Cogent(CCOI) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited condensed consolidated financial statements detail the Sprint Wireline Business acquisition, a $1.2 billion bargain purchase gain, and net income surge Condensed Consolidated Statements of Comprehensive Income (Three Months Ended June 30) | Indicator | 2023 (Unaudited) (in millions) | 2022 (Unaudited) (in millions) | | :--- | :--- | :--- | | Service Revenue | $239.8 | $148.5 | | Operating (Loss) Income | ($34.6) | $29.6 | | Gain on Bargain Purchase | $1,155.7 | $0 | | Net Income | $1,123.9 | $11.2 | | Diluted Net Income per Share | $23.65 | $0.24 | Condensed Consolidated Balance Sheets (As of) | Indicator | June 30, 2023 (Unaudited) (in millions) | December 31, 2022 (in millions) | | :--- | :--- | :--- | | Total Assets | $3,162.7 | $1,010.2 | | Total Liabilities | $2,623.5 | $1,528.8 | | Total Stockholders' Equity (Deficit) | $539.2 | ($518.6) | - The acquisition of the Sprint Wireline Business was accounted for as a business combination, resulting in a $1.2 billion gain on bargain purchase as the fair value of identifiable assets acquired exceeded liabilities assumed and net consideration paid[198] - In connection with the acquisition, T-Mobile USA, Inc. (TMUSA) will pay the company an aggregate of $700.0 million for IP transit services over 54 months, recorded at its discounted present value as part of the acquisition consideration[164][194] Notes to Interim Condensed Consolidated Financial Statements Details the Sprint Wireline Business acquisition, related agreements, debt structure, and dividend declaration - The Sprint Wireline Business acquisition closed on May 1, 2023, involving a purchase price of $1, a working capital adjustment payment of $61.1 million to the seller, and a future payment of $57.1 million from the seller for assumed lease obligations[162][163] - A Transition Services Agreement (TSA) was established for up to two years, under which the company recorded $118.8 million due to the Seller and $7.0 million due from the Seller for the three and six months ended June 30, 2023[167][195] - As of June 30, 2023, the company had $450.0 million of 7.00% Senior Unsecured Notes due 2027 and $500.0 million of 3.50% Senior Secured Notes due 2026, remaining in compliance with debt covenants[247][224] - The company is party to an interest rate swap agreement converting the fixed-rate 2026 Notes to a variable rate, with a fair value of $51.6 million net liability as of June 30, 2023[248][38] - On August 2, 2023, the Board of Directors approved a quarterly dividend of $0.945 per common share, an estimated payment of $44.6 million[252] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the transformative Sprint Wireline Business acquisition, its financial impact, strategic rationale, operational results, and liquidity Overview, Strategy, and Competitive Advantages Outlines the Sprint Wireline Business acquisition, expanded offerings, and key competitive advantages like a low-cost operating model and dark fiber access - The acquisition of the Sprint Wireline Business on May 1, 2023, expanded the company's offerings to include optical wavelength and transport services, targeting larger enterprise customers[263][325] - Key competitive advantages include a low-cost operating model, a single Ethernet network protocol, widespread access to dark fiber, and a large addressable market with 3,227 on-net buildings[362][6][332] - The company's strategy focuses on growing its on-net corporate and net-centric customer base, expanding its off-net business, and leveraging newly acquired assets to offer wavelength services[363][305][10] Results of Operations Analyzes operational results, highlighting significant revenue growth from the Wireline Business acquisition and a $1.2 billion gain on bargain purchase Key Operating Data Changes (Q2 2023 vs Q2 2022) | Indicator | Q2 2023 (in millions) | Q2 2022 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Service Revenue | $239.8 | $148.5 | 61.5% | | On-net Revenue | $127.7 | $112.0 | 14.0% | | Off-net Revenue | $102.0 | $36.3 | 181.1% | | Network Operations Expenses | $137.5 | $56.5 | 143.3% | | SG&A Expenses | $83.7 | $39.4 | 112.4% | | Depreciation & Amortization | $52.5 | $23.1 | 127.6% | - Revenue from the newly acquired Wireline Business was $78.0 million from May 1, 2023, to June 30, 2023, primarily driving the 61.5% YoY increase in total service revenue for the quarter[310] - For Q2 2023, off-net revenue grew 181.1% YoY, primarily due to a 194.5% increase in off-net customer connections, significantly boosted by 24,243 connections from the Wireline Business[19] - A $1.2 billion gain on bargain purchase was recognized in Q2 2023, as the fair value of assets acquired from the Wireline Business exceeded the liabilities assumed and consideration paid[22][353] - For the six months ended June 30, 2023, service revenue increased 32.2% YoY to $393.4 million, also driven by the Wireline Business acquisition[321][347] Liquidity and Capital Resources Examines liquidity, capital resources, and cash flow activities, noting impacts from the Wireline Business acquisition and dividend payments Consolidated Cash Flows (Six Months Ended June 30) | Cash Flow Activity | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $118.5 | $83.8 | | Net cash used in investing activities | ($45.5) | ($35.4) | | Net cash used in financing activities | ($107.1) | ($24.1) | - As of June 30, 2023, the company had total cash, cash equivalents, and restricted cash of $244.0 million and total indebtedness of $1.3 billion (at par)[130] - Net cash from operating activities increased primarily due to changes in operating profit and a $118.8 million payable to the Seller under the Transition Services Agreement for vendor reimbursements[125] - Investing activities included $60.7 million for property and equipment purchases and a net payment of $14.4 million for the Wireline Business acquisition, alongside $29.2 million received under the IP Transit Services Agreement[128] - Financing activities primarily consisted of $90.2 million in dividend payments and $17.2 million in principal payments for finance lease obligations during the first six months of 2023[129] Item 3. Quantitative and Qualitative Disclosures About Market Risk Reports no material changes to market risk exposures since the 2022 annual report, except as disclosed in the Risk Factors section - The company reports no material changes to its market risk exposures since its 2022 annual report, directing readers to the Risk Factors section for any updates[88] Item 4. Controls and Procedures Management confirms effective disclosure controls and procedures, with no material changes to internal control, excluding the Wireline Business for 2023 - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the reporting period[111] - No material changes were made to the company's internal control over financial reporting during the most recent fiscal quarter[112] - The company will exclude the acquired Wireline Business from its management report on internal control over financial reporting for the year ending December 31, 2023, in accordance with SEC guidance for acquired businesses[113] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings not expected to materially impact operations or financial results - The company is involved in legal proceedings in the ordinary course of business that are not expected to have a material impact on operations[48][49] Item 1A. Risk Factors Highlights significant risks associated with integrating the Sprint Wireline Business, including operational challenges, customer retention, and cost management - The primary risk factor discussed is the successful integration of the acquired Wireline Business, involving numerous challenges such as achieving projected cost savings, retaining customers and personnel, and managing complex operational integration[257][71] - Other than risks related to the Wireline acquisition, the company states there have been no material changes to risk factors from those disclosed in its annual report for the year ended December 31, 2022[80] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no common stock repurchases during the second quarter of 2023 under the authorized buyback program - There were no purchases of the company's common stock during the second quarter of 2023 under the authorized buyback program[81][92] Item 6. Exhibits Lists exhibits filed, including agreements related to the Sprint Wireline acquisition and various officer certifications - Key exhibits filed include agreements related to the Sprint Wireline acquisition, such as the Transition Services Agreement and the IP Transit Agreement, as well as executive certifications[52]