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EX-32.2 - EX-32.2 - Lumos Networks Corp.lmos-20170930xex32_2.htm
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EX-31.2 - EX-31.2 - Lumos Networks Corp.lmos-20170930xex31_2.htm
EX-31.1 - EX-31.1 - Lumos Networks Corp.lmos-20170930xex31_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, 2017

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”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



 

 

 

Large accelerated filer 


Emerging growth company  

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

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

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

There were 23,917,350 shares of the registrant’s common stock outstanding as of the close of business on November 3, 2017.





 

 


 

LUMOS NETWORKS CORP.
2017 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

Part I – FINANCIAL INFORMATION





PART II – OTHER INFORMATION





Signatures





 

2

 


 

Part I – FINANCIAL INFORMATION



Item 1.  Financial Statements.

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)











 

 

 

 

 

(In thousands)

September 30, 2017

 

December 31, 2016

Assets

 

 

 

 

 



 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

43,582 

 

$

33,575 

Marketable securities

 

 -

 

 

38,081 

Accounts receivable, net of allowance of $1,295  ($942 in 2016)

 

22,424 

 

 

22,609 

Other receivables

 

559 

 

 

753 

Income tax receivable

 

30 

 

 

459 

Prepaid expenses and other

 

6,804 

 

 

5,028 

Total Current Assets

 

73,399 

 

 

100,505 



 

 

 

 

 

Securities and Investments

 

1,643 

 

 

1,479 



 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land and buildings

 

25,667 

 

 

24,867 

Network plant and equipment

 

770,594 

 

 

733,154 

Furniture, fixtures and other equipment

 

55,190 

 

 

52,030 

Total in service

 

851,451 

 

 

810,051 

Under construction

 

19,682 

 

 

22,678 



 

 

 

 

 



 

871,133 

 

 

832,729 

Less accumulated depreciation and amortization

 

336,193 

 

 

296,441 



 

 

 

 

 

Total Property, Plant and Equipment, net

 

534,940 

 

 

536,288 



 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

125,667 

 

 

100,297 

Other intangibles, less accumulated amortization of $101,008  ($97,467 in 2016)

 

18,092 

 

 

8,503 

Deferred charges and other assets

 

5,273 

 

 

6,300 

Total Other Assets

 

149,032 

 

 

115,100 



 

 

 

 

 

Total Assets

$

759,014 

 

$

753,372 



 

 

 

 

 









 

 

 

 

 

 

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, 2017

 

December 31, 2016

Liabilities and Equity

 

 

 

 

 



 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

$

73,825 

 

$

13,530 

Accounts payable

 

7,076 

 

 

8,607 

Advance billings and customer deposits

 

14,275 

 

 

14,140 

Accrued compensation

 

1,665 

 

 

1,491 

Accrued operating taxes

 

5,999 

 

 

4,518 

Other accrued liabilities

 

10,034 

 

 

5,000 

Total Current Liabilities

 

112,874 

 

 

47,286 



 

 

 

 

 

Long-term Liabilities

 

 

 

 

 

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

 

388,027 

 

 

454,885 

Retirement benefits

 

15,227 

 

 

16,029 

Deferred income taxes, net

 

93,624 

 

 

96,988 

Other long-term liabilities

 

8,468 

 

 

2,124 

Total Long-term Liabilities

 

505,346 

 

 

570,026 



 

 

 

 

 

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; 24,059 shares issued and 23,936 outstanding (23,607 shares issued and 23,605 shares outstanding in 2016)

 

241 

 

 

236 

Additional paid-in capital

 

184,930 

 

 

175,008 

Treasury stock, 123 shares at cost (2 shares in 2016)

 

(2,178)

 

 

(2)

Accumulated deficit

 

(32,725)

 

 

(29,064)

Accumulated other comprehensive loss, net of tax

 

(10,399)

 

 

(11,004)

Total Lumos Networks Corp. Stockholders' Equity

 

139,869 

 

 

135,174 

Noncontrolling Interests

 

925 

 

 

886 



 

 

 

 

 

Total Equity

 

140,794 

 

 

136,060 



 

 

 

 

 

Total Liabilities and Equity

$

759,014 

 

$

753,372 



 

 

 

 

 







 

 

 

 

 

 

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)

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

$

55,610 

 

$

51,771 

 

$

166,892 

 

$

155,013 



 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

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

 

10,042 

 

 

9,657 

 

 

30,978 

 

 

29,948 

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

 

23,369 

 

 

20,505 

 

 

76,394 

 

 

64,056 

Depreciation and amortization

 

14,456 

 

 

12,739 

 

 

43,640 

 

 

37,028 

Accretion of asset retirement obligations

 

27 

 

 

23 

 

 

76 

 

 

91 

Restructuring charges

 

 -

 

 

(384)

 

 

34 

 

 

1,823 

Change in fair value of contingent consideration obligations

 

100 

 

 

 -

 

 

700 

 

 

 -

Total Operating Expenses

 

47,994 

 

 

42,540 

 

 

151,822 

 

 

132,946 

Operating Income

 

7,616 

 

 

9,231 

 

 

15,070 

 

 

22,067 



 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(7,771)

 

 

(7,164)

 

 

(22,756)

 

 

(21,165)

Other income, net

 

 

 

48 

 

 

647 

 

 

320 

Total Other Expenses, net

 

(7,763)

 

 

(7,116)

 

 

(22,109)

 

 

(20,845)

(Loss) Income Before Income Taxes

 

(147)

 

 

2,115 

 

 

(7,039)

 

 

1,222 



 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense (Benefit)

 

335 

 

 

1,046 

 

 

(1,838)

 

 

1,712 



 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income

 

(482)

 

 

1,069 

 

 

(5,201)

 

 

(490)



 

 

 

 

 

 

 

 

 

 

 

Net Loss (Income) Attributable to Noncontrolling Interests

 

29 

 

 

(46)

 

 

(39)

 

 

(137)



 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income Attributable to Lumos Networks Corp.

$

(453)

 

$

1,023 

 

$

(5,240)

 

$

(627)



 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) earnings per share

$

(0.02)

 

$

0.04 

 

$

(0.23)

 

$

(0.03)



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

 


 

Condensed Consolidated Statements of Comprehensive (Loss) Income

Lumos Networks Corp.

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

2017

 

2016

 

2017

 

2016

Net (Loss) Income

$

(482)

 

$

1,069 

 

$

(5,201)

 

$

(490)



 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

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

 

326 

 

 

338 

 

 

977 

 

 

1,013 

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

 

(1)

 

 

(11)

 

 

 

 

27 

Income Taxes

 

(126)

 

 

(128)

 

 

(380)

 

 

(406)



 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income, Net of Tax

 

199 

 

 

199 

 

 

605 

 

 

634 



 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive (Loss) Income

 

(283)

 

 

1,268 

 

 

(4,596)

 

 

144 



 

 

 

 

 

 

 

 

 

 

 

Less:  Comprehensive Loss (Income) Attributable to Noncontrolling Interests

 

29 

 

 

(46)

 

 

(39)

 

 

(137)



 

 

 

 

 

 

 

 

 

 

 

Comprehensive (Loss) Income Attributable to Lumos Networks Corp.

$

(254)

 

$

1,222 

 

$

(4,635)

 

$



 

 

 

 

 

 

 

 

 

 

 



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)

2017

 

2016

Cash Flows from Operating Activities:

 

 

 

 

 

Net Loss

$

(5,201)

 

$

(490)

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

 

 

 

 

 

Depreciation

 

40,099 

 

 

35,097 

Amortization

 

3,541 

 

 

1,931 

Accretion of asset retirement obligations

 

76 

 

 

91 

Change in fair value of contingent consideration obligations

 

700 

 

 

 -

Deferred income taxes

 

(1,838)

 

 

1,374 

Equity-based compensation expense

 

9,152 

 

 

8,477 

Amortization of debt discounts and issuance costs

 

3,586 

 

 

3,345 

Retirement benefits, net of cash contributions and distributions

 

175 

 

 

340 

Other

 

347 

 

 

649 

Changes in assets and liabilities from operations:

 

 

 

 

 

Decrease (increase) in accounts receivable

 

1,758 

 

 

(3,732)

Increase in other assets

 

(416)

 

 

(3,728)

Changes in income taxes

 

429 

 

 

28 

Increase in accounts payable

 

163 

 

 

436 

Increase in other current liabilities

 

397 

 

 

1,299 

Increase in deferred revenues

 

1,365 

 

 

670 

Net Cash Provided by Operating Activities

 

54,333 

 

 

45,787 



 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(36,947)

 

 

(65,280)

Acquisition of Clarity Communications, LLC, net of cash acquired

 

(9,961)

 

 

 -

Acquisition of DC74, LLC, net of cash acquired

 

(23,528)

 

 

 -

Purchases of available-for-sale marketable securities

 

(4,000)

 

 

(57,142)

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

 

42,096 

 

 

107,075 

Net Cash Used in Investing Activities

 

(32,340)

 

 

(15,347)



 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Principal payments on senior secured term loans

 

(9,774)

 

 

(6,024)

Capital distribution to noncontrolling interests

 

 -

 

 

(232)

Principal payments under capital lease obligations

 

(377)

 

 

(2,551)

Proceeds from stock option exercises and employee stock purchase plan

 

1,057 

 

 

630 

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

 

(2,892)

 

 

(2,354)

Net Cash Used in Financing Activities

 

(11,986)

 

 

(10,531)

Increase in cash and cash equivalents

 

10,007 

 

 

19,909 

Cash and Cash Equivalents:

 

 

 

 

 

Beginning of Period

 

33,575 

 

 

13,267 



 

 

 

 

 

End of Period

$

43,582 

 

$

33,176 



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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 offering end-to-end connectivity in 26 markets in Virginia, West Virginia, North Carolina, Pennsylvania, Maryland, Ohio and Kentucky. The Company serves carrier, enterprise 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.

In January 2017, the Company completed its acquisitions of Clarity Communications, LLC and DC74, LLC, for total consideration of up to approximately $15 million and $29.5 million, respectively, which expanded the Company’s operations into additional states in the southeastern region of the United States. See Note 4. Business Acquisitions for more information.

On February 18, 2017, the Company entered into a definitive agreement (“Merger Agreement”) by and among the Company, MTN Infrastructure TopCo, Inc. (“Parent”) and MTN Infrastructure BidCo, Inc. (“Merger Sub”), pursuant to which the Company will be acquired by EQT Infrastructure investment strategy (“EQT Infrastructure”), subject to stockholder approval, regulatory approval and other customary closing conditions (“the Merger” or “EQT Merger”). Pursuant to the Merger Agreement, each outstanding share of common stock of the Company immediately prior to the effective time of the Merger shall be automatically converted into the right to receive $18.00 in cash. See Note 3. EQT Merger for more information.



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, 2017 and 2016 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, 2017 are not necessarily indicative of the results to be expected for the full year.  The accompanying condensed consolidated balance sheet as of December 31, 2016 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, 2016. 



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, the valuation of deferred tax assets and/or liabilities, asset retirement obligations, stock warrants and equity-based compensation, goodwill impairment assessments, contingent consideration obligations, reserves for employee benefit obligations and income tax uncertainties.

Changes in Accounting Principle

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”) in January 2017, which simplifies the accounting for share-based payment transactions and is effective for public companies for annual reporting periods beginning after December 15, 2016.  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. The adoption of ASU 2016-09, which resulted in the recognition of excess tax benefits through the condensed consolidated statement of operations and an accounting policy election made by the Company to eliminate the use of a forfeiture estimate and recognize forfeitures as they occur, resulted in the recognition of a cumulative effect

8

 


 

adjustment with a $1.6 million impact to accumulated deficit and a $1.9 million total impact to stockholders’ equity and deferred income taxes. There was no material impact on the Company’s condensed consolidated statement of cash flows, the condensed consolidated statement of operations, or net income (loss) or earnings (loss) per share. The adoption of the accounting policy election to record forfeitures as incurred and the recognition of excess tax benefits in the condensed consolidated statement of operations may increase the volatility of net income (loss) in future periods.  

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. 

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 did not have any cash equivalents or other marketable securities as of September 30, 2017. The Company’s marketable securities at December 31, 2016 consist of debt securities not classified as cash equivalents, which were classified as available-for-sale securities as of December 31, 2016.

Trade Accounts Receivable

The Company sells its services to other communication carriers and to enterprise and residential customers primarily in Virginia and West Virginia and portions of other states in the Mid-Atlantic region of the United States.  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, 2017 and 2016 was $0.1 million and less than $0.1 million, respectively. Bad debt expense for the nine months ended September 30, 2017 and 2016 was $0.3 million and  $0.2 million, respectively.  The Company’s allowance for doubtful accounts and customer credits was $1.3 million and $0.9 million as of September 30, 2017 and December 31, 2016, respectively.

The following table presents a roll-forward of the Company’s allowance for doubtful accounts and customer credits from December 31, 2016 to September 30, 2017: 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Additions

 

 

 

 

 

 

(In thousands)

 

December 31, 2016

 

Charged to Expense

 

Charged to Other Accounts

 

Deductions

 

September 30, 2017

Allowance for doubtful accounts and customer credits

 

$

942 

 

$

329 

 

$

254 

 

$

(230)

 

$

1,295 



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 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, 2017 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 recorded 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

9

 


 

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.

Intangibles with a finite life are classified as other intangibles on the condensed consolidated balance sheets.  At September 30, 2017 and December 31, 2016, other intangibles were comprised of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

September 30, 2017

 

December 31, 2016

(Dollars in thousands)

Estimated Life

 

Gross
Amount

 

Accumulated Amortization

 

Gross

Amount

 

Accumulated Amortization

Customer relationships

6 to 15 yrs

 

$

115,808 

 

$

(98,794)

 

$

103,108 

 

$

(95,463)

Trademarks and franchise rights

4 to 15 yrs

 

 

3,262 

 

 

(2,206)

 

 

2,862 

 

 

(2,004)

Non-compete Agreements

2 to 3 yrs

 

 

30 

 

 

(8)

 

 

 -

 

 

 -

Total

 

 

$

119,100 

 

$

(101,008)

 

$

105,970 

 

$

(97,467)



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 Company generally amortizes certain customer relationship intangibles and some acquired trademarks 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, 2017Amortization expense for the three months ended September 30, 2017 and 2016 was $1.2 million and $0.6 million, respectively, and amortization expense for the nine months ended September 30, 2017 and 2016 was $3.5 million and $1.9 million, respectively.

Amortization expense for the remainder of 2017 and for the next five years is expected to be as follows:





 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Customer Relationships

 

Trademarks and Franchise Rights

 

Non-compete Agreements

 

Total

Remainder of 2017

 

$

1,154 

 

$

68 

 

$

 

$

1,226 

2018

 

 

3,727 

 

 

270 

 

 

12 

 

 

4,009 

2019

 

 

3,443 

 

 

247 

 

 

 

 

3,696 

2020

 

 

2,922 

 

 

115 

 

 

 -

 

 

3,037 

2021

 

 

2,531 

 

 

25 

 

 

 -

 

 

2,556 

2022

 

 

1,195 

 

 

 -

 

 

 -

 

 

1,195 



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 with a measurement date of 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, 2017.



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.

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For the three and nine months ended September 30, 2017 and 2016, the components of the Company’s net periodic benefit (income) cost for the Pension Plan were as follows:





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

2017

 

2016

 

2017

 

2016

Service cost

$

 -

 

$

 -

 

$

 -

 

$

 -

Interest cost

 

648 

 

 

674 

 

 

1,944 

 

 

2,022 

Expected return on plan assets

 

(912)

 

 

(884)

 

 

(2,736)

 

 

(2,652)

Amortization of loss

 

236 

 

 

262 

 

 

708 

 

 

786 

Net periodic benefit (income) cost

$

(28)

 

$

52 

 

$

(84)

 

$

156 



Pension Plan assets were valued at $57.2 million and  $55.6 million at September 30, 2017 and December 31, 2016, respectively.  No funding contributions were made during the three or nine months ended September 30, 2017, and the Company does not expect to make a funding contribution during the remainder of 2017.

The Company also provides life insurance benefits for retired employees who 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, 2017 or 2016.

The Company recognized expense for certain nonqualified pension plans for each of the three months ended September 30, 2017 and 2016 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, 2017 and 2016 was $0.4 million, and $0.3 million and $0.2 million of this expense, 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, 2017 and 2016 was $0.3 million, and $1.0 million for each of the nine months ended September 30, 2017 and 2016,  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, 2017 and 2016 and $0.4 million for each of the nine months ended September 30, 2017 and 2016.  

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 sheets.  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 $1.2 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively, and $9.2 million and $8.5 million for the nine months ended September 30, 2017 and 2016, 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, 2017 are estimated to be $1.1 million for the remainder of 2017, $2.1 million in 2018, $0.7 million in 2019 and less than $0.1 million in 2020 and 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.

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·

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 (Topic 606) (“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 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. Finally, in December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with customers, which makes minor corrections or improvements to ASU 2014-09.

The Company has completed its initial impact assessment and is in the process of developing an implementation plan to include any potential process or system changes. Although the full assessment of the impact to the Company’s results of operations, financial position and cash flows as a result of this guidance is ongoing, the Company expects that changes in the timing of and method of recognition for certain non-recurring charges received from customers and allocations of certain contract revenues to products and services may result in additional contract assets and liabilities in the consolidated balance sheet. In addition, the requirement to defer incremental contract acquisition costs, including sales commissions, and recognize such costs over the contract period or expected customer life may result in the recognition of a deferred charge within the consolidated balance sheets and could have the impact of deferring operating expenses. The Company will adopt this new standard as of January 1, 2018 and currently expects to apply the modified retrospective method, which may result in a cumulative effect adjustment as of the date of adoption. Both the Company’s initial assessment and its selected transition method may change depending on the results of the Company’s final assessment of the impact to 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 sheets 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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), which addresses eight classification issues related to the statement of cash flows presentation, with the objective of reducing diversity in practice. The amendments in this ASU provide guidance on the following cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments; 3) contingent consideration payments made after a  business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for

12

 


 

public business entities for annual reporting periods beginning after December 31, 2017, with early adoption permitted.  Although the Company is still evaluating the effect that ASU 2016-15 will have on its statement of cash flow and disclosures, the Company expects the standard will primarily impact the presentation of the earnouts associated with the business acquisitions completed in January 2017. Under ASU 2016-15, the earnouts would be presented in the statement of cash flows as cash outflows for financing activities up to the amount of the original contingent consideration liability and the excess would be classified as cash outflows for operating activities.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the accounting for goodwill impairment by eliminating Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under 2017-04, goodwill will be measured using the difference between the fair value and carrying value of the reporting unit. ASU 2017-04 is effective for public business entities for annual and interim reporting periods beginning after December 31, 2019, with early adoption permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company does not expect the future adoption of ASU 2017-04 to have a material impact on its consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-07, Compensation  Retirement Benefits (Topic 715):  Improving the Presentation of Net Periodic Pension Cost and Periodic Postretirement Benefit Cost (“ASU 2017-07”), which requires the service cost component of net benefit cost to be reported in the same line item as compensation cost on the consolidated statements of operations.  Under ASU 2017-07 all other components of net benefit cost will be reported outside of operating income.  ASU 2017-07 is effective for public business entities for annual and interim reporting periods beginning after December 15, 2017 and retrospective application of the change in income statement presentation is required. Based on current actuarial estimates, the Company estimates the future adoption of ASU 2017-07 would increase operating income by less than $0.5 million for the annual period. However, the calculation of post retirement benefit cost is subject to significant estimates and assumptions and changes in these estimates could result in changes to the impact of ASU 2017-07 on the Company’s operating income when adopted.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which amends the scope of modification accounting for share-based payment arrangements and requires that a description of significant modifications for each period for which an income statement is presented along with the related increase or decrease in expense due to these modifications.  ASU 2017-09 is effective for all public business entities for annual and interim periods beginning after December 15, 2017 and early adoption is permitted at the beginning of an annual period for which interim or annual financial statements have not been issued.  The Company does not expect the future adoption of ASU 2017-09 to have a material impact on its consolidated financial statements and disclosures..  T



Note 3. EQT Merger

On February 18, 2017, the Company entered into the Merger Agreement by and among the Company, Parent and Merger Sub, pursuant to which the Company will be acquired by EQT Infrastructure. Upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of the Parent. As a result of the Merger, Lumos Networks will cease to be a publicly traded company, and the directors of Merger Sub will continue as the directors of the surviving corporation.



At the effective time of the EQT Merger, each outstanding share of the Company’s common stock will be converted automatically into the right to receive $18.00 in cash, which amount the Company refers to as the “Merger Consideration,” without interest and less any applicable withholding taxes.



The completion of the EQT Merger, which is expected to close before the end of November 2017, is subject to the satisfaction or waiver of certain conditions, including (i) the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of common stock of the Company, (ii) the approval of the transaction by the Federal Communications Commission (the “FCC”), (iii) the filing of a voluntary notice with CFIUS and investigative procedures as deemed necessary by the agency, (iv) the provision of all required notices to applicable state public utility commissions and approval in return as required, (v) the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), as amended, (vi) the absence of any proceeding, order or law enjoining or prohibiting the EQT Merger or the other transactions contemplated by the Merger Agreement, (vii) each party’s material performance of its obligations and compliance with its covenants, (viii) the accuracy of each party’s representations and warranties, subject to customary materiality qualifiers, and (ix) the absence of a material adverse effect on the Company. The HSR Act waiting period expired on April 3, 2017. The Company’s stockholders voted to approve the adoption of the Merger Agreement at the Company’s annual meeting of stockholders on May 24, 2017. The Company has received all required regulatory approvals for the EQT Merger.

13

 


 



The consummation of the EQT Merger is not subject to a financing condition, although the funding of the equity financing and the debt financing is subject to the satisfaction of the conditions set forth in the applicable commitment letter under which such financing will be provided. Under the Merger Agreement, if the Merger Agreement is terminated by the Company under specific circumstances, the Company may be required to pay Parent a termination fee of approximately $16.1 million and if the Merger Agreement is terminated by Parent under specific circumstances, the Parent may be required to pay a termination fee of approximately $32.1 million to the Company.

During the three and nine months ended September 30, 2017, the Company incurred $0.5 million and  $3.7 million, respectively, in transaction related charges associated with the EQT Merger, which consist primarily of professional fees incurred from legal and investment banking services, which are included in selling, general and administrative expenses in the condensed consolidated statement of operations.



Note 4. Business Acquisitions

On January 4, 2017, the Company acquired 100% of the membership interests in Clarity Communications, LLC, (“Clarity”), a North Carolina based fiber bandwidth provider, for a total purchase price of up to approximately $15 million, approximately $10 million of which was paid in cash upon closing with the remaining $5 million subject to certain earnout provisions over a two year period following the closing date, which would be accelerated upon a change in control.  The earnout provisions are based upon achievement of certain monthly recurring revenue targets within the two year measurement period and are presented within other long-term liabilities in the Company’s condensed consolidated balance sheets.  Clarity operates a 730 mile fiber network with 75 on-net locations, a majority of which are located in North Carolina, with additional operations in South Carolina, Alabama, Tennessee, and Georgia. The acquisition of Clarity was funded using cash on hand and was considered an asset purchase for tax purposes.



On January 31, 2017, the Company acquired 100% of the membership interests in DC74 LLC, (“DC74”), a Charlotte, North Carolina based data center and managed services provider, for a total purchase price of up to $29.5 million, consisting of approximately $23.5 million paid in cash upon closing and up to $6 million subject to certain earnout provisions over a 12-month period following the closing date, which would vest upon a change in control.  The earnout provisions are based upon achievement of certain monthly recurring revenue targets within the one year measurement period and are presented within other accrued liabilities in the Company’s condensed consolidated balance sheets.  DC74 provides co-location,  bandwidth and cross-connect services in addition to managed services and managed hosting at its three data centers.  The acquisition of DC74 was funded using cash on hand and was considered an asset purchase for tax purposes.



The Company has accounted for the acquisitions of Clarity and DC74 under the acquisition method of accounting, in accordance with FASB ASC 805, Business Combinations, and will account for any measurement period adjustments under ASU 2015-16, Simplifying the Accounting for Measurement Period Adjustments. Under the acquisition method of accounting, the total purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed in connection with the acquisitions based on their estimated fair values.

In the first quarter of 2017, the Company initially recognized the assets acquired and liabilities assumed from the aforementioned acquisitions based on preliminary estimates of their acquisition date fair values. As additional information regarding the acquired assets and assumed liabilities becomes known, management may make additional adjustments to the opening balance sheets of the acquired companies up to the end of the measurement period, which is no longer than a one-year period following the acquisition date. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. No material adjustments were made to these estimates during the three or nine months ended September 30, 2017. Furthermore, as of September 30, 2017, the Company had not completed its fair value analyses and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of certain working capital and non-working capital acquired assets and assumed liabilities, including, but not limited to, the allocations to goodwill and intangible assets, tangible fixed assets and contingent consideration obligations related to its acquisitions of Clarity and DC74. All information presented with respect to working capital and non-working capital acquired assets and assumed liabilities as it relates to these acquisitions is preliminary and subject to revision pending the completion of the fair value analyses.  

The preliminary fair values of the assets acquired and liabilities assumed were determined using the income, cost, and market approaches. The cost and market approaches were used in combination to determine the fair value of the real and personal property and derivations of the income approach were predominantly used in valuing the intangible assets and contingent consideration obligations associated with the earnout provisions.  The weighted average useful life for all acquired assets was 8.9 years and the weighted average useful life by category was 9.0 years for customer relationships, 4.5 years for trademarks and 2.7 years for non-compete agreements.

14

 


 

The following table summarizes the Company's preliminary estimates of the acquisition date fair values of the assets acquired and liabilities assumed from its Clarity and DC74 acquisitions:





 

 

 

 

 

(In thousands)

Clarity Communications, LLC

January 4, 2017

 

DC74, LLC
January 31, 2017

Assets acquired

  

 

 

 

 

Cash

$

625 

 

$

493 

Other Current Assets

 

1,318 

 

 

380 

Property, Plant and Equipment

 

2,819 

 

 

1,684 

Goodwill

 

6,723 

 

 

18,647 

Intangible assets subject to amortization

 

 

 

 

 

Customer relationship intangible

 

4,300 

 

 

8,400 

Trademark intangible

 

200 

 

 

200 

Non-compete agreement intangible

 

20 

 

 

10 

Total intangible assets subject to amortization

 

4,520 

 

 

8,610 

Other Assets

 

34 

 

 

47 

Total assets acquired

 

16,039 

 

 

29,861 

Liabilities assumed

 

 

 

 

 

Current liabilities

 

853 

 

 

445 

Long-term liabilities

 

 -

 

 

495 

Total liabilities assumed

 

853 

 

 

940 

Net assets acquired

 

15,186 

 

 

28,921 

Less cash acquired

 

(625)

 

 

(493)

Net consideration paid

 

14,561 

 

 

28,428 

Less contingent consideration obligations

 

(4,600)

 

 

(4,900)

Net cash consideration paid at closing

$

9,961 

 

$

23,528 



The preliminary goodwill resulting from these acquisitions in the amount of $6.7 million from Clarity and $18.6 million from DC74 are the result of the added network diversity, access to new markets and prospective data customers, operational synergies and the assembled workforce.  Substantially all of the goodwill is expected to be deductible for tax purposes in future periods.  For segment reporting purposes, all of this goodwill was allocated to the Data operating segment.

A roll-forward of the preliminary segmented goodwill from December 31, 2016 to September 30, 2017 is as follows:





 

 

 

 

 

 

 

 

(In thousands)

December 31, 2016

 

Acquisition Additions

 

September 30, 2017

Data

$

90,561 

 

$

25,370 

 

$

115,931 

R&SB

 

9,736 

 

 

 -

 

 

9,736 

RLEC Access

 

 -

 

 

 -

 

 

 -

Total goodwill

$

100,297 

 

$

25,370 

 

$

125,667 



The amounts of Clarity revenue and net loss included in the Company’s condensed consolidated statement of operations for the period January 4, 2017 through September 30, 2017 are $4.9 million and $0.2 million, respectively, and $1.6 million and $0.3 million for the three months ended September 30, 2017, respectively.  The amounts of DC74 revenue and net loss included in the Company’s condensed consolidated statement of operations for the period January 31, 2017 through September 30, 2017 are $4.5 million and $0.2 million, respectively, and $1.7 million and $0.3 million for the three months ended September 30, 2017, respectively.  The pro forma results of the combined operations of the Company and Clarity and DC74 are not materially different from the Company’s presented statement of operations for the three and nine months ended September 30, 2017 and 2016.



In connection with the acquisitions of Clarity and DC74, the Company incurred certain professional fees (i.e., legal, accounting, regulatory, etc.), which have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from  operating activities in the condensed consolidated statement of cash flows. The Company

15

 


 

incurred no transaction costs for each acquisition during the three months ended September 30, 2017 and less than $0.1 million and $0.2 million, for the nine months ended September 30, 2017 in connection with the Clarity and DC74 acquisitions, respectively. 



Note 5.  Cash Equivalents and Marketable Securities

As of September 30, 2017, the Company held no cash equivalents or other marketable securities.  The Company’s cash equivalents and available-for-sale marketable securities reported at fair value as of December 31, 2016 are summarized below:







 

 

(In thousands)

December 31, 2016

Cash equivalents:

 

 

Money market mutual funds

$

6,742 

Corporate debt securities

 

413 

Total cash equivalents

 

7,155 

Marketable securities:

 

 

Variable rate demand notes

 

13,995 

Commercial paper

 

7,370 

Corporate debt securities

 

16,716 

Total marketable securities, available-for-sale

 

38,081 



 

 

Total cash equivalents and marketable securities

$

45,236 



At December 31, 2016, 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 Company received total proceeds of $4.5 million and $32.3 million from the sale or maturity of available-for-sale marketable securities during the three months ended September 30, 2017 and 2016, respectively, and $42.1 million and $107.1 million during the nine months ended September 30, 2017 and 2016, 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, 2017 and 2016.  Unrealized holding gains or losses are included in accumulated other comprehensive loss on the condensed consolidated balance sheets.



16

 


 

Note 6.  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”), data center 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 other states in the Mid-Atlantic region of the United States.

·

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 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, 2017:

Operating revenues

 

$

35,998 

 

$

14,632 

 

$

4,980 

 

$

 -

 

$

55,610 

Cost of revenue

 

 

5,562 

 

 

4,480 

 

 

 -

 

 

 -

 

 

10,042 

Gross profit

 

 

30,436 

 

 

10,152 

 

 

4,980 

 

 

 -

 

 

N/A

Direct operating and selling costs

 

 

2,454 

 

 

1,091 

 

 

155 

 

 

 -

 

 

3,700 

Indirect operating costs

 

 

7,881 

 

 

2,307 

 

 

51 

 

 

 -

 

 

10,239 

Corporate general and administrative costs

 

 

5,188 

 

 

1,604 

 

 

465 

 

 

2,173 

 

 

9,430 

Adjusted EBITDA(1)

 

 

14,913 

 

 

5,150 

 

 

4,309 

 

 

 -

 

 

N/A

Capital expenditures

 

 

10,069 

 

 

1,355 

 

 

 -

 

 

1,326 

 

 

12,750 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017:

Operating revenues

 

$

106,119 

 

$

45,327 

 

$

15,446 

 

$

 -

 

$

166,892 

Cost of revenue

 

 

16,643 

 

 

14,335 

 

 

 -

 

 

 -

 

 

30,978 

Gross profit

 

 

89,476 

 

 

30,992 

 

 

15,446 

 

 

 -

 

 

N/A

Direct operating and selling costs

 

 

6,940 

 

 

3,337 

 

 

472 

 

 

 -

 

 

10,749 

Indirect operating costs

 

 

24,000 

 

 

7,030 

 

 

154 

 

 

 -

 

 

31,184 

Corporate general and administrative costs

 

 

14,211 

 

 

4,694 

 

 

1,341 

 

 

14,215 

 

 

34,461 

Adjusted EBITDA(1)

 

 

44,325 

 

 

15,931 

 

 

13,479 

 

 

 -

 

 

N/A

Capital expenditures

 

 

30,755 

 

 

5,259 

 

 

 -

 

 

933 

 

 

36,947 



17

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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)

 

 

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)

 

 

41,707 

 

 

16,211 

 

 

13,233 

 

 

 -

 

 

N/A

Capital expenditures

 

 

60,379 

 

 

6,988 

 

 

 -

 

 

(2,087)

 

 

65,280 



(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, restructuring charges, transaction related charges and changes in the fair value of contingent consideration obligations.

N/A – Not Applicable (as totals are not presented in the condensed 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. 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.

18

 


 



The following table provides a reconciliation of the total of the Company’s reportable segments measure of profit to the Company’s consolidated income (loss) before income taxes for the three and nine months ended September 30, 2017 and 2016:







 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

 

2017

 

2016

 

2017