Attached files

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EX-32.2 - EX-32.2 - Lumos Networks Corp.lmos-20160930xex32_2.htm
EX-32.1 - EX-32.1 - Lumos Networks Corp.lmos-20160930xex32_1.htm
EX-31.2 - EX-31.2 - Lumos Networks Corp.lmos-20160930xex31_2.htm
EX-31.1 - EX-31.1 - Lumos Networks Corp.lmos-20160930xex31_1.htm
EX-10.1 - EX-10.1 - Lumos Networks Corp.lmos-20160930xex10_1.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, 2016

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 23,576,258 shares of the registrant’s common stock outstanding as of the close of business on November 4, 2016.





 

2


 

Part I – FINANCIAL INFORMATION



Item 1.  Financial Statements.

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)











 

 

 

 

 

(In thousands)

September 30, 2016

 

December 31, 2015

Assets

 

 

 

 

 



 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

33,176 

 

$

13,267 

Marketable securities

 

38,790 

 

 

88,811 

Accounts receivable, net of allowance of $1,074  ($1,235 in 2015)

 

24,306 

 

 

20,796 

Other receivables

 

1,606 

 

 

852 

Income tax receivable

 

447 

 

 

568 

Prepaid expenses and other

 

5,614 

 

 

7,215 

Total Current Assets

 

103,939 

 

 

131,509 



 

 

 

 

 

Securities and Investments

 

1,501 

 

 

1,180 



 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land and buildings

 

24,134 

 

 

23,019 

Network plant and equipment

 

713,754 

 

 

624,360 

Furniture, fixtures and other equipment

 

51,117 

 

 

48,266 

Total in service

 

789,005 

 

 

695,645 

Under construction

 

26,217 

 

 

51,663 



 

 

 

 

 



 

815,222 

 

 

747,308 

Less accumulated depreciation and amortization

 

283,167 

 

 

248,364 



 

 

 

 

 

Total Property, Plant and Equipment, net

 

532,055 

 

 

498,944 



 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

100,297 

 

 

100,297 

Other intangibles, less accumulated amortization of $96,823  ($94,892 in 2015)

 

9,147 

 

 

11,078 

Deferred charges and other assets

 

6,765 

 

 

2,364 

Total Other Assets

 

116,209 

 

 

113,739 



 

 

 

 

 

Total Assets

$

753,704 

 

$

745,372 



 

 

 

 

 









 

 

 

 

 

 

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, 2016

 

December 31, 2015

Liabilities and Equity

 

 

 

 

 



 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

$

12,303 

 

$

10,400 

Accounts payable

 

9,292 

 

 

14,182 

Advance billings and customer deposits

 

14,231 

 

 

13,849 

Accrued compensation

 

1,602 

 

 

1,191 

Accrued operating taxes

 

5,143 

 

 

3,907 

Other accrued liabilities

 

4,642 

 

 

4,974 

Total Current Liabilities

 

47,213 

 

 

48,503 



 

 

 

 

 

Long-term Liabilities

 

 

 

 

 

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

 

457,095 

 

 

456,300 

Retirement benefits

 

16,357 

 

 

17,029 

Deferred income taxes, net

 

91,129 

 

 

89,193 

Other long-term liabilities

 

2,104 

 

 

2,016 

Total Long-term Liabilities

 

566,685 

 

 

564,538 



 

 

 

 

 

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; 23,558 shares issued and 23,539 outstanding (23,005 shares issued and 22,992 shares outstanding in 2015)

 

236 

 

 

230 

Additional paid-in capital

 

179,327 

 

 

171,746 

Treasury stock, 19 shares at cost (13 shares in 2015)

 

(127)

 

 

(103)

Accumulated deficit

 

(29,168)

 

 

(28,541)

Accumulated other comprehensive loss, net of tax

 

(11,306)

 

 

(11,940)

Total Lumos Networks Corp. Stockholders' Equity

 

138,962 

 

 

131,392 

Noncontrolling Interests

 

844 

 

 

939 



 

 

 

 

 

Total Equity

 

139,806 

 

 

132,331 



 

 

 

 

 

Total Liabilities and Equity

$

753,704 

 

$

745,372 



 

 

 

 

 







 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



 

4

 


 

Condensed Consolidated Statements of Operations

Lumos Networks Corp.

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands, except per share amounts)

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

$

51,771 

 

$

50,969 

 

$

155,013 

 

$

152,417 



 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue, exclusive of depreciation and amortization shown separately below

 

9,657 

 

 

10,546 

 

 

29,948 

 

 

31,682 

Selling, general and administrative, exclusive of depreciation and amortization shown separately below

 

20,505 

 

 

19,940 

 

 

64,056 

 

 

58,531 

Depreciation and amortization

 

12,739 

 

 

11,803 

 

 

37,028 

 

 

35,112 

Accretion of asset retirement obligations

 

23 

 

 

33 

 

 

91 

 

 

105 

Restructuring charges

 

(384)

 

 

 -

 

 

1,823 

 

 

637 

Total Operating Expenses

 

42,540 

 

 

42,322 

 

 

132,946 

 

 

126,067 

Operating Income

 

9,231 

 

 

8,647 

 

 

22,067 

 

 

26,350 



 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(7,164)

 

 

(5,817)

 

 

(21,165)

 

 

(13,022)

Gain on interest rate swap derivatives

 

 -

 

 

198 

 

 

 -

 

 

445 

Other income (expenses), net

 

48 

 

 

58 

 

 

320 

 

 

(89)

Total Other Expenses, net

 

(7,116)

 

 

(5,561)

 

 

(20,845)

 

 

(12,666)

Income Before Income Taxes

 

2,115 

 

 

3,086 

 

 

1,222 

 

 

13,684 



 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

1,046 

 

 

1,774 

 

 

1,712 

 

 

6,221 



 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

1,069 

 

 

1,312 

 

 

(490)

 

 

7,463 



 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Noncontrolling Interests

 

(46)

 

 

(33)

 

 

(137)

 

 

(111)



 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Lumos Networks Corp.

$

1,023 

 

$

1,279 

 

$

(627)

 

$

7,352 



 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share

$

0.04 

 

$

0.06 

 

$

(0.03)

 

$

0.32 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

 


 

Condensed Consolidated Statements of Comprehensive Income (Loss)

Lumos Networks Corp.

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

2016

 

2015

 

2016

 

2015

Net Income (Loss)

$

1,069 

 

$

1,312 

 

$

(490)

 

$

7,463 



 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of actuarial loss from defined benefit plans included in net income (see Note 2)

 

338 

 

 

337 

 

 

1,013 

 

 

1,012 

Unrealized holding (loss) gain on available-for-sale marketable securities

 

(11)

 

 

20 

 

 

27 

 

 

31 

Income Taxes

 

(128)

 

 

(139)

 

 

(406)

 

 

(406)



 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income, Net of Tax

 

199 

 

 

218 

 

 

634 

 

 

637 



 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

1,268 

 

 

1,530 

 

 

144 

 

 

8,100 



 

 

 

 

 

 

 

 

 

 

 

Less:  Comprehensive Income Attributable to Noncontrolling Interests

 

(46)

 

 

(33)

 

 

(137)

 

 

(111)



 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Lumos Networks Corp.

$

1,222 

 

$

1,497 

 

$

 

$

7,989 



 

 

 

 

 

 

 

 

 

 

 



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)

2016

 

2015

Cash Flows from Operating Activities:

 

 

 

 

 

Net (Loss) Income

$

(490)

 

$

7,463 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

35,097 

 

 

31,035 

Amortization

 

1,931 

 

 

4,077 

Accretion of asset retirement obligations

 

91 

 

 

105 

Deferred income taxes

 

1,374 

 

 

5,802 

Gain on interest rate swap derivatives

 

 -

 

 

(445)

Equity-based compensation expense

 

8,477 

 

 

4,236 

Amortization of debt discounts and issuance costs

 

3,345 

 

 

1,648 

Retirement benefits, net of cash contributions and distributions

 

340 

 

 

(171)

Other

 

649 

 

 

206 

Changes in assets and liabilities from operations:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(3,732)

 

 

836 

Increase in other assets

 

(3,484)

 

 

(2,689)

Changes in income taxes

 

28 

 

 

(24)

Increase (decrease) in accounts payable

 

436 

 

 

(2,776)

Increase in other current liabilities

 

1,725 

 

 

2,702 

Net Cash Provided by Operating Activities

 

45,787 

 

 

52,005 



 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(65,280)

 

 

(80,118)

Broadband network expansion funded by stimulus grant

 

 -

 

 

(2,578)

Purchases of available-for-sale marketable securities

 

(57,142)

 

 

(74,088)

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

 

107,075 

 

 

29,903 

Change in restricted cash

 

 -

 

 

3,838 

Cash reimbursement received from broadband stimulus grant

 

 -

 

 

3,838 

Net Cash Used in Investing Activities

 

(15,347)

 

 

(119,205)



 

 

 

 

 

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

 

(6,024)

 

 

(45,953)

Capital distribution to noncontrolling interests

 

(232)

 

 

 -

Cash dividends paid on common stock

 

 -

 

 

(3,152)

Principal payments under capital lease obligations

 

(2,551)

 

 

(2,378)

Proceeds from stock option exercises and employee stock purchase plan

 

630 

 

 

293 

Repurchases of common stock to settle tax withholding obligations on employee stock awards

 

(2,354)

 

 

(295)

Other

 

 -

 

 

28 

Net Cash (Used in) Provided by Financing Activities

 

(10,531)

 

 

116,851 

Increase in cash and cash equivalents

 

19,909 

 

 

49,651 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning of Period

 

13,267 

 

 

14,140 



 

 

 

 

 

End of Period

$

33,176 

 

$

63,791 



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.

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, 2016 and three and nine months ended September 30, 2015 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, 2016 are not necessarily indicative of the results to be expected for the full year.  The accompanying condensed consolidated balance sheet as of December 31, 2015 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, 2015. Certain presentation changes have been made within the operating expense line items on the condensed consolidated statements of operations and prior period amounts have been reclassified in order to conform to the current year presentation. Specifically, the previously reported line item “network access costs” has been removed and the new line item “cost of revenue” has been added along with the necessary operating expense reclassifications. These reclassifications were not the result of an error and have no effect on previously reported operating income, net income or earnings per share.



Accounting Estimates

The preparation of condensed 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 condensed 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 and customer credits, deferred tax assets, marketable securities, asset retirement obligations, stock warrants and equity-based compensation, goodwill impairment assessments, reserves for employee benefit obligations and income tax uncertainties.

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.    

8

 


 

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, 2016 and December 31, 2015 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, 2016 and December 31, 2015.

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 advance payment for certain services.  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 in the condensed consolidated statements of operations.  Bad debt expense for the three months ended September 30, 2016 and 2015 was less than $0.1 million and $0.2 million, respectively, and bad debt expense for the nine months ended September 30, 2016 and 2015 was $0.2 million and $0.4 million, respectively.  The Company’s allowance for doubtful accounts and customer credits was $1.1 million and $1.2 million as of September 30, 2016 and December 31, 2015, respectively.

The following table presents a roll-forward of the Company’s allowance for doubtful accounts and customer credits from December 31, 2015 to September 30, 2016: 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Additions

 

 

 

 

 

 

(In thousands)

 

December 31, 2015

 

Charged to Expense

 

Charged to Other Accounts

 

Deductions

 

September 30, 2016

Allowance for doubtful accounts and customer credits

 

$

1,235 

 

$

213 

 

$

(76)

 

$

(298)

 

$

1,074 



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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35.  Impairment is 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, 2016 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.  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 an indefeasible right of use agreement, is included with depreciation expense.

9

 


 

Intangibles with a finite life are classified as other intangibles on the condensed consolidated balance sheets.  At September 30, 2016 and December 31, 2015, other intangibles were comprised of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

September 30, 2016

 

December 31, 2015

(Dollars in thousands)

Estimated Life

 

Gross
Amount

 

 

Accumulated Amortization

 

Gross Amount

 

Accumulated Amortization

Customer relationships

6 to 15 yrs

 

$

103,108 

 

 

$

(94,860)

 

$

103,108 

 

$

(93,051)

Trademarks and franchise rights

10 to 15 yrs

 

 

2,862 

 

 

 

(1,963)

 

 

2,862 

 

 

(1,841)

Total

 

 

$

105,970 

 

 

$

(96,823)

 

$

105,970 

 

$

(94,892)



Included in the above amounts are indefinite-lived intangible assets of $0.3 million, which are not subject to amortization. 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 three or nine months ended September 30, 2016Amortization expense for the three months ended September 30, 2016 and 2015 was $0.6 million and $0.7 million, respectively, and amortization for the nine months ended September 30, 2016 and 2015 was $1.9 million and $4.1 million, respectively.

Amortization expense for the remainder of 2016 and for the next five years is expected to be as follows:





 

 

 

 

 

 

 

 

 

(In thousands)

 

Customer Relationships

 

Trademarks and Franchise Rights

 

Total

Remainder of 2016

 

$

603 

 

$

41 

 

$

644 

2017

 

 

2,093 

 

 

163 

 

 

2,256 

2018

 

 

1,781 

 

 

163 

 

 

1,944 

2019

 

 

1,513 

 

 

152 

 

 

1,665 

2020

 

 

1,146 

 

 

48 

 

 

1,194 

2021

 

 

1,112 

 

 

 

 

1,113 



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, 2016.



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.  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, 2016 and 2015, the components of the Company’s net periodic benefit cost (income) for the Pension Plan were as follows:





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

2016

 

2015

 

2016

 

2015

Service cost

$

 -

 

$

 -

 

$

 -

 

$

 -

Interest cost

 

674 

 

 

666 

 

 

2,022 

 

 

1,998 

Expected return on plan assets

 

(884)

 

 

(1,028)

 

 

(2,652)

 

 

(3,084)

Amortization of loss

 

262 

 

 

248 

 

 

786 

 

 

743 

Net periodic benefit cost (income)

$

52 

 

$

(114)

 

$

156 

 

$

(343)

10

 


 



Pension Plan assets were valued at $54.8 million and $53.9 million at September 30, 2016 and December 31, 2015, respectively.  No funding contributions were made during the three or nine months ended September 30, 2016, and the Company does not expect to make a funding contribution during the remainder of 2016.

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 did not incur any significant costs associated with these plans during the three or nine months ended September 30, 2016 or 2015.

The Company recognized expense for certain nonqualified pension plans for each of the three months ended September 30, 2016 and 2015 of $0.1 million, and less than $0.1 million of this expense for each of these periods relates to the amortization of actuarial loss.  Expense for nonqualified pension plans for each of the nine months ended September 30, 2016 and 2015 was $0.4 million, and $0.2 million and $0.3 million of this expense for each period, respectively, relates to the amortization of actuarial loss.

The gross amount reclassified out of accumulated other comprehensive loss related to amortization of actuarial losses for retirement plans for each of the three months ended September 30, 2016 and 2015 was $0.3 million and $1.0 million for each of the nine months ended September 30, 2016 and 2015,  all of which has been reclassified to selling, general and administrative on the condensed consolidated statements of operations. Income taxes associated with these reclassifications were $0.1 million for each of the three months ended September 30, 2016 and 2015 and $0.4 million for each of the nine months ended September 30, 2016 and 2015.  

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.    

Total equity-based compensation expense related to all of the share-based awards, annual employee bonuses paid in the form of immediately vested shares and the Company’s 401(k) matching contributions was $1.7 million and $1.5 million for the three months ended September 30, 2016 and 2015, respectively, and $8.5 million and $4.2 million for the nine months ended September 30, 2016 and 2015, respectively, which amounts are included in selling, general and administrative expenses on the condensed consolidated statements of operations

Future charges for equity-based compensation related to instruments outstanding at September 30, 2016 are estimated to be $1.1 million for the remainder of 2016, $3.4 million in 2017, $1.5 million in 2018, $0.2 million in 2019, 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 Accounting Standards Update (“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) -  Deferral of the

11

 


 

Effective Date, 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.  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Gross versus Net) (“ASU 2016-08”), which clarifies implementation guidance on principal versus agent considerations.  In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing (“ASU 2016-10”), which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09.  In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which addresses narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in ASU 2016-12 provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The Company will implement the provisions of ASU 2014-09, ASU 2016-08, ASU 2016-10, and ASU 2016-12 as of January 1, 2018. 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 its consolidated financial statements and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. The Company does not expect the future adoption of ASU 2016-01 to have a material impact on its consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which will replace most existing lease guidance in U.S. GAAP when it becomes effective.  ASU 2016-02 requires an entity to recognize most leases, including operating leases, on the consolidated balance sheet of the lessee. ASU 2016-02 is effective for public business entities for annual reporting periods beginning after December 15, 2018, with early adoption permitted.  ASU 2016-02 requires the use of a modified retrospective transition method with elective reliefs.  The Company is still evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplifies the accounting for share-based payment transactions.  Among other things, ASU 2016-09 provides for (i) the simplification of accounting presentation of excess tax benefits and tax deficiencies, (ii) an accounting policy election regarding forfeitures to use an estimate or account for when incurred, and (iii) simplification of cash flow presentation for statutory tax rate withholding. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, with early adoption permitted.  The transition method required by ASU 2016-09 varies by amendment. The Company is still evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and disclosures.



12

 


 

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, 2016 and December 31, 2015 are summarized below:







 

 

 

 

 

(In thousands)

September 30, 2016

 

December 31, 2015

Cash equivalents:

 

 

 

 

 

Money market mutual funds

$

6,352 

 

$

6,746 

Commercial paper

 

11,970 

 

 

1,000 

Municipal bonds

 

1,860 

 

 

 -

Corporate debt securities

 

1,149 

 

 

1,055 

Total cash equivalents

 

21,331 

 

 

8,801 

Marketable securities:

 

 

 

 

 

Variable rate demand notes

 

13,395 

 

 

 -

Commercial paper

 

9,955 

 

 

8,684 

Debt securities issued by U.S. Government agencies

 

 -

 

 

35,155 

Corporate debt securities

 

15,440 

 

 

44,972 

Total marketable securities, available-for-sale

 

38,790 

 

 

88,811 



 

 

 

 

 

Total cash equivalents and marketable securities

$

60,121 

 

$

97,612 

At September 30, 2016 and December 31, 2015, 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, 2016:





 

 

(In thousands)

Total

Due in one year or less

$

25,395 

Due after one year through five years

 

1,400 

Due after five years through ten years

 

5,195 

Due after ten years

 

6,800 

Total debt securities

$

38,790 



The Company received total proceeds of $32.3 million and $11.9 million from the sale or maturity of available-for-sale marketable securities during the three months ended September 30, 2016 and 2015, respectively, and $107.1 million and $29.9 million during the nine months ended September 30, 2016 and 2015, respectively.  The Company did not recognize any material realized net gains or losses and net unrealized holding gains or losses on available-for-sale marketable securities were less than $0.1 million for each of the three and nine months ended September 30, 2016 and 2015, 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-

13

 


 

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 the Company’s 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.



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, 2016:

Operating revenues

 

$

31,373 

 

 

15,863 

 

 

4,535 

 

 

 -

 

$

51,771 

Cost of revenue

 

 

4,537 

 

 

5,120 

 

 

 -

 

 

 -

 

 

9,657 

Gross profit

 

 

26,836 

 

 

10,743 

 

 

4,535 

 

 

 -

 

 

N/A

Direct operating and selling costs

 

 

2,014 

 

 

1,227 

 

 

175 

 

 

 -

 

 

3,416 

Indirect operating costs

 

 

6,717 

 

 

2,354 

 

 

50 

 

 

 -

 

 

9,121 

Corporate general and administrative costs

 

 

3,538 

 

 

1,439 

 

 

340 

 

 

2,651 

 

 

7,968 

Adjusted EBITDA(1),(2)

 

 

14,567 

 

 

5,723 

 

 

3,970 

 

 

 -

 

 

N/A

Capital expenditures

 

 

18,197 

 

 

2,565 

 

 

 -

 

 

(673)

 

 

20,089 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2016:

Operating revenues

 

$

91,958 

 

 

47,840 

 

 

15,215 

 

 

 -

 

$

155,013 

Cost of revenue

 

 

13,669 

 

 

16,279 

 

 

 -

 

 

 -

 

 

29,948 

Gross profit

 

 

78,289 

 

 

31,561 

 

 

15,215 

 

 

 -

 

 

N/A

Direct operating and selling costs

 

 

5,600 

 

 

3,509 

 

 

492 

 

 

 -

 

 

9,601 

Indirect operating costs

 

 

19,470 

 

 

7,031 

 

 

156 

 

 

 -

 

 

26,657 

Corporate general and administrative costs

 

 

11,512 

 

 

4,810 

 

 

1,334 

 

 

10,142 

 

 

27,798 

Adjusted EBITDA(1),(2)

 

 

41,707 

 

 

16,211 

 

 

13,233 

 

 

 -

 

 

N/A

Capital expenditures

 

 

60,379 

 

 

6,988 

 

 

 -

 

 

(2,087)

 

 

65,280 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 

Cost of revenue

 

 

4,658 

 

 

5,888 

 

 

 -

 

 

 -

 

 

10,546 

Gross profit

 

 

23,965 

 

 

10,672 

 

 

5,786 

 

 

 -

 

 

N/A

Direct operating and selling costs

 

 

1,465 

 

 

1,329 

 

 

177 

 

 

 -

 

 

2,971 

Indirect operating costs

 

 

6,606 

 

 

2,586 

 

 

58 

 

 

 -

 

 

9,250 

Corporate general and administrative costs

 

 

3,679 

 

 

1,737 

 

 

512 

 

 

1,791 

 

 

7,719 

Adjusted EBITDA(1),(2)

 

 

12,215 

 

 

5,020 

 

 

5,039 

 

 

 -

 

 

N/A

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 

Cost of revenue

 

 

12,957 

 

 

18,725 

 

 

 -

 

 

 -

 

 

31,682 

Gross profit

 

 

71,522 

 

 

32,110 

 

 

17,103 

 

 

 -

 

 

N/A

Direct operating and selling costs

 

 

4,449 

 

 

3,535 

 

 

511 

 

 

 -

 

 

8,495 

Indirect operating costs

 

 

19,379 

 

 

7,560 

 

 

170 

 

 

 -

 

 

27,109 

Corporate general and administrative costs

 

 

11,015 

 

 

5,193 

 

 

1,471 

 

 

5,248 

 

 

22,927 

Adjusted EBITDA(1),(2)

 

 

36,679 

 

 

15,822 

 

 

14,951 

 

 

 -

 

 

N/A

Capital expenditures

 

 

72,055 

 

 

6,924 

 

 

 -

 

 

1,139 

 

 

80,118 



14

 


 

(1)     Adjusted EBITDA is used by the Company’s CODMs to evaluate performance. Adjusted EBITDA, as defined by the Company, is 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, amortization of actuarial losses on retirement plans, employee separation charges, restructuring-related charges, acquisition and separation related charges, gain or loss on settlements and gain or loss on interest rate swap derivatives.

(2)In the first quarter of 2016, the Company refined its methodology for allocating certain operating costs to the segments, resulting in immaterial changes to previously reported segment Adjusted EBITDA amounts for the three and nine months ended September 30, 2015.

N/A – Not Applicable (as totals are not presented in the consolidated statements of operations)



The Company’s CODMs do not currently review total assets by segment since the assets are centrally managed and some of the assets are shared by the segments.  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.



The following table provides a reconciliation of the total of the Company’s reportable segments measure of profit to the Company’s consolidated income before income taxes for the three and nine months ended September 30, 2016 and 2015:









 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

 

2016

 

2015

 

 

2016

2015

Data Adjusted EBITDA

 

$

14,567 

 

$

12,215 

 

$

41,707 

 

$

36,679 

R&SB Adjusted EBITDA

 

 

5,723 

 

 

5,020 

 

 

16,211 

 

 

15,822 

RLEC Access Adjusted EBITDA

 

 

3,970 

 

 

5,039 

 

 

13,233 

 

 

14,951 

Total reportable segments measure of profit

 

 

24,260 

 

 

22,274 

 

 

71,151 

 

 

67,452 

Interest expense

 

 

(7,164)

 

 

(5,817)

 

 

(21,165)

 

 

(13,022)

Gain on interest rate swap derivatives

 

 

 -

 

 

198 

 

 

 -

 

 

445 

Other income (expense), net

 

 

48 

 

 

58 

 

 

320 

 

 

(89)

Depreciation and amortization and accretion of asset retirement obligations

 

 

(12,762)

 

 

(11,836)

 

 

(37,119)

 

 

(35,217)

Amortization of actuarial losses

 

 

(338)

 

 

(337)

 

 

(1,013)

 

 

(1,012)

Equity-based compensation

 

 

(1,661)

 

 

(1,454)

 

 

(8,477)

 

 

(4,236)

Restructuring charges

 

 

384 

 

 

 -

 

 

(1,823)

 

 

(637)

Acquisition and separation related charges

 

 

(652)

 

 

 -

 

 

(652)

 

 

 -

Income before income taxes

 

$

2,115 

 

$

3,086 

 

$

1,222 

 

$

13,684 





The Company does not currently have any single customer that individually accounted for more than 10% of the Company’s total operating revenues. The Company’s five largest carrier customers, in the aggregate, accounted for 32% of  the Company’s total operating revenues for each of the three and nine months ended September 30, 2016 and 31% of the Company’s total operating revenues for each of the three and nine months ended September 30, 2015. Revenues from these carrier customers were derived primarily from network access, data transport and FTTC services.
 

 

15

 


 

Note 5.  Long-Term Debt

As of September 30, 2016 and December 31, 2015, the Company’s outstanding long-term debt consisted of the following: 





 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015

(In thousands)

 

Principal

 

Unamortized Discount and Debt Issuance Costs

 

Principal

 

Unamortized Discount and Debt Issuance Costs

Credit Facility

 

$

342,393 

 

$

3,634 

 

$

348,415 

 

$

4,705 

8% Notes due 2022

 

 

150,000 

 

 

27,333 

 

 

150,000 

 

 

29,607 

Capital lease obligations

 

 

7,972