Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12538962&doc=14
Exact name of registrant
as specified in its charter
 
State or other
jurisdiction of 
incorporation or organization
 
Commission
File Number
 
I.R.S. Employer Identification No.
 
 
 
Windstream Holdings, Inc.
 
Delaware
 
001-32422
 
46-2847717
Windstream Services, LLC
 
Delaware
 
001-36093
 
20-0792300


 
 
 
 
 
4001 Rodney Parham Road
 
 
 
Little Rock, Arkansas
 
72212
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
(501) 748-7000
 
 
 
(Registrants’ telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Windstream Holdings, Inc.
ý  YES   ¨ NO
 
 
 
Windstream Services, LLC
ý  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).
Windstream Holdings, Inc.
ý  YES   ¨ NO
 
 
 
Windstream Services, LLC
ý  YES   ¨ NO
 
 
 
 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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:
Windstream Holdings, Inc.
 
 
Large accelerated filer  ý
Accelerated filer  ¨ 
 
 
 
Non-accelerated filer  ¨
Smaller reporting company  ý
 
 
 
Emerging growth company  ¨
 
 
 
 
 
Windstream Services, LLC
 
 
Large accelerated filer  ¨
Accelerated filer  ¨ 
 
 
 
Non-accelerated filer  ý
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.
Windstream Holdings, Inc.
¨  YES  ¨ NO 
 
 
 
Windstream Services, LLC
¨  YES  ¨ NO
 
 
 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Windstream Holdings, Inc.
¨  YES  ý NO
 
 
 
Windstream Services, LLC
¨  YES  ý NO
 
 
 

As of November 6, 2018, 42,935,942 shares of common stock of Windstream Holdings, Inc.were outstanding. Windstream Holdings, Inc. holds a 100 percent interest in Windstream Services, LLC.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Windstream Holdings, Inc. and Windstream Services, LLC. Windstream Services, LLC is a direct, wholly-owned subsidiary of Windstream Holdings, Inc. Accordingly, Windstream Services, LLC meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. Unless the context indicates otherwise, the use of the terms “Windstream,” “we,” “us” or “our” shall refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Services, LLC, and the term “Windstream Services” shall refer to Windstream Services, LLC and its subsidiaries.
The Exhibit Index is located on page 95.
 
 




Table of Contents


WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
*
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
Item 6.
 _____________
*
No reportable information under this item.





1




Table of Contents



WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
PART I - FINANCIAL INFORMATION


Item 1Financial Statements

WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions, except per share amounts)
 
2018

 
2017

 
2018

 
2017

Revenues and sales:
 
 
 
 
 
 
 
 
Service revenues
 
$
1,400.1

 
$
1,472.4

 
$
4,260.1

 
$
4,282.4

Product sales
 
20.5

 
25.3

 
59.2

 
72.6

Total revenues and sales
 
1,420.6

 
1,497.7

 
4,319.3

 
4,355.0

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization
   included below)
 
700.2

 
780.5

 
2,159.9

 
2,215.0

Cost of products sold
 
19.7

 
22.3

 
54.7

 
72.8

Selling, general and administrative
 
225.8

 
231.8

 
679.1

 
672.0

Depreciation and amortization
 
383.8

 
365.4

 
1,136.3

 
1,066.3

Merger, integration and other costs
 
9.0

 
33.7

 
30.4

 
107.4

Restructuring charges
 
6.5

 
22.8

 
26.0

 
33.7

Total costs and expenses
 
1,345.0

 
1,456.5

 
4,086.4

 
4,167.2

Operating income
 
75.6

 
41.2

 
232.9

 
187.8

Other income, net
 
3.2

 
1.7

 
12.9

 
8.5

Net gain on early extinguishment of debt
 
190.3

 
5.2

 
190.3

 
2.0

Interest expense
 
(230.0
)
 
(216.4
)
 
(677.5
)
 
(642.6
)
Income (loss) before income taxes
 
39.1

 
(168.3
)
 
(241.4
)
 
(444.3
)
Income tax benefit
 
(2.2
)
 
(66.8
)
 
(67.6
)
 
(163.4
)
Net income (loss)
 
$
41.3

 
$
(101.5
)
 
$
(173.8
)
 
$
(280.9
)
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
Net income (loss)
 

$.97

 

($2.76
)
 

($4.32
)
 

($8.50
)
















See the accompanying notes to the unaudited interim consolidated financial statements.

2




Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
 
2018

 
2017

 
2018

 
2017

Net income (loss)
 
$
41.3

 
$
(101.5
)
 
$
(173.8
)
 
$
(280.9
)
Other comprehensive income:
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Unrealized gain on designated interest rate swaps
 
1.9

 
5.5

 
21.6

 
3.6

Amortization of net unrealized losses on de-designated
   interest rate swaps
 
0.7

 
1.3

 
2.4

 
4.2

Income tax expense
 
(0.6
)
 
(2.6
)
 
(6.1
)
 
(3.0
)
Change in interest rate swaps
 
2.0

 
4.2

 
17.9

 
4.8

Postretirement and pension plans:
 
 
 
 
 
 
 
 
Prior service credit arising during the period
 

 

 
2.7

 

Change in net actuarial gain for employee benefit plans
 

 

 
5.4

 
1.4

Amounts included in net periodic benefit cost:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
0.1

 

 
0.2

 
0.1

Amortization of prior service credits
 
(1.2
)
 
(0.1
)
 
(3.8
)
 
(0.5
)
Income tax expense
 
(0.5
)
 

 
(1.1
)
 
(0.4
)
Change in postretirement and pension plans
 
(1.6
)
 
(0.1
)
 
3.4

 
0.6

Other comprehensive income
 
0.4

 
4.1

 
21.3

 
5.4

Comprehensive income (loss)
 
$
41.7

 
$
(97.4
)
 
$
(152.5
)
 
$
(275.5
)





























See the accompanying notes to the unaudited interim consolidated financial statements.

3




Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except par value)
 
September 30,
2018

 
December 31,
2017

Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
37.3

 
$
43.4

Accounts receivable (less allowance for doubtful
 
 
 
 
accounts of $24.8 and $29.7, respectively)
 
649.0

 
643.0

Inventories
 
87.0

 
93.0

Prepaid expenses and other
 
184.3

 
154.3

Total current assets
 
957.6

 
933.7

Goodwill
 
2,876.8

 
2,842.4

Other intangibles, net
 
1,300.3

 
1,454.4

Net property, plant and equipment
 
5,049.2

 
5,391.8

Deferred income taxes
 
418.0

 
370.8

Other assets
 
108.2

 
91.2

Total Assets
 
$
10,710.1

 
$
11,084.3

Liabilities and Shareholders’ Deficit
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
17.9

 
$
169.3

Current portion of long-term lease obligations
 
206.0

 
188.6

Accounts payable
 
483.4

 
494.0

Advance payments and customer deposits
 
195.2

 
207.3

Accrued taxes
 
93.5

 
89.5

Accrued interest
 
69.9

 
52.6

Other current liabilities
 
308.8

 
342.1

Total current liabilities
 
1,374.7

 
1,543.4

Long-term debt
 
5,721.3

 
5,674.6

Long-term lease obligations
 
4,486.5

 
4,643.3

Other liabilities
 
488.5

 
521.9

Total liabilities
 
12,071.0

 
12,383.2

Commitments and Contingencies (See Note 15)
 


 


Shareholders’ Deficit:
 
 
 
 
Common stock, $.0001 par value, 75.0 shares authorized,
 
 
 
 
42.9 and 36.5 shares issued and outstanding, respectively
 

 

Additional paid-in capital
 
1,247.1

 
1,191.9

Accumulated other comprehensive income
 
44.4

 
21.4

Accumulated deficit
 
(2,652.4
)
 
(2,512.2
)
Total shareholders’ deficit
 
(1,360.9
)
 
(1,298.9
)
Total Liabilities and Shareholders’ Deficit
 
$
10,710.1

 
$
11,084.3











See the accompanying notes to the unaudited interim consolidated financial statements.

4




Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended
September 30,
(Millions)
 
2018

 
2017

Cash Flows from Operating Activities:
 
 
 
 
Net loss
 
$
(173.8
)
 
$
(280.9
)
Adjustments to reconcile net loss to net cash provided from operations:
 
 
 
 
Depreciation and amortization
 
1,136.3

 
1,066.3

Provision for doubtful accounts
 
26.3

 
33.5

Share-based compensation expense
 
25.5

 
45.2

Deferred income taxes
 
(67.6
)
 
(145.3
)
Net gain on early extinguishment of debt
 
(190.3
)
 
(2.0
)
Other, net
 
10.1

 
15.5

Changes in operating assets and liabilities, net
 
 
 
 
Accounts receivable
 
(25.9
)
 
(8.9
)
Prepaid income taxes
 
(4.1
)
 
(5.6
)
Prepaid expenses and other
 
4.6

 
(20.3
)
Accounts payable
 
(12.7
)
 
(31.2
)
Accrued interest
 
17.6

 
25.0

Accrued taxes
 
(3.4
)
 
3.6

Other current liabilities
 
(2.5
)
 
(13.2
)
Other liabilities
 
7.1

 
1.2

Other, net
 
9.0

 
(36.3
)
Net cash provided from operating activities
 
756.2

 
646.6

Cash Flows from Investing Activities:
 
 
 
 
Additions to property, plant and equipment
 
(603.2
)
 
(724.2
)
Acquisition of Broadview, net of cash acquired
 

 
(63.3
)
Cash acquired from EarthLink
 

 
5.0

Acquisitions of MASS and ATC, net of cash acquired
 
(46.9
)
 

Other, net
 
(7.6
)
 
(9.4
)
Net cash used in investing activities
 
(657.7
)
 
(791.9
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends paid to shareholders
 

 
(64.4
)
Proceeds from issuance of stock
 
12.2

 
9.6

Repayments of debt and swaps
 
(540.4
)
 
(1,710.6
)
Proceeds from debt issuance
 
627.0

 
2,099.6

Debt issuance costs
 
(23.5
)
 
(7.3
)
Stock repurchases
 

 
(19.0
)
Payments under long-term lease obligations
 
(139.5
)
 
(124.9
)
Payments under capital lease obligations
 
(38.1
)
 
(29.2
)
Other, net
 
(2.3
)
 
(11.1
)
Net cash (used in) provided from financing activities
 
(104.6
)
 
142.7

Decrease in cash and cash equivalents
 
(6.1
)
 
(2.6
)
Cash and Cash Equivalents:
 
 
 
 
Beginning of period
 
43.4

 
59.1

End of period
 
$
37.3

 
$
56.5

Supplemental Cash Flow Disclosures:
 
 
 
 
Interest paid, net of interest capitalized
 
$
640.4

 
$
597.5

Income taxes (refunded) paid, net
 
$
(15.1
)
 
$
1.5

See the accompanying notes to the unaudited interim consolidated financial statements.

5




Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT (UNAUDITED)
(Millions, except per share amounts)
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated Deficit
 
Total
Balance at December 31, 2017
 
$
1,191.9

 
$
21.4

 
$
(2,512.2
)
 
$
(1,298.9
)
Cumulative effect adjustments, net of tax:
 
 
 
 
 
 
 
 
Adoption of ASU 2014-09 (See Note 1)
 

 

 
35.3

 
35.3

Adoption of ASU 2017-12 (See Note 1)
 

 
1.7

 
(1.7
)
 

Net loss
 

 

 
(173.8
)
 
(173.8
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in postretirement and pension plans
 

 
3.4

 

 
3.4

Amortization of net unrealized losses on de-designated
   interest rate swaps
 

 
1.8

 

 
1.8

Change in designated interest rate swaps
 

 
16.1

 

 
16.1

Comprehensive income (loss)
 

 
21.3

 
(173.8
)
 
(152.5
)
Share-based compensation
 
10.2

 

 

 
10.2

Stock issued under equity distribution agreement
 
12.2

 

 

 
12.2

Stock issued for pension contribution
 
5.8

 

 

 
5.8

Stock issued to employee savings plan
 
28.3

 

 

 
28.3

Taxes withheld on vested restricted stock and other
 
(1.3
)
 

 

 
(1.3
)
Balance at September 30, 2018
 
$
1,247.1

 
$
44.4

 
$
(2,652.4
)
 
$
(1,360.9
)






























See the accompanying notes to the unaudited interim consolidated financial statements.

6




Table of Contents



WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
 
2018

 
2017

 
2018

 
2017

Revenues and sales:
 
 
 
 
 
 
 
 
Service revenues
 
$
1,400.1

 
$
1,472.4

 
$
4,260.1

 
$
4,282.4

Product sales
 
20.5

 
25.3

 
59.2

 
72.6

Total revenues and sales
 
1,420.6

 
1,497.7

 
4,319.3

 
4,355.0

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization
   included below)
 
700.2

 
780.5

 
2,159.9

 
2,215.0

Cost of products sold
 
19.7

 
22.3

 
54.7

 
72.8

Selling, general and administrative
 
225.5

 
231.3

 
677.6

 
670.4

Depreciation and amortization
 
383.8

 
365.4

 
1,136.3

 
1,066.3

Merger, integration and other costs
 
9.0

 
33.7

 
30.4

 
107.4

Restructuring charges
 
6.5

 
22.8

 
26.0

 
33.7

Total costs and expenses
 
1,344.7

 
1,456.0

 
4,084.9

 
4,165.6

Operating income
 
75.9

 
41.7

 
234.4

 
189.4

Other income, net
 
3.2

 
1.7

 
12.9

 
8.5

Net gain on early extinguishment of debt
 
190.3

 
5.2

 
190.3

 
2.0

Interest expense
 
(230.0
)
 
(216.4
)
 
(677.5
)
 
(642.6
)
Income (loss) before income taxes
 
39.4

 
(167.8
)
 
(239.9
)
 
(442.7
)
Income tax benefit
 
(2.1
)
 
(66.6
)
 
(67.2
)
 
(162.8
)
Net income (loss)
 
$
41.5

 
$
(101.2
)
 
$
(172.7
)
 
$
(279.9
)

























See the accompanying notes to the unaudited interim consolidated financial statements.

7




Table of Contents


WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
 
2018

 
2017

 
2018

 
2017

Net income (loss)
 
$
41.5

 
$
(101.2
)
 
$
(172.7
)
 
$
(279.9
)
Other comprehensive income:
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Unrealized gain on designated interest rate swaps
 
1.9

 
5.5

 
21.6

 
3.6

Amortization of net unrealized losses on de-designated
   interest rate swaps
 
0.7

 
1.3

 
2.4

 
4.2

Income tax expense
 
(0.6
)
 
(2.6
)
 
(6.1
)
 
(3.0
)
Change in interest rate swaps
 
2.0

 
4.2

 
17.9

 
4.8

Postretirement and pension plans:
 
 
 
 
 
 
 
 
Prior service credit arising during the period
 

 

 
2.7

 

Change in net actuarial gain for employee benefit plans
 

 

 
5.4

 
1.4

Amounts included in net periodic benefit cost:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
0.1

 

 
0.2

 
0.1

Amortization of prior service credits
 
(1.2
)
 
(0.1
)
 
(3.8
)
 
(0.5
)
Income tax expense
 
(0.5
)
 

 
(1.1
)
 
(0.4
)
Change in postretirement and pension plans
 
(1.6
)
 
(0.1
)
 
3.4

 
0.6

Other comprehensive income
 
0.4

 
4.1

 
21.3

 
5.4

Comprehensive income (loss)
 
$
41.9

 
$
(97.1
)
 
$
(151.4
)
 
$
(274.5
)





























See the accompanying notes to the unaudited interim consolidated financial statements.

8




Table of Contents


WINDSTREAM SERVICES, LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions)
 
September 30,
2018

 
December 31,
2017

Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
37.3

 
$
43.4

Accounts receivable (less allowance for doubtful
 
 
 
 
accounts of $24.8 and $29.7, respectively)
 
649.0

 
643.0

Inventories
 
87.0

 
93.0

Prepaid expenses and other
 
184.3

 
154.3

Total current assets
 
957.6

 
933.7

Goodwill
 
2,876.8

 
2,842.4

Other intangibles, net
 
1,300.3

 
1,454.4

Net property, plant and equipment
 
5,049.2

 
5,391.8

Deferred income taxes
 
418.0

 
370.8

Other assets
 
108.2

 
91.2

Total Assets
 
$
10,710.1

 
$
11,084.3

Liabilities and Member Deficit
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
17.9

 
$
169.3

Current portion of long-term lease obligations
 
206.0

 
188.6

Accounts payable
 
483.4

 
494.0

Advance payments and customer deposits
 
195.2

 
207.3

Accrued taxes
 
93.5

 
89.5

Accrued interest
 
69.9

 
52.6

Other current liabilities
 
308.8

 
342.1

Total current liabilities
 
1,374.7

 
1,543.4

Long-term debt
 
5,721.3

 
5,674.6

Long-term lease obligations
 
4,486.5

 
4,643.3

Other liabilities
 
488.5

 
521.9

Total liabilities
 
12,071.0

 
12,383.2

Commitments and Contingencies (See Note 15)
 

 


Member Deficit:
 
 
 
 
Additional paid-in capital
 
1,241.2

 
1,187.1

Accumulated other comprehensive income
 
44.4

 
21.4

Accumulated deficit
 
(2,646.5
)
 
(2,507.4
)
Total member deficit
 
(1,360.9
)
 
(1,298.9
)
Total Liabilities and Member Deficit
 
$
10,710.1

 
$
11,084.3













See the accompanying notes to the unaudited interim consolidated financial statements.

9




Table of Contents


WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended
September 30,
(Millions)
 
2018

 
2017

Cash Flows from Operating Activities:
 
 
 
 
Net loss
 
$
(172.7
)
 
$
(279.9
)
Adjustments to reconcile net loss to net cash provided from operations:
 
 
 
 
Depreciation and amortization
 
1,136.3

 
1,066.3

Provision for doubtful accounts
 
26.3

 
33.5

Share-based compensation expense
 
25.5

 
45.2

Deferred income taxes
 
(67.6
)
 
(145.3
)
Net gain on early extinguishment of debt
 
(190.3
)
 
(2.0
)
Other, net
 
10.1

 
15.5

Changes in operating assets and liabilities, net
 
 
 
 
Accounts receivable
 
(25.9
)
 
(8.9
)
Prepaid income taxes
 
(4.1
)
 
(5.6
)
Prepaid expenses and other
 
4.6

 
(20.3
)
Accounts payable
 
(12.7
)
 
(31.2
)
Accrued interest
 
17.6

 
25.0

Accrued taxes
 
(3.4
)
 
3.6

Other current liabilities
 
(2.4
)
 
(14.2
)
Other liabilities
 
7.1

 
1.2

Other, net
 
9.0

 
(36.3
)
Net cash provided from operating activities
 
757.4

 
646.6

Cash Flows from Investing Activities:
 
 
 
 
Additions to property, plant and equipment
 
(603.2
)
 
(724.2
)
Acquisition of Broadview, net of cash acquired
 

 
(63.3
)
Cash acquired from EarthLink
 

 
5.0

Acquisitions of MASS and ATC, net of cash acquired
 
(46.9
)
 

Other, net
 
(7.6
)
 
(9.4
)
Net cash used in investing activities
 
(657.7
)
 
(791.9
)
Cash Flows from Financing Activities:
 
 
 
 
Distributions to Windstream Holdings, Inc.
 
(1.2
)
 
(83.4
)
Contribution from Windstream Holdings, Inc.
 
12.2

 
9.6

Repayments of debt and swaps
 
(540.4
)
 
(1,710.6
)
Proceeds from debt issuance
 
627.0

 
2,099.6

Debt issuance costs
 
(23.5
)
 
(7.3
)
Payments under long-term lease obligations
 
(139.5
)
 
(124.9
)
Payments under capital lease obligations
 
(38.1
)
 
(29.2
)
Other, net
 
(2.3
)
 
(11.1
)
Net cash (used in) provided from financing activities
 
(105.8
)
 
142.7

Decrease in cash and cash equivalents
 
(6.1
)
 
(2.6
)
Cash and Cash Equivalents:
 
 
 
 
Beginning of period
 
43.4

 
59.1

End of period
 
$
37.3

 
$
56.5

Supplemental Cash Flow Disclosures:
 
 
 
 
Interest paid, net of interest capitalized
 
$
640.4

 
$
597.5

Income taxes (refunded) paid, net
 
$
(15.1
)
 
$
1.5

See the accompanying notes to the unaudited interim consolidated financial statements.

10




Table of Contents


WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENT OF MEMBER DEFICIT (UNAUDITED)
(Millions)
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated Deficit
 
Total
Balance at December 31, 2017
 
$
1,187.1

 
$
21.4

 
$
(2,507.4
)
 
$
(1,298.9
)
Cumulative effect adjustments, net of tax:
 
 
 
 
 
 
 
 
Adoption of ASU 2014-09 (See Note 1)
 

 

 
35.3

 
35.3

Adoption of ASU 2017-12 (See Note 1)
 

 
1.7

 
(1.7
)
 

Net loss
 

 

 
(172.7
)
 
(172.7
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in postretirement and pension plans
 

 
3.4

 

 
3.4

Amortization of unrealized losses on de-designated
   interest rate swaps
 

 
1.8

 

 
1.8

Change in designated interest rate swaps
 

 
16.1

 

 
16.1

Comprehensive income (loss)
 

 
21.3

 
(172.7
)
 
(151.4
)
Share-based compensation
 
10.2

 

 

 
10.2

Contributions from Windstream Holdings, Inc.:
 
 
 
 
 
 
 
 
Stock issued under equity distribution agreement
 
12.2

 

 

 
12.2

Stock issued for pension contribution
 
5.8

 

 

 
5.8

Stock issued to employee savings plan
 
28.3

 

 

 
28.3

Taxes withheld on vested restricted stock and other
 
(1.3
)
 

 

 
(1.3
)
Distributions payable to Windstream Holdings, Inc.
 
(1.1
)
 

 

 
(1.1
)
Balance at September 30, 2018
 
$
1,241.2

 
$
44.4

 
$
(2,646.5
)
 
$
(1,360.9
)




























See the accompanying notes to the unaudited interim consolidated financial statements.

11




Table of Contents


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 

1. Preparation of Interim Financial Statements:

In these consolidated financial statements, unless the context requires otherwise, the use of the terms “Windstream,” “we,” “us” or “our” shall refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Services, LLC, and the term “Windstream Services” shall refer to Windstream Services, LLC and its subsidiaries.
 
Organizational Structure – Windstream Holdings, Inc. (“Windstream Holdings”) is a publicly traded holding company incorporated in the state of Delaware on May 23, 2013, and the parent of Windstream Services, LLC (“Windstream Services”), a Delaware limited liability company organized on March 1, 2004. Windstream Holdings common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “WIN”. Windstream Holdings owns a 100 percent interest in Windstream Services. Windstream Services and its guarantor subsidiaries are the sole obligors of all outstanding debt obligations and, as a result, also file periodic reports with the Securities and Exchange Commission (“SEC”). Windstream Holdings is not a guarantor of nor subject to the restrictive covenants included in any of Windstream Services’ debt agreements. The Windstream Holdings board of directors and officers oversee both companies.

Description of Business – We are a leading provider of advanced network communications and technology solutions for businesses across the U.S. We also offer broadband, entertainment and security solutions to consumers and small businesses primarily in rural areas in 18 states. Additionally, we supply core transport solutions on a local and long-haul fiber network spanning approximately 150,000 miles.

Consumer service revenues are generated from the provisioning of high-speed Internet, voice and video services to consumers. Enterprise service revenues include revenues from integrated voice and data services, advanced data and traditional voice and long-distance services provided to enterprise, mid-market and small business customers. Wholesale revenues include revenues from other communications services providers for special access circuits and fiber connections, voice and data transport services, and revenues from the reselling of our services. Service revenues also include switched access revenues, federal and state Universal Service Fund (“USF”) revenues, amounts received from Connect America Fund (“CAF”) - Phase II, USF surcharges and revenues from providing other miscellaneous services.

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2017, was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. In our opinion, these financial statements reflect all adjustments that are necessary for a fair statement of results of operations and financial condition for the interim periods presented including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 28, 2018.

On May 23, 2018, we amended our certificate of incorporation to decrease the number of authorized shares of our common and preferred stock from 375.0 million to 75.0 million and from 33.3 million to 6.7 million, respectively, and enacted a one-for-five reverse stock split with respect to all of our outstanding shares of common stock which became effective on May 25, 2018. All per share data of Windstream Holdings presented herein has been retrospectively adjusted to reflect the decrease in authorized shares and the reverse stock split, as appropriate.

Windstream Holdings and its domestic subsidiaries, including Windstream Services, file a consolidated federal income tax return. As such, Windstream Services and its subsidiaries are not separate taxable entities for federal and certain state income tax purposes. In instances when Windstream Services does not file a separate return, income taxes as presented within the accompanying consolidated financial statements attribute current and deferred income taxes of Windstream Holdings to Windstream Services and its subsidiaries in a manner that is systematic, rational and consistent with the asset and liability method. Income tax provisions presented for Windstream Services and its subsidiaries are prepared under the “separate return method.” The separate return method represents a hypothetical computation assuming that the reported revenue and expenses of Windstream Services and its subsidiaries were incurred by separate taxable entities.


12

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

The preparation of financial statements, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.

There are no significant differences between the consolidated results of operations, financial condition, and cash flows of Windstream Holdings and those of Windstream Services other than for certain expenses incurred directly by Windstream Holdings principally consisting of audit, legal and board of director fees, NASDAQ listing fees, other shareholder-related costs, income taxes, common stock activity, and payables from Windstream Services to Windstream Holdings. Earnings per share data has not been presented for Windstream Services because that entity has not issued publicly held common stock as defined in accordance with U.S. GAAP. Unless otherwise indicated, the note disclosures included herein pertain to both Windstream Holdings and Windstream Services.

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact net income (loss) or comprehensive income (loss).

Recently Adopted Accounting Standards

Revenue Recognition – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASU Nos. 2015-14, 2016-08, 2016-10, 2016-11, 2016-12 and 2016-20 (collectively “ASU 2014-09”). The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. ASU 2014-09 also provided new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.

On January 1, 2018, we adopted ASU 2014-09 using the modified retrospective transition method applied to those contracts which were not complete as of January 1, 2018. Under the modified retrospective transition method, we recognized the cumulative effect of initial adoption as an adjustment to our opening accumulated deficit balance. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

Under the new revenue recognition guidance, a substantial portion of our service revenues continue to be recognized when services are provided. Changes to the timing of recognition of certain installation services, discounts and promotional credits given to customers under the new guidance resulted in the recognition of incremental contract assets and liabilities in our consolidated balance sheet at the date of adoption. In addition, the new requirement to defer incremental contract acquisition and fulfillment costs, including sales commissions and installation costs, and recognize such costs over the period where control of goods and services are transferred resulted in the recognition of additional deferred contract costs in our consolidated balance sheet at the date of adoption. We evaluated the effect of the time value of money and determined it to be immaterial.

The following table presents the cumulative effect of the changes made to our consolidated balance sheet at December 31, 2017:
(Millions)
 
December 31, 2017
 
ASU 2014-09 Adjustments
 
January 1,
2018
Assets
 
 
 
 
 
 
   Accounts receivable
 
$
643.0

 
$

 
$
643.0

   Prepaid expenses and other
 
$
154.3

 
$
26.0

 
$
180.3

   Other assets
 
$
91.2

 
$
20.9

 
$
112.1

   Deferred income taxes
 
$
370.8

 
$
(12.0
)
 
$
358.8

Liabilities
 
 
 
 
 
 
   Advance payments and customer deposits
 
$
207.3

 
$
(0.5
)
 
$
206.8

   Other current liabilities
 
$
342.1

 
$
(0.3
)
 
$
341.8

   Other liabilities
 
$
521.9

 
$
0.4

 
$
522.3

Accumulated deficit
 
$
(2,512.2
)
 
$
35.3

 
$
(2,476.9
)


13




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

The impact of adoption of ASU 2014-09 on our 2018 consolidated statements of operations and consolidated balance sheet are as follows:
 
Three Months Ended September 30, 2018
(Millions)
Under
ASC 605
 
Effect of Adoption of
ASU 2014-09
 
As reported
Revenue and sales
 
 
 
 
 
   Service revenues
$
1,401.0

 
$
(0.9
)
 
$
1,400.1

   Product sales
$
20.5

 
$

 
$
20.5

Costs and expenses
 
 
 
 
 
   Cost of services
$
699.9

 
$
0.3

 
$
700.2

   Selling, general and administrative
$
227.0

 
$
(1.2
)
 
$
225.8

Income tax benefit
$
(2.2
)
 
$

 
$
(2.2
)
Net income
$
41.3

 
$

 
$
41.3

 
Nine Months Ended September 30, 2018
(Millions)
Under
ASC 605
 
Effect of Adoption of
ASU 2014-09
 
As reported
Revenue and sales
 
 
 
 
 
   Service revenues
$
4,259.9

 
$
0.2

 
$
4,260.1

   Product sales
$
59.2

 
$

 
$
59.2

Costs and expenses
 
 
 
 
 
   Cost of services
$
2,159.2

 
$
0.7

 
$
2,159.9

   Selling, general and administrative
$
680.7

 
$
(1.6
)
 
$
679.1

Income tax benefit
$
(67.9
)
 
$
0.3

 
$
(67.6
)
Net loss
$
(174.6
)
 
$
0.8

 
$
(173.8
)
 
September 30, 2018
(Millions)
Under
ASC 605
 
Effect of Adoption of
ASU 2014-09
 
As reported
Assets
 
 
 
 
 
   Accounts receivable
$
649.0

 
$

 
$
649.0

   Prepaid expenses and other
$
154.0

 
$
30.3

 
$
184.3

   Other assets
$
90.8

 
$
17.4

 
$
108.2

   Deferred income taxes
$
430.3

 
$
(12.3
)
 
$
418.0

Liabilities
 
 
 
 
 
   Advance payments and customer deposits
$
195.9

 
$
(0.7
)
 
$
195.2

   Other current liabilities
$
308.8

 
$

 
$
308.8

   Other liabilities
$
488.5

 
$

 
$
488.5

Accumulated deficit
$
(2,688.5
)
 
$
36.1

 
$
(2,652.4
)

The new revenue recognition standard also requires additional disclosures related to performance obligations; contract asset and liability balances; deferred commissions and costs to fulfill; disaggregation of revenue and use of practical expedients in applying the new guidance. See Note 2 for these additional disclosures.


14




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

Statement of Cash Flows – In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). This standard provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows, including among others, debt prepayment and extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and distributions received from equity method investees. The standard also clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use of the underlying cash flows. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this standard effective January 1, 2018. The effect of the retrospective adoption of this standard was to change previously reported amounts within the accompanying consolidated statement of cash flows for the nine-month period ended September 30, 2017 due to reclassifying $21.2 million of debt prepayment penalties and fees paid to lenders in conjunction with the early termination of long-term debt obligations from operating activities to financing activities. Other than this change in classification of debt prepayment penalties and fees, adoption of this standard did not have an impact on our consolidated statement of cash flows.

The following table presents the effect of the changes made to our consolidated statement of cash flows for the nine-month period ended September 30, 2017:
(Millions)
 
As Previously Reported
 
Reclassification Adjustments
 
As
Revised
Cash Flows from Operating Activities:
 
 
 
 
 
 
Adjustments to reconcile net loss to net cash provided from operations:
 
 
 
 
 
 
   Noncash portion of net gain on early extinguishment of debt
 
$
(20.2
)
 
$
20.2

 
$

   Net gain on early extinguishment of debt
 
$

 
$
(2.0
)
 
$
(2.0
)
Changes in operating assets and liabilities, net:
 
 
 
 
 
 
   Other, net
 
$
(39.3
)
 
$
3.0

 
$
(36.3
)
Net cash provided from operating activities
 
$
625.4

 
$
21.2

 
$
646.6

Cash Flows from Financing Activities:
 
 
 
 
 
 
   Repayments of debt and swaps
 
$
(1,689.4
)
 
$
(21.2
)
 
$
(1,710.6
)
Net cash provided from financing activities
 
$
163.9

 
$
(21.2
)
 
$
142.7


Definition of a Business – In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business (“ASU 2017-01”). The standard clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Under the new guidance an integrated set of activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. ASU 2017-01 provides a framework to assist entities in evaluating whether both an input and a substantive process are present and removes the evaluation of whether a market participant could replace missing elements.  Although outputs are not required for an integrated set of activities to be a business, outputs generally are a key element of a business; therefore, the new guidance provides more stringent criteria for an integrated sets of activities without outputs. Furthermore, ASU 2017-01 narrows the definition of the term output so that it is consistent with how outputs are described in Topic 606. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We adopted this standard effective January 1, 2018. Following adoption, we expect fewer transactions will be accounted for as acquisitions or disposals of businesses.


15




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

Presentation of Defined Benefit Retirement Costs – In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This standard changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, actuarial gains and losses, curtailments and settlements). The operating expense component will be reported in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period while the non-operating components will be reported in other income and expense. In addition, only the service cost component will be eligible for capitalization as part of an asset such as inventory or property, plant and equipment. Retrospective application of the change in income statement presentation is required, while the change in capitalized benefit cost is to be applied prospectively. The ASU is effective for fiscal years beginning after December 15, 2017. We adopted this standard effective January 1, 2018. The effect of the retrospective adoption of this standard was to change previously reported amounts within the accompanying consolidated statement of operations for the three and nine month periods ended September 30, 2017, respectively, for operating income and other income, net, resulting in decreases in operating income from $43.0 million to $41.2 million and from $195.8 million to $187.8 million, respectively, with corresponding increases to other (expense) income, net from $(0.1) million to $1.7 million and $0.5 million to $8.5 million, respectively. There was no change to our reported net loss for the three and nine month periods ended September 30, 2017. The impact of only capitalizing service cost on a prospective basis was immaterial to our consolidated financial statements as of and for the three and nine month periods ended September 30, 2018.

Hedging Activities – In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). This standard modifies hedge accounting to allow more hedging strategies to qualify for hedge accounting, amends presentation and disclosure requirements, and changes how entities assess effectiveness of their hedging transactions. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. As permitted, we early adopted this standard effective January 1, 2018. Upon adoption, we recognized a cumulative effect adjustment of $(1.7) million, net of tax, to the opening balance of our accumulated deficit with an offsetting increase to accumulated comprehensive income. Comparative prior-period information has not been restated. See Note 6 for additional information regarding our hedging activities and derivative financial instruments.

Recently Issued Authoritative Guidance

Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which will require that virtually all lease arrangements that do not meet the criteria of a short-term lease be presented on the lessee’s balance sheet by recording a right-of-use asset and a lease liability equal to the present value of the related future lease payments. The income statement impacts of the leases will depend on the nature of the leasing arrangement and will be similar to existing accounting for operating and capital leases. The new standard does not substantially change the accounting for lessors. The new standard will also require additional disclosures regarding an entity’s leasing arrangements and will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). This amendment provides an optional transition method that permits an entity to initially apply the new guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and not recast comparative periods. As a result, prior period financial statements and disclosures will continue to be presented in accordance with ASC 840. Prior to the issuance of ASU 2018-11, lessees and lessors would have been required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. In addition, ASU 2018-11 also includes a practical expedient for lessors to not separate the lease and nonlease components of a contract. The effective date for this amendment is the same as ASU 2016-02 discussed above.

We will adopt ASU 2016-02 effective January 1, 2019, using the optional transition method available under ASU 2018-11. Our existing operating lease portfolio primarily consists of network, real estate and equipment leases. Upon adoption of this standard, we expect to record in our consolidated balance sheet a right-of-use asset and liability related to substantially all of our operating lease arrangements. We have established a cross-functional team to determine the scope of arrangements subject to this standard as well as to assess the impact to our systems, processes and internal controls that will be necessary to meet the standard’s reporting and disclosure requirements.


16




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

Financial Instruments - Credit Losses – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This new standard also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019, and the guidance is to be applied using a modified retrospective transition approach. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2018. We intend to adopt this standard update in the first quarter of 2020. We are currently assessing the impact the new standard will have on our consolidated financial statements.

Fair Value Measurement Disclosures - In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This standard modifies the disclosure requirements for fair value measurements by removing the requirements to disclose: (i) amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) timing of recognizing transfers between levels within the fair value hierarchy; and (iii) valuation processes used for Level 3 fair value measurements. Additionally, the standard now requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of each reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt all of the disclosure changes or early adopt only the removed disclosure requirements and delay adoption of the additional disclosures until the effective date of this amendment. Except for changes to certain disclosures related to fair value measurements, we do not expect this standard to have a material impact on our consolidated financial statements upon adoption.

Pension and Other Postretirement Plan Disclosures - In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). This standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing the requirements to disclose: (i) amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; (ii) amount and timing of plan assets expected to be returned to the employer; and (iii) effects of a one-percentage point change in assumed health care cost trend rates. Additionally, the standard now requires disclosure of 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, with early adoption permitted. Except for changes to certain disclosures related to our pension and postretirement plans, we do not expect this standard to have a material impact on our consolidated financial statements upon adoption.

Implementation Costs in Cloud Computing Arrangements - In August 2018, the FASB issued ASU No. 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”). This standard requires entities that are customers in cloud computing arrangements to defer implementation costs if they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance. The guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption. ASU 2018-15 is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently assessing the timing of adoption and the impact the new standard will have on our consolidated financial statements.





17




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


2. Revenues:

As previously discussed in Note 1, we adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective transition method. The majority of our revenue is derived from providing access to or usage of our networks and facilities we operate.

Performance Obligations – A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and represents the unit of account in applying the new revenue recognition guidance. A contract’s transaction price, considering discounts given for bundled purchases and promotional credits, is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have multiple performance obligations. While many contracts include one or more performance obligations, the revenue recognition pattern is generally not impacted by the allocation since the performance obligations are generally satisfied over the same period of time. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on the relative standalone selling price of each performance obligation in the contract. The standalone selling price is the estimated price we would charge for the good or service in a separate transaction with similar customers in similar circumstances. Identifying distinct performance obligations and determining the standalone selling price for each performance obligation within a contract with multiple performance obligations requires management judgment.

Our performance obligations are satisfied over time as services are rendered or at a point in time depending on our evaluation of when the customer obtains control of the promised goods. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs when services are rendered or control of our communication products is transferred. Service revenues are recognized over the period that the corresponding services are rendered to customers. Revenues that are billed in advance include monthly recurring network access and data services, special access and monthly recurring voice, Internet and other related charges. Revenues derived from other telecommunications services, including interconnection, long-distance and enhanced service revenues are recognized monthly as services are provided. Telecommunications network maintenance revenue from indefeasible rights to use fiber optic network facility arrangements (“IRUs”) are generally recognized over the term of the related contract. Sales of communications products including customer premise equipment and modems are recognized when products are delivered to and accepted by customers.

In determining whether installation is a separate performance obligation, we evaluate, among other factors, whether other performance obligations are highly dependent upon installation requiring significant integration or customization or whether a customer can benefit from the installation with other readily available resources. In circumstances where customers can benefit from the installation with other readily available resources, installation is a separate performance obligation. We recognize installation revenue when the installation is complete. In circumstances where other telecommunication service performance obligations are highly dependent upon installation, installation is not a separate purchase obligation, and accordingly, we include the installation fees in the transaction price allocated to and recognized with other telecommunication service performance obligations.

Fees assessed to customers for service activation are considered a material right in a month-to-month contract. These service activation fees are deferred and recognized as service revenue on a straight-line basis over the estimated life of the customer.

As a practical expedient, we group similar contracts or performance obligations together into portfolios of contracts or performance obligations for the following: service activations, installation services, certain promotional credits, commissions and other costs to fulfill a contract. Portfolios are recognized over the estimated life of the customer. Determining the estimated life of the customer requires management judgment.

The estimated life of our customer relationships varies by business segment. Wholesale customer lives are estimated based on the average number of months each individual circuit was active. Enterprise and small business customer lives are based on average contract terms. Consumer lives are estimated based on average customer tenure.


18




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


2. Revenues, Continued:

Our contracts include discounts and promotional credits given to customers. We include discounts and promotional credits in the transaction price. These estimates are based on historical experience and anticipated performance.

In determining whether to include in revenues and expenses, the taxes and surcharges assessed and collected from customers and remitted to government authorities, including USF charges, sales, use, value added and excise taxes, we evaluate, among other factors, whether we are the primary obligor or principal tax payer for the fees and taxes assessed in each jurisdiction in which we operate. In those jurisdictions for which we are the primary obligor, we record the taxes and surcharges on a gross basis and include in revenues and costs of services and products. In jurisdictions in which we function as a collection agent for the government authority, we record the taxes on a net basis and exclude the amounts from our revenues and costs of services and products.

We offer third-party video services to our customers. The third-party service provider retains control of the service and is the primary obligor. We record commissions received on a net basis.

Accounts Receivable – Accounts receivable, principally consist of amounts billed and currently due from customers and are generally unsecured and due within 30 days. The amounts due are stated at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of historical collection experience, age of outstanding receivables, current economic conditions and a specific customer’s ability to meet its financial obligations. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up our customer base. Due to varying customer monthly billing cycle cut-off, we must estimate service revenues earned but not yet billed at the end of each reporting period. Included in accounts receivable are unbilled revenues related to communication services and product sales of $24.8 million and $23.8 million at September 30, 2018 and December 31, 2017, respectively.

Contract Balances – Contract assets include unbilled amounts resulting when revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Contract assets principally consist of discounts and promotional credits given to customers. The current and noncurrent portion of contract assets is included in prepaid expenses and other and other assets, respectively, in the accompanying consolidated balance sheets.

Our contract liabilities consist of services billed in excess of revenue recognized. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. The change in our contract liabilities is primarily related to customer activity associated with services billed in advance, the receipt of cash payments and the satisfaction of our performance obligations. We classify these amounts as current or noncurrent based on the timing of when we expect to recognize revenue.

Contract assets and liabilities from contracts with customers were as follows at:
(Millions)
 
September 30, 2018

 
January 1, 2018

Contract assets (a)
 
$
13.2

 
$
13.1

Contract liabilities (b)
 
$
(197.7
)
 
$
(209.3
)
Revenues recognized included in the opening contract liability balance
 
$
186.3

 
 

(a)
Includes $8.7 million and $3.6 million in prepaid expense and other and $4.5 million and $9.5 million in other assets as of September 30, 2018 and January 1, 2018, respectively.

(b)
Includes $185.6 million and $198.3 million in advance payments and customer deposits and $12.1 million and $11.0 million in other liabilities as of September 30, 2018 and January 1, 2018, respectively.


19




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


2. Revenues, Continued:

Remaining Performance Obligations – Our remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. Certain contracts provide customers the option to purchase additional services or usage based services. The fees related to the additional services or usage based services are recognized when the customer exercises the option, typically on a month-to-month basis. In determining the transaction price allocated, we do not include these non-recurring fees and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year.

Remaining performance obligations reflect recurring charges billed, adjusted for discounts and promotional credits and revenue adjustments. At September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $3.4 billion for contracts with original expected durations of more than one year remaining. We expect to recognize approximately 11.3 percent, 39.7 percent and 28.8 percent of our remaining performance obligations as revenue during the remainder of 2018, 2019 and 2020, with the remaining balance thereafter.

Revenue by Category – We disaggregate our revenue from contracts with customers by product type for each of our segments, as we believe it best depicts the nature, amount and timing of our revenue. Revenues recognized from contracts with customers by customer and product type for the three-month period ended September 30, 2018 was as follows:
(Millions)
 
Consumer & Small Business
 
Enterprise
 
Wholesale
 
Consumer CLEC
 
Total
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
Type of service:
 
 
 
 
 
 
 
 
 
 
High-speed Internet bundles
 
$
239.2

 
$

 
$

 
$
22.0

 
$
261.2

Voice and long-distance
 
29.7

 
233.6

 

 

 
263.3

Video and miscellaneous
 
11.1

 

 

 

 
11.1

Dial-up, e-mail and miscellaneous
 

 

 

 
21.7

 
21.7

Data and integrated services
 

 
380.7

 

 

 
380.7

Small business services
 
75.0

 

 

 

 
75.0

Core wholesale (a)
 

 

 
136.7

 

 
136.7

Resale (b)
 

 

 
19.5

 

 
19.5

Wireless TDM (c)
 

 

 
2.3

 

 
2.3

Switched access
 
6.7

 

 
8.4

 

 
15.1

Miscellaneous
 

 
39.8

 

 

 
39.8

Service revenues from contracts with
   customers
 
361.7

 
654.1

 
166.9

 
43.7

 
1,226.4

Product sales
 
7.5

 
12.6

 
0.2

 
0.2

 
20.5

Total revenue from contracts with
   customers
 
369.2

 
666.7

 
167.1

 
43.9

 
1,246.9

Other service revenues (d)
 
97.2

 
62.4

 
14.0

 
0.1

 
173.7

Total revenues and sales
 
$
466.4

 
$
729.1

 
$
181.1

 
$
44.0

 
$
1,420.6



20




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


2. Revenues, Continued:

Revenues recognized from contracts with customers by customer and product type for the nine-month period ended September 30, 2018 was as follows:
(Millions)
 
Consumer & Small Business
 
Enterprise
 
Wholesale
 
Consumer CLEC
 
Total
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
Type of service:
 
 
 
 
 
 
 
 
 
 
High-speed Internet bundles
 
$
725.2

 
$

 
$

 
$
69.6

 
$
794.8

Voice and long-distance
 
91.8

 
716.6

 

 

 
808.4

Video and miscellaneous
 
33.8

 

 

 

 
33.8

Dial-up, e-mail and miscellaneous
 

 

 

 
67.0