Q3 2018 - 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



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



For the quarterly period ended September 30, 2018



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



C:\Users\biantorn\Desktop\logo.gif



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)



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 every Interactive Data File required to be submitted 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 such files).

Yes       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    



The number of shares outstanding of the registrant’s Common Stock as of November 2, 2018 was 105,549,000.

 

 


 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



Table of Contents





 



Page

Part I.  Financial Information (Unaudited)

 



 

Item 1.  Financial Statements

 



 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

2



 

Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

 

3



 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017

 

4



 

Consolidated Statement of Equity for the nine months ended September 30, 2018

5



 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

6



 

Notes to Consolidated Financial Statements

7



 

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

36



 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

55



 

Item 4.  Controls and Procedures

56



 

Part II.  Other Information

 



 

Item 1.  Legal Proceedings

57



 

Item 1A.  Risk Factors

57



 

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

58



 

Item 6.  Exhibits

59



 

Signature

60



 

 

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, 2018

 

December 31, 2017

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

238 

 

$

362 

Accounts receivable, less allowances of $106 and $69, respectively

 

 

744 

 

 

819 

Contract acquisition costs

 

 

102 

 

 

 -

Prepaid expenses

 

 

95 

 

 

78 

Income taxes and other current assets

 

 

103 

 

 

64 

Total current assets

 

 

1,282 

 

 

1,323 



 

 

 

 

 

 

Property, plant and equipment, net

 

 

14,268 

 

 

14,377 

Goodwill

 

 

6,624 

 

 

7,024 

Other intangibles, net

 

 

1,626 

 

 

2,063 

Other assets

 

 

233 

 

 

97 

Total assets

 

$

24,033 

 

$

24,884 



 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Long-term debt due within one year

 

$

1,005 

 

$

656 

Accounts payable

 

 

457 

 

 

564 

Advanced billings

 

 

261 

 

 

270 

Accrued content costs

 

 

111 

 

 

102 

Accrued other taxes

 

 

197 

 

 

156 

Accrued interest

 

 

233 

 

 

401 

Pension and other postretirement benefits

 

 

29 

 

 

29 

Other current liabilities

 

 

324 

 

 

330 

Total current liabilities

 

 

2,617 

 

 

2,508 



 

 

 

 

 

 

Deferred income taxes

 

 

1,204 

 

 

1,139 

Pension and other postretirement benefits

 

 

1,571 

 

 

1,676 

Other liabilities

 

 

296 

 

 

317 

Long-term debt

 

 

16,402 

 

 

16,970 



 

 

 

 

 

 

Equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

11.125%, Series A, 0 and 19,250 shares issued and outstanding

 

 

 

 

 

 

at September 30, 2018 and December 31, 2017, respectively)

 

 

 -

 

 

 -

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

 

 

 

 

 

 

106,025 and 79,532 issued and 105,553 and 78,441 outstanding,

 

 

 

 

 

 

at September 30, 2018 and December 31, 2017, respectively)

 

 

27 

 

 

20 

Additional paid-in capital

 

 

4,793 

 

 

5,034 

Accumulated deficit

 

 

(2,533)

 

 

(2,263)

Accumulated other comprehensive loss, net of tax

 

 

(330)

 

 

(366)

Treasury common stock

 

 

(14)

 

 

(151)

Total equity

 

 

1,943 

 

 

2,274 

Total liabilities and equity

 

$

24,033 

 

$

24,884 



 

 

 

 

 

 



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, 2018 AND 2017

($ 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,



 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,126 

 

$

2,251 

 

$

6,487 

 

$

6,911 



 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Network access expenses

 

 

353 

 

 

390 

 

 

1,094 

 

 

1,209 

Network related expenses

 

 

476 

 

 

498 

 

 

1,437 

 

 

1,468 

Selling, general and administrative expenses

 

 

445 

 

 

487 

 

 

1,374 

 

 

1,560 

Depreciation and amortization

 

 

471 

 

 

539 

 

 

1,462 

 

 

1,670 

Goodwill impairment

 

 

400 

 

 

 -

 

 

400 

 

 

670 

Acquisition and integration costs

 

 

 -

 

 

 

 

 -

 

 

15 

Restructuring costs and other charges

 

 

14 

 

 

14 

 

 

20 

 

 

55 

Total operating expenses

 

 

2,159 

 

 

1,929 

 

 

5,787 

 

 

6,647 



 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(33)

 

 

322 

 

 

700 

 

 

264 



 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

 

 

 

 

 

16 

 

 

Pension settlement costs

 

 

 

 

15 

 

 

34 

 

 

77 

Gain (loss) on extinguishment of debt

 

 

(2)

 

 

 

 

31 

 

 

(89)

Interest expense

 

 

389 

 

 

381 

 

 

1,148 

 

 

1,157 



 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(430)

 

 

(69)

 

 

(435)

 

 

(1,055)

Income tax benefit

 

 

(4)

 

 

(31)

 

 

(11)

 

 

(280)



 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(426)

 

 

(38)

 

 

(424)

 

 

(775)

Less: Dividends on preferred stock

 

 

 -

 

 

54 

 

 

107 

 

 

161 

Net loss attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Frontier common shareholders

 

$

(426)

 

$

(92)

 

$

(531)

 

$

(936)



 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Frontier common shareholders

 

$

(4.11)

 

$

(1.19)

 

$

(6.09)

 

$

(12.06)



 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Frontier common shareholders

 

$

(4.11)

 

$

(1.19)

 

$

(6.09)

 

$

(12.07)



 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average shares outstanding - basic

 

 

103,665 

 

 

77,797 

 

 

87,138 

 

 

77,714 



 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average shares outstanding - diluted

 

 

103,665 

 

 

77,797 

 

 

87,138 

 

 

77,875 



 

 

 

 

 

 

 

 

 

 

 

 









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

3

 


 

 

 

PART I. FINANCIAL INFORMATION (Continued)



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

($ in millions)

(Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

September 30,

 

September 30,



 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(426)

 

$

(38)

 

$

(424)

 

$

(775)

Other comprehensive income (loss), net of tax

 

 

(34)

 

 

(20)

 

 

36 

 

 

38 



 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(460)

 

$

(58)

 

$

(388)

 

$

(737)







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, 2018

($ in millions and shares in thousands)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the nine months ended September 30, 2018



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 at January 1, 2018

 

19,250 

 

$

 -

 

79,532 

 

$

20 

 

$

5,034 

 

$

(2,263)

 

$

(366)

 

(1,091)

 

$

(151)

 

$

2,274 

Impact of adoption of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASC 606

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

154 

 

 

 -

 

 -

 

 

 -

 

 

154 

Conversion of preferred stock

 

(19,250)

 

 

 -

 

25,529 

 

 

 

 

(7)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

Stock plans

 

 -

 

 

 -

 

964 

 

 

 -

 

 

(127)

 

 

 -

 

 

 -

 

619 

 

 

137 

 

 

10 

Dividends on preferred stock

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(107)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(107)

Net loss

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(424)

 

 

 -

 

 -

 

 

 -

 

 

(424)

Other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

36 

 

 -

 

 

 -

 

 

36 

Balance September 30, 2018

 

 -

 

$

 -

 

106,025 

 

$

27 

 

$

4,793 

 

$

(2,533)

 

$

(330)

 

(472)

 

$

(14)

 

$

1,943 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





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, 2018 AND 2017

($ in millions)

(Unaudited)









 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended September 30,



 

2018

 

2017



 

 

 

 

 

 

Cash flows provided from (used by) operating activities:

 

 

 

 

 

 

Net loss

 

$

(424)

 

$

(775)

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

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,462 

 

 

1,670 

(Gain) loss on extinguishment of debt

 

 

(31)

 

 

89 

Pension settlement costs

 

 

34 

 

 

77 

Stock-based compensation expense

 

 

14 

 

 

10 

Amortization of deferred financing costs

 

 

26 

 

 

26 

Other adjustments

 

 

(24)

 

 

(11)

Deferred income taxes

 

 

(12)

 

 

(286)

Goodwill impairment

 

 

400 

 

 

670 

Change in accounts receivable

 

 

43 

 

 

161 

Change in accounts payable and other liabilities

 

 

(239)

 

 

(449)

Change in prepaid expenses, income taxes and other assets

 

 

(40)

 

 

Net cash provided from operating activities

 

 

1,209 

 

 

1,185 



 

 

 

 

 

 

Cash flows provided from (used by) investing activities:

 

 

 

 

 

 

Capital expenditures - Business operations

 

 

(947)

 

 

(846)

Capital expenditures - Integration activities

 

 

 -

 

 

(19)

Proceeds on sale of assets

 

 

11 

 

 

109 

Other

 

 

 

 

Net cash used by investing activities

 

 

(932)

 

 

(750)



 

 

 

 

 

 

Cash flows provided from (used by) financing activities:

 

 

 

 

 

 

Proceeds from long-term debt borrowings

 

 

1,840 

 

 

1,500 

Long - term debt payments

 

 

(1,997)

 

 

(1,662)

Financing costs paid

 

 

(43)

 

 

(15)

Premium paid to retire debt

 

 

(17)

 

 

(80)

Dividends paid on common stock

 

 

 -

 

 

(219)

Dividends paid on preferred stock

 

 

(107)

 

 

(161)

Capital lease obligation payments

 

 

(30)

 

 

(30)

Other

 

 

(11)

 

 

(4)

Net cash used by financing activities

 

 

(365)

 

 

(671)



 

 

 

 

 

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(88)

 

 

(236)

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

 

 

376 

 

 

522 



 

 

 

 

 

 

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

 

$

288 

 

$

286 



 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

Interest

 

$

1,266 

 

$

1,373 

Income tax payments (refunds), net

 

$

 

$

(4)





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, 2017. Certain reclassifications of amounts previously reported have been made to conform to the current presentation. 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, 2018, 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).



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.



b)

Accounting Changes: 

Except for the changes discussed below, Frontier has consistently applied the accounting policies to all periods presented in these unaudited consolidated financial statements.



Effective January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” as modified (ASC 606). Frontier applied ASC 606 using the modified retrospective method – i.e., by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC 605 “Revenue Recognition.” See Note 3 for additional details.



7

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

The table below summarizes the impact of the adoption of ASC 606 on revenue, operating expenses, and operating income for the three and nine months ended September 30, 2018:









 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 



 

For the three months ended September 30, 2018

 



 

 

 

 

 

 

Amounts without

 



 

 

 

 

Adjustments

 

Adoption of

 

($ in millions)

 

As Reported

 

for ASC 606

 

ASC 606

 



 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,126 

 

$

(6)

 

$

2,120 

 

Operating expenses

 

 

2,159 

 

 

 

 

2,162 

 

Operating loss

 

$

(33)

 

$

(9)

 

$

(42)

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the nine months ended September 30, 2018

 



 

 

 

 

 

 

Amounts without

 



 

 

 

 

Adjustments

 

Adoption of

 

($ in millions)

 

As Reported

 

for ASC 606

 

ASC 606

 



 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,487 

 

$

(14)

 

$

6,473 

 

Operating expenses

 

 

5,787 

 

 

10 

 

 

5,797 

 

Operating income (loss)

 

$

700 

 

$

(24)

 

$

676 

 



 

 

 

 

 

 

 

 

 

 



c)

Revenue Recognition: 

Revenue for Voice services, Data & Internet services, Video services, Switched and non-switched access services will be recognized as the service is provided. Services that are billed in advance include 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. Services that are billed in arrears include 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 revenue in our consolidated statements of operations and accrued in “Accounts receivable” on our consolidated balance sheet in the period that services are provided. Excise taxes are recognized as a liability when billed.



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), $50 million and $52 million, and $160 million and $160 million for the three and nine months ended September 30, 2018 and 2017, respectively, and video franchise fees of $11 million and $13 million, and $35 million and $39 million for the three and nine months ended September 30, 2018 and 2017, respectively, that we have recorded on a gross basis in our consolidated statements of operations and included within “Revenue” and “Network related expenses.



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 2016 acquisition of properties in California, Texas, and Florida with Verizon (CTF Acquisition), Frontier assumed the CAF Phase II support and related obligations that Verizon had previously accepted with regard to California and Texas. We are recognizing these subsidies into revenue on a straight-line basis.



8

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

For additional information about our revenue policies and other required disclosures in accordance with ASC 606, refer to Note 3.





d)

Cash Equivalents:

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash of $50 million and $14 million is included within “Income taxes and other current assets” on our consolidated balance sheet as of September 30, 2018 and December 31, 2017.  This amount represents funds held as collateral by a bank against letters of credit issued predominately to insurance carriers.



e)

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.



As a result of our quarterly qualitative assessment, we tested goodwill for impairment as of September 30, 2018. Refer to Note 6 for a discussion of our goodwill impairment testing and results as of September 30, 2018. 



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.

 





9

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

(2)      Recent Accounting Literature:



Recently Adopted Accounting Pronouncements



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. Frontier adopted the standard during the first quarter of 2018, using the modified retrospective method – i.e., by recognizing the cumulative effect of initially applying Accounting Standards Codification Topic (ASC) 606 as an adjustment to the opening balance of shareholders’ equity at January 1, 2018. The comparative information for historical periods has not been adjusted and continues to be reported under ASC 605. See Note 3 for additional details and disclosures.



Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

Effective January 1, 2018, we adopted FASB 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. For adoption, Frontier retrospectively applied changes to our presentation of pension settlement costs and certain other benefit costs.



10

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 



The following table summarizes the impacts of adopting ASU No. 2017-07.







 

 

 

 

 

 

 

 

 

 



 

 

 



 

For the three months ended September 30, 2017

 



 

 

 

Impact of Adoption

 

 

 

($ in millions)

 

As Reported

 

of ASU 2017-07

 

As Restated

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Network related expenses

 

$

497 

 

$

 

$

498 

 

Selling, general and administrative expenses

 

$

486 

 

$

 

$

487 

 

Pension settlement costs

 

$

15 

 

$

(15)

 

$

 -

 



 

 

 

 

 

 

 

 

 

 

Non-operating income/expenses:

 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

$

 

$

 

$

 

Pension settlement costs

 

$

 -

 

$

15 

 

$

15 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the nine months ended September 30, 2017

 



 

 

 

Impact of Adoption

 

 

 

($ in millions)

 

As Reported

 

of ASU 2017-07

 

As Restated

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Network related expenses

 

$

1,468 

 

$

 -

 

$

1,468 

 

Selling, general and administrative expenses

 

$

1,561 

 

$

(1)

 

$

1,560 

 

Pension settlement costs

 

$

77 

 

$

(77)

 

$

 -

 



 

 

 

 

 

 

 

 

 

 

Non-operating income/expenses:

 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

$

 

$

(1)

 

$

 

Pension settlement costs

 

$

 -

 

$

77 

 

$

77 

 



 

 

 

 

 

 

 

 

 

 



Recent Accounting Pronouncements Not Yet Adopted



Leases

In February 2016, the FASB issued ASU No. 2016 – 02, “Leases (ASC 842).” This standard, along with its amendments, 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. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. 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. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.



Frontier plans to adopt ASU 2016-02 using the modified retrospective approach which will result in the recognition of operating leases on the consolidated balance sheet without revising comparative period information or disclosures. The modified retrospective approach includes a number of optional practical expedients that we are currently evaluating and may elect to apply when we adopt this standard.  Frontier is currently evaluating the impact of adoption on our financial statements and related disclosures, including expected increases to assets and liabilities on our balance sheet, and expected minimal impact on our statement of operations.



Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, FASB issued ASU 2018-02, which allows for the reclassification of certain income tax effects related to the Tax Cuts and Jobs Act (the “Tax Act”) between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates to be included in “Income from continuing operations,” even in situations where the related items were originally recognized in “Other comprehensive income” (rather than in “Income

11

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

from continuing operations”). The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. We are still evaluating certain aspects of this ASU as well as the related impacts it may have on our financial statements.



Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, “Compensation — Stock Compensation (ASC 718), Improvements to Nonemployee Share-Based Payment Accounting,” which aligns the measurement and classification guidance for share-based payments to nonemployees with that for employees, with certain exceptions. It expands the scope of ASC 718 to include share-based payments granted to nonemployees and supersedes the guidance in ASC 505-50. Currently, nonemployee share-based payment awards are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever can be more reliably measured. The ASU retains the existing cost attribution guidance, which requires entities to recognize compensation cost for nonemployee awards in the same period and in the same manner (i.e., capitalize or expense) they would if they paid cash for the goods or services, but it moves the guidance to ASC 718. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Frontier is currently evaluating the impact of adopting this guidance.



(3)      ASC 606 Adoption and Revenue Recognition:



Frontier applied ASC 606 using the modified retrospective method  i.e., by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC 605 “Revenue Recognition.”



The following table includes information for the transition adjustment recorded as of January 1, 2018 to record the cumulative impact of adoption of ASC 606 for prior periods.







 

 

 

 

 

 

 

 

 



 

 



 

 

 

 

(Unaudited)



 

As Reported

 

ASC 606

 

Adjusted

($ in millions)

 

December 31, 2017

 

Transition Adjustment

 

January 1, 2018

Assets

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

819 

 

$

(32)

 

$

787 

Contract acquisition costs

 

$

 -

 

$

87 

 

$

87 

Other current assets

 

$

64 

 

$

 

$

68 

Property, plant and equipment, net

 

$

14,377 

 

$

15 

 

$

14,392 

Other assets

 

$

97 

 

$

127 

 

$

224 



 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

330 

 

$

 

$

335 

Other liabilities

 

$

317 

 

$

(9)

 

$

308 

Deferred income taxes

 

$

1,139 

 

$

51 

 

$

1,190 

Accumulated deficit

 

$

(2,263)

 

$

154 

 

$

(2,109)



 

 

 

 

 

 

 

 

 



The details of the significant changes are set out below.



12

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

Bundled Service and Allocation of Discounts

When customers purchase more than one service, the revenue allocable to each service under ASC 606 is determined based upon the relative stand-alone selling price of each service received.  While this change results in different allocations to each of the services, it does not change total customer revenue. We frequently offer service discounts as an incentive to customers. Service discounts reduce the total transaction price allocated to the performance obligations that are satisfied over the term of the customer contract. We may also offer incentives which are considered cash equivalents (e.g. Visa gift cards) that similarly result in a reduction of the total transaction price as well as lower revenue over the term of the contract. A contract asset is often created during the beginning of the contract term when the term of the incentive is shorter than the contract term. These contract assets are realized over the term of the contract as our performance obligations are satisfied and customer consideration is received.



Customer Incentives

In the process of acquiring and/or retaining customers, we may issue a variety of incentives aside from service discounts or cash equivalent incentives. Those incentives that have stand-alone value (e.g. gift cards not considered cash equivalents or free goods/services) are considered a separate performance obligation under ASC606. As a result, while these incentives are free to the customer, a portion of the consideration received from the customer over the contract term is ascribed to them based upon their relative stand-alone selling price. The revenue, reflected in “Other revenue” and costs, reflected in “Network access expense”, for these incentives are recognized when they are delivered to the customer and the performance obligation is satisfied.  Similar to discounts, these types of incentives generally result in the creation of a contract asset during the beginning of the contract term. As part of the above transition adjustment, $40 million and $37 million of Short-term and Long-term contract assets were recorded, respectively. As of September 30, 2018, we have included $38 million of Short-term contract assets in Other current assets and $37 million of Long-term contract assets in Other assets on our consolidated balance sheet.



Upfront Fees

All non-refundable upfront fees provide our customers with a material right to renew and therefore must be deferred and amortized into revenue over the expected period for which related services are provided.  With upfront fees assessed at the beginning of a contract, a contract liability is often created, which is reduced over the term of the contract as the performance obligations are satisfied. As part of the transition adjustment above, $13 million and $9 million of Short-term and Long-term contract liabilities were recorded, respectively, for carrier upfront fees. As of September 30, 2018, we have included $13 million of Short-term contract liabilities in Other current liabilities and $9 million of Long-term contract liabilities in Other liabilities on our consolidated balance sheet related to carrier upfront fees.



Contract Acquisition Costs

Under ASC 606, certain costs to acquire customers must be deferred and amortized over the related contract period or expected customer life (average of 3.8 years). For Frontier, this includes certain commissions paid to acquire new customers. Beginning January 1, 2018, commissions attributable to new customer contracts are being deferred and amortized into expense. Historically these acquisition costs were expensed as incurred. Frontier expects that the incremental commissions paid as a result of acquiring customers are recoverable and therefore, as part of the transition adjustment above, short-term acquisition costs of $87 million and long-term contract acquisition costs of $117 million were deferred. For the nine months ended September 30, 2018, Frontier deferred $106 million of costs and amortized deferred costs of $80 million to Selling, general and administrative expense. As of September 30, 2018, we have recorded short-term contract acquisition costs of $102 million and included $128 million of long-term contract acquisition costs in Other assets on our consolidated balance sheet. 



13

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

Reserves and Disputes

For carrier disputes, Frontier previously recorded a reserve as a reduction of commercial revenue on a case by case basis once the carrier claim was validated by Frontier. Under ASC 606, credits issued for disputes are variable consideration and an estimate for the credits to be issued is now being recorded at the time of customer billing and the related contract liability is reflected in our Allowance for doubtful accounts (see Note 4).  Other than the transition adjustment, there was no impact to our operating results for the nine months ended September 30, 2018 related to this change. 



Switched Access

Under ASC 606, switched access revenue, which has been historically reflected in Other regulatory revenue, is considered revenue from a customer; therefore, will be reflected in commercial customer revenue on a prospective basis.



Contributions in Aid of Construction (CIAC)

It is customary for us to charge customers for certain construction activities requested by them. Historically, these amounts were reflected as offsets to the costs of construction and were recorded net in property, plant and equipment accounts. Under ASC 606, certain CIAC amounts will now be recognized as other customer revenue. For the nine months ended September 30<