a2f7c6b0cdf844a

 

 

 

 

 

FRONTIER COMMUNICATIONS CORPORATION

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014

 

 

 

 

 

 

 


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C.  20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2014

 

or

 

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

 

For the transition period from _________to__________

 

Commission file number:  001-11001

 

FRONTIER COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

06-0619596

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

 

 

3 High Ridge Park

 

 

Stamford, Connecticut  

 

06905

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

(203) 614-5600

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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  X       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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  X       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 definition of “accelerated filer,” “large 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 

 

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

 

Yes           No X   

 

The number of shares outstanding of the registrant’s Common Stock as of May 2, 2014 was 1,002,282,000.

 

 

 


 

 

 

 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Index

 

 

 

 

 

Page No.

Part I.  Financial Information (Unaudited)

 

 

 

Item 1.  Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

2

 

 

Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013

3

 

 

Consolidated Statements of Comprehensive Income for the three months ended

 

March 31, 2014 and 2013

3

 

 

Consolidated Statements of Equity for the three months ended March 31, 2013, the nine months

 

ended December 31, 2013 and the three months ended March 31, 2014

4

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013

5

 

 

Notes to Consolidated Financial Statements

6

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

36

 

 

Item 4.  Controls and Procedures

37

 

 

Part II.  Other Information

 

 

 

Item 1.  Legal Proceedings

38

 

 

Item 1A.  Risk Factors

38

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

Item 4.  Mine Safety Disclosure

38

 

 

Item 6.  Exhibits

39

 

 

Signature

40

 

 

 

 

 

 

1

 


 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

March 31, 2014

 

December 31, 2013

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

954,241 

 

$

880,039 

Accounts receivable, less allowances of $70,094 and $71,362, respectively

 

 

463,081 

 

 

479,210 

Restricted cash

 

 

11,412 

 

 

11,411 

Prepaid expenses

 

 

62,547 

 

 

68,573 

Income taxes and other current assets

 

 

108,133 

 

 

179,606 

Total current assets

 

 

1,599,414 

 

 

1,618,839 

 

 

 

 

 

 

 

Restricted cash

 

 

2,000 

 

 

2,000 

Property, plant and equipment, net

 

 

7,190,258 

 

 

7,255,762 

Goodwill

 

 

6,337,719 

 

 

6,337,719 

Other intangibles, net

 

 

1,139,041 

 

 

1,214,932 

Other assets

 

 

200,442 

 

 

206,232 

Total assets

 

$

16,468,874 

 

$

16,635,484 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Long-term debt due within one year

 

$

365,625 

 

$

257,916 

Accounts payable

 

 

218,022 

 

 

327,256 

Advanced billings

 

 

135,246 

 

 

137,319 

Accrued other taxes

 

 

81,076 

 

 

66,276 

Accrued interest

 

 

202,324 

 

 

188,639 

Other current liabilities

 

 

329,583 

 

 

324,181 

Total current liabilities

 

 

1,331,876 

 

 

1,301,587 

 

 

 

 

 

 

 

Deferred income taxes

 

 

2,396,448 

 

 

2,417,108 

Pension and other postretirement benefits

 

 

713,777 

 

 

725,333 

Other liabilities

 

 

266,429 

 

 

262,308 

Long-term debt

 

 

7,762,672 

 

 

7,873,667 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Common stock, $0.25 par value (1,750,000,000 authorized shares,

 

 

 

 

 

 

1,002,281,000 and 999,462,000 outstanding, respectively, and

 

 

 

 

 

 

1,027,986,000 issued, at March 31, 2014 and December 31, 2013)

 

 

256,997 

 

 

256,997 

Additional paid-in capital

 

 

4,181,483 

 

 

4,321,056 

Retained earnings

 

 

115,382 

 

 

76,108 

Accumulated other comprehensive loss, net of tax

 

 

(257,491)

 

 

(260,530)

Treasury stock

 

 

(298,699)

 

 

(338,150)

Total equity

 

 

3,997,672 

 

 

4,055,481 

Total liabilities and equity

 

$

16,468,874 

 

$

16,635,484 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

2

 


 

 

PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

($ in thousands, except for per-share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,154,046 

 

$

1,205,396 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Network access expenses

 

 

107,092 

 

 

109,398 

 

Other operating expenses

 

 

528,926 

 

 

541,499 

 

Depreciation and amortization

 

 

281,407 

 

 

303,675 

 

Acquisition and integration costs

 

 

10,596 

 

 

 -

 

Total operating expenses

 

 

928,021 

 

 

954,572 

 

 

 

 

 

 

 

 

 

Operating income

 

 

226,025 

 

 

250,824 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

 

1,395 

 

 

4,654 

 

Interest expense

 

 

170,957 

 

 

171,420 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

56,463 

 

 

84,058 

 

Income tax expense

 

 

17,189 

 

 

33,275 

 

 

 

 

 

 

 

 

 

Net income

 

 

39,274 

 

 

50,783 

 

Less: Income attributable to the noncontrolling

 

 

 

 

 

 

 

interest in a partnership

 

 

 -

 

 

2,643 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

 

 

 

 

 

 

of Frontier

 

$

39,274 

 

$

48,140 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

attributable to common shareholders of Frontier

 

$

0.04 

 

$

0.05 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

($ in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Net income

 

$

39,274 

 

$

50,783 

 

Other comprehensive income, net of tax (see Note 13)

 

 

3,039 

 

 

6,746 

 

Comprehensive income

 

 

42,313 

 

 

57,529 

 

 

 

 

 

 

 

 

 

Less:  Income attributable to the

 

 

 

 

 

 

 

noncontrolling interest in a partnership

 

 

 -

 

 

(2,643)

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to

 

 

 

 

 

 

 

the common shareholders of Frontier

 

$

42,313 

 

$

54,886 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

3

 


 

 

 

PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013, THE NINE MONTHS ENDED DECEMBER 31, 2013 AND THE THREE MONTHS ENDED MARCH 31, 2014

($ and shares in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity of Frontier

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury Stock

 

Noncontrolling

 

Total

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Shares

 

Amount

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2013

 

1,027,986 

 

$

256,997 

 

$

4,639,563 

 

$

63,205 

 

$

(483,576)

 

(29,576)

 

$

(368,593)

 

$

11,675 

 

$

4,119,271 

Stock plans

 

 -

 

 

 -

 

 

(3,094)

 

 

 -

 

 

 -

 

(279)

 

 

2,888 

 

 

 -

 

 

(206)

Dividends on common stock

 

 -

 

 

 -

 

 

(99,812)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(99,812)

Net income

 

 -

 

 

 -

 

 

 -

 

 

48,140 

 

 

 -

 

 -

 

 

 -

 

 

2,643 

 

 

50,783 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of tax

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

6,746 

 

 -

 

 

 -

 

 

 -

 

 

6,746 

Distributions

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(6,400)

 

 

(6,400)

Balance March 31, 2013

 

1,027,986 

 

 

256,997 

 

 

4,536,657 

 

 

111,345 

 

 

(476,830)

 

(29,855)

 

 

(365,705)

 

 

7,918 

 

 

4,070,382 

Stock plans

 

 -

 

 

 -

 

 

(15,577)

 

 

 -

 

 

 -

 

1,331 

 

 

27,555 

 

 

 -

 

 

11,978 

Dividends on common stock

 

 -

 

 

 -

 

 

(200,024)

 

 

(99,932)

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(299,956)

Net income

 

 -

 

 

 -

 

 

 -

 

 

64,695 

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

64,695 

Pension settlement costs, net of tax

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

27,381 

 

 -

 

 

 -

 

 

 -

 

 

27,381 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of tax

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

188,919 

 

 -

 

 

 -

 

 

 -

 

 

188,919 

Distributions

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

Sale of Mohave partnership interest

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(7,918)

 

 

(7,918)

Balance December 31, 2013

 

1,027,986 

 

 

256,997 

 

 

4,321,056 

 

 

76,108 

 

 

(260,530)

 

(28,524)

 

 

(338,150)

 

 

 -

 

 

4,055,481 

Stock plans

 

 -

 

 

 -

 

 

(39,345)

 

 

 -

 

 

 -

 

2,819 

 

 

39,451 

 

 

 -

 

 

106 

Dividends on common stock

 

 -

 

 

 -

 

 

(100,228)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(100,228)

Net income

 

 -

 

 

 -

 

 

 -

 

 

39,274 

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

39,274 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of tax

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,039 

 

 -

 

 

 -

 

 

 -

 

 

3,039 

Balance March 31, 2014

 

1,027,986 

 

$

256,997 

 

$

4,181,483 

 

$

115,382 

 

$

(257,491)

 

(25,705)

 

$

(298,699)

 

$

 -

 

$

3,997,672 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

4

 


 

 

PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

($ in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

Net income

 

$

39,274 

 

$

50,783 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

281,407 

 

 

303,675 

Pension/OPEB costs

 

 

3,053 

 

 

5,018 

Stock based compensation expense

 

 

6,151 

 

 

3,885 

Other non-cash adjustments

 

 

10,140 

 

 

1,710 

Deferred income taxes

 

 

(22,479)

 

 

(10,133)

Change in accounts receivable

 

 

16,129 

 

 

48,951 

Change in accounts payable and other liabilities

 

 

(70,663)

 

 

(84,756)

Change in prepaid expenses, income taxes and other current assets

 

 

49,852 

 

 

40,159 

Net cash provided by operating activities

 

 

312,864 

 

 

359,292 

 

 

 

 

 

 

 

Cash flows provided from (used by) investing activities:

 

 

 

 

 

 

Capital expenditures - Business operations

 

 

(135,059)

 

 

(189,009)

Capital expenditures - Integration activities

 

 

(10,348)

 

 

 -

Network expansion funded by Connect America Fund

 

 

(6,380)

 

 

(1,815)

Grant funds received for network expansion from Connect America Fund

 

 

3,748 

 

 

5,998 

Cash transferred from (to) escrow

 

 

 -

 

 

(11)

Other assets purchased and distributions received, net

 

 

14,217 

 

 

528 

Net cash used by investing activities

 

 

(133,822)

 

 

(184,309)

 

 

 

 

 

 

 

Cash flows provided from (used by) financing activities:

 

 

 

 

 

 

Long-term debt borrowing

 

 

10,706 

 

 

 -

Long-term debt payments

 

 

(14,479)

 

 

(517,129)

Dividends paid

 

 

(100,228)

 

 

(99,812)

Repayment of customer advances for construction,

 

 

 

 

 

 

distributions to noncontrolling interests and other

 

 

(839)

 

 

(7,279)

Net cash used by financing activities

 

 

(104,840)

 

 

(624,220)

 

 

 

 

 

 

 

(Decrease)/Increase in cash and cash equivalents

 

 

74,202 

 

 

(449,237)

Cash reclassed to assets held for sale

 

 

 -

 

 

(1,386)

Cash and cash equivalents at January 1,

 

 

880,039 

 

 

1,326,532 

 

 

 

 

 

 

 

Cash and cash equivalents at March 31,

 

$

954,241 

 

$

875,909 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

Interest

 

$

145,620 

 

$

168,095 

Income taxes (refunds), net

 

$

(4,928)

 

$

947 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements

 

 

5

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1)   Summary of Significant Accounting Policies:

(a)   Basis of Presentation and Use of Estimates:

Frontier Communications Corporation and its subsidiaries are referred to as “we,” “us,” “our,” “Frontier,” or the “Company” in this report. Our interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.  All significant intercompany balances and transactions have been eliminated in consolidation. These interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of Frontier’s management, to present fairly the results for the interim periods shown. Revenues, net income and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year. For our interim financial statements as of and for the period ended March 31, 2014, we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this quarterly report on Form 10-Q with the Securities and Exchange Commission (SEC).

 

Frontier had a 33% controlling general partner interest in a partnership entity, the Mohave Cellular Limited Partnership (Mohave). Mohave’s results of operations were included in our consolidated financial statements through its date of disposal on April 1, 2013. The minority interest of the limited partners was reflected in the consolidated statements of operations as “Income attributable to the noncontrolling interest in a partnership.” On April 1, 2013, the Company sold its partnership interest in Mohave and received proceeds of $17.8 million. The Company recognized a gain on sale of approximately $14.6 million before taxes in the second quarter of 2013.

 

The preparation of our interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the disclosure of contingent assets and liabilities, and (iii) the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.  Estimates and judgments are used when accounting for revenue recognition, including the allowance for doubtful accounts, impairment of long-lived assets, intangible assets, depreciation and amortization, income taxes, contingencies, and pension and other postretirement benefits, among others. Certain information and footnote disclosures have been excluded and/or condensed pursuant to SEC rules and regulations.   

 

(b)   Revenue Recognition:

Revenue is recognized when services are provided or when products are delivered to customers. Revenue that is billed in advance includes: monthly recurring network access services (including data services), special access services and monthly recurring voice, video and related charges. The unearned portion of these fees is initially deferred as a component of “Advanced billings” on our consolidated balance sheet and recognized as revenue over the period that the services are provided. Revenue that is billed in arrears includes: non-recurring network access services (including data services), switched access services, non-recurring voice and video services. The earned but unbilled portion of these fees is recognized as revenue in our consolidated statements of operations and accrued in accounts receivable in the period that the services are provided. Excise taxes are recognized as a liability when billed.  Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue.

 

As required by law, the Company collects various taxes from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded through the consolidated balance sheet and presented on a net basis in our consolidated statements of operations. We also collect Universal Service Fund (USF) surcharges from customers (primarily federal USF) that we have recorded on a gross basis in our consolidated statements of operations and included within “Revenue” and “Other operating expenses” of $29.9 million and $29.8 million for the three months ended March 31, 2014 and 2013, respectively.

 

6

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(c)   Goodwill and Other Intangibles:

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets acquired. We undertake studies to determine the fair values of assets and liabilities acquired and allocate purchase prices to assets and liabilities, including property, plant and equipment, goodwill and other identifiable intangibles. We annually (during the fourth quarter) or more frequently, if appropriate, examine the carrying value of our goodwill and trade name to determine whether there are any impairment losses. We test for goodwill impairment at the “operating segment” level, as that term is defined in U.S. GAAP. Our four operating segments consist of the following regions: Central, East, National and West. Our regional operating segments are aggregated into one reportable segment.  

 

The Company amortizes finite-lived intangible assets over their estimated useful lives and reviews such intangible assets at least annually (during the fourth quarter) to assess whether any potential impairment exists and whether factors exist that would necessitate a change in useful life and a different amortization period. 

 

(2)   Recent Accounting Literature:

Internal Control – Integrated Framework

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued its updated Internal Control – Integrated Framework (the 2013 Framework) and related illustrative documents. COSO will continue to make available its original Framework during the transition period extending to December 15, 2014. The Company currently utilizes COSO’s original Framework, which was published in 1992 and is recognized as the leading guidance for designing, implementing and conducting internal controls over external financial reporting and assessing its effectiveness. The 2013 Framework is expected to help organizations design and implement internal control in light of many changes in business and operating environments since the issuance of the original Framework, broaden the application of internal control in addressing operations and reporting objectives, and clarify the requirements for determining what constitutes effective internal control. We plan to adopt the 2013 Framework during 2014 and do not expect that it will have a significant impact on the Company.

 

(3)   The Transactions:

The 2010 Transaction

On July 1, 2010, the Company acquired the defined assets and liabilities of the local exchange business and related landline activities of Verizon Communications Inc. (Verizon) in 14 states (the Acquired Territories), including Internet access and long distance services and broadband video provided to designated customers in the Acquired Territories (the 2010 Acquired Business). Frontier was considered the acquirer of the 2010 Acquired Business for accounting purposes. All integration activities for the 2010 Transaction were completed as of the end of 2012.

 

The AT&T Transaction 

On December 17, 2013, the Company announced that it entered into an agreement to acquire the wireline properties of AT&T Inc. (AT&T) in Connecticut (the AT&T Transaction) for a purchase price of $2.0 billion in cash, with adjustments for working capital. Upon completion of the AT&T Transaction, Frontier will operate AT&T’s wireline business and fiber optic network that provides services to residential, commercial and wholesale customers in Connecticut. The Company will also acquire AT&T’s U-verse® video and satellite TV customers in Connecticut. 

 

The Company will account for the AT&T Transaction in accordance with the guidance included in ASC Topic 805. We incurred $10.6 million of acquisition and integration related costs in connection with the AT&T Transaction during the three months ended March 31, 2014. Such costs are required to be expensed as incurred and are reflected in “Acquisition and integration costs” in our consolidated statements of operations.  

 

7

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(4)   Accounts Receivable:

The components of accounts receivable, net are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   ($ in thousands)

 

March 31, 2014

 

December 31, 2013

    

 

 

 

 

 

 

Retail and Wholesale

 

474,278 

 

$

498,717 

Other

 

 

58,897 

 

 

51,855 

Less: Allowance for doubtful accounts

 

 

(70,094)

 

 

(71,362)

Accounts receivable, net

 

$

463,081 

 

$

479,210 

 

We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable. Bad debt expense, which is recorded as a reduction to revenue, was $12.9 million and $16.2 million for the three months ended March 31, 2014 and 2013, respectively.

 

(5)   Property, Plant and Equipment:

Property, plant and equipment, net is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

March 31, 2014

 

December 31, 2013

    

 

 

 

 

 

 

Property, plant and equipment

 

14,984,356 

 

$

14,850,697 

Less:  Accumulated depreciation

 

 

(7,794,098)

 

 

(7,594,935)

Property, plant and equipment, net

 

$

7,190,258 

 

$

7,255,762 

 

Depreciation expense is principally based on the composite group method. Depreciation expense was $205.5 million and $216.7 million for the three months ended March 31, 2014 and 2013, respectively. As a result of an independent study of the estimated remaining useful lives of our plant assets, we adopted new estimated remaining useful lives for certain plant assets as of October 1, 2013, with an immaterial impact to depreciation expense. 

 

(6)   Goodwill and Other Intangibles:

The components of goodwill by the reporting units in effect as of both March 31, 2014 and December 31, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

 

    

 

 

 

Central

 

$

1,815,498 

East

 

 

2,003,574 

National

 

 

1,218,113 

West

 

 

1,300,534 

Total Goodwill

 

$

6,337,719 

 

8

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The components of other intangibles are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

March 31, 2014

 

December 31, 2013

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer base

 

2,427,648 

 

(1,412,743)

 

1,014,905 

 

2,427,648 

 

(1,336,852)

 

1,090,796 

Trade name and license

 

 

124,136 

 

 

 -

 

 

124,136 

 

 

124,136 

 

 

 -

 

 

124,136 

Total other intangibles

 

$

2,551,784 

 

$

(1,412,743)

 

$

1,139,041 

 

$

2,551,784 

 

$

(1,336,852)

 

$

1,214,932 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense was $75.9 million and $87.0 million for the three months ended March 31, 2014 and 2013, respectively. Amortization expense represents the amortization of intangible assets (primarily customer base) that were acquired in the 2010 Transaction based on a useful life of nine years for the residential customer base and 12 years for the business customer base, amortized on an accelerated method.

 

(7)   Fair Value of Financial Instruments:

The following table summarizes the carrying amounts and estimated fair values for long-term debt at March 31, 2014 and December 31, 2013.  For the other financial instruments including cash, accounts receivable, long-term debt due within one year, accounts payable and other current liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments. Other equity method investments, for which market values are not readily available, are carried at cost, which approximates fair value.

 

The fair value of our long-term debt is estimated based upon quoted market prices at the reporting date for those financial instruments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

March 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

 

 

Carrying

 

 

 

 

 

 

Amount

 

 

Fair Value

 

 

Amount

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

7,762,672 

 

$

8,343,979 

 

$

7,873,667 

 

$

8,191,744 

 

 

 

9

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(8)   Long-Term Debt:

The activity in our long-term debt from December 31, 2013 to March 31, 2014 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

  

 

Three months ended

  

  

  

  

 

  

 

  

  

 

March 31, 2014

  

  

  

 

Interest

  

 

  

  

  

  

  

  

  

  

  

  

  

 

Rate at

  

 

December 31,

  

Payments

  

New

  

March 31,

 

March 31,

($ in thousands)

 

2013

 

and Retirements

 

Borrowings

 

2014

 

2014 *

  

 

  

  

  

  

  

  

  

  

  

  

  

  

 

Senior Unsecured Debt

 

$

8,107,066 

 

$

(14,375)

 

 $

 -

  

 $

8,092,691 

 

7.95%

Other Secured Debt

 

 

13,550 

  

 

 -

  

 

10,706 

  

 

24,256 

 

3.54%

Rural Utilities Service Loan Contracts

 

 

8,930 

 

 

(104)

 

 

 -

  

 

8,826 

 

6.15%

Total Long-Term Debt

 

$

8,129,546 

 

 $

(14,479)

 

 $

10,706 

  

$

8,125,773 

 

7.94%

  

 

  

  

  

  

  

  

  

  

  

  

  

  

 

  Less: Debt (Discount)/Premium

 

 

2,037 

  

  

  

  

  

  

  

 

2,524 

  

 

  Less: Current Portion

 

 

(257,916)

  

  

  

  

  

  

  

 

(365,625)

  

 

 

 

$

7,873,667 

  

  

  

  

  

  

  

$

7,762,672 

  

 

 

* Interest rate includes amortization of debt issuance costs and debt premiums or discounts. The interest rates at March 31, 2014 represent a weighted average of multiple issuances

.

10

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Additional information regarding our Senior Unsecured Debt is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

March 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

Interest

 

Principal

 

Interest

 

 

Outstanding

 

Rate

 

Outstanding

 

Rate

 

 

 

 

 

 

 

 

 

 

 

Senior Notes and Debentures Due:

 

 

 

 

 

 

 

 

 

 

5/1/2014

 

 

200,000 

 

8.250%

 

 

200,000 

 

8.250%

3/15/2015

 

 

105,026 

 

6.625%

 

 

105,026 

 

6.625%

4/15/2015

 

 

96,872 

 

7.875%

 

 

96,872 

 

7.875%

10/14/2016 *

 

 

445,625 

 

3.035% (Variable)

 

 

460,000 

 

3.045% (Variable)

4/15/2017

 

 

606,874 

 

8.250%

 

 

606,874 

 

8.250%

10/1/2018

 

 

582,739 

 

8.125%

 

 

582,739 

 

8.125%

3/15/2019

 

 

434,000 

 

7.125%

 

 

434,000 

 

7.125%

4/15/2020

 

 

1,021,505 

 

8.500%

 

 

1,021,505 

 

8.500%

7/1/2021

 

 

500,000 

 

9.250%

 

 

500,000 

 

9.250%

4/15/2022

 

 

500,000 

 

8.750%

 

 

500,000 

 

8.750%

1/15/2023

 

 

850,000 

 

7.125%

 

 

850,000 

 

7.125%

4/15/2024

 

 

750,000 

 

7.625%