ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes and the other financial information included elsewhere in this Form 10-K.
OVERVIEW
We are a fiber broadband and managed IT services provider, offering technology
and service enabled customer solutions to business and wholesale customers in
and out of
The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practical. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating our own performance and allocating our resources.
We operate in a geographically diverse state with unique characteristics. We
monitor the state of the economy in general. In doing so, we compare
? investment activity in the oil and gas markets and the price of crude oil ? tourism levels ? governmental spending and activity of military personnel ? the price and price trends of bandwidth ? the growth in demand for bandwidth ? decline in demand for voice and other legacy services ? local customer preferences ? unemployment levels ? housing activity and development patterns
We have observed variances in the factors affecting the
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Historically, the
Management estimates the
Our objective is to continue generating sector leading revenue growth in the
broadband market through investments in sales, service, marketing and product
development while expanding our broadband network capabilities through higher
efficiencies, automation, new technology and expanded service areas. We intend
to continue our growth in the managed IT services market by providing these
services to our broadband customers and leveraging our position as the premier
Cloud Enabler for business in the state of
Business Plan Core Principles
Our results of operations, financial position and sources and uses of cash in
the current and future periods reflect our focus on being the most successful
broadband solutions company in
? Create a Workplace That Develops Our People and Celebrates Success. We
believe an engaged workforce is critical to our success. We are deeply
committed to the development of our people and creating opportunities for
them.
? Deliver an Exceptional Customer Experience. We strive to deliver service as
promised to our customers and make it right if our customers are not
satisfied with what we delivered. We track virtually every customer
interaction and we utilize the Net Promoter Score framework for assessing
the satisfaction of our customers.
? Augment and Expand our Network Capabilities and Services Focusing on
Efficient Delivery and Management. We are moving toward higher efficiencies
and improved customer experience through automation, new technology and
expanded geographic service areas. Our network architecture is a simpler
mix of our fiber backbone, supported with fixed wireless ("FiWi"), WiFi and
satellite.
? Relentlessly Simplify and Transform How We Do Business to Drive Operational
Excellence. We believe we must reduce waste, which is defined as any
activity that does not add value to its intended customer. Doing so
improves the experience we deliver to our customers. We make investments in
technology and process improvement, utilize the LEAN framework, and expect
these efforts to meaningfully impact our financial performance in the
long-term.
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? Accelerate the Growth of Broadband and Managed IT Solutions that Create
Market Differentiation. We are building on strength in designing and
providing new products and solutions to our customers.
We believe we can create value for our shareholders by:
? Driving revenue growth through increasing business broadband and managed IT
service revenues,
? Improving our operating and cash flow performance through margin management, and
? Careful allocation of capital, including selectively investing
success-based capital into opportunities that generate appropriate returns
on investments.
Revenue Sources by
We operate our business under a single reportable segment. We manage our revenues based on the sale of services and products to the three customer categories listed below. Revenue in the following management's discussion and analysis is presented by customer and product category, combining revenue accounted for under Revenue from Contracts with Customers ("ASC 606") and other guidance.
? Business and Wholesale (broadband, voice and managed IT services) ? Consumer (broadband and voice services) ? Regulatory (access services, high cost support and carrier termination) Business and Wholesale
Providing services to Business and Wholesale customers generates the majority of
our revenues and is expected to continue being the primary driver of our growth
in the near term. Our business customers include large enterprises in the oil
and gas industry, health care, education, Alaska Native Corporations, financial
industries, Federal, state and local governments, and small and medium business.
We were the first
Business services have experienced significant growth and we believe the
incremental economics of business services are attractive. Given the demand from
our customers for more bandwidth and services, we expect revenue growth from
these customers to continue for the foreseeable future. We provide services such
as voice and broadband, managed IT services including remote network monitoring
and support, managed IT security and IT professional services, and long-distance
services primarily over our own terrestrial network. We are continuing our
efforts to position the Company as the premier Cloud Enabler for business in the
state of
Our wholesale customers are primarily in-state, national and international telecommunications carriers who rely on us to provide connectivity for broadband and other needs to access their customers over our Alaskan network. The wholesale market is characterized by larger transactions that can create variability in our operating performance. We have a dedicated sales team that sells into this customer segment, and we expect wholesale revenue to grow for the foreseeable future.
Consumer
We also provide broadband and voice services to residential customers, including residential homes and multi-dwelling units. Given that our primary competitor has extensive quad play capabilities (video, voice, wireless and broadband) we target how and where we offer products and services to this customer group in order to maintain our returns. Our focus is to leverage the capabilities of our existing network and sell customers our highest available bandwidth. Our primary competitive advantage is that we offer reliable internet service without data caps, while our competitor, with certain exceptions, charges customers or throttles customers' speeds for exceeding given levels of data usage. We also continue to expand product and service offerings to this customer group and have implemented fiber fed WiFi and certain fixed wireless technology solutions for providing broadband, all of which provided a basis for continued growth in this market in 2020.
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Table of Contents Regulatory
Regulatory revenue is generated from three primary sources: (i) access charges, which include interstate and intrastate switched access and special access charges, and cellular access; (ii) surcharges billed to the end user (pass-through and non-pass-through); and (iii) federal and state support. We provide voice and broadband origination and termination services to interstate and intrastate carriers. While we are compensated for these services, these revenue streams have been in decline and we expect them to continue to decline, although at a relatively predictable rate. In addition, as regulators have reformed traditional access charges, they have simultaneously implemented new end user surcharges that contribute to our revenue.
The following table summarizes our primary sources of regulatory revenue and their contribution to total revenue in 2020 (dollars in thousands).
As a % of As a % of
Regulatory Total
Source Description 2020 Revenue Revenue Revenue
Access Interstate and intrastate
Charges switched access are services
based primarily on originating
and terminating access minutes
from other carriers. Special
access is primarily access to
dedicated circuits sold to
wholesale customers,
substantially all of which is
generated from interstate $ 3,418 8.3 % 1.4 %
services. Cellular access is
the transport of local network
services between switches for
cellular companies based on
individually negotiated
contracts. Access charges have
declined an average of
approximately 11% annually over
the past three years.
Total Access $ 3,418 8.3 % 1.4 %
Charges
Surcharges
We assess our customers for
surcharges, typically on a
monthly basis, as required by
various state and federal
regulatory agencies, and remit
these surcharges to these
agencies. These pass-through
surcharges include Federal
Universal Access and State
Universal Access. These
surcharges vary from year to
year, and are primarily
Pass-Through recognized as revenue, and the $ 5,275 12.8 % 2.2 %
subsequent remittance to the
state or federal agency as a
cost of sale and service. The
rates imposed by the regulators
continue to increase. However,
because the charges are only
assessed on a portion of our
services, and that portion
continues to decline, we expect
these revenue streams to
decline over time as the
revenue base declines.
Other non-pass-through
surcharges are collected from
our customers as authorized by
the regulatory body. The amount
charged is based on the type of
line: single line business,
multi-line business, consumer
or lifeline. The rates are
Other established based on federal or $ 9,882 24.0 % 4.1 %
state orders. These charges are
recorded as revenue and do not
have a direct associated cost.
Rather, they represent a
revenue recovery mechanism
established by the FCC or the
Regulatory Commission of
Alaska.
Total $ 15,157 36.8 % 6.3 %
Surcharges
Federal and
State Support
In 2016, the FCC released the
CAF Phase II order specific to
Alaska Communications which
transitioned from CAF Phase I
frozen support to CAF Phase II.
Funding under the new program
generally requires the Company
CAF II to provide broadband service to $ 19,694 47.9 % 8.2 %
unserved locations throughout
the designated coverage area by
the end of a specified
build-out period, and meet
interim milestone build-out
obligations. CAF II revenues
are expected to be relatively
stable through 2026.
We are required by the State of
Alaska to provide and maintain
local services for retail and
carrier-to-carrier
telecommunication throughout
certain local exchange
ENS facilities. Funds received from $ 2,873 7.0 % 1.2 %
the State under the Essential
Network Support ("ENS") program
is to be used to fund capital
expenditures or pay ongoing
operation and maintenance
expenses.
Total Federal
and State $ 22,567 54.9 % 9.4 %
Support
Total
Regulatory $ 41,142 17.1 %
Revenue
Total Revenue $ 240,569
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Table of Contents Executive Summary
As described below, the COVID-19 pandemic negatively impacted year-over-year
operating income by approximately
Operating Revenues
Total revenue of
Operating Income
Operating income of
Operating Metrics
Business broadband average monthly revenue per user ("ARPU") of
Consumer broadband connections of 30,598 at
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The table below provides certain key operating metrics as of, or for, the
periods indicated.
2020 2019
Voice
At December 31:
Business access lines 65,294 68,242
Consumer access lines 20,578 22,829
For the year ended December 31 :
ARPU business $ 27.95 $ 26.38
ARPU consumer $ 34.65 $ 34.44
Broadband
At December 31:
Business connections 14,652 14,880
Consumer connections 30,598 31,480
For the year ended December 31 :
ARPU business $ 364.82 $ 342.05
ARPU consumer $ 71.40 $ 68.89
Liquidity
We generated cash from operating activities of
In 2020 and 2019, we invested a total of
In 2020, we made a one-time cash dividend payment totaling
Net debt (defined as total debt excluding debt issuance costs, less cash and
cash equivalents) at
Other Initiatives
We have expanded our network to 181,000 terrestrial and submarine fiber miles.
In 2020, we secured additional spectrum through the
On
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Table of Contents RESULTS OF OPERATIONS
The following tables summarize our results of operations for the years ended
(in thousands) 2020 2019 Business and Wholesale Revenue Business broadband$ 64,238 $ 61,785 Business voice and other 28,936 28,660 Managed IT services 5,052 6,494 Equipment sales and installations 9,508 4,698 Wholesale broadband 49,878 43,310 Wholesale voice and other 5,256 5,617 Business and Wholesale Revenue 162,868 150,564 Growth in Business and Wholesale Revenue 8.2 % Consumer revenue Broadband 27,180 26,589 Voice and other 9,379 10,431 Consumer Revenue 36,559 37,020 Total Business, Wholesale, and Consumer Revenue 199,427 187,584 Growth in Business, Wholesale and Consumer Revenue 6.3 % Growth in Broadband Revenue 7.3 % Regulatory Revenue Access 21,448 24,416 High cost support 19,694 19,694 Total Regulatory Revenue 41,142 44,110 Total Revenue$ 240,569 $ 231,694 Growth in Total Revenue 3.8 % 43
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2020 2019
Operating expenses:
Cost of services and sale (excluding
depreciation and amortization) 112,443 105,615
Selling, general and administrative 65,773 66,718
Transaction and termination costs 9,550 -
Depreciation and amortization 40,667 37,276
Loss on disposal of assets, net 240 156
Total operating expenses 228,673 209,765
Operating income 11,896 21,929
Other income and (expense):
Interest expense (11,000 ) (12,059 )
Loss on extinguishment of debt - (2,830 )
Interest income 174 385
Other 439 175
Total other income and (expense) (10,387 ) (14,329 )
Income before income tax expense 1,509 7,600
Income tax expense (2,665 ) (2,765 )
Net (loss) income (1,156 ) 4,835
Less net loss attributable to noncontrolling
interest (83 ) (93 )
Net (loss) income attributable to Alaska
Communications $ (1,073 ) $ 4,928 Year Ended
Operating Revenue
The COVID-19 pandemic did not have a material effect on the Company's revenue in 2020.
Business and Wholesale
Business and wholesale revenue of
While connections and ARPU serve as data points to support the analysis of period-over-period changes in revenue, they are not critical indicators utilized by the Company to manage the Business and Wholesale customer group.
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Business and wholesale revenue included the amortization of deferred revenue in
2020 and 2019 as follows:
2020 2019
GCI capacity revenue $ 2,077 $ 2,071 Other deferred capacity revenue 4,593 2,584 Total deferred capacity revenue 6,670 4,655 Other deferred revenue
4,023 3,785
Total $ 10,693 $ 8,440
Consumer
Consumer revenue of
Regulatory
Regulatory revenue of
Operating Expenses
Cost of Services and Sales (excluding depreciation and amortization)
Cost of services and sales (excluding depreciation and amortization) of
Selling, General and Administrative
Selling, general and administrative expenses of
Transaction and Termination Costs
The Company incurred costs totaling
Depreciation and Amortization
Depreciation and amortization expense of
Other Income and Expense
Interest expense of
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Table of Contents Income Taxes
Income tax expense was
Income tax expense and the effective tax rate in 2019 was
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to the noncontrolling interest of our joint venture
with
Net (Loss) Income Attributable to
The net loss attributable to
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
We satisfied our cash requirements for operations, capital expenditures,
dividend payments and scheduled debt service under our 2019 Senior Credit
Facility in 2020 through internally generated funds and cash on hand. At
A summary of significant sources and use of funds for the years ended
(in thousands) 2020 2019
Net cash provided by operating activities
$ (48,243 ) $ (44,764 ) Capitalized interest$ (1,364 ) $ (1,379 )
Change in unsettled capital expenditures
$ (8,908 ) $ (174,040 )
Proceeds from the issuance of long-term debt $ -
$ - $ (2,683 )
Cash paid for debt extinguishment $ - $ (1,252 ) Payment of cash dividend on common stock
$ - $ (1,812 )
Interest paid (1) $ 11,137 $ 12,228
Income taxes refunded, net (1) $ 4,307 $ 5,041
(1) Included in net cash provided by operating activities.
Cash Flows from Operating Activities
Cash provided by operating activities of
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Cash provided by operating activities of
Interest payments, net of cash interest income and including capitalized
interest, were
Cash Flows from Investing Activities
Cash used by investing activities of
Cash used by investing activities of
Our networks require the timely maintenance of plant and infrastructure. Future capital requirements may change due to impacts of regulatory decisions that affect our ability to recover our investments, changes in technology, the effects of competition, changes in our business strategy, the age and condition of certain portions of our current infrastructure, and our decision to pursue specific acquisition and investment opportunities. We intend to fund future capital expenditures with cash on hand, net cash generated from operations and selected borrowings.
Cash Flows from Financing Activities
Cash used by financing activities of
Cash used by financing activities was
Liquidity and Capital Resources
Consistent with our history, our current and long-term liquidity could be impacted by a number of challenges, including, but not limited to: (i) potential future reductions in our revenues resulting from governmental and public policy changes, including regulatory actions affecting inter-carrier compensation, changes in revenue from Universal Service Funds, and the timing of Rural Health Care Program funding receipts; (ii) servicing our debt and funding principal payments; (iii) the funding of other obligations, including our pension plans and lease commitments; (iv) competitive pressures in the markets we serve; (v) the capital intensive nature of our industry; (vi) our ability to respond to and fund the rapid technological changes inherent to our industry, including new products; (vii) funding of costs associated with the Merger Agreement; and (viii) our ability to obtain adequate financing to support our business and pursue growth opportunities.
We are responding to these challenges by (i) driving top line growth in broadband service revenues with a focus on business and wholesale customers; (ii) managing our cost structure to deliver consistent Adjusted EBITDA and Adjusted Free Cash flow performance; and (iii) prioritizing our capital spending.
As described above in the discussion of cash flows, the COVID-19 pandemic
resulted in an approximately
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In
Certain of our capital projects are prefunded, in part, by the customer to whom the associated services will be provided. We also enter into lease agreements, including for dark fiber, requiring significant long-term funding commitments. The leased fiber is typically subleased to our customers who, in some cases, prefund their payments to the Company.
As of
We believe that we will have sufficient cash on hand, cash provided by operations and available borrowing capacity under our 2019 Senior Credit Facility to service our debt, and fund our operations, capital expenditures and other obligations over the next twelve months. However, our ability to make such an assessment is dependent upon our future financial performance, which is subject to future economic conditions and to financial, business, regulatory, competitive entry and many other factors, many of which are beyond our control and could impact us during the time period of this assessment. See Item 1A. Risk Factors in this Annual Report on Form 10-K for further information regarding these risks.
2019 Senior Credit Facility
The 2019 Senior Credit Facility consists of an Initial Term A Facility in the
amount of
Principal payments on the Initial Term A Facility, Delayed-Draw A Facility and
any amounts outstanding under the Incremental Term A Loans are due commencing in
the third quarter of 2019 as follows: the third quarter of 2019 through the
second quarter of 2020 -
The obligations under the 2019 Senior Credit Facility are secured by substantially all of the personal property and real property of the Company, subject to certain agreed exceptions. The 2019 Senior Credit Facility provides for events of default customary for credit facilities of this type, including non-payment defaults on other debt, misrepresentation, breach of covenants, representations and warranties, change of control, and insolvency and bankruptcy. The 2019 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, the payment of dividends and repurchase of the Company's common stock.
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Financial covenants as defined in the Agreement are summarized below.
Maximum Net Total Leverage Ratio: The ratio of our (a) total debt, less unrestricted cash and cash equivalents held in pledged accounts, less cash drawn under the Delayed-Draw Term A Facility held for specified capital projects to (b) Consolidated EBITDA (as defined more specifically below) for the consecutive four fiscal quarters ending as of the calculation date. The maximum allowable net total leverage ratio is provided in the table below.
Period Ratio
3.00 to 1.00
June 30, 2022 and thereafter 2.50 to 1.00
The actual net total leverage ratio was 2.51 at
Fixed Charge Coverage Ratio: The ratio of our (a) Consolidated EBITDA for the
applicable period (as defined below) to (b) (i) the sum of, for the same period,
consolidated interest expense, capital expenditures (with certain exceptions),
long term indebtedness (with certain exceptions) required to be paid, capital
lease obligations required to be paid, restricted payments, cash payments for
income taxes, (ii) minus, for the same period, specified capital expenditures.
The remaining applicable periods for purposes of calculating this ratio are the
four consecutive fiscal quarters ending
Consolidated EBITDA, as defined in the 2019 Senior Credit Facility, is not a
GAAP measure and is defined as consolidated net income attributable to
? cash and non-cash interest expense;
? depreciation and amortization expense;
? income taxes;
? other non-cash charges and expenses, including equity-based compensation
expense;
? the write down or write off on any assets, other than accounts receivable;
? subject to limitation, fees, premiums, penalty payments and out-of-pocket
transaction costs incurred in connection with the 2019 refinancing
transactions;
? non-cash cost of goods sold associated with certain projects;
? subject to limitation, unusual, non-recurring losses, charges and expenses;
? one-time costs associated with permitted acquisitions;
? cost savings from synergies in connection with permitted acquisitions or
dispositions;
? certain costs required to be expensed in connection permitted
acquisitions; and
? investment losses of unconsolidated entities.
minus (to the extent included in calculating net income) the sum of:
? unusual, non-recurring gains on permitted sales or dispositions of assets
and casualty events;
? cash and non-cash interest income;
? other unusual nonrecurring items;
? the write up of any asset;
? patronage refunds or similar distributions from any lender;
? deferred revenue associated with certain projects; and
? investment income of unconsolidated entities.
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The Initial Term A Facility, Revolving Facility, Delayed-Draw Facility and Incremental Term A Loans bear interest at LIBOR plus 4.5% per annum.
The weighted interest rate on the 2019 Senior Credit Facility was 5.81% at
Under the terms of the 2019 Senior Credit Facility, the Company is required to
hedge interest payments on a minimum of
All terms are defined in the Agreement. See the "First Amended and Restated
Credit Agreement, dated as of
Other Matters
In 2019, the Company repurchased 1 million shares of its common stock at a
weighted average price of
The Federal Communications Act requires the
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Table of Contents OUTLOOK
Operating Results, Liquidity and Capital Resources
We expect to see continued strength in business and wholesale revenues, led by
broadband revenue and managed IT services, focused on the larger enterprise and
carrier customer segments. These revenue increases are driven by continued
demand for broadband as businesses migrate their IT infrastructure to the cloud,
deployment of small cell networks, growth in managed IT services, investments by
Federal agencies in long haul broadband infrastructure and continued progress in
serving new school districts. Continued state of
Additionally, we are focused on continued implementation of the CAF II program and expect to meet our obligations for 2021.
We also expect continued attention by our Board of Directors on the evaluation of value creating strategic opportunities that address our scale and geographic concentration issues.
ADDITIONAL INFORMATION
Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support and we do not engage in leasing, hedging, research and development services or other relationships that expose us to any material liabilities that are not reflected on our balance sheet or for which we are contractually obligated.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements, in conformity with
accounting principles generally accepted in
We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations. We consider these policies and estimates critical because they had a material impact, or they have the potential to have a material impact, on our financial statements and they require significant judgments, assumptions or estimates.
Revenue Recognition
At contract inception, the Company assesses the goods and services promised to the customer and identifies the performance obligation for each promise to transfer a good or service that is distinct.
The Company's broadband and voice revenue includes service, installation and equipment charges. The primary performance obligation in contracts for broadband and voice services is the provision of that service over time to the customer and revenue is recognized as that service is provided to the customer. The Company also charges certain of its broadband and voice service customers for equipment installed on the customers' premise, physical possession, control and ownership of which pass to the customer upon installation. Revenue is recognized for these obligations at the point of installation.
Managed IT revenues include the sale, configuration and installation of equipment and the subsequent provision of ongoing IT services. Revenue is recognized on the sale, configuration and installation of equipment when physical possession, control and ownership of the equipment has been passed to the customer.
The Company enters into contracts with its rural health care customers and is
subject to various regulatory requirements associated with the provision of
these services. Revenues associated with rural health care customers are
recognized based on the amount the Company expects to collect as evidenced in
its contract with the customer and the Company's and customer's agreement with
the
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Deferred revenue capacity liabilities are established for indefeasible rights of use on the Company's network provided to third parties and are typically accounted for as operating leases. A deferred revenue liability is established at fair value and amortized to revenue on a straight-line basis over the contractual life of the relevant contract.
Substantially all recurring non-usage sensitive service revenues are billed one month in advance and are deferred until the service has been provided to the customer. Non-recurring and usage sensitive revenues are billed in arrears and are recognized when the relevant service is provided. Equipment sales and installation are billed following customer acceptance. Payment terms for the contracts discussed above are typically thirty days.
Income Taxes
We use the asset-liability method of accounting for income taxes and account for income tax uncertainties using the "more-likely-than-not" threshold. Under the asset-liability method, deferred taxes reflect the temporary differences between the financial and tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management determines it is more-likely-than-not that the value of our deferred tax assets will not be fully realized.
Recently Issued Accounting Pronouncements
See Note 1 "Description of Company and Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for a description of recently adopted accounting pronouncements and recently issued pronouncements not yet adopted.
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