Q3 2017 Form 10-Q_Taxonomy2017

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 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:  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)

 

 



 

 

401 Merritt 7

 

 

Norwalk, Connecticut  

 

06851

(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, a smaller reporting company, or an emerging growth company.  See definition of “accelerated filer,” “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer               Accelerated filer                Non-accelerated filer  

Smaller reporting company               Emerging growth 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 Exchange Act).

Yes           No X   



The number of shares outstanding of the registrant’s Common Stock as of October 27, 2017 was 78,458,000.

 

 


 



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



Index





 



Page No.

Part I.  Financial Information (Unaudited)

 



 

Item 1.  Financial Statements

 



 

Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

2



 

Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016

 

3



 

Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

 

4



 

Consolidated Statement of Equity for the nine months ended September 30, 2017

5



 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

 

6



 

Notes to Consolidated Financial Statements

7



 

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

30



 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

50



 

Item 4.  Controls and Procedures

51



 

Part II.  Other Information

 



 

Item 1.  Legal Proceedings

52



 

Item 1A.  Risk Factors

52



 

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

53



 

Item 4.  Mine Safety Disclosure

53



 

Item 6.  Exhibits

54



 

Signature

55



 

 

1

 


 

 

 

PART I. FINANCIAL INFORMATION



Item 1.Financial Statements



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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







 

 

 

 

 

 



 

 

 

 

 

 



 

(Unaudited)

 

 

 



 

September 30, 2017

 

December 31, 2016

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

286 

 

$

522 

Accounts receivable, less allowances of $69 and $131, respectively

 

 

780 

 

 

938 

Prepaid expenses

 

 

98 

 

 

88 

Income taxes and other current assets

 

 

98 

 

 

108 

Total current assets

 

 

1,262 

 

 

1,656 



 

 

 

 

 

 

Property, plant and equipment, net

 

 

14,375 

 

 

14,902 

Goodwill

 

 

9,102 

 

 

9,674 

Other intangibles, net

 

 

2,223 

 

 

2,662 

Other assets

 

 

114 

 

 

119 

Total assets

 

$

27,076 

 

$

29,013 



 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Long-term debt due within one year

 

$

166 

 

$

363 

Accounts payable

 

 

509 

 

 

698 

Advanced billings

 

 

277 

 

 

301 

Accrued content costs

 

 

130 

 

 

164 

Accrued other taxes

 

 

177 

 

 

134 

Accrued interest

 

 

205 

 

 

437 

Pension and other postretirement benefits

 

 

23 

 

 

23 

Other current liabilities

 

 

306 

 

 

324 

Total current liabilities

 

 

1,793 

 

 

2,444 



 

 

 

 

 

 

Deferred income taxes

 

 

2,253 

 

 

2,516 

Pension and other postretirement benefits

 

 

1,647 

 

 

1,602 

Other liabilities

 

 

369 

 

 

372 

Long-term debt

 

 

17,604 

 

 

17,560 



 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value (50,000 authorized shares,

 

 

 

 

 

 

11.125%, Series A, 19,250 shares issued and outstanding)

 

 

 -

 

 

 -

Common stock, $0.25 par value (175,000 authorized shares,

 

 

 

 

 

 

79,532 issued and 78,462 and 78,170 outstanding,

 

 

 

 

 

 

at September 30, 2017 and December 31, 2016, respectively)

 

 

20 

 

 

20 

Additional paid-in capital

 

 

5,124 

 

 

5,561 

Accumulated deficit

 

 

(1,234)

 

 

(460)

Accumulated other comprehensive loss, net of tax

 

 

(349)

 

 

(387)

Treasury common stock

 

 

(151)

 

 

(215)

Total equity

 

 

3,410 

 

 

4,519 

Total liabilities and equity

 

$

27,076 

 

$

29,013 



 

 

 

 

 

 



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 AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

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

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

September 30,

 

September 30,



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,251 

 

$

2,524 

 

$

6,911 

 

$

6,487 



 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Network access expenses

 

 

390 

 

 

440 

 

 

1,209 

 

 

1,053 

Network related expenses

 

 

497 

 

 

527 

 

 

1,468 

 

 

1,399 

Selling, general and administrative expenses

 

 

486 

 

 

582 

 

 

1,561 

 

 

1,535 

Depreciation and amortization

 

 

539 

 

 

578 

 

 

1,670 

 

 

1,469 

Goodwill impairment

 

 

 -

 

 

 -

 

 

670 

 

 

 -

Acquisition and integration costs

 

 

 

 

122 

 

 

15 

 

 

387 

Pension settlement costs

 

 

15 

 

 

 -

 

 

77 

 

 

 -

Restructuring costs and other charges

 

 

14 

 

 

11 

 

 

55 

 

 

11 

Total operating expenses

 

 

1,942 

 

 

2,260 

 

 

6,725 

 

 

5,854 



 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

309 

 

 

264 

 

 

186 

 

 

633 



 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

 

 

 

 

 

 

 

14 

Loss (gain) on extinguishment of debt and debt exchanges

 

 

(1)

 

 

 

 

89 

 

 

Interest expense

 

 

381 

 

 

386 

 

 

1,157 

 

 

1,145 



 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(69)

 

 

(126)

 

 

(1,055)

 

 

(505)

Income tax benefit

 

 

(31)

 

 

(46)

 

 

(280)

 

 

(212)



 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(38)

 

 

(80)

 

 

(775)

 

 

(293)

Less: Dividends on preferred stock

 

 

54 

 

 

54 

 

 

161 

 

 

161 

Net loss attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Frontier common shareholders

 

$

(92)

 

$

(134)

 

$

(936)

 

$

(454)



 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Frontier common shareholders

 

$

(1.19)

 

$

(1.73)

 

$

(12.06)

 

$

(5.87)



 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Frontier common shareholders

 

$

(1.19)

 

$

(1.73)

 

$

(12.07)

 

$

(5.87)



 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average  shares outstanding - basic

 

 

77,797 

 

 

77,612 

 

 

77,714 

 

 

77,608 



 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average shares outstanding - diluted

 

 

77,797 

 

 

77,612 

 

 

77,875 

 

 

77,608 



 

 

 

 

 

 

 

 

 

 

 

 







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

3

 


 

 

 

PART I. FINANCIAL INFORMATION (Continued)



CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

($ in millions)

(Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

September 30,

 

September 30,



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(38)

 

$

(80)

 

$

(775)

 

$

(293)



 

 

 

 

 

 

 

 

 

 

 

 

Pension settlement costs, net of tax

 

 

12 

 

 

 -

 

 

48 

 

 

 -

Other comprehensive income (loss), net of tax

 

 

(32)

 

 

(61)

 

 

(10)

 

 

(50)

Net current-period other comprehensive income (loss)

 

 

(20)

 

 

(61)

 

 

38 

 

 

(50)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(58)

 

$

(141)

 

$

(737)

 

$

(343)









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



4

 


 

 

 

PART I. FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

($ in millions and shares in thousands)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the nine months ended September 30, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Treasury

 

 

 



 

Preferred Stock

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Common Stock

 

Total



 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Loss

 

Shares

 

Amount

 

Equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2017 (See Note 1)

 

19,250 

 

$

 -

 

79,532 

 

$

20 

 

$

5,561 

 

$

(460)

 

$

(387)

 

(1,362)

 

$

(215)

 

$

4,519 

Cumulative-effect adjustment from adoption of ASU 2016-09

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 

 

 -

 

 -

 

 

 -

 

 

Stock plans

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(57)

 

 

 -

 

 

 -

 

292 

 

 

64 

 

 

Dividends on common stock

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(219)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(219)

Dividends on preferred stock

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(161)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(161)

Net loss

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(775)

 

 

 -

 

 -

 

 

 -

 

 

(775)

Pension settlement costs, net of tax

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

48 

 

 -

 

 

 -

 

 

48 

Other comprehensive income, net of tax

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(10)

 

 -

 

 

 -

 

 

(10)

Balance September 30, 2017

 

19,250 

 

$

 -

 

79,532 

 

$

20 

 

$

5,124 

 

$

(1,234)

 

$

(349)

 

(1,070)

 

$

(151)

 

$

3,410 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







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

5

 


 

 

 



PART I. FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

($ in millions)

(Unaudited)









 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Cash flows provided from (used by) operating activities:

 

 

 

 

 

 

Net loss

 

$

(775)

 

$

(293)

Adjustments to reconcile net loss to net cash provided from (used by)

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,670 

 

 

1,469 

Loss on extinguishment of debt and debt exchanges

 

 

89 

 

 

Pension settlement costs

 

 

77 

 

 

 -

Pension/OPEB costs

 

 

22 

 

 

59 

Stock-based compensation expense

 

 

10 

 

 

21 

Amortization of deferred financing costs

 

 

26 

 

 

38 

Other adjustments

 

 

(11)

 

 

 -

Deferred income taxes

 

 

(286)

 

 

(163)

Goodwill impairment

 

 

670 

 

 

 -

Change in accounts receivable

 

 

161 

 

 

(56)

Change in accounts payable and other liabilities

 

 

(471)

 

 

(108)

Change in prepaid expenses, income taxes and other current assets

 

 

 

 

(12)

Net cash provided from operating activities

 

 

1,185 

 

 

962 



 

 

 

 

 

 

Cash flows provided from (used by) investing activities:

 

 

 

 

 

 

Capital expenditures - Business operations

 

 

(846)

 

 

(960)

Capital expenditures - Integration activities

 

 

(19)

 

 

(99)

Cash paid for the CTF Acquisition

 

 

 -

 

 

(9,886)

Proceeds on sale of assets

 

 

109 

 

 

 -

Other

 

 

 

 

 -

Net cash used by investing activities

 

 

(750)

 

 

(10,945)



 

 

 

 

 

 

Cash flows provided from (used by) financing activities:

 

 

 

 

 

 

Proceeds from long-term debt borrowings

 

 

1,500 

 

 

1,625 

Long - term debt payments

 

 

(1,662)

 

 

(113)

Financing costs paid

 

 

(15)

 

 

(38)

Premium paid to retire debt

 

 

(80)

 

 

 -

Dividends paid on common stock

 

 

(219)

 

 

(370)

Dividends paid on preferred stock

 

 

(161)

 

 

(161)

Capital lease obligation payments

 

 

(30)

 

 

(8)

Taxes paid on behalf of employees for shares withheld

 

 

(5)

 

 

(10)

Other

 

 

 

 

Net cash provided from (used by) financing activities

 

 

(671)

 

 

934 



 

 

 

 

 

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(236)

 

 

(9,049)

Cash, cash equivalents, and restricted cash at January 1,

 

 

522 

 

 

9,380 



 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at September 30,

 

$

286 

 

$

331 



 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

Interest

 

$

1,373 

 

$

1,277 

Income tax refunds, net

 

$

(4)

 

$

(35)



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



 

6

 


 

 

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 (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, 2016. Certain reclassifications of amounts previously reported have been made to conform to the current presentation, as described in Note 2 – Recent Accounting Literature. 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 loss 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 September 30, 2017, we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this Form 10-Q with the Securities and Exchange Commission (SEC). 



Effective April 1, 2016, Frontier’s scope of operations and balance sheet changed materially as a result of the completion of the CTF Acquisition, as described in Note 3 – Acquisitions. Historical financial data presented for Frontier is not indicative of the future financial position or operating results for Frontier, and includes the results of the CTF Operations, as defined in Note 3 – Acquisitions, from the date of acquisition on April 1, 2016.



The preparation of our interim financial statements in conformity with 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 the allowance for doubtful accounts, asset impairments, indefinite-lived intangibles, depreciation and amortization, income taxes, business combinations, and pension and other postretirement benefits, among others.



We operate in one reportable segment. Frontier provides both regulated and unregulated voice, data and video services to consumer, commercial and wholesale customers and is typically the incumbent voice services provider in its service areas.



On July 10, 2017, we effected a one for fifteen reverse stock split of our common stock. The reverse stock split reduced the number of common shares issued (which includes outstanding shares and treasury shares) from approximately 1,193,000,000 shares to 80,000,000 shares, and reduced shares outstanding from 1,178,000,000 shares to 79,000,000 shares. In addition, and at the same time, the total number of shares of common stock that Frontier is authorized to issue changed from 1,750,000,000 shares to 175,000,000 shares. There was no change in the par value of the common stock, and no fractional shares were issued. All share and per share amounts in the financial statements and footnotes have been retroactively adjusted for all periods presented to give effect to the reverse stock split. As a result of our reverse stock split the conversion rates of our Series A Preferred Stock were proportionately adjusted.



(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 and non-recurring voice and video services. The earned but unbilled portion of these fees is recognized as

7

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

revenue in our consolidated statements of operations and accrued in “Accounts receivable” on our consolidated balance sheet 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.



Frontier 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 “Network related expenses” of $52 million and $60 million, and $160 million and $161 million for the three and nine months ended September 30, 2017 and 2016, respectively.



In 2015, we accepted the FCC’s Connect America Fund (CAF) Phase II offer of support, which is a successor to and augments the USF frozen high cost support that we had been receiving pursuant to a 2011 FCC order. Upon completion of the CTF Acquisition, Frontier assumed the CAF Phase II support and related obligations that Verizon had previously accepted with regard to California and Texas. CAF Phase II funding is a program intended to subsidize the high cost of establishing and delivering communications services to certain unserved or underserved areas. We are recognizing these subsidies into revenue on a straight line basis, which is consistent with how the costs related to these subsidies are being and are expected to be incurred. CAF Phase II is a multi-year program which requires us to deploy broadband to a specified number of households in each of the states where funding was accepted. Failure to meet our deployment obligations at the end of the program in 2020 would result in a return of a portion of the funding received. We regularly evaluate our ability to meet our broadband deployment obligations and adjust revenue accordingly.



We categorize our products, services and other revenues among the following five categories:



·

Data and Internet services include broadband services for consumer and commercial customers. We provide data transmission services to high volume commercial customers and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”);



·

Voice services include traditional local and long distance wireline services, Voice over Internet Protocol (VoIP) services, as well as a number of unified messaging services offered to our consumer and commercial customers. Voice services also include the long distance voice origination and termination services that we provide to our commercial customers and other carriers;



·

Video services include services provided directly to consumer customers through the FiOS® and Vantage video brands, and through DISH® satellite TV services;



·

Other includes sales of customer premise equipment to our commercial customers and directory services, less our provision for bad debts; and



·

Switched Access and Subsidy revenues include revenues derived from allowing other carriers to use our network to originate and/or terminate their local and long distance voice traffic (“switched access”). These services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies. We also receive cost subsidies from state and federal authorities, including the Connect America Fund Phase II.

8

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 



The following table provides a summary of revenues from external customers by the categories of Frontier’s products and services:





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended

 



 

September 30,

 

September 30,

 



 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

2017

 

2016

 

2017

 

2016

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Data and Internet services

 

$

956 

 

$

1,045 

 

$

2,923 

 

$

2,680 

 

Voice services

 

 

702 

 

 

809 

 

 

2,177 

 

 

2,112 

 

Video services

 

 

318 

 

 

392 

 

 

994 

 

 

879 

 

Other

 

 

84 

 

 

73 

 

 

231 

 

 

218 

 

Customer revenue

 

 

2,060 

 

 

2,319 

 

 

6,325 

 

 

5,889 

 

Switched access and subsidy

 

 

191 

 

 

205 

 

 

586 

 

 

598 

 

Total revenue

 

$

2,251 

 

$

2,524 

 

$

6,911 

 

$

6,487 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



(c)    Goodwill and Other Intangibles:

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets acquired in a business combination. We have undertaken studies to determine the fair values of assets and liabilities acquired as well as to allocate the purchase price to assets and liabilities, including property, plant and equipment, goodwill and other identifiable intangibles. We examine the carrying value of our goodwill and trade name annually as of December 31, or more frequently as circumstances warrant, to determine whether there are any impairment losses. We test for goodwill impairment at the “operating segment” level, as that term is defined in GAAP.



We determined that we have one operating segment based on a number of factors that our management uses to evaluate and run our business operations, including similarities of customers, products and technology. We tested goodwill for impairment as of September 30, 2017 as a result of the continued decline in share price of our common stock since June 30, 2017, the date of our last goodwill impairment test. Refer to Note 6 for a discussion of our goodwill impairment testing and results as of September 30, 2017. As stated in Note 2, we early adopted ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” during the second quarter of 2017 in conjunction with our goodwill impairment assessment.



Frontier amortizes finite-lived intangible assets over their estimated useful lives on the accelerated method of sum of the years digits. We review such intangible assets at least annually as of December 31 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:



Recent Accounting Pronouncements Not Yet Adopted



Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” This standard, along with its related amendments, requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which they expect to be entitled in exchange for those goods or services. This new standard will be adopted by Frontier for annual and interim reporting periods beginning with the first quarter of 2018. 



The FASB allows two adoption methods under ASC 606. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We currently plan to adopt the standard in the first quarter of 2018, using the

9

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

“modified retrospective method.” Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing, in beginning retained earnings, a cumulative-effect adjustment to include the establishment of contract asset and contract liability accounts with a corresponding adjustment to retained earnings. We will also provide additional disclosures comparing revenue recognized under ASC 606 to revenue as reported prior to the adoption of the standard.



Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues among various services and equipment, and the timing of when those revenues are recognized. Additionally, the new standard will impact the timing of recognizing costs to obtain contracts. This includes a change in our existing policy related to the way we account for customer incentives, upfront non-recurring charges, commission payments, customer disputes and the allocation of discounts.



We are in the process of identifying and implementing changes to our systems, processes, policies and internal controls to meet the standard’s reporting and disclosure requirements.



Leases

In February 2016, the FASB issued ASU No. 2016 – 02, “Leases (Topic 842).” This standard establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Upon implementation, lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years using modified retrospective application. Early application is permitted.  Frontier is in the initial stages of evaluating the potential impact this new standard may have on the consolidated financial statements.



Compensation – Retirement Benefits

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This standard was established to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring that an employer disaggregate the service cost component of periodic benefit cost from the other components of net benefit cost. The amendments in the update also provide explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement and allow only the service cost components of net benefit cost to be eligible for capitalization. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and requires the presentation of the income statement to be applied retrospectively.  As a result of the standard, pension settlement costs and certain benefit costs which are currently included in operating expense, would be reported as other non-operating expense and will no longer be capitalized.  This will have a material impact on previously reported operating income and may have a material impact to operating income in future periods, however, the impact to pre-tax income is not expected to be material.



10

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

Recently Adopted Accounting Pronouncements



Share-Based Payments - Scope of Modification Accounting

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting which amends the scope of modification accounting for share-based payment arrangements. This standard provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and early adoption is permitted including in any interim period. Frontier has adopted this standard during the second quarter 2017, with no impact to our share-based payment awards.



Intangibles – Goodwill

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard was established to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Frontier early adopted this standard during the second quarter of 2017 in conjunction with our goodwill impairment assessment. See Note 1 and Note 6 for further discussion. 



Compensation – Stock Compensation

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” to amend ASC Topic 718, “Compensation – Stock Compensation.” The ASU is part of the FASB’s ongoing simplification initiative, which is designed to reduce cost and complexity while maintaining or improving the usefulness of the information provided to the users of financial statements. The simplifications address a variety of areas for public entities, including the following: 1) accounting for income taxes, 2) classification of excess tax benefits on the statement of cash flows, 3) forfeitures, 4) minimum statutory tax withholding requirements, 5) classifications of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, and 6) classification of awards with repurchase features. This guidance was effective for Frontier as of the third quarter of 2017.  During the nine months ended September 30, 2017, Frontier recognized $2 million of income tax expense and recorded a cumulative effect adjustment to beginning accumulated deficit of $1 million to recognize all unrecognized deferred tax benefits recorded as of January 1, 2017. For the nine months ended September 30, 2016, Frontier reclassified $10 million of taxes paid on behalf of employees related to shares withheld from “Cash flows provided from (used by) operations” to “Cash flows used by financing activities” in accordance with the new standard. 



11

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

(3)  Acquisitions:



The CTF Acquisition

On April 1, 2016, Frontier acquired the wireline operations of Verizon Communications, Inc. in California, Texas and Florida (the CTF Operations) for a purchase price of $10,540 million in cash and assumed debt (the CTF Acquisition), pursuant to the February 5, 2015 Securities Purchase Agreement, as amended. The final allocation of the purchase price presented below represents the effect of recording the fair value of assets acquired and liabilities assumed as of the date of the CTF Acquisition, based on the total transaction cash consideration of $9,871 million.





 

 

 



 

 

 

($ in millions)

 

 

    

 

 

 

Current assets

 

$

353 

Property, plant & equipment

 

 

6,096 

Goodwill

 

 

2,606 

Other intangibles - primarily customer list

 

 

2,262 

Current liabilities

 

 

(579)

Long-term debt

 

 

(544)

Other liabilities

 

 

(323)

Total net assets acquired

 

$

9,871 



 

 

 



The fair value estimates related to the allocation of the purchase price to Other intangibles were revised and updated during the first quarter of 2017 from the previous estimates as of December 31, 2016. The allocation that was reported as of December 31, 2016 for Other intangibles increased $100 million, from $2,162 million to $2,262 million. These measurement period adjustments resulted in $20 million of amortization expense during the first quarter of 2017 that would have been recorded in 2016 if the adjustments had been recognized as of the acquisition date. Other adjustments to the allocation of the purchase price for the CTF Acquisition during the first quarter of 2017 resulted in a $140 million decrease in Property, plant & equipment, a $61 million increase in Current liabilities, and a $98 million increase in Goodwill.



The total consideration exceeded the net estimated fair value of the assets acquired and liabilities assumed by $2,606 million, which we recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. This amount of goodwill associated with the CTF Acquisition will be deductible for income tax purposes.



12

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

The following unaudited pro forma financial information presents the combined results of operations of Frontier and the CTF Operations as if the CTF Acquisition had occurred as of January 1, 2016. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the CTF Acquisition been completed as of January 1, 2016. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Frontier. The unaudited pro forma financial information excludes acquisition and integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies that may result from the CTF Acquisition. 





 

 

 

 

 



 

 

 

 

 



 

 

 

 

 



 

(Unaudited)



 

For the nine months ended

($ in millions, except per share amounts)

 

September 30, 2016

    

 

 

 

 

 

Revenue

 

 

7,846 

 



 

 

 

 

 

Operating income

 

 

1,129 

 



 

 

 

 

 

Net loss attributable to Frontier common shareholders

 

 

(164)

 



 

 

 

 

 

Basic and diluted net loss per share attributable

 

 

 

 

 

to Frontier common shareholders

 

 

(2.10)

 



 

 

 

 

 



Acquisition and Integration Costs

Acquisition costs include financial advisory, accounting, regulatory, legal and other related costs. Integration costs include expenses that are incremental and directly related to the acquisition, which were incurred to integrate the network and information technology platforms.  Integration costs also include costs to achieve synergies and operational efficiencies directly associated with the acquisition. 



Frontier incurred operating expenses related to the CTF Acquisition as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended September 30,

 

For the nine months ended September 30,

($ in millions)

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs

 

$

 -

 

$

 -

 

$

 -

 

$

23 

Integration costs

 

 

 

 

122 

 

 

15 

 

 

364 

Total acquisition and

 

 

 

 

 

 

 

 

 

 

 

 

integration costs

 

$

 

$

122 

 

$

15 

 

$

387 



 

 

 

 

 

 

 

 

 

 

 

 



We also invested $19 million and $99 million in capital expenditures related to the CTF Acquisition during the nine months ended September 30, 2017 and 2016, respectively.



13

 


 

 

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 millions)

 

September 30, 2017

 

December 31, 2016

    

 

 

 

 

 

 

Retail and wholesale

 

$

768 

 

$

979 

Other

 

 

81 

 

 

90 

Less: Allowance for doubtful accounts

 

 

(69)

 

 

(131)

Accounts receivable, net

 

$

780 

 

$

938 



We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable. During 2017, we resolved settlements with carriers resulting in a reduction to our reserves of approximately $35 million. Bad debt expense, which is recorded as a reduction to revenue, was as follows:









 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended September 30,

 

For the nine months ended September 30,

($ in millions)

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Bad debt expense

 

$

26 

 

$

56 

 

$

83 

 

$

104 

 

 

 

 

 

 

 

 

 

 

 







(5)  Property, Plant and Equipment:

Property, plant and equipment, net is as follows:







 

 

 

 

 

 



 

 

 

 

 

 

($ in millions)

 

September 30, 2017

 

December 31, 2016

    

 

 

 

 

 

 

Property, plant and equipment

 

$

26,124 

 

$

25,541 

Less:  Accumulated depreciation

 

 

(11,749)

 

 

(10,639)

Property, plant and equipment, net

 

$

14,375 

 

$

14,902 



Depreciation expense is principally based on the composite group method. Depreciation expense was as follows: