 575.8 | |||||||
IT Services and Hardware | 96.3 | 122.9 | 278.5 | 335.2 | |||||||||||
Intersegment | (3.3 | ) | (3.5 | ) | (10.0 | ) | (10.5 | ) | |||||||
Total revenue | $ | 289.2 | $ | 312.4 | $ | 861.4 | $ | 900.5 | |||||||
Intersegment revenue | |||||||||||||||
Entertainment and Communications | $ | 0.4 | $ | 0.4 | $ | 1.3 | $ | 1.0 | |||||||
IT Services and Hardware | 2.9 | 3.1 | 8.7 | 9.5 | |||||||||||
Total intersegment revenue | $ | 3.3 | $ | 3.5 | $ | 10.0 | $ | 10.5 | |||||||
Operating income | |||||||||||||||
Entertainment and Communications | $ | 25.0 | $ | 21.1 | $ | 49.8 | $ | 76.0 | |||||||
IT Services and Hardware | 4.8 | 7.8 | 7.9 | 21.9 | |||||||||||
Corporate | (17.1 | ) | (3.4 | ) | (29.4 | ) | (15.4 | ) | |||||||
Total operating income | $ | 12.7 | $ | 25.5 | $ | 28.3 | $ | 82.5 | |||||||
Expenditures for long-lived assets | |||||||||||||||
Entertainment and Communications | $ | 41.4 | $ | 63.1 | $ | 138.9 | $ | 178.7 | |||||||
IT Services and Hardware | 1.6 | 4.1 | 18.9 | 9.9 | |||||||||||
Corporate | — | — | — | 0.2 | |||||||||||
Total expenditures for long-lived assets | $ | 43.0 | $ | 67.2 | $ | 157.8 | $ | 188.8 | |||||||
Depreciation and amortization | |||||||||||||||
Entertainment and Communications | $ | 43.9 | $ | 43.0 | $ | 129.1 | $ | 124.8 | |||||||
IT Services and Hardware | 3.4 | 3.4 | 10.9 | 9.8 | |||||||||||
Corporate | — | 0.1 | 0.1 | 0.1 | |||||||||||
Total depreciation and amortization | $ | 47.3 | $ | 46.5 | $ | 140.1 | $ | 134.7 | |||||||
September 30, 2017 | December 31, 2016 | ||||||||||||||
Assets | |||||||||||||||
Entertainment and Communications | $ | 1,114.7 | $ | 1,093.5 | |||||||||||
IT Services and Hardware | 85.9 | 60.0 | |||||||||||||
Corporate and eliminations | 256.7 | 387.5 | |||||||||||||
Total assets | $ | 1,457.3 | $ | 1,541.0 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements regarding future events and results that are subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “predicts,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” “will,” “proposes,” “potential,” “could,” “should,” “outlook” or variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, anticipated growth and trends in businesses, and other characterizations of future events or circumstances, including but not limited to, the possible impacts of the current adverse economic conditions associated with the COVID-19 global health pandemic, are forward-looking statements. Readers are cautioned these forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially and adversely from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A, and those discussed in other documents that the Company has filed with the Securities and Exchange Commission (“SEC”). Actual results may differ materially and adversely from those expressed in any forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements for any reason.
Introduction
This Management’s Discussion and Analysis section provides an overview of Cincinnati Bell Inc.'s financial condition as of
September 30,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.
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 an affiliate of Brookfield a termination fee of $24.8 million in the first quarter of 2020 as required by the terms of the Brookfield Merger Agreement.
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. On May 7, 2020, the shareholders of the Company adopted the MIP Merger Agreement at a virtual special meeting of shareholders.
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. Upon the closing of the MIP Merger, the Company will cease to be a publicly traded company.
Executive Summary
Segment results described in the Executive Summary and Consolidated Results of Operations sections are net of intercompany eliminations.
Cincinnati Bell Inc. and its consolidated subsidiaries ("Cincinnati Bell," "we," "our," "us" or the "Company") providesprovide integrated communications and IT solutions that keep residentialconsumer and businessenterprise customers connected with each other and with the world. Through its Entertainment and Communications segment, the Company provides high speed data, video,Data, Video, and voiceVoice solutions to consumersconsumer and businessesenterprise customers over an expanding fiber network and a legacy copper network. In addition, businessenterprise customers across the United States, Canada and Europe rely on Cincinnati Bell Technology Solutions Inc. ("CBTS"), a wholly-owned subsidiary, reported as the IT Services and Hardware segment for the sale and service of efficient, end-to-end communications and IT systems and solutions.
Consolidated revenue totaling $289.2$389.5 million and $861.4$1,149.5 million for the three and nine months ended September 30, 2017,2020 increased $7.0 million and $3.2 million, respectively, decreased compared to the prior year comparablesame periods primarily due toin 2019 as growth in the IT Services and Hardware segment more than offset declines in the Entertainment and Communications segment. TheEntertainment and Communications Legacy revenue decreased $10.4 million and $29.2 million, respectively, for the three and nine months ended September 30, 2020 compared to similar periods in the prior year. Decline in Video revenue due to fewer video subscribers and lower nonrecurring revenue due to participation in the Keep Americans Connected pledge (“Pledge”) also contributed to the decline year over year in each of the comparable periods. IT Services and Hardware segment is a result of Telecom and IT hardware revenue decreasing $21.4increased by $14.1 million and $41.0$26.3 million for the three and nine months ended September 30, 2017,2020, respectively, as well as declining service revenue as one of our significant customers pursued cost out initiatives by in-sourcing IT professionals. Forcompared to the same periods in the prior year. In the three months ended September 30, 2020, IT Services and Hardware experienced revenue growth in all practices with the exception of Cloud revenue. In the nine months ended September 30, 2017,2020, revenue from our strategic products totaled $167.9 milliongrowth in the Consulting and $504.0 million, respectively, up 3%Communications practices more than offset decreased revenue contributed by the Cloud and 7% fromInfrastructure Solutions practices. Cloud revenue declined in the nine months ended September 30, 2020 compared to the prior year comparable periods. Declining legacydue to General Electric Company (“GE”) revenue in additionrelated to the aforementioned changescertain programs still included in the IT Services and Hardware segment offset the increasesfirst quarter of 2019 that did not recur in our strategic revenue.
Operating income was $12.7$24.7 million for the three months ended September 30, 2020, up $1.9 million compared to the same period in the prior year. The increase in operating income was primarily due to lower selling, general and $28.3administrative and depreciation and amortization costs incurred in the third quarter of 2020 compared to the same period in 2019. The decrease in selling, general and administrative costs is a result of cost containment strategies taken to reduce the negative impact of the COVID-19 pandemic on the business. These strategies more than offset incremental expense of $5.7 million recorded in the third quarter to reward employees for their efforts during COVID-19 that is impacting cost of services and products and selling, general and administrative expense for the three and nine months ended September 30, 2017, respectively,2020. Lower depreciation and amortization expense is primarily due to a decrease in assets placed in service during 2020 in connection with the expansion of our fiber network. Operating income was $32.2 million for the nine months ended September 30, 2020, down from$25.6 million compared to the same period in 2019. The decrease in operating income was primarily due to higher transaction and integration charges, including the termination fee of $24.8 million paid to an affiliate of Brookfield in the first quarter of 2020, as well as restructuring and severance related charges related to the voluntary severance program (“VSP”) finalized in the three months ended March 31, 2020.
Loss before income taxes totaled $11.1million for the three months ended September 30, 2020, resulting in a decrease in the loss as compared to the comparable period in 2019 primarily due to the increase in operating income and a decrease in interest expense. Loss before income taxes totaled $76.2 million for the nine months ended September 30, 2020, higher than the prior year comparable periods. Transactiondue to the factors impacting operating income.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted, and integrationis likely to continue to result, in significant economic disruption and has adversely affected, and will likely continue to adversely affect, our business. As of the date of this filing, significant uncertainty continues to exist concerning the magnitude of the impact and duration of the COVID-19 pandemic. While certain parts of the country have eased stay-at-home orders, the current rise in cases may result in restrictions being reinstated. On March 13, 2020, in response to the COVID-19 pandemic, the 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 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. The Pledge expired on June 30, 2020, and the Company started to collect late payment fees and reactivation fees starting in August 2020. In accordance with regulatory orders in Hawaii, the Pledge continues to be honored for certain regulated services. The Company proactively worked with customers in an effort to avoid deactivations, but not all accounts could be cured and approximately 3,300 customer accounts in the Cincinnati market were disconnected in the third quarter.
In response to the number of households that must provide remote schooling either full or part-time as a result of the COVID-19 pandemic, the Company partnered with several community organizations to provide free internet to qualifying students through the “Connect our Students” program. As of September 30, 2020, the Company has delivered internet to approximately 4,300 households.
The majority of our operations have continued as usual as the services that we provide and the networks that we maintain are considered critical by local and state authorities in the geographies in which we operate. The Company started executing its business continuity plan in March and transitioned employees who could execute their work remotely to work from home with little disruption and has implemented additional safety protocols for customer facing employees. In states in which employees are allowed to return to the office, the Company has implemented updated safety policies to ensure the safety of our employees and customers. As of September 30, 2020, a significant portion of our workforce continues to work from home.
With respect to liquidity, we continue to evaluate and take actions to reduce costs associated with merger and acquisition activity incurredspending across our organization. This includes reducing hiring activities, adjusting pay programs, limiting discretionary spending, significantly reducing non-essential travel until further notice and re-evaluating the timing of capital projects. Additionally, we have leveraged certain benefits included in the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that was enacted on March 27, 2020, including deferral of 2020 required pension plan contributions to the fourth quarter of 2020 and deferral of employer social security tax payments for wage payments subsequent to March 12, 2020 of approximately $5 million each quarter for the remainder of 2020 to be paid equally in the fourth quarters of 2021 and 2022.
We expect the ultimate significance of the impact on our financial condition, results of operations, or cash flows will be dictated by the length of time that such circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic. COVID-19 also makes it more challenging for management to estimate future performance of our businesses, particularly over the near term. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. The programs put in place and efforts by employees to manage and reduce expenses have more than offset the negative impacts caused by COVID-19 in the second and third quarters of 2020 due to revenue loss and incremental spend for personal protective equipment, employee compensation programs and bad debt expense. To reward employees for their continued efforts during COVID-19, a one-time bonus was recorded in the third quarter of $5.7 million that will be paid in the fourth quarter. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe that it is important to share where our Company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses.
Consolidated Results of Operations
Revenue
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 236.1 |
|
| $ | 243.2 |
|
| $ | (7.1 | ) |
|
| (3 | )% |
| $ | 709.7 |
|
| $ | 732.8 |
|
| $ | (23.1 | ) |
|
| (3 | )% |
IT Services and Hardware |
|
| 153.4 |
|
|
| 139.3 |
|
|
| 14.1 |
|
|
| 10 | % |
|
| 439.8 |
|
|
| 413.5 |
|
|
| 26.3 |
|
|
| 6 | % |
Total revenue |
| $ | 389.5 |
|
| $ | 382.5 |
|
| $ | 7.0 |
|
|
| 2 | % |
| $ | 1,149.5 |
|
| $ | 1,146.3 |
|
| $ | 3.2 |
|
|
| 0 | % |
Entertainment and Communications revenue decreased for the three and nine months ended September 30, 2017 contributed2020 compared to the same periods in 2019 primarily due to the decline in operating income from the prior year.Legacy revenue. In addition to transaction costs, operating income forLegacy revenue decline, Video revenue declined in each of the nine months ended September 30, 2017 was downcomparable periods due to restructuring7,000 fewer subscribers in Cincinnati and severance related charges. Restructuring and severance charges were incurred for reorganizations done to appropriately align3,000 fewer subscribers in Hawaii as well as decline of certain nonrecurring revenue as a result of the Company for future growth, adjust tosuspending late payment fees and reactivation fees as part of the cost out initiatives pursued by one of our significant customers,Pledge.
IT Services and reduce field and network costs associated with our legacy copper network. Net loss totaled $11.2 million and net income totaled $51.3 millionHardware revenue increased for the three and nine months ended September 30, 2017, respectively, including the $117.7 million gain recognized on the sale of 2.8 million CyrusOne Inc. common shares2020 compared to similar periods in the first quarterprior year primarily due to revenue growth in the Consulting and Communications practices. In addition, Infrastructure Solutions revenue increased in the three months ended September 30, 2020 compared to the same period in the prior year primarily due to additional projects generating revenue growth from existing customers. Cloud revenue declined in the nine months ended September 30, 2020 compared to the same period in 2019 due to lower revenue resulting from GE insourcing certain cloud services. Lower Infrastructure Solutions revenue was recorded in the nine months ended September 30, 2020 due to a decline in hardware sales partially due to the impacts of 2017.
Operating Costs
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||||||
Cost of services and products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 105.8 |
|
| $ | 110.2 |
|
| $ | (4.4 | ) |
|
| (4 | )% |
| $ | 314.7 |
|
| $ | 334.8 |
|
| $ | (20.1 | ) |
|
| (6 | )% |
IT Services and Hardware |
|
| 98.1 |
|
|
| 84.5 |
|
|
| 13.6 |
|
|
| 16 | % |
|
| 276.3 |
|
|
| 253.1 |
|
|
| 23.2 |
|
|
| 9 | % |
Total cost of services and products |
| $ | 203.9 |
|
| $ | 194.7 |
|
| $ | 9.2 |
|
|
| 5 | % |
| $ | 591.0 |
|
| $ | 587.9 |
|
| $ | 3.1 |
|
|
| 1 | % |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
Service revenue | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 195.0 | $ | 192.4 | $ | 2.6 | 1 | % | $ | 589.2 | $ | 572.6 | $ | 16.6 | 3 | % | |||||||||||||
IT Services and Hardware | 49.3 | 54.3 | (5.0 | ) | (9 | )% | 145.6 | 160.5 | (14.9 | ) | (9 | )% | |||||||||||||||||
Total service revenue | $ | 244.3 | $ | 246.7 | $ | (2.4 | ) | (1 | )% | $ | 734.8 | $ | 733.1 | $ | 1.7 | — | % |
Entertainment and Communications revenue increased as the growth in Fioptics and other strategic services offset legacy declines. Fioptics revenue totaled $79.1 millioncosts decreased for the three months ended September 30, 2017 and $229.7 million for2020 compared to the nine months then ended, up 21% and 24% fromsame period in the prior year comparable periods, respectively. IT Servicesdue to lower video content costs and Hardware revenue declined primarilyoperating taxes. Lower operating taxes are due to decreases in billable headcount as one of our significant customers pursued cost out initiatives by in-sourcing IT professionals.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
Product revenue | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 0.8 | $ | 0.2 | $ | 0.6 | n/m | $ | 2.4 | $ | 2.2 | $ | 0.2 | 9 | % | ||||||||||||||
IT Services and Hardware | 44.1 | 65.5 | (21.4 | ) | (33 | )% | 124.2 | 165.2 | (41.0 | ) | (25 | )% | |||||||||||||||||
Total product revenue | $ | 44.9 | $ | 65.7 | $ | (20.8 | ) | (32 | )% | $ | 126.6 | $ | 167.4 | $ | (40.8 | ) | (24 | )% |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
Cost of services | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 90.1 | $ | 87.1 | $ | 3.0 | 3 | % | $ | 272.5 | $ | 256.0 | $ | 16.5 | 6 | % | |||||||||||||
IT Services and Hardware | 38.9 | 40.6 | (1.7 | ) | (4 | )% | 108.7 | 119.7 | (11.0 | ) | (9 | )% | |||||||||||||||||
Total cost of services | $ | 129.0 | $ | 127.7 | $ | 1.3 | 1 | % | $ | 381.2 | $ | 375.7 | $ | 5.5 | 1 | % |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
Cost of products | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 0.3 | $ | 0.7 | $ | (0.4 | ) | (57 | )% | $ | 1.3 | $ | 1.6 | $ | (0.3 | ) | (19 | )% | |||||||||||
IT Services and Hardware | 33.3 | 55.4 | (22.1 | ) | (40 | )% | 100.3 | 140.0 | (39.7 | ) | (28 | )% | |||||||||||||||||
Total cost of products | $ | 33.6 | $ | 56.1 | $ | (22.5 | ) | (40 | )% | $ | 101.6 | $ | 141.6 | $ | (40.0 | ) | (28 | )% |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
Selling, general, and administrative | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 33.8 | $ | 37.1 | $ | (3.3 | ) | (9 | )% | $ | 104.5 | $ | 107.1 | $ | (2.6 | ) | (2 | )% | |||||||||||
IT Services and Hardware | 15.7 | 15.1 | 0.6 | 4 | % | 47.6 | 42.5 | 5.1 | 12 | % | |||||||||||||||||||
Corporate | 5.0 | 3.3 | 1.7 | 52 | % | 14.5 | 15.3 | (0.8 | ) | (5 | )% | ||||||||||||||||||
Total selling, general and administrative | $ | 54.5 | $ | 55.5 | $ | (1.0 | ) | (2 | )% | $ | 166.6 | $ | 164.9 | $ | 1.7 | 1 | % |
Entertainment and Communications costs decreased for the nine months ended September 30, 2017 as compared to the prior year driven largely by additional stock-based compensation expense recorded in 2016 as a result of changes in our stock price.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
Depreciation and amortization expense | |||||||||||||||||||||||||||||
Entertainment and Communications | $ | 43.9 | $ | 43.0 | $ | 0.9 | 2 | % | $ | 129.1 | $ | 124.8 | $ | 4.3 | 3 | % | |||||||||||||
IT Services and Hardware | 3.4 | 3.4 | — | — | % | 10.9 | 9.8 | 1.1 | 11 | % | |||||||||||||||||||
Corporate | — | 0.1 | (0.1 | ) | n/m | 0.1 | 0.1 | — | — | % | |||||||||||||||||||
Total depreciation and amortization expense | $ | 47.3 | $ | 46.5 | $ | 0.8 | 2 | % | $ | 140.1 | $ | 134.7 | $ | 5.4 | 4 | % |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||
Other operating costs | |||||||||||||||||||||||||||
Transaction and integration costs | $ | 12.1 | $ | — | $ | 12.1 | n/m | $ | 14.4 | $ | — | $ | 14.4 | n/m | |||||||||||||
Restructuring and severance related charges | $ | — | $ | — | $ | — | n/m | $ | 29.2 | $ | — | $ | 29.2 | n/m | |||||||||||||
Loss on sale or disposal of assets, net | — | 1.1 | (1.1 | ) | n/m | — | 1.1 | (1.1 | ) | n/m |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 44.4 |
|
| $ | 44.2 |
|
| $ | 0.2 |
|
|
| 0 | % |
| $ | 130.2 |
|
| $ | 133.9 |
|
| $ | (3.7 | ) |
|
| (3 | )% |
IT Services and Hardware |
|
| 36.7 |
|
|
| 38.5 |
|
|
| (1.8 | ) |
|
| (5 | )% |
|
| 110.0 |
|
|
| 113.0 |
|
|
| (3.0 | ) |
|
| (3 | )% |
Corporate |
|
| 4.9 |
|
|
| 5.3 |
|
|
| (0.4 | ) |
|
| (8 | )% |
|
| 15.1 |
|
|
| 14.4 |
|
|
| 0.7 |
|
|
| 5 | % |
Total selling, general and administrative |
| $ | 86.0 |
|
| $ | 88.0 |
|
| $ | (2.0 | ) |
|
| (2 | )% |
| $ | 255.3 |
|
| $ | 261.3 |
|
| $ | (6.0 | ) |
|
| (2 | )% |
Entertainment and Communications SG&A costs increased in the second half of 2018.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
Non-operating costs | |||||||||||||||||||||||||||||
Interest expense | $ | 18.8 | $ | 17.9 | $ | 0.9 | 5 | % | $ | 54.9 | $ | 58.1 | $ | (3.2 | ) | (6 | )% | ||||||||||||
Loss on extinguishment of debt, net | — | 11.4 | (11.4 | ) | n/m | — | 14.2 | (14.2 | ) | n/m | |||||||||||||||||||
Gain on sale of CyrusOne investment | — | (33.3 | ) | 33.3 | n/m | (117.7 | ) | (151.9 | ) | 34.2 | (23 | )% | |||||||||||||||||
Other expense (income), net | 4.5 | (0.1 | ) | 4.6 | n/m | 3.5 | (1.2 | ) | 4.7 | n/m | |||||||||||||||||||
Income tax expense | 0.6 | 10.8 | (10.2 | ) | n/m | 36.3 | 59.9 | (23.6 | ) | (39 | )% |
SG&A costs decreased in both segments in the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to cost containment strategies taken in 2020 to reduce the negative impact of the COVID-19 pandemic on the business. Decreases in both segments were partially offset by an increase in bad debt expense due to updating our estimate of the impact of the economic downturn associated with the COVID-19 pandemic on the Company’s receivables and incremental bonus expense recorded in the third quarter. The decrease in Entertainment and Communications SG&A costs was also partially offset by an increase in contract services due to higher insurance costs. Corporate SG&A costs increased in the nine months ended September 30, 2020 compared to the comparable period in 2019 primarily due to the Company no longer qualifying for a payroll tax benefit that was received in 2019.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||||||
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and Communications |
| $ | 61.6 |
|
| $ | 64.4 |
|
| $ | (2.8 | ) |
|
| (4 | )% |
| $ | 190.0 |
|
| $ | 190.5 |
|
| $ | (0.5 | ) |
|
| 0 | % |
IT Services and Hardware |
|
| 10.2 |
|
|
| 11.1 |
|
|
| (0.9 | ) |
|
| (8 | )% |
|
| 30.7 |
|
|
| 38.5 |
|
|
| (7.8 | ) |
|
| (20 | )% |
Corporate |
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
| n/m |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| — |
|
|
| 0 | % | |
Total depreciation and amortization expense |
| $ | 71.9 |
|
| $ | 75.5 |
|
| $ | (3.6 | ) |
|
| (5 | )% |
| $ | 220.8 |
|
| $ | 229.1 |
|
| $ | (8.3 | ) |
|
| (4 | )% |
Entertainment and Communications depreciation and amortization expense decreased in the three and nine months ended September 30, 2020 compared to the same periods in the prior year primarily due to a decrease in assets placed in service in connection with the expansion of our fiber network.The decrease in IT Services and Hardware depreciation and amortization expense is primarily related to accelerated depreciation for certain network assets that were determined in the first quarter of 2019 to have a shorter useful life due to a change in customer requirements and were fully depreciated as of December 31, 2019.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, | |||||||||||||||||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change | |||||||
Other operating costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and severance related charges |
| $ | 0.8 |
|
| $ | 1.3 |
|
| $ | (0.5 | ) |
|
| (38 | )% |
| $ | 16.4 |
|
| $ | 6.4 |
|
| $ | 10.0 |
|
| n/m |
Transaction and integration costs |
|
| 2.2 |
|
|
| 0.2 |
|
|
| 2.0 |
|
| n/m |
|
|
| 33.8 |
|
|
| 3.8 |
|
|
| 30.0 |
|
| n/m | |
Total other operating costs |
| $ | 3.0 |
|
| $ | 1.5 |
|
| $ | 1.5 |
|
|
| 100 | % |
| $ | 50.2 |
|
| $ | 10.2 |
|
| $ | 40.0 |
|
| n/m |
Restructuring and severance charges recorded in the three and nine months ended September 30, 2020 in the IT Services and Hardware segment are associated with initiatives to reduce and contain costs. Restructuring and severance charges recorded in the nine months ended September 30, 2020 in the Entertainment and Communications segment are primarily related to a VSP for certain bargained and management employees in an effort to reduce costs associated with our copper field and network operations. Restructuring and severance charges recorded in the three and nine months ended September 30, 2019 in the Entertainment and Communications segment are related to a severance program for certain management employees as the Company continued its efforts to streamline Cincinnati and Hawaii operations. Restructuring and severance charges recorded in the second and third quarters of 2019 in the IT Services and Hardware segment are associated with initiatives to reduce and contain costs as well as headcount reductions as a result of insourcing initiatives by one of our significant customers.
Transaction and integration costs incurred in 2020, recorded as a Corporate expense, are primarily due to $24.8 million paid to an affiliate of $12.1 million, non-deductibleBrookfield to terminate the Brookfield Merger Agreement in the first quarter of 2020. The Company also incurred transaction and integration costs in the three and nine months ended September 30, 2020 associated with the MIP Merger Agreement. Transaction and integration costs incurred in 2019, recorded as a Corporate expense, are primarily due to the continued integration of Hawaiian Telcom.
Non-operating Costs
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| $ Change |
|
| % Change |
| ||||||||
Non-operating costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| $ | 33.4 |
|
| $ | 35.0 |
|
| $ | (1.6 | ) |
|
| (5 | )% |
| $ | 100.6 |
|
| $ | 105.0 |
|
| $ | (4.4 | ) |
|
| (4 | )% |
Other components of pension and postretirement benefit plans expense |
|
| 2.6 |
|
|
| 2.8 |
|
|
| (0.2 | ) |
|
| (7 | )% |
|
| 9.0 |
|
|
| 8.4 |
|
|
| 0.6 |
|
|
| 7 | % |
Other (income) expense, net |
|
| (0.2 | ) |
|
| 0.5 |
|
|
| (0.7 | ) |
| n/m |
|
|
| (1.2 | ) |
|
| (0.4 | ) |
|
| (0.8 | ) |
| n/m |
| ||
Income tax benefit |
|
| (2.9 | ) |
|
| (1.9 | ) |
|
| (1.0 | ) |
|
| 53 | % |
|
| (26.2 | ) |
|
| (9.2 | ) |
|
| (17.0 | ) |
| n/m |
|
Interest expense decreased for incomethe three and nine months ended September 30, 2020 compared to the same periods in the prior year due to the decrease in LIBOR rates.
Income tax purposes, resulted in income tax expensebenefit increased for the three months ended September 30, 2017. In2020 compared to the fourthsame period in the prior year primarily due to the effect of interest expense limitation released in the reporting period, and unfavorable discrete adjustments recorded in the comparable period, offset in part by the decreased loss before taxes. Income tax benefit increased in the nine months ended September 30, 2020 compared to the same period in 2019 due to an increase in the loss before income taxes and several significant discrete items recorded primarily in the first quarter as a result of 2020. During the OnX Holdings acquisition,nine months ended September 30, 2020, the Company anticipates a partial releasereleased $15.3 million of the valuation allowances against Texas margin credits and state, local and foreign net operating losses.that were previously recorded on deferred tax assets related to interest expense for which the tax deduction was limited. The Company expectsCARES Act contains provisions that increase the Company’s ability to use federal and state net operating loss carryforwards to substantially defray paymentdeduct interest expense. Discrete tax benefits were offset, in part, by the $7.6 million tax effect of federal and state tax liabilities in 2017.
Entertainment and Communications
The Entertainment and Communications segment provides products and services suchthat can be categorized as data transport, high-speed internet, video, local voice, long distance, VoIP and other services.either Fioptics in Cincinnati or Consumer/SMB Fiber in Hawaii (collectively, "Consumer/SMB Fiber"), Enterprise Fiber or Legacy. Cincinnati Bell Telephone Company LLC ("CBT"), a subsidiary of the Company, is the incumbent local exchange carrier ("ILEC") for a geography that covers a radius of approximately 25 miles around Cincinnati, Ohio, and includes parts of northern Kentucky and southeastern Indiana. CBT has operated in this territory for over 140145 years. Voice and data services in the Enterprise Fiber and Legacy categories that are delivered beyond itsthe Company's ILEC territory, particularly in Dayton and Mason, Ohio, are provided through the operations of Cincinnati Bell Extended Territories LLC ("CBET"), a competitive local exchange carrier ("CLEC") and subsidiary of CBT. On July 2, 2018, the Company acquired Hawaiian Telcom. Hawaiian Telcom is the ILEC for the State of Hawaii and the largest full-service provider of communications services and products in the state. Originally incorporated in Hawaii in 1883 as Mutual Telephone Company, Hawaiian Telcom has a strong heritage of over 135 years as Hawaii’s communications carrier. Its services are offered on all of Hawaii’s major islands, except its video service, which currently is only available on the island of Oahu.
Consumer/SMB Fiber products include high-speed internet access, voice lines and video. The Company providesis able to deliver speeds of up to 30 megabits or more to approximately 75% of Greater Cincinnati and up to 20 megabits or more to approximately 50% of Hawaii's total addressable market.
Enterprise Fiber products include metro-ethernet, dedicated internet access, wavelength, IRU contracts, and wireless backhaul to macro-towers and small cell. As enterprise customers migrate from legacy products and copper-based technology, our metro-ethernet product becomes the preferred method of transport due to its ability to support multiple applications on a single physical connection.
Legacy products include traditional voice lines, consumer long distance, switched access, digital trunking, DSL, DS0, DS1, DS3 and VoIPother value-added services primarily through CBTS Technology Solutions LLC which was formerly knownsuch as Cincinnati Bell Any Distance Inc.caller identification, voicemail, call waiting and call return.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| Change |
|
| % Change |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
| $ | 119.8 |
|
| $ | 119.5 |
|
| $ | 0.3 |
|
|
| 0 | % |
| $ | 358.8 |
|
| $ | 356.5 |
|
| $ | 2.3 |
|
|
| 1 | % |
Video |
|
| 48.1 |
|
|
| 50.2 |
|
|
| (2.1 | ) |
|
| (4 | )% |
|
| 145.1 |
|
|
| 153.5 |
|
|
| (8.4 | ) |
|
| (5 | )% |
Voice |
|
| 65.5 |
|
|
| 70.7 |
|
|
| (5.2 | ) |
|
| (7 | )% |
|
| 197.6 |
|
|
| 215.4 |
|
|
| (17.8 | ) |
|
| (8 | )% |
Other |
|
| 7.6 |
|
|
| 8.1 |
|
|
| (0.5 | ) |
|
| (6 | )% |
|
| 23.0 |
|
|
| 23.9 |
|
|
| (0.9 | ) |
|
| (4 | )% |
Total Revenue |
|
| 241.0 |
|
|
| 248.5 |
|
|
| (7.5 | ) |
|
| (3 | )% |
|
| 724.5 |
|
|
| 749.3 |
|
|
| (24.8 | ) |
|
| (3 | )% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and products |
|
| 107.8 |
|
|
| 111.5 |
|
|
| (3.7 | ) |
|
| (3 | )% |
|
| 319.7 |
|
|
| 338.8 |
|
|
| (19.1 | ) |
|
| (6 | )% |
Selling, general and administrative |
|
| 44.4 |
|
|
| 44.2 |
|
|
| 0.2 |
|
|
| 0 | % |
|
| 130.2 |
|
|
| 133.9 |
|
|
| (3.7 | ) |
|
| (3 | )% |
Depreciation and amortization |
|
| 61.6 |
|
|
| 64.4 |
|
|
| (2.8 | ) |
|
| (4 | )% |
|
| 190.0 |
|
|
| 190.5 |
|
|
| (0.5 | ) |
|
| 0 | % |
Restructuring and severance charges |
|
| — |
|
|
| 0.7 |
|
|
| (0.7 | ) |
| n/m |
|
|
| 14.8 |
|
|
| 4.9 |
|
|
| 9.9 |
|
| n/m |
| ||
Total operating costs and expenses |
|
| 213.8 |
|
|
| 220.8 |
|
|
| (7.0 | ) |
|
| (3 | )% |
|
| 654.7 |
|
|
| 668.1 |
|
|
| (13.4 | ) |
|
| (2 | )% |
Operating income |
| $ | 27.2 |
|
| $ | 27.7 |
|
| $ | (0.5 | ) |
|
| (2 | )% |
| $ | 69.8 |
|
| $ | 81.2 |
|
| $ | (11.4 | ) |
|
| (14 | )% |
Operating margin |
|
| 11.3 | % |
|
| 11.1 | % |
|
|
|
|
| 0.2 pts |
|
|
| 9.6 | % |
|
| 10.8 | % |
|
|
|
|
| (1.2) pts |
| ||
Capital expenditures |
| $ | 55.9 |
|
| $ | 51.3 |
|
|
| 4.6 |
|
|
| 9 | % |
| $ | 142.5 |
|
| $ | 150.3 |
|
|
| (7.8 | ) |
|
| (5 | )% |
Entertainment and Communications, continued
|
| September 30, |
| |||||||||||||
Metrics information (in thousands): |
| 2020 |
|
| 2019 |
|
| Change |
|
| % Change |
| ||||
Cincinnati |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fioptics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet FTTP* |
|
| 235.0 |
|
|
| 214.6 |
|
|
| 20.4 |
|
|
| 10 | % |
Internet FTTN* |
|
| 27.7 |
|
|
| 32.5 |
|
|
| (4.8 | ) |
|
| (15 | )% |
Total Fioptics Internet |
|
| 262.7 |
|
|
| 247.1 |
|
|
| 15.6 |
|
|
| 6 | % |
Video |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video FTTP* |
|
| 108.7 |
|
|
| 113.5 |
|
|
| (4.8 | ) |
|
| (4 | )% |
Video FTTN* |
|
| 20.8 |
|
|
| 23.0 |
|
|
| (2.2 | ) |
|
| (10 | )% |
Total Fioptics Video |
|
| 129.5 |
|
|
| 136.5 |
|
|
| (7.0 | ) |
|
| (5 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fioptics Voice Lines |
|
| 104.4 |
|
|
| 108.0 |
|
|
| (3.6 | ) |
|
| (3 | )% |
Fioptics Units Passed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units passed FTTP* |
|
| 494.8 |
|
|
| 482.0 |
|
|
| 12.8 |
|
|
| 3 | % |
Units passed FTTN* |
|
| 138.0 |
|
|
| 138.6 |
|
|
| (0.6 | ) |
|
| 0 | % |
Total Fioptics units passed |
|
| 632.8 |
|
|
| 620.6 |
|
|
| 12.2 |
|
|
| 2 | % |
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethernet Bandwidth (Gb) |
|
| 5,978 |
|
|
| 5,006 |
|
|
| 972 |
|
|
| 19 | % |
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSL |
|
| 63.3 |
|
|
| 65.9 |
|
|
| (2.6 | ) |
|
| (4 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Voice Lines |
|
| 180.3 |
|
|
| 202.9 |
|
|
| (22.6 | ) |
|
| (11 | )% |
* | Fiber-to-the-Premise (FTTP), Fiber-to-the-Node (FTTN) |
Entertainment and Communications, continued
|
| September 30, |
| |||||||||||||
Metrics information (in thousands): |
| 2020 |
|
| 2019 |
|
| Change |
|
| % Change |
| ||||
Hawaii |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet FTTP* |
|
| 58.6 |
|
|
| 54.6 |
|
|
| 4.0 |
|
|
| 7 | % |
Internet FTTN* |
|
| 11.7 |
|
|
| 13.2 |
|
|
| (1.5 | ) |
|
| (11 | )% |
Total Consumer / SMB Fiber Internet |
|
| 70.3 |
|
|
| 67.8 |
|
|
| 2.5 |
|
|
| 4 | % |
Video |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video FTTP* |
|
| 30.6 |
|
|
| 31.8 |
|
|
| (1.2 | ) |
|
| (4 | )% |
Video FTTN* |
|
| 11.4 |
|
|
| 13.2 |
|
|
| (1.8 | ) |
|
| (14 | )% |
Total Consumer / SMB Fiber Video |
|
| 42.0 |
|
|
| 45.0 |
|
|
| (3.0 | ) |
|
| (7 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber Voice Lines |
|
| 29.8 |
|
|
| 30.1 |
|
|
| (0.3 | ) |
|
| (1 | )% |
Consumer / SMB Fiber Units Passed ** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units passed FTTP* |
|
| 178.1 |
|
|
| 170.6 |
|
|
| 7.5 |
|
|
| 4 | % |
Units passed FTTN* |
|
| 72.5 |
|
|
| 72.8 |
|
|
| (0.3 | ) |
|
| 0 | % |
Total Consumer / SMB Fiber units passed |
|
| 250.6 |
|
|
| 243.4 |
|
|
| 7.2 |
|
|
| 3 | % |
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethernet Bandwidth (Gb) |
|
| 4,063 |
|
|
| 3,424 |
|
|
| 639 |
|
|
| 19 | % |
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSL |
|
| 38.2 |
|
|
| 44.3 |
|
|
| (6.1 | ) |
|
| (14 | )% |
Voice |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Voice Lines |
|
| 164.2 |
|
|
| 183.0 |
|
|
| (18.8 | ) |
|
| (10 | )% |
* | Fiber-to-the-Premise (FTTP), Fiber-to-the-Node (FTTN) |
** | Includes units passed for both consumer and business on Oahu and neighboring islands. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | % Change | 2017 | 2016 | Change | % Change | ||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||
Data | $ | 88.0 | $ | 86.4 | $ | 1.6 | 2 | % | $ | 263.3 | $ | 258.4 | $ | 4.9 | 2 | % | ||||||||||||||
Voice | 66.7 | 68.7 | (2.0 | ) | (3 | )% | 201.5 | 208.0 | (6.5 | ) | (3 | )% | ||||||||||||||||||
Video | 37.8 | 32.2 | 5.6 | 17 | % | 111.0 | 92.1 | 18.9 | 21 | % | ||||||||||||||||||||
Services and Other | 3.7 | 5.7 | (2.0 | ) | (35 | )% | 17.1 | 17.3 | (0.2 | ) | (1 | )% | ||||||||||||||||||
Total revenue | 196.2 | 193.0 | 3.2 | 2 | % | 592.9 | 575.8 | 17.1 | 3 | % | ||||||||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||||||||
Cost of services and products | 93.5 | 91.0 | 2.5 | 3 | % | 282.6 | 267.1 | 15.5 | 6 | % | ||||||||||||||||||||
Selling, general and administrative | 33.8 | 37.1 | (3.3 | ) | (9 | )% | 104.5 | 107.1 | (2.6 | ) | (2 | )% | ||||||||||||||||||
Depreciation and amortization | 43.9 | 43.0 | 0.9 | 2 | % | 129.1 | 124.8 | 4.3 | 3 | % | ||||||||||||||||||||
Restructuring and severance charges | — | 0.8 | (0.8 | ) | n/m | 26.9 | 0.8 | 26.1 | n/m | |||||||||||||||||||||
Total operating costs and expenses | 171.2 | 171.9 | (0.7 | ) | — | % | 543.1 | 499.8 | 43.3 | 9 | % | |||||||||||||||||||
Operating income | $ | 25.0 | $ | 21.1 | $ | 3.9 | 18 | % | $ | 49.8 | $ | 76.0 | $ | (26.2 | ) | (34 | )% | |||||||||||||
Operating margin | 12.7 | % | 10.9 | % | 1.8 | pts | 8.4 | % | 13.2 | % | (4.8 | ) | pts | |||||||||||||||||
Capital expenditures | $ | 41.4 | $ | 63.1 | $ | (21.7 | ) | (34 | )% | $ | 138.9 | $ | 178.7 | $ | (39.8 | ) | (22 | )% | ||||||||||||
Metrics information (in thousands): | ||||||||||||||||||||||||||||||
Fioptics units passed | 564.7 | 509.5 | 55.2 | 11 | % | |||||||||||||||||||||||||
Internet subscribers: | ||||||||||||||||||||||||||||||
DSL | 86.7 | 114.2 | (27.5 | ) | (24 | )% | ||||||||||||||||||||||||
Fioptics | 221.2 | 185.6 | 35.6 | 19 | % | |||||||||||||||||||||||||
Total internet subscribers | 307.9 | 299.8 | 8.1 | 3 | % | |||||||||||||||||||||||||
Fioptics video subscribers | 143.5 | 133.4 | 10.1 | 8 | % | |||||||||||||||||||||||||
Residential voice lines: | ||||||||||||||||||||||||||||||
Legacy voice lines | 99.5 | 124.6 | (25.1 | ) | (20 | )% | ||||||||||||||||||||||||
Fioptics voice lines | 88.1 | 80.3 | 7.8 | 10 | % | |||||||||||||||||||||||||
Total residential voice lines | 187.6 | 204.9 | (17.3 | ) | (8 | )% | ||||||||||||||||||||||||
Business voice lines | ||||||||||||||||||||||||||||||
Legacy voice lines | 172.1 | 197.7 | (25.6 | ) | (13 | )% | ||||||||||||||||||||||||
VoIP lines* | 151.9 | 121.2 | 30.7 | 25 | % | |||||||||||||||||||||||||
Total business voice lines | 324.0 | 318.9 | 5.1 | 2 | % | |||||||||||||||||||||||||
Total voice lines | 511.6 | 523.8 | (12.2 | ) | (2 | )% | ||||||||||||||||||||||||
Long distance lines | ||||||||||||||||||||||||||||||
Residential | 179.2 | 190.9 | (11.7 | ) | (6 | )% | ||||||||||||||||||||||||
Business | 119.9 | 132.8 | (12.9 | ) | (10 | )% | ||||||||||||||||||||||||
Total Long Distance Lines | 299.1 | 323.7 | (24.6 | ) | (8 | )% | ||||||||||||||||||||||||
* VoIP lines include Fioptics voice lines. |
Entertainment and Communications, continued
Revenue
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
| $ | 43.0 |
|
| $ | 9.1 |
|
| $ | 52.1 |
|
| $ | 39.3 |
|
| $ | 8.0 |
|
| $ | 47.3 |
|
Video |
|
| 38.7 |
|
|
| 9.4 |
|
|
| 48.1 |
|
|
| 39.5 |
|
|
| 10.7 |
|
|
| 50.2 |
|
Voice |
|
| 8.9 |
|
|
| 2.7 |
|
|
| 11.6 |
|
|
| 9.2 |
|
|
| 2.7 |
|
|
| 11.9 |
|
Other |
|
| 0.4 |
|
|
| 0.2 |
|
|
| 0.6 |
|
|
| 0.4 |
|
|
| 0.2 |
|
|
| 0.6 |
|
|
|
| 91.0 |
|
|
| 21.4 |
|
|
| 112.4 |
|
|
| 88.4 |
|
|
| 21.6 |
|
|
| 110.0 |
|
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 21.4 |
|
|
| 10.6 |
|
|
| 32.0 |
|
|
| 21.6 |
|
|
| 9.9 |
|
|
| 31.5 |
|
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 23.4 |
|
|
| 12.3 |
|
|
| 35.7 |
|
|
| 26.1 |
|
|
| 14.6 |
|
|
| 40.7 |
|
Voice |
|
| 27.9 |
|
|
| 26.0 |
|
|
| 53.9 |
|
|
| 31.5 |
|
|
| 27.3 |
|
|
| 58.8 |
|
Other |
|
| 3.1 |
|
|
| 3.9 |
|
|
| 7.0 |
|
|
| 3.2 |
|
|
| 4.3 |
|
|
| 7.5 |
|
|
|
| 54.4 |
|
|
| 42.2 |
|
|
| 96.6 |
|
|
| 60.8 |
|
|
| 46.2 |
|
|
| 107.0 |
|
Total Entertainment and Communications revenue |
| $ | 166.8 |
|
| $ | 74.2 |
|
| $ | 241.0 |
|
| $ | 170.8 |
|
| $ | 77.7 |
|
| $ | 248.5 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer / SMB Fiber * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
| $ | 126.0 |
|
| $ | 26.5 |
|
| $ | 152.5 |
|
| $ | 115.5 |
|
| $ | 23.8 |
|
| $ | 139.3 |
|
Video |
|
| 116.3 |
|
|
| 28.8 |
|
|
| 145.1 |
|
|
| 120.3 |
|
|
| 33.2 |
|
|
| 153.5 |
|
Voice |
|
| 25.0 |
|
|
| 8.1 |
|
|
| 33.1 |
|
|
| 27.6 |
|
|
| 8.2 |
|
|
| 35.8 |
|
Other |
|
| 1.1 |
|
|
| 0.6 |
|
|
| 1.7 |
|
|
| 1.1 |
|
|
| 0.5 |
|
|
| 1.6 |
|
|
|
| 268.4 |
|
|
| 64.0 |
|
|
| 332.4 |
|
|
| 264.5 |
|
|
| 65.7 |
|
|
| 330.2 |
|
Enterprise Fiber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 64.3 |
|
|
| 31.0 |
|
|
| 95.3 |
|
|
| 63.8 |
|
|
| 29.3 |
|
|
| 93.1 |
|
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data |
|
| 71.6 |
|
|
| 39.4 |
|
|
| 111.0 |
|
|
| 78.4 |
|
|
| 45.7 |
|
|
| 124.1 |
|
Voice |
|
| 85.7 |
|
|
| 78.8 |
|
|
| 164.5 |
|
|
| 96.3 |
|
|
| 83.3 |
|
|
| 179.6 |
|
Other |
|
| 9.3 |
|
|
| 12.0 |
|
|
| 21.3 |
|
|
| 10.2 |
|
|
| 12.1 |
|
|
| 22.3 |
|
|
|
| 166.6 |
|
|
| 130.2 |
|
|
| 296.8 |
|
|
| 184.9 |
|
|
| 141.1 |
|
|
| 326.0 |
|
Total Entertainment and Communications revenue |
| $ | 499.3 |
|
| $ | 225.2 |
|
| $ | 724.5 |
|
| $ | 513.2 |
|
| $ | 236.1 |
|
| $ | 749.3 |
|
* | Represents Fioptics in Cincinnati |
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||
Revenue: | ||||||||||||||||||
Consumer | ||||||||||||||||||
Strategic | ||||||||||||||||||
Data | $ | 32.2 | $ | 26.5 | $ | 93.2 | $ | 75.2 | ||||||||||
Voice | 6.2 | 5.4 | 18.2 | 16.0 | ||||||||||||||
Video | 37.2 | 31.7 | 109.1 | 90.6 | ||||||||||||||
Services and other | 0.4 | 0.8 | 1.2 | 2.6 | ||||||||||||||
76.0 | 64.4 | 221.7 | 184.4 | |||||||||||||||
Legacy | ||||||||||||||||||
Data | 8.4 | 10.4 | 27.0 | 34.4 | ||||||||||||||
Voice | 16.1 | 18.2 | 50.8 | 56.7 | ||||||||||||||
Services and other | 0.7 | 1.0 | 2.2 | 3.2 | ||||||||||||||
25.2 | 29.6 | 80.0 | 94.3 | |||||||||||||||
Integration | ||||||||||||||||||
Services and other | 0.2 | 0.9 | 0.3 | 3.0 | ||||||||||||||
Total consumer revenue | $ | 101.4 | $ | 94.9 | $ | 302.0 | $ | 281.7 | ||||||||||
Business | ||||||||||||||||||
Strategic | ||||||||||||||||||
Data | $ | 25.1 | $ | 24.3 | $ | 74.9 | $ | 71.9 | ||||||||||
Voice | 16.3 | 13.3 | 46.3 | 37.8 | ||||||||||||||
Video | 0.6 | 0.5 | 1.9 | 1.5 | ||||||||||||||
Services and other | 0.5 | 0.6 | 1.6 | 1.5 | ||||||||||||||
42.5 | 38.7 | 124.7 | 112.7 | |||||||||||||||
Legacy | ||||||||||||||||||
Data | 4.1 | 4.9 | 13.3 | 15.4 | ||||||||||||||
Voice | 24.4 | 27.7 | 74.5 | 85.1 | ||||||||||||||
Services and other | 0.1 | 0.4 | 0.6 | 1.0 | ||||||||||||||
28.6 | 33.0 | 88.4 | 101.5 | |||||||||||||||
Integration | ||||||||||||||||||
Services and other | 0.4 | 0.4 | 1.1 | 1.3 | ||||||||||||||
Total business revenue | $ | 71.5 | $ | 72.1 | $ | 214.2 | $ | 215.5 | ||||||||||
Carrier | ||||||||||||||||||
Strategic | ||||||||||||||||||
Data | $ | 10.7 | $ | 11.3 | $ | 31.5 | $ | 33.9 | ||||||||||
Services and other | — | — | 5.4 | — | ||||||||||||||
10.7 | 11.3 | 36.9 | 33.9 | |||||||||||||||
Legacy | ||||||||||||||||||
Data | 7.5 | 9.0 | 23.4 | 27.6 | ||||||||||||||
Voice | 3.7 | 4.1 | 11.7 | 12.4 | ||||||||||||||
Services and other | 1.4 | 1.6 | 4.7 | 4.7 | ||||||||||||||
12.6 | 14.7 | 39.8 | 44.7 | |||||||||||||||
Total carrier revenue | $ | 23.3 | $ | 26.0 | $ | 76.7 | $ | 78.6 | ||||||||||
Total Entertainment and Communications revenue | $ | 196.2 | $ | 193.0 | $ | 592.9 | $ | 575.8 |
Entertainment and Communications, continued
Cincinnati Fioptics and Hawaii Consumer/SMB Fiber (collectively, "Consumer/SMB Fiber")
Consumer/SMB Fiber revenue has increased fromby $2.4 million for the comparable periods in the previous year due to Fioptics growth offsetting losses in legacy access lines, DSL subscribers and long-distance lines. Our Consumer Fioptics internet subscriber base increased 18% and average revenue per user ("ARPU") was up 4% compared to the third quarter of 2016. Consumer Fioptics video subscribers as of the end of the third quarter of 2017 increased 9%three months ended September 30, 2020 compared to the same period ain the prior year ago, in addition to a 4%as the increase in ARPU.
Consumer/SMB Fiber revenue increased by $2.2 million for the nine months ended September 30, 2020 compared to other service providers. The Companythe same period in 2019 as similar trends impacting the revenue increase for the quarter also continuesimpacted the nine months ended September 30, 2020. ARPU for the nine months ended September 30, 2020 increased for internet in both Cincinnati and Hawaii by 4% and 8%, respectively, as compared to experience DSL subscriber loss because of customers migratingthe same period in the prior year. In addition, revenue in the nine months ended September 30, 2020 was negatively impacted by a decline in non-recurring revenue due to Fioptics, or an alternative internet provider, particularlyCOVID-19 and the Company’s participation in areas not upgraded to Fioptics.
Enterprise Fiber
Enterprise Fiber revenue is down slightly from prior comparable periodsincreased $0.5 million and $2.2 million for the three and nine months ended September 30, 20172020 as compared to the growthsame periods in strategic revenue only partially offset declines realized by our legacy and integration products and services. Data revenue2019 as a result of customers migrating from our business customers was consistent for the three months ended September 30, 2017, and increased for the nine months ended September 30, 2017 as customers migrate from our legacy product offerings to higher bandwidth fiber solutions. Voicesolutions, as evidenced by the 19% increase in Ethernet Bandwidth in both Cincinnati and Hawaii. The increase to revenue declinedfrom additional customers switching to fiber solutions is partially offset by pricing pressures to provide higher speeds for a lower cost.
Legacy
Legacy revenue decreased for the three and nine months ended September 30, 2017,2020 compared to the same periods in the prior year due to the decline in voice lines and DSL subscribers. Voice lines declined 11% and 10% in Cincinnati and Hawaii, respectively, as the traditional voice lines become less relevant. DSL subscribers decreased by 4% and 14% in Cincinnati and Hawaii, respectively, as subscribers demand the higher speeds that can be provided by fiber. In addition, declines in DS1, DS3 and digital trunking have contributed to the revenue decline for these products in 2020 compared to the same periods in the prior year as customers migrate away from these solutions to fiber-based solutions.
Operating Costs and Expenses
Cost of services and products decreased $3.7 million for the three months ended September 30, 2020 compared to the same period in 2019 due to decreases in video content costs and operating taxes of $1.8 million and $1.3 million, respectively. Lower video content costs are a result of decreased subscribers. The decrease in operating taxes is due to decreases in regulatory fees and general excise tax. In addition to video content costs and operating taxes, payroll wages and taxes decreased by $1.3 million due to reduced headcount as a result of the restructuring that took place in the first quarter of 2020 and throughout 2019. Partially offsetting this cost savings is higher bonus expense due to a one-time bonus awarded to employees for their efforts during COVID-19.
Cost of services and products decreased $19.1 million for the nine months ended September 30, 2020 compared to the same period in the prior year due primarily to decreases in payroll related costs, video content costs and operating taxes. Payroll related costs decreased $2.2 million for the nine months ended September 30, 2020 compared to the same period in the prior year due to reduced headcount as well as lower workers compensation benefits more than offsetting incremental bonus expense. Video content costs decreased by $5.8 million for the nine months ended September 30, 2020 compared to the same period in 2019 as a result of decreased subscribers. Lower operating taxes are primarily due to favorable audit results that resulted in a nonrecurring benefit of $4.2 million for the nine months ended September 30, 2020 in addition to a decrease in general excise tax.
SG&A expenses increased $0.2 million for the three months ended September 30, 2020 compared to the same period in 2019. An increase in contract services as a result of higher insurance costs in third quarter of 2020 and increased bonus expense of $1.9 million primarily due to a one-time employee award was partially offset by cost containment strategies taken in 2020 to reduce the negative impact of the COVID-19 pandemic on the business.
SG&A expenses decreased $3.7 million for the nine months ended September 30, 2020 compared to the comparable period in the prior year primarily related to cost containment strategies taken in 2020 to reduce the negative impact of the COVID-19 pandemic on the business. The decrease was partially offset by increases to contract services as a result of higher insurance costs, bad debt expense due to updating our estimate of the impact of the economic downturn associated with the loss of legacy voice linesCOVID-19 pandemic on the Company’s receivables and long distance lines was greater than the growthincremental bonus expense recorded in the revenue associated with VoIP lines.third quarter.
Entertainment and Communications, continued
Depreciation and amortization decreased $2.8 million and $0.5 million in the three and nine months ended September 30, 2017, data revenue declined by $2.1 million and $6.6 million,2020, respectively, as carriers increased focus on improving the efficiency of their networks as they migrate from legacy product offerings to higher bandwidth fiber solutions. Voice revenue continues to decrease in 2017 in part due to Federal Communications Commission ("FCC") mandated reductions of terminating switched access rates. Strategic services and other revenue of $5.4 million is related to a one time project that was completed in the second quarter of 2017.
Restructuring and severance charges recorded in the nine months ended September 30, 20172020 are primarily related to a voluntaryVSP for certain bargained and management employees in an effort to continue to reduce costs associated with our copper field and network operations. Restructuring and severance charges recorded in the three and nine months ended September 30, 2019 were related to a severance program for certain bargainedmanagement employees as the Company continued its efforts to reduce fieldstreamline operations between Cincinnati and network costs associated with our legacy copper network.Hawaii.
Capital Expenditures
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Consumer / SMB Fiber capital expenditures * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
| $ | 6.1 |
|
| $ | 4.1 |
|
| $ | 10.2 |
|
| $ | 4.8 |
|
| $ | 2.4 |
|
| $ | 7.2 |
|
Installation |
|
| 8.4 |
|
|
| 3.4 |
|
|
| 11.8 |
|
|
| 10.7 |
|
|
| 3.4 |
|
|
| 14.1 |
|
Other |
|
| 2.4 |
|
|
| 0.2 |
|
|
| 2.6 |
|
|
| 2.9 |
|
|
| 0.8 |
|
|
| 3.7 |
|
Total Consumer / SMB Fiber |
|
| 16.9 |
|
|
| 7.7 |
|
|
| 24.6 |
|
|
| 18.4 |
|
|
| 6.6 |
|
|
| 25.0 |
|
Enterprise Fiber |
|
| 4.4 |
|
|
| 2.7 |
|
|
| 7.1 |
|
|
| 4.9 |
|
|
| 2.1 |
|
|
| 7.0 |
|
Other |
|
| 9.8 |
|
|
| 14.4 |
|
|
| 24.2 |
|
|
| 10.4 |
|
|
| 8.9 |
|
|
| 19.3 |
|
Total Entertainment and Communications capital expenditures |
| $ | 31.1 |
|
| $ | 24.8 |
|
| $ | 55.9 |
|
| $ | 33.7 |
|
| $ | 17.6 |
|
| $ | 51.3 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||
|
| Cincinnati |
|
| Hawaii |
|
| Total |
|
| Cincinnati |
|
| Hawaii |
|
| Total |
| ||||||
Consumer / SMB Fiber capital expenditures * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
| $ | 14.1 |
|
| $ | 9.5 |
|
| $ | 23.6 |
|
| $ | 21.4 |
|
| $ | 6.2 |
|
| $ | 27.6 |
|
Installation |
|
| 25.1 |
|
|
| 10.6 |
|
|
| 35.7 |
|
|
| 36.8 |
|
|
| 11.5 |
|
|
| 48.3 |
|
Other |
|
| 6.9 |
|
|
| 0.3 |
|
|
| 7.2 |
|
|
| 7.2 |
|
|
| 2.1 |
|
|
| 9.3 |
|
Total Consumer / SMB Fiber |
|
| 46.1 |
|
|
| 20.4 |
|
|
| 66.5 |
|
|
| 65.4 |
|
|
| 19.8 |
|
|
| 85.2 |
|
Enterprise Fiber |
|
| 8.8 |
|
|
| 8.2 |
|
|
| 17.0 |
|
|
| 8.4 |
|
|
| 5.4 |
|
|
| 13.8 |
|
Other |
|
| 26.8 |
|
|
| 32.2 |
|
|
| 59.0 |
|
|
| 24.8 |
|
|
| 26.5 |
|
|
| 51.3 |
|
Total Entertainment and Communications capital expenditures |
| $ | 81.7 |
|
| $ | 60.8 |
|
| $ | 142.5 |
|
| $ | 98.6 |
|
| $ | 51.7 |
|
| $ | 150.3 |
|
* | ||
Represents Fioptics in Cincinnati |
Capital Expenditures
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Fioptics capital expenditures | ||||||||||||||||
Construction | $ | 12.5 | $ | 21.6 | $ | 43.9 | $ | 59.0 | ||||||||
Installation | 11.1 | 19.0 | 39.5 | 40.2 | ||||||||||||
Other | 1.6 | 2.3 | 8.1 | 13.3 | ||||||||||||
Total Fioptics | 25.2 | 42.9 | 91.5 | 112.5 | ||||||||||||
Other strategic | 7.1 | 9.6 | 23.0 | 35.9 | ||||||||||||
Maintenance | 9.1 | 10.6 | 24.4 | 30.3 | ||||||||||||
Total capital expenditures | $ | 41.4 | $ | 63.1 | $ | 138.9 | $ | 178.7 |
Enterprise Fiber capital expenditures in Cincinnati are related to success-based fiber builds, including associated equipment, for enterprise and carrier projects to provide ethernet services as well as network refresh projects that occurredensure that we continue to grow our capacity and services within the network core. Other capital expenditures are related to IT projects, cable and equipment maintenance and capacity additions, real estate upgrades and maintenance, plus other minor capital purchases.
Hawaii construction capital expenditures increased $1.7 million and $3.3 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year due to building out 1,900 new addresses in the third quarter of 2016. Other Fioptics related costs include costs to expand core network capacity, as well as projects to enhance2020, primarily in rural areas and on the customer experience.
IT Services and Hardware
The IT Services and Hardware segment provides a full range of managedend-to-end IT solutions including managed infrastructureranging from consulting to implementation to ongoing optimization of existing technology. These solutions include Cloud, Communications and Consulting services telephonyalong with the sale and maintenance of major branded Telecom and IT equipment sales, and professional IT staffing services.hardware reported as Infrastructure Solutions. These services and products are provided through the Company's subsidiaries in various geographic areas throughout the United States, Canada and the United Kingdom.Europe. By offering a full range of equipment and outsourcedstrategic services in conjunction with the Company’s fiber and copper networks, the IT Services and Hardware segment provides end-to-end IT and telecommunications infrastructure managementour customers personalized solutions designed to reduce costmeet their business objectives.
Cloud services include the design, implementation and mitigateon-going management of the customer’s infrastructure. This includes on-premise, public cloud and private cloud solutions. The Company assists customers with the risk while optimizing performance for its customers.
Communications solutions help to transform the way our customers do business by connecting employees, customers, and business partners. By upgrading legacy technologies through customized build projects and reducing customer costs, the Company helps to transform the customer’s business. These services include Unified Communications as a Service ("UCaaS"), Software-Defined Wide Area Network ("SD-WAN"), Network as a Service ("NaaS"), Contact Center and Collaboration.
Using our experience and expertise, Infrastructure Solutions are tailored to our customers’ organizational goals. We offer a complete portfolio of services that provide customers with efficient and optimized IT solutions that are agile and responsive to their business and are integrated, simplified and manageable. Through consulting with customers, the Company will build a solution using standard manufacturer equipment to meet our customers’ specific requirements.
Consulting services help customers assess their business and technology needs and provide the talent needed to ensure success. The Company is a premier provider of application services and IT staffing.
Three Months Ended September 30, | Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | % Change | 2017 | 2016 | Change | % Change |
| 2020 |
|
| 2019 |
|
| Change |
|
| % Change |
|
| 2020 |
|
| 2019 |
|
| Change |
|
| % Change |
| ||||||||||||||||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Professional Services | $ | 24.9 | $ | 26.5 | $ | (1.6 | ) | (6 | )% | $ | 70.1 | $ | 79.9 | $ | (9.8 | ) | (12 | )% | ||||||||||||||||||||||||||||||||||||||||||||
Management and Monitoring | 5.5 | 8.1 | (2.6 | ) | (32 | )% | 15.6 | 24.1 | (8.5 | ) | (35 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||
Unified Communications | 10.7 | 9.9 | 0.8 | 8 | % | 31.6 | 30.1 | 1.5 | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cloud Services | 10.9 | 12.2 | (1.3 | ) | (11 | )% | 36.2 | 33.2 | 3.0 | 9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Telecom and IT hardware | 44.3 | 66.2 | (21.9 | ) | (33 | )% | 125.0 | 167.9 | (42.9 | ) | (26 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consulting |
| $ | 49.4 |
|
| $ | 37.6 |
|
| $ | 11.8 |
|
|
| 31 | % |
| $ | 138.5 |
|
| $ | 114.6 |
|
| $ | 23.9 |
|
|
| 21 | % | ||||||||||||||||||||||||||||||
Cloud |
|
| 21.1 |
|
|
| 22.6 |
|
|
| (1.5 | ) |
|
| (7 | )% |
|
| 63.0 |
|
|
| 69.8 |
|
|
| (6.8 | ) |
|
| (10 | )% | ||||||||||||||||||||||||||||||
Communications |
|
| 53.9 |
|
|
| 51.3 |
|
|
| 2.6 |
|
|
| 5 | % |
|
| 160.3 |
|
|
| 147.0 |
|
|
| 13.3 |
|
|
| 9 | % | ||||||||||||||||||||||||||||||
Infrastructure Solutions |
|
| 30.8 |
|
|
| 29.0 |
|
|
| 1.8 |
|
|
| 6 | % |
|
| 82.7 |
|
|
| 85.6 |
|
|
| (2.9 | ) |
|
| (3 | )% | ||||||||||||||||||||||||||||||
Total revenue | 96.3 | 122.9 | (26.6 | ) | (22 | )% | 278.5 | 335.2 | (56.7 | ) | (17 | )% |
|
| 155.2 |
|
|
| 140.5 |
|
|
| 14.7 |
|
|
| 10 | % |
|
| 444.5 |
|
|
| 417.0 |
|
|
| 27.5 |
|
|
| 7 | % | ||||||||||||||||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Cost of services and products | 72.4 | 96.2 | (23.8 | ) | (25 | )% | 209.8 | 260.3 | (50.5 | ) | (19 | )% |
|
| 102.7 |
|
|
| 89.4 |
|
|
| 13.3 |
|
|
| 15 | % |
|
| 290.2 |
|
|
| 268.3 |
|
|
| 21.9 |
|
|
| 8 | % | ||||||||||||||||||
Selling, general and administrative | 15.7 | 15.2 | 0.5 | 3 | % | 47.6 | 42.9 | 4.7 | 11 | % |
|
| 36.9 |
|
|
| 38.8 |
|
|
| (1.9 | ) |
|
| (5 | )% |
|
| 110.6 |
|
|
| 113.8 |
|
|
| (3.2 | ) |
|
| (3 | )% | ||||||||||||||||||||
Depreciation and amortization | 3.4 | 3.4 | — | — | % | 10.9 | 9.8 | 1.1 | 11 | % |
|
| 10.2 |
|
|
| 11.1 |
|
|
| (0.9 | ) |
|
| (8 | )% |
|
| 30.7 |
|
|
| 38.5 |
|
|
| (7.8 | ) |
|
| (20 | )% | ||||||||||||||||||||
Restructuring and severance related charges | — | 0.3 | (0.3 | ) | n/m | 2.3 | 0.3 | 2.0 | n/m |
|
| 0.8 |
|
|
| 0.6 |
|
|
| 0.2 |
|
|
| 33 | % |
|
| 1.5 |
|
|
| 1.5 |
|
|
| — |
|
|
| — |
| |||||||||||||||||||||
Total operating costs and expenses | 91.5 | 115.1 | (23.6 | ) | (21 | )% | 270.6 | 313.3 | (42.7 | ) | (14 | )% |
|
| 150.6 |
|
|
| 139.9 |
|
|
| 10.7 |
|
|
| 8 | % |
|
| 433.0 |
|
|
| 422.1 |
|
|
| 10.9 |
|
|
| 3 | % | ||||||||||||||||||
Operating income | $ | 4.8 | $ | 7.8 | $ | (3.0 | ) | (38 | )% | $ | 7.9 | $ | 21.9 | $ | (14.0 | ) | (64 | )% | ||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) |
| $ | 4.6 |
|
| $ | 0.6 |
|
| $ | 4.0 |
|
| n/m |
|
| $ | 11.5 |
|
| $ | (5.1 | ) |
| $ | 16.6 |
|
| n/m |
| ||||||||||||||||||||||||||||||||
Operating margin | 5.0 | % | 6.3 | % | (1.3 | ) | pts | 2.8 | % | 6.5 | % | (3.7 | ) | pts |
|
| 3.0 | % |
|
| 0.4 | % |
|
|
|
|
| 2.6 pts |
|
|
| 2.6 | % |
|
| (1.2 | )% |
|
|
|
|
| 3.8 pts |
| ||||||||||||||||||
Capital expenditures | $ | 1.6 | $ | 4.1 | $ | (2.5 | ) | (61 | )% | $ | 9.3 | $ | 9.9 | $ | (0.6 | ) | (6 | )% |
| $ | 3.9 |
|
| $ | 5.4 |
|
| $ | (1.5 | ) |
|
| (28 | )% |
| $ | 16.7 |
|
| $ | 16.9 |
|
| $ | (0.2 | ) |
|
| (1 | )% |
IT Services and Hardware, continued
|
| September 30, |
| |||||||||||||
Metrics information (in thousands): |
| 2020 |
|
| 2019 |
|
| Change |
|
| % Change |
| ||||
Consulting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billable Resources |
|
| 1,437 |
|
|
| 1,007 |
|
|
| 430 |
|
|
| 43 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NaaS Locations |
|
| 5,419 |
|
|
| 3,492 |
|
|
| 1,927 |
|
|
| 55 | % |
SD - WAN Locations |
|
| 2,783 |
|
|
| 1,849 |
|
|
| 934 |
|
|
| 51 | % |
Hosted UCaaS Profiles* |
|
| 277,610 |
|
|
| 270,335 |
|
|
| 7,275 |
|
|
| 3 | % |
* | Includes Hawaii Hosted UCaaS Profiles |
Revenue
IT Services and Hardware servicessegment revenue increased $14.7 million and products have either been classified as strategic or integration:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Strategic business revenue | ||||||||||||||||
Professional Services | $ | 17.5 | $ | 22.9 | $ | 54.2 | $ | 68.3 | ||||||||
Management and Monitoring | 5.5 | 8.1 | 15.6 | 24.1 | ||||||||||||
Unified Communications | 7.2 | 7.3 | 21.7 | 22.1 | ||||||||||||
Cloud Services | 10.9 | 12.2 | 36.2 | 33.2 | ||||||||||||
Total strategic business revenue | 41.1 | 50.5 | 127.7 | 147.7 | ||||||||||||
Integration business revenue | ||||||||||||||||
Professional Services | 7.4 | 3.6 | 15.9 | 11.6 | ||||||||||||
Unified Communications | 3.5 | 2.6 | 9.9 | 8.0 | ||||||||||||
Telecom and IT hardware | 44.3 | 66.2 | 125.0 | 167.9 | ||||||||||||
Total integration business revenue | 55.2 | 72.4 | 150.8 | 187.5 | ||||||||||||
Total IT Services and Hardware revenue | $ | 96.3 | $ | 122.9 | $ | 278.5 | $ | 335.2 |
Operating Costs and Expenses
IT Services and Hardware cost of our national footprint.
SG&A expenses decreased $1.9 million and $3.2 million for the three and nine months ended September 30, 2020, respectively, as compared to the comparable periods in 2019. The decreases are primarily related to cost containment strategies taken in 2020 to reduce the negative impact of the COVID-19 pandemic on the business. This was partially offset by an increase in bad debt expense due to updating our estimate of the impact of the economic downturn associated with the COVID-19 pandemic on the Company’s receivables and a one-time bonus awarded to employees in the third quarter. In addition, employee contract termination costs incurred in the first quarter of 2020 partially offset the decrease in the nine months ended September 30, 2020 compared to the same period in the prior year.
Depreciation and amortization expenses decreased $0.9 million and $7.8 million for the three months and nine months ended September 30, 2020, respectively, as compared to the same periods in the prior year due to accelerated depreciation expense for certain network assets designated for use by a specific customer. The network assets for which accelerated depreciation expense was incurred were determined to have a shorter useful life due to a change in the customer's requirements in the first quarter of 2019 and were fully depreciated as of December 31, 2019.
Restructuring and severance related charges recorded in the three and nine months ended September 30, 2020 and 2019 are associated with initiatives to reduce and contain costs. In addition, restructuring and severance related charges recorded in the second quarter of 2019 are related to insourcing initiatives by one of our significant customers.
Capital Expenditures
Capital expenditures are dependent on the timing of success-based projects. Capital expenditures for the three and nine months ended September 30, 2020, were primarily related to projects supporting the growth of our strategic products, primarily cloud services.
Financial Condition, Liquidity, and Capital Resources
As of September 30, 2017,2020, the Company had $1,132.8$1,958.0 million of outstanding indebtedness and an accumulated deficit of $2,680.8$2,826.0 million. A significant amount of the Company's indebtedness and accumulated deficit resulted from the purchase and operation of a national broadband business, which was sold in 2003.
The Company’s primary source of cash is generated by operations. The Company generated $156.8$138.9 million and $141.6$188.9 million of cash flows from operations during the nine months ended September 30, 20172020 and 2016,2019, respectively. As of September 30, 2017,2020, the Company had $290.1$159.9 million of short-term liquidity, comprised of $43.7$8.8 million of cash and cash equivalents, $150.0$143.0 million of undrawn capacity on our CorporateRevolving Credit AgreementFacility, and $96.4$8.1 million available under the Receivables Facility.
The Receivables Facility permits maximum borrowings of up to $200.0 million and is subject to annual renewal. As of September 30, 2017,2020, the Company had no borrowings of $179.5 million and $6.3$12.4 million of letters of credit outstanding under the Receivables Facility on a borrowing capacity of $102.7$200.0 million. In the second quarter of 2017, the Company executed an amendment of its Receivables Facility, which replaced, amended and added certain provisions and definitions to increase the credit availability and renew the facility, which is subject to renewal every 364 days, until May 2018. The facility's termination date is in May 2019. While we expect to continue to renew this facility, we would be required to use cash or our CorporateRevolving Credit Agreement or other sourcesFacility to repay any outstanding balance on the Receivables Facility if it werewas not renewed.
The Company’s primary uses of cash are for capital expenditures and debt service and, to a lesser extent, to fund pension and retiree medical obligations and preferred stock dividends. In 2017, cash was also utilized to fund merger and acquisition activity. the first quarter of 2020, as a result of terminating the Brookfield Merger Agreement, we paid an affiliate of Brookfield a termination fee of $24.8 million on March 13, 2020. The Company believes that its cash on hand, cash generated from operations, and available funding under its credit facilities will be adequate to meet its cash requirements for the next twelve months. In addition, management expects that
As of September 30, 2020, the Company will continue to have access towas in compliance with the capital markets to refinance debt and other obligations should such a need arise in the near future.
Cash Flows
Cash provided by operating activities during the nine months ended September 30, 20172020 totaled $156.8$138.9 million, an increasea decrease of $15.2$50.0 million compared to the same period in 2016.2019. The increasedecrease is due primarily to a $5.4 million decrease in interest payments resulting fromincreased transaction and termination costs and increased cash outflow due to working capital compared to the Company refinancing the 8
Cash flows used in investing activities during the nine months ended September 30, 20172020 totaled $16.8$160.8 million, a decrease of $76.1$6.2 million compared to the same period in 2016. The decrease is primarily2019 due to the Company depositing $90.7 million of funds into a restricted cash account to redeem the remaining balance of the 8
Cash flows usedprovided by financing activities during the nine months ended September 30, 20172020 totaled $106.0$19.3 million as compared to $47.6cash used in financing activities of $30.9 million usedduring the same period in the prior year. In the first half of 2017, we repaid $89.5 million on the Receivables Facility, compared to borrowing $5.9 million in the prior year. In the third quarter of 2016, the Company issued $425.0 million of 7% Senior Notes due 2024. In addition, debt repayments totaling $6.4 million for the nine months ended September 30, 2017 was a decrease of $454.6 million from the prior year. We also repurchased and retired approximately 0.2 million shares of the Company's common stock for $4.8 million in the prior year.
In the second quarter of 2020, the Company executed amendments to its Corporate Credit Agreement, no additional borrowings underReceivables Facility, which replaced, amended and added certain provisions and definitions to decrease the Corporate Credit Agreement would be availablecredit availability and renew the facility, which is subject to renewal every 364 days, until May 2021, and extend the default was waived or cured. The Company was in compliance with all offacility’s termination date to May 2023. Capacity on the financial covenants under the Corporate Credit Agreement as of September 30, 2017.
Indentures
The Company’s debt, which includes the 7% Senior Notes due 2024, and the New 8% Senior Notes due 2025 issued in October 2017, containsare governed by indentures which contain covenants that, among other things, limit the Company’s ability to incur additional debt or liens, pay dividends or make other restricted payments, sell, transfer, lease or dispose of assets and make investments or merge with another company. The Company is in compliance with all of its debt indentures.
Share Repurchase Plan
In 2010, the Board of Directors approved a plan for the repurchase of the Company's outstanding common stock in an amount up to $150.0 million. In prior years, the Company repurchased and retired a total of 1.7 million shares at a total cost of $25.6 million.million dollars. As of September 30, 2017,2020, the Company has the authority to repurchase its common stock with a value of up to $124.4 million under the plan approved by its Board of Directors, subject to satisfaction of the requirements under its bond indentures.
Regulatory Matters
Universal Service
In January 2020, the FCC adopted a Report and Order establishing the Rural Digital Opportunity Fund (“RDOF”), which will be used to distribute $20.4 billion over ten years to expand broadband in areas that remain unserved at the conclusion of the CAF II price cap support program. The funds will be awarded via two reverse auctions. In June 2020, the FCC released the procedures for the Phase I auction which is scheduled to begin on October 29, 2020. On October 13, 2020, the FCC announced that 386 applicants, including Cincinnati Bell Inc., are qualified to bid in the Phase I auction, which will award up to $16 billion over the 10-year support term. The remaining $4.4 billion plus any funds not awarded during Phase I will be distributed via a second auction to be held at a later date when more accurate broadband availability data becomes available.The Report and Order also extended the current price cap CAF II support for an additional year (through 2021). CBT and Hawaiian Telcom have accepted the seventh year of CAF II support, which will provide $2.2 million for CBT and $4.4 million for Hawaiian Telcom in 2021.
Special Access/Business Data Services
The deadline for detariffing of price cap carrier Business Data Services (“BDS”) as mandated by the FCC’s 2017 BDS Report and Order was August 1, 2020. By that date, all price cap carriers must have removed from their federal tariffs all packet-based services, Ethernet services, TDM services above the DS3 level, DS1 and DS3 transport services, and DS1 and DS3 services provided to end users within counties the FCC has determined are competitive. Hawaiian Telcom detariffed all of these services in late 2017 and early 2018 for all counties within Hawaii, whereas CBT chose to maintain its tariffs for these services during this permissive tariffing period. However, effective August 1, 2020, CBT eliminated its tariffs for all of these services except for DS1 and DS3 end user services in the two counties that the FCC has determined are non-competitive. Nearly all of the Company’s current federally tariffed BDS revenue is derived from the competitive counties that are subject to the detariffing mandate.
Keep Americans Connected Pledge
On March 13, 2020, in response to the COVID-19 pandemic, FCC Chairman Pai called on broadband and telephone service providers to keep Americans connected as the country reacts to the serious disruptions caused by the coronavirus outbreak. To ensure that Americans do not lose their broadband or telephone connectivity during this outbreak, he asked the service providers to take the Keep Americans Connected pledge. Cincinnati Bell, on behalf of all of its affiliates, including Hawaiian Telecom, signed on to the Pledge under which it committed that for the next 60 days, it would (1) not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the coronavirus pandemic; (2) waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and (3) open its Wi-Fi hotspots to any American who needs them. Chairman Pai later called on companies to extend the pledge through June 30, 2020, which Cincinnati Bell and all of its affiliates agreed to do. In accordance with regulatory orders in Hawaii, the Pledge has continued to be honored for certain regulated services through the date of this filing.
Intercarrier Compensation
On October 9, 2020, the FCC released a Report and Order transitioning originating access charges for toll free calls to bill and keep over a three-year period. The Order does not provide a specific recovery mechanism for price cap companies to replace this lost revenue, finding instead that these companies can increase their existing Subscriber Line Charge or Access Recovery Charge to the extent they are otherwise able to do so. CBT and Hawaiian Telcom will assess the impact of the reduction in toll free charges and determine whether they have the ability to recover the lost revenue via existing mechanisms.
Unbundled Network Elements
In November 2019, the FCC opened a new proceeding to consider whether to update the remaining unbundling and resale obligations that apply to ILECs and proposed eliminating most remaining unbundling obligations with the exception of mass-market broadband-capable loops in rural areas. The FCC has announced that it will vote on a report and order at its October meeting that will eliminate DS0 loops in densely populated areas, DS1 and DS3 loops in areas with sufficient competition, and dark fiber loops near competitive fiber networks. Although Cincinnati Bell’s ILEC operations may benefit from the elimination of the UNE unbundling requirements, the benefits will likely be outweighed by the increased costs the changes will impose on its CLEC operations.
Citizens Band Radio Service Spectrum Auction
The FCC conducted an auction of over 22,000 county-sized Priority Access Licenses (“PALs”) in the 3550-3650 MHz portion of the Citizens Band Radio Service (“CBRS”) 3.5 GHz spectrum band. This auction, which was designated as Auction 105, commenced on July 23, 2020 and ended on August 25, 2020. This auction offered up to seven PALs in each county-based license area, for a total of 22,631 PALs nationwide. Each PAL consists of a 10-megahertz unpaired channel in the 3.55-3.65 GHz band. Cincinnati Bell was the winning bidder for 56 PALs (23 in Ohio, 20 in Kentucky, and 13 in Hawaii) at a total cost of $6.2 million.
Refer to the Company’s Annual Report on Form 10-K for the year ended 20162019 for a complete description of regulatory matters. Refer to the Company Quarterly Report on Form 10-Q for the period ended June 30, 2017 for changes to certain regulatory matters that occurred in the first and second quarter of 2017.
Contingencies
In the normal course of business, the Company is subject to various regulatory and tax proceedings, lawsuits, claims and other matters. The Company believes adequate provision has been made for all such asserted and unasserted claims in accordance with U.S. GAAP.accounting principles generally accepted in the United States. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.
Future Operating Trends
Refer to the Company’s Annual Report on Form 10-K for the year ended 20162019 for a complete description of future operating trends for our business.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the accompanying condensed consolidated financial statementsCondensed Consolidated Financial Statements and information available as of the date of the financial statements. As this information changes, the financial statements could reflect different estimates or judgments. The Company’s most critical accounting policies and estimates are described in its Annual Report on Form 10-K for the year ended
Recently Issued Accounting Standards
Refer to Note 1 of the Condensed Consolidated Financial Statements for further information on recently issued accounting standards. The adoptionstandards and the impact to the Condensed Consolidated Financial Statements as a result of new accounting standards did not have a material impact on the Company’s financial results for the three and nine months ended
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Refer to the Company’s Annual Report on Form 10-K for the year ended
December 31,Item 4.Controls and Procedures
(a) |
Evaluation of disclosure controls and procedures. |
Cincinnati Bell Inc.’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13-a 15(e)13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, Cincinnati Bell Inc.’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective.
(b) | Changes in internal control over financial reporting. |
Cincinnati Bell Inc.’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the third quarter of 2017 and have2020, including the continuation of employees working remotely that started mid-March in response to the COVID-19 pandemic. Management has concluded that there were no changes to Cincinnati Bell Inc.’s internal control over financial reporting during the third quarter of 20172020 that materially affect, or are reasonably likely to materially affect, Cincinnati Bell Inc.’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Cincinnati Bell and its subsidiaries are involved in a number of legal proceedings. Liabilities are established for legal claims when losses associated with the claims are judged to be probable and the loss can be reasonably estimated. In many lawsuits and arbitrations, including most class action lawsuits, it is not possible to determine whether a liability has been incurred or to estimate the amount of the liability until the case is close to resolution, in which case a liability will not be recognized until that time. Based on information currently available, consultation with counsel, available insurance coverage and recognized liabilities, the Company believes that the eventual outcome of all claims will not, individually or in the aggregate, have a material effect on the Company’s financial position or results of operations.
Item 1A. Risk Factors
The following risk factors should be read in conjunction with those risk factors and other information disclosed in our Form 10‑K filed on February 24, 2020 and should be considered carefully in evaluating us. Our business, financial condition, liquidity or results of operations could be materially affected by any of these risks.
Risk Factors Related to our Business and Operations
The recent global outbreak of COVID-19 and related government, private sector and individual consumer responsive actions have adversely affected the Company’s business operations, employee availability, financial performance, liquidity and cash flow and may continue to do so for an unknown period of time.
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the President of the United States declared a national emergency relating to the outbreak. The outbreak has resulted in infections in the United States and abroad and has adversely affected workforces, customers and consumer sentiment and, along with a decrease in consumer spending, led to an economic downturn in many markets. National, state and local authorities have recommended social distancing measures and have imposed or are considering quarantine and isolation measures for large portions of the population, including mandatory business closures. These measures, while intended to protect human life, have had, and are expected to continue to have, serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including government payments under the CARES Act to affected citizens and industries, is uncertain.
In the United States and in other countries and regions where we have a significant employee presence, facilities or critical operations, the outbreak of COVID-19 has impacted our ability to manage day-to-day operations and service our customers and has increased our costs of operations and resulted in, among other things, loss of revenue. For example, we have implemented corporate and personal travel restrictions for employees and vendors, cancelled events and enabled work-from-home for many employees by equipping them to safely support customers remotely. We have also implemented additional safety measures for our retail stores and field operations teams. Additionally, we have been required to temporarily close or reduce operations at some of our retail locations, facilities and customer call centers. Retail locations inside malls were closed temporarily, but reopened in June 2020 as stay-at-home orders began to ease in Ohio. Retail locations that remain open continue to have reduced hours of operation. As a result of travel restrictions enacted by local government, our third-party off-shore call center was forced to reduce its hours of operation for several weeks, resulting in longer than normal hold times during that period. The call centers that support the Cincinnati market returned to normal hours of operation on April 28, 2020. Due to stay-at-home orders easing in the primary markets in which the Company operates, operations have normalized as of the date of this filing, but we may be required to temporarily close or reduce operations at more of or all of our retail locations, facilities or call centers again if there is a resurgence of COVID-19 in the markets in which we operate. The foregoing effects, and other effects of COVID-19, may continue for an unknown period of time.
Our business has been, and may continue to be, negatively impacted by the effects of, or precautions taken to avoid exposure to, COVID-19, such as reduced travel or recommendations or mandates from governmental authorities to avoid large gatherings or to self-quarantine, and by the resulting disruptions to economic conditions and financial markets. Such impacts include, but are not limited to:
• | Disruptions to our third-party providers, including those who provide many of our information technology, call center functions, certain accounting functions and other critical vendor services; |
• | Reduced workforces caused by, among other things, the temporary inability of the workforce to work due to illness, quarantine, or government mandates, or temporary unwillingness to work due to health concerns; |
• | Reduced customer demand or customer payment of accounts receivables as a result of adverse economic conditions resulting from the COVID-19 pandemic; |
• | Reduced availability of certain network equipment in the supply chain due to increased demand and certain suppliers who have had, or continue to have, workforce constraints due to the COVID-19 pandemic; and |
• | Reduced revenues as a result of our pledge to not terminate service to certain customers due to their inability to pay bills because of disruptions caused by COVID-19 and to waive late fees for certain customers as a result of circumstances related to COVID-19. |
Potential future impacts include, but are not limited to:
• | Increased capital costs and service disruptions or reduced bandwidth for customers due to significant short-term increases in consumer activations and bandwidth usage due to individuals working from home; |
• | Increased supply chain risks such as increased scrutiny or embargoing of goods produced in infected areas; |
• | Increased health insurance and labor-related costs arising from illness, quarantine and the implementation of social distancing and work-from-home measures; |
• | Reduced employee productivity and a negative impact on the execution of our business plans and operations as employees must balance working remotely from home with personal responsibilities, such as child care and education; |
• | Increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us, our customers or other third parties as a result of employees or third-party vendors’ employees working remotely; and |
• | In the event of a natural disaster, power outage, connectivity issue or other event that impacts our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue to support our customers’ needs and respond to inquiries through call center operations or to perform necessary repairs and maintenance. |
The foregoing impacts, and other impacts of COVID-19 discussed elsewhere in these risk factors, are consistent with those generally affecting the economic, financial, regulatory and political conditions in the United States and elsewhere in the world, and are generally applicable to the industries and markets in which the Company and its subsidiaries operate. These impacts could materially increase our costs, negatively impact our consumer and business sales and damage the Company’s financial condition, results of operations, cash flows and liquidity position, possibly to a significant degree. The severity and duration of any such impacts cannot be predicted because of the rapidly evolving nature of the COVID-19 pandemic.
The Company may be unable to grow our revenues and cash flows despite the initiatives we have implemented.
We must produce adequate revenues and cash flows that, when combined with cash on hand and funds available under our revolving credit facilities, will be sufficient to service our debt, fund our capital expenditures, fund our pension and other employee benefit obligations and pay preferred dividends pursuant to our dividend policy. We have identified some potential areas of opportunity and implemented several growth initiatives. We cannot be assured that these opportunities will be successful or that these initiatives will improve our financial position or our results of operations. The outbreak of COVID-19 may also negatively impact these opportunities and require us to incur additional related costs responding to the virus, particularly if the effects of COVID-19 persist for a significant period of time.
The Company’s failure to meet performance standards under its agreements could result in customers terminating their relationships with the Company or customers being entitled to receive financial compensation, leading to reduced revenues and/or increased costs.
The Company’s agreements with its customers contain various requirements regarding performance and levels of service. If the Company fails to provide the levels of service or performance required by its agreements, customers may be able to receive financial compensation or may be able to terminate their relationship with the Company. In order to provide these levels of service, the Company is required to protect against human error, natural disasters, equipment failure, power failure, sabotage and vandalism, and have disaster recovery plans available in the event of disruption of service. As a result of the COVID-19 outbreak, this same level of service must now be provided in a predominantly remote working environment due to many members of the workforce now executing their daily responsibilities from their homes. Our increased reliance on personnel working from home may negatively impact productivity and there is no certainty that such measures will be sufficient to mitigate the risks posed by the COVID-19 outbreak. Additionally, our field technicians are classified as essential personnel and continue to operate business as usual. In the event that a significant number of our field technicians are affected by COVID-19, our ability to maintain our network could be reduced. The failure to address these or other events may result in a disruption of service. In addition, any inability to meet service level commitments or other performance standards could reduce the confidence of customers. Decreased customer confidence could impair the Company’s ability to attract and retain customers, which could adversely affect the Company’s ability to generate revenues and operating results.
The Company generates a substantial portion of its revenue by serving a limited geographic area.
The Company generates a substantial 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 any of these limited operating territories would have a disproportionate effect on the Company’s 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. Furthermore, because of Hawaii’s geographic isolation, the successful operation and growth of the business in Hawaii is dependent on favorable economic and regulatory conditions in the state. The impact of COVID-19 on the Hawaiian Islands has been, and could continue to be, more significant than in other geographies due to reliance on tourism by many businesses and reductions in tourism due to social distancing measures, self-quarantine requirements for visitors and recommendations of federal, state and local governments.
The customer base for telecommunications services in Hawaii is small and geographically concentrated. The population of Hawaii is approximately 1.4 million, approximately 70% of whom live on the island of Oahu. Any adverse economic conditions affecting Oahu (including the outbreak of COVID-19), or Hawaii generally, could materially impair our ability to operate our business. Labor shortages or increased labor costs in Hawaii could also have an adverse effect on our business. In addition, we may be subject to increased costs for goods and services that the Company is unable to control or defray as a result of operating in this limited territory or as a result of the COVID-19 outbreak. Increased expenses including, but not limited to, energy and health care could have an adverse effect on our business and results of operations.
Increases in broadband usage may cause network capacity limitations, resulting in service disruptions or reduced capacity for customers.
Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional internet activity such as web browsing and email. As utilization rates and availability of these services continue to grow, our high-speed internet customers may use much more bandwidth than in the past. As a result of stay-at-home orders in Ohio and Hawaii in response to the COVID-19 outbreak, increased numbers of people working from home and students attending school online have resulted in, and could continue to result in, significantly higher than normal demands on our network capacity. If this continues to occur and our existing network capacity becomes unable to handle the increased demand, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions or reduced capacity for customers. We may not be able to recover the costs of the necessary network investments. Service disruptions or reduced capacity for customers may result if we do not sufficiently increase network capacity in response to further sudden and significant increases in demand, such as may result from the COVID-19 outbreak. Any of these occurrences could result in an adverse impact to our results of operations and financial condition.
The regulation of the Company’s businesses by federal and state authorities may, among other things, place the Company at a competitive disadvantage, restrict its ability to price its products and services competitively and threaten its operating licenses.
Several of the Company’s subsidiaries are subject to regulatory oversight of varying degrees at both the state and federal levels, which may differ from the regulatory scrutiny faced by the Company’s competitors. A significant portion of the Company’s revenue is derived from pricing plans that are subject to regulatory review and approval. These regulated pricing plans limit the rates the Company can charge for some services while the competition has typically been able to set rates for services with limited or no restriction. In the future, regulatory initiatives that would put the Company at a competitive disadvantage or mandate lower rates for its services would result in lower profitability and cash flows for the Company. In addition, different regulatory interpretations of existing regulations or guidelines may affect the Company’s revenues and expenses in future periods.
At the federal level, the Company’s telecommunications services are subject to the Communications Act of 1934 as amended by the Telecommunications Act of 1996, including rules adopted by the Federal Communications Commission (“FCC”). In addition, the Company’s submarine cable facilities and operations are also subject to requirements imposed by the national security and law enforcement agencies (e.g., the Departments of Justice, Defense and Homeland Security). At the state level, Cincinnati Bell Telephone Company LLC (“CBT”) operates as the incumbent local exchange carrier (“ILEC”) and carrier of last resort in portions of Ohio, Kentucky, and Indiana, while Hawaiian Telcom, Inc. (“HTI”) serves as the ILEC and carrier of last resort in Hawaii. As the ILEC in those states, these entities are subject to regulation by the Public Utilities Commissions in those states. Various regulatory decisions or initiatives at the federal or state level may from time to time have a negative impact on CBT’s and HTI’s ability to compete in their respective markets. In addition, although less heavily regulated than the Company’s ILEC operations, other subsidiaries are authorized to provide competitive local exchange service, long distance, and cable television service in various states, and are consequently also subject to various state and federal telecommunications and cable regulations that could adversely impact their operations.
There are currently many regulatory actions under way and being contemplated by federal and state authorities regarding issues, including national security and law enforcement issues that could result in significant changes to the business conditions in the telecommunications industry. On April 4, 2020, the President of the United States issued Executive Order No. 13913 Establishing the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector (the “Committee”), which formalized the ad-hoc foreign investment review process (formerly referred to as “Team Telecom”) applicable to FCC licenses and transactions. The Executive Order empowers the Committee to review FCC license and transfer applications involving foreign participation to determine whether grant of the requested license or transfer approval may pose a risk to the national security or law enforcement interests of the United States, and to review existing licenses to identify any additional or new risks to national security or law enforcement interests that did not exist when a license was first granted. Following an investigation, the Committee may recommend that the FCC revoke or modify existing licenses, or deny or condition approval of new licenses and license transfers. It is not possible for the Company to determine whether it may be subject to a proceeding to revoke or modify its existing licenses or predict the outcome of a review of new license or transfer applications by the Committee in the future. A review of existing licenses and/or a review of new licenses and transfers by the Committee may result in additional compliance obligations that may affect the Company’s expenses and business operations in the future.
In addition, in connection with our internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the internet. There is currently only limited regulation applicable to these services although court decisions and/or legislative action could lead to greater regulation of the internet (including internet access services). We cannot provide any assurances that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative, or judicial initiatives relating to the telecommunications industry, will not have an adverse effect on the Company’s business, financial condition, results of operations and cash flows.
From time to time, different regulatory agencies conduct audits to ensure that the Company is in compliance with the respective regulations. The Company could be subject to fines and penalties if found to be out of compliance with these regulations, and these fines and penalties could be material to the Company’s Annual Reportfinancial condition.
The Company depends on Form 10-K fora number of third-party providers and the year ended December 31, 2016 for a comprehensive listingloss of or problems with one or more of these providers may impede the Company’s growth, cause it to lose customers or materially and adversely impact our business, financial condition, and results of operations.
The Company depends on third-party providers to supply products and services. For example, many of the Company’s risk factors.information technology, call center functions and certain accounting functions are performed by third-party providers, some of which are located outside of the United States, and network equipment is purchased from and maintained by vendors. Additionally, certain installation services sold by our IT Services and Hardware segment are performed by third-party providers.
Governments, public institutions and other organizations in countries and regions where cases of COVID-19 have been detected have taken certain emergency measures to combat its spread and impact, including implementation of travel bans, suspension of public transportation and closures of factories, schools, public buildings, businesses and other institutions. As a result of such measures, our third-party off-shore call center was forced to reduce its hours of operation for several weeks, resulting in longer than normal hold times during that period. The risk factors below supersedeloss of, or further problems with, one or more of these third-party providers may result in an adverse effect on our ability to provide products and services to our customers. While the risk factors includedfull impact of the COVID-19 outbreak is not yet known, potential effects on our business include disruptions to or restrictions on our third-party providers, suppliers and other vendors in our supply chain, including limitations on the ability of their employees to travel and temporary closures or reductions in the Company's Quarterly Reporthours of their facilities or customer call centers.
We have suppliers around the world, including in China, the United States and other countries where cases of COVID-19 have been reported and are continuing to spread. As a result, the COVID-19 pandemic may result in shortages, price increases or delays to the delivery of materials. We could be materially adversely impacted, including from any disruption to critical vendor services or losses of business, if any of our suppliers face significant business disruptions as a result of COVID-19 or any similar outbreak.
Moreover, certain policies and statements of the President of the United States and senior government officials have given rise to uncertainty about the status of certain international trade agreements to which the United States is a party and the position of the United States with respect to international trade generally. The U.S. government has recently increased tariffs and imposed new tariffs on Form 10-Q fora wide range of products imported from China. It remains unclear what additional actions, if any, the quarter ended June 30, 2017.
Risks Related to Our Indebtedness
The servicing of the Company’s indebtedness is dependent on its ability to generate cash, which could be impacted by many factors beyond its control.
The Company’s ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors, including the effects of the COVID-19 outbreak, many of which are beyond its control. The Company cannot provide assurance that its business will generate sufficient cash flow from operations, that additional sources of debt financing will be available or that future borrowings will be available under its Revolving Credit Facility or Receivables Facility, in each case, in amounts sufficient to enable the Company to service its indebtedness or to fund other liquidity needs. If the Company cannot service its indebtedness, it will have to take actions such as reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, selling assets, restructuring or refinancing indebtedness or seeking additional equity capital, which may adversely affect its shareholders, debt holders and customers. The Company may not be able to negotiate remedies on commercially reasonable terms or at all. In addition, the terms of existing or future debt instruments may restrict the Company from adopting any of these alternatives. The Company’s inability to generate the necessary cash flows could result in its dissolution, bankruptcy, liquidation or reorganization.
Risks Relating to the Merger with Hawaiian Telcom
There are material uncertainties and risks associated with the MIP Merger Agreement and proposed MIP Merger.
On March 13, 2020, the Company entered into an Agreement and Plan of Merger (the “merger”“MIP Merger Agreement”) pursuant to which the Company will be acquired by an affiliate of Hawaiian Telcom Holding, Inc.Macquarie Infrastructure Partners V (“Hawaiian Telcom”MIP”) into, a wholly owned subsidiaryfund managed by Macquarie Infrastructure and Real Assets (the “MIP Merger”). Below are material uncertainties and risks associated with the MIP Merger Agreement and the proposed MIP Merger. If any of the risks develop into actual events, then the Company’s business, financial condition, results and ongoing operations, share price or prospects could be adversely affected.
• | The announcement or pendency of the MIP Merger may impede the Company’s ability to retain and hire key personnel and its ability to maintain relationships with its customers, suppliers and others with whom it does business or its operating results and business generally; |
• | The attention of the Company’s employees and management may be diverted due to activities related to the MIP Merger, which may affect the Company’s business operations; |
• | Matters relating to the transactions may require substantial commitments of time and resources by the Company’s management, which could harm the Company’s relationships with its employees, customers, distributors, suppliers or other business partners, and may result in a loss of or a substantial decrease in purchases by its customers; |
• | The MIP Merger Agreement restricts the Company from engaging in certain actions without the approval of MIP, which could prevent the Company from pursuing certain business opportunities outside the ordinary course of business that arise prior to the closing of the MIP Merger; |
• | The MIP Merger Agreement contains provisions that could discourage a potential competing acquirer of the Company; |
• | The Company’s directors and executive officers have financial interests in the MIP Merger that may be different from, or in addition to, the interests of the Company’s shareholders generally, which could have influenced their decisions to support or approve the MIP Merger; |
• | Shareholder litigation in connection with the transactions contemplated by the MIP Merger Agreement may result in significant costs of defense, indemnification and liability; and |
• | The MIP Merger may materially limit the Company’s ability to utilize existing deferred tax assets related to federal and state net operating losses. |
The proposed MIP Merger may not be completed in a timely manner or at all.
Completion of the MIP Merger is subject to customary closing conditions, including (1) the receiptabsence of clearancesan order, injunction or approvals from various regulatory authorities, which may impose conditions that could have an adverse effect onlaw prohibiting the Company followingMIP Merger, (2) the closingexpiration or early termination of the merger (the “combined company”) or, if not obtained, could prevent completion of the merger.
In addition, the MIP Merger Agreement may require the Company and Hawaiian TelcomMIP to comply with conditions imposed by regulatory entities and neither company is required to take any action with respect to obtaining any regulatory approval that, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect (as defined in the agreementmaterial adverse effect on MIP and plan of merger dated July 9, 2017 (the “merger agreement”), among Hawaiian Telcom,its affiliates (taken as a whole) or the Company and Twin Acquisition Corp.) on either Hawaiian Telcom or the Company.its subsidiaries (taken as a whole). There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the merger, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reduce the anticipated benefits of the merger. In addition, the Company cannot provide assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger.
The obligation of each of the Company and regulatory clearances and approvals,MIP to consummate the mergerMIP Merger is also conditioned on, subject to certain materiality and other conditions beyondqualifiers, the controlaccuracy of the representations and warranties of the other party and the performance in all material respects by the other party of its obligations under the MIP Merger Agreement. Competing offers or acquisition proposals for the Company may be made, resulting in delay of the MIP Merger or termination of the MIP Merger Agreement. Lawsuits have been and may be filed against the Company relating to the MIP Merger and an adverse ruling in any such lawsuit may prevent the MIP Merger from being completed in the time frame expected or at all. While the MIP Merger Agreement is not subject to any financing condition, if MIP fails to obtain debt financing, the MIP Merger is unlikely to be consummated. Each of the Company thatand MIP has the right to terminate the MIP Merger Agreement under certain circumstances, as described in the MIP Merger Agreement.
Failure to complete the MIP Merger could negatively impact the Company’s business, financial results and stock price.
If the MIP Merger is delayed or not completed, the Company’s ongoing businesses may prevent, delay, or otherwise materiallybe adversely affect completion of the merger. The Company cannot predict whetheraffected and when these other conditions will be satisfied. The requirements for satisfying such conditions could delay completion ofsubject to several risks and consequences, including the merger for a period of time, reducing or eliminating some or all anticipated benefits of the merger, or prevent completion of the merger from occurring at all.
• | decline in share price to the extent that the current price of Company common shares reflects an assumption that the MIP Merger will be completed; |
• | negative publicity and a negative impression of the Company in the investment community; |
• | loss of business opportunities and the ability to effectively respond to competitive pressures; and |
• | the Company may be required, under certain circumstances, to pay MIP a termination fee and additional expenses. |
The pendencyCompany has incurred, and will incur, substantial direct and indirect costs as a result of the merger could materially adversely affect the future businessMIP Merger.
The Company has incurred, and operations of the Company and/or resultwill continue to incur, significant costs, expenses and fees for professional advisors, printing and other transaction costs in a loss of employees for the Company.
Other Risk Factors
The trading price of the Company, it is possible that some customers, suppliersCompany’s common stock has been, and may continue to be, volatile, and the value of an investment in the Company’s common stock may decline.
The market price of the Company’s common stock has been volatile and could be subject to wide fluctuations in response to, among other things, the risk factors described in this report and other persons with whomfactors beyond the Company hasCompany’s control, such as volatility in equity markets and fluctuations in the valuation of companies perceived by investors to be comparable to the Company. The Company’s recent stock price reflects the assumption that the MIP Merger will be completed or a business relationship may delay or defer certain business decisions, which could negatively impact revenues, earningsnew offer will proceed to an agreement and cash flows ofan acquisition will be completed.
Equity markets have experienced price and volume fluctuations that have affected the Company, as well asCompany’s stock price and the market prices of the Company’s common shares, regardlessequity securities of whether the merger is completed. Similarly, currentmany other companies. These market and prospective employees of the Companyindustry fluctuations, as well as general economic, political, and market conditions, may experience uncertainty about their future roles within the combined company following completion of the merger, which may materially adverselynegatively affect the ability of the Company to attract and retain key employees.
The COVID-19 outbreak has also caused severe disruption in financial and equity markets in the United States and abroad. Uncertainty around the duration of business disruptions and the extent of the spread of the virus could continue to adversely impact the national or global economy and may negatively affect the market price of the Company’s stock.
Companies that have experienced volatility in the market price of common shares have periodically been subject to Hawaiian Telcom stockholderssecurities class action litigation. The Company may be the target of this type of litigation in the merger (including common shares of the Company to be issued in connection with outstanding Hawaiian Telcom equity awards). As a result of these issuances, the Company’s current shareholders and Hawaiian Telcom’s stockholders are expected to hold approximately 85% and 15%, respectively, of the Company’s outstanding common shares immediately following completion of the merger.
The combined company’s results of operations could also be adversely affected by any issues attributable to either company’s operations that arise or are based on events or actions that occur prior to the closing of the merger. The companies may have difficulty addressing possible differences in corporate cultures and management philosophies. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreasesuncertain economic environment, including uncertainty in the amount of expected revenuesU.S. and world securities markets, could adversely affect the combined company’s future business, financial condition, operating results and prospects.
The Company and Hawaiian Telcom are dependent on the experience and industry knowledge of their officers and other key employees to execute their business plans. The Company’s success until the merger, and the combined company’s success after the merger, will depend in part upon the ability of the Company and Hawaiian Telcom to retain key management personnel and other key employees. Current and prospective employees of the Company and Hawaiian Telcom may experience uncertainty about their roles within the combined company following the merger, which mayuncertain economic environment could have an adverse effect on the abilityCompany’s business and financial liquidity. The COVID-19 pandemic has resulted in an economic downturn, including increased unemployment and a decrease in consumer and commercial activity, that may continue for an extended period of time. The Company’s primary source of cash is customer collections. As a result of current adverse economic conditions and uncertainty relating to the COVID-19 pandemic, some customers have canceled or requested discounts on future contracted services or have had difficulty paying their accounts receivable. Additional customers may cancel or request discounts on future contracted services or have difficulty paying their accounts receivable, especially if economic conditions worsen. In response to the negative economic impacts of the COVID-19 pandemic, the Company has pledged to not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by COVID-19 and Hawaiian Telcom to attractwaive any late fees that any residential or retain key managementsmall business customers would incur because of economic circumstances related to COVID-19. This pledge has resulted and other key personnel. Accordingly, no assurance cancould continue to result in lower revenues, and has resulted, and could continue to result, in increases in the allowance for doubtful accounts due to future collection risk, which has negatively affected our results of operations and could continue to negatively affect our results of operations in the future. Furthermore, the sales cycle has been lengthened, and could be given thatfurther lengthened, due to business customers slowing spending and/or delaying decision-making on the combined company will be able to attractCompany’s products and services, which has adversely affected, and could further adversely affect, revenues. Some competitors have lowered prices or retain key management personneloffered promotions as a result of economic conditions, and other key employeesothers may do so as well, which has exerted, and could further exert, pricing pressure on the Company. If the economies of the U.S. and the world continue to deteriorate, this could have an adverse effect on the Company’s business, financial condition, results of operations and cash flows.
The Company and Hawaiian Telcomcould be subject to a significant amount of litigation, which could require the same extentCompany to pay significant damages or settlements.
The industry that the Company operates in faces a substantial risk of litigation, including, from time to time, patent infringement lawsuits, antitrust class actions, securities class actions, wage and Hawaiian Telcom have previously been ablehour class actions, personal injury claims and lawsuits relating to attract or retain their own employees.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine month period ended September 30, 2017,2020, the Company had no unregistered sales of equity securities. The Company also had no purchases of its common stock for the nine months ended September 30, 2017.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosure
None.
Item 5. Other Information
No reportable items.
Item 6.Exhibits
|
| Incorporated by Reference |
|
| |||||||
Exhibit Number |
Exhibit Description |
Form |
Filing Date |
Exhibit No. |
SEC File No. | Filed Herewith | |||||
|
|
|
|
|
|
| |||||
Agreement and Plan of Merger, dated as of March 13, 2020, by and among Cincinnati Bell Inc., Red Fiber Parent LLC and RF Merger Sub Inc.
| 8-K | 3/13/2020 | 2.1 | 1-8519 |
| ||||||
Amended and Restated Articles of Incorporation of Cincinnati Bell Inc.
| 8-K | 4/30/2008 | 3.1 | 1-8519 |
| ||||||
Amendment to the Amended and Restated Articles of Incorporation of Cincinnati Bell Inc.
| 8-K | 10/5/2016 | 3.1 | 1-8519 |
| ||||||
Amended and Restated Regulations of Cincinnati Bell Inc.
| 10-Q | 8/8/2018 | 3.3 | 1-8519 |
| ||||||
Sixth Supplemental Indenture, dated as of July 2, 2020, among Cincinnati Bell Inc., as Issuer, each subsidiary of the Issuer identified as a Guarantor, and Regions Bank, as Trustee. | 8-K | 7/6/2020 | 4.1 | 1-8519 |
| ||||||
|
|
|
|
|
|
| |||||
Second Supplemental Indenture, dated as of July 2, 2020, among Cincinnati Bell Inc., as Issuer, each subsidiary of the Issuer identified as a Guarantor, and Regions Bank, as Trustee. | 8-K | 7/6/2020 | 4.2 | 1-8519 |
| ||||||
|
|
|
|
|
|
| |||||
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
| + | ||||||
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
| + | ||||||
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
| + | ||||||
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
| + | ||||||
101 | The following financial statements from Cincinnati Bell Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 were formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Shareholders’ Deficit, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.
| ||||||||||
104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
The Company's reports on Form 10-K, 10-Q, and 8-K are available free of charge in the Investor Relations section of the Company's website: http://www.cincinnatibell.com. The Company will furnish any other exhibit at cost.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cincinnati Bell Inc. | ||||
Date: | November | /s/ Andrew R. Kaiser | ||
Andrew R. Kaiser | ||||
Chief Financial Officer | ||||
Date: | November | /s/ | Suzanne E. Maratta | |
Suzanne E. Maratta | ||||
Chief Accounting Officer |
50