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EX-31.1 - EX-31.1 - Lumos Networks Corp.lmos-20150930xex311.htm
EX-32.2 - EX-32.2 - Lumos Networks Corp.lmos-20150930xex322.htm
EX-31.2 - EX-31.2 - Lumos Networks Corp.lmos-20150930xex312.htm
EX-32.1 - EX-32.1 - Lumos Networks Corp.lmos-20150930xex321.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10Q

(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, 2015

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:  000-35180

 

Lumos Networks Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of incorporation or organization)

80-0697274

(I.R.S. Employer Identification No.)

 

One Lumos Plaza, Waynesboro, Virginia 22980

(Address of principal executive offices) (Zip Code)

 

(540) 946-2000

(Registrant’s telephone number, including area code)

 

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

 

 

Title of each class

Name of each exchange on which registered

Common stock, $0.01 par value

The NASDAQ Stock Market LLC

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

None

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes    No

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

 

 

 

 

Large accelerated filer 

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No

There were 22,969,714 shares of the registrant’s common stock outstanding as of the close of business on October 30, 2015.

 

 

 

2


 

Part I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

(In thousands)

September 30, 2015

 

December 31, 2014

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

63,791 

 

$

14,140 

Marketable securities

 

60,875 

 

 

16,870 

Restricted cash

 

370 

 

 

4,208 

Accounts receivable, net of allowance of $1,430 ($1,217 in 2014)

 

21,867 

 

 

22,925 

Other receivables

 

789 

 

 

2,113 

Income tax receivable

 

179 

 

 

172 

Prepaid expenses and other

 

5,822 

 

 

4,321 

Deferred income taxes

 

2,360 

 

 

5,601 

Total Current Assets

 

156,053 

 

 

70,350 

 

 

 

 

 

 

Securities and Investments

 

1,119 

 

 

914 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land and buildings

 

22,694 

 

 

19,726 

Network plant and equipment

 

603,517 

 

 

540,108 

Furniture, fixtures and other equipment

 

48,420 

 

 

45,729 

Total in service

 

674,631 

 

 

605,563 

Under construction

 

46,118 

 

 

34,426 

 

 

 

 

 

 

 

 

720,749 

 

 

639,989 

Less accumulated depreciation and amortization

 

241,572 

 

 

210,538 

 

 

 

 

 

 

Total Property, Plant and Equipment, net

 

479,177 

 

 

429,451 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

100,297 

 

 

100,297 

Other intangibles, less accumulated amortization of $94,163 ($90,086 in 2014)

 

11,807 

 

 

15,884 

Deferred charges and other assets

 

1,639 

 

 

512 

Total Other Assets

 

113,743 

 

 

116,693 

 

 

 

 

 

 

Total Assets

$

750,092 

 

$

617,408 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3

 


 

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

(In thousands, except par value per share amounts)

September 30, 2015

 

December 31, 2014

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

$

10,454 

 

$

10,227 

Accounts payable

 

19,147 

 

 

20,257 

Dividends payable

 

 -

 

 

3,152 

Advance billings and customer deposits

 

13,760 

 

 

14,029 

Accrued compensation

 

1,381 

 

 

1,516 

Accrued operating taxes

 

4,943 

 

 

4,618 

Other accrued liabilities

 

5,257 

 

 

4,223 

Total Current Liabilities

 

54,942 

 

 

58,022 

 

 

 

 

 

 

Long-term Liabilities

 

 

 

 

 

Long-term debt, net of unamortized discount and debt issuance costs, excluding current portion

 

457,306 

 

 

357,950 

Retirement benefits

 

17,075 

 

 

18,257 

Deferred income taxes

 

90,833 

 

 

87,864 

Other long-term liabilities

 

1,888 

 

 

1,746 

Income tax payable

 

93 

 

 

110 

Total Long-term Liabilities

 

567,195 

 

 

465,927 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Preferred stock, par value $0.01 per share, authorized 100 shares, none issued

 

 -

 

 

 -

Common stock, par value $0.01 per share, authorized 55,000 shares; 22,962 shares issued and 22,954 shares outstanding (22,579 shares issued and 22,544 shares outstanding in 2014)

 

230 

 

 

226 

Additional paid-in capital

 

169,934 

 

 

143,545 

Treasury stock, 8 shares at cost (35 shares in 2014)

 

(38)

 

 

(41)

Accumulated deficit

 

(31,215)

 

 

(38,567)

Accumulated other comprehensive loss, net of tax

 

(11,849)

 

 

(12,486)

Total Lumos Networks Corp. Stockholders' Equity

 

127,062 

 

 

92,677 

Noncontrolling Interests

 

893 

 

 

782 

 

 

 

 

 

 

Total Equity

 

127,955 

 

 

93,459 

 

 

 

 

 

 

Total Liabilities and Equity

$

750,092 

 

$

617,408 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

4

 


 

Condensed Consolidated Statements of Income

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands, except per share amounts)

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

$

50,969 

 

$

50,516 

 

$

152,417 

 

$

150,771 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Network access costs

 

9,932 

 

 

10,250 

 

 

29,556 

 

 

31,154 

Selling, general and administrative

 

20,554 

 

 

8,545 

 

 

60,657 

 

 

44,964 

Depreciation and amortization

 

11,803 

 

 

11,272 

 

 

35,112 

 

 

33,141 

Accretion of asset retirement obligations

 

33 

 

 

38 

 

 

105 

 

 

95 

Restructuring charges

 

 -

 

 

 -

 

 

637 

 

 

 -

Total Operating Expenses

 

42,322 

 

 

30,105 

 

 

126,067 

 

 

109,354 

Operating Income

 

8,647 

 

 

20,411 

 

 

26,350 

 

 

41,417 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,817)

 

 

(3,969)

 

 

(13,022)

 

 

(11,755)

Gain on interest rate swap derivatives

 

198 

 

 

302 

 

 

445 

 

 

395 

Other income (expenses), net

 

58 

 

 

179 

 

 

(89)

 

 

529 

Total Other Expenses, net

 

(5,561)

 

 

(3,488)

 

 

(12,666)

 

 

(10,831)

Income Before Income Taxes

 

3,086 

 

 

16,923 

 

 

13,684 

 

 

30,586 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

1,774 

 

 

6,713 

 

 

6,221 

 

 

12,402 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

1,312 

 

 

10,210 

 

 

7,463 

 

 

18,184 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Noncontrolling Interests

 

(33)

 

 

(3)

 

 

(111)

 

 

(69)

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Lumos Networks Corp.

$

1,279 

 

$

10,207 

 

$

7,352 

 

$

18,115 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings per Common Share Attributable to Lumos Networks Corp. Stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

$

0.06 

 

$

0.46 

 

$

0.32 

 

$

0.81 

Earnings per share - diluted

$

0.06 

 

$

0.45 

 

$

0.32 

 

$

0.80 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared per Share - Common Stock

$

 -

 

$

0.14 

 

$

 -

 

$

0.42 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

 


 

Condensed Consolidated Statements of Comprehensive Income

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

2015

 

2014

 

2015

 

2014

Net Income

$

1,312 

 

$

10,210 

 

$

7,463 

 

$

18,184 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

Adjustment to unrecognized loss due to curtailment of postretirement medical plan benefits, net of $462 of income taxes for the three and nine months ended September 30, 2014.

 

 -

 

 

726 

 

 

 -

 

 

726 

Reclassification adjustment for amortization of actuarial loss from defined benefit plans included in net income, net of $131 and $25 of income taxes for the three months ended September 30, 2015 and 2014, respectively, and $395 and $75 of income taxes for the nine months ended September 30, 2015 and 2014, respectively (see Note 2)

 

206 

 

 

39 

 

 

618 

 

 

117 

Unrealized holding gain (loss) on available-for-sale marketable securities, net of  $8 and ($8) of income taxes for the three months ended September 30, 2015 and 2014, respectively, and $12 and ($7) of income taxes for the nine months ended September 30, 2015 and 2014, respectively

 

12 

 

 

(15)

 

 

19 

 

 

(13)

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income, Net of Tax

 

218 

 

 

750 

 

 

637 

 

 

830 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

1,530 

 

 

10,960 

 

 

8,100 

 

 

19,014 

 

 

 

 

 

 

 

 

 

 

 

 

Less:  Comprehensive Income Attributable to Noncontrolling Interests

 

(33)

 

 

(3)

 

 

(111)

 

 

(69)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Lumos Networks Corp.

$

1,497 

 

$

10,957 

 

$

7,989 

 

$

18,945 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

6

 


 

Condensed Consolidated Statements of Cash Flows

Lumos Networks Corp. 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(In thousands)

2015

 

2014

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

$

7,463 

 

$

18,184 

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

 

 

 

 

 

Depreciation

 

31,035 

 

 

26,251 

Amortization

 

4,077 

 

 

6,890 

Accretion of asset retirement obligations

 

105 

 

 

95 

Deferred income taxes

 

5,802 

 

 

12,045 

Gain on interest rate swap derivatives

 

(445)

 

 

(395)

Equity-based compensation expense

 

4,236 

 

 

3,109 

Amortization of debt discounts and issuance costs

 

1,648 

 

 

1,102 

Retirement benefits, net of cash contributions and distributions

 

(171)

 

 

(11,352)

Excess tax benefits from share-based compensation

 

 -

 

 

(201)

Other

 

206 

 

 

206 

Changes in assets and liabilities from operations:

 

 

 

 

 

Increase (decrease) in accounts receivable

 

836 

 

 

(992)

(Increase) decrease in other assets

 

(2,689)

 

 

1,220 

Changes in income taxes

 

(24)

 

 

298 

(Decrease) increase in accounts payable

 

(2,776)

 

 

4,323 

Increase (decrease) in other current liabilities

 

2,702 

 

 

(230)

Net Cash Provided by Operating Activities

 

52,005 

 

 

60,553 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(80,118)

 

 

(64,151)

Broadband network expansion funded by stimulus grant

 

(2,578)

 

 

(284)

Purchases of available-for-sale marketable securities

 

(74,088)

 

 

(17,010)

Proceeds from sale or maturity of available-for-sale marketable securities

 

29,903 

 

 

36,856 

Change in restricted cash

 

3,838 

 

 

116 

Cash reimbursement received from broadband stimulus grant

 

3,838 

 

 

116 

Other

 

 -

 

 

106 

Net Cash Used in Investing Activities

 

(119,205)

 

 

(44,251)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of senior secured term loan

 

28,000 

 

 

 -

Proceeds from issuance of unsecured notes, net of debt discount

 

148,500 

 

 

 -

Payment of financing costs

 

(8,192)

 

 

 -

Principal payments on senior secured term loans

 

(45,953)

 

 

(3,313)

Cash dividends paid on common stock

 

(3,152)

 

 

(9,323)

Principal payments under capital lease obligations

 

(2,378)

 

 

(1,312)

Proceeds from stock option exercises and employee stock purchase plan

 

293 

 

 

1,668 

Excess tax benefits from share-based compensation

 

 -

 

 

201 

Other

 

(267)

 

 

(66)

Net Cash Provided by (Used in) Financing Activities

 

116,851 

 

 

(12,145)

Increase in cash and cash equivalents

 

49,651 

 

 

4,157 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning of Period

 

14,140 

 

 

14,114 

 

 

 

 

 

 

End of Period

$

63,791 

 

$

18,271 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

e accompanying

 

 

 

7

 


 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

Lumos Networks Corp.

 

Note 1.  Organization

Lumos Networks Corp. (“Lumos Networks” or the “Company”) is a fiber-based bandwidth infrastructure and service provider in the Mid-Atlantic region with a network of long-haul fiber, metro Ethernet and Ethernet rings located primarily in Virginia and West Virginia, and portions of Maryland, Pennsylvania, Ohio and Kentucky.  The Company serves carrier, business and residential customers over its fiber network offering data, voice and IP services.  The Company’s principal products and services include Multiprotocol Label Switching (“MPLS”) based Ethernet, Metro Ethernet (“Metro E”), Fiber to the Cell (“FTTC”) wireless backhaul and fiber transport services, wavelength transport services, IP services and other voice services.

On March 17, 2015, in a secondary offering of the Company’s common stock, Quadrangle Capital Partners LP. (“Quadrangle”) sold 1,600,000 shares on an underwritten basis.  On September 14, 2015, Quadrangle distributed its remaining 591,898 shares to its investors (the “Distribution”).  As a result, the shareholder agreement between Quadrangle and the Company expired as of the effective date of the Distribution.  All direct costs of the March 2015 offering, which were primarily legal and accounting fees, totaled $0.3 million and are included in other expenses in the condensed consolidated statement of income for the nine months ended September 30, 2015.

Note 2.  Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company, Lumos Networks Operating Company, a wholly-owned subsidiary of the Company, and all of Lumos Networks Operating Company’s wholly-owned subsidiaries and those limited liability corporations where Lumos Networks Operating Company or certain of its subsidiaries, as managing member, exercise control.  All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2015 and September 30, 2014 contain all adjustments necessary to present fairly in all material respects the Company’s financial position and the results of operations and cash flows for all periods presented on the respective condensed consolidated financial statements included herein.  The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year.  The accompanying condensed consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as adjusted for the change in accounting principle described below. 

Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.  Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the valuation of interest rate swap derivatives, deferred tax assets, marketable securities, asset retirement obligations, stock warrants and equity-based compensation; goodwill impairment assessments and reserves for employee benefit obligations and income tax uncertainties.

Change in Accounting Principle

The Company historically presented unamortized debt issuance costs, or fees directly related to issuing debt, as long-term assets on the consolidated balance sheets in accordance with existing GAAP. In the third quarter of 2015, the Company elected early adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) and applied it retrospectively to all prior periods presented in the financial statements. The guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense over the life of the associated debt instrument. The adoption of ASU 2015-03 resulted in the presentation of $10.9 million of debt issuance costs as a reduction to long-term debt in the condensed consolidated balance sheet as of September 30, 2015. The Company also reclassified $5.2 million of debt issuance costs from deferred charges and other assets to long-term debt on the condensed consolidated balance sheet as of December 31, 2014. The adoption of ASU 2015-03 did not impact net income or any other amounts previously reported on the condensed consolidated statements of income or comprehensive income.

8

 


 

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, services are rendered or products are delivered, installed and functional, as applicable, the price to the buyer is fixed or determinable and collectability is reasonably assured.  Certain services of the Company require payment in advance of service performance.  In such cases, the Company records a service liability at the time of billing and subsequently recognizes revenue ratably over the service period.  The Company bills customers certain transactional taxes on service revenues.  These transactional taxes are not included in reported revenues as they are recognized as liabilities at the time customers are billed.

The Company earns revenue by providing services through access to and usage of its networks.  Local service revenues are recognized as services are provided.  Carrier data revenues are earned by providing switched access and other switched and dedicated services to other carriers.  Revenues for equipment sales are recognized at the point of sale. 

Cash Equivalents and Marketable Securities

The Company considers its investment in all highly liquid debt instruments with an original maturity of three months or less, when purchased, to be cash equivalents.  The Company’s marketable securities at September 30, 2015 and December 31, 2014 consist of debt securities not classified as cash equivalents. The Company classifies such debt securities as either held-to-maturity, when the Company has the positive intent and ability to hold the securities to maturity, or available-for-sale.  Held-to-maturity debt securities are carried at amortized cost, adjusted for the amortization of premiums or accretion of discounts.  Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in other comprehensive income or loss, net of tax.  All of the Company’s debt securities not classified as cash equivalents were classified as available-for-sale securities as of September 30, 2015 and December 31, 2014.

Restricted Cash

During 2010, the Company received a federal broadband stimulus award to bring broadband services and infrastructure to Alleghany County, Virginia.  The total project was $16.1 million, of which 50% (approximately $8 million) was funded by a grant from the federal government.  The project was completed as of September 30, 2015.  The Company was required to deposit 100% of its portion for the grant (approximately $8 million) into a pledged account in advance of any reimbursements, which was drawn down ratably following the grant reimbursement approvals.  The Company received $3.8 million in cash reimbursements during the nine months ended September 30, 2015.  As of September 30, 2015, the Company had no remaining receivable for the reimbursable portion of the qualified recoverable expenditures and the Company’s pledged account balance was $0.4 million, which the Company expects to be released by year end 2015. The escrow account is a non-interest bearing account with the Company’s primary commercial bank. 

Trade Accounts Receivable

The Company sells its services to other communication carriers and to business and residential customers primarily in Virginia and West Virginia and portions of Maryland, Pennsylvania, Ohio and Kentucky.  The Company has credit and collection policies to maximize collection of trade receivables and requires deposits on certain sales.  The Company estimates an allowance for doubtful accounts based on a review of specific customers with large receivable balances and for the remaining customer receivables the Company uses historical results, current and expected trends and changes in credit policies.  Management believes the allowance adequately covers all anticipated losses with respect to trade receivables.  Actual credit losses could differ from such estimates.  The Company includes bad debt expense in selling, general and administrative expense in the condensed consolidated statements of income.  Bad debt expense for each of the three months ended September 30, 2015 and 2014 was $0.2 million, and bad debt expense for the nine months ended September 30, 2015 and 2014 was $0.4 million and $0.7 million, respectively.  The Company’s allowance for doubtful accounts and customer credits was $1.4 million and $1.2 million as of September 30, 2015 and December 31, 2014, respectively.

The following table presents a roll-forward of the Company’s allowance for doubtful accounts and customer credits from December 31, 2014 to September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

(In thousands)

 

December 31, 2014

 

Charged to Expense

 

Charged to Other Accounts

 

Deductions

 

September 30, 2015

Allowance for doubtful accounts and customer credits

 

$

1,217 

 

$

413 

 

$

197 

 

$

(397)

 

$

1,430 

 

Property, Plant and Equipment and Other Long-Lived Assets (Excluding Goodwill and Indefinite-Lived Intangible Assets)

Property, plant and equipment, finite-lived intangible assets and long-term deferred charges are recorded at cost and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated pursuant to the subsequent measurement guidance described in FASB Accounting Standards Codification (“ASC”) 360-10-35.  Impairment is 

9

 


 

determined by comparing the carrying value of these long-lived assets to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets.  If the carrying value exceeds the estimated undiscounted cash flows, the excess of the asset’s carrying value over the estimated fair value is recorded as an impairment charge. 

The Company believes that no impairment indicators exist as of September 30, 2015 that would require the Company to perform impairment testing for long-lived assets, including property, plant and equipment, long-term deferred charges and finite-lived intangible assets to be held and used.

Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets, which the Company reviews and updates based on historical experiences and future expectations.  Buildings are depreciated over a 50-year life and leasehold improvements, which are categorized in land and buildings, are depreciated over the shorter of the estimated useful lives or the remaining lease terms.  Network plant and equipment are generally depreciated over various lives from 3 to 25 years, with a current weighted average life of approximately 17 years.  Furniture, fixtures and other equipment are depreciated over various lives from 2 to 24 years. Plant and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.  Amortization of assets held under capital leases, including certain software licenses, is included with depreciation expense.

Intangibles with a finite life are classified as other intangibles on the condensed consolidated balance sheets.  At September 30, 2015 and December 31, 2014, other intangibles were comprised of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

(Dollars in thousands)

Estimated Life

 

Gross Amount

 

Accumulated

Amortization

 

Gross Amount

 

Accumulated

Amortization

Customer relationships

6 to 15 yrs

 

$

103,108 

 

$

(92,362)

 

$

103,108 

 

$

(88,406)

Trademarks and franchise rights

10 to 15 yrs

 

 

2,862 

 

 

(1,801)

 

 

2,862 

 

 

(1,680)

Total

 

 

$

105,970 

 

$

(94,163)

 

$

105,970 

 

$

(90,086)

 

The Company amortizes its finite-lived intangible assets using the straight-line method unless it determines that another systematic method is more appropriate.  The amortization for certain customer relationship intangibles is being recognized using an accelerated amortization method based on the pattern of estimated earnings from these assets.

The estimated life of amortizable intangible assets is determined from the unique factors specific to each asset, and the Company periodically reviews and updates estimated lives based on current events and future expectations.  The Company capitalizes costs incurred to renew or extend the term of a recognized intangible asset and amortizes such costs over the remaining life of the asset. No such costs were incurred during the nine months ended September 30, 2015.  Amortization expense for the three months ended September 30, 2015 and 2014 was $0.7 million and $2.3 million, respectively, and amortization expense for the nine months ended September 30, 2015 and 2014 was $4.1 million and $6.9 million, respectively.

Amortization expense for the remainder of 2015 and for the next five years is expected to be as follows:

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Customer Relationships

 

Trademarks and Franchise Rights

 

Total

Remainder of 2015

 

$

689 

 

$

41 

 

$

730 

2016

 

 

2,412 

 

 

163 

 

 

2,575 

2017

 

 

2,093 

 

 

163 

 

 

2,256 

2018

 

 

1,781 

 

 

163 

 

 

1,944 

2019

 

 

1,513 

 

 

152 

 

 

1,665 

2020

 

 

1,146 

 

 

48 

 

 

1,194 

 

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and certain trademarks are considered to be indefinite-lived intangible assets.  Indefinite-lived intangible assets are not subject to amortization but are instead tested for impairment annually or more frequently if an event indicates that the asset might be impaired.  The Company’s policy is to assess the recoverability of indefinite-lived intangible assets annually on October 1 and whenever adverse events or changes in circumstances indicate that impairment may have occurred.    The Company believes there have been no events or circumstances to cause it to evaluate the carrying amount of goodwill or indefinite-lived intangible assets during the nine months ended September 30, 2015.

 

10

 


 

Pension Benefits and Retirement Benefits Other Than Pensions

The Company sponsors a non-contributory defined benefit pension plan (the “Pension Plan”) covering all employees who meet eligibility requirements and were employed prior to October 1, 2003.  Pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65.  The Company froze the Pension Plan effective December 31, 2012. As such, no further benefits are being accrued by participants for services rendered beyond that date.

For the three and nine months ended September 30, 2015 and 2014, the components of the Company’s net periodic benefit income for the Pension Plan were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

2015

 

2014

 

2015

 

2014

Service cost

$

 -

 

$

 -

 

$

 -

 

$

 -

Interest cost

 

666 

 

 

656 

 

 

1,998 

 

 

1,968 

Expected return on plan assets

 

(1,028)

 

 

(1,093)

 

 

(3,084)

 

 

(3,279)

Amortization of loss

 

248 

 

 

 -

 

 

743 

 

 

 -

Net periodic benefit income

$

(114)

 

$

(437)

 

$

(343)

 

$

(1,311)

 

Pension Plan assets were valued at $53.1 million and $58.4 million at September 30, 2015 and December 31, 2014, respectively.  No funding contributions were made during the three or nine months ended September 30, 2015, and the Company does not expect to make a funding contribution during the remainder of 2015.

The Company also provides life insurance benefits for retired employees that meet eligibility requirements through two postretirement welfare benefit plans (the “Other Postretirement Benefit Plans”).  The Company had provided retiree medical benefits under these plans until those benefits were terminated effective December 31, 2014.  The Company recognized a curtailment gain of $10.2 million in the condensed consolidated statements of income for the three and nine months ended September 30, 2014 related to the termination of these benefits.  The net periodic benefit income for the Other Postretirement Benefit Plans was $10.0 million and $9.7 million for the three and nine months ended September 30, 2014, respectively, inclusive of the curtailment gain.  The net periodic benefit income included interest cost of $0.1 million and $0.4 million, respectively, and less than $0.1 million of service cost and amortization of actuarial losses during each period. The Company did not incur any significant costs associated with these plans during the nine months ended September 30, 2015.

The Company recognized expense for certain nonqualified pension plans for each of the three months ended September 30, 2015 and 2014 of $0.1 million, and $0.1 million and less than $0.1 million of this expense for these periods, respectively, relates to the amortization of actuarial loss.  Expense for nonqualified pension plans for the nine months ended September 30, 2015 and 2014 was $0.4 million and $0.3 million, respectively, and $0.3 million and $0.2 million of the expense for these periods, respectively, relates to the amortization of actuarial loss.

The total amount reclassified out of accumulated other comprehensive loss related to amortization of actuarial losses for retirement plans for the three months ended September 30, 2015 and 2014 was $0.3 million and $0.1 million, respectively, and $1.0 million and $0.2 million for the nine months ended September 30, 2015 and 2014, respectively, all of which has been reclassified to selling, general and administrative expenses on the condensed consolidated statements of income.

Equity-based Compensation

The Company accounts for share-based employee compensation plans under FASB ASC 718, Stock Compensation.  Equity-based compensation expense from share-based equity awards is recorded with an offsetting increase to additional paid-in capital on the condensed consolidated balance sheet.  For equity awards with only service conditions, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.

The fair value of common stock options granted with service-only conditions is estimated at the respective measurement date using the Black-Scholes option-pricing model with assumptions related to risk-free interest rate, expected volatility, dividend yield and expected term.  The fair value of restricted stock awards granted with service-only conditions is estimated based on the market value of the common stock on the date of grant reduced by the present value of expected dividends as applicable.  Certain stock options and restricted shares granted by the Company contain vesting provisions that are conditional on achievement of a target market price for the Company’s common stock.  The grant date fair value of these options and restricted shares is adjusted to reflect the probability of the achievement of the market condition based on management’s best estimate using a Monte Carlo model.  The Company initially recognizes the related compensation cost for these awards that contain a market condition on a straight-line basis over the requisite service period as derived from the valuation model.  The Company accelerates expense recognition if the market conditions are achieved prior to the end of the derived requisite service period.  

11

 


 

Total equity-based compensation expense related to all of the share-based awards and the Company’s 401(k) matching contributions was $1.5 million and $1.1 million for the three months ended September 30, 2015 and 2014, respectively, and $4.2 million and $3.1 million for the nine months ended September 30, 2015 and 2014, respectively, which amounts are included in selling, general and administrative expenses on the condensed consolidated statements of income. 

Future charges for equity-based compensation related to instruments outstanding at September 30, 2015 are estimated to be $1.4 million for the remainder of 2015, $4.0 million in 2016, $3.2 million in 2017, $0.9 million in 2018, and less than $0.1 million thereafter. 

Fair Value Measurements

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required to be recorded at fair value or for certain financial instruments for which disclosure of fair value is required, the Company uses fair value techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.  However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability.  Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs.

GAAP establishes a fair value hierarchy with three levels of inputs that may be used to measure fair value:

·

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

·

Level 2 – Unadjusted quoted prices for similar assets or liabilities in active markets, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs other than quoted prices that are observable for the asset or liability.

·

Level 3 – Unobservable inputs for the asset or liability.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), which defers the effective date of ASU 2014-09 for public business entities from annual reporting periods beginning after December 15, 2016, to annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method.  The Company has not yet selected a transition method and is still evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and disclosures.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 820): Amendments to the Consolidation Analysis (“ASU 2015-02”).  ASU 2015-02 provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities.  All legal entities will be subject to reevaluation under this revised consolidation model.  The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships.  ASU 2015-02 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after September 1, 2016.  The Company does not expect the future adoption of ASU 2015-02 to have a material impact on the Company’s consolidated financial statements and disclosures.

 

Note 3.  Cash Equivalents and Marketable Securities

The Company’s cash equivalents and available-for-sale marketable securities reported at fair value as of September 30, 2015 and December 31, 2014 are summarized below:

 

 

 

 

 

 

 

 

(In thousands)

September 30, 2015

 

December 31, 2014

Cash equivalents:

 

 

 

 

 

Money market mutual funds

$

41,614 

 

$

49 

Commercial paper

 

2,249 

 

 

 -

Debt securities issued by U.S. Government agencies

 

5,993 

 

 

 -

Corporate debt securities

 

2,912 

 

 

1,357 

Total cash equivalents

 

52,768 

 

 

1,406 

12

 


 

Marketable securities:

 

 

 

 

 

Certificates of deposit

 

1,500 

 

 

 -

Commercial paper

 

6,187 

 

 

998 

Debt securities issued by U.S. Government agencies

 

25,085 

 

 

2,734 

Municipal bonds

 

351 

 

 

353 

Corporate debt securities

 

27,752 

 

 

12,785 

Total marketable securities, available-for-sale

 

60,875 

 

 

16,870 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

113,643 

 

$

18,276 

At September 30, 2015 and December 31, 2014, the carrying values of the investments included in cash and cash equivalents approximated fair value.  The aggregate amortized cost of the available-for-sale securities was not materially different from the aggregate fair value.

The contractual maturities of the Company’s available-for-sale debt securities were as follows as of September 30, 2015:

 

 

 

 

(In thousands)

Total

Due in one year or less

$

55,721 

Due after one year through two years

 

5,154 

Total debt securities

$

60,875 

The Company received total proceeds of $11.9 million and $22.7 million from the sale or maturity of available-for-sale marketable securities during the three months ended September 30, 2015 and 2014, respectively, and $29.9 million and $36.9 million during the nine months ended September 30, 2015 and 2014, respectively.  The Company did not recognize any material realized net gains or losses and net unrealized holding gains on available-for-sale marketable securities were less than $0.1 million for each of the three and nine months ended September 30, 2015 and 2014, respectively.  Unrealized holding gains or losses are included in accumulated other comprehensive loss on the condensed consolidated balance sheets.

Note 4.  Disclosures About Segments of an Enterprise and Related Information

The Company’s operating segments generally align with its major product and service offerings and coincide with the way that the Company’s chief operating decision makers measure performance and allocate resources.  The Company’s chief operating decision makers are its Chief Executive Officer and its Chief Financial Officer (collectively, the “CODMs”).  The Company’s current reportable operating segments are data, residential and small business (“R&SB”) and RLEC access.  A general description of the products and services offered and the customers served by each of these segments is as follows:

·

Data:  This segment includes the Company’s enterprise data (metro Ethernet, dedicated Internet, voice over IP (“VoIP”) and private line), transport, and FTTC product and service groups.  These businesses primarily serve enterprise and carrier customers utilizing the Company’s network of long-haul fiber, metro Ethernet and Ethernet rings located primarily in Virginia and West Virginia, and portions of Pennsylvania, Maryland, Ohio and Kentucky.

·

R&SB:  This segment includes the following voice products:  local lines, primary rate interface (“PRI”), long distance, toll and directory advertising and other voice services (excluding VoIP which are typically provided to enterprise customers and are included in the Company’s data segment) and the following IP services products: fiber-to-the-premise broadband XL, DSL, integrated access and video.  These products are sold to residential and small business customers on the Company’s network and within the Company’s footprint.  This segment also provides carrier customers access to our network located in competitive markets.

·

RLEC Access:  This segment provides carrier customers access to the Company’s network within the Company’s RLEC footprint and primarily includes switched access services.

 

13

 


 

Summarized financial information concerning the Company’s reportable segments is presented in the following table: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Data

 

R&SB

 

RLEC
Access

 

Corporate (Unallocated)

 

Total

For the three months ended September 30, 2015:

Operating revenues

 

$

28,623 

 

 

16,560 

 

 

5,786 

 

 

 -

 

$

50,969 

Network access costs

 

 

4,533 

 

 

5,399 

 

 

 -

 

 

 -

 

 

9,932 

Network operating and selling costs

 

 

7,991 

 

 

3,962 

 

 

267 

 

 

 -

 

 

12,220 

Other general and administrative expenses

 

 

3,704 

 

 

2,154 

 

 

685 

 

 

1,791 

 

 

8,334 

Adjusted EBITDA(1)

 

 

12,395 

 

 

5,045 

 

 

4,834 

 

 

 -

 

 

22,274 

Capital expenditures

 

 

25,418 

 

 

1,538 

 

 

 -

 

 

(2,187)

 

 

24,769 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2015:

Operating revenues

 

$

84,479 

 

$

50,835 

 

$

17,103 

 

$

 -

 

$

152,417 

Network access costs

 

 

12,242 

 

 

17,314 

 

 

 -

 

 

 -

 

 

29,556 

Network operating and selling costs

 

 

23,799 

 

 

11,172 

 

 

799 

 

 

 -

 

 

35,770 

Other general and administrative expenses

 

 

11,184 

 

 

6,350 

 

 

2,105 

 

 

5,248 

 

 

24,887 

Adjusted EBITDA(1)

 

 

37,254 

 

 

15,999 

 

 

14,199 

 

 

 -

 

 

67,452 

Capital expenditures

 

 

72,055 

 

 

6,924 

 

 

 -

 

 

1,139 

 

 

80,118 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Data

 

R&SB

 

RLEC
Access

 

Corporate (Unallocated)

 

Total

For the three months ended September 30, 2014:

Operating revenues

 

$

26,488 

 

$

17,668 

 

$

6,360 

 

$

 -

 

$

50,516 

Network access costs

 

 

3,937 

 

 

6,313 

 

 

 -

 

 

 -

 

 

10,250 

Network operating and selling costs

 

 

6,408 

 

 

4,745 

 

 

388 

 

 

 -

 

 

11,541 

Other general and administrative expenses

 

 

3,159 

 

 

2,107 

 

 

758 

 

 

(9,020)

 

 

(2,996)

Adjusted EBITDA(1)

 

 

12,984 

 

 

4,503 

 

 

5,214 

 

 

10,207 

 

 

32,908 

Capital expenditures

 

 

19,387 

 

 

2,244 

 

 

 -

 

 

5,232 

 

 

26,863 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2014:

Operating revenues

 

$

79,332 

 

$

54,605 

 

$

16,834 

 

$

 -

 

$

150,771 

Network access costs

 

 

12,030 

 

 

19,124 

 

 

 -

 

 

 -

 

 

31,154 

Network operating and selling costs

 

 

18,091 

 

 

13,162 

 

 

1,081 

 

 

 -

 

 

32,334 

Other general and administrative expenses

 

 

10,115 

 

 

7,042 

 

 

2,135 

 

 

(6,662)

 

 

12,630 

Adjusted EBITDA(1)

 

 

39,096 

 

 

15,277 

 

 

13,618 

 

 

10,207 

 

 

78,198 

Capital expenditures

 

 

44,181 

 

 

7,231 

 

 

 -

 

 

12,739 

 

 

64,151 

 

(1)     The Company’s CODMs evaluate performance based upon Adjusted EBITDA (a non-GAAP measure), defined by the Company as net income or loss attributable to Lumos Networks Corp. before interest, income taxes, depreciation and amortization, accretion of asset retirement obligations, net income or loss attributable to noncontrolling interests, other income or expenses, equity-based compensation charges, acquisition-related charges, amortization of actuarial losses on retirement plans, employee separation charges, restructuring-related charges, gain or loss on settlements and gain or loss on interest rate swap derivatives.

 

The Company’s CODMs do not currently review total assets by segment since the majority of the assets are shared by the segments and centrally-managed.  However, total assets may be allocated to the segments in the future should the CODMs decide to manage the business in that manner.  Management does review capital expenditures using success-based metrics that allow the Company to determine which segment product groups are driving investment in the network.  Depreciation and amortization expense and certain corporate expenses that are excluded from the measurement of segment profit or loss are not allocated to the operating segments. 

 

14

 


 

The following table provides a reconciliation of net income attributable to Lumos Networks Corp. to Adjusted EBITDA, as defined by the Company, on a consolidated basis for the three and nine months ended September 30, 2015 and 2014:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

 

2015

 

2014

 

 

2015

2014

Net Income Attributable to Lumos Networks Corp.

 

$

1,279 

 

$

10,207 

 

$

7,352 

 

$

18,115 

Net Income Attributable to Noncontrolling Interests

 

 

33 

 

 

 

 

111 

 

 

69 

Net income

 

 

1,312 

 

 

10,210 

 

 

7,463 

 

 

18,184 

Income tax expense

 

 

1,774 

 

 

6,713 

 

 

6,221 

 

 

12,402 

Interest expense

 

 

5,817 

 

 

3,969 

 

 

13,022 

 

 

11,755 

Gain on interest rate swap derivatives

 

 

(198)

 

 

(302)

 

 

(445)

 

 

(395)

Other (income) expenses, net

 

 

(58)

 

 

(179)

 

 

89 

 

 

(529)

Operating Income

 

 

8,647 

 

 

20,411 

 

 

26,350 

 

 

41,417 

Depreciation and amortization and accretion

 

 

 

 

 

 

 

 

 

 

 

 

of asset retirement obligations

 

 

11,836 

 

 

11,310 

 

 

35,217 

 

 

33,236 

Amortization of actuarial losses

 

 

337 

 

 

64 

 

 

1,012 

 

 

192 

Equity-based compensation

 

 

1,454 

 

 

1,123 

 

 

4,236 

 

 

3,109 

Restructuring charges

 

 

 -

 

 

 -

 

 

637 

 

 

 -

Employee separation charges

 

 

 -

 

 

 -

 

 

 -

 

 

244 

Adjusted EBITDA

 

$

22,274 

 

$

32,908 

 

$

67,452 

 

$

78,198 

 

One of the Company’s carrier customers, AT&T, individually accounted for 8% and 10% of the Company’s total operating revenues for the three months ended September 30, 2015 and 2014, respectively, and 8% and 9% for the nine months ended September 30, 2015 and 2014, respectively.  Revenues from this carrier customer were derived primarily from network access, data transport and fiber to the cell site services.
 

 

Note 5.  Long-Term Debt

As of September 30, 2015 and December 31, 2014, the Company’s outstanding long-term debt consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

(In thousands)

 

Principal

 

Unamortized Discount and Debt Issuance Costs

 

Principal

 

Unamortized Discount and Debt Issuance Costs

Credit Facility

 

$

350,422 

 

$

5,072 

 

$

368,375 

 

$

5,206 

8% Notes due 2022

 

 

150,000 

 

 

30,281 

 

 

 -

 

 

 -

Capital lease obligations

 

 

2,691 

 

 

 -

 

 

5,008 

 

 

 -

Long-term debt

 

 

503,113 

 

 

35,353 

 

 

373,383 

 

 

5,206 

Less:  Current portion of long-term debt

 

 

10,454 

 

 

 -

 

 

10,227 

 

 

 -

Long-term debt, excluding current portion

 

$

492,659 

 

$

35,353 

 

$

363,156 

 

$

5,206 

 

Credit Facility

On April 30, 2013, Lumos Networks Operating Company, a wholly-owned subsidiary of the Company, entered into a $425 million credit facility (the “Credit Facility”).  The Credit Facility consists of a $100 million senior secured five