UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
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☐ |
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: 001-38341
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware |
52-2126573 |
(State or other jurisdiction |
(I.R.S. Employer |
of incorporation or organization) |
Identification No.) |
600 Telephone Avenue, Anchorage, Alaska 99503-6091
(Address of principal executive offices) (Zip Code)
(907) 297-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
Common Stock, par value $.01 per share |
ALSK |
The Nasdaq Stock Market LLC |
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 (§232.405 of this chapter) 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 ☒
As of May 4, 2020, there were outstanding 53,560,784 shares of Common Stock, $.01 par value, of the registrant.
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PART I. |
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Item 1. |
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Condensed Consolidated Balance Sheets (Unaudited) As of March 31, 2020 and December 31, 2019 |
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4 |
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6 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
25 |
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Item 3. |
43 |
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Item 4. |
44 |
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PART II. |
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Item 1. |
44 |
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Item 1A. |
44 |
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Item 2. |
45 |
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Item 3. |
45 |
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Item 4. |
45 |
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Item 5. |
45 |
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Item 6. |
45 |
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46 |
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 101.INS
Exhibit 101.SCH
Exhibit 101.CAL
Exhibit 101.DEF
Exhibit 101.LAB
Exhibit 101.PRE
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Condensed Consolidated Balance Sheets
(Unaudited, In Thousands Except Per Share Amounts)
March 31, |
December 31, |
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2020 |
2019 |
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Assets | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 33,818 | $ | 26,662 | ||||
Restricted cash |
1,620 | 1,631 | ||||||
Short-term investments |
134 | 134 | ||||||
Accounts receivable, net of allowance of $4,285 and $4,627 |
27,738 | 34,354 | ||||||
Materials and supplies |
7,745 | 8,900 | ||||||
Prepayments and other current assets |
12,535 | 9,617 | ||||||
Total current assets |
83,590 | 81,298 | ||||||
Property, plant and equipment |
1,429,446 | 1,424,904 | ||||||
Less: accumulated depreciation and amortization |
(1,049,102 | ) | (1,042,546 | ) | ||||
Property, plant and equipment, net |
380,344 | 382,358 | ||||||
Operating lease right of use assets |
80,394 | 80,991 | ||||||
Other assets |
10,307 | 12,598 | ||||||
Total assets |
$ | 554,635 | $ | 557,245 | ||||
Liabilities and Stockholders' Equity |
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Current liabilities: |
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Current portion of long-term obligations |
$ | 7,931 | $ | 8,906 | ||||
Accounts payable, accrued and other current liabilities |
42,337 | 39,108 | ||||||
Advance billings and customer deposits |
3,680 | 3,761 | ||||||
Operating lease liabilities - current |
2,902 | 2,795 | ||||||
Total current liabilities |
56,850 | 54,570 | ||||||
Long-term obligations, net of current portion |
165,561 | 167,476 | ||||||
Deferred income taxes |
4,550 | 4,403 | ||||||
Operating lease liabilities - noncurrent |
78,207 | 78,767 | ||||||
Other long-term liabilities, net of current portion |
80,606 | 78,520 | ||||||
Total liabilities |
385,774 | 383,736 | ||||||
Commitments and contingencies |
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Alaska Communications stockholders' equity: | ||||||||
Common stock, $.01 par value; 145,000 authorized; 54,561 issued and 53,561 outstanding at March 31, 2020; 54,085 issued and 53,085 outstanding at December 31, 2019 |
546 | 541 | ||||||
Treasury stock, 1,000 shares at cost |
(1,812 | ) | (1,812 | ) | ||||
Additional paid in capital |
161,709 | 161,844 | ||||||
Retained earnings |
12,902 | 15,367 | ||||||
Accumulated other comprehensive loss |
(5,312 | ) | (3,277 | ) | ||||
Total Alaska Communications stockholders' equity |
168,033 | 172,663 | ||||||
Noncontrolling interest |
828 | 846 | ||||||
Total stockholders' equity |
168,861 | 173,509 | ||||||
Total liabilities and stockholders' equity |
$ | 554,635 | $ | 557,245 |
See Notes to Condensed Consolidated Financial Statements
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, In Thousands Except Per Share Amounts)
Three Months Ended |
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March 31, |
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2020 |
2019 |
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Operating revenues |
$ | 58,266 | $ | 56,909 | ||||
Operating expenses: |
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Cost of services and sales (excluding depreciation and amortization) |
27,114 | 25,627 | ||||||
Selling, general and administrative |
15,394 | 16,656 | ||||||
Depreciation and amortization |
9,840 | 8,679 | ||||||
Loss (gain) on disposal of assets, net |
86 | (2 | ) | |||||
Total operating expenses |
52,434 | 50,960 | ||||||
Operating income |
5,832 | 5,949 | ||||||
Other income and (expense): |
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Interest expense |
(2,959 | ) | (3,056 | ) | ||||
Loss on extinguishment of debt |
- | (2,799 | ) | |||||
Interest income |
75 | 75 | ||||||
Other income, net |
381 | 122 | ||||||
Total other income and (expense) |
(2,503 | ) | (5,658 | ) | ||||
Income before income tax expense |
3,329 | 291 | ||||||
Income tax expense |
(960 | ) | (98 | ) | ||||
Net income |
2,369 | 193 | ||||||
Less net loss attributable to noncontrolling interest |
(18 | ) | (34 | ) | ||||
Net income attributable to Alaska Communications |
2,387 | 227 | ||||||
Other comprehensive (loss) income: |
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Minimum pension liability adjustment |
68 | 20 | ||||||
Income tax effect |
(19 | ) | (6 | ) | ||||
Amortization of defined benefit plan loss |
(33 | ) | 121 | |||||
Income tax effect |
9 | (34 | ) | |||||
Interest rate swap marked to fair value |
(2,878 | ) | (13 | ) | ||||
Income tax effect |
818 | 4 | ||||||
Reclassification to interest expense |
- | (227 | ) | |||||
Income tax effect |
- | 64 | ||||||
Total other comprehensive loss |
(2,035 | ) | (71 | ) | ||||
Total comprehensive income attributable to Alaska Communications |
352 | 156 | ||||||
Net loss attributable to noncontrolling interest |
(18 | ) | (34 | ) | ||||
Total other comprehensive income attributable to noncontrolling interest |
- | - | ||||||
Total comprehensive loss attributable to noncontrolling interest |
(18 | ) | (34 | ) | ||||
Total comprehensive income |
$ | 334 | $ | 122 | ||||
Net income per share attributable to Alaska Communications: |
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Basic |
$ | 0.04 | $ | 0.00 | ||||
Diluted |
$ | 0.04 | $ | 0.00 | ||||
Weighted average shares outstanding: |
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Basic |
53,186 | 53,382 | ||||||
Diluted |
54,237 | 54,605 |
See Notes to Condensed Consolidated Financial Statements
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, In Thousands Except Per Share Amounts)
Three Months Ended |
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March 31, |
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2020 |
2019 |
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Number of Common Shares Issued and Outstanding |
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Balance at beginning of period |
53,085 | 53,268 | ||||||
Issuance of common stock pursuant to stock plans, $.01 par |
476 | 342 | ||||||
Purchases of common stock, $.01 par |
- | - | ||||||
Balance at end of period |
53,561 | 53,610 | ||||||
Total Stockholders' Equity - Beginning Balance |
$ | 173,509 | $ | 169,750 | ||||
Common Stock |
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Balance at beginning of period |
541 | 533 | ||||||
Issuance of common stock pursuant to stock plans, $.01 par |
5 | 3 | ||||||
Balance at end of period |
546 | 536 | ||||||
Treasury Stock |
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Balance at beginning of period |
(1,812 | ) | - | |||||
Purchases of common stock, $.01 par |
- | - | ||||||
Balance at end of period |
(1,812 | ) | - | |||||
Additional Paid In Capital |
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Balance at beginning of period |
161,844 | 160,514 | ||||||
Stock-based compensation |
309 | 498 | ||||||
Surrender of shares to cover minimum withholding taxes on stock-based compensation |
(439 | ) | (305 | ) | ||||
Issuance of common stock pursuant to stock plans, $.01 par |
(5 | ) | (3 | ) | ||||
Balance at end of period |
161,709 | 160,704 | ||||||
Retained Earnings |
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Balance at beginning of period |
15,367 | 10,439 | ||||||
Net income attributable to Alaska Communications |
2,387 | 227 | ||||||
Cash dividends declared, $0.09 per common share |
(4,852 | ) | - | |||||
Balance at end of period |
12,902 | 10,666 | ||||||
Accumulated Other Comprehensive Loss |
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Balance at beginning of period |
(3,277 | ) | (2,675 | ) | ||||
Other comprehensive loss |
(2,035 | ) | (71 | ) | ||||
Balance at end of period |
(5,312 | ) | (2,746 | ) | ||||
Noncontrolling Interest |
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Balance at beginning of period |
846 | 939 | ||||||
Net loss attributable to noncontrolling interest |
(18 | ) | (34 | ) | ||||
Balance at end of period |
828 | 905 | ||||||
Total Stockholders' Equity - Ending Balance |
$ | 168,861 | $ | 170,065 |
See Notes to Condensed Consolidated Financial Statements
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
Three Months Ended |
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March 31, |
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2020 |
2019 |
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Cash Flows from Operating Activities: |
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Net income |
$ | 2,369 | $ | 193 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
9,840 | 8,679 | ||||||
Loss (gain) on disposal of assets, net |
86 | (2 | ) | |||||
Amortization of debt issuance costs and debt discount |
350 | 303 | ||||||
Loss on extinguishment of debt |
- | 2,799 | ||||||
Amortization of deferred capacity revenue |
(1,360 | ) | (1,126 | ) | ||||
Stock-based compensation |
309 | 498 | ||||||
Deferred income tax expense |
636 | 92 | ||||||
Charge for uncollectible accounts |
(229 | ) | (697 | ) | ||||
Amortization of right-of-use assets |
521 | 565 | ||||||
Other non-cash (income) expense, net |
(33 | ) | 121 | |||||
Changes in operating assets and liabilities |
9,873 | 4,050 | ||||||
Net cash provided by operating activities |
22,362 | 15,475 | ||||||
Cash Flows from Investing Activities: |
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Capital expenditures |
(7,463 | ) | (8,563 | ) | ||||
Capitalized interest |
(316 | ) | (355 | ) | ||||
Change in unsettled capital expenditures |
(3,759 | ) | (1,121 | ) | ||||
Net cash used by investing activities |
(11,538 | ) | (10,039 | ) | ||||
Cash Flows from Financing Activities: |
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Repayments of long-term debt |
(3,240 | ) | (171,758 | ) | ||||
Proceeds from the issuance of long-term debt |
- | 180,000 | ||||||
Debt issuance costs and discounts |
- | (2,659 | ) | |||||
Cash paid for debt extinguishment |
- | (1,222 | ) | |||||
Payment of withholding taxes on stock-based compensation |
(439 | ) | (305 | ) | ||||
Net cash (used) provided by financing activities |
(3,679 | ) | 4,056 | |||||
Change in cash, cash equivalents and restricted cash |
7,145 | 9,492 | ||||||
Cash, cash equivalents and restricted cash, beginning of period |
28,293 | 14,985 | ||||||
Cash, cash equivalents and restricted cash, end of period |
$ | 35,438 | $ | 24,477 | ||||
Supplemental Cash Flow Data: |
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Interest paid |
$ | 2,919 | $ | 3,075 | ||||
Income taxes paid, net |
$ | - | $ | 10 |
See Notes to Condensed Consolidated Financial Statements
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
1. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Alaska Communications Systems Group, Inc. (“we”, “our”, “us”, the “Company” and “Alaska Communications”), a Delaware corporation, through its operating subsidiaries, provides broadband telecommunication and managed information technology (“IT”) services to customers in the State of Alaska and beyond using its statewide and interstate telecommunications network.
The accompanying unaudited condensed consolidated financial statements represent the consolidated financial position, comprehensive income, stockholders’ equity and cash flows of Alaska Communications Systems Group, Inc. and the following wholly-owned subsidiaries:
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Alaska Communications Systems Holdings, Inc. ("ACS Holdings") |
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Crest Communications Corporation |
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ACS of Alaska, LLC (“ACSAK”) |
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WCI Cable, Inc. |
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ACS of the Northland, LLC (“ACSN”) |
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WCIC Hillsboro, LLC |
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ACS of Fairbanks, LLC (“ACSF”) |
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Alaska Northstar Communications, LLC |
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ACS of Anchorage, LLC (“ACSA”) |
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WCI LightPoint, LLC |
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ACS Wireless, Inc. ("ACSW") |
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WorldNet Communications, Inc. |
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ACS Long Distance, LLC |
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Alaska Fiber Star, LLC |
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• |
Alaska Communications Internet, LLC (“ACSI”) |
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TekMate, LLC |
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ACS Messaging, Inc. |
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• |
ACS Cable Systems, LLC (“ACSC”) |
In addition to the wholly-owned subsidiaries, the Company has a fifty percent controlling interest in ACS-Quintillion JV, LLC (“AQ-JV”), a joint venture formed by its wholly-owned subsidiary ACSC and Quintillion Holdings, LLC (“QHL”) in connection with the North Slope fiber optic network. See Note 3 “Joint Venture” for additional information.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company believes the disclosures made are adequate to make the information presented not misleading.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act provides for certain Federal income tax relief including the accelerated receipt of refundable Federal Alternative Minimum Tax (“AMT”) credits. This will result in the accelerated receipt by the Company of Federal AMT credits in the amount of $2,155. The CARES Act is not expected to have a material effect on the Company’s income tax provision or payments.
The Company consolidates the financial results of the AQ-JV based on its determination that, for accounting purposes, it holds a controlling financial interest in the joint venture and is the primary beneficiary of this variable interest entity. The Company has accounted for and reported QHL’s fifty percent ownership interest in the joint venture as a noncontrolling interest.
In the opinion of management, the unaudited condensed consolidated financial statements contain all normal, recurring adjustments necessary to present fairly the consolidated financial position, comprehensive income, stockholders’ equity and cash flows for all periods presented. Comprehensive income for the three-month period ended March 31, 2020, is not necessarily indicative of comprehensive income which might be expected for the entire year or any other interim periods. The balance sheet at December 31, 2019 has been derived from the audited financial statements as of that date but does not include all information and notes required by GAAP for complete financial statements. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes, including estimates of operating revenues, probable losses and expenses. Actual results could differ materially from those estimates.
Recently Adopted Accounting Pronouncements
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”) on a retrospective basis. ASU 2018-13 eliminates the requirement to disclose (i) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. The new guidance also requires the disclosure of (i) changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company did not have any financial assets and liabilities measured at Level 3 and had no transfers between Level 1 and Level 2 in the first quarter of 2020. Therefore, adoption of ASU 2018-13 had no effect on the Company’s financial statements and related disclosures.
Effective January 1, 2020, the Company adopted ASU 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”) on a prospective basis. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. The Company did not incur any implementation costs associated with hosting arrangements that are service contracts in the first quarter of 2020. Therefore, adoption of ASU 2018-15 had no effect on the Company’s financial statements and related disclosures.
Accounting Pronouncements Issued Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The amendments in ASU 2016-13, and subsequent amendments, introduce a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for the Company’s 2023 fiscal year and early adoption is permitted. Adoption on a modified-retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption is required. The Company is evaluating the effect ASU 2016-13 and subsequent updates will have on its financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20), Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). The amendments in ASU 2018-14 are intended to improve the effectiveness of disclosures in the notes to the financial statements about employer-sponsored defined benefit plans. The new guidance eliminates, among other items, the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. Expanded disclosures required under ASU 2018-14 include an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. Adoption on a retrospective basis to all periods presented is required. The Company is evaluating the effect ASU 2018-14 will have on its disclosures.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in ASU 2019-12 remove certain exceptions to the general principals of Topic 740 and improve and simplify other areas of Topic 740. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. Adoption is to be applied on a retrospective, modified-retrospective or prospective basis based on the specific amendment in the update. The Company is evaluating the effect ASU 2019-12 will have on its financial statements and related disclosures and doesn’t currently expect the effect to be material.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Optional expedients for cash flow hedging relationships affected by reference rate reform are offered if certain criteria are met. The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is evaluating ASU 2020-04 and considering the possible adoption of certain expedients offered.
2. |
REVENUE |
Revenue Recognition Policies
Revenue Accounted for in Accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”)
At contract inception, the Company assesses the goods and services promised to the customer and identifies the performance obligation for each promise to transfer a good or service that is distinct. The Company considers all obligations whether they are explicitly stated in the contract or are implied by customary business practices.
The Company’s broadband and voice revenue includes service, installation and equipment charges. Managed IT revenues include the sale, configuration and installation of equipment and the subsequent provision of ongoing IT services. The Company enters into contracts with its rural health care customers and is subject to various regulatory requirements associated with the provision of these services. Revenues associated with rural health care customers are recognized based on the amount the Company expects to collect as evidenced in its contract with the customer and the Company’s and customer’s agreement with the Federal Communications Commission (“FCC”) as the relevant service is provided. Regulatory access revenue includes (i) special access, which is primarily access to dedicated circuits sold to wholesale customers, substantially all of which is generated from interstate services; and (ii) cellular access, which is the transport of tariffed local network services between switches for cellular companies based on individually negotiated contracts. Regulatory access revenue is recognized as the service is provided to the customer.
Revenue Accounted for in Accordance with Other Guidance
Deferred revenue capacity liabilities are established for indefeasible rights of use (“IRUs”) on the Company’s network provided to third parties and are typically accounted for as operating leases. Regulatory access revenue includes interstate and intrastate switched access, consisting of services based primarily on originating and terminating access minutes from other carriers. High-cost support revenue consists of interstate revenue streams structured by federal regulatory agencies that allow the Company to recover its cost of providing universal service in Alaska.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
Disaggregation of Revenue
The following table provides the Company’s revenue disaggregated on the basis of its primary markets, customers, products and services for the three-month periods ended March 31, 2020 and 2019:
Three Months Ended March 31, 2020 |
Three Months Ended March 31, 2019 |
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Accounted for Under ASC 606 |
Accounted for Under Other Guidance |
Total Revenue |
Accounted for Under ASC 606 |
Accounted for Under Other Guidance |
Total Revenue |
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Business and Wholesale Revenue |
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Business broadband |
$ | 15,353 | $ | - | $ | 15,353 | $ | 15,208 | $ | - | $ | 15,208 | ||||||||||||
Business voice and other |
6,857 | - | 6,857 | 7,001 | - | 7,001 | ||||||||||||||||||
Managed IT services |
1,227 | - | 1,227 | 1,659 | - | 1,659 | ||||||||||||||||||
Equipment sales and installations |
1,414 | - | 1,414 | 880 | - | 880 | ||||||||||||||||||
Wholesale broadband |
10,253 | - | 10,253 | 8,551 | - | 8,551 | ||||||||||||||||||
Wholesale voice and other |
1,288 | - | 1,288 | 1,426 | - | 1,426 | ||||||||||||||||||
Operating leases and other deferred revenue |
- | 2,391 | 2,391 | - | 1,770 | 1,770 | ||||||||||||||||||
Total Business and Wholesale Revenue |
36,392 | 2,391 | 38,783 | 34,725 | 1,770 | 36,495 | ||||||||||||||||||
Consumer Revenue |
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Broadband |
6,692 | - | 6,692 | 6,468 | - | 6,468 | ||||||||||||||||||
Voice and other |
2,449 | - | 2,449 | 2,733 | - | 2,733 | ||||||||||||||||||
Total Consumer Revenue |
9,141 | - | 9,141 | 9,201 | - | 9,201 | ||||||||||||||||||
Regulatory Revenue |
||||||||||||||||||||||||
Access (1) |
4,691 | - | 4,691 | 5,116 | - | 5,116 | ||||||||||||||||||
Access (2) |
- | 727 | 727 | - | 1,173 | 1,173 | ||||||||||||||||||
High-cost support |
- | 4,924 | 4,924 | - | 4,924 | 4,924 | ||||||||||||||||||
Total Regulatory Revenue |
4,691 | 5,651 | 10,342 | 5,116 | 6,097 | 11,213 | ||||||||||||||||||
Total Revenue |
$ | 50,224 | $ | 8,042 | $ | 58,266 | $ | 49,042 | $ | 7,867 | $ | 56,909 |
(1) |
Includes customer ordered service and special access. |
(2) |
Includes Essential Network Support (“ENS”). |
Business broadband revenue includes revenue associated with rural health care customers. Consumer voice and other revenue includes revenue associated with the FCC’s Lifeline program.
Timing of Revenue Recognition
Revenue accounted for in accordance with ASC 606 consisted of the following for the three-month periods ended March 31, 2020 and 2019:
Three Months Ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
Services transferred over time |
$ | 44,119 | $ | 43,046 | ||||
Goods transferred at a point in time |
1,414 | 880 | ||||||
Regulatory access revenue (1) |
4,691 | 5,116 | ||||||
Total revenue |
$ | 50,224 | $ | 49,042 |
(1) |
Includes customer ordered service and special access. |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
Transaction Price Allocated to Remaining Performance Obligations
The aggregate amount of the transaction price allocated to the remaining performance obligations for contracts with customers that are unsatisfied, or partially unsatisfied, accounted for in accordance with ASC 606 was approximately $79,373 at March 31, 2020. Revenue will be recognized as the Company satisfies the associated performance obligations. For equipment delivery, installation and configuration, and certain managed IT services, which comprise approximately $1,851 of the total, the performance obligation is currently expected to be satisfied during the next twelve months. For business broadband, voice and other managed IT services, which comprise approximately $77,522 of the total, the performance obligation will be satisfied as the service is provided over the terms of the contracts, which range from one to ten years. The Company’s agreements with its consumer customers are typically on a month-to-month basis. Therefore, the Company’s provision of future service to these customers is not reflected in the above discussion of future performance obligations.
Contract Assets and Liabilities
The Company incurs certain incremental costs to obtain contracts that it expects to recover. These costs consist primarily of sales commissions and other directly related incentive compensation payments (reported as contract additions in the table below) which are dependent upon, and paid upon, successfully entering into individual customer contracts.
The table below provides a reconciliation of the contract assets associated with contracts with customers accounted for in accordance with ASC 606 for the three-month period ended March 31, 2020. Contract modifications did not have a material effect on contract assets in the three-month period ended March 31, 2020. Contract assets are classified as “Other assets” on the consolidated balance sheet.
2020 |
||||
Balance at January 1 |
$ | 7,242 | ||
Contract additions |
842 | |||
Amortization |
(930 | ) | ||
Balance at March 31 |
$ | 7,154 |
The Company recorded a charge for uncollectible accounts receivable of $299 in the three-month period ended March 31, 2020 associated with its contracts with customers. See Note 5 “Accounts Receivable.”
The table below provides a reconciliation of the contract liabilities associated with contracts with customers accounted for in accordance with ASC 606 for the three-month period ended March 31, 2020. Contract liabilities consist of deferred revenue and are included in “Accounts payable, accrued and other current liabilities” and “Other long-term liabilities, net of current portion.”
2020 |
||||
Balance at January 1 |
$ | 3,903 | ||
Contract additions |
96 | |||
Revenue recognized |
(359 | ) | ||
Balance at March 31 |
$ | 3,640 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
3. |
JOINT VENTURE |
The table below provides certain financial information about the AQ-JV included on the Company’s consolidated balance sheet at March 31, 2020 and December 31, 2019. Cash may be utilized only to settle obligations of the joint venture. Because the joint venture is an LLC, and the Company has not guaranteed its operations, the joint venture’s creditors do not have recourse to the general credit of the Company.
2020 |
2019 |
|||||||
Cash |
$ | 270 | $ | 270 | ||||
Property, plant and equipment, net of accumulated depreciation of $433 and $408 |
$ | 1,708 | $ | 1,733 |
The operating results and cash flows of the joint venture in the three-month periods of 2020 and 2019 were not material to the Company’s consolidated financial results.
4. |
FAIR VALUE MEASUREMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS |
Fair Value Measurements
The Company has developed valuation techniques based upon observable and unobservable inputs to calculate the fair value of non-current monetary assets and liabilities. Observable inputs reflect market data obtained from independent sources and unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
● |
Level 1 - Quoted prices for identical instruments in active markets. |
● |
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
● |
Level 3 - Significant inputs to the valuation model are unobservable. |
Financial assets and liabilities are classified within the fair value hierarchy in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured, as well as their level within the fair value hierarchy.
The fair values of cash equivalents, restricted cash, other short-term monetary assets and liabilities and finance leases approximate carrying values due to their nature. The carrying values of the Company’s senior credit facilities and other long-term obligations of $175,205 and $178,245 at March 31, 2020 and December 31, 2019, respectively, approximate fair value primarily as a result of the stated interest rates of the 2019 Senior Credit Facility approximating current market rates (Level 2).
The following table presents the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, at each hierarchical level:
March 31, 2020 |
December 31, 2019 |
|||||||||||||||||||||||||||||||
Total |
Level 1 |
Level 2 |
Level 3 |
Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||||||||||||
Other long-term liabilities: |
||||||||||||||||||||||||||||||||
Interest rate swaps |
$ | 3,167 | $ | - | $ | 3,167 | $ | - | $ | 288 | $ | - | $ | 288 | $ | - |
Derivative Financial Instruments
The Company currently uses interest rate swaps to manage variable interest rate risk. At low LIBOR rates, payments under the swaps increase the Company’s cash interest expense, and at high LIBOR rates, they have the opposite effect.
The outstanding amount of the swaps as of a period end are reported on the balance sheet at fair value, represented by the estimated amount the Company would receive or pay to terminate the swaps. They are valued using models based on readily observable market parameters for all substantial terms of the contracts and are classified within Level 2 of the fair value hierarchy.
Under the terms of the 2019 Senior Credit Facility, the Company is required to enter into or obtain an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the agreement of a minimum of $90,000 with a weighted average life of at least two years. On June 28, 2019, the Company entered into two pay-fixed, receive-floating, interest rate swaps. Each swap is in the initial notional amount of $67,500, has an interest rate of 6.1735% inclusive of a 4.5% LIBOR spread, and a maturity date of June 30, 2022. The swaps are with different counter parties. Changes in fair value of interest rate swaps are recorded to accumulated other comprehensive loss and reclassified to interest expense when the hedged transaction is recognized in earnings. Cash payments and receipts associated with interest rate swaps are classified as cash flows from operating activities. See Note 8 “Long-Term Obligations” and Note 11 “Accumulated Other Comprehensive Loss.”
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The following table presents the notional amount, fair value and balance sheet classification of the Company’s derivative financial instruments designated as cash flow hedges as of March 31, 2020 and December 31, 2019.
Notional |
Fair |
||||||||
Balance Sheet Location |
Amount |
Value |
|||||||
At March 31, 2020: |
|||||||||
Interest rate swaps |
Other long-term liabilities |
$ | 132,469 | $ | 3,167 | ||||
At December 31, 2019: |
|||||||||
Interest rate swaps |
Other assets |
$ | 133,313 | $ | 288 |
The following table presents gains and losses before income taxes on the Company’s interest rate swaps designated as a cash flow hedge for the three-month periods ending March 31, 2020 and 2019.
Three Months Ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
Loss recognized in accumulated other comprehensive loss |
$ | (2,878 | ) | $ | (13 | ) | ||
Gain reclassified from accumulated other comprehensive loss to income |
- | 227 |
The following table presents the effect of cash flow hedge accounting on the Company’s Statements of Comprehensive Income for the three-month periods ending March 31, 2020 and 2019:
Three Months Ended |
||||||||
March 31, | ||||||||
2020 |
2019 |
|||||||
Recorded as Interest Expense: |
||||||||
Hedged interest payments | $ | (2,081 | ) | $ | (1,594 | ) | ||
Gain on interest rate swap | - | (227 | ) |
5. |
ACCOUNTS RECEIVABLE |
Accounts receivable, net, consists of the following at March 31, 2020 and December 31, 2019:
2020 |
2019 |
|||||||
Retail customers |
$ | 20,085 | $ | 22,101 | ||||
Wholesale carriers |
8,257 | 13,157 | ||||||
Other |
3,681 | 3,723 | ||||||
32,023 | 38,981 | |||||||
Less: allowance for doubtful accounts |
(4,285 | ) | (4,627 | ) | ||||
Accounts receivable, net |
$ | 27,738 | $ | 34,354 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The following table presents the activity in the allowance for doubtful accounts for the three-month period ended March 31, 2020, which is associated entirely with the Company’s contracts with customers:
2020 |
||||
Balance at January 1 |
$ | 4,627 | ||
Provision for uncollectible accounts |
(229 | ) | ||
Charged to other accounts |
- | |||
Deductions |
(113 | ) | ||
Asset at March 31 |
$ | 4,285 |
As of March 31, 2020, USAC had issued funding commitment letters for all of the Company’s rural health care customer applications for Funding Year 2018 (July 1, 2018 through June 30, 2019). For Funding Year 2019 (July 1, 2019 through June 30, 2020), the FCC had approved the Company’s cost-based rural rates for the majority of its customers and USAC began issuing funding commitment letters in February 2020. Accounts receivable, net, associated with rural health care customers was $4,450 and $6,827 at March 31, 2020 and December 31, 2019, respectively. Rural health care accounts are a component of the Retail Customers category in the above table.
6. |
OTHER CURRENT ASSETS |
Prepayments and other current assets consist of the following at March 31, 2020 and December 31, 2019:
2020 |
2019 |
|||||||
Income tax receivable |
$ | 4,659 | $ | 2,510 | ||||
Prepaid expense |
3,878 | 3,528 | ||||||
Other |
3,998 | 3,579 | ||||||
Total prepayments and other current assets |
$ | 12,535 | $ | 9,617 |
7. |
CURRENT LIABILITIES |
Accounts payable, accrued and other current liabilities consist of the following at March 31, 2020 and December 31, 2019:
2020 |
2019 |
|||||||
Accounts payable - trade |
$ | 10,474 | $ | 14,918 | ||||
Accrued payroll, benefits, and related liabilities |
14,975 | 12,193 | ||||||
Deferred capacity and other revenue |
6,712 | 7,311 | ||||||
Other |
10,176 | 4,686 | ||||||
Total accounts payable, accrued and other current liabilities |
$ | 42,337 | $ | 39,108 |
Advance billings and customer deposits consist of the following at March 31, 2020 and December 31, 2019:
2020 |
2019 |
|||||||
Advance billings |
$ | 3,650 | $ | 3,730 | ||||
Customer deposits |
30 | 31 | ||||||
Total advance billings and customer deposits |
$ | 3,680 | $ | 3,761 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
8. |
LONG-TERM OBLIGATIONS |
Long-term obligations consist of the following at March 31, 2020 and December 31, 2019:
2020 |
2019 |
|||||||
2019 senior secured credit facility due 2024 |
$ | 174,521 | $ | 177,750 | ||||
Debt discount |
(2,033 | ) | (2,234 | ) | ||||
Debt issuance costs |
(1,713 | ) | (1,863 | ) | ||||
Finance leases and other long-term obligations |
2,717 | 2,729 | ||||||
Total long-term obligations |
173,492 | 176,382 | ||||||
Less current portion |
(7,931 | ) | (8,906 | ) | ||||
Long-term obligations, net of current portion |
$ | 165,561 | $ | 167,476 |
As of March 31, 2020, the aggregate maturities of long-term obligations were as follows:
2020 (April 1 - December 31) |
$ | 5,666 | ||
2021 (January 1 - December 31) |
9,067 | |||
2022 (January 1 - December 31) |
11,333 | |||
2023 (January 1 - December 31) |
15,851 | |||
2024 (January 1 - December 31) |
133,018 | |||
Thereafter |
2,303 | |||
Total maturities of long-term obligations |
$ | 177,238 |
2019 Senior Credit Facility
The Company’s 2019 Senior Credit Facility consists of an Initial Term A Facility in the amount of $180,000, a Revolving Facility in an amount not to exceed $20,000, a Delayed-Draw Term A Facility in an amount not to exceed $25,000, and Incremental Term A Loans up to an aggregate principal amount of the greater of $60,000 and trailing twelve month EBITDA, as defined in the Agreement. On January 15, 2019, proceeds from the Initial Term A Facility of $178,335, net of discounts of $1,665, were used to repay in full the outstanding principal balance of the Term A-1 Facility and Term A-2 Facility under the Company’s 2017 Senior Credit Facility of $112,500 and $59,250, respectively, pay accrued and unpaid interest of $590, and pay fees and expenses associated with the transaction totaling $2,270 in 2019. The 2017 Senior Credit Facility was terminated on January 15, 2019. Discounts, debt issuance costs and fees associated with the 2019 Senior Credit Facility totaling $2,683 were deferred and will be charged to interest expense over the term of the agreement.
Amounts outstanding under the Initial Term A Facility, Revolving Facility, Delayed-Draw Facility and Incremental Term A Loans bear interest at LIBOR plus 4.5% per annum. The Company may, at its discretion and subject to certain limitations as defined in the Agreement, select an alternate base rate at a margin that is 1.0% lower than the counterpart LIBOR margin.
Principal payments on the Initial Term A Facility, Delayed-Draw A Facility and any amounts outstanding under the Incremental Term A Loans are due commencing in the third quarter of 2019 as follows: the third quarter of 2019 through the second quarter of 2020 – $1,125 per quarter; the third quarter of 2020 through the second quarter of 2022 – $2,250 per quarter; the third quarter of 2022 through the second quarter of 2023 – $3,375 per quarter; and the third quarter of 2023 through the fourth quarter of 2023 – $4,500 per quarter. The remaining outstanding principal balance, including any amounts outstanding under the Revolving Facility, is due on January 15, 2024. This schedule is subject to mandatory prepayments under certain conditions, including the Company’s generation of excess cash flow as defined in the Agreement. As a result of the generation of excess cash flow in 2019, a prepayment of principal in the amount of $2,104 was required in the first quarter of 2020.
There were no amounts outstanding under the Revolving Facility, Delayed-Draw Term A Facility and Incremental Term A Loans at March 31, 2020.
The obligations under the 2019 Senior Credit Facility are secured by substantially all the personal property and real property of the Company, subject to certain agreed exceptions.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The 2019 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, the payment of dividends and repurchase of the Company’s common stock.
The 2019 Senior Credit Facility provides for events of default customary for credit facilities of this type, including non-payment defaults on other debt, misrepresentation, breach of covenants, representations and warranties, change of control, and insolvency and bankruptcy.
Under the terms of the 2019 Senior Credit Facility, the Company is required to enter into or obtain an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the agreement of a minimum of $90,000 with a weighted average life of at least two years. On June 28, 2019, the Company entered into two pay-fixed, receive-floating, interest rate swaps. Each swap is in the initial notional amount of $67,500, has an interest rate of 6.1735% inclusive of a 4.5% LIBOR spread, and a maturity date of June 30, 2022. The swaps are with different counter parties.
2017 Senior Credit Facility
On January 15, 2019, the Company utilized proceeds from the 2019 Senior Credit Facility to repay in full the outstanding principal balance of its 2017 Senior Credit Facility in the amount of $171,750. The Company recorded a loss totaling $2,830 in 2019 on the extinguishment of debt associated with this transaction, including the write-off of debt issuance costs and third-party fees.
9. |
OTHER LONG-TERM LIABILITIES |
Other long-term liabilities consist of the following at March 31, 2020 and December 31, 2019:
2020 |
2019 |
|||||||
Other deferred IRU capacity revenue, net of current portion |
$ | 35,201 | $ | 34,440 | ||||
Deferred GCI capacity revenue, net of current portion |
28,519 | 29,036 | ||||||
Other deferred revenue, net of current portion |
4,541 | 4,825 | ||||||
Other |
12,345 | 10,219 | ||||||
Total other long-term liabilities |
$ | 80,606 | $ | 78,520 |
Amortization of deferred revenue included in the Consolidated Statements of Comprehensive Income was $2,357 and $2,025 in the three-month periods ended March 31, 2020 and 2019, respectively.
10. |
LEASES |
Lease Agreements Under Which the Company is the Lessee
The Company enters into agreements for land, land easements, access rights, IRUs, co-located data centers, buildings, equipment, pole attachments and personal property. These assets are utilized in the provision of broadband and telecommunications services to the Company’s customers. Operating leases are included in operating lease right of use assets and current and noncurrent operating lease liabilities on the consolidated balance sheet. Finance leases are included in property, plant and equipment and current portion of long-term obligations and long-term obligations on the consolidated balance sheet.
Certain leases include a provision for early termination, typically in return for an agreed amount of consideration. Early terminations recorded in the three-month period ended March 31, 2019 were not material.
The Company entered into additional operating lease commitments that had not yet commenced as of March 31, 2020 with a present value totaling approximately $8,928. These leases consist primarily of a dark fiber IRU agreement with a telecom carrier. The Company will sublease this fiber, with additional fiber of its own, to another carrier. These two agreements have a 10-year terms and are expected to commence in 2020. The commitments also include agreements associated with the Company’s CAF Phase II services which are expected to commence in 2020 and have terms of 7 to 25 years.
Short-term and variable lease cost recorded during the three-month periods ended March 31, 2020 and 2019 were not material.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The Company did not enter into any sale and leaseback transactions during the three-month period ended March 31, 2020.
The following table presents lease costs for agreements under which the Company is the lessee for the three-month periods ended March 31, 2020 and 2019.
Three Months Ended |
Three Months Ended |
|||||||
March 31, 2020 |
March 31, 2019 |
|||||||
Finance lease cost: |
||||||||
Amortization of right-of-use assets |
$ | 47 | $ | 20 | ||||
Interest on lease liabilities |
67 | 68 | ||||||
Operating lease costs |
1,968 | 1,955 | ||||||
Total lease cost |
$ | 2,082 | $ | 2,043 |
The following table provides information included on the consolidated balance sheet for agreements under which the Company is the lessee as of March 31, 2020 and December 31, 2019.
At |
At |
|||||||
March 31, 2020 |
December 31, 2019 |
|||||||
Operating leases: |
||||||||
Right of use assets |
$ | 80,394 | $ | 80,991 | ||||
Liabilities - current |
$ | 2,902 | $ | 2,795 | ||||
Liabilities - noncurrent |
78,207 | 78,767 | ||||||
Total liabilities |
$ | 81,109 | $ | 81,562 | ||||
Finance leases: |
||||||||
Property, plant and equipment |
$ | 5,800 | $ | 5,800 | ||||
Accumulated depreciation and amortization |
(3,746 | ) | (3,699 | ) | ||||
Property, plant and equipment, net |
$ | 2,054 | $ | 2,101 | ||||
Current portion of long-term obligations |
$ | 56 | $ | 53 | ||||
Long-term obligations, net of current portion |
2,661 | 2,676 | ||||||
Total finance lease liabilities |
$ | 2,717 | $ | 2,729 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The following table presents the maturities of lease liabilities at March 31, 2020 in twelve-month increments beginning April 1, 2020.
At March 31, 2020 |
||||||||
Operating |
Financing |
|||||||
Leases |
Leases |
|||||||
Year 1 |
$ | 7,433 | $ | 320 | ||||
Year 2 |
7,410 | 329 | ||||||
Year 3 |
7,357 | 338 | ||||||
Year 4 |
7,116 | 348 | ||||||
Year 5 |
6,929 | 357 | ||||||
Thereafter |
157,626 | 3,383 | ||||||
Total lease payments |
193,871 | 5,075 | ||||||
Less imputed interest |
(113,749 | ) | (2,358 | ) | ||||
Total present value of lease obligations |
80,122 | 2,717 | ||||||
Present value of current obligations |
(1,915 | ) | (56 | ) | ||||
Present value of long-term obligations |
$ | 78,207 | $ | 2,661 |
The following table presents other information about agreements under which the Company is the lessee for the three-month periods ended March 31, 2020 and 2019 and as of March 31, 2020.
Three Months Ended |
Three Months Ended |
|||||||
March 31, 2020 |
March 31, 2019 |
|||||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
Operating cash flows from finance leases |
$ | 266 | $ | 68 | ||||
Operating cash flows from operating leases |
1,826 | 2,276 | ||||||
Financing cash flows from finance leases |
52 | 9 |
At |
At |
|||||||
March 31, 2020 |
March 31, 2019 |
|||||||
Weighted-average remaining lease term (in years): |
||||||||
Finance leases |
13 | 14 | ||||||
Operating leases |
29 | 30 | ||||||
Weighted-average discount rate: |
||||||||
Finance leases |
9.8 | % | 9.8 | % | ||||
Operating leases |
6.9 | % | 6.9 | % |
Lease Agreements Under Which the Company is the Lessor
The Company’s agreements under which it is the lessor are primarily associated with the use of its network assets, including IRUs for fiber optic cable, colocation and buildings.
Certain leases include a provision for early termination, typically in return for an agreed amount of consideration. There were no early terminations recorded in the three-month period ended March 31, 2020.
The Company does not have material sublease arrangements as the lessor or lease arrangements with related parties.
The Company did not have sales-type leases or direct financing leases as of March 31, 2020.
The underlying assets associated with the Company’s operating leases are accounted for under ASC 360, “Property, Plant and Equipment.” The assets are depreciated on a straight-line basis over their estimated useful life, including any periods in which the Company expects to utilize the asset subsequent to termination of the lease.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The following table presents lease income for agreements under which the Company is the lessor for the three-month periods ended March 31, 2020 and 2019. Lease income is classified as revenue on the Statement of Comprehensive Income. The carrying value of the underlying leased assets is not material.
Three Months Ended |
Three Months Ended |
|||||||
March 31, 2020 |
March 31, 2019 |
|||||||
Total lease income |
$ | 1,171 | $ | 861 |
The following table presents the maturities of future undiscounted lease payments at March 31, 2020 in twelve-month increments beginning April 1, 2020.
At March 31, |
||||
2020 |
||||
Year 1 |
$ | 1,476 | ||
Year 2 |
987 | |||
Year 3 |
463 | |||
Year 4 |
446 | |||
Year 5 |
412 | |||
Thereafter |
2,649 | |||
Total future undiscounted lease payments |
$ | 6,433 |
11. |
ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following table summarizes the activity in accumulated other comprehensive loss for the three-month period ended March 31, 2020:
Defined |
||||||||||||
Benefit |
||||||||||||
Pension |
Interest |
|||||||||||
Plan |
Rate Swaps |
Total |
||||||||||
Balance at December 31, 2019 |
$ | (3,070 | ) | $ | (207 | ) | $ | (3,277 | ) | |||
Other comprehensive income (loss) before reclassifications |
49 | (2,060 | ) | (2,011 | ) | |||||||
Reclassifications from accumulated loss to net income |
(24 | ) | - | (24 | ) | |||||||
Net other comprehensive income (loss) |
25 | (2,060 | ) | (2,035 | ) | |||||||
Balance at March 31, 2020 |
$ | (3,045 | ) | $ | (2,267 | ) | $ | (5,312 | ) |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The following table summarizes the reclassifications from accumulated other comprehensive loss to net income for the three-month periods ended March 31, 2020 and 2019:
Three Months Ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
Amortization of defined benefit plan pension items: |
||||||||
Amortization of loss |
$ | (33 | ) | $ | 121 | |||
Income tax effect |
9 | (34 | ) | |||||
After tax |
(24 | ) | 87 | |||||
Amortization of gain on interest rate swap: |
||||||||
Reclassification to interest expense |
- | (227 | ) | |||||
Income tax effect |
- | 64 | ||||||
After tax |
- | (163 | ) | |||||
Total reclassifications, net of income tax |
$ | (24 | ) | $ | (76 | ) |
Amounts reclassified to net income from our defined benefit pension plan and interest rate swaps have been presented within “Other income (expense), net” and “Interest expense,” respectively, in the Statements of Comprehensive Income. The estimated amount to be reclassified from accumulated other comprehensive loss as an increase in interest expense within the next twelve months is $1,599. See Note 4 “Fair Value Measurements and Derivative Financial Instruments.”
12. |
STOCK INCENTIVE PLANS |
Under the Company’s stock incentive plan, stock options, restricted stock, stock-settled stock appreciation rights, performance share units and other awards may be granted to officers, employees, consultants, and non-employee directors.
2011 Incentive Award Plan
On June 10, 2011, Alaska Communications shareholders approved the 2011 Incentive Award Plan, which was amended and restated on June 30, 2014 and June 25, 2018, and which terminates in 2021. Following termination, all shares granted under this plan, prior to termination, will continue to vest under the terms of the grant when awarded. All remaining unencumbered shares of common stock previously allocated to the Prior Plans were transferred to the 2011 Incentive Award Plan. In addition, to the extent that any outstanding awards under the Prior Plans are forfeited or expire or such awards are settled in cash, such shares will again be available for future grants under the 2011 Incentive Award Plan. The Company grants Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”) as the primary equity based incentive for executive and certain non union-represented employees. The disclosures below are primarily associated with RSU and PSU grants awarded in 2017, 2018 and 2019.
Restricted Stock Units
The Company measures the fair value of RSUs based on the number of shares granted and the quoted closing market price of the Company’s common stock on the date of grant.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The following table summarizes the RSU, LTIP and non-employee director stock compensation activity for the three-month period ended March 31, 2020.
Weighted |
||||||||
Average |
||||||||
Grant Date |
||||||||
Number |
Fair |
|||||||
of Units |
Value |
|||||||
Nonvested at December 31, 2019 |
792 | $ | 1.74 | |||||
Granted |
- | - | ||||||
Vested |
(406 | ) | 1.79 | |||||
Canceled or expired |
- | - | ||||||
Nonvested at March 31, 2020 |
386 | $ | 1.69 |
Performance Stock Units
PSUs granted in 2017 vest at the end of the 2.5-year performance period, subject to achievement of certain performance conditions, achievement of a market condition and approval of the Compensation and Personnel Committee of the Board of Directors. As of December 31, 2019, certain Company performance targets were deemed probable of achievement and the relevant stock compensation was expensed in 2019.The PSUs granted in 2018 will vest in three equal installments, or tranches, if certain stock price thresholds and service thresholds are achieved. PSUs granted in the third quarter of 2019 will vest proportionally over the three-year period ending in March 2022 subject to the achievement of certain Company performance targets.
The following table summarizes the PSU activity for the three-month period ended March 31, 2020.
Weighted |
||||||||
Average |
||||||||
Grant Date |
||||||||
Number |
Fair |
|||||||
of Units |
Value |
|||||||
Nonvested at December 31, 2019 |
1,629 | $ | 1.07 | |||||
Granted |
28 | 1.76 | ||||||
Vested |
(296 | ) | 1.76 | |||||
Canceled or expired |
(268 | ) | 1.43 | |||||
Nonvested at March 31, 2020 |
1,093 | $ | 0.81 |
The following table provides selected information about the Company’s share-based compensation as of and for the three-month periods ended March 31, 2020 and 2019:
Three Months Ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
Total compensation cost for share-based payments |
$ | 309 | $ | 498 | ||||
Weighted average grant-date fair value of equity instruments granted (per share) |
$ | - | $ | - | ||||
Total fair value of shares vested during the period |
$ | 1,248 | $ | 991 | ||||
At March 31: |
||||||||
Unamortized share-based payments |
$ | 799 | $ | 947 | ||||
Weighted average period (in years) to be recognized as expense |
1.8 | 1.0 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
13. |
EARNINGS PER SHARE |
Earnings per share are based on the weighted average number of shares of common stock and dilutive potential common share equivalents outstanding. Basic earnings per share assumes no dilution and is computed by dividing net income attributable to Alaska Communications by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company.
The calculation of basic and diluted earnings per share for the three-month periods ended March 31, 2020 and 2019 are as follows:
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
14. |
RETIREMENT PLANS |
Multi-employer Defined Benefit Plan
Pension benefits for substantially all of the Company’s Alaska-based employees are provided through the Alaska Electrical Pension Fund (“AEPF”). The Company pays a contractual hourly amount based on employee classification or base compensation to the AEPF. As a multi-employer defined benefit plan, the accumulated benefits and plan assets are not determined for, or allocated separately to, the individual employer. This plan was not in endangered or critical status during the plan year.
Defined Benefit Plan
The Company has a separate defined benefit plan that covers certain employees previously employed by Century Telephone Enterprise, Inc. (“CenturyTel Plan”). This plan was transferred to the Company in connection with the acquisition of CenturyTel, Inc.’s Alaska properties, whereby assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan (the “Plan”) on September 1, 1999. As of March 31, 2020, this plan is not fully funded under the Employee Retirement Income Security Act of 1974, as amended.
The following table presents the net periodic pension expense for the ACS Retirement Plan for the three-month periods ended March 31, 2020 and 2019:
Three Months Ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
Interest cost |
$ | 117 | $ | 150 | ||||
Expected return on plan assets |
(185 | ) | (170 | ) | ||||
Amortization of loss |
35 | 141 | ||||||
Net periodic pension expense |
$ | (33 | ) | $ | 121 |
Net periodic pension expense is included in the line item “Other income, net” in the Statements of Comprehensive Income.
15. |
STOCKHOLDERS’ EQUITY |
Treasury Stock
The Company does not currently have an authorized share repurchase program. Common stock repurchased under prior authorizations were accounted for as treasury stock.
Dividends
The Company’s dividend policy is set by the Company’s Board of Directors and is subject to the terms of its credit facilities and the continued current and future performance and liquidity needs of the Company. Dividends on the Company’s common stock are not cumulative to the extent they are declared. On March 9, 2020, the Company’s Board of Directors declared a one-time cash dividend of $0.09 per share of common stock to be paid on June 18, 2020 to shareholders of record as of the close of business on April 20, 2020. The dividend totaled $4,852.
16. |
SUPPLEMENTAL CASH FLOW INFORMATION |
Restricted cash of $1,620 at March 31, 2020 consisted of certificates of deposit of $1,600 required under the terms of certain contracts to which the Company is a party and other restricted cash of $20. Restricted cash of $1,631 at December 31, 2019 consisted of certificates of deposit of $1,600 required under the terms of certain contracts to which the Company is a party and other restricted cash of $31.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the statement of financial position at March 31, 2020 and 2019 that sum to the total of these items reported in the statement of cash flows:
March 31, |
||||||||
2020 |
2019 |
|||||||
Cash and cash equivalents |
$ | 33,818 | $ | 22,845 | ||||
Restricted cash |
1,620 | 1,632 | ||||||
Total cash, cash equivalents and restricted cash |
$ | 35,438 | $ | 24,477 |
The following table presents supplemental non-cash transaction information for the three-month periods ended March 31, 2020 and 2019:
2020 |
2019 |
|||||||
Supplemental Non-cash Transactions: |
||||||||
Capital expenditures incurred but not paid at March 31 |
$ | 2,215 | $ | 3,878 | ||||
Dividends payable at March 31, 2020 |
$ | 4,852 | $ | - | ||||
Additions to ARO asset |
$ | 70 | $ | 7 |
17. |
BUSINESS SEGMENTS |
The Company operates its business under a single reportable segment. The Company’s chief operating decision maker assesses the financial performance of the business as follows: (i) revenues are managed on the basis of specific customers and customer groups; (ii) costs are managed and assessed by function and generally support the organization across all customer groups or revenue streams; (iii) profitability is assessed at the consolidated level; and (iv) investment decisions and the assessment of existing assets are based on the support they provide to all revenue streams.
18. |
COMMITMENTS AND CONTINGENCIES |
The Company enters into purchase commitments with vendors in the ordinary course of business, including minimum purchase agreements. The Company also has long-term purchase contracts with vendors to support the on-going needs of its business. These purchase commitments and contracts have varying terms and in certain cases may require the Company to buy goods and services in the future at predetermined volumes and at fixed prices.
In February 2020, the Company received a draft audit report from USAC in connection with USAC’s inquiry into the Company’s funding requests under the Rural Health Care program for certain customers for funding years 2012 through 2016 (July 2012 through June 2017). The draft audit report alleges violations of the FCC’s rules for establishing rural rates and urban rates, the provisioning and billing of ineligible services and products, and violations of the FCC’s competitive bidding rules. The Company intends to vigorously defend against the conclusions of the draft audit report and, if necessary, appeal the final audit findings. Based on these draft findings, the Company has determined that it is probable that resolution of these matters will result in the recognition of a contingent liability and charge to expense. The Company does not currently have sufficient information to reasonably estimate the amount, or a range, of the potential charge.
The Company is involved in various claims, legal actions and regulatory proceedings arising in the ordinary course of business. The Company establishes an accrual when a particular contingency is probable and estimable, and has recorded litigation accruals totaling $1,200 at March 31, 2020 against certain current claims and legal actions. The Company also faces contingencies that are reasonably possible to occur that cannot currently be estimated. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, comprehensive income or cash flows. It is the Company’s policy to expense costs associated with loss contingencies, including any related legal fees, as they are incurred.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ANALYSTS’ REPORTS
This Form 10-Q and our future filings on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “seeks”, “should” and variations of these words and similar expressions are intended to identify these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Such forward-looking statements may be contained in this Form 10-Q under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by us as a result of a number of important factors. Examples of these factors include (without limitation):
• |
Our ability to continue to develop and fund attractive, integrated products and services to evolving industry standards, and meet the pressure from competition to offer these services at lower prices |
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unforeseen challenges when entering new markets and our ability to recognize and react to actions, products or services of competitors that threaten our competitive advantage in the marketplace |
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our size, because we are a smaller sized competitor in the markets we serve and we compete against large competitors with substantially greater resources |
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a major public health issue, such as an epidemic or pandemic, could adversely affect our operations and financial performance |
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governmental and public policy changes and audits and investigations, including on-going changes in our revenues, or obligations for current and prior periods related to these programs, resulting from regulatory actions affecting on-going support for state programs such as Essential Network Support, and federal programs such as the rural health care universal service support mechanism, including ascertainment of the “urban rate” and “rural rate” used to determine federal support payments for services we provide to our rural health care customers for current and prior periods, some of which are currently under audit or subject to an inquiry |
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our ability to comply with the regulatory requirements to contribute to the Universal Service Fund and receive support payments from that fund |
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our ability to obtain and appropriately allocate resources to support our growth objectives |
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• |
our ability to maintain successful arrangements with our represented employees |
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our ability to keep pace with rapid technological developments and changing standards in the telecommunications industry, including on-going capital expenditures needed to upgrade our network to industry competitive speeds, particularly in light of expected 5G deployments by mobile wireless carriers |
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our ability to maintain our cost structure as a focused broadband and managed IT services company, which could impact both cash flow from operating activities and our overall financial condition |
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• |
disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber-attacks or security breaches of the physical infrastructure, operating systems or devices that our customers use to access our products and services; due to the COVID-19 pandemic, many of our employees are temporarily working remotely, which may pose additional data security risks |
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• |
our ability to adequately invest in the maintenance and upgrade of our networks and other information technology systems |
• |
the Alaskan economy, which has been impacted by continued low crude oil prices which are creating a significant impact on both the level of spending by the State of Alaska and the level of investment in resource development projects by natural resource exploration and development companies in Alaska, together with the ongoing cuts to the state of Alaska budget and resulting spending reductions, all of which may impact the economy in the markets we serve and impact our future financial performance |
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• |
our ability to invest sufficiently in our underlying physical infrastructure, including buildings, fleet and related equipment |
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• |
the ability to attract, recruit, retain and develop our workforce, and implement succession planning necessary for achieving our business plan |
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structural declines for voice and other legacy services within the telecommunications industry |
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• |
the success or failure of any future acquisitions or other major transactions |
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• |
the actions of activist stockholders, which could cause us to incur significant expense, hinder execution of our business strategy and impact our stock price |
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• |
unanticipated damage to one or more of our undersea fiber optic cables resulting from construction or digging mishaps, fishing boats or other reasons |
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• |
a maintenance or other failure of our network or data centers |
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• |
a failure of information technology systems |
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• |
a third-party claim that the Company is infringing upon their intellectual property, resulting in litigation or licensing expenses, or the loss of our ability to sell or support certain products |
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• |
unanticipated costs required to fund our post-retirement benefit plans, or contingent liabilities associated with our participation in a multi-employer pension plan |
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geologic or other natural disturbances relevant to the location of our operations |
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our ability to meet the terms of our financing agreements and to draw down additional funds under the facility to meet our liquidity needs |
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• |
the cost and availability of future financing, at the terms, and subject to the conditions necessary, to support our business and pursue growth opportunities; our debt could also have negative consequences for our business; for example, it could increase our vulnerability to general adverse economic and industry conditions, or limit our flexibility in planning for, or reacting to, changes in our business and the telecommunications industry; in addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities; if we are unable to satisfy the financial covenants contained in those agreements, or are unable to generate cash sufficient to make required debt payments, the lenders and other parties to those arrangements could accelerate the maturity of some or all of our outstanding indebtedness |
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• |
our success in providing broadband solutions to the North Slope and western Alaska |
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• |
the success of the Company’s expansion into managed IT services, including the execution of those services for customers |
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our internal control over financial reporting may not be effective, which could cause our financial reporting to be unreliable |
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• |
the matters described under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and this Quarterly Report on Form 10-Q. |
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause the forward-looking events discussed in this Form 10-Q or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10-Q.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
OVERVIEW
We are a fiber broadband and managed IT services provider, offering technology and service enabled customer solutions to business and wholesale customers in and out of Alaska. We also provide telecommunication services to consumers in the most populated communities throughout the state. Our facilities-based communications network extends through the economically significant portions of Alaska and connects to the contiguous states via our two diverse undersea fiber optic cable systems. Our network is among the most expansive in Alaska and forms the foundation of service to our customers. We operate in a largely two-player terrestrial wireline market and we estimate our market share to be less than 25% statewide. However, our revenue performance relative to our largest competitor suggests that we are gaining market share in the markets we are serving. A third-party market study indicates that we have a market share of close to 40% for “near net” opportunities, that is, within one mile of our fiber network.
The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating our own performance and allocating our resources.
Operating Initiatives
We are focused on being a customer centric fiber and managed IT company. Everything we do is focused around our customer, meeting and exceeding their needs through the application of technology. We are focused on delivering an exceptional customer experience throughout the customer lifecycle. This forms the foundation of our sustained differentiation, creating unique value for our customers to grow our market share, expand business with existing customers and minimize churn.
Our future investments and subsequent initiatives are focused on building and strengthening the business in three areas:
● |
Enhance and Augment our Network and Capabilities: This is what we do and is the basis of our offers, to lead the competition through innovation and leverage the latest technologies to meet our customer’s needs. Activities include investments to grow our fiber footprint, augmented with high speed fixed wireless technologies, as well as expanding our product capabilities that fully leverage our existing and growing fiber footprint. |
● |
Accelerate the Growth of Managed IT Services: This is a fragmented market without a leader, a significant market size and a set of services that are both adjacent and synergistic with communications and networking services. We continue to invest in winning share and expanding our capabilities, enabling and accelerating our customers’ transition to cloud services. |
● |
Drive Operational Excellence: Invest in operational systems that fundamentally change the way we deliver services that both enhance the customer experience as well as increase efficiency and productivity, redefining processes throughout the entire customer lifecycle to create new operating models and efficiencies. Investments that update our operational support and billing systems provide the foundational platform to further leverage digital technologies and expand with investments in analytics and artificial intelligence. |
These investment areas are not standalone and, in fact, are synergistic. We look to maximize each of these with any initiative for the highest return.
We recognize that everything we do is only possible through our people. Our employees are enablers that make any and all initiatives happen to serve our customers and earn their business. We will focus and make investments in employee engagement to maximize the realization of an exceptional customer experience and maximize the effectiveness of our investments.
We will continue to evaluate strategic opportunities that address scale, geographic diversification, and return value to our shareholders.
The Alaska Economy
We operate in a geographically diverse state with unique characteristics. We monitor the state of the economy and, in doing so, we compare Alaska economic activity with broader economic conditions. In general, we believe that the Alaska telecommunications market, as well as general economic activity in Alaska, is affected by certain economic factors, which include:
● |
investment activity in the oil and gas markets and the price of crude oil |
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● |
tourism levels |
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● |
governmental spending and activity of military personnel |
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● |
the price and price trends of bandwidth |
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● |
the growth in demand for bandwidth |
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● |
decline in demand for voice and other legacy services |
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● |
local customer preferences |
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● |
unemployment levels |
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● |
housing activity and development patterns |
We have observed variances in the factors affecting the Alaska economy as compared to the U.S. as a whole. Some factors, particularly the price of oil and gas, have a greater direct impact on the Alaska economy compared to other macro-economic trends impacting the U.S. economy as a whole. The COVID-19 pandemic negatively impacted the Alaska economy beginning in the first quarter of 2020. Certain of these impacts are discussed below. The duration of the pandemic and ultimate impact on the Alaska and U.S. economy is uncertain.
Historically, the Alaska economy has benefited from a stable employment base, including a growing tourism industry. However, economic indicators have been impacted by the substantial decline in the price of crude oil in 2015 through 2017. Crude oil prices recovered somewhat in 2018 but declined marginally in 2019. During the first quarter of 2020, in part as a result of the COVID-19 pandemic, crude oil prices declined significantly. The Alaskan economy entered a moderate recession beginning in the second half of 2015 and certain areas of the economy showed improvement beginning in 2018. However, economists currently expect the recession to continue for another two to three years. The COVID-19 pandemic is expected to negatively impact the leisure and hospitality, retail and transportation segments of the Alaskan economy and the economy at large. The population of Alaska grew marginally in 2016, remained steady in 2017 and declined slightly in 2018 and 2019. Employment levels declined approximately 1.3% and 0.3% in 2017 and 2018, respectively and increased approximately 0.6% in 2019. The increase in 2019 was driven by growth in leisure and hospitality, oil and gas, health care, professional and business services and construction, offset by declines in state government and retail. In March 2020, unemployment claims increased significantly, primarily as a result of the COVID-19 pandemic. State revenue relies on tax revenue from the production of crude oil and investment in resource development projects by exploration companies in Alaska. The state’s budget deficit has been reduced from $3.7 billion in 2015 to $0.4 billion in 2019 primarily through spending reductions and utilization of interest earned on the state’s permanent fund. The 2020 budget originally projected a $0.1 million surplus. Recent significant declines in oil prices and other impacts from the COVID-19 pandemic are expected to result in a deficit in 2020. The prospect of continued lower tax revenue continues to impact the overall economy and may affect our future financial performance.
Management estimates the Alaska wireline telecom and IT services market to be approximately $1.65 billion. This market is comprised of the IT services market of approximately $840 million, the broadband market of approximately $700 million and the voice market of approximately $110 million. Management estimates that over 85% of this market opportunity is from the business and wholesale customer segment.
Our objective is to continue generating sector leading revenue growth in the broadband market through investments in sales, service, marketing and product development while expanding our broadband network capabilities through higher efficiencies, automation, new technology and expanded service areas. We also intend to continue our growth in the managed IT services market by providing these services to our broadband customers, and leveraging our position as the premier Cloud Enabler for business in the state of Alaska. We also seek to continuously improve our customer service and utilize the Net Promoter Score (“NPS”) framework to track the feedback of our customers for virtually all customer interactions. We believe that higher NPS scores will allow us to increasingly provide a differentiated service experience for our customers, which will support our growth. We are focused on expanding our margins, and we utilize the LEAN framework to eliminate waste and simplify how we do business.
COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted global, national and local economies, disrupted global supply chains and created significant volatility and disruptions to financial markets.
In response to economic pressures impacting the Company’s customers and the community at large as a result of the COVID-19 pandemic, we proactively implemented the following actions in the first quarter of 2020:
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Working to increase bandwidth, as needed, for participants in the rural health care program at no charge to the customer. Timing is subject to FCC guidance and its waiver of certain rules. |
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● |
Offering kindergarten through grade 12, university students and teachers who do not have internet service, unlimited internet service at no charge through the end of the current school year. |
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● |
Will not terminate service to residential and small business customers in the event they are unable to pay us for services due to disruptions caused by the COVID-19 pandemic. |
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● |
Will waive late fees incurred by residential and small business customers resulting from their economic circumstances related to the COVID-19 pandemic. |
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● |
Will waive long distance overage fees, as appropriate, related to the COVID-19 pandemic. |
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● |
Have extended technical support hours. |
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● |
Proactively monitoring our network and prioritizing the augmentation of network links. |
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● |
Working with local and state utilities, governments and educational institutions to ensure they have the necessary resources. |
The COVID-19 pandemic has also impacted the Company’s suppliers, employees and other aspects of its business, including an increase in demand for its broadband and managed IT services. We have implemented various social-distancing policies including making accommodations for many of our employees to work remotely, travel restrictions and making the appropriate arrangements for our customer service representatives and customers. These arrangements include a new, self-installation process for certain customers. These actions have largely mitigated disruption to the Company’s business, including the provisioning of services to customers and ongoing operations.
In March 2020, the Federal government passed legislation, including the CARES Act, intended to provide economic relief to individuals, families and businesses. This relief includes cash payments, additional unemployment benefits, grants, forgivable loans and additional funding (through the FCC) for telemedicine services and devices. The FCC has also relaxed competitive bidding rules and delayed certain deadlines under the E-Rate and rural health care programs. The CARES Act has provided for the accelerated receipt of the Company’s AMT credits. The Company is continuing to review the legislation and other actions for further potential implications to the Company and its customers.
We are currently assessing the potential future impact of the COVID-19 pandemic on the demand for our products and services, which could be material. As a result of the customer accommodations noted above, collection of accounts receivable from certain customers may be delayed. Travel restrictions and other required actions may reduce the efficiency of our operations and result in higher costs. This is a rapidly evolving situation and we cannot predict the extent or duration of the pandemic, its effects on the global, national or local economy and its longer-term effects on our financial condition, results of operations or cash flows, which could be material. We will continue to monitor the situation and make the appropriate adjustments to our operations as required and appropriate.
Regulatory Update
The items reported under Part I, Item 1. Business – Regulation in our Annual Report on Form 10-K for the year ended December 31, 2019, are updated as follows. This section should be read in conjunction with the corresponding items previously disclosed in our Annual Report.
US Federal Regulatory Matters
Interconnection with Local Telephone Companies and Access to Other Facilities
The Communications Act imposes a number of requirements on LECs. Generally, a LEC must: not prohibit or unreasonably restrict the resale of its services; provide for telephone number portability so customers may keep the same telephone number if they switch service providers; provide access to their poles, ducts, conduits and rights-of-way on a reasonable, non-discriminatory basis; and, when a call originates on its network, compensate other telephone companies for terminating or transporting the call (see the “Interstate Access” discussion below).
All of our LEC subsidiaries are considered incumbent LECs (“ILECs”) and have additional obligations under the Communications Act.
On August 2, 2019, the FCC issued an Order granting forbearance from enforcement of its previous requirements that ILECs unbundle two-wire and four-wire analog voice-grade copper loops. The Order also granted forbearance from enforcement of the requirement that each ILEC must offer for resale at wholesale rates any telecommunications service that the ILEC provides at retail to subscribers who are not telecommunications carriers. While the obligation to offer telecommunications services for resale remains in effect (as it does for all local exchange carriers, incumbent and competitive entrants alike), we will no longer be obligated to offer any particular wholesale discount on those services. Both grants of forbearance are subject to a two-part transition period. First, for a six-month period that began on August 2, 2019, we were required to continue to accept new orders for analog voice-grade copper loops and discounted wholesale services, in accordance with the previous rules. Second, we must continue to honor existing arrangements, including those put in place during that initial six-month period, for a three-year period that also began on August 2, 2019, to permit customers sufficient time to put alternative arrangements in place.
In November 2019, the FCC proposed to forbear from most of the remaining ILEC UNE unbundling obligations that remain in effect. We filed comments supporting the proposed forbearance in February 2020, but the timing of any FCC decision in the proceeding is uncertain.
Rural Health Care Universal Service Support Program
On March 27, 2020, the President signed into law the “Coronavirus Aid, Relief, and Economic Security Act,” which, among other things, appropriates $200 million for the FCC to help health care providers provide connected care services to patients at their homes or mobile locations in response to the novel Coronavirus 2019 disease (COVID-19) pandemic. On March 31, 2020, the FCC issued a Report and Order establishing the “COVID-19 Telehealth Program,” under which eligible health care providers responding to the COVID-19 pandemic may receive full funding for telecommunications services, information services, and devices necessary to provide critical connected care services until the appropriation has been expended or the COVID-19 pandemic has ended. In the same Report and Order, the FCC also created the “Connected Care Pilot Program,” which will make an additional $100 million in universal service funding available over three years to study how the FCC can help support the trend towards connected care services, particularly for low-income Americans and veterans. While it is too soon to assess the impact, if any, of these programs on our business, programs of this type that make the telehealth and telemedicine services more affordable could stimulate greater demand for those services in Alaska.
The FCC approved RHC rural rates for Funding Year 2018 in November 2018, after our request in September 2018 for the funding year beginning July 1, 2018. We began to receive funding commitment letters for the associated services for Funding Year 2018 in December 2018. Similarly, the FCC approved RHC rural rates for Funding Year 2019 in December 2019, after our request in November 2018 in advance of the funding year beginning July 1, 2019. We began to receive funding commitment letters for the associated services for Funding Year 2019 in February 2020. We also filed a request in January 2020 for approval of our RHC rural rates to be used for upcoming Funding Year 2020, which begins July 1, 2020.
On August 1, 2019, the FCC adopted an order making comprehensive changes to the rules governing the competitive bidding process and the method for determining the urban and rural rates used to calculate the amount of Rural Health Care Telecommunications Program support payments for which a health care provider is eligible. The changes to the urban and rural rate rules do not take effect until Funding Year 2021, which will begin July 1, 2021, and USAC will need to conduct a lengthy implementation process before eligible rates and associated support levels can be known. Under the FCC’s Order, USAC must develop and publish a database by July 1, 2020, containing rates that will be used to set rural rates for Funding Year 2021 and beyond. The FCC’s Order divided Alaska into four geographic zones, and the rural rate in each zone will be capped at the median of the rural rates for similar services offered in that zone, as identified by USAC. We are unable to predict the impact the new rules will have, but the FCC’s Order gave USAC limited guidance and substantial discretion in identifying rates and determining how to group them within the database. If the rural rate caps established using the resulting median are too low, we may be unable to continue to serve rural health care customers in the most expensive portions of each rural zone. We are continuing to evaluate the impact of the funding cap constraints, ongoing uncertainty and unpredictability in the Rural Health Care Universal Service Support Mechanism, and the impact of the rule changes on our rural health care customers and revenues in light of these developments. On October 21, 2019, an appeal challenging the new method of setting rates for supported services was filed in the United States Court of Appeals for the District of Columbia Circuit, adding further uncertainty to the ultimate outcome of this proceeding. Similarly, the Company and several other parties have filed Petitions for Reconsideration of the FCC’s August 2019 Report and Order, seeking to mitigate the risks described above. At this time, we are unable to predict the outcome of the challenges to the FCC’s new Rural Health Care rules or the impact the new rules may have on our business, financial condition, results of operations and liquidity.
USAC Audit of RHC Program Funding Requests
In addition to the prospective changes to the RHC program discussed above, the FCC and USAC have undertaken reviews of current and past funding requests. In June 2017, the Company received a letter from USAC’s auditors inquiring about past funding requests, all of which were previously approved by USAC. After clarifying the request, the Company responded to the auditors with the requested information through the remainder of 2017 and mid-way into 2018. Late in 2018, the auditors asked the Company to comment on some preliminary audit findings, and the Company responded with a letter dated December 21, 2018. After more than a year without communications from the auditors, on February 24, 2020, the Company received a draft audit report from USAC that is described more fully in Note 18 “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. The draft audit report alleges violations of the FCC’s rules for establishing rural rates and urban rates, the provisioning and billing of ineligible services and products, and violations of the FCC’s competitive bidding rules. The Company was invited to comment on this draft audit report, and we intend to seek correction of numerous factual errors we believe are contained in that report. In addition, the Company has had conversations with USAC’s auditors and we are compiling a list of proposed clarifications, corrections and modifications to the draft audit report. As a result of these conversations and comments to be submitted by the Company, USAC’s auditors may revise their findings, including the amounts they recommend USAC seek to recover. USAC’s auditors are expected to issue a final audit report incorporating the Company’s responses that will be sent to USAC’s Rural Health Care division to review and determine if corrective action would be appropriate. In the event that the Company disagrees with USAC’s final audit report, the Company can appeal that decision to USAC’s Rural Health Care division and/or the FCC. At this time, we cannot predict the contents of the USAC audit report, the outcome of the audit or the impact on our business, financial condition, results of operations and liquidity.
FCC Inquiry into Company’s RHC Program Participation
In addition, the Company received a Letter of Inquiry on March 18, 2018, from the FCC Enforcement Bureau requesting historical information regarding the Company’s participation in the FCC’s Rural Health Care program. In response, the Company produced voluminous records throughout 2018 and into the first quarter of 2019. On November 5, 2019, the Company received another letter from the FCC Enforcement Bureau requesting additional information, to which it responded on December 6, 2019. The Company is currently responding to an additional letter from the Enforcement Bureau dated January 22, 2020. As of the date of this Form 10-Q, the FCC’s Enforcement Bureau has not asserted any claims or rule violations. The Company continues to work constructively with the FCC’s Enforcement Bureau to provide it the information it is seeking. At this time, we cannot predict the outcome of the FCC Enforcement Bureau’s inquiry or the impact it may have on our business, financial condition, results of operations and liquidity.
CAF Phase II
On October 31, 2016, the FCC released its order adopting the Connect America Fund (“CAF”) Phase II (“CAF II”) for price cap carriers in Alaska. Alaska Communications is the only price cap carrier in Alaska and, under the CAF II order, we receive approximately $19.7 million annually.
We are continuing to work toward meeting our CAF Phase II obligations in a capital-efficient manner, including the delivery of broadband Internet access services meeting CAF Phase II requirements using a fixed wireless platform and DSL in some instances.
Satellite Services
On February 16, 2018, the FCC granted our application for a license to operate a network of C-band satellite earth stations to be used to serve our customers that cannot be reached by terrestrial middle mile facilities. Under that license, we are authorized to use up to 144 MHz of C-band spectrum on Eutelsat’s satellite, E115WB, for a term of 15 years. We have steadily expanded this network to serve nearly 40 sites, primarily in rural and remote areas of the state. We expect this approach to provide us with greater predictability and stability in the availability and cost of long-haul transport connectivity to our customers that must be served by satellite.
On March 3, 2020, the FCC released the text of a Report and Order clearing the lower portion of that band (3.7-4.0 GHz) of virtually all satellite services in the 48 contiguous United States and the District of Columbia. The Report and Order allowed continued use of that spectrum for satellite services in other areas of the nation, including Alaska, essentially preserving the status quo. As a result, the FCC’s decision has little to no effect on our authority to continue to offer C-band satellite communications services in the future.
Call Authentication
On December 30, 2019, Congress enacted the Telephone Robocall Abuse Criminal Enforcement and Deterrence (TRACED) Act. Among other things, the TRACED Act seeks to reduce the number of unwanted calls in which the calling party deceive the recipient by falsifying the Caller ID information to make it appear that the call is from someone the recipient knows or can trust. To do so, the TRACED Act directs the FCC to require all voice service providers to implement “STIR/SHAKEN” standards developed by the Internet Engineering Task Force (IETF) and the Alliance for Telecommunications Industry Solutions (ATIS) for authenticating and verifying caller ID information for calls carried in the IP portions of their networks, and implement an effective caller ID authentication framework in the non-IP portions of their networks. The law requires service providers to take these steps no later than 18 months from enactment.
On March 31, 2020, the FCC issued a Report and Order implementing this law by mandating that all voice service providers implement the STIR/SHAKEN framework in the Internet Protocol (IP) portions of their networks by June 30, 2021. In a related Notice of Proposed Rulemaking, the FCC sought comment on additional issues, including proposals for implementing the law with respect to non-IP networks and “intermediate” providers of voice service, as well as a potential extension of time for small providers that serve 100,000 or fewer voice service subscriber lines. Until the FCC resolves these important additional issues, we cannot assess the potential impact of these requirements on our business.
Network Equipment
On March 12, 2020, the Secure and Trusted Communications Networks Act of 2019 was signed into law, prohibiting the use of federal universal service funds to obtain communications equipment or services from a company that poses a national security risk to U.S. communications networks. In addition, under the law, each communications provider must submit an annual report to the FCC regarding whether it has purchased, rented, leased, or otherwise obtained any prohibited equipment and, if so, provide a detailed justification for such action. Previously, in November 2019, the FCC preliminarily designated Huawei and ZTE as companies that pose such risks. Currently, Alaska Communications believes that little or no equipment from those manufacturers is present in our network.
State of Alaska Regulatory Matters
Alaska Universal Service Fund
The Alaska Universal Service Fund (“AUSF”) complements the federal Universal Service Fund, but is focused on obligations to meet intrastate service obligations.
In January 2018, the RCA opened a rulemaking to repeal the AUSF effective July 31, 2019 and sought comments and reply comments. A final order issued by the RCA on October 24, 2018 stopped short of repealing the AUSF but made changes to the distribution to be effective January 1, 2019, and capped contributions at 10% of intrastate telecommunications revenues. These changes resulted in shortfalls to carriers beginning in 2019.
Telecommunications Modernization Act
In late December 2019, the RCA opened R-19-002 to consider the Alaska Telephone Associations Petition to revise the RCA’s regulation as a result of SB 83 or the Telecommunications Modernization Act. The comment and reply comment period ended February 3, 2020 and are under consideration by the RCA.
Business Plan Core Principles
Our results of operations, financial position and sources and uses of cash in the current and future periods reflect our focus on being the most successful broadband solutions company in Alaska by delivering the best customer experience in the markets we choose to serve. To do this we will continue to:
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Create a Workplace That Develops Our People and Celebrates Success We believe an engaged workforce is critical to our success. We are deeply committed to the development of our people and creating opportunities for them. |
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Create a Consistent Customer Experience Every Time We strive to deliver service as promised to our customers, and make it right if our customers are not satisfied with what we delivered. We track virtually every customer interaction and we utilize the Net Promoter Score framework for assessing the satisfaction of our customers. |
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Develop Our Network Focusing on Efficient Delivery and Management We are moving toward higher efficiencies and improved customer experience through automation, new technology and expanded geographic service areas. Our network architecture is a simpler mix of our fiber backbone, supported with fixed wireless (“FiWi”), WiFi and satellite. |
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Relentlessly Simplify and Transform How We Do Business We believe we must reduce waste, which is defined as any activity that does not add value to its intended customer. Doing so improves the experience we deliver to our customers. We make investments in technology and process improvement, utilize the LEAN framework, and expect these efforts to meaningfully impact our financial performance in the long-term. |
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Offer Broadband and Managed IT Solutions that Create Market Differentiation We are building on strength in designing and providing new products and solutions to our customers. |
We believe we can create value for our shareholders by:
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Driving revenue growth through increasing business broadband and managed IT service revenues, |
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Improving our operating and cash flow performance through margin management, and |
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Careful allocation of capital, including selectively investing success-based capital into opportunities that generate appropriate returns on investments. |
Revenue Sources by Customer Group
We operate our business under a single reportable segment. We manage our revenues based on the sale of services and products to the three customer categories listed below. Revenue in the following management’s discussion and analysis is presented by customer and product category, combining revenue accounted for under ASC 606 and other guidance.
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Business and Wholesale (broadband, voice and managed IT services) |
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Consumer (broadband and voice services) |
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Regulatory (access services, high cost support and carrier termination) |
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Business and Wholesale |
Providing services to Business and Wholesale customers provides the majority of our revenues and is expected to continue being the primary driver of our growth in the near term. Our business customers include large enterprises in the oil and gas industry, health care, education, Alaska Native Corporations, financial industries, Federal, state and local governments, and small and medium business. We were the first Alaska-based carrier to be Carrier Ethernet 2.0 Certified and are currently the only Alaska-based carrier certified for multipoint-to-multipoint services. This certification means that we meet international standards for the quality of our broadband services. We also offer IP based voice including the largest SIP implementations in the State of Alaska and are the first Microsoft Express Route provider in the state. We believe our network differentiates us in the markets we serve, because we prefer not to compete on price; but on the quality, reliability, customer service and the overall value of our solutions. Accordingly, we have significant capacity to “sell into” the network we operate and do so at what we believe are attractive incremental gross margins.
Business services have experienced significant growth and we believe the incremental economics of business services are attractive. Given the demand from our customers for more bandwidth and services, we expect revenue growth from these customers to continue for the foreseeable future. We provide services such as voice and broadband, managed IT services including remote network monitoring and support, managed IT security and IT professional services, and long distance services primarily over our own terrestrial network. We are continuing our efforts to position the Company as the premier Cloud Enabler for business in the state of Alaska.
Our wholesale customers are primarily in-state, national and international telecommunications carriers who rely on us to provide connectivity for broadband and other needs to access their customers over our Alaskan network. The wholesale market is characterized by larger transactions that can create variability in our operating performance. We have a dedicated sales team that sells into this customer segment, and we expect wholesale revenue to grow for the foreseeable future.
Consumer
We also provide broadband, voice and IT services to residential customers, including residential homes and multi-dwelling units. Given that our primary competitor has extensive quad play capabilities (video, voice, wireless and broadband) we target how and where we offer products and services to this customer group in order to maintain our returns. Our focus is to leverage the capabilities of our existing network and sell customers our highest available bandwidth. Our primary competitive advantage is that we offer reliable internet service without data caps, while our competitor, with certain exceptions, charges customers or throttles customers’ speeds for exceeding given levels of data usage. We experienced consistent growth in consumer broadband revenues in 2019. We have expanded product and service offerings to this customer group and have implemented fiber fed WiFi and certain fixed wireless technology solutions for providing broadband, all of which provided a basis for continued growth in this market in 2019.
Regulatory
Regulatory revenue is generated from three primary sources: (i) access charges, which include interstate and intrastate switched access and special access charges, and cellular access; (ii) surcharges billed to the end user (pass-through and non-pass-through); and (iii) federal and state support. We provide voice and broadband origination and termination services to interstate and intrastate carriers. While we are compensated for these services, these revenue streams have been in decline and we expect them to continue to decline, although at a relatively predictable rate. In addition, as regulators have reformed traditional access charges, they have simultaneously implemented new end user surcharges that contribute to our revenue.
The following table summarizes our primary sources of regulatory revenue and their contribution to total revenue in 2019 (dollars in thousands).
Source |
Description |
2019 Revenue |
As a % of Regulatory Revenue |
As a % of Total Revenue |
|||||||||
Access Charges |
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Interstate and intrastate switched access are services based primarily on originating and terminating access minutes from other carriers. Special access is primarily access to dedicated circuits sold to wholesale customers, substantially all of which is generated from interstate services. Cellular access is the transport of local network services between switches for cellular companies based on individually negotiated contracts. Access revenue has declined at an average of approximately 9% annually over the past three years. |
$ | 3,903 | 8.8 | % | 1.7 | % | |||||||
Total Access Charges |
$ | 3,903 | 8.8 | % | 1.7 | % | |||||||
Surcharges |
|||||||||||||
Pass-Through |
We assess our customers for surcharges, typically on a monthly basis, as required by various state and federal regulatory agencies, and remit these surcharges to these agencies. These pass-through surcharges include Federal Universal Access and State Universal Access. These surcharges vary from year to year, and are primarily recognized as revenue, and the subsequent remittance to the state or federal agency as a cost of sale and service. The rates imposed by the regulators continue to increase. However, because the charges are only assessed on a portion of our services, and that portion continues to decline, we expect these revenue streams to decline over time as the revenue base declines. |
$ | 5,268 | 12.0 | % | 2.3 | % | ||||||
Other |
Other non-pass-through surcharges are collected from our customers as authorized by the regulatory body. The amount charged is based on the type of line: single line business, multi-line business, consumer or lifeline. The rates are established based on federal or state orders. These charges are recorded as revenue and do not have a direct associated cost. Rather, they represent a revenue recovery mechanism established by the FCC or the Regulatory Commission of Alaska. |
$ | 10,771 | 24.4 | % | 4.6 | % | ||||||
Total Surcharges |
$ | 16,039 | 36.4 | % | 6.9 | % | |||||||
Federal and State Support |
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CAF II |
In 2016, the FCC released the CAF Phase II order specific to Alaska Communications which transitioned from CAF Phase I frozen support to CAF Phase II. Funding under the new program generally requires the Company to provide broadband service to unserved locations throughout the designated coverage area by the end of a specified build-out period, and meet interim milestone build-out obligations. CAF II revenues are expected to be relatively stable through 2026. |
$ | 19,694 | 44.7 | % | 8.5 | % | ||||||
COLR and CCL |
The Company was designated by the State of Alaska as a Carrier of Last Resort ("COLR") in five of the six study areas. In addition to COLR, the Company received Carrier Common Line ("CCL") support. We did not receive COLR or CCL funding for the ACS of Anchorage study area. As a COLR we were required to provide services essential for retail and carrier-to-carrier telecommunication throughout the applicable coverage area. Effective in 2019, the COLR and CCL funding mechanisms were eliminated and replaced with the ENS funding mechanism. Funding levels under ENS are approximately half of those under the prior mechanisms. |
$ | 4,474 | 10.1 | % | 1.9 | % | ||||||
Total Federal and State Support |
$ | 24,168 | 54.8 | % | 10.4 | % | |||||||
Total Regulatory Revenue |
$ | 44,110 | 19.0 | % | |||||||||
Total Revenue |
$ | 231,694 |
Executive Summary
Operating Revenues
Total revenue of $58.3 million increased $1.4 million, or 2.4%, in the first quarter of 2020 compared with the first quarter of 2019. Business and wholesale revenue increased $2.3 million including a $2.1 million increase in total broadband revenue. Rural health care revenue of $3.3 million in the first quarter 2020 compares with $4.1 million in 2019. Consumer revenue of $9.1 million was down marginally year over year. As anticipated, regulatory access revenue declined $0.9 million due to the restructuring and contribution capping (and thereby reducing) of AUSF support.
Operating Income
Operating income of $5.8 million in the first quarter of 2020 declined marginally from $5.9 million in 2019. The growth in revenue was offset by higher operating expenses, consisting of increased cost of services and sales and depreciation expense, partially offset by lower selling, general and administrative expense. These items are discussed in more detail below.
Operating Metrics
Business broadband average monthly revenue per user (“ARPU”) of $352.28 in the first quarter of 2020 increased from $334.87 in the first quarter of 2019. Business broadband connections of 14,689 at March 31, 2020 declined from connections of 15,132 at March 31, 2019. We count connections on a unitary basis regardless of the size of the bandwidth. For example, a customer that has a 10MB connection is counted as one connection as is a customer with a 1MB connection. While we present metrics related to Business connections, we note that we manage Business and Wholesale in terms of new Monthly Recurring Charges (“MRC”) sold. Achievement of sales performance in terms of MRC is the primary operating metric used by management to measure market performance. For competitive reasons, we do not disclose our sales or performance in MRC.
Consumer broadband connections of 31,819 at March 31, 2020 declined from 32,811 at March 31, 2019, and consumer broadband ARPU of $70.19 in the first quarter of 2020 increased from $65.44 in the first quarter of 2019.
The table below provides certain key operating metrics as of, or for, the periods indicated.
March 31, |
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2020 |
2019 | |||||||
Voice: |
||||||||
At quarter end: |
||||||||
Business access lines |
67,406 | 68,788 | ||||||
Consumer access lines |
22,227 | 25,156 | ||||||
Quarter: |
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ARPU - business |
$ | 27.14 | $ | 25.21 | ||||
ARPU - consumer |
$ | 34.11 | $ | 33.77 | ||||
Broadband: |
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At quarter end: |
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Business connections |
14,689 | 15,132 | ||||||
Consumer connections |
31,819 | 32,811 | ||||||
Quarter: |
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ARPU - business |
$ | 352.28 | $ | 334.87 | ||||
ARPU - consumer |
$ | 70.19 | $ | 65.44 |
Liquidity
We generated cash from operating activities of $22.4 million in the first quarter of 2020 compared with $15.5 million in the first quarter of 2019. This improvement reflects higher earnings in 2020 and cash receipts associated with deferred revenue agreements.
In the first quarters of 2020 and 2019, we invested a total of $11.5 million and $10.0 million, respectively, in capital, including capitalized interest and net of the settlement of items accrued in previous periods. Success based capital spending was $4.8 million in 2020 compared with $5.1 million in 2019.
Net debt (defined as total debt excluding debt issuance costs, less cash and cash equivalents) at March 31, 2020 was $143.4 million compared with $153.8 million at December 31, 2019. The decrease reflects cash generated from operating activities during in the first quarter, partially offset by capital spending and principal payments the 2019 Senior Credit Facility and other obligations.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
The following table summarizes our results of operations for the three-month periods ended March 31, 2020 and 2019. Revenue and the associated analysis is presented by customer and product category, combining revenue accounted for under ASC 606 and other guidance.
(in thousands) |
2020 |
2019 |
Change |
% Change |
||||||||||||
Revenue |
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Business and wholesale revenue |
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Business broadband |
$ | 15,639 | $ | 15,267 | $ | 372 | 2.4 | % | ||||||||
Business voice and other |
7,236 | 7,001 | 235 | 3.4 | % | |||||||||||
Managed IT services |
1,227 | 1,659 | (432 | ) | -26.0 | % | ||||||||||
Equipment sales and installations |
1,414 | 880 | 534 | 60.7 | % | |||||||||||
Wholesale broadband |
11,979 | 10,262 | 1,717 | 16.7 | % | |||||||||||
Wholesale voice and other |
1,288 | 1,426 | (138 | ) | -9.7 | % | ||||||||||
Total business and wholesale revenue |
38,783 | 36,495 | 2,288 | 6.3 | % | |||||||||||
Consumer revenue | ||||||||||||||||
Broadband | 6,692 | 6,468 | 224 | 3.5 | % | |||||||||||
Voice and other |
2,449 | 2,733 | (284 | ) | -10.4 | % | ||||||||||
Total consumer revenue |
9,141 | 9,201 | (60 | ) | -0.7 | % | ||||||||||
Total business, wholesale and consumer revenue |
47,924 | 45,696 | 2,228 | 4.9 | % | |||||||||||
Growth in broadband revenue |
7.2 | % | ||||||||||||||
Regulatory revenue | ||||||||||||||||
Access |
5,418 | 6,289 | (871 | ) | -13.8 | % | ||||||||||
High cost support |
4,924 | 4,924 | - | 0.0 | % | |||||||||||
Total regulatory revenue |
10,342 | 11,213 | (871 | ) | -7.8 | % | ||||||||||
Total revenue |
$ | 58,266 | $ | 56,909 | $ | 1,357 | 2.4 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of services and sales (excluding depreciation and amortization) |
27,114 | 25,627 | 1,487 | 5.8 | % | |||||||||||
Selling, general and administrative |
15,394 | 16,656 | (1,262 | ) | -7.6 | % | ||||||||||
Depreciation and amortization |
9,840 | 8,679 | 1,161 | 13.4 | % | |||||||||||
Loss (gain) on disposal of assets, net |
86 | (2 | ) | 88 | NM | |||||||||||
Total operating expenses |
52,434 | 50,960 | 1,474 | 2.9 | % | |||||||||||
Operating income |
5,832 | 5,949 | (117 | ) | -2.0 | % | ||||||||||
Other income and (expense): |
||||||||||||||||
Interest expense | (2,959 | ) | (3,056 | ) | 97 | -3.2 | % | |||||||||
Loss on extinguishment of debt |
- | (2,799 | ) | 2,799 | NM | |||||||||||
Interest income |
75 | 75 | - | 0.0 | % | |||||||||||
Other income, net |
381 | 122 | 259 | NM | ||||||||||||
Total other income and (expense) |
(2,503 | ) | (5,658 | ) | 3,155 | -55.8 | % | |||||||||
Income before income tax expense |
3,329 | 291 | 3,038 | NM | ||||||||||||
Income tax expense |
(960 | ) | (98 | ) | (862 | ) | NM | |||||||||
Net income |
2,369 | 193 | 2,176 | NM | ||||||||||||
Less net loss attributable to noncontrolling interest |
(18 | ) | (34 | ) | 16 | -47.1 | % | |||||||||
Net income attributable to Alaska Communications |
$ | 2,387 | $ | 227 | $ | 2,160 | NM |
Operating Revenue
Business and Wholesale
Business and wholesale revenue of $38.8 million increased $2.3 million, or 6.3%, in the first quarter of 2020 from $36.5 million in the first quarter of 2019. Wholesale broadband revenue increased $1.7 million, equipment sales and installations increased $0.5 million, and business broadband and voice revenue increased $0.4 million and $0.2 million, respectively. These increases were partially offset by a $0.4 million decline in managed IT services and $0.1 million decline in wholesale voice and other. The increase in business broadband revenue was due primarily to an increase in ARPU to $352.28 in the first quarter of 2020 from $334.87 in the first quarter of 2019, partially offset by a decline in connections from 15,132 to 14,689 and lower rural health care revenue. Rural health care revenue of $3.3 million in the first quarter of 2020 decreased from $4.1 million in 2019 and represented 5.6% and 7.1% of consolidated revenue in 2020 and 2019, respectively. While connections and ARPU serve as data points to support the analysis of period-over-period changes in revenue, they are not critical indicators utilized by the Company to manage the Business and Wholesale customer group.
Business and wholesale revenue includes the amortization of deferred revenue for the three-month periods ended March 31, 2020 and 2019 as follows:
Three Months Ended |
||||||||
March 31, |
||||||||
2020 |
2019 |
|||||||
GCI capacity revenue |
$ | 516 | $ | 511 | ||||
Other deferred capacity revenue |
844 | 615 | ||||||
Total deferred capacity revenue |
1,360 | 1,126 | ||||||
Other deferred revenue |
997 | 899 | ||||||
Total |
$ | 2,357 | $ | 2,025 |
Consumer
Consumer revenue of $9.1 million in the first quarter of 2020 compares with $9.2 million in the first quarter of 2019. Broadband revenue increased $0.2 million year over year as lower connections were offset by an increase in ARPU to $70.19 from $65.44. Voice and other revenue decreased $0.3 million due to 2,929 fewer connections, partially offset by an increase in ARPU to $34.11 from $33.77 in the prior year.
Regulatory
Regulatory revenue of $10.3 million decreased $0.9 million year over year due to lower access revenue resulting from reduced funding from the Alaska Universal Service Fund.
Operating Expenses
Cost of Services and Sales (excluding depreciation and amortization)
Cost of services and sales (excluding depreciation and amortization) of $27.1 million increased $1.5 million, or 5.8%, in the first quarter of 2020 from $25.6 million in the first quarter of 2019 due primarily to higher circuit installation costs.
Selling, General and Administrative
Selling, general and administrative expenses of $15.4 million decreased $1.3 million, or 7.6%, in the first quarter of 2020 from $16.7 million in the first quarter of 2019 due primarily to lower labor and other costs, partially offset by an increase in the provision for doubtful accounts receivable
Depreciation and Amortization
Depreciation and amortization expense of $9.8 million increased $1.1 million, or 13.4%, in the first quarter of 2020 from $8.7 million in the first quarter of 2019. This increase was due primarily to the completion of various capital projects.
Other Income and Expense
Interest expense of $3.0 million in the first quarter of 2020 declined from $3.1 million in the first quarter of 2011 due primarily to a lower average interest rate. The loss on extinguishment of debt of $2.8 million in the first quarter of 2019 was associated with the settlement of the 2017 Senior Credit Facility in the first quarter.
Income Taxes
Income tax expense and the effective tax rate in the first quarter of 2020 were $1.0 million and 28.8%, respectively. Income tax expense and the effective tax rate in the first quarter of 2019 were $0.1 million and 33.7%, respectively.
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to the noncontrolling interest of the AQ-JV was $18 thousand and $34 thousand in the first quarter of 2020 and 2019, respectively.
Net Income Attributable to Alaska Communications
Net income attributable to Alaska Communications of $2.4 million in the first quarter of 2020 compares with $0.2 million in the same period of 2019. The year over year results reflect the revenue and expense items discussed above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
We satisfied our cash requirements for operations and capital expenditures in the first quarter of 2020 through internally generated funds and cash on hand. At March 31, 2020, we had $33.8 million of cash and cash equivalents, $1.6 million of restricted cash and $20.0 million available under our revolving credit facility.
Our major sources and uses of funds in the three months ended March 31, 2020 and 2019 were as follows:
Three Months Ended |
||||||||
March 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
Net cash provided by operating activities |
$ | 22,362 | $ | 15,475 | ||||
Capital expenditures |
$ | (7,463 | ) | $ | (8,563 | ) | ||
Change in unsettled capital expenditures |
$ | (3,759 | ) | $ | (1,121 | ) | ||
Repayments of long-term debt |
$ | (3,240 | ) | $ | (171,758 | ) | ||
Proceeds from the issuance of long-term debt |
$ | - | $ | 180,000 | ||||
Debt issuance costs and discounts |
$ | - | $ | (2,659 | ) | |||
Cash paid for debt extinguishment |
$ | - | $ | (1,222 | ) | |||
Interest paid (1) |
$ | (2,919 | ) | $ | (3,075 | ) |
(1) Included in net cash provided by operating activities. |
Cash Flows from Operating Activities
Cash provided by operating activities of $22.4 million in the first quarter of 2020 reflects net income excluding non-cash items (defined as cash provided by operating activities excluding changes in operating assets and liabilities) of $12.5 million and a $6.8 million decrease in accounts receivable primarily associated with deferred revenue arrangements and rural health care customers.
Cash provided by operating activities of $15.5 million in the first quarter of 2019 reflects net income excluding non-cash items (defined as cash provided by operating activities excluding changes in operating assets and liabilities) of $11.4 million, a $6.5 million decrease in account receivable primarily reflecting cash receipts, partially offset by a $1.6 million increase in materials and supplies due to timing of construction projects.
Cash Flows from Investing Activities
Cash used by investing activities of $11.5 million in the first quarter of 2020 consisted of expenditures on capital. Of $7.5 million incurred in 2020, $4.8 million was success based.
Cash used by investing activities of $10.0 million in the first quarter of 2019 consisted of expenditures on capital. Of $8.6 million incurred in 2019, $5.1 million was success based versus maintenance.
Our networks require the timely maintenance of plant and infrastructure. Future capital requirements may change due to impacts of regulatory decisions that affect our ability to recover our investments, changes in technology, the effects of competition, changes in our business strategy, and our decision to pursue specific acquisition and investment opportunities. We also engage in capital projects which may be pre-funded, in part, by the customer. Capital spending is typically higher during the second and third quarters. We intend to fund future capital expenditures primarily with cash on hand and net cash generated from operations.
Cash Flows from Financing Activities
Cash used by financing activities of $3.7 million in the first quarter of 2020 consisted primarily of principal payments totaling $3.2 million on the 2019 Senior Credit Facility, including a prepayment of $2.1 required due to the generation of excess cash flow in 2019.
Cash provided by financing activities was $4.1 million in the first quarter of 2019. Proceeds from the issuance of long-term debt of $180.0 million consisted of Term A Facility of the 2019 Senior Credit Facility. Repayments of long-term debt of $171.8 million consisted of settlement of the 2017 Senior Credit Facility. Debt discount, issuance and extinguishment payments totaling $3.9 million were associated with the refinancing transaction.
Liquidity and Capital Resources
Consistent with our history, our current and long-term liquidity could be impacted by a number of challenges, including, but not limited to: (i) potential future reductions in our revenues resulting from governmental and public policy changes, including regulatory actions affecting inter-carrier compensation, changes in revenue from Universal Service Funds, and the timing of Rural Health Care Program funding receipts; (ii) servicing our debt and funding principal payments; (iii) the funding of other obligations, including our pension plans and lease commitments; (iv) competitive pressures in the markets we serve; (v) the capital intensive nature of our industry; (vi) our ability to respond to and fund the rapid technological changes inherent to our industry, including new products; and (vii) our ability to obtain adequate financing to support our business and pursue growth opportunities.
We are responding to these challenges by (i) driving top line growth in broadband service revenues with a focus on business and wholesale customers; (ii) managing our cost structure to deliver consistent Adjusted EBITDA and Adjusted Free Cash flow performance; and (iii) prioritizing our capital spending.
Certain of our capital projects are prefunded, in part, by the customer to whom the associated services will be provided. We also enter into lease agreements, including for dark fiber, requiring significant long-term funding commitments. The leased fiber is typically subleased to our customers who, in some cases, prefund their payments to the Company.
As of March 31, 2020, total long-term obligations outstanding, including current portion, were $177.2 million, consisting of $174.5 million in term loans under our 2019 Senior Credit Facility and $2.7 million in capital lease and other obligations. As of March 31, 2020, we had $33.8 million in cash and access to the full amount of the $20.0 million revolving credit facility under our 2019 Senior Credit Facility. Certain deferred revenue lease arrangements for which cash was received in advance require future investments in capital to support the service to be provided.
The obligations under the 2019 Senior Credit Facility are secured by substantially all of the personal property and real property of the Company, subject to certain agreed exceptions. The 2019 Senior Credit Facility provides for events of default customary for credit facilities of this type, including non-payment defaults on other debt, misrepresentation, breach of covenants, representations and warranties, change of control, and insolvency and bankruptcy. The 2019 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, the payment of dividends and repurchase of the Company’s common stock.
Financial covenants as defined in the Agreement are summarized below.
Maximum Net Total Leverage Ratio: The ratio of our (a) total debt, less unrestricted cash and cash equivalents held in pledged accounts, less cash drawn under the Delayed-Draw Term A Facility held for specified capital projects to (b) Consolidated EBITDA (as defined more specifically below) for the consecutive four fiscal quarters ending as of the calculation date. The maximum allowable net total leverage ratio is provided in the table below.
Period |
Ratio |
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January 15, 2019 through March 30, 2020 |
3.50 | to | 1.00 | |
March 31, 2020 through September 29, 2020 |
3.35 | to | 1.00 | |
September 30, 2020 through June 29, 2021 |
3.25 | to | 1.00 | |
June 30, 2021 through June 29, 2022 |
3.00 | to | 1.00 | |
June 30, 2022 and thereafter |
2.50 | to | 1.00 |
The actual net total leverage ratio was 2.68 at March 31, 2020.
Fixed Charge Coverage Ratio: The ratio of our (a) Consolidated EBITDA for the applicable period (as defined below) to (b) (i) the sum of, for the same period, consolidated interest expense, capital expenditures (with certain exceptions), long term indebtedness (with certain exceptions) required to be paid, capital lease obligations required to be paid, restricted payments, cash payments for income taxes, (ii) minus, for the same period, specified capital expenditures. The remaining applicable periods for purposes of calculating this ratio are the four consecutive fiscal quarters ending March 31, 2020 and thereafter. The minimum fixed charge coverage ratio is 1.10 to 1.00. The actual fixed charge coverage ratio was 1.52 at March 31, 2020.
Consolidated EBITDA, as defined in the 2019 Senior Credit Facility, is not a GAAP measure and is defined as consolidated net income attributable to Alaska Communications, plus (to the extent deducted in calculating net income) the sum of:
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cash and non-cash interest expense; |
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depreciation and amortization expense; |
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income taxes; |
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other non-cash charges and expenses, including equity-based compensation expense; |
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the write down or write off on any assets, other than accounts receivable; |
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subject to limitation, fees, premiums, penalty payments and out-of-pocket transaction costs incurred in connection with the 2019 refinancing transactions; |
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non-cash cost of goods sold associated with certain projects; |
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subject to limitation, unusual, non-recurring losses, charges and expenses; |
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one-time costs associated with permitted acquisitions; |
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cost savings from synergies in connection with permitted acquisitions or dispositions; |
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certain costs required to be expensed in connection permitted acquisitions; and |
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investment losses of unconsolidated entities. |
minus (to the extent included in calculating net income) the sum of:
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unusual, non-recurring gains on permitted sales or dispositions of assets and casualty events; |
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cash and non-cash interest income; |
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other unusual nonrecurring items; |
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the write up of any asset; |
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patronage refunds or similar distributions from any lender; |
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deferred revenue associated with certain projects; and |
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investment income of unconsolidated entities. |
The Initial Term A Facility, Revolving Facility, Delayed-Draw Facility and Incremental Term A Loans bear interest at LIBOR plus 4.5% per annum.
The weighted interest rate on the 2019 Senior Credit Facility was 6.01% at March 31, 2020.
Under the terms of the 2019 Senior Credit Facility, the Company is required to hedge interest payments on a minimum of $90.0 million, or 50%, of the outstanding principal. On June 28, 2019, the Company entered into interest rate swaps in the initial total notional amount of $135.0 million, effectively fixing the interest payments on 75% of the outstanding principle.
On March 9, 2020, the Company’s Board of Directors declared a one-time cash dividend of $0.09 per share of common stock to be paid on June 18, 2020 to shareholders of record as of the close of business on April 20, 2020. The dividend totaled $4.9 million.
As of March 31, 2019, USAC had issued funding commitment letters for all of the Company’s rural health care customer applications for Funding Year 2018 (July 1, 2018 through June 30, 2019). For Funding Year 2019 (July 1, 2019 through June 30, 2020), the FCC had approved the Company’s cost-based rural rates for the majority of its customers. USAC began issuing funding commitment letters for Funding Year 2019 in February 2020. We recorded revenue from the rural health care program of $3.3 million and $4.1 million in the first quarters of 2020 and 2019, respectively. Our accounts receivable balance for rural health care customers, net of amounts reserved, was $4.5 million at March 31, 2020 and $6.8 million at December 31, 2019.
OUTLOOK
In response to economic pressures impacting the Company’s customers and the community at large as a result of the COVID-19 pandemic, we implemented the following actions in the first quarter of 2020:
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Working to increase bandwidth, as needed, for participants in the rural health care program at no charge to the customer. Timing is subject to FCC guidance and its waiver of certain rules. |
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Offering kindergarten through grade 12, university students and teachers who do not have internet service, unlimited internet service at no charge through the end of the current school year. |
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Will not terminate service to residential and small business customers in the event they are unable to pay us for services due to disruptions caused by the COVID-19 pandemic. |
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Will waive late fees incurred by residential and small business customers resulting from their economic circumstances related to the COVID-19 pandemic. |
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Will waive long distance overage fees, as appropriate, related to the COVID-19 pandemic. |
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Have extended technical support hours. |
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Proactively monitoring our network and prioritizing the augmentation of network links. |
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Working with local and state utilities, governments and educational institutions to ensure they have the necessary resources. |
The COVID-19 pandemic has impacted the Company’s suppliers, employees and other aspects of its business, including an increase in demand for its broadband and managed IT services. We have implemented various social-distancing policies including making accommodations for many of our employees to work remotely, travel restrictions and making the appropriate arrangements for our customer service representatives and customers.
The COVID-19 pandemic did not have a material effect on the Company’s financial results in the first quarter of 2020. We are currently assessing the potential future impact of the COVID-19 pandemic on the demand for our products and services, which could be material. It has caused disruption to certain of our business customers’ operations and could result in changes to our wholesale customers’ operations and reductions in consumer spending, all of which could negatively impact our future revenue and cash flows. As a result of the customer accommodations noted above, collection of accounts receivable from certain customers may be delayed. Travel restrictions and other required actions may reduce the efficiency of our operations and result in higher costs. Declines in revenue and cash flows could require that we reduce operating costs and capital expenditures. Disruptions to the financial markets could limit our access to financing and other sources of capital. This is a rapidly evolving situation and we cannot predict the extent or duration of the pandemic, its effects on the global, national or local economy and its longer-term effects on our financial condition, results of operations or cash flows, which could be material. We will continue to closely monitor the situation and make the appropriate adjustments to our operations as required and appropriate.
In March 2020, the Federal government passed legislation, including the CARES Act, intended to provide economic relief to individuals, families and businesses. This relief includes cash payments, additional unemployment benefits, grants, forgivable loans and additional funding (through the FCC) for telemedicine services and devices. The FCC has also relaxed competitive bidding rules and delayed certain deadlines under the E-Rate and rural health care programs. The CARES Act has provided for the accelerated receipt of the Company’s AMT credits. The Company is continuing to review the legislation and other actions for further potential implications to the Company and its customers.
Subject to the duration and magnitude of the COVID-19 pandemic, we expect to see continued strength in business and wholesale revenues, led by broadband revenue and managed IT services, focused on the larger enterprise and carrier customer segments. This growth driven by continued demand for broadband as businesses migrate their IT infrastructure to the cloud, deployment of small cell networks, expansion into managed IT services, investments by Federal agencies in long haul broadband infrastructure and continued progress in serving new school districts. Continued state of Alaska budget constraints may negatively impact these growth opportunities. We expect to see solid performance from our carrier and federal customers as well as opportunities in markets enabled by the North Slope networks. Driven by our network investments in fiber fed wifi and fixed wireless, we expect to strengthen our competitive position serving small business and residential customers. Growth in these areas is expected to be somewhat offset by continued pressure in the rural health care program.
Additionally, we are focused on continued implementation of the CAF II program and expect to meet our obligations for 2020.
We also expect continued attention by our Board of Directors on the evaluation of value creating strategic opportunities that address our scale and geographic concentration issues.
We believe that we will have sufficient cash on hand, cash provided by operations and availability under our 2019 Senior Credit Facility to service our debt and fund our operations, capital expenditures and other obligations over the next twelve months. However, our ability to make such an assessment is dependent upon our future financial performance, which is subject to future economic conditions and to financial, business, regulatory, competitive entry and many other factors, many of which are beyond our control and could impact us during the time period of this assessment. See Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019 for further information regarding these risks.
LEGAL
We are involved in various claims, legal actions, personnel matters and regulatory proceedings arising in the ordinary course of business and as of March 31, 2020, we have recorded litigation accruals of $1.2 million against certain of those claims and legal actions. Estimates involved in developing these litigation accruals could change as these claims, legal actions and regulatory proceedings progress. See also Part II, Item 1. Legal Proceedings.
EMPLOYEES
As of March 31, 2020, we employed 572 regular full-time employees, 7 regular part-time employees and 4 temporary employees, compared with 569, 8 and 4, respectively at December 31, 2019. Approximately 54% of our employees are represented by the IBEW. Our Master Collective Bargaining Agreement (“CBA”) with the IBEW, which is effective through December 31, 2023, governs the terms and conditions of employment for all IBEW represented employees working for us in the state of Alaska. Management considers employee relations to be generally good.
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations. For additional discussion on the application of significant accounting policies, see “Critical Accounting Policies and Estimates” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019. These policies and estimates are considered critical because they had a material impact, or have the potential to have a material impact, on our financial statements and because they require significant judgments, assumptions or estimates.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting the financial statements are those related to the realizable value of accounts receivable and long-lived assets, the value of derivative instruments, deferred capacity revenue, legal contingencies, stock-based compensation and income taxes. As future events and their effects cannot be determined with precision, actual results may differ significantly from those estimates. Changes in those estimates will be reflected in the financial statements of future periods.
The following critical accounting policies have been updated to reflect the potential effects of the COVID-19 pandemic.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company does not have any off-balance sheet credit exposure related to its customers. Allowances for uncollectible receivables are established and incurred during the period. These estimates are derived through an analysis of account aging profiles and a review of historical recovery experience. Receivables are charged off against the allowance when management confirms it is probable amounts will not be collected. Subsequent recoveries, if any, are credited to the allowance. The Company records bad debt expense as a component of “Selling, general and administrative expense” in the Consolidated Statements of Comprehensive Income. As a result of changing market conditions due to the COVID-19 pandemic, the policy for determining the allowance for uncollectible accounts receivable will be adjusted if required.
Revenue Recognition
The Company accounts for revenue in accordance with ASC 606 and other guidance. Revenue is typically recognized as services or products are provided to the customer based on the amount of consideration expected to be collected from the customer or other sources. See Note 2 “Revenue Recognition” for a summary of the Company’s revenue recognition policies. As a result of changing market conditions due to the COVID-19 pandemic, the policy for assessment of the consideration expected to be collected will be adjusted if required.
New Accounting Pronouncements
See Note 1 “Summary of Significant Accounting Polices” to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements and recently issued pronouncements not yet adopted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide the information called for by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.
Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated any changes in our internal control over financial reporting that occurred during the first quarter of 2020 and have concluded that there were no changes to our internal control over financial reporting that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved in various claims, legal actions, personnel matters and regulatory proceedings arising in the ordinary course of business. As of March 30, 2020, we have recorded litigation accruals of $1.2 million against certain current claims and legal actions. Other than as described above and as disclosed previously in Item 3. Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2019, we believe that the disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Other than as described below, there have been no material changes to the Company's risk factors as previously disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.
The following risk factors have been updated to reflect the potential effects of the COVID-19 pandemic.
A major public health issue, such as an epidemic or pandemic, and including the current COVID-19 pandemic, could adversely affect our operations and financial performance.
The COVID-19 pandemic has negatively impacted the global, national and state of Alaska economies. It has caused disruption to certain of our business customers’ operations and could result in changes to our wholesale customers’ operations and reductions in consumer spending, all of which could negatively impact our revenue, collection of accounts receivable and cash flows. Disruptions to the financial markets could limit our access to debt and other sources of capital. Our operations, including the provision of services and products to our customers and maintenance of the supporting infrastructure, rely on products, resources and our employees inside and outside the state of Alaska. A major public health issue, including the COVID-19 pandemic, could disrupt the timely receipt of those products and resources, the productivity of our employees, our provision of products and services to our customers and negatively affect our operations, financial results and liquidity.
Cyber-attacks may damage our networks or breach customer and other proprietary data, leading to service disruption, harm to reputation, loss of customers, and litigation over privacy violations.
All industries that rely on technology in customer interactions are increasingly at risk for cyber-attacks. A cyber-attack could be levied against our network, causing disruption of operations and service, requiring implementation of greater network security measures, and resulting in lost revenue due to lost service. A cyber-attack could also be targeted to infiltrate customer proprietary and other data, breaching customer privacy, resulting in misuse of customer information and other data, and possibly leading to litigation over privacy breaches and causing harm to the Company’s reputation. In the event of a cyber-attack, Company insiders could utilize their knowledge of such an attack in trading the Company’s publicly traded shares. We rely on a variety of procedures to guard against cyber-attacks, and to take appropriate actions in the event of a cyber-attack, but the frequency of threats from these attacks is growing globally and the risk to us is also growing. Due to the COVID-19 pandemic, many of our employees are temporarily working remotely, which may pose additional data security risks.
Our internal control over financial reporting may not be effective, which could cause our financial reporting to be unreliable.
Because of its inherent limitations, and irrespective of the existence of material weaknesses, our internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that such controls may become inadequate because of changes in conditions, or the degree of compliance with policies and procedures may deteriorate. The effects of the COVID-19 pandemic may also impact our financial reporting systems and internal control over financial reporting. Any of these circumstances could cause our financial reporting to be unreliable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Working Capital Restrictions and Other Limitations on the Payment of Dividends
Our 2019 Senior Credit Facility contains a number of restrictive covenants and events of default, including covenants limiting capital expenditures, incurrence of debt and the payment of dividends. The 2019 Senior Credit Facility also requires that we maintain certain financial ratios.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
Exhibit Number |
Exhibit Description |
Location |
31.1 |
Filed herewith |
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31.2 |
Filed herewith |
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32.1 |
Furnished herewith |
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32.2 |
Furnished herewith |
|
101.INS |
XBRL Instance Document |
Filed herewith |
101.SCH |
XBRL Taxonomy Extension Schema Document |
Filed herewith |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
Filed herewith |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
Filed herewith |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
Filed herewith |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
Filed herewith |
* |
Indicates a management contract or compensatory plan or arrangement. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. |
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Date: May 11, 2020 |
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/s/ William Bishop |
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William Bishop President and Chief Executive Officer (Principal Executive Officer) |
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Date: May 11, 2020 |
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/s/ Laurie Butcher |
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Laurie Butcher Chief Financial Officer (Principal Financial Officer) |
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Exhibit 31.1
Sarbanes-Oxley Section 302(a) Certification
I, William Bishop, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Alaska Communications Systems Group, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 11, 2020 |
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/s/ William Bishop William Bishop President and Chief Executive Officer Alaska Communications Systems Group, Inc. |
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Exhibit 31.2
Sarbanes-Oxley Section 302(a) Certification
I, Laurie Butcher, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Alaska Communications Systems Group, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 11, 2020 |
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/s/ Laurie Butcher Laurie Butcher Chief Financial Officer Alaska Communications Systems Group, Inc. |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Alaska Communications Systems Group, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William Bishop, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 11, 2020 |
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/s/ William Bishop William Bishop President and Chief Executive Officer Alaska Communications Systems Group, Inc. |
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Alaska Communications Systems Group, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Laurie Butcher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 11, 2020 |
/s/ Laurie Butcher Laurie Butcher Chief Financial Officer Alaska Communications Systems Group, Inc. |
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