ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. FORWARD-LOOKING STATEMENTS AND ANALYSTS' REPORTS
This Form 10-Q and our future filings on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as "anticipates", "believes", "could", "estimates", "expects", "intends", "may", "plans", "projects", "seeks", "should" and variations of these words and similar expressions are intended to identify these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Such forward-looking statements may be contained in this Form 10-Q under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by us as a result of a number of important factors. Examples of these factors include (without limitation):
• Our ability to continue to develop and fund attractive, integrated products
and services to evolving industry standards, and meet the pressure from
competition to offer these services at lower prices
• unforeseen challenges when entering new markets and our ability to recognize
and react to actions, products or services of competitors that threaten our
competitive advantage in the marketplace
• our size, because we are a smaller sized competitor in the markets we serve
and we compete against large competitors with substantially greater resources
• a major public health issue, such as an epidemic or pandemic, could adversely
affect our operations and financial performance
• governmental and public policy changes and audits and investigations,
including on-going changes in our revenues, or obligations for current and
prior periods related to these programs, resulting from regulatory actions
affecting on-going support for state programs such as Essential Network
Support, and federal programs such as the rural health care universal service
support mechanism, including ascertainment of the "urban rate" and "rural
rate" used to determine federal support payments for services we provide to
our rural health care customers for current and prior periods, some of which
are currently under audit or subject to an inquiry
• our ability to comply with the regulatory requirements to contribute to the
Universal Service Fund and receive support payments from that fund
• our ability to obtain and appropriately allocate resources to support our
growth objectives
• our ability to maintain successful arrangements with our represented employees
• our ability to keep pace with rapid technological developments and changing
standards in the telecommunications industry, including on-going capital
expenditures needed to upgrade our network to industry competitive speeds,
particularly in light of expected 5G deployments by mobile wireless carriers
• our ability to maintain our cost structure as a focused broadband and managed
IT services company, which could impact both cash flow from operating
activities and our overall financial condition
• disruptions or failures in the physical infrastructure or operating systems
that support our businesses and customers, or cyber-attacks or security
breaches of the physical infrastructure, operating systems or devices that our
customers use to access our products and services; due to the COVID-19
pandemic, many of our employees are temporarily working remotely, which may
pose additional data security risks
• our ability to adequately invest in the maintenance and upgrade of our
networks and other information technology systems
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• the Alaskan economy, which has been impacted by continued low crude oil prices
which are creating a significant impact on both the level of spending by the
State of Alaska and the level of investment in resource development projects
by natural resource exploration and development companies in Alaska , together
with the ongoing cuts to the state of Alaska budget and resulting spending
reductions, all of which may impact the economy in the markets we serve and
impact our future financial performance
• our ability to invest sufficiently in our underlying physical infrastructure,
including buildings, fleet and related equipment
• the ability to attract, recruit, retain and develop our workforce, and
implement succession planning necessary for achieving our business plan
• structural declines for voice and other legacy services within the
telecommunications industry
• the success or failure of any future acquisitions or other major transactions
• the actions of activist stockholders, which could cause us to incur
significant expense, hinder execution of our business strategy and impact our
stock price
• unanticipated damage to one or more of our undersea fiber optic cables
resulting from construction or digging mishaps, fishing boats or other reasons
• a maintenance or other failure of our network or data centers
• a failure of information technology systems
• a third-party claim that the Company is infringing upon their intellectual
property, resulting in litigation or licensing expenses, or the loss of our
ability to sell or support certain products
• unanticipated costs required to fund our post-retirement benefit plans, or
contingent liabilities associated with our participation in a multi-employer
pension plan
• geologic or other natural disturbances relevant to the location of our
operations
• our ability to meet the terms of our financing agreements and to draw down
additional funds under the facility to meet our liquidity needs
• the cost and availability of future financing, at the terms, and subject to
the conditions necessary, to support our business and pursue growth
opportunities; our debt could also have negative consequences for our
business; for example, it could increase our vulnerability to general adverse
economic and industry conditions, or limit our flexibility in planning for, or
reacting to, changes in our business and the telecommunications industry; in
addition, our ability to borrow funds in the future will depend in part on the
satisfaction of the covenants in our credit facilities; if we are unable to
satisfy the financial covenants contained in those agreements, or are unable
to generate cash sufficient to make required debt payments, the lenders and
other parties to those arrangements could accelerate the maturity of some or
all of our outstanding indebtedness
• our success in providing broadband solutions to the North Slope and western
Alaska
• the success of the Company's expansion into managed IT services, including the
execution of those services for customers
• our internal control over financial reporting may not be effective, which
could cause our financial reporting to be unreliable
• the matters described under Item 1A. Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2019 and this Quarterly Report on Form
10-Q.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause the forward-looking events discussed in this Form 10-Q or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10-Q.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
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Table of Contents OVERVIEW
We are a fiber broadband and managed IT services provider, offering technology
and service enabled customer solutions to business and wholesale customers in
and out of
The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating our own performance and allocating our resources.
Operating Initiatives
We are focused on being a customer centric fiber and managed IT company. Everything we do is focused around our customer, meeting and exceeding their needs through the application of technology. We are focused on delivering an exceptional customer experience throughout the customer lifecycle. This forms the foundation of our sustained differentiation, creating unique value for our customers to grow our market share, expand business with existing customers and minimize churn.
Our future investments and subsequent initiatives are focused on building and strengthening the business in three areas:
? Enhance and Augment our Network and Capabilities: This is what we do and is
the basis of our offers, to lead the competition through innovation and
leverage the latest technologies to meet our customer's needs. Activities
include investments to grow our fiber footprint, augmented with high speed
fixed wireless technologies, as well as expanding our product capabilities
that fully leverage our existing and growing fiber footprint.
? Accelerate the Growth of Managed IT Services: This is a fragmented market
without a leader, a significant market size and a set of services that are
both adjacent and synergistic with communications and networking services. We
continue to invest in winning share and expanding our capabilities, enabling
and accelerating our customers' transition to cloud services.
? Drive Operational Excellence: Invest in operational systems that fundamentally
change the way we deliver services that both enhance the customer experience
as well as increase efficiency and productivity, redefining processes
throughout the entire customer lifecycle to create new operating models and
efficiencies. Investments that update our operational support and billing
systems provide the foundational platform to further leverage digital
technologies and expand with investments in analytics and artificial
intelligence.
These investment areas are not standalone and, in fact, are synergistic. We look to maximize each of these with any initiative for the highest return.
We recognize that everything we do is only possible through our people. Our employees are enablers that make any and all initiatives happen to serve our customers and earn their business. We will focus and make investments in employee engagement to maximize the realization of an exceptional customer experience and maximize the effectiveness of our investments.
We will continue to evaluate strategic opportunities that address scale, geographic diversification, and return value to our shareholders.
The Alaska Economy
We operate in a geographically diverse state with unique characteristics. We
monitor the state of the economy and, in doing so, we compare
? investment activity in the oil and gas markets and the price of crude oil
? tourism levels
? governmental spending and activity of military personnel
? the price and price trends of bandwidth
? the growth in demand for bandwidth
? decline in demand for voice and other legacy services
? local customer preferences
? unemployment levels
? housing activity and development patterns
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We have observed variances in the factors affecting the
Historically, the
Management estimates the
Our objective is to continue generating sector leading revenue growth in the
broadband market through investments in sales, service, marketing and product
development while expanding our broadband network capabilities through higher
efficiencies, automation, new technology and expanded service areas. We also
intend to continue our growth in the managed IT services market by providing
these services to our broadband customers, and leveraging our position as the
premier Cloud Enabler for business in the state of
COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted global, national and local economies, disrupted global supply chains and created significant volatility and disruptions to financial markets.
In response to economic pressures impacting the Company's customers and the community at large as a result of the COVID-19 pandemic, we proactively implemented the following actions in the first quarter of 2020:
? Working to increase bandwidth, as needed, for participants in the rural health
care program at no charge to the customer. Timing is subject to FCC guidance
and its waiver of certain rules.
? Offering kindergarten through grade 12, university students and teachers who
do not have internet service, unlimited internet service at no charge through
the end of the current school year.
? Will not terminate service to residential and small business customers in the
event they are unable to pay us for services due to disruptions caused by the
COVID-19 pandemic.
? Will waive late fees incurred by residential and small business customers
resulting from their economic circumstances related to the COVID-19 pandemic.
? Will waive long distance overage fees, as appropriate, related to the COVID-19
pandemic.
? Have extended technical support hours.
? Proactively monitoring our network and prioritizing the augmentation of
network links.
? Working with local and state utilities, governments and educational
institutions to ensure they have the necessary resources.
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The COVID-19 pandemic has also impacted the Company's suppliers, employees and other aspects of its business, including an increase in demand for its broadband and managed IT services. We have implemented various social-distancing policies including making accommodations for many of our employees to work remotely, travel restrictions and making the appropriate arrangements for our customer service representatives and customers. These arrangements include a new, self-installation process for certain customers. These actions have largely mitigated disruption to the Company's business, including the provisioning of services to customers and ongoing operations.
In
We are currently assessing the potential future impact of the COVID-19 pandemic on the demand for our products and services, which could be material. As a result of the customer accommodations noted above, collection of accounts receivable from certain customers may be delayed. Travel restrictions and other required actions may reduce the efficiency of our operations and result in higher costs. This is a rapidly evolving situation and we cannot predict the extent or duration of the pandemic, its effects on the global, national or local economy and its longer-term effects on our financial condition, results of operations or cash flows, which could be material. We will continue to monitor the situation and make the appropriate adjustments to our operations as required and appropriate.
Regulatory Update
The items reported under Part I, Item 1. Business - Regulation in our Annual
Report on Form 10-K for the year ended
US Federal Regulatory Matters
Interconnection with Local Telephone Companies and Access to Other Facilities
The Communications Act imposes a number of requirements on LECs. Generally, a LEC must: not prohibit or unreasonably restrict the resale of its services; provide for telephone number portability so customers may keep the same telephone number if they switch service providers; provide access to their poles, ducts, conduits and rights-of-way on a reasonable, non-discriminatory basis; and, when a call originates on its network, compensate other telephone companies for terminating or transporting the call (see the "Interstate Access" discussion below).
All of our LEC subsidiaries are considered incumbent LECs ("ILECs") and have additional obligations under the Communications Act.
On
In
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Rural Health Care Universal Service Support Program
On
The
On
USAC Audit of RHC Program Funding Requests
In addition to the prospective changes to the RHC program discussed above, the
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In addition, the Company received a Letter of Inquiry on
CAF Phase II
On
We are continuing to work toward meeting our CAF Phase II obligations in a capital-efficient manner, including the delivery of broadband Internet access services meeting CAF Phase II requirements using a fixed wireless platform and DSL in some instances.
Satellite Services
On
On
Call Authentication
On
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On
Network Equipment
On
State of Alaska Regulatory Matters
Alaska Universal Service Fund
In
Telecommunications Modernization Act
In late
Business Plan Core Principles
Our results of operations, financial position and sources and uses of cash in
the current and future periods reflect our focus on being the most successful
broadband solutions company in
? Create a Workplace That Develops Our People and Celebrates Success We believe
an engaged workforce is critical to our success. We are deeply committed to
the development of our people and creating opportunities for them.
? Create a Consistent Customer Experience Every Time We strive to deliver
service as promised to our customers, and make it right if our customers are
not satisfied with what we delivered. We track virtually every customer
interaction and we utilize the Net Promoter Score framework for assessing the
satisfaction of our customers.
? Develop Our Network Focusing on Efficient Delivery and Management We are
moving toward higher efficiencies and improved customer experience through
automation, new technology and expanded geographic service areas. Our network
architecture is a simpler mix of our fiber backbone, supported with fixed
wireless ("FiWi"), WiFi and satellite.
? Relentlessly Simplify and Transform How We Do Business We believe we must
reduce waste, which is defined as any activity that does not add value to its
intended customer. Doing so improves the experience we deliver to our
customers. We make investments in technology and process improvement, utilize
the LEAN framework, and expect these efforts to meaningfully impact our
financial performance in the long-term.
? Offer Broadband and Managed IT Solutions that Create Market Differentiation We
are building on strength in designing and providing new products and solutions
to our customers.
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We believe we can create value for our shareholders by:
? Driving revenue growth through increasing business broadband and managed IT
service revenues,
? Improving our operating and cash flow performance through margin management,
and
? Careful allocation of capital, including selectively investing success-based
capital into opportunities that generate appropriate returns on investments.
Revenue Sources by
We operate our business under a single reportable segment. We manage our revenues based on the sale of services and products to the three customer categories listed below. Revenue in the following management's discussion and analysis is presented by customer and product category, combining revenue accounted for under ASC 606 and other guidance.
? Business and Wholesale (broadband, voice and managed IT services) ? Consumer (broadband and voice services) ? Regulatory (access services, high cost support and carrier termination) ? Business and Wholesale
Providing services to Business and Wholesale customers provides the majority of
our revenues and is expected to continue being the primary driver of our growth
in the near term. Our business customers include large enterprises in the oil
and gas industry, health care, education, Alaska Native Corporations, financial
industries, Federal, state and local governments, and small and medium business.
We were the first
Business services have experienced significant growth and we believe the
incremental economics of business services are attractive. Given the demand from
our customers for more bandwidth and services, we expect revenue growth from
these customers to continue for the foreseeable future. We provide services such
as voice and broadband, managed IT services including remote network monitoring
and support, managed IT security and IT professional services, and long distance
services primarily over our own terrestrial network. We are continuing our
efforts to position the Company as the premier Cloud Enabler for business in the
state of
Our wholesale customers are primarily in-state, national and international telecommunications carriers who rely on us to provide connectivity for broadband and other needs to access their customers over our Alaskan network. The wholesale market is characterized by larger transactions that can create variability in our operating performance. We have a dedicated sales team that sells into this customer segment, and we expect wholesale revenue to grow for the foreseeable future.
Consumer
We also provide broadband, voice and IT services to residential customers, including residential homes and multi-dwelling units. Given that our primary competitor has extensive quad play capabilities (video, voice, wireless and broadband) we target how and where we offer products and services to this customer group in order to maintain our returns. Our focus is to leverage the capabilities of our existing network and sell customers our highest available bandwidth. Our primary competitive advantage is that we offer reliable internet service without data caps, while our competitor, with certain exceptions, charges customers or throttles customers' speeds for exceeding given levels of data usage. We experienced consistent growth in consumer broadband revenues in 2019. We have expanded product and service offerings to this customer group and have implemented fiber fed WiFi and certain fixed wireless technology solutions for providing broadband, all of which provided a basis for continued growth in this market in 2019.
Regulatory
Regulatory revenue is generated from three primary sources: (i) access charges, which include interstate and intrastate switched access and special access charges, and cellular access; (ii) surcharges billed to the end user (pass-through and non-pass-through); and (iii) federal and state support. We provide voice and broadband origination and termination services to interstate and intrastate carriers. While we are compensated for these services, these revenue streams have been in decline and we expect them to continue to decline, although at a relatively predictable rate. In addition, as regulators have reformed traditional access charges, they have simultaneously implemented new end user surcharges that contribute to our revenue.
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The following table summarizes our primary sources of regulatory revenue and their contribution to total revenue in 2019 (dollars in thousands).
As a % of As a % of
Regulatory Total
Source Description 2019 Revenue Revenue Revenue
Access Charges
Interstate and intrastate
switched access are services
based primarily on
originating and terminating
access minutes from other
carriers. Special access is
primarily access to
dedicated circuits sold to
wholesale customers,
substantially all of which
is generated from interstate
services. Cellular access is
the transport of local
network services between
switches for cellular
companies based on
individually negotiated
contracts. Access revenue
has declined at an average
of approximately 9% annually
over the past three years. $ 3,903 8.8 % 1.7 %
Total Access Charges $ 3,903 8.8 % 1.7 %
Surcharges
We assess our customers for
surcharges, typically on a
monthly basis, as required
by various state and federal
regulatory agencies, and
remit these surcharges to
these agencies. These
pass-through surcharges
include Federal Universal
Access and State Universal
Access. These surcharges
vary from year to year, and
are primarily recognized as
Pass-Through revenue, and the subsequent
remittance to the state or
federal agency as a cost of
sale and service. The rates
imposed by the regulators
continue to increase.
However, because the charges
are only assessed on a
portion of our services, and
that portion continues to
decline, we expect these
revenue streams to decline
over time as the revenue
base declines. $ 5,268 12.0 % 2.3 %
Other non-pass-through
surcharges are collected
from our customers as
authorized by the regulatory
body. The amount charged is
based on the type of line:
single line business,
multi-line business,
consumer or lifeline. The
Other rates are established based
on federal or state orders.
These charges are recorded
as revenue and do not have a
direct associated cost.
Rather, they represent a
revenue recovery mechanism
established by the FCC or
the Regulatory Commission of
Alaska. $ 10,771 24.4 % 4.6 %
Total Surcharges $ 16,039 36.4 % 6.9 %
Federal and State Support
In 2016, the FCC released
the CAF Phase II order
specific to Alaska
Communications which
transitioned from CAF Phase
I frozen support to CAF
Phase II. Funding under the
new program generally
requires the Company to
CAF II provide broadband service to
unserved locations
throughout the designated
coverage area by the end of
a specified build-out
period, and meet interim
milestone build-out
obligations. CAF II revenues
are expected to be
relatively stable through
2026. $ 19,694 44.7 % 8.5 %
The Company was designated
by the State of Alaska as a
Carrier of Last Resort
("COLR") in five of the six
study areas. In addition to
COLR, the Company received
Carrier Common Line ("CCL")
support. We did not receive
COLR or CCL funding for the
ACS of Anchorage study area.
As a COLR we were requiredCOLR and CCL to provide services
essential for retail and
carrier-to-carrier
telecommunication throughout
the applicable coverage
area. Effective in 2019, the
COLR and CCL funding
mechanisms were eliminated
and replaced with the ENS
funding mechanism. Funding
levels under ENS are
approximately half of those
under the prior mechanisms. $ 4,474 10.1 % 1.9 %
Total Federal and State Support $ 24,168 54.8 % 10.4 %
Total Regulatory Revenue $ 44,110 19.0 %
Total Revenue $ 231,694
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Table of Contents Executive Summary Operating Revenues
Total revenue of
Operating Income
Operating income of
Operating Metrics
Business broadband average monthly revenue per user ("ARPU") of
Consumer broadband connections of 31,819 at
The table below provides certain key operating metrics as of, or for, the
periods indicated.
March 31,
2020 2019
Voice:
At quarter end:
Business access lines 67,406 68,788
Consumer access lines 22,227 25,156
Quarter:
ARPU - business $ 27.14 $ 25.21
ARPU - consumer $ 34.11 $ 33.77
Broadband:
At quarter end:
Business connections 14,689 15,132
Consumer connections 31,819 32,811
Quarter:
ARPU - business $ 352.28 $ 334.87
ARPU - consumer $ 70.19 $ 65.44
Liquidity
We generated cash from operating activities of
In the first quarters of 2020 and 2019, we invested a total of
Net debt (defined as total debt excluding debt issuance costs, less cash and
cash equivalents) at
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Table of Contents RESULTS OF OPERATIONS
Three Months Ended
The following table summarizes our results of operations for the three-month
periods ended
(in thousands) 2020 2019 Change % Change
Revenue
Business and wholesale revenue Business broadband$ 15,639 $ 15,267 $ 372 2.4 % Business voice and other 7,236 7,001 235 3.4 % Managed IT services 1,227 1,659 (432 ) -26.0 % Equipment sales and installations 1,414 880 534 60.7 % Wholesale broadband 11,979 10,262 1,717 16.7 % Wholesale voice and other 1,288 1,426 (138 ) -9.7 % Total business and wholesale revenue 38,783 36,495 2,288 6.3 % Consumer revenue Broadband 6,692 6,468 224 3.5 % Voice and other 2,449 2,733 (284 ) -10.4 % Total consumer revenue 9,141 9,201 (60 ) -0.7 % Total business, wholesale and consumer revenue 47,924 45,696 2,228 4.9 % Growth in broadband revenue 7.2 % Regulatory revenue Access 5,418 6,289 (871 ) -13.8 % High cost support 4,924 4,924 - 0.0 % Total regulatory revenue 10,342 11,213 (871 ) -7.8 % Total revenue$ 58,266 $ 56,909 $ 1,357 2.4 % Operating expenses: Cost of services and sales (excluding depreciation and amortization) 27,114 25,627 1,487 5.8 % Selling, general and administrative 15,394 16,656 (1,262 ) -7.6 % Depreciation and amortization 9,840 8,679 1,161 13.4 % Loss (gain) on disposal of assets, net 86 (2 ) 88 NM Total operating expenses 52,434 50,960 1,474 2.9 % Operating income 5,832 5,949 (117 ) -2.0 % Other income and (expense): Interest expense (2,959 ) (3,056 ) 97 -3.2 % Loss on extinguishment of debt - (2,799 ) 2,799 NM Interest income 75 75 - 0.0 % Other income, net 381 122 259 NM Total other income and (expense) (2,503 ) (5,658 ) 3,155 -55.8 % Income before income tax expense 3,329 291 3,038 NM Income tax expense (960 ) (98 ) (862 ) NM Net income 2,369 193 2,176 NM Less net loss attributable to noncontrolling interest (18 ) (34 ) 16 -47.1 % Net income attributable toAlaska Communications$ 2,387 $ 227 $ 2,160 NM 36
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Table of Contents Operating Revenue Business and Wholesale
Business and wholesale revenue of
Business and wholesale revenue includes the amortization of deferred revenue for
the three-month periods ended
Three Months Ended
March 31,
2020 2019
GCI capacity revenue $ 516 $ 511 Other deferred capacity revenue 844 615 Total deferred capacity revenue 1,360 1,126 Other deferred revenue
997 899
Total $ 2,357 $ 2,025
Consumer
Consumer revenue of
Regulatory
Regulatory revenue of
Operating Expenses
Cost of Services and Sales (excluding depreciation and amortization)
Cost of services and sales (excluding depreciation and amortization) of
Selling, General and Administrative
Selling, general and administrative expenses of
Depreciation and Amortization
Depreciation and amortization expense of
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Table of Contents Other Income and Expense
Interest expense of
Income Taxes
Income tax expense and the effective tax rate in the first quarter of 2020 were
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to the noncontrolling interest of the AQ-JV was
Net Income Attributable to
Net income attributable to
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
We satisfied our cash requirements for operations and capital expenditures in
the first quarter of 2020 through internally generated funds and cash on hand.
At
Our major sources and uses of funds in the three months endedMarch 31, 2020 and 2019 were as follows: Three Months Ended March 31, (in thousands) 2020 2019
Net cash provided by operating activities
$ (7,463 ) $ (8,563 )
Change in unsettled capital expenditures
$ (3,240 ) $ (171,758 )
Proceeds from the issuance of long-term debt $ -
$ - $ (2,659 )
Cash paid for debt extinguishment $ - $ (1,222 )
Interest paid (1) $ (2,919 ) $ (3,075 ) (1) Included in net cash provided by operating activities.
Cash Flows from Operating Activities
Cash provided by operating activities of
Cash provided by operating activities of
Cash Flows from Investing Activities
Cash used by investing activities of
Cash used by investing activities of
Our networks require the timely maintenance of plant and infrastructure. Future capital requirements may change due to impacts of regulatory decisions that affect our ability to recover our investments, changes in technology, the effects of competition, changes in our business strategy, and our decision to pursue specific acquisition and investment opportunities. We also engage in capital projects which may be pre-funded, in part, by the customer. Capital spending is typically higher during the second and third quarters. We intend to fund future capital expenditures primarily with cash on hand and net cash generated from operations.
Cash Flows from Financing Activities
Cash used by financing activities of
Cash provided by financing activities was
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Liquidity and Capital Resources
Consistent with our history, our current and long-term liquidity could be impacted by a number of challenges, including, but not limited to: (i) potential future reductions in our revenues resulting from governmental and public policy changes, including regulatory actions affecting inter-carrier compensation, changes in revenue from Universal Service Funds, and the timing of Rural Health Care Program funding receipts; (ii) servicing our debt and funding principal payments; (iii) the funding of other obligations, including our pension plans and lease commitments; (iv) competitive pressures in the markets we serve; (v) the capital intensive nature of our industry; (vi) our ability to respond to and fund the rapid technological changes inherent to our industry, including new products; and (vii) our ability to obtain adequate financing to support our business and pursue growth opportunities.
We are responding to these challenges by (i) driving top line growth in broadband service revenues with a focus on business and wholesale customers; (ii) managing our cost structure to deliver consistent Adjusted EBITDA and Adjusted Free Cash flow performance; and (iii) prioritizing our capital spending.
Certain of our capital projects are prefunded, in part, by the customer to whom the associated services will be provided. We also enter into lease agreements, including for dark fiber, requiring significant long-term funding commitments. The leased fiber is typically subleased to our customers who, in some cases, prefund their payments to the Company.
As of
The obligations under the 2019 Senior Credit Facility are secured by substantially all of the personal property and real property of the Company, subject to certain agreed exceptions. 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. 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.
Financial covenants as defined in the Agreement are summarized below.
Maximum Net Total Leverage Ratio: The ratio of our (a) total debt, less unrestricted cash and cash equivalents held in pledged accounts, less cash drawn under the Delayed-Draw Term A Facility held for specified capital projects to (b) Consolidated EBITDA (as defined more specifically below) for the consecutive four fiscal quarters ending as of the calculation date. The maximum allowable net total leverage ratio is provided in the table below.
Period Ratio
2.50 to 1.00
The actual net total leverage ratio was 2.68 at
Fixed Charge Coverage Ratio: The ratio of our (a) Consolidated EBITDA for the
applicable period (as defined below) to (b) (i) the sum of, for the same period,
consolidated interest expense, capital expenditures (with certain exceptions),
long term indebtedness (with certain exceptions) required to be paid, capital
lease obligations required to be paid, restricted payments, cash payments for
income taxes, (ii) minus, for the same period, specified capital expenditures.
The remaining applicable periods for purposes of calculating this ratio are the
four consecutive fiscal quarters ending
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Consolidated EBITDA, as defined in the 2019 Senior Credit Facility, is not a
GAAP measure and is defined as consolidated net income attributable to
? cash and non-cash interest expense;
? depreciation and amortization expense;
? income taxes;
? other non-cash charges and expenses, including equity-based compensation
expense;
? the write down or write off on any assets, other than accounts receivable;
? subject to limitation, fees, premiums, penalty payments and out-of-pocket
transaction costs incurred in connection with the 2019 refinancing
transactions;
? non-cash cost of goods sold associated with certain projects;
? subject to limitation, unusual, non-recurring losses, charges and expenses;
? one-time costs associated with permitted acquisitions;
? cost savings from synergies in connection with permitted acquisitions or
dispositions;
? certain costs required to be expensed in connection permitted acquisitions;
and
? investment losses of unconsolidated entities.
minus (to the extent included in calculating net income) the sum of:
? unusual, non-recurring gains on permitted sales or dispositions of assets and
casualty events;
? cash and non-cash interest income;
? other unusual nonrecurring items;
? the write up of any asset;
? patronage refunds or similar distributions from any lender;
? deferred revenue associated with certain projects; and
? investment income of unconsolidated entities.
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 weighted interest rate on the 2019 Senior Credit Facility was 6.01% at
Under the terms of the 2019 Senior Credit Facility, the Company is required to
hedge interest payments on a minimum of
On
As of
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In response to economic pressures impacting the Company's customers and the community at large as a result of the COVID-19 pandemic, we implemented the following actions in the first quarter of 2020:
? Working to increase bandwidth, as needed, for participants in the rural health
care program at no charge to the customer. Timing is subject to FCC guidance
and its waiver of certain rules.
? Offering kindergarten through grade 12, university students and teachers who
do not have internet service, unlimited internet service at no charge through
the end of the current school year.
? Will not terminate service to residential and small business customers in the
event they are unable to pay us for services due to disruptions caused by the
COVID-19 pandemic.
? Will waive late fees incurred by residential and small business customers
resulting from their economic circumstances related to the COVID-19 pandemic.
? Will waive long distance overage fees, as appropriate, related to the COVID-19
pandemic.
? Have extended technical support hours.
? Proactively monitoring our network and prioritizing the augmentation of
network links.
? Working with local and state utilities, governments and educational
institutions to ensure they have the necessary resources.
The COVID-19 pandemic has impacted the Company's suppliers, employees and other aspects of its business, including an increase in demand for its broadband and managed IT services. We have implemented various social-distancing policies including making accommodations for many of our employees to work remotely, travel restrictions and making the appropriate arrangements for our customer service representatives and customers.
The COVID-19 pandemic did not have a material effect on the Company's financial results in the first quarter of 2020. We are currently assessing the potential future impact of the COVID-19 pandemic on the demand for our products and services, which could be material. It has caused disruption to certain of our business customers' operations and could result in changes to our wholesale customers' operations and reductions in consumer spending, all of which could negatively impact our future revenue and cash flows. As a result of the customer accommodations noted above, collection of accounts receivable from certain customers may be delayed. Travel restrictions and other required actions may reduce the efficiency of our operations and result in higher costs. Declines in revenue and cash flows could require that we reduce operating costs and capital expenditures. Disruptions to the financial markets could limit our access to financing and other sources of capital. This is a rapidly evolving situation and we cannot predict the extent or duration of the pandemic, its effects on the global, national or local economy and its longer-term effects on our financial condition, results of operations or cash flows, which could be material. We will continue to closely monitor the situation and make the appropriate adjustments to our operations as required and appropriate.
In
Subject to the duration and magnitude of the COVID-19 pandemic, we expect to see
continued strength in business and wholesale revenues, led by broadband revenue
and managed IT services, focused on the larger enterprise and carrier customer
segments. This growth driven by continued demand for broadband as businesses
migrate their IT infrastructure to the cloud, deployment of small cell networks,
expansion into managed IT services, investments by Federal agencies in long haul
broadband infrastructure and continued progress in serving new school districts.
Continued state of
Additionally, we are focused on continued implementation of the CAF II program and expect to meet our obligations for 2020.
We also expect continued attention by our Board of Directors on the evaluation of value creating strategic opportunities that address our scale and geographic concentration issues.
We believe that we will have sufficient cash on hand, cash provided by
operations and availability under our 2019 Senior Credit Facility to service our
debt and fund our operations, capital expenditures and other obligations over
the next twelve months. However, our ability to make such an assessment is
dependent upon our future financial performance, which is subject to future
economic conditions and to financial, business, regulatory, competitive entry
and many other factors, many of which are beyond our control and could impact us
during the time period of this assessment. See Item 1A. Risk Factors in this
Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year
ended
LEGAL
We are involved in various claims, legal actions, personnel matters and
regulatory proceedings arising in the ordinary course of business and as of
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As of
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
We have identified certain policies and estimates as critical to our business
operations and the understanding of our past or present results of operations.
For additional discussion on the application of significant accounting policies,
see "Critical Accounting Policies and Estimates" in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting the financial statements are those related to the realizable value of accounts receivable and long-lived assets, the value of derivative instruments, deferred capacity revenue, legal contingencies, stock-based compensation and income taxes. As future events and their effects cannot be determined with precision, actual results may differ significantly from those estimates. Changes in those estimates will be reflected in the financial statements of future periods.
The following critical accounting policies have been updated to reflect the potential effects of the COVID-19 pandemic.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company does not have any off-balance sheet credit exposure related to its customers. Allowances for uncollectible receivables are established and incurred during the period. These estimates are derived through an analysis of account aging profiles and a review of historical recovery experience. Receivables are charged off against the allowance when management confirms it is probable amounts will not be collected. Subsequent recoveries, if any, are credited to the allowance. The Company records bad debt expense as a component of "Selling, general and administrative expense" in the Consolidated Statements of Comprehensive Income. As a result of changing market conditions due to the COVID-19 pandemic, the policy for determining the allowance for uncollectible accounts receivable will be adjusted if required.
Revenue Recognition
The Company accounts for revenue in accordance with ASC 606 and other guidance. Revenue is typically recognized as services or products are provided to the customer based on the amount of consideration expected to be collected from the customer or other sources. See Note 2 "Revenue Recognition" for a summary of the Company's revenue recognition policies. As a result of changing market conditions due to the COVID-19 pandemic, the policy for assessment of the consideration expected to be collected will be adjusted if required.
New Accounting Pronouncements
See Note 1 "Summary of Significant Accounting Polices" to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements and recently issued pronouncements not yet adopted.
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