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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

☒

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

For the Quarterly Period Ended March 31, 2023

 

☐

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 1-8519

CINCINNATI BELL INC.

 

Ohio

31-1056105

(State of Incorporation)

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

 

221 East Fourth Street, Cincinnati, Ohio 45202

(Address of principal executive offices) (Zip Code)

(513) 397-9900

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ( § 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. (Check one):

 

Large accelerated filer

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Accelerated filer

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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 ☒

Securities Registered Pursuant to Section 12(b) of the Act:

TABLE OF CONTENTS

 

PART I. Financial Information

 

 

 

 

 

 

 

 

 

Description

 

 

 

Page

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Equity (Deficit) (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II. Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

 

 

 

 

 

Item 1A.

 

Risk Factors

 

39

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 3.

 

Default upon Senior Securities

 

39

 

 

 

 

 

Item 4.

 

Mine Safety Disclosure

 

39

 

 

 

 

 

Item 5.

 

Other Information

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

 

 

 

Signatures

 

42

 

 

Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Revenue

 

$

448.9

 

 

$

435.8

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

Cost of services and products, excluding items below

 

 

253.3

 

 

 

238.5

 

Selling, general and administrative, excluding items below

 

 

105.3

 

 

 

89.6

 

Depreciation and amortization

 

 

133.3

 

 

 

119.5

 

Restructuring and severance related charges

 

 

0.2

 

 

 

0.9

 

Transaction and integration costs

 

 

—

 

 

 

2.3

 

Total operating costs and expenses

 

 

492.1

 

 

 

450.8

 

Operating loss

 

 

(43.2

)

 

 

(15.0

)

Interest expense

 

 

35.5

 

 

 

16.5

 

Other components of pension and postretirement benefit plans expense (benefit)

 

 

0.4

 

 

 

(2.6

)

Other expense (income), net

 

 

3.1

 

 

 

(0.4

)

Loss before income taxes

 

 

(82.2

)

 

 

(28.5

)

Income tax benefit

 

 

(12.3

)

 

 

(6.5

)

Net loss

 

$

(69.9

)

 

$

(22.0

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

1

Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Net loss

 

$

(69.9

)

 

$

(22.0

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

Foreign currency translation gain

 

 

—

 

 

 

1.8

 

Defined benefit plans:

 

 

 

 

 

 

Amortization of prior service benefits included in net income, net of tax of ($0.1)

 

 

(0.1

)

 

 

—

 

Amortization of net actuarial gain included in net income, net of tax of ($0.2)

 

 

(0.8

)

 

 

—

 

Total other comprehensive (loss) income

 

 

(0.9

)

 

 

1.8

 

Total comprehensive loss

 

$

(70.8

)

 

$

(20.2

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

2

Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

(in millions)

(Unaudited)

 

 

 

Controlling Interest

 

 

 

 

 

 

 

 

 

Additional Paid-in

 

 

 

 

 

Accumulated Other
Comprehensive

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

Capital

 

 

Accumulated Deficit

 

 

Income (Loss)

 

 

Total

 

 

Interests

 

 

Total

 

Balance at December 31, 2022

 

$

1,716.1

 

 

$

(158.1

)

 

$

19.5

 

 

$

1,577.5

 

 

$

0.8

 

 

$

1,578.3

 

Net loss

 

 

—

 

 

 

(69.9

)

 

 

—

 

 

 

(69.9

)

 

 

—

 

 

 

(69.9

)

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

(0.9

)

 

 

(0.9

)

 

 

—

 

 

 

(0.9

)

Balance at March 31, 2023

 

$

1,716.1

 

 

$

(228.0

)

 

$

18.6

 

 

$

1,506.7

 

 

$

0.8

 

 

$

1,507.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

$

1,716.1

 

 

$

(27.2

)

 

$

1.2

 

 

$

1,690.1

 

 

$

—

 

 

$

1,690.1

 

Net loss

 

 

—

 

 

 

(22.0

)

 

 

—

 

 

 

(22.0

)

 

 

—

 

 

 

(22.0

)

Other comprehensive income

 

 

—

 

 

 

—

 

 

 

1.8

 

 

 

1.8

 

 

 

—

 

 

 

1.8

 

Balance at March 31, 2022

 

$

1,716.1

 

 

$

(49.2

)

 

$

3.0

 

 

$

1,669.9

 

 

$

—

 

 

$

1,669.9

 

 

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

Cincinnati Bell Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

7.4

 

 

$

9.4

 

Receivables, less allowances of $15.0 and $12.0

 

 

384.5

 

 

 

447.8

 

Inventory, materials and supplies

 

 

95.7

 

 

 

103.4

 

Prepaid expenses

 

 

48.6

 

 

 

45.7

 

Other current assets

 

 

29.5

 

 

 

25.7

 

Total current assets

 

 

565.7

 

 

 

632.0

 

Property, plant and equipment, net

 

 

2,171.0

 

 

 

2,116.8

 

Operating lease right-of-use assets

 

 

72.6

 

 

 

73.1

 

Goodwill

 

 

723.5

 

 

 

723.5

 

Intangible assets, net

 

 

800.5

 

 

 

829.1

 

Deferred income tax assets

 

 

2.1

 

 

 

2.2

 

Other noncurrent assets

 

 

67.5

 

 

 

58.9

 

Total assets

 

$

4,402.9

 

 

$

4,435.6

 

Liabilities and Shareowners’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current portion of long-term debt

 

$

45.2

 

 

$

45.0

 

Accounts payable

 

 

430.4

 

 

 

492.5

 

Unearned revenue and customer deposits

 

 

76.6

 

 

 

81.6

 

Accrued taxes

 

 

12.5

 

 

 

14.5

 

Accrued interest

 

 

3.6

 

 

 

2.0

 

Accrued payroll and benefits

 

 

36.5

 

 

 

52.5

 

Other current liabilities

 

 

44.8

 

 

 

47.8

 

Total current liabilities

 

 

649.6

 

 

 

735.9

 

Long-term debt, less current portion

 

 

1,781.5

 

 

 

1,656.0

 

Operating lease liabilities

 

 

66.0

 

 

 

66.1

 

Pension and postretirement benefit obligations

 

 

138.5

 

 

 

138.9

 

Pole license agreement obligation

 

 

42.9

 

 

 

43.6

 

Deferred income tax liability

 

 

84.1

 

 

 

98.2

 

Other noncurrent liabilities

 

 

132.8

 

 

 

118.6

 

Total liabilities

 

 

2,895.4

 

 

 

2,857.3

 

Shareowners’ equity

 

 

 

 

 

 

Additional paid-in capital

 

 

1,716.1

 

 

 

1,716.1

 

Accumulated deficit

 

 

(228.0

)

 

 

(158.1

)

Accumulated other comprehensive income

 

 

18.6

 

 

 

19.5

 

Shareowners’ equity - controlling interest

 

 

1,506.7

 

 

 

1,577.5

 

Noncontrolling interests

 

 

0.8

 

 

 

0.8

 

Total equity

 

 

1,507.5

 

 

 

1,578.3

 

Total liabilities and shareowners’ equity

 

$

4,402.9

 

 

$

4,435.6

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(69.9

)

 

$

(22.0

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

133.3

 

 

 

119.5

 

Provision for loss on receivables

 

 

2.8

 

 

 

0.7

 

Unrealized loss on interest rate swaps

 

 

10.4

 

 

 

—

 

Noncash portion of interest expense

 

 

1.6

 

 

 

1.3

 

Deferred income taxes

 

 

(13.8

)

 

 

(7.9

)

Pension and other postretirement payments in excess of expense

 

 

(1.6

)

 

 

(4.7

)

Other, net

 

 

(0.9

)

 

 

1.2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Decrease in receivables

 

 

60.7

 

 

 

83.7

 

Decrease (increase) in inventory, materials, supplies, prepaid expenses and other current assets

 

 

3.0

 

 

 

(10.7

)

Decrease in accounts payable

 

 

(74.1

)

 

 

(50.8

)

Decrease in accrued and other current liabilities

 

 

(24.7

)

 

 

(14.4

)

Increase in other noncurrent assets

 

 

(2.4

)

 

 

(3.0

)

Increase (decrease) in other noncurrent liabilities

 

 

2.2

 

 

 

(3.8

)

Net cash provided by operating activities

 

 

26.6

 

 

 

89.1

 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures

 

 

(143.7

)

 

 

(87.8

)

Other, net

 

 

(2.7

)

 

 

2.4

 

Net cash used in investing activities

 

 

(146.4

)

 

 

(85.4

)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

6.3

 

 

 

—

 

Net increase in corporate credit facility with initial maturities less than 90 days

 

 

77.0

 

 

 

—

 

Proceeds from borrowings on receivables facilities

 

 

608.3

 

 

 

338.6

 

Payments on receivables facilities

 

 

(560.9

)

 

 

(336.9

)

Repayment of debt

 

 

(6.5

)

 

 

(5.9

)

Debt issuance costs

 

 

(1.5

)

 

 

—

 

Net cash provided by (used in) financing activities

 

 

122.7

 

 

 

(4.2

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

—

 

 

 

—

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

2.9

 

 

 

(0.5

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

12.9

 

 

 

6.1

 

Cash, cash equivalents and restricted cash at end of period

 

$

15.8

 

 

$

5.6

 

Noncash investing and financing transactions:

 

 

 

 

 

 

Acquisition of property by assuming debt and other noncurrent liabilities

 

$

0.9

 

 

$

0.8

 

Acquisition of property on account

 

$

90.7

 

 

$

51.2

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of Business and Accounting Policies

Description of Business — Cincinnati Bell Inc. and its consolidated subsidiaries ("Cincinnati Bell," "we," "our," "us" or the "Company") provides diversified telecommunications and technology services. The Company generates a large portion of its revenue by serving customers in Cincinnati, Ohio, Dayton, Ohio and the islands of Hawaii. An economic downturn or natural disaster occurring in these, or a portion of these, limited operating territories could have a disproportionate effect on our business, financial condition, results of operations and cash flows compared to similar companies of a national scope and similar companies operating in different geographic areas.

The Company had receivables with one customer, Verizon Communications Inc. (“Verizon”), which made up 21% of the outstanding accounts receivable balance at December 31, 2022. No customers exceeded 10% of outstanding accounts receivable at March 31, 2023. Revenue derived from foreign operations was approximately 7% of consolidated revenue for the three months ended March 31, 2023 and 2022.

Basis of Presentation — The Condensed Consolidated Financial Statements of the Company have been prepared pursuant to the rules and regulations of the SEC and, in the opinion of management, include all adjustments necessary for a fair statement of the results of operations, other comprehensive income, financial position and cash flows for each period presented.

The adjustments referred to above are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules and regulations for interim reporting.

The Company’s Condensed Consolidated Balance Sheet as of December 31, 2022 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2022 Annual Report on Form 10-K.

Business Combinations — In accounting for business combinations, we apply the accounting requirements of Accounting Standards Codification 805 (“ASC 805”), “Business Combinations,” which requires the recording of net assets of acquired businesses at fair value. In developing fair value estimates for acquired assets and assumed liabilities, management analyzes a variety of factors including market data, estimated future cash flows of the acquired operations, industry growth rates, current replacement cost for fixed assets, and market rate assumptions for contractual obligations. Such a valuation requires management to make significant estimates and assumptions, particularly with respect to the intangible assets. In addition, any contingent consideration is presented at fair value at the date of acquisition, and transaction costs are expensed as incurred. The Company reports in its Condensed Consolidated Financial Statements provisional amounts for the items for which accounting is incomplete. Goodwill is adjusted for any changes to provisional amounts made within the measurement period. See Note 2 for disclosures related to mergers and acquisitions.

Use of Estimates — Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. In the normal course of business, the Company is subject to various regulatory and tax proceedings, lawsuits, claims and other matters. The Company believes adequate provision has been made for all such asserted and unasserted claims in accordance with U.S. GAAP. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.

Accounting Policies — The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Variable Interest Entity — The Company holds a controlling interest in a limited liability company, Digital Access Ohio LLC (“DAO”), that is considered a variable interest entity ("VIE") in accordance with ASC 810-10 "Consolidation." The Company is the primary beneficiary of DAO as it has the power over the activities that most significantly impact the economic performance of DAO and has the obligation to absorb expected losses and the right to receive expected benefits that could be significant to DAO. As a result, the Company consolidated DAO, and all significant intercompany accounts have been eliminated. DAO is consolidated with the equity owned by the other joint venture member shown as noncontrolling interests in our Condensed Consolidated Balance Sheets. For the three months ended March 31, 2023, results of operations of DAO were nominal. The Company will continue to assess whether it has a controlling financial interest and whether it is the primary beneficiary at each reporting period.

6

Cash, Cash Equivalents and Restricted Cash — Cash consists of funds held in bank accounts. Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. Restricted cash as of March 31, 2023 and December 31, 2022 consists of funds held in an escrow account related to a cost method investment and funds held by DAO. Restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Condensed Consolidated Statements of Cash Flows. A reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets follows:

 

(dollars in millions)

March 31, 2023

 

 

December 31, 2022

 

Cash and cash equivalents

$

7.4

 

 

$

9.4

 

Restricted cash included in Other noncurrent assets

 

8.4

 

 

 

3.5

 

Cash, cash equivalents and restricted cash per Condensed Consolidated Statements of Cash Flows

$

15.8

 

 

$

12.9

 

 

Goodwill — Goodwill represents the excess of the purchase price consideration over the fair value of net assets acquired and recorded in connection with business acquisitions. Goodwill is allocated at the business segment level. Goodwill is tested for impairment on an annual basis or when events or changes in circumstances indicate that such assets may be impaired. If the net book value of the reporting unit exceeds its fair value, an impairment loss is recognized. An impairment loss is measured as the excess of the carrying value of goodwill of a reporting unit over its fair value.

Indefinite-Lived Intangible Assets — Intangible assets represent purchased assets that lack physical substance but can be separately distinguished from goodwill because of contractual or legal rights, or because the asset is capable of being separately sold or exchanged. Federal Communications Commission ("FCC") licenses for wireless spectrum and other perpetual licenses represent indefinite-lived intangible assets. The Company may renew the wireless licenses in a routine manner every ten years for a nominal fee, provided the Company continues to meet the service and geographic coverage provisions required by the FCC. Intangible assets not subject to amortization are tested for impairment annually, or when events or changes in circumstances indicate that the asset might be impaired.

Long-Lived Assets — Management reviews the carrying value of property, plant and equipment and other long-lived assets, including intangible assets with definite lives, when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the estimated future undiscounted cash flows expected to result from the use of an asset (or group of assets) and its eventual disposition is less than its carrying amount. An impairment loss is measured as the amount by which the asset’s carrying value exceeds its estimated fair value. Long-lived intangible assets are amortized based on the estimated economic value generated by the asset in future years.

7

Income and Operating Taxes

Income taxes — In accordance with ASC 740-270, the Company’s income tax provision for interim periods is determined through the use of an estimated annual effective tax rate applied to year-to-date ordinary income/loss plus or minus the tax effects of discrete items. The Company’s estimated annual effective tax rate benefit was lower than the period’s income at the statutory rate, due primarily to a federal and state valuation allowance recorded against deferred tax assets. With the current year loss, net operating losses now exceed deferred tax liabilities available for offset, therefore a $8.4 million partial federal and state valuation allowance was recorded on net operating losses that are primarily non-expiring.

Operating taxes — Certain operating taxes such as property, sales, use, and gross receipts taxes are reported as expenses in operating income primarily within cost of services. These taxes are not included in income tax expense because the amounts to be paid are not dependent on our level of income. Liabilities for audit exposures are established based on management's assessment of the probability of payment. The provision for such liabilities is recognized as either property, plant and equipment, operating tax expense, or depreciation expense depending on the nature of the audit exposure. Upon resolution of an audit, any remaining liability not paid is released against the account in which it was originally recorded. Certain telecommunication taxes and surcharges that are collected from customers are also recorded as revenue; however, in accordance with ASC 606, revenue associated with these charges is excluded from the transaction price.

 

Derivative Financial Instruments — The Company accounts for derivative financial instruments by recognizing derivative instruments as either assets or liabilities in the Condensed Consolidated Balance Sheets at fair value and recognizing the resulting gains or losses as adjustments to the Condensed Consolidated Statements of Operations or “Accumulated other comprehensive income.” The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

 

For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of "Accumulated other comprehensive income" in stockholder's equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. Derivatives that do not qualify as hedges are adjusted to fair value through earnings in the current period. All cash flows associated with the Company’s derivative instruments are classified as operating activities in the Condensed Consolidated Statements of Cash Flows.

Recently Issued Accounting Standards

Accounting standards that have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s condensed consolidated financial statements upon adoption.

 

8

2. Mergers and Acquisitions

Acquisition of Lawrenceburg Fiber Assets

In the first quarter of 2023, the Company acquired fiber network assets from the City of Lawrenceburg for an aggregate purchase price of $3.0 million consisting of $2.7 million in cash and $0.3 million in contingent consideration. The Company accounted for the Lawrenceburg fiber asset acquisition as an asset acquisition under ASC 805-10-55 “Business Combinations” because the assets acquired do not include an assembled workforce, and the gross value of the assets acquired meets the screen test in ASC 805-10-55-5A related to substantially all of the fair value being concentrated in a single asset or group of assets (i.e., the fiber infrastructure assets) and, thus, the assets are not considered a business. The fiber network assets will help to support and expand the Company's existing network. The assets are recorded as network equipment in “Property, plant and equipment, net” on the Condensed Consolidated Balance Sheets.

Acquisition of Agile IWG Holdings, LLC

On May 2, 2022 (“Agile Acquisition Date”), the Company acquired Agile, based in Canton, Ohio for total cash consideration of $65.5 million. Agile delivers customers, primarily located in Ohio and Pennsylvania, with middle mile, last mile and campus connectivity services through hybrid fiber wireless networks that are designed, built and managed by Agile.

The cash portion of the purchase price was funded through borrowings under the Company's former Receivables Facility and the Revolving Credit Facility (see Note 5).

The valuation of the assets acquired and liabilities assumed is based on estimated fair values at the Agile Acquisition Date. The allocation disclosed below is considered preliminary in nature due to the ongoing work by management, with the assistance of third party experts, to refine the fair value estimates. The Company considers the allocation and fair value estimates of property, plant and equipment, ROU Assets and Liabilities, Intangible Assets and Goodwill to be preliminary in nature as of March 31, 2023. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired as of the Agile Acquisition Date while the measurement period remains open. Measurement period adjustments related to the acquisition of Agile will be applied retrospectively to the Agile Acquisition Date.

Nominal expenses related to the Agile acquisition were recorded in the three months ended March 31, 2023. The Company incurred $1.5 million in acquisition expenses related to the Agile acquisition in the three months ended March 31, 2022. These expenses are recorded in "Transaction and integration costs" on the Condensed Consolidated Statements of Operations.

Based on fair value estimates, the purchase price has been allocated on a preliminary basis to individual assets acquired and liabilities assumed as follows:

(dollars in millions)

 

Agile

 

Assets acquired

 

 

 

Receivables and other current assets

 

$

1.8

 

Property, plant and equipment

 

 

10.2

 

Operating lease right-of-use assets

 

 

27.8

 

Intangible assets

 

 

19.4

 

Goodwill

 

 

39.4

 

Total assets acquired

 

 

98.6

 

Liabilities assumed

 

 

 

Accrued expenses and other current liabilities

 

 

2.5

 

Operating lease liabilities

 

 

25.7

 

Deferred income tax liability

 

 

4.4

 

Other noncurrent liabilities

 

 

0.5

 

Total liabilities assumed

 

 

33.1

 

Net assets acquired

 

$

65.5

 

In connection with this acquisition, the Company recorded goodwill attributable to a diversified customer base and acquired workforce with industry expertise. The Company is continuing to evaluate the amount of goodwill that is expected to be deductible for income tax purposes.

9

Based on fair value estimates, the identifiable intangible assets acquired are as follows:

 

(dollars in millions)

 

Fair Value

 

 

Useful Lives

      Customer relationships

 

$

16.0

 

 

15 years

      Trade names

 

 

2.3

 

 

10 years

      Technology

 

 

1.1

 

 

7 years

Total identifiable intangible assets

 

$

19.4

 

 

 

 

 

10

3. Revenue

The Network segment provides products and services to both residential and commercial customers that can be categorized as Fioptics, Enterprise Fiber or Legacy. The products and services within these three categories can be further categorized as either Data, Voice, Video or Other. Fioptics and Legacy revenue include both residential and commercial customers. Enterprise Fiber revenue includes ethernet and dedicated internet access services that are provided to enterprise customers, as well as revenue associated with the Southeast Asia to United States ("SEA-US") trans-Pacific submarine cable system. Subsequent to the Company’s acquisition of Agile, services provided by Agile are also included in Enterprise Fiber.

Residential customers have implied month-to-month contracts. Commercial customers, with the exception of contracts associated with the SEA-US cable system, typically have contracts with a duration of one to five years and automatically renew on a month-to-month basis. Customers are invoiced on a monthly basis for services rendered. Contracts for projects that are included within the Other revenue stream are typically short in duration and less than one year. Contracts associated with the SEA-US cable system typically range from 15 to 25 years and payment is prepaid.

The IT Services and Hardware segment provides a full range of Information Technology ("IT") solutions, including Communications, Cloud and Consulting services. IT Services and Hardware customers enter into contracts that have a typical duration of one to five years, with varied renewal options at the end of the term. Customers are invoiced on a monthly basis for services rendered. The IT Services and Hardware segment also provides enterprise customers with Infrastructure Solutions, which includes the sale of hardware and maintenance contracts. These contracts are typically satisfied in less than twelve months and revenue is recognized at a point in time.

 

The Company has elected the practical expedient described in ASC 606-10-32-18 that allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects that the period of time between the transfer of a promised good or service to the customer and when the customer pays for such good or service will be one year or less. Customers are typically billed immediately upon the rendering of services or the delivery of products. Payment terms for customers are between 30 and 120 days. Subsequent to the acquisition of Hawaiian Telcom Holdco., Inc. ("Hawaiian Telcom"), the Company began recognizing a financing component associated with the up-front payments for services to be delivered under indefeasible right of use ("IRU") contracts for fiber circuit capacity. The IRU contracts typically have a duration ranging from 15 to 25 years.

 

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, or a series of distinct goods or services, and is the unit of account defined in ASC Topic 606. The transaction price identified in the contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Contract modifications for changes to services provided are routine throughout the term of our contracts. In most instances, contract modifications are for the addition or reduction of services that are distinct, and price changes are based on the stand-alone selling price of the service and, as such, are accounted for on a prospective basis as a new contract.

Goods and services are sold individually, or a contract may include multiple goods or services. For contracts with multiple goods and services, the transaction price identified in the contract is allocated to each performance obligation using the stand-alone selling price of each distinct good or service in the contract.

Certain customers of the Company may receive cash-based rebates based on volume of sales, which are accounted for as variable consideration. Potential rebates are considered at contract inception in our estimate of transaction price based on the estimated projection of sales volume. Estimates are reassessed quarterly.

Performance obligations are satisfied either over time as services are performed or at a point in time. Substantially all of our service revenue is recognized over time. For services transferred over time, the Company has elected the practical expedient to recognize revenue based on amounts invoiced to the customer as the Company has concluded that the invoice amount directly corresponds with the value of services provided to the customer. Management considers this a faithful depiction of the transfer of control as services are provided evenly over the month and are substantially the same over the life of the contract. As the Company has elected the practical expedients detailed at ASC 606-10-50-13, revenue for these unsatisfied performance obligations that will be billed in future periods has not been disclosed.

11

As of March 31, 2023, our estimated revenue, including a financing component, expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially unsatisfied) is $186.9 million. Certain IRU contracts extend for periods of up to 30 years and are invoiced at the beginning of the contract term. The revenue from such contracts is recognized over time as services are provided over the contract term. The expected revenue to be recognized for existing customer contracts is as follows:

 

(dollars in millions)

 

 

 

Nine months ended December 31, 2023

 

$

11.8

 

2024

 

 

17.7

 

2025

 

 

17.8

 

2026

 

 

18.2

 

2027

 

 

18.3

 

Thereafter

 

 

103.1

 

 

Network

The Company has identified four distinct performance obligations in the Network segment, namely Data, Voice, Video and Other. For each of the Data, Voice and Video services, service is delivered to the customer continuously and in a substantially similar manner for each period of the agreement, the customer takes full control over the services as the service is delivered, and as such, Data, Voice and Video are identified to be a series of distinct services. Services provided by the Network segment can be categorized into three main categories that include Fioptics, Enterprise Fiber and Legacy, each of which may include one or more of the aforementioned performance obligations. Data services include high-speed internet access, digital subscriber lines, ethernet, routed network services, SONET (Synchronous Optical Network), dedicated internet access, wavelength, digital signal and IRU revenue. Voice services include traditional and fiber voice lines, switched access, digital trunking and consumer and business long distance calling. Video services are offered through our fiber network to residential and commercial customers based on various standard plans with the opportunity to add premium channels. To receive video services, customers are required to use the Company's set top boxes that are billed as part of the monthly recurring service. Set top boxes are not considered a separate performance obligation from video because the equipment is necessary for the service to operate and the customer has no alternative use for the equipment.

Services and products not included in Data, Voice or Video are included in Other revenue and are comprised of wire care, time and materials projects, subsidized fiber build projects and advertising. Transfer of control of these services and products is evaluated on an individual project basis and can occur over time or at a point in time.

The Company uses multiple methods to determine stand-alone selling prices in the Network segment. For Data, Video and Voice products in Fioptics, market rate is the primary method used to determine stand-alone selling prices. For Data performance obligations under the Enterprise Fiber category, and Voice, Data and Other performance obligations under the Legacy category, stand-alone selling prices are determined based on a list price, discount off of list price, a tariff rate, a margin percentage range, or a minimum margin percentage.

12

IT Services and Hardware

The Company has identified four distinct performance obligations in the IT Services and Hardware segment. These performance obligations are Communications, Cloud, Consulting and Infrastructure Solutions. Communications services are monthly services that include data and VoIP services, tailored solutions that include converged IP communications of data, voice, video and mobility applications, enterprise long distance, MPLS (Multi-Protocol Label Switching) and conferencing services. Cloud services include storage, backup, disaster recovery, SLA-based monitoring and management, cloud computing and cloud consulting. Consulting services provide customers with IT staffing, consulting and emerging technology solutions. Infrastructure Solutions includes the sale of hardware and maintenance contracts as well as installation projects.

For the sale of hardware, the Company evaluated whether it is the principal or the agent. The Company has concluded it acts as an agent because it does not control the inventory before it is transferred to customers, it does not have the ability to direct the product to anyone besides the purchasing customer, and it does not integrate the hardware with any of its own goods or services. Based on this assessment, the performance obligation is to arrange a sale of hardware between the vendor and the customer. In the instance where there is an issue with the hardware, the Company coordinates with the manufacturer to facilitate a return in accordance with the standard manufacturer warranty. Hardware returns are not significant to the Company.

Within the IT Services and Hardware segment, stand-alone selling prices for the four performance obligations are determined based on either a margin percentage range, minimum margin percentage or discount from standard price list if it is determined to be representative of stand-alone selling price.

For hardware sales, revenue is recognized net of the cost of product and is recognized when the hardware is either shipped or delivered in accordance with the terms of the contract. For certain projects within Communications and Consulting, revenue is recognized when the customer communicates acceptance of the services performed. For contracts with freight on board shipping terms, management has elected to account for shipping and handling as activities to fulfill the promise to transfer the good, and, therefore, has not evaluated whether shipping and handling activities are promised services to its customers.

 

13

Contract Balances

The Company recognizes incremental fulfillment costs as an asset when installation expenses are incurred as part of performing the agreement for Voice, Video and Data product offerings in the Network segment in which the contract life is longer than one year. These fulfillment costs are amortized ratably over the expected life of the customer, which is representative of the expected period of benefit of the asset capitalized. The expected life of the customer is determined utilizing the average churn rate for each product. The Company calculates average churn based on the historical average customer life. We also recognize an asset for incremental fulfillment costs for certain Cloud and Communications services in the IT Services and Hardware segment that require us to incur installation and provisioning expenses. The asset recognized for Cloud and Communication services is amortized over the average contract life. Churn rates and average contract life are reviewed on an annual basis. Fulfillment costs are capitalized to “Other noncurrent assets.” The related amortization expense is recorded to “Cost of services and products.”

The Company recognizes an asset for the incremental costs of acquiring a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs related to Voice, Video, Data and certain Cloud and Communications services meet the requirements to be capitalized. The contract asset established for the costs of acquiring a contract is recorded to “Other noncurrent assets.” Sales incentives are amortized ratably over the period that services are delivered using either an average churn rate or average contract term, both representative of the expected period of benefit of the asset capitalized. Customer churn rates and average contract term assumptions are reviewed on an annual basis. The related amortization expense is recorded to “Selling, general and administrative.”

Management has elected to use the practical expedient detailed in ASC 340-40-25-4 to expense any costs to fulfill a contract and costs to obtain a contract as they are incurred when the amortization period would have been one year or less. This practical expedient has been applied to fulfillment costs that include installation costs associated with wiring projects and certain Cloud services. In addition, this practical expedient has been applied to acquisition costs associated with revenue from certain Communications projects.

The following table presents the activity for the Company’s contract assets:

 

 

 

Fulfillment Costs

 

 

Cost of Acquisition

 

 

Total Contract Assets

 

(dollars in millions)

 

Network

 

 

IT Services
and
Hardware

 

 

Total
Company

 

 

Network

 

 

IT Services
and
Hardware

 

 

Total
Company

 

 

Network

 

 

IT Services
and
Hardware

 

 

Total
Company

 

Balance as of December 31, 2022

 

$

2.5

 

 

$

2.7

 

 

$

5.2

 

 

$

12.0

 

 

$

1.0

 

 

$

13.0

 

 

$

14.5

 

 

$

3.7

 

 

$

18.2

 

Additions

 

 

0.5

 

 

 

0.5

 

 

 

1.0

 

 

 

3.0

 

 

 

0.2

 

 

 

3.2

 

 

 

3.5

 

 

 

0.7

 

 

 

4.2

 

Amortization

 

 

(0.2

)

 

 

(0.2

)

 

 

(0.4

)

 

 

(1.2

)

 

 

(0.2

)

 

 

(1.4

)

 

 

(1.4

)

 

 

(0.4

)

 

 

(1.8

)

Balance as of March 31, 2023

 

$

2.8

 

 

$

3.0

 

 

$

5.8

 

 

$

13.8

 

 

$

1.0

 

 

$

14.8

 

 

$

16.6

 

 

$

4.0

 

 

$

20.6

 

 

The Company recognizes a liability for cash received up-front for IRU contracts. At March 31, 2023 and December 31, 2022, $3.4 million and $3.2 million, respectively, of contract liabilities were included in "Other current liabilities." At March 31, 2023 and December 31, 2022, $73.3 million and $74.2 million, respectively, of contract liabilities were included in "Other noncurrent liabilities."

Disaggregated Revenue

The following table presents revenues disaggregated by product and service lines:

 

(dollars in millions)

 

Three Months Ended March 31, 2023

 

 

Three Months Ended March 31, 2022

 

Data

 

$

136.2

 

 

$

126.1

 

Video

 

 

48.6

 

 

 

48.6

 

Voice

 

 

56.9

 

 

 

59.3

 

Other

 

 

8.1

 

 

 

9.5

 

Total Network

 

 

249.8

 

 

 

243.5

 

Consulting

 

 

84.7

 

 

 

83.4

 

Cloud

 

 

26.6

 

 

 

24.6

 

Communications

 

 

56.2

 

 

 

54.9

 

Infrastructure Solutions

 

 

37.5

 

 

 

35.9

 

Total IT Services and Hardware

 

 

205.0

 

 

 

198.8

 

Intersegment Revenue

 

 

(5.9

)

 

 

(6.5

)

Total Revenue

 

$

448.9

 

 

$

435.8

 

 

14

 

The following table presents revenues disaggregated by contract type:

 

 

 

Three Months Ended March 31, 2023

 

(dollars in millions)

 

Network

 

 

IT Services and Hardware

 

 

Intersegment revenue
elimination

 

 

Total

 

Products and Services transferred at a point in time

 

$

5.6

 

 

$

41.1

 

 

$

—

 

 

$

46.7

 

Products and Services transferred over time

 

 

240.1

 

 

 

162.1

 

 

 

—

 

 

 

402.2

 

Intersegment revenue

 

 

4.1

 

 

 

1.8

 

 

 

(5.9

)

 

 

—

 

Total revenue

 

$

249.8

 

 

$

205.0

 

 

$

(5.9

)

 

$

448.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2022

 

(dollars in millions)

 

Network

 

 

IT Services and Hardware

 

 

Intersegment revenue
elimination

 

 

Total

 

Products and Services transferred at a point in time

 

$

7.4

 

 

$

38.5

 

 

$

—

 

 

$

45.9

 

Products and Services transferred over time

 

 

231.2

 

 

 

158.7

 

 

 

—

 

 

 

389.9

 

Intersegment revenue

 

 

4.9

 

 

 

1.6

 

 

 

(6.5

)

 

 

—

 

Total revenue

 

$

243.5

 

 

$

198.8

 

 

$

(6.5

)

 

$

435.8

 

 

15

 

4. Goodwill and Intangible Assets

Goodwill

 

As of March 31, 2023 and December 31, 2022, goodwill in the IT Services and Hardware segment totaled $177.6 million and goodwill in the Network segment totaled $545.9 million. No impairment losses were recognized in goodwill for the three months ended March 31, 2023 and 2022.

Intangible Assets

The Company’s intangible assets consisted of the following:

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net

 

 

Gross Carrying

 

 

Accumulated

 

 

Net

 

(dollars in millions)

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Intangible assets subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

862.1

 

 

$

(165.2

)

 

$

696.9

 

 

$

862.1

 

 

$

(140.7

)

 

$

721.4

 

Trade names

 

 

109.5

 

 

 

(24.4

)

 

 

85.1

 

 

 

109.5

 

 

 

(20.5

)

 

 

89.0

 

Technology

 

 

6.0

 

 

 

(1.3

)

 

 

4.7

 

 

 

6.0

 

 

 

(1.0

)

 

 

5.0

 

  Total

 

 

977.6

 

 

 

(190.9

)

 

 

786.7

 

 

 

977.6

 

 

 

(162.2

)

 

 

815.4

 

Intangible assets not subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FCC licenses and spectrum usage rights

 

 

7.0

 

 

 

—

 

 

 

7.0

 

 

 

6.9

 

 

 

—

 

 

 

6.9

 

Perpetual licenses

 

 

6.8

 

 

 

—

 

 

 

6.8

 

 

 

6.8

 

 

 

—

 

 

 

6.8

 

Total intangible assets

 

$

991.4

 

 

$

(190.9

)

 

$

800.5

 

 

$

991.3

 

 

$

(162.2

)

 

$

829.1

 

 

 

The finite-lived intangible assets are amortized over their useful lives based on a number of assumptions including the estimated period of economic benefit and utilization.

 

Amortization expense for finite-lived intangible assets was $28.7 million and $30.1 million for the three months ended March 31, 2023 and 2022, respectively. No impairment losses were recognized on intangible assets for the three months ended March 31, 2023 and 2022.

The estimated useful lives for each finite-lived intangible asset class are as follows:

 

Customer relationships

 

15 years

Trade names

 

3 to 10 years

Technology

 

7 years

 

The annual estimated amortization expense for future years is as follows:

 

(dollars in millions)

 

 

 

Nine months ended December 31, 2023

 

$

86.0

 

2024

 

 

105.4

 

2025

 

 

93.6

 

2026

 

 

86.5

 

2027

 

 

79.3

 

Thereafter

 

 

335.9

 

Total

 

$

786.7

 

 

16

5. Debt and Other Financing Arrangements

The Company’s debt consists of the following:

 

(dollars in millions)

 

March 31, 2023

 

 

December 31, 2022

 

Current portion of long-term debt:

 

 

 

 

 

 

Credit Agreement - Term B-1 Loans

 

$

5.0

 

 

$

5.0

 

Credit Agreement - Term B-2 Loans

 

 

6.5

 

 

 

6.5

 

7 1/4% Notes due 2023 (1)

 

 

22.5

 

 

 

22.8

 

Paniolo Fiber Assets Financing Arrangement

 

 

0.5

 

 

 

0.5

 

Other financing arrangements

 

 

0.1

 

 

 

0.3

 

Finance lease liabilities

 

 

10.6

 

 

 

9.9

 

Current portion of long-term debt

 

 

45.2

 

 

 

45.0

 

Long-term debt, less current portion:

 

 

 

 

 

 

Receivables Facility

 

 

—

 

 

 

186.9

 

Network Receivables Facility

 

 

35.5

 

 

 

—

 

CBTS Receivables Facility

 

 

198.8

 

 

 

—

 

Credit Agreement - Revolving Credit Facility

 

 

300.0

 

 

 

223.0

 

Credit Agreement - Term B-1 Loans

 

 

488.8

 

 

 

490.0

 

Credit Agreement - Term B-2 Loans

 

 

635.4

 

 

 

637.0

 

Various Cincinnati Bell Telephone notes (1)

 

 

96.0

 

 

 

96.4

 

Paniolo Fiber Assets Financing Arrangement

 

 

21.7

 

 

 

21.8

 

Digital Access Ohio Advance

 

 

3.7

 

 

 

0.9

 

Other financing arrangements

 

 

0.4

 

 

 

—

 

Finance lease liabilities

 

 

42.6

 

 

 

43.1

 

 

 

1,822.9

 

 

 

1,699.1

 

Net unamortized discount

 

 

(4.1

)

 

 

(4.3

)

Unamortized note issuance costs

 

 

(37.3

)

 

 

(38.8

)

Long-term debt, less current portion

 

 

1,781.5

 

 

 

1,656.0

 

Total debt

 

$

1,826.7

 

 

$

1,701.0

 
(1)
As of March 31, 2023, the net carrying amounts of the 7 ¼% Notes due 2023 and Various Cincinnati Bell Telephone notes included unamortized fair value adjustments recorded on the Company's merger date, September 7, 2021, of $0.2 million and $8.1 million, respectively. As of December 31, 2022, the net carrying amounts of the 7 ¼% Notes due 2023 and Various Cincinnati Bell Telephone notes included unamortized fair value adjustments of $0.5 million and $8.5 million, respectively. Each adjustment is being amortized over the life of the respective notes and is recorded as a reduction of interest expense.

 

Credit Agreement

The Company had $300.0 million of outstanding borrowings on the Credit Agreement’s revolving credit facility, leaving $100.0 million available for borrowings as of March 31, 2023. The revolving credit facility matures in September 2026, and the Term B-1 Loans and Term B-2 loans under the Credit Agreement mature in November 2028.

In May 2023, the Company entered into an Incremental Amendment to the Credit Agreement (the "Incremental Amendment”) to provide for the incurrence of a new tranche of $200.0 million senior secured term loans (the “Term B-3 Loans”). The Term B-3 Loans will mature in November 2028 and will bear interest at a floating rate plus a margin equal to (x) 3.00% for Term B-3 Loans bearing interest based on the Base Rate (as defined in the Credit Agreement) and (y) 4.00% for Term B-3 Loans bearing interest based on Term SOFR. All other material terms, conditions and covenants of the Credit Agreement were unchanged by the Incremental Amendment.

17

Accounts Receivable Securitization Facility

On January 31, 2023, the Company, together with certain of its U.S. and Canadian subsidiaries, made certain amendments (the “Amendments”) to the Company’s accounts receivable securitization facility ("Receivables Facility"). The Amendments amend the Receivables Facility to, among other things: (i) increase the total maximum borrowing capacity to $280.0 million, (ii) separate the Receivables Facility into two separate facilities, with (A) the existing Receivables Facility (the “Network Receivables Facility”), as amended by the Amendments, covering receivables originated by certain U.S. subsidiaries of the Company including Cincinnati Bell Telephone Company LLC, Hawaiian Telcom Communications, Inc. and certain of their respective subsidiaries having a maximum borrowing capacity of $55.0 million and (B) a new facility (the “CBTS Receivables Facility”) covering receivables originated by certain U.S. and Canadian subsidiaries in the Company's IT Services and Hardware segment including CBTS Technology Solutions LLC and OnX Enterprise Solutions Ltd. having a maximum borrowing capacity of $225.0 million, (iii) move the receivables monetization arrangements from the Network Receivables Facility to the CBTS Receivables Facility, and (iv) make applicable technical and conforming changes thereto. In addition, the Amendments extend the renewal dates of each facility to January 2025 and the termination dates of each facility to January 2026.

As of March 31, 2023, the Company had $35.5 million in borrowings and $15.3 million of letters of credit outstanding under the Network Receivables Facility, leaving $4.2 million remaining availability on the total borrowing capacity of $55.0 million. As of March 31, 2023, the Company had $198.8 million in borrowings and $0.8 million of letters of credit outstanding under the CBTS Receivables Facility, leaving $13.6 million remaining availability on the total borrowing capacity of $213.2 million. The maximum borrowing limit for loans and letters of credit under the Network Receivables Facility and the CBTS Receivables Facility is $55.0 million and $225.0 million, respectively, in the aggregate. The available borrowing capacity on each facility is calculated monthly based on the quantity and quality of outstanding accounts receivable, and thus may be lower than the maximum borrowing limit.

Under the Network Receivables Facility and the CBTS Receivables Facility, certain U.S. and Canadian subsidiaries, as originators, sell their respective trade receivables on a continuous basis to Cincinnati Bell Funding LLC (“CBF”), Cincinnati Bell Funding Canada Ltd. ("CBFC"), or CBTS Funding LLC (“CBTSF”), wholly-owned consolidated subsidiaries of the Company. Although CBF, CBFC and CBTSF are wholly-owned consolidated subsidiaries of the Company, CBF, CBFC and CBTSF are legally separate from the Company and each of the Company’s other subsidiaries. Upon and after the sale or contribution of the accounts receivable to CBF, CBFC or CBTSF, such accounts receivable are legally assets of CBF, CBFC and CBTSF and, as such, are not available to creditors of other subsidiaries or the parent company. As a result of the Amendments, the CBTS Receivables Facility includes an option for CBTSF to sell, rather than borrow against, certain receivables on a non-recourse basis. As of March 31, 2023, the outstanding balance of certain accounts receivable sold, rather than borrowed against, was $19.1 million.

18

6. Leases

Lessee Disclosures

The Company primarily leases real estate for offices, retail stores and central offices, as well as equipment, cell towers, designated space on third party towers and fleet vehicles. Upon adoption of ASC 842, the Company elected not to recognize leases with terms of one-year or less on the balance sheet.

Supplemental balance sheet information related to the Company's leases is as follows:

 

(dollars in millions)

 

Balance Sheet Location

 

March 31, 2023

 

 

December 31, 2022

 

Operating lease assets, net of amortization

 

Operating lease right-of-use assets

 

$

72.6

 

 

$

73.1

 

Finance lease assets, net of amortization

 

Property, plant and equipment, net

 

 

17.4

 

 

 

16.5

 

Operating lease liabilities:

 

 

 

 

 

 

 

 

Current operating lease liabilities

 

Other current liabilities

 

 

12.4

 

 

 

12.7

 

Noncurrent operating lease liabilities

 

Operating lease liabilities

 

 

66.0

 

 

 

66.1

 

Total operating lease liabilities

 

 

 

 

78.4

 

 

 

78.8

 

Finance lease liabilities:

 

 

 

 

 

 

 

 

Current finance lease liabilities

 

Current portion of long-term debt

 

 

10.6

 

 

 

9.9

 

Noncurrent finance lease liabilities

 

Long-term debt, less current portion

 

 

42.6

 

 

 

43.1

 

Total finance lease liabilities

 

 

 

$

53.2

 

 

$

53.0

 

 

.

Supplemental cash flow information related to leases is as follows:

 

 

 

Three Months Ended March 31,

 

(dollars in millions)

 

2023

 

 

2022

 

Supplemental Cash Flows Information

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from finance leases

 

$

1.0

 

 

$

0.8

 

Operating cash flows from operating leases

 

$

3.2

 

 

$

2.5

 

Financing cash flows from finance leases

 

$

3.6

 

 

$

2.8

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

New operating leases

 

$

2.4

 

 

$

1.9

 

New finance leases

 

$

3.8

 

 

$

0.8

 

 

 

 

19

7. Financial Instruments and Fair Value Measurements

Fair Value Measurements

The Company defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements, the Company uses a three-level hierarchy that prioritizes the use of observable inputs. The three levels are:

Level 1 — Quoted market prices for identical instruments in an active market;

Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and

Level 3 — Unobservable inputs that reflect management's determination of assumptions that market participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including our own data.

The determination of where an asset or liability falls in the hierarchy requires significant judgment.

Cash Flow Hedging

Cash Flow Hedges Not Designated as Hedging Instruments

The Company uses non-designated cash flow hedges including interest rate swap agreements and interest rate cap agreements to minimize its exposure to interest rate fluctuations on variable rate debt borrowings. Interest rate swaps involve the exchange of fixed and variable rate interest payments and do not represent an actual exchange of the underlying notional amounts between parties. Interest rate caps provide that the counterparty will pay the purchaser at the end of each contractual period in which the index interest rate exceeds the contractually agreed upon cap rate.

In the first quarter of 2023, the Company entered into three forward starting non-amortizing interest rate swaps to convert variable rate debt to fixed rate debt. The interest rate swaps have notional amounts of $150.0 million, $150.0 million and $100.0 million resulting in interest payments based on an average fixed rate per swap of 3.6875%, 3.6500% and 3.5095%, respectively. The interest rate swaps expire in March 2027.

In the second quarter of 2022, the Company entered into three forward starting non-amortizing interest rate swaps to convert variable rate debt to fixed rate debt. The interest rate swaps have notional amounts of $175.0 million, $115.0 million and $85.0 million resulting in interest payments based on an average fixed rate per swap of 2.9185%, 2.8520% and 2.8605%, respectively. The interest rate swaps expire in May 2026.

In the second quarter of 2022, the Company entered into two interest rate cap agreements to limit exposure to interest rate risk on variable rate debt. The interest rate caps each have a cap rate of 3.0% with notional amounts of $200.0 million and $175.0 million and deferred premiums of $6.7 million and $5.3 million, respectively. The deferred premiums will be paid on a monthly basis over the term of the respective interest rate cap. The interest rate caps expire in May 2026.

The fair value of the Company's interest rate swaps and interest rate caps are impacted by the credit risk of both the Company and its counterparties. The Company has agreements with its derivative financial instrument counterparties that contain provisions providing that if the Company defaults on the indebtedness associated with its derivative financial instruments, then the Company could also be declared in default on its derivative financial instruments obligations. In addition, the Company minimizes nonperformance risk on its derivative instruments by evaluating the creditworthiness of its counterparties, which are limited to major banks and financial institutions.

The Company does not apply hedge accounting to the interest rate swaps and interest rate caps and records all mark-to-market adjustments directly to “Other expense (income), net” in the Condensed Consolidated Statements of Operations. The fair values of the interest rate swaps and interest rate caps are categorized as Level 2 in the fair value hierarchy as they are based on well-recognized financial principles and available market data.

20

As of March 31, 2023, the fair values of the interest rate swaps and interest rate caps are recorded in the Condensed Consolidated Balance Sheets as follows:

(dollars in millions)

 

Balance Sheet Location

 

March 31, 2023

 

 

Quoted Prices in
active markets
Level 1

 

 

Significant
observable inputs
Level 2

 

 

Significant
unobservable inputs
Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap

 

Other current assets

 

$

10.3

 

 

$

—

 

 

$

10.3

 

 

$

—

 

Interest Rate Swap

 

Other noncurrent assets

 

$

1.5

 

 

$

—

 

 

$

1.5

 

 

$

—

 

Interest Rate Cap

 

Other current assets

 

$

3.0

 

 

$

—

 

 

$

3.0

 

 

$

—

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap

 

Other noncurrent liabilities

 

$

6.9

 

 

$

—

 

 

$

6.9

 

 

$

—

 

Interest Rate Cap

 

Other noncurrent liabilities

 

$

4.6

 

 

$

—

 

 

$

4.6

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022, the fair values of the interest rate swaps and interest rate caps are recorded in the Condensed Consolidated Balance Sheets as follows:

(dollars in millions)

 

Balance Sheet Location

 

December 31, 2022

 

 

Quoted Prices in
active markets
Level 1

 

 

Significant
observable inputs
Level 2

 

 

Significant
unobservable inputs
Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap

 

Other current assets

 

$

7.2

 

 

$

—

 

 

$

7.2

 

 

$

—

 

Interest Rate Swap

 

Other noncurrent assets

 

$

5.1

 

 

$

—

 

 

$

5.1

 

 

$

—

 

Interest Rate Cap

 

Other current assets

 

$

3.8

 

 

$

—

 

 

$

3.8

 

 

$

—

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Cap

 

Other noncurrent liabilities

 

$

2.4

 

 

$

—

 

 

$

2.4

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the location of losses in the Condensed Consolidated Statements of Operations that were recognized during the three months ended March 31, 2023, in addition to the derivative contract type:

(dollars in millions)

 

Statement of Operations Location

 

Three Months Ended March 31, 2023

 

Interest Rate Swap

 

Other expense (income), net

 

$

5.8

 

Interest Rate Cap

 

Other expense (income), net

 

$

2.4

 

 

Disclosure on Financial Instruments

The carrying values of the Company's financial instruments approximate the estimated fair values as of March 31, 2023 and December 31, 2022, except for the Company's long-term debt and other financing arrangements. The carrying and fair values of these items are as follows:

 

 

 

March 31, 2023

 

 

December 31, 2022

 

(dollars in millions)

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, including current portion*

 

$

1,810.3

 

 

$

1,765.2

 

 

$

1,686.5

 

 

$

1,647.0

 

Other financing arrangements

 

 

48.9

 

 

 

41.4

 

 

 

50.1

 

 

 

45.3

 

 

*Excludes finance leases, other financing arrangements and note issuance costs

The fair value of our long-term debt was based on closing or estimated market prices of the Company’s debt at March 31, 2023 and December 31, 2022, which is considered Level 2 of the fair value hierarchy. The fair value of the other financing arrangements was calculated using a discounted cash flow model that incorporates current borrowing rates for obligations of similar duration, which is considered Level 3 of the fair value hierarchy. As of March 31, 2023, the current borrowing rate was estimated by applying the Company's credit spread to the risk-free rate for a similar duration borrowing.

21

8. Pension and Postretirement Plans

As of March 31, 2023, the Company sponsors three noncontributory defined benefit plans and a postretirement health and life insurance plan in Cincinnati (collectively the "Cincinnati Plans"), and one noncontributory defined benefit plan for union employees, one cash balance pension plan for nonunion employees, and two postretirement health and life insurance plans for Hawaiian Telcom employees (collectively the "Hawaii Plans").

In accordance with ASC 715, only the service cost component of net benefit cost is eligible for capitalization, which was immaterial for the three months ended March 31, 2023 and 2022.

Pension and postretirement costs (benefits) are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

(dollars in millions)

 

Pension Benefits

 

 

Postretirement and Other Benefits

 

Service cost

 

$

—

 

 

$

—

 

 

$

0.1

 

 

$

0.1

 

Other components of pension and postretirement benefit plans expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost on projected benefit obligation

 

 

5.5

 

 

 

3.9

 

 

 

1.3

 

 

 

0.7

 

Expected return on plan assets

 

 

(5.2

)

 

 

(7.2

)

 

 

—

 

 

 

—

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

Prior service benefit

 

 

—

 

 

 

—

 

 

 

(0.2

)

 

 

—

 

Actuarial gain

 

 

(0.1

)

 

 

—

 

 

 

(0.9

)

 

 

—

 

Pension / postretirement cost (benefit)

 

$

0.2

 

 

$

(3.3

)

 

$

0.3

 

 

$

0.8

 

 

 

Amortization of prior service benefit and actuarial gain in the three months ended March 31, 2023 represent reclassifications from accumulated other comprehensive income.

For the three months ended March 31, 2023, there were no contributions to the qualified pension plans, and contributions to the non-qualified pension plans were $0.4 million. For the three months ended March 31, 2022, there were no contributions to the qualified pension plans, and contributions to the non-qualified pension plans were $0.6 million. Based on current assumptions, contributions are expected to be nominal to the qualified pension plans in 2023. Contributions to the non-qualified pension plans in 2023 are expected to be approximately $2 million.

For the three months ended March 31, 2023 and 2022, contributions to our postretirement plans were $1.4 million and $1.5 million, respectively. Management expects to make total cash payments of approximately $7 million related to its postretirement health plans in 2023.

 

 

22

9. Equity

Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component were as follows:

 

(dollars in millions)

 

Unrecognized
Net Periodic
Pension and
Postretirement
Benefit (Cost)

 

 

 

Foreign
Currency
Translation Gain (Loss)

 

 

Total

 

Balance as of December 31, 2022

 

$

27.1

 

 

 

$

(7.6

)

 

$

19.5

 

Reclassifications, net

 

 

(0.9

)

(a)

 

 

—

 

 

 

(0.9

)

Balance as of March 31, 2023

 

$

26.2

 

 

 

$

(7.6

)

 

$

18.6

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

$

2.6

 

 

 

$

(1.4

)

 

$

1.2

 

Foreign currency gain

 

 

—

 

 

 

 

1.8

 

 

 

1.8

 

Balance as of March 31, 2022

 

$

2.6

 

 

 

$

0.4

 

 

$

3.0

 

 

 

 

(a)
These reclassifications are included in the other components of net periodic pension and postretirement benefit plans expense and represent amortization of prior service benefit and actuarial gain, net of tax. The other components of net periodic pension and postretirement benefit plans expense are recorded in "Other components of pension and postretirement benefit plans expense (benefit)" on the Condensed Consolidated Statements of Operations. See Note 8 for further disclosures.

 

 

23

10. Business Segment Information

The Company’s segments are strategic business units that offer distinct products and services and are aligned with the Company's internal management structure and reporting. The Company operates two business segments identified as Network and IT Services and Hardware.

The Network segment provides products and services that can be categorized as Data, Video, Voice or Other. Data products include high-speed internet access, digital subscriber lines, ethernet, SONET, dedicated internet access, wavelength, digital signal and IRU. Video services provide our customers access to over 400 entertainment channels, over 150 high-definition channels, parental controls, HD DVR, Video On-Demand and access to a live TV streaming application. Voice represents traditional voice lines as well as fiber voice lines, consumer and business long distance, switched access and digital trunking. Other services consist of revenue generated from wiring projects for enterprise customers, advertising, directory assistance, maintenance, information services and subsidized fiber build project revenue related to extending the Company’s fiber network in the Greater Cincinnati territory subsidized through our UniCity program and in Hawaii subsidized through a customer contract. In May 2022, the Company acquired Agile and includes Agile’s financial results in the Network segment.

The IT Services and Hardware segment provides end-to-end solutions from consulting to implementation to ongoing optimization. These solutions include Cloud, Communications and Consulting services along with the sale, installation and maintenance of major branded Telecom and IT hardware reported as Infrastructure Solutions.

Certain corporate administrative expenses have been allocated to the segments based upon the nature of the expense and the relative size of the segment. Intercompany transactions between segments have been eliminated.

Selected financial data for the Company’s business segment information is as follows:

 

 

 

Three Months Ended March 31,

 

(dollars in millions)

 

2023

 

 

2022

 

Revenue

 

 

 

 

 

 

Network

 

$

249.8

 

 

$

243.5

 

IT Services and Hardware

 

 

205.0

 

 

 

198.8

 

Intersegment

 

 

(5.9

)

 

 

(6.5

)

Total revenue

 

$

448.9

 

 

$

435.8

 

Intersegment revenue

 

 

 

 

 

 

Network

 

$

4.1

 

 

$

4.9

 

IT Services and Hardware

 

 

1.8

 

 

 

1.6

 

Total intersegment revenue

 

$

5.9

 

 

$

6.5

 

Operating loss

 

 

 

 

 

 

Network

 

$

(29.1

)

 

$

(3.1

)

IT Services and Hardware

 

 

(5.8

)

 

 

(4.9

)

Corporate

 

 

(8.3

)

 

 

(7.0

)

Total operating loss

 

$

(43.2

)

 

$

(15.0

)

Expenditures for long-lived assets*

 

 

 

 

 

 

Network

 

$

140.4

 

 

$

81.5

 

IT Services and Hardware

 

 

5.9

 

 

 

6.3

 

Corporate

 

 

0.1

 

 

 

—

 

Total expenditures for long-lived assets

 

$

146.4

 

 

$

87.8

 

Depreciation and amortization

 

 

 

 

 

 

Network

 

$

108.9

 

 

$

93.4

 

IT Services and Hardware

 

 

24.3

 

 

 

26.0

 

Corporate

 

 

0.1

 

 

 

0.1

 

Total depreciation and amortization

 

$

133.3

 

 

$

119.5

 

 

* Includes cost of acquisitions

 

(dollars in millions)

 

March 31, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

Network

 

$

3,276.5

 

 

$

3,218.5

 

IT Services and Hardware

 

 

982.9

 

 

 

812.2

 

Corporate and eliminations

 

 

143.5

 

 

 

404.9

 

Total assets

 

$

4,402.9

 

 

$

4,435.6

 

 

24

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

Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements regarding future events and results that are subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “predicts,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” “will,” “proposes,” “potential,” “could,” “should,” “outlook” or variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, anticipated growth and trends in businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned these forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially and adversely from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A, and those discussed in other documents the Company filed with the Securities and Exchange Commission (“SEC”). Actual results may differ materially and adversely from those expressed in any forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements for any reason.

Introduction

This Management’s Discussion and Analysis section provides an overview of Cincinnati Bell Inc.’s financial condition as of March 31, 2023 and the results of operations for the three months ended March 31, 2023 and 2022. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and accompanying notes as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Results for interim periods may not be indicative of results for the full year or any other interim period.

altafiber Brand

In March 2022, the Company announced that we will begin doing business as “altafiber” in Ohio, Kentucky and Indiana as we continue to expand our geographic reach and invest in our fiber network that delivers broadband connectivity. The branding change will not impact our Hawaiian Telcom business or IT Services business, which is branded as CBTS in the U.S. and Europe and OnX in Canada.

25

Executive Summary

Segment results described in the Executive Summary are net of intercompany eliminations.

Cincinnati Bell Inc. and its consolidated subsidiaries ("altafiber," "Cincinnati Bell," "we," "our," "us" or the "Company") provide integrated communications and IT solutions that keep consumer and enterprise customers connected with each other and with the world. Through our Network segment, the Company provides Data, Video, and Voice solutions to consumer and enterprise customers over an expanding fiber network and a legacy copper network. In addition, enterprise customers across the United States, Canada and Europe rely on the IT Services and Hardware segment for the sale and service of efficient, end-to-end communications and IT systems and solutions.

Consolidated revenue totaling $448.9 million for the three months ended March 31, 2023 increased $13.1 million compared to the same period in 2022 due to strategic revenue growth in both segments offsetting declines in Legacy revenue. For the three months ended March 31, 2023, Fioptics revenue increased $10.1 million compared to the comparable period in the prior year as the Company continues to focus on high-speed internet activations while Legacy revenue decreased $8.8 million compared to the comparable period in 2022. IT Services and Hardware experienced revenue growth in all practices primarily due to services for existing customers which continue to bill and grow in 2023 in addition to increased hardware sales.

Operating loss for the three months ended March 31, 2023 and 2022 was $43.2 million and $15.0 million, respectively. Revenue growth in both segments was more than offset due to SG&A expenses to support revenue growth and higher depreciation and amortization expenses in the Network segment related to assets placed in service in connection with the expansion of our fiber network. In addition, Corporate SG&A costs in the three months ended March 31, 2023 include $3.1 million related to employee contract termination costs. These increases were partially offset by the decrease in transaction and integration costs in the three months ended March 31, 2023 compared to the same period in the prior year.

Interest expense increased $19.0 million for the three months ended March 31, 2023 compared to the comparable period in the prior year. The increase is primarily due to higher interest rates on the Term B-1 Loans, Term B-2 Loans and the Company's accounts receivable securitization facilities in addition to increased borrowings on the Revolving Credit Facility due 2026 and accounts receivable securitization facilities.

Other components of pension and postretirement benefit plans expense increased for the three months ended March 31, 2023 compared to the same period in 2022 due to the annual remeasurement of the pension and postretirement projected benefit obligations that resulted in additional expense due to higher interest costs and less benefit from expected return on plan assets.

Other expense (income), net totaled $3.1 million for the three months ended March 31, 2023 primarily due to recording losses associated with the Company's interest rate swap agreements and interest rate cap agreements of $8.2 million partially offset by recording a patronage distribution of $5.0 million from one of the syndicated lenders in the Company's Credit Agreement.

Loss before income taxes totaled $82.2 million for the three months ended March 31, 2023 resulting in an increase in the loss of $53.7 million compared to the same period in the prior year primarily due to the increase in operating loss in addition to higher interest expense in the three months ended March 31, 2023.

The income tax provisions for the three months ended March 31, 2023 and 2022 were benefits of $12.3 million and $6.5 million, respectively. In the three months ended March 31, 2023, the income tax provision was lower than the period’s income at the statutory rate, due primarily to a federal and state valuation allowance recorded against deferred tax assets. With the current year loss, net operating losses now exceed deferred tax liabilities available for offset, therefore a $8.4 million partial federal and state valuation allowance was recorded on net operating losses that are primarily non-expiring. In the comparable period, the income tax provision was higher than the period’s income at the statutory rate due to the effect of state taxes. The income tax benefit recorded in the three months ended March 31, 2023 was higher than the benefit recorded in the comparable period due to higher losses before taxes in the current period, offset in part by the effect of the federal valuation allowance that was recorded in the three months ended March 31, 2023.

 

26

Network

The Network segment provides products and services that are categorized as Fioptics, Enterprise Fiber or Legacy. Cincinnati Bell Telephone Company LLC ("CBT"), a subsidiary of the Company, is the incumbent local exchange carrier ("ILEC") for a geography that covers a radius of approximately 25 miles around Cincinnati, Ohio, and includes parts of northern Kentucky and southeastern Indiana. CBT has operated in this territory since 1873. In 2022, the Company announced that we will being doing business as "altafiber" and started our network expansion outside of this territory to provide fiber services to Dayton, Ohio. Voice and data services in the Enterprise Fiber and Legacy categories that are delivered beyond the Company's ILEC territory, particularly in Dayton and Mason, Ohio, are provided through the operations of Cincinnati Bell Extended Territories LLC ("CBET"), a subsidiary of CBT. On July 2, 2018, the Company acquired Hawaiian Telcom. Hawaiian Telcom is the ILEC for the State of Hawaii and the largest full-service provider of communications services and products in the state. Originally incorporated in Hawaii in 1883 as Mutual Telephone Company, Hawaiian Telcom has a strong heritage of 140 years as Hawaii’s communications carrier. Its services are offered on all of Hawaii’s major islands, except its video service, which currently is only available on the island of Oahu. On May 2, 2022, the Company acquired Agile IWG Holdings, LLC (“Agile”), based in Canton, Ohio. Agile leases wireless infrastructure assets to third parties and provides connectivity through hybrid fiber wireless data networks primarily to customers in Ohio and Pennsylvania.

Fioptics products include high-speed internet access, categorized below as data, voice lines and video as well as subsidized fiber build project revenue included in Other related to extending the Company’s fiber network in the Greater Cincinnati territory subsidized through our UniCity program and in Hawaii subsidized through a customer contract. The Company is able to deliver speeds of up to one gigabit per second to more than 80% of Greater Cincinnati and nearly 45% of Hawaii’s total addressable market.

Enterprise Fiber products include metro-ethernet, dedicated internet access, wavelength, IRU contracts, and wireless backhaul to macro-towers and small cell. Hawaiian Telcom Enterprise Fiber revenue also includes revenue from the SEA-US cable. As enterprise customers migrate from legacy products and copper-based technology, our metro-ethernet product becomes the preferred method of transport due to its ability to support multiple applications on a single physical connection. Subsequent to the Company’s acquisition of Agile in May 2022, Enterprise Fiber revenue also includes revenue from Agile.

Legacy products include traditional voice lines, consumer long distance, switched access, digital trunking, DSL, DS0, DS1, DS3 and other value-added services such as caller identification, voicemail, call waiting and call return.

 

 

 

Three Months Ended March 31,

 

(dollars in millions)

 

2023

 

 

2022

 

 

Change

 

 

% Change

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

$

136.2

 

 

$

126.1

 

 

$

10.1

 

 

 

8

%

Video

 

 

48.6

 

 

 

48.6

 

 

 

—

 

 

 

0

%

Voice

 

 

56.9

 

 

 

59.3

 

 

 

(2.4

)

 

 

(4

)%

Other

 

 

8.1

 

 

 

9.5

 

 

 

(1.4

)

 

 

(15

)%

Total Revenue

 

 

249.8

 

 

 

243.5

 

 

 

6.3

 

 

 

3

%

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products

 

 

116.9

 

 

 

108.0

 

 

 

8.9

 

 

 

8

%

Selling, general and administrative

 

 

53.1

 

 

 

45.2

 

 

 

7.9

 

 

 

17

%

Depreciation and amortization

 

 

108.9

 

 

 

93.4

 

 

 

15.5

 

 

 

17

%

Total operating costs and expenses

 

 

278.9

 

 

 

246.6

 

 

 

32.3

 

 

 

13

%

Operating loss

 

$

(29.1

)

 

$

(3.1

)

 

$

(26.0

)

 

n/m

 

Operating margin

 

 

(11.6

)%

 

 

(1.3

)%

 

 

 

 

(10.3) pts

 

Capital expenditures

 

$

137.7

 

 

$

81.5

 

 

$

56.2

 

 

 

69

%

 

27

Network, continued

Metrics information (in thousands):

 

March 31, 2023

 

 

March 31, 2022

 

 

Change

 

 

% Change

 

Cincinnati

 

 

 

 

 

 

 

 

 

 

 

 

Fioptics

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

 

 

 

 

 

 

 

 

 

 

Internet FTTP*

 

 

309.8

 

 

 

267.5

 

 

 

42.3

 

 

 

16

%

Video

 

 

 

 

 

 

 

 

 

 

 

 

Fioptics Video

 

 

122.2

 

 

 

121.5

 

 

 

0.7

 

 

 

1

%

Voice

 

 

 

 

 

 

 

 

 

 

 

 

Fioptics Voice Lines

 

 

99.6

 

 

 

100.7

 

 

 

(1.1

)

 

 

(1

)%

Fioptics Units Passed

 

 

 

 

 

 

 

 

 

 

 

 

Units passed FTTP*

 

 

679.0

 

 

 

554.3

 

 

 

124.7

 

 

 

22

%

Enterprise Fiber

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

 

 

 

 

 

 

 

 

 

 

Ethernet Bandwidth (Gb)

 

 

11,450

 

 

 

7,233

 

 

 

4,217

 

 

 

58

%

Legacy

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

 

 

 

 

 

 

 

 

 

 

DSL and FTTN**

 

 

44.2

 

 

 

69.0

 

 

 

(24.8

)

 

 

(36

)%

Voice

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Voice Lines

 

 

130.1

 

 

 

150.0

 

 

 

(19.9

)

 

 

(13

)%

 

* Fiber-to-the-Premise (FTTP)

**Internet speeds of less than 100mpbs including Legacy DSL and Fiber-to-the-Node (FTTN) previously included in Fioptics Data

28

Network, continued

 

Metrics information (in thousands):

 

March 31, 2023

 

 

March 31, 2022

 

 

Change

 

 

% Change

 

Hawaii

 

 

 

 

 

 

 

 

 

 

 

 

Fioptics

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

 

 

 

 

 

 

 

 

 

 

Internet FTTP*

 

 

75.1

 

 

 

66.2

 

 

 

8.9

 

 

 

13

%

Video

 

 

 

 

 

 

 

 

 

 

 

 

Fioptics Video

 

 

35.5

 

 

 

36.7

 

 

 

(1.2

)

 

 

(3

)%

Voice

 

 

 

 

 

 

 

 

 

 

 

 

Fioptics Voice Lines

 

 

29.7

 

 

 

28.6

 

 

 

1.1

 

 

 

4

%

Fioptics Units Passed **

 

 

 

 

 

 

 

 

 

 

 

 

Units passed FTTP*

 

 

284.4

 

 

 

224.2

 

 

 

60.2

 

 

 

27

%

Enterprise Fiber

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

 

 

 

 

 

 

 

 

 

 

Ethernet Bandwidth (Gb)

 

 

5,284

 

 

 

4,270

 

 

 

1,014

 

 

 

24

%

Legacy

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

 

 

 

 

 

 

 

 

 

 

DSL and FTTN***

 

 

35.2

 

 

 

36.8

 

 

 

(1.6

)

 

 

(4

)%

Voice

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Voice Lines

 

 

117.7

 

 

 

134.3

 

 

 

(16.6

)

 

 

(12

)%

 

* Fiber-to-the-Premise (FTTP)

** Includes units passed for both consumer and business on Oahu and neighboring islands

***Internet speeds of less than 100mpbs including Legacy DSL and Fiber-to-the-Node (FTTN) previously included in Fioptics Data

29

Network, continued

Revenue

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

(dollars in millions)

 

Cincinnati

 

 

Hawaii

 

 

Total

 

 

Cincinnati

 

 

Hawaii

 

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fioptics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

$

59.6

 

 

$

13.9

 

 

$

73.5

 

 

$

51.3

 

 

$

10.8

 

 

$

62.1

 

Video

 

 

39.9

 

 

 

8.7

 

 

 

48.6

 

 

 

39.5

 

 

 

9.1

 

 

 

48.6

 

Voice

 

 

8.5

 

 

 

2.9

 

 

 

11.4

 

 

 

8.5

 

 

 

2.8

 

 

 

11.3

 

Other

 

 

1.4

 

 

 

0.7

 

 

 

2.1

 

 

 

3.5

 

 

 

—

 

 

 

3.5

 

 

 

109.4

 

 

 

26.2

 

 

 

135.6

 

 

 

102.8

 

 

 

22.7

 

 

 

125.5

 

Enterprise Fiber

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

25.4

 

 

 

12.8

 

 

 

38.2

 

 

 

21.5

 

 

 

11.7

 

 

 

33.2

 

Legacy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

 

15.8

 

 

 

8.7

 

 

 

24.5

 

 

 

19.3

 

 

 

11.5

 

 

 

30.8

 

Voice

 

 

22.6

 

 

 

22.9

 

 

 

45.5

 

 

 

23.7

 

 

 

24.3

 

 

 

48.0

 

Other

 

 

2.5

 

 

 

3.5

 

 

 

6.0

 

 

 

3.8

 

 

 

2.2

 

 

 

6.0

 

 

 

40.9

 

 

 

35.1

 

 

 

76.0

 

 

 

46.8

 

 

 

38.0

 

 

 

84.8

 

Total Network revenue

 

$

175.7

 

 

$

74.1

 

 

$

249.8

 

 

$

171.1

 

 

$

72.4

 

 

$

243.5

 

 

Fioptics

Fioptics revenue for the three months ended March 31, 2023 increased $10.1 million compared to the same period in 2022 primarily due to the increase in the subscriber base for internet. The internet subscriber base continues to increase as we focus attention on growing the internet FTTP subscriber base and accelerating the pace of our fiber build which enabled us to pass 21,800 FTTP addresses in Cincinnati and 16,400 FTTP addresses in Hawaii during the three months ended March 31, 2023. The Average Revenue Per User (“ARPU”) for the three months ended March 31, 2023 increased for internet in both Cincinnati and Hawaii compared to the comparable period in 2022 primarily due to price increases and more customers subscribing to higher broadband tiers. Video ARPU also increased 3% in Hawaii which partially offset the decline in subscribers. Video ARPU increases are related to price increases as well as the change in the mix of subscribers. Other revenue primarily consists of revenue from nonrecurring subsidized fiber build projects in Cincinnati and Hawaii and totaled $2.0 million and $3.3 million for the three months ended March 31, 2023 and 2022, respectively.

 

30

Network, continued

Enterprise Fiber

Enterprise Fiber revenue for the three months ended March 31, 2023 increased $5.0 million compared to the same period in the prior year primarily due to revenue contributed by Agile of $3.7 million. In addition, revenue increased as a result of customers migrating from legacy product offerings to higher bandwidth fiber solutions as evidenced by the 58% and 24% increases in Ethernet Bandwidth in Cincinnati and Hawaii, respectively. During 2022, significant contracts were signed with large carriers in Cincinnati and Hawaii to upgrade Ethernet Bandwidth across their networks which continue to bill and grow in 2023. Increased revenue was partially offset by pricing pressures to provide higher speeds at a lower cost.

Legacy

Legacy revenue decreased $8.8 million for the three months ended March 31, 2023 compared to the same period in 2022 due to the decline in voice lines and DSL subscribers. Voice lines declined 13% and 12% in Cincinnati and Hawaii, respectively, as the traditional voice lines become less relevant. DSL subscribers continue to decrease in Cincinnati and Hawaii as subscribers demand the higher speeds that can be provided by fiber.

Operating Costs and Expenses

Cost of services and products increased $8.9 million for the three months ended March 31, 2023 compared to the comparable period in the prior year due to increased video content costs of $1.9 million due to rate increases and increases in operating taxes, rent expense and contract services of $1.8 million each. Operating taxes increased primarily due to increased regulatory fees. Higher rent expense is primarily due to expense contributed by Agile in the three months ended March 31, 2023. The increase in contract services is due to higher utilization of outside contractors on certain specialized projects including the expansion of our fiber network. In addition, payroll related costs increased $1.2 million due to higher headcount to support our fiber network expansion, partially offset by favorable payroll benefit costs in the three months ended March 31, 2023 compared to the same period in 2022.

31

Network, continued

SG&A expenses increased $7.9 million for the three months ended March 31, 2023 compared to the same period in the prior year. Increased costs are primarily due to initiatives to support revenue growth in addition to increases in payroll related costs, bad debt expense and advertising costs. Payroll related costs increased $3.5 million due to additional headcount, including headcount associated with the acquisition of Agile, and higher commissions costs. Bad debt expense increased $1.6 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to favorable collection efforts resulting in lower bad debt expense in the first quarter of 2022. The increase in advertising costs of $0.9 million is due to increased marketing campaigns and promotional events.

Depreciation and amortization expense increased $15.5 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to assets placed in service in connection the expansion of our fiber network.

 

 

32

Network, continued

Capital Expenditures

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

(dollars in millions)

 

Cincinnati

 

 

Hawaii

 

 

Total

 

 

Cincinnati

 

 

Hawaii

 

 

Total

 

Fioptics Capital Expenditures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

39.7

 

 

$

15.4

 

 

$

55.1

 

 

$

25.1

 

 

$

9.5

 

 

$

34.6

 

Installation

 

 

21.4

 

 

 

8.9

 

 

 

30.3

 

 

 

10.9

 

 

 

5.1

 

 

 

16.0

 

Other

 

 

7.1

 

 

 

0.5

 

 

 

7.6

 

 

 

2.0

 

 

 

0.3

 

 

 

2.3

 

Total Fioptics

 

 

68.2

 

 

 

24.8

 

 

 

93.0

 

 

 

38.0

 

 

 

14.9

 

 

 

52.9

 

Enterprise Fiber

 

 

5.4

 

 

 

5.3

 

 

 

10.7

 

 

 

2.7

 

 

 

3.6

 

 

 

6.3

 

Other

 

 

14.9

 

 

 

19.1

 

 

 

34.0

 

 

 

9.5

 

 

 

12.8

 

 

 

22.3

 

Total Network Capital Expenditures

 

$

88.5

 

 

$

49.2

 

 

$

137.7

 

 

$

50.2

 

 

$

31.3

 

 

$

81.5

 

 

Capital expenditures in Cincinnati are incurred to expand our Fioptics product suite, upgrade and increase capacity for our networks, and to maintain our fiber and copper networks. The Company is focused on building FTTP addresses and has accelerated the pace of our build, and during the first quarter of 2023, we passed 21,800 FTTP addresses in Cincinnati. As of March 31, 2023, the Company is able to deliver its Fioptics services with speeds up to one gigabit or more to 679,000 residential and commercial addresses, or more than 80% of our operating territory in Cincinnati.

Cincinnati construction capital expenditures for the three months ended March 31, 2023 increased $14.6 million compared to the same period in 2022 due to the timing of capital expenditures, which does not necessarily coincide with the timing of when addresses become available. In the three months ended March 31, 2023, Cincinnati installation capital expenditures increased $10.5 million compared to the comparable period in the prior year primarily due to increased activations. Cincinnati installation capital expenditures were also impacted by the timing of expenditures for customer premise equipment (“CPE”) utilized for installations.

Enterprise Fiber capital expenditures in Cincinnati are related to success-based fiber builds, including associated equipment, for enterprise and carrier projects to provide ethernet services as well as network refresh projects that ensure we continue to grow our capacity and services within the network core. Cincinnati Enterprise Fiber capital expenditures increased $2.7 million in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to capital expenditures contributed by Agile of $1.7 million. Other capital expenditures are related to IT projects, cable and equipment maintenance and capacity additions, real estate upgrades and maintenance, plus other minor capital purchases.

Hawaii construction capital expenditures for the three months ended March 31, 2023 increased $5.9 million compared to the same period in the prior year due to building out 16,400 FTTP addresses in the first quarter of 2023. Hawaii installation capital expenditures increased $3.8 million for the three months ended March 31, 2023 compared to the comparable period in 2022 primarily due to increased internet installations. Enterprise Fiber capital in Hawaii is primarily driven by new ethernet customers. Hawaii capital expenditures classified as Other include IT projects, real estate projects, road jobs or plant damage projects, and network upgrades or optimization projects.

33

IT Services and Hardware

The IT Services and Hardware segment provides end-to-end solutions ranging from consulting to implementation to ongoing optimization. These solutions include Cloud, Communications and Consulting services along with the sale and maintenance of major branded Telecom and IT hardware reported as Infrastructure Solutions. These services and products are provided through the CBTS brand in various geographic areas throughout the United States and Europe and through the OnX brand in Canada. By offering a full range of equipment and strategic services in conjunction with the Company’s fiber and copper networks, the IT Services and Hardware segment provides our customers personalized solutions designed to meet their business objectives.

Cloud services include the design, implementation and on-going management of the customer’s infrastructure. This includes on-premise, public cloud and private cloud solutions. The Company assists customers with the risk assessment phase through an in-depth understanding of the customer’s business as well as designing and building a solution, using either the customer's existing infrastructure or new cloud based options that transform the way that the customer does business.

Communications solutions help to transform the way our customers do business by connecting employees, customers, and business partners. By upgrading legacy technologies through customized build projects and reducing customer costs, the Company helps to transform the customer’s business. These services include Unified Communications as a Service ("UCaaS"), Software-Defined Wide Area Network ("SD-WAN"), Network as a Service ("NaaS"), Contact Center and Collaboration.

Using our experience and expertise, Infrastructure Solutions are tailored to our customers’ organizational goals. We offer a complete portfolio of services that provide customers with efficient and optimized IT solutions that are agile and responsive to their business and are integrated, simplified and manageable. Through consulting with customers, the Company will build a solution using standard manufacturer equipment to meet our customers’ specific requirements.

Consulting services help customers assess their business and technology needs and provide the talent needed to ensure success. The Company is a premier provider of application services and IT staffing.

 

 

 

Three Months Ended March 31,

 

(dollars in millions)

 

2023

 

 

2022

 

 

Change

 

 

% Change

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Consulting

 

$

84.7

 

 

$

83.4

 

 

$

1.3

 

 

 

2

%

Cloud

 

 

26.6

 

 

 

24.6

 

 

 

2.0

 

 

 

8

%

Communications

 

 

56.2

 

 

 

54.9

 

 

 

1.3

 

 

 

2

%

Infrastructure Solutions

 

 

37.5

 

 

 

35.9

 

 

 

1.6

 

 

 

4

%

Total revenue

 

 

205.0

 

 

 

198.8

 

 

 

6.2

 

 

 

3

%

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products

 

 

142.2

 

 

 

136.8

 

 

 

5.4

 

 

 

4

%

Selling, general and administrative

 

 

44.1

 

 

 

40.0

 

 

 

4.1

 

 

 

10

%

Depreciation and amortization

 

 

24.3

 

 

 

26.0

 

 

 

(1.7

)

 

 

(7

)%

Restructuring and severance related charges

 

 

0.2

 

 

 

0.9

 

 

 

(0.7

)

 

 

(78

)%

Total operating costs and expenses

 

 

210.8

 

 

 

203.7

 

 

 

7.1

 

 

 

3

%

Operating loss

 

$

(5.8

)

 

$

(4.9

)

 

$

(0.9

)

 

 

18

%

Operating margin

 

 

(2.8

)%

 

 

(2.5

)%

 

 

 

 

(0.3) pts

 

Capital expenditures

 

$

5.9

 

 

$

6.3

 

 

$

(0.4

)

 

 

(6

)%

 

 

34

IT Services and Hardware, continued

 

Metrics information:

 

March 31, 2023

 

 

 

March 31, 2022

 

 

Change

 

 

% Change

 

Consulting

 

 

 

 

 

 

 

 

 

 

 

 

 

Billable Resources

 

 

2,388

 

 

 

 

2,289

 

 

 

99

 

 

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

NaaS Locations

 

 

12,036

 

 

 

 

10,855

 

 

 

1,181

 

 

 

11

%

SD - WAN Locations

 

 

9,107

 

 

 

 

7,924

 

 

 

1,183

 

 

 

15

%

Hosted UCaaS Profiles*

 

 

317,224

 

 

 

 

305,443

 

 

 

11,781

 

 

 

4

%

* Includes Hawaii Hosted UCaaS Profiles

 

Revenue

IT Services and Hardware segment revenue for the three months ended March 31, 2023 increased $6.2 million compared to the comparable period in the prior year due to growth in each of the practices. Consulting revenue increased $1.3 million due to existing projects which continue to bill and grow in 2023. Cloud revenue increased $2.0 million primarily due to providing ongoing monitoring and management services related to significant customer contracts obtained in prior years which continue to bill and grow in 2023. Communications revenue increased $1.3 million as a result of customers migrating to newer technologies which has increased the Company’s Hosted UCaaS profiles, NaaS locations and SD-WAN locations. These increases were partially offset by the decline in legacy communications revenue. The increase in Infrastructure Solutions revenue is due primarily to the sale of hardware partially offset by a decrease in the sale of maintenance services.

Operating Costs and Expenses

IT Services and Hardware cost of services and products increased $5.4 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to increases in payroll related costs, contractor costs and operating taxes. For the three months ended March 31, 2023, payroll costs and contractor costs increased $1.4 million and $2.2 million, respectively, compared to the same period in the prior year due to additional headcount to support the growth in the Cloud and Consulting practices. Primarily as a result of existing consulting projects that continue to grow, billable resources increased by 99 persons compared to March 31, 2022. Operating taxes increased $1.4 million for the three months ended March 31, 2023 compared to the same period in the prior year due to increases in general excise tax and regulatory fees.

SG&A expenses increased $4.1 million for the three months ended March 31, 2023 compared to the same period in the prior year primarily to support revenue growth and to a lesser extent fill roles and implement software that the Company strategically determined will no longer be carried out by a shared resource for each of the segments. Payroll related costs increased $1.6 million due to increased headcount and employee commissions. Software development costs increased $1.1 million due to internal software projects. Bad debt expense increased $0.5 million due to the aging of certain customer receivables. Employee related costs increased $0.4 million as the Company continues to increase travel and entertainment expenses that were previously limited as a result of the COVID-19 pandemic.

Depreciation and amortization expense decreased $1.7 million for the three months ended March 31, 2023 compared to the same period in 2022. The decrease is due to certain assets that were given a shorter useful life when recorded at fair value on the Company's merger date, September 7, 2021, and were fully depreciated by December 31, 2022 in addition to declining amortization expense on certain intangibles.

Capital Expenditures

Capital expenditures are dependent on the timing of success-based projects. Capital expenditures for the three months ended March 31, 2023 were primarily related to projects supporting the Cloud and Communications practices. In addition to success-based projects, the Company incurred $0.8 million for implementation work associated with internal software projects in the three months ended March 31, 2023.

35

Financial Condition, Liquidity, and Capital Resources

As of March 31, 2023, the Company had an accumulated deficit of $228.0 million and $1,826.7 million of outstanding indebtedness.

The Company’s primary source of cash is generated by operations. The Company generated $26.6 million and $89.1 million of cash flows from operations during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the Company had $125.2 million of short-term liquidity, comprised of $7.4 million of cash and cash equivalents, $100.0 million of undrawn capacity on our Revolving Credit Facility due 2026, $4.2 million available under the Network Receivables Facility (defined below) and $13.6 million available under the CBTS Receivables Facility (defined below).

On January 31, 2023, the Company, together with certain of its U.S. and Canadian subsidiaries, made certain amendments (the “Amendments”) to the Company’s accounts receivable securitization facility ("Receivables Facility"). The Amendments amend the Receivables Facility to, among other things: (i) increase the total maximum borrowing capacity to $280.0 million, (ii) separate the Receivables Facility into two separate facilities, with (A) the existing Receivables Facility (the “Network Receivables Facility”), as amended by the Amendments, covering receivables originated by certain U.S. subsidiaries of the Company including Cincinnati Bell Telephone Company LLC, Hawaiian Telcom Communications, Inc. and certain of their respective subsidiaries having a maximum borrowing capacity of $55.0 million and (B) a new facility (the “CBTS Receivables Facility”) covering receivables originated by certain U.S. and Canadian subsidiaries in the Company's IT Services and Hardware segment including CBTS Technology Solutions LLC and OnX Enterprise Solutions Ltd. having a maximum borrowing capacity of $225.0 million, (iii) move the receivables monetization arrangements from the Network Receivables Facility to the CBTS Receivables Facility, and (iv) make applicable technical and conforming changes thereto. In addition, the Amendments extend the renewal dates of each facility to January 2025 and the termination dates of each facility to January 2026.

As of March 31, 2023, the Company had borrowings of $35.5 million and $15.3 million of letters of credit outstanding under the Network Receivables Facility on a borrowing capacity of $55.0 million. As of March 31, 2023, the Company had borrowings of $198.8 million and $0.8 million of letters of credit outstanding under the CBTS Receivables Facility on a borrowing capacity of $213.2 million.

Capacity on the Network Receivables Facility and the CBTS Receivables Facility is calculated and will continue to be calculated based on the quantity and quality of outstanding accounts receivables. Therefore if the Company experiences declines in revenue or extends discounts to customers, the capacity could be negatively impacted and reduce our short term liquidity. While we expect to continue to renew the Network Receivables Facility and CBTS Receivables Facility, we would be required to use cash, our Revolving Credit Facility due 2026, or other sources to repay any outstanding balances on the facilities if they were not renewed.

The Company’s primary uses of cash are for capital expenditures and debt service and, to a lesser extent, to fund pension and retiree medical obligations. The Company believes that cash on hand, operating cash flows, its Revolving Credit Facility due 2026, its Network Receivables Facility and CBTS Receivables Facility, and the expectation that the Company will continue to have access to capital markets to refinance debt and other obligations as they mature and come due, should allow the Company to meet its cash requirements for the foreseeable future.

As of March 31, 2023, the Company was in compliance with the Credit Agreement covenants and ratios.

Cash Flows

Cash provided by operating activities during the three months ended March 31, 2023 totaled $26.6 million, a decrease of $62.5 million compared to the same period in the prior year. The decrease is primarily due to higher interest payments of $16.9 million for the three months ended March 31, 2023 compared to the comparable period in 2022 due to higher interest rates and increased borrowings on the Company's credit facilities in addition to increased cash outflow due to increased working capital associated with the IT Services and Hardware segment as well as increased inventory by the Network segment to support the accelerated build strategy compared to the same period in the prior year. The decrease was partially offset by $19.1 million of accounts receivable sold on the CBTS Receivables Facility as of March 31, 2023 compared to no accounts receivable sold on the Company's former Receivables Facility as of March 31, 2022.

Cash used in investing activities during the three months ended March 31, 2023 totaled $146.4 million, an increase of $61.0 million compared to the same period in the prior year due to the increase in capital expenditures primarily associated with extending the Company's fiber network.

Cash provided by financing activities during the three months ended March 31, 2023 totaled $122.7 million primarily due to net borrowings on the Revolving Credit Facility due 2026 and receivables facilities of $77.0 million and $47.4 million, respectively. Cash used in financing activities during the three months ended March 31, 2022 totaled $4.2 million as net borrowings of $1.7 million on the Company's former Receivables Facility were more than offset by debt repayments of $5.9 million.

Regulatory Matters

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a complete description of regulatory matters.

36

Contingencies

In the normal course of business, the Company is subject to various regulatory and tax proceedings, lawsuits, claims and other matters. The Company believes adequate provision has been made for all such asserted and unasserted claims in accordance with accounting principles generally accepted in the United States. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements and information available as of the date of the financial statements. As this information changes, the financial statements could reflect different estimates or judgments.

The Company’s most critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2022.

Recently Issued Accounting Standards

Refer to Note 1 of the Condensed Consolidated Financial Statements for further information on recently issued accounting standards. The adoption of new accounting standards did not have a material impact on the Company’s financial results for the three months ended March 31, 2023.

37

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a description of the Company's market risks.

Item 4. Controls and Procedures

(a)
Evaluation of disclosure controls and procedures.

Cincinnati Bell Inc.’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, Cincinnati Bell Inc.’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective.

(b)
Changes in internal control over financial reporting.

Cincinnati Bell Inc.’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the first quarter of 2023 and have concluded that there were no changes to Cincinnati Bell Inc.’s internal control over financial reporting during the first quarter of 2023 that materially affect, or are reasonably likely to materially affect, Cincinnati Bell Inc.’s internal control over financial reporting.

38

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Cincinnati Bell and its subsidiaries are involved in a number of legal proceedings. Liabilities are established for legal claims when losses associated with the claims are judged to be probable and the loss can be reasonably estimated. In many lawsuits and arbitrations, including most class action lawsuits, it is not possible to determine whether a liability has been incurred or to estimate the amount of the liability until the case is close to resolution, in which case a liability will not be recognized until that time. Based on information currently available, consultation with counsel, available insurance coverage and recognized liabilities, the Company believes that the eventual outcome of all claims will not, individually or in the aggregate, have a material effect on the Company’s financial position or results of operations.

Item 1A. Risk Factors

 

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a comprehensive listing of the Company’s risk factors. There are no material changes for the three months ended March 31, 2023.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosure

None.

Item 5. Other Information

No reportable items.

39

Item 6. Exhibits

 

 

 

 

 

 

Incorporated by Reference

 

 

Exhibit

Number

 

Exhibit Description

 

Form

 

Filing Date

 

Exhibit No.

 

SEC File No.

Filed

Herewith

 

 

 

 

 

 

 

3.1

Second Amended Articles of Incorporation of Cincinnati Bell Inc.

 

10-K

5/19/2022

3.1

1-8519

 

3.2

Second Amended and Restated Regulations of Cincinnati Bell Inc.

 

8-K

9/7/2021

3.1

1-8519

 

10.1

Third Amended and Restated Purchase and Sale Agreement dated as of January 31, 2023, by and among the Originators listed on Schedule I thereto, Cincinnati Bell Funding LLC, and Cincinnati Bell Inc. as Servicer.

8-K

2/6/2023

 

99.1

1-8519

 

10.2

Amended and Restated Receivables Financing Agreement dated as of January 31, 2023, by and among Cincinnati Bell Funding LLC as Borrower, Cincinnati Bell Inc. as Servicer, the various Lenders, LC Participants and Group Agents from time to time party thereto, PNC Bank, National Association as the Administrator and LC Bank, and PNC Capital Markets LLC as Structuring Agent.

8-K

2/6/2023

99.2

1-8519

 

10.3

Purchase and Sale Agreement dated as of January 31, 2023 by and among CBTS Funding LLC, the Originators listed on Schedule I thereto and CBTS Technology Solutions LLC as Servicer.

8-K

2/6/2023

99.3

1-8519

 

10.4

Receivables Financing Agreement dated as of January 31, 2023, by and among CBTS Funding LLC and Cincinnati Bell Funding Canada Ltd. as Borrowers, CBTS Technology Solutions LLC and OnX Enterprise Solutions Ltd. as Servicers, the various Lenders, LC Participants and Group Party Agents thereto, PNC Bank, National Association as Administrator and Letter of Credit Bank, and PNC Capital Markets LLC as Structuring Agent.

8-K

2/6/2023

99.4

1-8519

 

10.5

Amended and Restated Canadian Purchase and Sale Agreement dated as of January 31, 2023, by and among Cincinnati Bell Funding Canada Ltd. as Purchaser, and OnX Enterprises Solutions Ltd. as Originator and Servicer.

8-K

2/6/2023

99.5

1-8519

 

10.6

Receivables Purchase Agreement dated as of January 31, 2023, by and among CBTS Funding LLC as Seller, CBTS Technology Solutions LLC as Servicer, PNC Bank, National Association as Buyer and PNC Capital Markets LLC as Structuring Agent.

8-K

2/6/2023

99.6

1-8519

 

31.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

+

31.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

+

32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

+

40

32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

+

101

The following financial statements from Cincinnati Bell Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 were formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Equity (Deficit), (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

 

 

The Company's historical reports on Form 10-K, 10-Q, and 8-K are available free of charge at the following website: http://www.altafiber.com. The Company has ceased to be a registrant but continues to voluntarily file annual, quarterly and certain other information with the SEC due to contractual provisions included in certain indentures.

 

 

 

 

41

SIGNATURES

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.

 

 

 

 

Cincinnati Bell Inc.

 

 

 

 

Date:

May 4, 2023

 

/s/ Joshua T. Duckworth

 

 

 

Joshua T. Duckworth

 

 

 

Chief Financial Officer

 

 

 

 

Date:

May 4, 2023

 

/s/ Suzanne E. Maratta

 

 

 

Suzanne E. Maratta

 

 

 

Chief Accounting Officer

 

42
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