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") provides diversified telecommunications and technology services. The Company generates a large portion of its revenue by serving customers in the Greater Cincinnati and Dayton, Ohio areas. An economic downturn or natural disaster occurring in this, or a portion of this, limited operating territory could have a disproportionate effect on our business, financial condition, results of operations and cash flows compared to similar companies of a national scope and similar companies operating in different geographic areas.
The Company has receivables with
one
large customer, General Electric Company, that makes up
14%
and
21%
of the outstanding accounts receivable balance at
September 30, 2017
and
December 31, 2016
, respectively. This same customer represented
12%
of consolidated revenue for the three and nine months ended September 30, 2016.
Merger and Acquisition Activity —
On October 2, 2017, we consummated our previously announced acquisition of OnX Holdings LLC ("OnX"), a privately held company that provides technology services and solutions to enterprise customers in the U.S., Canada and the U.K. The acquisition of OnX, originally announced on July 10, 2017, indicated that the purchase price of
$201 million
was subject to customary post-closing adjustments. Based on preliminary working capital adjustments, the cash consideration exchanged for the acquisition on October 2, 2017 was
$242.3 million
. The final purchase price is subject to completion of post-closing adjustments. The initial accounting for the business combination was not complete at the time the financial statements were issued due to the timing of the acquisition and the filing of this Quarterly Report on Form 10-Q. As a result, disclosures required under ASC 805-10-50, Business Combinations, are not possible at this time.
On July 9, 2017, the Company and Hawaiian Telcom Holdco, Inc., a Delaware corporation (“Hawaiian Telcom”), entered into an Agreement and Plan of Merger (the "Hawaiian Telcom Merger Agreement") providing for the merger of Hawaiian Telcom with a wholly-owned subsidiary of the Company in exchange for the consideration described below. Hawaiian Telcom is a fiber-centric technology leader providing voice, video, broadband, data center and cloud solutions to consumer, business and wholesale customers on the Hawaiian islands.
At the effective time of the merger, each share of Hawaiian Telcom common stock, par value of
$0.01
per share, issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive, at the holder’s election and subject to proration as set forth in the Hawaiian Telcom Merger Agreement (1)
1.6305
common shares, par value
$0.01
per share, of the Company (the “Company Common Shares”) (the “Share Consideration”); (2)
0.6522
Company Common Shares and
$18.45
in cash, without interest (the “Mixed Consideration”); or (3)
$30.75
in cash, without interest (the “Cash Consideration”). Hawaiian Telcom stockholders who elect to receive the Share Consideration or the Cash Consideration will be subject to proration to ensure that the aggregate number of Company Common Shares to be issued by the Company in the Hawaiian Telcom Merger and the aggregate amount of cash to be paid in the Hawaiian Telcom Merger will be the same as if all electing stockholders received the Mixed Consideration.
Based on (1) the closing price of Cincinnati Bell’s common shares of
$19.45
as of October 27, 2017, (2) the number of shares of Hawaiian Telcom common stock outstanding as of August 8, 2017, (3) the number of shares of Hawaiian Telcom common stock potentially issuable in respect of RSUs under Hawaiian Telcom benefit and compensation plans between August 17, 2017 and the closing date and (4) the number of shares of Hawaiian Telcom common stock potentially issuable in respect of Annual and Retention Bonuses under Hawaiian Telcom benefit and compensation plans outstanding between August 17, 2017 and the closing date (which aggregate number of shares of Hawaiian Telcom common stock in clauses (2) through (4) equals the maximum number of shares of Hawaiian Telcom common stock that could be outstanding as of the closing date), the estimated total consideration, less Hawaiian Telcom’s existing indebtedness of approximately
$310 million
as of June 30, 2017 to be repaid in conjunction with the merger, is approximately
$380 million
. The estimated total consideration expected to be transferred may not represent what the actual total consideration transferred will be when the merger is completed. The fair value of equity securities issued as part of the total consideration transferred is required to be measured on the closing date of the merger at the then current number of Hawaiian Telcom shares of common stock outstanding and RSUs that will vest between August 17, 2017 and the closing date. This requirement will likely result in equity and cash components different from what has been estimated as of September 30, 2017.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
The merger is subject to standard closing conditions including the approval of Hawaiian Telcom's stockholders, the approval of the listing of additional shares of Cincinnati Bell common stock to be issued to Hawaiian Telcom’s stockholders, required federal and state regulatory approvals and other customary closing conditions. We expect the merger to close in the second half of 2018.
In connection with the mergers with Hawaiian Telcom and OnX, we secured financing for
$1,150 million
in senior secured credit facilities and senior notes, as described in Note 3, that, in addition to cash on hand and other sources of liquidity, are expected to be used to repay the existing indebtedness of Hawaiian Telcom, pay the cash consideration for both mergers, repay certain indebtedness of the Company and pay the fees and expenses in connection with both mergers.
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, 2016
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
2016
Annual Report on Form 10-K. Operating results for the three and nine months ended
September 30, 2017
are not necessarily indicative of the results expected for the full year or any other interim period.
Business Combinations —
In accounting for business combinations, we apply the accounting requirements of ASC 805, “Business Combinations,” which requires the recording of net assets of acquired businesses at fair value. In developing estimates of fair value of acquired assets and assumed liabilities, management analyzes a variety of factors including market data, estimated future cash flows of the acquired operations, industry growth rates, current replacement cost for fixed assets, and market rate assumptions for contractual obligations. Such a valuation requires management to make significant estimates and assumptions, particularly with respect to the intangible assets. In addition, contingent consideration is presented at fair value at the date of acquisition. Transaction costs are expensed as incurred.
On February 28, 2017, we acquired SunTel Services, a private company that provides network security, data connectivity, and unified communications solutions to commercial and enterprise customers across multiple sectors throughout Michigan for cash consideration of
$10.0 million
. Based on final fair value assessment, the acquired assets and liabilities assumed consisted primarily of property plant and equipment of
$0.4 million
, customer relationship intangible assets of
$1.2 million
, working capital of
$4.1 million
and goodwill of
$4.3 million
. These assets and liabilities are included in the IT Services and Hardware segment.
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.
Investment in CyrusOne —
As of
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.
In the first quarter of 2017, we sold our remaining
2.8 million
shares of CyrusOne Inc. common stock for net proceeds totaling
$140.7 million
that resulted in a realized gain of
$117.7 million
. As of March 31, 2017, we no longer have an investment in CyrusOne Inc.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
Income Taxes —
The Company’s income tax provision for interim periods is determined through the use of an estimated annual effective tax rate applied to year-to-date ordinary income, as well as the tax effects associated with discrete items. The Company expects its effective rate to exceed statutory rates primarily due to non-deductible expenses.
During 2016, the Company reclassed
$14.5 million
of Alternative Minimum Tax ("AMT") refundable tax credits from "Deferred income taxes, net" to "Receivables" as these credits were expected to be utilized during 2017. In the nine months ended September 30, 2017, the Company reclassed an additional
$10.2 million
from "Deferred income taxes, net" to "Receivables." In the second quarter of 2017, the Company received
$14.5 million
of payments related to the 2016 AMT tax credits. Acceleration 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. The Company plans to make the same election on its 2017 federal income tax return.
Recently Issued Accounting Standards
— In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation - Stock Compensation, which amends the scope of modification accounting for share-based payment arrangements. The ASU is effective for public business entities for annual periods 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 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Period Pension Cost and Net Periodic Postretirement Benefit Cost, which amends the requirements in Accounting Standards Codification ("ASC") 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The ASU requires entities to disaggregate the current service cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented on a retrospective basis as of the date of adoption. In addition, only the service cost component of net benefit cost is eligible for capitalization on a prospective basis. The ASU is effective for public business entities for annual periods beginning after December 15, 2017. The Company plans to adopt the standard effective January 1, 2018, and will be applied retrospectively for prior periods. The Company estimates approximately
$2 million
and
$1 million
of other components of net benefit cost will be reclassed from "Cost of Services" and "Selling, general and administrative," respectively, to a new line below Operating income, "Other components of pension and postretirement benefit plans expense," on the Consolidated Statements of Operations upon adoption.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the amended guidance, the Company shall now recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value. The new standard is effective for public entities for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted the amended guidance effective January 1, 2017 and will apply the guidance when performing the annual impairment test in the fourth quarter of 2017.
In November 2016, the FASB issued ASU 2016-16, Statement of Cash Flow - Restricted Cash, which amends ASC 230 to require that a statement of cash flows explain 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.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow - Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The FASB issued the ASU with the intent of reducing diversity in practice. The new standard is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The impact of adopting this standard effective January 1, 2018 is not expected to have a material affect on the Company’s consolidated statement of cash flows.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, which simplifies various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The new standard was adopted effective January 1, 2017.
The primary impact of adoption is the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital starting in the first quarter of fiscal year 2017. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of the date of adoption. Effective January 1, 2017, we adopted a prospective company-wide policy change due to the change in accounting principle and now record forfeitures as they are incurred on a go-forward basis. As a result of the change in accounting principle, the cumulative-effect adjustment to retained earnings to account for the accounting policy election was immaterial to the financial statements.
The presentation requirements for cash flows related to excess tax benefits were applied retrospectively to all periods presented and did not result in a material impact to prior period net cash provided by operations and net cash used in financing. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.
In February 2016, the FASB issued ASU 2016-02, Leases, which represents a wholesale change to lease accounting. The standard introduces a lessee model that brings most leases on the balance sheet as well as aligns certain underlying principles of the new lessor model with those in ASC 606. The new standard is effective for public entities for fiscal years beginning after December 15, 2018, and lessees and lessors are required to use a modified retrospective transition method for existing leases. The Company is in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements.
The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments in January 2016. The amended guidance requires entities to carry all investments in equity securities at fair value through net income unless the entity has elected the practicability exception to fair value measurement. This standard will be effective for the fiscal year ending December 31, 2018 and will require a cumulative-effect adjustment to beginning retained earnings on this date. The Company is currently in the process of evaluating the impact of adoption of this ASU on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard also includes expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. In August 2015, ASU 2015-14 was issued deferring the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 with an optional early application date for annual reporting periods beginning after December 15, 2016. The Company will adopt the standard and all subsequent amendments in the first quarter of the fiscal year ending December 31, 2018.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented. Our ability to adopt using the full retrospective method is dependent on the successful and timely implementation of a revenue software application procured from a third-party provider, as well as the completion of our analysis of information necessary to restate prior period financial statements.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
We 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,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, issued by the FASB in March 2016. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations focusing on a control model rather than a risk and reward model. This guidance could materially change revenue and cost of products. In addition, we are still finalizing our accounting policies related to variable consideration, rebates and certain contract assets and liabilities. We are still assessing the full impact of disclosure requirements; however, upon adopting FASB ASC Topic 606, we will provide additional disclosures in the notes to the consolidated financial statements related to disaggregated revenue, contract balances and performance obligations.
In preparation for adoption of the standard, we have implemented internal controls, new system functionality and revised business processes to prepare financial information in accordance with the standard. These new processes and procedures ensure data utilized for financial reporting is complete and accurate and is assessed in accordance with the guidelines of the standard. We are assessing new internal controls to address risks associated with applying the five-step model, as well as monitoring controls to identify new sales arrangements or changes in our business environment that will affect our current accounting assessment.
No other new accounting pronouncement issued or effective during the year had, or is expected to have, a material impact on the consolidated financial statements.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
2. Earnings Per Common Share
Basic earnings per common share (“EPS”) is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur upon 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,
|
(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 months ended September 30, 2017, the Company had a net loss available to common shareholders and, as a result, all common stock equivalents were excluded from the computation of diluted EPS as their inclusion would have been anti-dilutive. For the nine months ended September 30, 2017, awards under the Company's stock-based compensation plans for common shares of
0.2 million
were excluded from the computation of diluted EPS as the inclusion would have been anti-dilutive. For 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.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
3. Debt
The Company’s debt consists of the following:
|
|
|
|
|
|
|
|
|
(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
|
|
Corporate Credit Agreement
There were
no
outstanding borrowings on the Corporate Credit Agreement's revolving credit facility, leaving
$150.0 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.
New Revolving Credit Facility and Term Loan Facility (Credit Agreement)
In October 2017, the Company entered into a new Credit Agreement. The Credit Agreement provides for (i) a five-year
$200 million
senior secured revolving credit facility (including both a letter of credit subfacility of up to
$30 million
and a swingline loan subfacility of up to
$25 million
) (the “Revolving Credit Facility”) and (ii) a seven-year
$600 million
senior secured term loan facility (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Credit Facilities”). The Revolving Credit Facility expires in October 2022 and the Term Loan Facility expires in October 2024.
Borrowings under the Credit Facilities will bear interest, at the Company’s option, at a rate per annum determined by reference to either the London Interbank Offered Rate (“LIBOR”) or an adjusted base rate, in each case plus an applicable margin. In the case of the Term Loan Facility, the adjusted base rate and LIBOR will not, in any event, be less than
2.00%
and
1.00%
, respectively. The applicable margin for the Credit Facilities with respect to LIBOR borrowings will be
3.75%
and, with respect to adjusted base rate borrowings, will be
2.75%
. In addition, the Company will be required to pay a commitment fee on any unused portion of the Revolving Credit Facility at a rate of
0.50%
per annum.
On October 2, 2017, the Term Loan Facility net proceeds of
$577.0 million
, after fees, expenses and note discount, were used to repay the remaining
$315.8 million
outstanding principal amount of its Tranche B Term Loan and accrued and unpaid interest. As a result, a loss on extinguishment of debt will be recorded in the fourth quarter of approximately
$3 million
. The remaining proceeds of the Term Loan Facility were used to fund the purchase price and associated transaction costs of the acquisition of OnX that closed on October 2, 2017.
As a result of the Company entering into the Credit Agreement in October 2017, certain previously deferred costs associated with the Corporate Credit Agreement's revolving credit facility will be written off in the fourth quarter. The loss on extinguishment of debt associated with the transaction is expected to be less than
$1 million
.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
Accounts Receivable Securitization Facility
As of
September 30, 2017
, the Company had
no
borrowings and
$6.3 million
of letters of credit outstanding under the accounts receivable securitization facility ("Receivables Facility"), leaving
$96.4 million
remaining availability on the total borrowing capacity of
$102.7 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 and was not changed by this amendment. In the event the Receivables Facility is not renewed, the Company has the ability to refinance any outstanding borrowings with borrowings under the Corporate Credit Agreement. Under the terms of the Receivables Facility, the Company could obtain up to
$120.0 million
depending on the quantity and quality of accounts receivable. Under this agreement, certain subsidiaries, or originators, sell their respective trade receivables on a continuous basis to Cincinnati Bell Funding LLC (“CBF”). Although CBF is a wholly-owned consolidated subsidiary of the Company, CBF is 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, such accounts receivable are legally assets of CBF and, as such, are not available to creditors of the Company's other subsidiaries or the Company.
New 8% Senior Notes due 2025
In October 2017, CB Escrow Corp. (the “Issuer”), an Ohio corporation and wholly owned subsidiary of Cincinnati Bell Inc., closed the private offering of
$350 million
aggregate principal amount of 8% senior notes due 2025 (the “8% Senior Notes”) at par. The 8% Senior Notes were issued pursuant to an indenture, dated as of October 6, 2017 (the “Indenture”), between the Issuer and Regions Bank, as trustee.
Concurrently with the closing 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 all interest that would accrue on the Notes up to, but not including, October 9, 2018.
The offering of the 8% Senior Notes is part of the financing of the cash portion of the merger consideration for the previously announced acquisition of Hawaiian Telcom Holdco, Inc. (“Hawaiian Telcom”) by the Company (the “HCOM Acquisition”). At the closing of the HCOM Acquisition, the Issuer will merge with and into the Company (the “Escrow Merger”), with the Company continuing as the surviving corporation. At the time of the Escrow Merger, the Company will assume the obligations of the Issuer under the 8% Senior Notes and the Indenture (the “Assumption”) and, subject to the satisfaction of certain other conditions, the proceeds from the offering will be released from the escrow account to the Company. In the event that the HCOM Acquisition has not occurred on or prior to January 9, 2019, the Issuer has notified the escrow agent that the HCOM Acquisition will not be consummated, the Agreement and Plan of Merger, dated as of July 9, 2017, among Hawaiian Telcom, the Company and Twin Acquisition Corp. has been terminated or the Issuer fails, after receiving written notice from the escrow agent of the Issuer’s failure to timely deposit cash into the escrow account equal to
30
days of interest that would accrue on the 8% Senior Notes to deposit such amount of cash within
five
business days after receipt of such notice, the Issuer will be required to redeem all of the 8% Senior Notes at a redemption price equal to
100%
of the initial issue price, plus accrued and unpaid interest to, but excluding, the redemption date.
The 8% Senior Notes will bear interest at a rate of 8.000% per annum, payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2018, to persons who are registered holders of the 8% Senior Notes on the immediately preceding April 1 and October 1, respectively. The 8% Senior Notes will mature on October 15, 2025.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
4. 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, 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
|
|
The Company had
no
severance charges in the third quarter of 2017. In the second quarter of 2017, the Company initiated reorganizations within both segments of the business in order 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. In the first quarter of 2017, the Company finalized a voluntary severance program for certain bargained employees related to an initiative to reduce field and network costs within our legacy copper network. As a result, a severance charge of
$25.6 million
was recorded to 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.
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, 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, 2017
and
December 31, 2016
,
$4.7 million
and
$7.4 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.
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
5. Financial Instruments and Fair Value Measurements
The carrying values of the Company's financial instruments approximate the estimated fair values as of
September 30, 2017
and
December 31, 2016
, except for the Company's long-term debt. The carrying and fair values of these financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
The fair value of our long-term debt was based on closing or estimated market prices of the Company’s debt at
September 30, 2017
and
December 31, 2016
, which is considered Level 2 of the fair value hierarchy.
Non-Recurring Fair Value Measurements
Certain long-lived assets are required to be measured at fair value on a non-recurring basis subsequent to their initial measurement. These non-recurring fair value measurements generally occur when evidence of impairment has occurred. In the third quarter of 2017 an equity method investment recorded within “Other noncurrent assets” in the Consolidated Balance Sheets was remeasured at fair value due to a triggering event identified by management. As a result of the fair value analysis, the entire carrying value of
$4.7 million
was impaired and recorded to "Other expense (income), net" on the Consolidated Statements of Operations. This fair value measurement is considered a Level 3 measurement due to the significance of its unobservable inputs.
6. Pension and Postretirement Plans
The Company sponsors three noncontributory defined benefit plans and a postretirement health and life insurance plan. For the three and nine months ended September 30, 2017, approximately
13%
of the costs were capitalized as a component of property, plant 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.
For the
three and nine months ended September 30, 2017 and 2016
, pension and postretirement benefit costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
Amortizations of prior service cost (benefit) and actuarial loss represent reclassifications from accumulated other comprehensive income.
Based on current assumptions, contributions to qualified and non-qualified pension plans in
2017
are expected to be approximately
$2 million
each. Management expects to make cash payments of approximately
$9 million
related to its postretirement health plans in
2017
.
For the
nine months ended September 30, 2017
, contributions to the pension plans were
$3.3 million
and contributions to the postretirement plan were
$5.5 million
.
7. Shareowners' Deficit
Accumulated Other Comprehensive Loss
For the nine months ended
September 30, 2017
, the changes in accumulated other comprehensive loss by component were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
The unrealized gain on Investment in CyrusOne, net of tax, represents changes in the fair value of CyrusOne shares of common stock owned by the Company during the period, before any subsequent sales of those shares.
|
|
|
(b)
|
These reclassifications are included in the components of net periodic pension and postretirement benefit costs (see Note 6 for additional details). The components of net periodic pension and postretirement benefit cost are reported within "Cost of services," "Cost of products sold," and "Selling, general and administrative" expenses on the Condensed Consolidated Statements of Operations.
|
|
|
(c)
|
These reclassifications are reported within "Gain on sale of Investment in CyrusOne" on the Condensed Consolidated Statements of Operations.
|
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|
8. Business Segment Information
The Company’s segments are strategic business units that offer distinct products and services and are aligned with its internal management structure and reporting. The Entertainment and Communications segment provides products and services such as data transport, high-speed internet, video, local voice, long distance, voice over internet protocol ("VoIP") and other services. The IT Services and Hardware segment provides a range of fully managed and outsourced IT and telecommunications 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)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
Form 10-Q Part I
|
|
Cincinnati Bell Inc.
|