Quarterly Report (10-q)

Date : 11/08/2019 @ 5:51PM
Source : Edgar (US Regulatory)
Stock : Alaska Communications Systems Group Inc (ALSK)
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Quarterly Report (10-q)

 

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended September 30, 2019

or

 

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

 

For the transition period from                         to ___________                    

 

Commission File Number: 001-38341

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware  52-2126573
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization)  Identification No.)

                                                                                                                                                             

600 Telephone Avenue, Anchorage, Alaska 99503-6091

(Address of principal executive offices) (Zip Code)

(907) 297-3000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, par value $.01 per share ALSK The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes          No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes          No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [X]      Non-accelerated filer [ ]   Smaller reporting company [X]

Emerging growth company [ ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                        No

As of October 31, 2019, there were outstanding 53,011,579 shares of Common Stock, $.01 par value, of the registrant.

 



 

 

 

TABLE OF CONTENTS

 

 

    Page
 

 

Number

PART I.

Financial Information

 
     

Item 1.

Financial Statements:

 

 

Condensed Consolidated Balance Sheets (Unaudited) As of September 30, 2019 and December 31, 2018

3

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) For the Three and Nine Months Ended September 30, 2019 and 2018

4

 

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) For the Three and Nine Months Ended September 30, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2019 and 2018

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

     

Item 2.

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

27
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

     

Item 4.

Controls and Procedures

47

     

PART II.

Other Information

 
     

Item 1.

Legal Proceedings

48

     

Item 1A.

Risk Factors

48

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

     

Item 3.

Defaults Upon Senior Securities

49

     

Item 4.

Mine Safety Disclosures

49

     

Item 5.

Other Information

49

     

Item 6.

Exhibits

50

     

Signatures

51

 

Exhibit 3.1

Exhibit 4.1

Exhibit 4.2

Exhibit 10.1

Exhibit 10.2

Exhibit 10.3

Exhibit 10.4

Exhibit 10.5

Exhibit 10.6

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

Exhibit 101.INS

Exhibit 101.SCH

Exhibit 101.CAL

Exhibit 101.DEF

Exhibit 101.LAB

Exhibit 101.PRE

 

 

 

PART I.     FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Balance Sheets

(Unaudited, In Thousands Except Per Share Amounts)

 

   

September 30,

   

December 31,

 

 

 

2019

   

2018

 
Assets                

Current assets:

               

Cash and cash equivalents

  $ 25,046     $ 13,351  

Restricted cash

    1,631       1,634  

Short-term investments

    134       134  

Accounts receivable, net of allowance of $4,807 and $3,936

    25,438       31,472  

Materials and supplies

    9,185       6,737  

Prepayments and other current assets

    13,191       12,169  

Total current assets

    74,625       65,497  
                 

Property, plant and equipment

    1,414,940       1,390,622  

Less: accumulated depreciation and amortization

    (1,036,422 )     (1,017,442 )

Property, plant and equipment, net

    378,518       373,180  
                 

Deferred income taxes

    -       498  

Operating lease right of use assets

    80,748       -  

Other assets

    12,354       16,010  

Total assets

  $ 546,245     $ 455,185  
                 

Liabilities and Stockholders' Equity

         

Current liabilities:

               

Current portion of long-term obligations

  $ 5,674     $ 2,289  

Accounts payable, accrued and other current liabilities

    40,317       40,957  

Advance billings and customer deposits

    3,791       4,024  

Operating lease liabilities - current

    2,626       -  

Total current liabilities

    52,408       47,270  
                 

Long-term obligations, net of current portion

    171,541       168,023  

Deferred income taxes

    2,823       2,315  

Operating lease liabilities - noncurrent

    78,362       -  

Other long-term liabilities, net of current portion

    71,250       67,827  

Total liabilities

    376,384       285,435  

Commitments and contingencies

               

Common stock, $.01 par value; 145,000 authorized; 54,012 issued and 53,012 outstanding at September 30, 2019; 53,268 issued and outstanding at December 31, 2018

    540       533  

Treasury stock, 1,000 shares at cost

    (1,812 )     -  

Additional paid in capital

    160,931       160,514  

Retained earnings

    12,723       10,439  

Accumulated other comprehensive loss

    (3,384 )     (2,675 )

Total Alaska Communications stockholders' equity

    168,998       168,811  

Noncontrolling interest

    863       939  

Total stockholders' equity

    169,861       169,750  

Total liabilities and stockholders' equity

  $ 546,245     $ 455,185  

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, In Thousands Except Per Share Amounts)

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 
                                 

Operating revenues

  $ 59,128     $ 58,229     $ 173,432     $ 173,779  
                                 

Operating expenses:

                               

Cost of services and sales (excluding depreciation and amortization)

    26,785       27,220       78,768       79,595  

Selling, general and administrative

    16,832       16,879       52,206       49,398  

Depreciation and amortization

    9,546       8,352       27,425       25,336  

Loss on disposal of assets, net

    198       15       101       56  

Total operating expenses

    53,361       52,466       158,500       154,385  
                                 

Operating income

    5,767       5,763       14,932       19,394  
                                 

Other income and (expense):

                               

Interest expense

    (2,997 )     (3,286 )     (9,149 )     (10,191 )

Loss on extinguishment of debt

    -       -       (2,830 )     -  

Interest income

    121       36       291       74  

Other income, net

    192       66       192       79  

Total other income and (expense)

    (2,684 )     (3,184 )     (11,496 )     (10,038 )
                                 

Income before income tax expense

    3,083       2,579       3,436       9,356  
                                 

Income tax expense

    (1,084 )     (774 )     (1,228 )     (2,080 )
                                 

Net income

    1,999       1,805       2,208       7,276  
                                 

Less net loss attributable to noncontrolling interest

    (23 )     (12 )     (76 )     (84 )
                                 

Net income attributable to Alaska Communications

    2,022       1,817       2,284       7,360  
                                 

Other comprehensive (loss) income:

                               

Minimum pension liability adjustment

    (69 )     55       (30 )     169  

Income tax effect

    19       (16 )     8       (48 )

Amortization of defined benefit plan loss

    (192 )     (13 )     51       169  

Income tax effect

    55       4       (14 )     (48 )

Interest rate swap marked to fair value

    (396 )     17       (362 )     429  

Income tax effect

    112       (5 )     102       (123 )

Reclassification to interest expense

    (197 )     (136 )     (648 )     (258 )

Income tax effect

    56       39       184       74  

Total other comprehensive (loss) income

    (612 )     (55 )     (709 )     364  
                                 

Total comprehensive income attributable to Alaska Communications

    1,410       1,762       1,575       7,724  
                                 

Net loss attributable to noncontrolling interest

    (23 )     (12 )     (76 )     (84 )

Total other comprehensive income attributable to noncontrolling interest

    -       -       -       -  

Total comprehensive loss attributable to noncontrolling interest

    (23 )     (12 )     (76 )     (84 )
                                 

Total comprehensive income

  $ 1,387     $ 1,750     $ 1,499     $ 7,640  
                                 

Net income per share attributable to Alaska Communications:

                               

Basic

  $ 0.04     $ 0.03     $ 0.04     $ 0.14  

Diluted

  $ 0.04     $ 0.03     $ 0.04     $ 0.14  
                                 

Weighted average shares outstanding:

                               

Basic

    53,328       53,184       53,503       52,994  

Diluted

    53,991       54,116       54,405       53,887  

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited, In Thousands Except Per Share Amounts)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Number of Common Shares Issued and Outstanding

                               

Balance at beginning of period

    53,774       53,184       53,268       52,526  

Issuance of common stock pursuant to stock plans, $.01 par

    119       -       744       658  

Purchases of common stock, $.01 par

    (881 )     -       (1,000 )     -  

Balance at end of period

    53,012       53,184       53,012       53,184  
                                 

Total Stockholders' Equity - Beginning Balance

  $ 169,804     $ 165,646     $ 169,750     $ 154,510  
                                 

Common Stock

                               

Balance at beginning of period

    540       532       533       525  

Issuance of common stock pursuant to stock plans, $.01 par

    -       -       7       7  

Balance at end of period

    540       532       540       532  
                                 

Treasury Stock

                               

Balance at beginning of period

    (205 )     -       -       -  

Purchases of 1,000 shares of common stock, $.01 par

    (1,607 )     -       (1,812 )     -  

Balance at end of period

    (1,812 )     -       (1,812 )     -  
                                 

Additional Paid In Capital

                               

Balance at beginning of period

    160,654       159,230       160,514       158,969  

Stock-based compensation

    277       642       766       1,209  

Surrender of shares to cover minimum withholding taxes on stock-based compensation

    -       -       (448 )     (410 )

Issuance of common stock pursuant to stock plans, $.01 par

    -       -       99       104  

Balance at end of period

    160,931       159,872       160,931       159,872  
                                 

Retained Earnings (Accumulated Deficit)

                               

Balance at beginning of period

    10,701       6,902       10,439       (3,579 )

Net income attributable to Alaska Communications

    2,022       1,817       2,284       7,360  

Cumulative effect of new accounting principles adopted

    -       -       -       4,938  

Balance at end of period

    12,723       8,719       12,723       8,719  
                                 

Accumulated Other Comprehensive Loss

                               

Balance at beginning of period

    (2,772 )     (1,977 )     (2,675 )     (2,396 )

Other comprehensive (loss) income

    (612 )     (55 )     (709 )     364  

Balance at end of period

    (3,384 )     (2,032 )     (3,384 )     (2,032 )
                                 

Noncontrolling Interest

                               

Balance at beginning of period

    886       959       939       991  

Net loss attributable to noncontrolling interest

    (23 )     (12 )     (76 )     (84 )

Contributions from noncontrolling interest

    -       -       -       40  

Balance at end of period

    863       947       863       947  
                                 

Total Stockholders' Equity - Ending Balance

  $ 169,861     $ 168,038     $ 169,861     $ 168,038  

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In Thousands)

 

   

Nine Months Ended

 
   

September 30,

 
   

2019

   

2018

 

Cash Flows from Operating Activities:

               

Net income

  $ 2,208     $ 7,276  

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

               

Depreciation and amortization

    27,425       25,336  

Loss on disposal of assets, net

    101       56  

Amortization of debt issuance costs and debt discount

    911       1,022  

Loss on extinguishment of debt

    2,830       -  

Amortization of deferred capacity revenue

    (3,400 )     (2,997 )

Stock-based compensation

    766       1,209  

Income tax expense

    1,228       2,080  

Charge for uncollectible accounts

    275       2,371  

Amortization of right-of-use assets

    1,716       -  

Other non-cash expense, net

    52       168  

Income taxes receivable

    (65 )     (37 )

Changes in operating assets and liabilities

    8,573       10,395  

Net cash provided by operating activities

    42,620       46,879  
                 

Cash Flows from Investing Activities:

               

Capital expenditures

    (31,556 )     (25,432 )

Capitalized interest

    (983 )     (1,456 )

Change in unsettled capital expenditures

    583       (1,811 )

Proceeds on sale of assets

    20       1  

Net cash used by investing activities

    (31,936 )     (28,698 )
                 

Cash Flows from Financing Activities:

               

Repayments of long-term debt

    (172,903 )     (29,164 )

Proceeds from the issuance of long-term debt

    180,000       14,000  

Debt issuance costs and discounts

    (2,683 )     -  

Cash paid for debt extinguishment

    (1,252 )     -  

Cash proceeds from noncontrolling interest

    -       40  

Payment of withholding taxes on stock-based compensation

    (448 )     (410 )

Purchases of treasury stock

    (1,812 )     -  

Proceeds from the issuance of common stock

    106       111  

Net cash provided (used) by financing activities

    1,008       (15,423 )
                 

Change in cash, cash equivalents and restricted cash

    11,692       2,758  

Cash, cash equivalents and restricted cash, beginning of period

    14,985       16,168  
                 

Cash, cash equivalents and restricted cash, end of period

  $ 26,677     $ 18,926  
                 

Supplemental Cash Flow Data:

               

Interest paid

  $ 9,236     $ 10,723  

Income taxes paid, net

  $ 10     $ 4  

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Alaska Communications Systems Group, Inc. (“we”, “our”, “us”, the “Company” and “Alaska Communications”), a Delaware corporation, through its operating subsidiaries, provides broadband telecommunication and managed information technology (“IT”) services to customers in the State of Alaska and beyond using its telecommunications network.

 

The accompanying unaudited condensed consolidated financial statements represent the consolidated financial position, comprehensive income, stockholders’ equity and cash flows of Alaska Communications Systems Group, Inc. and the following wholly-owned subsidiaries:

 

Alaska Communications Systems Holdings, Inc. ("ACS Holdings")

Crest Communications Corporation

ACS of Alaska, LLC (“ACSAK”)

WCI Cable, Inc.

ACS of the Northland, LLC (“ACSN”)

WCIC Hillsboro, LLC

ACS of Fairbanks, LLC (“ACSF”)

Alaska Northstar Communications, LLC

ACS of Anchorage, LLC (“ACSA”)

WCI LightPoint, LLC

ACS Wireless, Inc. ("ACSW")

WorldNet Communications, Inc.

ACS Long Distance, LLC

Alaska Fiber Star, LLC

Alaska Communications Internet, LLC (“ACSI”)

TekMate, LLC

ACS Messaging, Inc.

   

ACS Cable Systems, LLC (“ACSC”)

   

 

In addition to the wholly-owned subsidiaries, the Company has a fifty percent controlling interest in ACS-Quintillion JV, LLC (“AQ-JV”), a joint venture formed by its wholly-owned subsidiary ACSC and Quintillion Holdings, LLC (“QHL”) in connection with the North Slope fiber optic network. See Note 3 “Joint Venture” for additional information.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company believes the disclosures made are adequate to make the information presented not misleading.

 

See Note 10 “Leases” for a summary of the Company’s lease accounting policies and related disclosures.

 

The Company consolidates the financial results of the AQ-JV based on its determination that, for accounting purposes, it holds a controlling financial interest in the joint venture and is the primary beneficiary of this variable interest entity. The Company has accounted for and reported QHL’s fifty percent ownership interest in the joint venture as a noncontrolling interest.

 

In the opinion of management, the unaudited condensed consolidated financial statements contain all normal, recurring adjustments necessary to present fairly the consolidated financial position, comprehensive income, stockholders’ equity and cash flows for all periods presented. Comprehensive income for the three and nine-month periods ended September 30, 2019, is not necessarily indicative of comprehensive income which might be expected for the entire year or any other interim periods. The balance sheet at December 31, 2018 has been derived from the audited financial statements as of that date but does not include all information and notes required by GAAP for complete financial statements. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

 

Employee Termination Benefits

 

In the second quarter of 2019, the Company recorded a charge of $1,595 associated with cash-based termination benefits paid or to be paid to is former Chief Executive Officer who separated from the Company effective June 30, 2019. These benefits consist of special termination benefits as defined in Accounting Standards Codification (“ASC”) 712, “Compensation – Nonretirement Postemployment Benefits” and include the continuation of salary and certain benefits through December 31, 2019, and the payment of annual cash incentive and long-term cash awards, subject to certain conditions. Payments totaling $1,193 were made in the third quarter of 2019 and the balance will be paid in the fourth quarter of 2019 and in 2020 and 2021. The effect of the former Chief Executive Officer’s separation on the relevant equity awards were accounted for in accordance with ASC 718, “Compensation – Stock Compensation.” See Note 12 “Stock Incentive Plans.”

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Share Repurchase Program

 

In the second quarter of 2017, the Company’s Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to $10,000 of its common stock effective March 13, 2017 through December 31, 2019. Under the program, repurchases may be conducted through open market purchases or through privately-negotiated transactions in accordance with all applicable securities laws and regulations, including through Rule 10b5-1 trading plans. The timing and amount of repurchases will be determined based on the Company’s evaluation of its financial position including liquidity, the trading price of its stock, debt covenant restrictions, general business and market conditions and other factors. The Company intends to use cash on hand to fund share repurchases subject to, among other things, federal and state securities, corporate and other laws and regulations, and the Company’s financing arrangements. Share repurchases are accounted for as treasury stock.

 

As of September 30, 2019, the Company had repurchased 1,000,000 shares under the program at a weighted average price of $1.81 per share with an aggregate value of $1,812.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes, including estimates of operating revenues, probable losses and expenses. Actual results could differ materially from those estimates.

 

Recently Adopted Accounting Pronouncements

 

Effective January 1, 2019, the Company adopted ASC 842, “Leases” (“ASC 842”) on a modified retrospective basis. Accordingly, information presented for periods prior to 2019 have not been recast. Adoption of ASC 842 resulted in the establishment of right-of-use (“ROU”) assets and associated liabilities totaling $82,020 representing the Company’s right to use the underlying assets and the present value of the future lease payments over the terms of the Company’s operating leases. The Company elected the package of practical expedients, which among other things, does not require reassessment of lease classification. Adoption of ASC 842 did not have a material effect on the Company’s finance leases and its consolidated statements of Comprehensive Income and Cash Flows. See Note 10 “Leases” for a summary of the Company’s lease accounting policies and other disclosures required under ASC 842.

 

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2017-12, “Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12”) on a prospective basis. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and, for qualifying hedges, requires the entire change in the fair value of the hedging instrument to be presented in the same income statement line as the hedged item. The Company’s hedges, consisting of a pay-fixed, receive-floating interest rate swaps, are fully effective. Therefore, adoption of ASU 2017-12 did not have any impact on the Company’s financial statements. See Note 4 “Fair Value Measurements and Derivative Financial Instruments” for the disclosures required by ASU 2017-12.

 

Effective January 1, 2019, the Company adopted ASU No. 2018-16, “Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”). Permitting use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes will facilitate the London Interbank Offered Rate (“LIBOR”) to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies. ASU 2018-16 was required to be adopted concurrently with ASU 2017-12. Adoption of ASU 2018-16 did not affect the Company’s financial statements and related disclosures.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Accounting Pronouncements Issued Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The amendments in ASU 2016-13, and subsequent amendments, introduce a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is expected to be effective for the Company’s 2023 fiscal year. The Company is evaluating the effect ASU 2016-13 will have on its financial statements and related disclosures.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The amendments in ASU 2018-13 are intended to improve the effectiveness of fair value measurement disclosures in the notes to the financial statements. The new guidance eliminates the requirement to disclose (i) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarch; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. The new guidance also requires the disclosure of (i) changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is evaluating ASU 2018-13 and, based on its existing assets and liabilities measured at fair value, does not currently believe that adoption will have a material effect on its financial statements and related disclosures.

 

In August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20), Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). The amendments in ASU 2018-14 are intended to improve the effectiveness of disclosures in the notes to the financial statements about employer-sponsored defined benefit plans. The new guidance eliminates, among other items, the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. Expanded disclosures required under ASU 2018-14 include an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is evaluating the effect ASU 2018-14 will have on its disclosures.

 

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is evaluating the effect ASU 2018-15 will have on its financial statements and related disclosures.

 

 

2.                REVENUE RECOGNITION

 

Revenue Recognition Policies

 

Revenue Accounted for in Accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”)

 

At contract inception, the Company assesses the goods and services promised to the customer and identifies the performance obligation for each promise to transfer a good or service that is distinct. The Company considers all obligations whether they are explicitly stated in the contract or are implied by customary business practices.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The Company’s broadband and voice revenue includes service, installation and equipment charges. Managed IT revenues include the sale, configuration and installation of equipment and the subsequent provision of ongoing IT services. The Company enters into contracts with its rural health care customers and is subject to various regulatory requirements associated with the provision of these services. Revenues associated with rural health care customers are recognized based on the amount the Company expects to collect as evidenced in its contract with the customer and the Company’s and customer’s agreement with the Federal Communications Commission (“FCC”) as the relevant service is provided. Regulatory access revenue includes (i) special access, which is primarily access to dedicated circuits sold to wholesale customers, substantially all of which is generated from interstate services; and (ii) cellular access, which is the transport of tariffed local network services between switches for cellular companies based on individually negotiated contracts. Regulatory access revenue is recognized as the service is provided to the customer.

 

Revenue Accounted for in Accordance with Other Guidance

 

Deferred revenue capacity liabilities are established for indefeasible rights of use (“IRUs”) on the Company’s network provided to third parties and are typically accounted for as operating leases. Regulatory access revenue includes interstate and intrastate switched access, consisting of services based primarily on originating and terminating access minutes from other carriers. High-cost support revenue consists of interstate revenue streams structured by federal regulatory agencies that allow the Company to recover its cost of providing universal service in Alaska.

 

Disaggregation of Revenue

 

The following tables provide the Company’s revenue disaggregated on the basis of its primary markets, customers, products and services for the three and nine-month periods ended September 30, 2019 and 2018:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2019

   

September 30, 2019

 
   

Accounted

for Under

ASC 606

   

Accounted

for Under

Other

Guidance

   

Total

Revenue

   

Accounted

for Under

ASC 606

   

Accounted

for Under

Other

Guidance

   

Total

Revenue

 

Business and Wholesale Revenue

                                               

Business broadband

  $ 15,595     $ -     $ 15,595     $ 46,181     $ -     $ 46,181  

Business voice and other

    6,889       -       6,889       20,546       -       20,546  

Managed IT services

    1,789       -       1,789       4,965       -       4,965  

Equipment sales and installations

    942       -       942       2,830       -       2,830  

Wholesale broadband

    9,550       -       9,550       26,821       -       26,821  

Wholesale voice and other

    1,870       -       1,870       4,688       -       4,688  

Operating leases and other deferred revenue

    -       2,104       2,104       -       6,241       6,241  

Total Business and Wholesale Revenue

    36,635       2,104       38,739       106,031       6,241       112,272  
                                                 

Consumer Revenue

                                               

Broadband

    6,718       -       6,718       19,880       -       19,880  

Voice and other

    2,567       -       2,567       7,947       -       7,947  

Total Consumer Revenue

    9,285       -       9,285       27,827       -       27,827  
                                                 

Regulatory Revenue

                                               

Access (1)

    5,005       -       5,005       15,040       -       15,040  

Access (2)

    -       1,176       1,176       -       3,523       3,523  

High-cost support

    -       4,923       4,923       -       14,770       14,770  

Total Regulatory Revenue

    5,005       6,099       11,104       15,040       18,293       33,333  

Total Revenue

  $ 50,925     $ 8,203     $ 59,128     $ 148,898     $ 24,534     $ 173,432  

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2018

   

September 30, 2018

 
   

Accounted

for Under

ASC 606

   

Accounted

for Under

Other

Guidance

   

Total

Revenue

   

Accounted

for Under

ASC 606

   

Accounted

for Under

Other

Guidance

   

Total

Revenue

 

Business and Wholesale Revenue

                                               

Business broadband

  $ 15,309     $ -     $ 15,309     $ 45,859     $ -     $ 45,859  

Business voice and other

    7,199       -       7,199       21,088       -       21,088  

Managed IT services

    1,480       -       1,480       3,936       -       3,936  

Equipment sales and installations

    1,488       -       1,488       3,870       -       3,870  

Wholesale broadband

    7,624       -       7,624       23,475       -       23,475  

Wholesale voice and other

    1,525       -       1,525       4,455       -       4,455  

Operating leases and other deferred revenue

    -       1,740       1,740       -       4,923       4,923  

Total Business and Wholesale Revenue

    34,625       1,740       36,365       102,683       4,923       107,606  
                                                 

Consumer Revenue

                                               

Broadband

    6,539       -       6,539       19,726       -       19,726  

Voice and other

    2,719       -       2,719       8,355       -       8,355  

Total Consumer Revenue

    9,258       -       9,258       28,081       -       28,081  
                                                 

Regulatory Revenue

                                               

Access (1)

    5,944       -       5,944       18,203       -       18,203  

Access (2)

    -       1,738       1,738       -       5,118       5,118  

High-cost support

    -       4,924       4,924       -       14,771       14,771  

Total Regulatory Revenue

    5,944       6,662       12,606       18,203       19,889       38,092  

Total Revenue

  $ 49,827     $ 8,402     $ 58,229     $ 148,967     $ 24,812     $ 173,779  

 

(1)     Includes customer ordered service and special access.

(2)     Includes carrier of last resort and carrier common line.

 

Business broadband revenue includes revenue associated with rural health care customers. Consumer voice and other revenue includes revenue associated with the FCC’s Lifeline program.

 

Timing of Revenue Recognition

 

Revenue accounted for in accordance with ASC 606 consisted of the following for the three and nine-month periods ended September 30, 2019 and 2018:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Services transferred over time

  $ 44,978     $ 42,395     $ 131,028     $ 126,894  

Goods transferred at a point in time

    942       1,488       2,830       3,870  

Regulatory access revenue (1)

    5,005       5,944       15,040       18,203  
                                 

Total revenue

  $ 50,925     $ 49,827     $ 148,898     $ 148,967  

 

(1)

Includes customer ordered service and special access.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Transaction Price Allocated to Remaining Performance Obligations

 

The aggregate amount of the transaction price allocated to the remaining performance obligations for contracts with customers that are unsatisfied, or partially unsatisfied, accounted for in accordance with ASC 606 was approximately $85,212 at September 30, 2019. Revenue will be recognized as the Company satisfies the associated performance obligations. For equipment delivery, installation and configuration, and certain managed IT services, which comprise approximately $1,425 of the total, the performance obligation is currently expected to be satisfied during the next twelve months. For business broadband, voice and other managed IT services, which comprise approximately $83,787 of the total, the performance obligation will be satisfied as the service is provided over the terms of the contracts, which range from one to ten years. The Company’s agreements with its consumer customers are typically on a month-to-month basis. Therefore, the Company’s provision of future service to these customers is not reflected in the above discussion of future performance obligations.

 

Contract Assets and Liabilities

 

The Company incurs certain incremental costs to obtain contracts that it expects to recover. These costs consist primarily of sales commissions and other directly related incentive compensation payments (reported as contract additions in the table below) which are dependent upon, and paid upon, successfully entering into individual customer contracts.

 

The table below provides a reconciliation of the contract assets associated with contracts with customers accounted for in accordance with ASC 606 for the nine-month period ended September 30, 2019. Contract modifications did not have a material effect on contract assets in the nine-month period ended September 30, 2019. Contract assets are classified as “Other assets” on the consolidated balance sheet.

 

Balance at January 1

  $ 8,052  

Contract additions

    2,192  

Amortization

    (2,864 )

Impairments

    (83 )

Balance at September 30

  $ 7,297  

 

The Company recorded a charge for uncollectible accounts receivable of $275 in the nine-month period ended September 30, 2019 associated with its contracts with customers. See Note 5 “Accounts Receivable.”

 

The table below provides a reconciliation of the contract liabilities associated with contracts with customers accounted for in accordance with ASC 606 for the nine-month period ended September 30, 2019. Contract liabilities consist of deferred revenue and are included in “Accounts payable, accrued and other current liabilities” and “Other long-term liabilities, net of current portion.”

 

Balance at January 1

  $ 2,766  

Contract additions

    1,535  

Revenue recognized

    (1,045 )

Balance at September 30

  $ 3,256  

 

 

 

3.     JOINT VENTURE

 

The table below provides certain financial information about the AQ-JV included on the Company’s consolidated balance sheet at September 30, 2019 and December 31, 2018. Cash may be utilized only to settle obligations of the joint venture. Because the joint venture is an LLC, and the Company has not guaranteed its operations, the joint venture’s creditors do not have recourse to the general credit of the Company.

 

     

2019

   

2018

 

Cash

  $ 270     $ 270  

Property, plant and equipment, net of accumulated depreciation of $383 and $309

  $ 1,758     $ 1,832  

 

The operating results and cash flows of the joint venture in the three and nine-month periods of 2019 and 2018 were not material to the Company’s consolidated financial results.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

4.     FAIR VALUE MEASUREMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS

 

Fair Value Measurements

 

The Company has developed valuation techniques based upon observable and unobservable inputs to calculate the fair value of non-current monetary assets and liabilities. Observable inputs reflect market data obtained from independent sources and unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

 

 

Level 1 - Quoted prices for identical instruments in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 - Significant inputs to the valuation model are unobservable.

 

Financial assets and liabilities are classified within the fair value hierarchy in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured, as well as their level within the fair value hierarchy.

 

The fair values of cash equivalents, restricted cash, other short-term monetary assets and liabilities and financing leases approximate carrying values due to their nature. The carrying values of the Company’s senior credit facilities and other long-term obligations of $179,207 and $172,494 at September 30, 2019 and December 31, 2018, respectively, approximate fair value primarily as a result of the stated interest rates of the 2019 Senior Credit Facility approximating current market rates (Level 2).

 

The following table presents the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, at each hierarchical level. There were no transfers into or out of Levels 1 and 2 during the first nine months of 2019:

 

   

September 30, 2019

   

December 31, 2018

 
   

Total

   

Level 1

   

Level 2

   

Level 3

   

Total

   

Level 1

   

Level 2

   

Level 3

 

Other assets:

                                                               

Interest rate swaps

  $ -     $ -     $ -     $ -     $ 458     $ -     $ 458     $ -  

Other long-term liabilities:

                                                               

Interest rate swaps

  $ 552     $ -     $ 552     $ -     $ -     $ -     $ -     $ -  

 

Derivative Financial Instruments

 

The Company currently uses interest rate swaps to manage variable interest rate risk. At low LIBOR rates, payments under the swaps increase the Company’s cash interest expense, and at high LIBOR rates, they have the opposite effect.

 

The outstanding amount of the swaps as of a period end are reported on the balance sheet at fair value, represented by the estimated amount the Company would receive or pay to terminate the swaps. They are valued using models based on readily observable market parameters for all substantial terms of the contracts and are classified within Level 2 of the fair value hierarchy.

 

Under the terms of the 2019 Senior Credit Facility, the Company is required to enter into or obtain an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the agreement of a minimum of $90,000 with a weighted average life of at least two years. In 2017, as required under the terms of its 2017 Senior Credit Facility, the Company entered into a pay-fixed, receive-floating interest rate swap in the notional amount of $90,000, with an interest rate of 6.49425%, inclusive of a 5.0% LIBOR spread, and a maturity date of June 28, 2019. Upon repayment of the outstanding principal balance of the 2017 Senior Credit Facility on January 15, 2019, this swap was assigned to the 2019 Senior Credit Facility through its maturity date of June 28, 2019. On June 28, 2019, the Company entered into two pay-fixed, receive-floating, interest rate swaps. Each swap is in the notional amount of $67,500, has an interest rate of 6.1735% inclusive of a 4.5% LIBOR spread, and a maturity date of June 30, 2022. The swaps are with different counter parties. Changes in fair value of interest rate swaps are recorded to accumulated other comprehensive loss and reclassified to interest expense when the hedged transaction is recognized in earnings. Cash payments and receipts associated with interest rate swaps are classified as cash flows from operating activities. See Note 8 “Long-Term Obligations” and Note 11 “Accumulated Other Comprehensive Loss.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table presents the notional amount, fair value and balance sheet classification of the Company’s derivative financial instruments designated as cash flow hedges as of September 30, 2019 and December, 31, 2018. The fair values of both interest rate swaps were liabilities at September 30, 2019 and were hedges of the same interest rate risk.

 

       

Notional

   

Fair

 
 

Balance Sheet Location

 

Amount

   

Value

 

At September 30, 2019:

                   

Interest rate swaps

Other long-term liabilities

  $ 135,000     $ 552  
                     

At December 31, 2018:

                   

Interest rate swaps

Other assets

  $ 90,000     $ 458  

 

The following table presents gains and losses before income taxes on the Company’s interest rate swaps designated as a cash flow hedge for the three and nine-month periods ending September 30, 2019 and 2018.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

(Loss) gain recognized in accumulated other comprehensive loss

  $ (396 )   $ 17     $ (362 )   $ 429  

Gain reclassified from accumulated other comprehensive loss to income

    197       136       648       258  

 

The following table presents the effect of cash flow hedge accounting on the Company’s Statements of Comprehensive Income for the three and nine-month periods ending September 30, 2019 and 2018:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Recorded as Interest Expense:

                               

Hedged interest payments

  $ (2,327 )   $ (1,628 )   $ (5,524 )   $ (4,690 )

Gain on interest rate swap

    197       136       648       258  

 

 

5.      ACCOUNTS RECEIVABLE

 

Accounts receivable, net, consists of the following at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

Retail customers

  $ 19,340     $ 21,732  

Wholesale carriers

    6,615       9,315  

Other

    4,290       4,361  
      30,245       35,408  

Less: allowance for doubtful accounts

    (4,807 )     (3,936 )

Accounts receivable, net

  $ 25,438     $ 31,472  

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table presents the activity in the allowance for doubtful accounts for the nine-month period ended September 30, 2019, which is associated entirely with the Company’s contracts with customers:

 

   

2019

 

Balance at January 1

  $ 3,936  

Provision for uncollectible accounts

    275  

Charged to other accounts

    1,252  

Deductions

    (656 )

Asset at September 30

  $ 4,807  

 

USAC has issued funding commitment letters for all of the Company’s rural health care customer applications for Funding Year 2018 (July 1, 2018 through June 30, 2019). Accounts receivable, net, associated with rural health care customers was $4,012 and $8,122 at September 30, 2019 and December 31, 2018, respectively. Rural health care accounts are a component of the retail customers category in the above table.

 

 

6.     OTHER CURRENT ASSETS

 

Prepayments and other current assets consist of the following at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

Income tax receivable

  $ 7,559     $ 5,087  

Prepaid expense

    3,003       3,878  

Other

    2,629       3,204  

Total prepayments and other current assets

  $ 13,191     $ 12,169  

 

 

7.      CURRENT LIABILITIES

 

Accounts payable, accrued and other current liabilities consist of the following at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

Accounts payable - trade

  $ 15,392     $ 14,627  

Accrued payroll, benefits, and related liabilities

    13,018       13,473  

Deferred capacity and other revenue

    6,588       6,095  

Other

    5,319       6,762  

Total accounts payable, accrued and other current liabilities

  $ 40,317     $ 40,957  

 

Advance billings and customer deposits consist of the following at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

Advance billings

  $ 3,760     $ 3,992  

Customer deposits

    31       32  

Total advance billings and customer deposits

  $ 3,791     $ 4,024  

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

 

8.     LONG-TERM OBLIGATIONS

 

Long-term obligations consist of the following at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

2019 senior secured credit facility due 2024

  $ 178,875     $ -  

Debt discount

    (2,408 )     -  

Debt issuance costs

    (1,992 )     -  

2017 senior secured credit facility due 2023

    -       171,750  

Debt discount

    -       (2,024 )

Debt issuance costs

    -       (2,182 )

Capital leases and other long-term obligations

    2,740       2,768  

Total long-term obligations

    177,215       170,312  

Less current portion

    (5,674 )     (2,289 )

Long-term obligations, net of current portion

  $ 171,541     $ 168,023  

 

As of September 30, 2019, the aggregate maturities of long-term obligations were as follows:

 

2019 (October 1 - December 31)

  $ 1,136  

2020 (January 1 - December 31)

    6,802  

2021 (January 1 - December 31)

    9,067  

2022 (January 1 - December 31)

    11,333  

2023 (January 1 - December 31)

    15,851  

2024 (January 1 - December 31)

    135,122  

Thereafter

    2,304  

Total maturities of long-term obligations

  $ 181,615  

 

2019 Senior Credit Facility

 

On January 15, 2019, the Company entered into an amended and restated credit facility consisting of an Initial Term A Facility in the amount of $180,000, a Revolving Facility in an amount not to exceed $20,000 and a Delayed-Draw Term A Facility in an amount not to exceed $25,000 (together the “2019 Senior Credit Facility” or “Agreement”). The Agreement also provides for Incremental Term A Loans up to an aggregate principal amount of the greater of $60,000 and trailing twelve month EBITDA, as defined in the Agreement. On January 15, 2019, proceeds from the Initial Term A Facility of $178,335, net of discounts of $1,665, were used to repay in full the outstanding principal balance of the Term A-1 Facility and Term A-2 Facility under the Company’s 2017 Senior Credit Facility of $112,500 and $59,250, respectively, pay accrued and unpaid interest of $590, and pay fees and expenses associated with the transaction totaling $2,216. The 2017 Senior Credit Facility was terminated on January 15, 2019. Discounts, debt issuance costs and fees associated with the 2019 Senior Credit Facility totaling $2,683 were deferred and will be charged to interest expense over the term of the agreement.

 

Amounts outstanding under the Initial Term A Facility, Revolving Facility, Delayed-Draw Facility and Incremental Term A Loans bear interest at LIBOR plus 4.5% per annum. The Company may, at its discretion and subject to certain limitations as defined in the Agreement, select an alternate base rate at a margin that is 1.0% lower than the counterpart LIBOR margin.

 

Principal payments on the Initial Term A Facility, Delayed-Draw A Facility and any amounts outstanding under the Incremental Term A Loans are due commencing in the third quarter of 2019 as follows: the third quarter of 2019 through the second quarter of 2020 – 0.625% per quarter; the third quarter of 2020 through the second quarter of 2022 – 1.25% per quarter; the third quarter of 2022 through the second quarter of 2023 – 1.875% per quarter; and the third quarter of 2023 through the fourth quarter of 2023 – 2.5% per quarter. The remaining outstanding principal balance, including any amounts outstanding under the Revolving Facility, is due on January 15, 2024.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

There were no amounts outstanding under the Revolving Facility, Delayed-Draw Term A Facility and Incremental Term A Loans at September 30, 2019.

 

The obligations under the 2019 Senior Credit Facility are secured by substantially all the personal property and real property of the Company, subject to certain agreed exceptions.

 

The 2019 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, the payment of dividends and repurchase of the Company’s common stock.

 

The 2019 Senior Credit Facility provides for events of default customary for credit facilities of this type, including non-payment defaults on other debt, misrepresentation, breach of covenants, representations and warranties, change of control, and insolvency and bankruptcy.

 

Under the terms of the 2019 Senior Credit Facility, the Company is required to enter into or obtain an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the agreement of a minimum of $90,000 with a weighted average life of at least two years. Upon repayment of the outstanding principal balance of the 2017 Senior Credit Facility on January 15, 2019, the pay-fixed, receive-floating interest rate swap in the notional amount of $90,000, with an interest rate of 6.49425%, inclusive of a 5.0% LIBOR spread, and a maturity date of June 28, 2019 was assigned to the 2019 Senior Credit Facility. On June 28, 2019, the Company entered into two pay-fixed, receive-floating, interest rate swaps. Each swap is in the notional amount of $67,500, has an interest rate of 6.1735% inclusive of a 4.5% LIBOR spread, and a maturity date of June 30, 2022. The swaps are with different counter parties.

 

2017 Senior Credit Facility

 

On January 15, 2019, the Company utilized proceeds from the 2019 Senior Credit Facility to repay in full the outstanding principal balance of its 2017 Senior Credit Facility in the amount of $171,750. The Company recorded a loss of $2,830 on the extinguishment of debt associated with this transaction, including the write-off of debt issuance costs and third-party fees.

 

6.25% Convertible Notes Due 2018

 

On May 1, 2018, the Company repurchased the outstanding balance of its 6.25% Notes. The cash settlement totaled $10,358, including principal of $10,044 and accrued interest of $314. Settlement was funded utilizing restricted cash of $10,044 and cash on hand of $314. There was no gain or loss associated with the repurchase.

 

 

9.     OTHER LONG-TERM LIABILITIES

 

Other long-term liabilities, consisting primarily of deferred capacity and other revenue, was as follows at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

Deferred GCI capacity revenue, net of current portion

  $ 29,558     $ 31,113  

Other deferred IRU capacity revenue, net of current portion

    27,083       25,732  

Other deferred revenue, net of current portion

    4,605       2,113  

Other

    10,004       8,869  

Total other long-term liabilities

  $ 71,250     $ 67,827  

 

 

10.     LEASES

 

The Company adopted the provisions of ASC 842 effective in the first quarter of 2019 on a modified retrospective basis. Refer to Note 1 “Summary of Significant Accounting Policies” for a summary of the effect of initial adoption on the Company’s consolidated financial statements.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The Company applied the following practical expedients as provided for under ASC 842:

 

 

(i)

The determination of whether expired or existing contracts contain leases at the date of adoption was not reassessed;

 

(ii)

The classification of existing or expired leases at the date of adoption was not reassessed;

 

(iii)

The provisions of ASC 842 were not applied to lease agreements with a term of 12 months or less;

 

(iv)

Non-lease components, which are not material, were combined with lease components and, accordingly, consideration was not allocated between these two elements;

 

(v)

Existing lease agreements were not reassessed to identify any initial direct costs; and

 

(vi)

Hindsight was applied to determine changes in lease terms and assess for the impairment of ROU assets.

 

Lease Agreements Under Which the Company is the Lessee

 

The Company enters into agreements for land, land easements, access rights, IRUs, co-located data centers, buildings, equipment, pole attachments and personal property. These assets are utilized in the provision of broadband and telecommunications services to the Company’s customers. An agreement is determined to be a lease if it conveys to the Company the right to control the use of an identified asset for a period of time in exchange for consideration. Control is defined as the Company having both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. This determination is made at contract inception. Operating leases are included in operating lease ROU assets and current and noncurrent operating lease liabilities on the consolidated balance sheet. Finance leases are included in property, plant and equipment and current portion of long-term obligations and long-term obligations on the consolidated balance sheet.

 

ROU assets represent the Company’s right to use the underlying asset for the term of the operating lease and operating lease liabilities represent the Company’s obligation to make lease payments over the term of the lease. ROU assets and operating lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the term of the lease.

 

The terms of the Company’s leases are primarily fixed. A limited number of leases include a variable payment component based on a pre-determined percentage or index.

 

Most of the Company’s lease agreements include extension options which vary between leases but are generally consistent with industry practice. Extension options are exercised as required to meet the Company’s service obligations and other business requirements. Extension options are included in the determination of the ROU asset if, at lease inception, it is reasonably certain that the option will be exercised.

 

Certain leases include a provision for early termination, typically in return for an agreed amount of consideration. The terms of these provisions vary by contract. Upon the exercise of an early termination option, the ROU asset and associated liability are remeasured to reflect the present value of the revised cash flows. Early terminations recorded in the nine-month period ended September 30, 2019 were not material.

 

The Company’s operating and financing lease agreements do not include residual value guarantees, embedded leases or impose material restrictions or covenants on the Company’s operations. It has no lease arrangements with related parties. The Company has subleases associated with certain leased assets. Such arrangements are not material.

 

The Company entered into additional operating lease commitments that had not yet commenced as of September 30, 2019 with a present value totaling approximately $922. These leases are primarily associated with the Company’s CAF Phase II services, are expected to commence in 2019 and 2020, and have terms of 7 to 25 years.

 

The discount rate applied to determine the present value of the future lease payments is based on the Company’s incremental borrowing rate which is derived from recent secured borrowing arrangements entered into by the Company and publicly available information for instruments with similar terms.

 

Short-term and variable lease cost recorded during the three and nine-month periods ended September 30, 2019 were not material.

 

The Company did not enter into any sale and leaseback transactions during the nine-month period ended September 30, 2019.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following tables provide certain quantitative information about the Company’s lease agreements under which it is the lessee as of and for the three and nine-month periods ended September 30, 2019. The maturities of lease liabilities are presented in twelve-month increments beginning October 1, 2019.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2019

   

September 30, 2019

 

Lease Cost

               
                 

Finance lease cost:

               

Amortization of right-of-use assets

  $ 20     $ 59  

Interest on lease liabilities

    67       203  

Operating lease costs

    1,972       5,882  

Total lease cost

  $ 2,059     $ 6,144  

 

   

At

 
   

September 30, 2019

 

Balance Sheet Information

       
         

Operating leases:

       

ROU assets

  $ 80,748  
         

Liabilities - current

  $ 2,626  

Liabilities - noncurrent

    78,362  

Total liabilities

  $ 80,988  
         

Finance leases:

       

Property, plant and equipment

  $ 2,519  

Accumulated depreciation and amortization

    (1,430 )

Property, plant and equipment, net

  $ 1,089  
         

Current portion of long-term obligations

  $ 49  

Long-term obligations, net of current portion

    2,691  

Total finance lease liabilities

  $ 2,740  

 

 

   

At September 30, 2019

 
   

Operating

   

Financing

 
   

Leases

   

Leases

 

Maturities of Lease Liabilities

               
                 

Year 1

  $ 7,236     $ 316  

Year 2

    7,464       325  

Year 3

    7,364       334  

Year 4

    7,140       343  

Year 5

    6,884       352  

Thereafter

    159,470       3,562  

Total lease payments

    195,558       5,232  

Less imputed interest

    (115,317 )     (2,492 )

Total present value of lease obligations

    80,241       2,740  

Present value of current obligations

    (1,879 )     (49 )

Present value of long-term obligations

  $ 78,362     $ 2,691  

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Other Information

       

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows from finance leases

  $ 203  

Operating cash flows from operating leases

    5,645  

Financing cash flows from finance leases

    28  

Right-of-use assets obtained in exchange for new operating lease liabilities

    592  

Weighted-average remaining lease term (in years):

 

Finance leases

    14  

Operating leases

    30  

Weighted-average discount rate:

       

Finance leases

    9.8 %

Operating leases

    6.9 %

 

Lease Agreements Under Which the Company is the Lessor

 

The Company’s agreements under which it is the lessor are primarily associated with the use of its network assets, including IRUs for fiber optic cable, colocation and buildings. An agreement is determined to be a lease if it coveys to the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Control is defined as the lessee having both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. This determination is made at contract inception. Exchanges of IRUs with other carriers are accounted for as leases if the arrangement has commercial substance. All of the Company’s agreements under which it is the lessor have been determined to be operating leases.

 

Lease payments are recognized as income on a straight-line basis over the term of the agreement, including scheduled changes in payments not based on an index or otherwise determined to be variable in nature. Any changes in payments based on an index are reflected in income in the period of the change. The underlying leased asset is reported as a component of property, plant and equipment on the balance sheet.

 

Initial direct costs associated with the lease incurred by the Company are deferred and expensed over the term of the lease.

 

Certain of the Company’s operating lease agreements include extension options which vary between leases but are generally consistent with industry practice. Extension options are not included in the determination of lease income unless, at lease inception, it is reasonably certain that the option will be exercised.

 

The Company’s operating leases do not include purchase options.

 

Certain leases include a provision for early termination, typically in return for an agreed amount of consideration. The terms of these provisions vary by contract. Upon the exercise of an early termination option, any deferred rent receivable, deferred income and unamortized initial direct costs are written off. The underlying asset is assessed for impairment giving consideration to the Company’s ability to utilize the asset in its business. There were no early terminations recorded in the nine-month period ended September 30, 2019.

 

The Company does not have material sublease arrangements as the lessor or lease arrangements with related parties.

 

The Company did not have sales-type leases or direct financing leases as of September 30, 2019.

 

The underlying assets associated with the Company’s operating leases are accounted for under ASC 360, “Property, Plant and Equipment.” The assets are depreciated on a straight-line basis over their estimated useful life, including any periods in which the Company expects to utilize the asset subsequent to termination of the lease.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The Company’s operating lease agreements may include a non-lease component associated with operation and maintenance services. Consideration received for these services are recognized as income on a straight-line basis consistently with the lease components. Certain operating lease arrangements include a separate maintenance and service agreement. Consideration received under these separate agreements are recognized as income when the relevant service is provided to the lessee.

 

The following tables provide certain quantitative information about the Company’s operating lease agreements under which it is the lessor as of and for the three and nine-month periods ended September 30, 2019. Lease income is classified as revenue on the Statement of Comprehensive Income. The carrying value of the underlying leased assets is not material.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2019

   

September 30, 2019

 

Lease Income

               

Total lease income

  $ 879     $ 2,595  

 

   

At September 30,

 
   

2019

 

Maturities of Future Undiscounted Lease Payments

 

Year 1

  $ 1,228  

Year 2

    1,154  

Year 3

    544  

Year 4

    385  

Year 5

    383  

Thereafter

    2,933  

Total future undiscounted lease payments

  $ 6,627  

 

 

11.     ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table summarizes the activity in accumulated other comprehensive income (loss) for the nine-month period ended September 30, 2019:

 

   

Defined

                 
   

Benefit

                 
   

Pension

   

Interest

         
   

Plan

   

Rate Swaps

   

Total

 

Balance at December 31, 2018

  $ (3,003 )   $ 328     $ (2,675 )

Other comprehensive income before reclassifications

    (22 )     (260 )     (282 )

Reclassifications from accumulated comprehensive income (loss) to net income

    37       (464 )     (427 )

Net other comprehensive income (loss)

    15       (724 )     (709 )

Balance at September 30, 2019

  $ (2,988 )   $ (396 )   $ (3,384 )

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to net income for the three and nine-month periods ended September 30, 2019 and 2018:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Amortization of defined benefit plan pension items:

                               

Amortization of loss

  $ (192 )   $ (13 )   $ 51     $ 169  

Income tax effect

    55       4       (14 )     (48 )

After tax

    (137 )     (9 )     37       121  
                                 

Amortization of gain on interest rate swap:

                               

Reclassification to interest expense

    (197 )     (136 )     (648 )     (258 )

Income tax effect

    56       39       184       74  

After tax

    (141 )     (97 )     (464 )     (184 )

Total reclassifications, net of income tax

  $ (278 )   $ (106 )   $ (427 )   $ (63 )

 

Amounts reclassified to net income from our defined benefit pension plan and interest rate swaps have been presented within “Other income (expense), net” and “Interest expense,” respectively, in the Statements of Comprehensive Income. The estimated amount to be reclassified from accumulated other comprehensive income as a reduction in interest expense within the next twelve months is $19. See Note 4 “Fair Value Measurements and Derivative Financial Instruments.”

 

 

12.     STOCK INCENTIVE PLANS

 

Under the Company’s stock incentive plan, stock options, restricted stock, stock-settled stock appreciation rights, performance share units and other awards may be granted to officers, employees, consultants, and non-employee directors. Long-term incentive awards (“LTIP”) were granted to executive management annually through 2010.

 

2011 Incentive Award Plan

 

On June 10, 2011, Alaska Communications shareholders approved the 2011 Incentive Award Plan, which was amended and restated on June 30, 2014 and June 25, 2018, and which terminates in 2021. Following termination, all shares granted under this plan, prior to termination, will continue to vest under the terms of the grant when awarded. All remaining unencumbered shares of common stock previously allocated to the Prior Plans were transferred to the 2011 Incentive Award Plan. In addition, to the extent that any outstanding awards under the Prior Plans are forfeited or expire or such awards are settled in cash, such shares will again be available for future grants under the 2011 Incentive Award Plan. The Company grants Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”) as the primary equity based incentive for executive and certain non union-represented employees. The disclosures below are primarily associated with RSU and PSU grants awarded in 2017, 2018 and 2019.

 

Restricted Stock Units

 

The Company measures the fair value of RSUs based on the number of shares granted and the quoted closing market price of the Company’s common stock on the date of grant. RSUs granted in 2019 vest ratably over the three-year period ending March 1, 2022.

 

In the second quarter of 2019, RSU’s granted to the Company’s former Chief Executive Officer in 2017 and 2018 were modified. The vesting dates were accelerated from 2020 and 2021 to June 2019, and the awards were revalued. The modification resulted in a net increase in share-based compensation expense of $112 in the second quarter. The modification is included in grants and cancellations in the table below.

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table summarizes the RSU, LTIP and non-employee director stock compensation activity for the nine-month period ended September 30, 2019.

 

           

Weighted

 
           

Average

 
           

Grant Date

 
   

Number

   

Fair

 
   

of Units

   

Value

 

Nonvested at December 31, 2018

    1,185     $ 1.88  

Granted

    443       1.69  

Vested

    (768 )     1.86  

Canceled or expired

    (208 )     1.96  

Nonvested at September 30, 2019

    652     $ 1.76  

 

Performance Stock Units

 

PSUs granted in the third quarter of 2019 will vest proportionally over the three-year period ending in March 2022 subject to the achievement of certain Company performance targets.

 

In the second quarter of 2019, certain PSU’s granted to the Company’s former Chief Executive Officer in 2017 and 2018 were modified. The vesting dates were accelerated from 2019, 2020 and 2021 to June 2019, and the awards were revalued. The modification resulted in a net decrease in share-based compensation expense of $165 in the second quarter. The modification is included in grants and cancellations in the table below.

 

The following table summarizes the PSU activity for the nine-month period ended September 30, 2019.

 

           

Weighted

 
           

Average

 
           

Grant Date

 
   

Number

   

Fair

 
   

of Units

   

Value

 

Nonvested at December 31, 2018

    2,070     $ 0.85  

Granted

    1,188       0.77  

Vested

    -       -  

Canceled or expired

    (1,722 )     0.78  

Nonvested at September 30, 2019

    1,536     $ 0.87  

 

The following table provides selected information about the Company’s share-based compensation as of and for the three and nine-month periods ended September 30, 2019 and 2018:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Total compensation cost for share-based payments

  $ 277     $ 642     $ 766     $ 1,209