UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 2011
OR
o 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 000-51446
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
02-0636095 |
(State or other jurisdiction of |
|
(IRS Employer Identification No.) |
incorporation or organization) |
|
|
121 South 17th Street |
|
|
Mattoon, Illinois |
|
61938-3987 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
(217) 235-3311
(Registrants Telephone Number, including Area Code)
Indicate by checkmark 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 x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES o NO o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
|
Accelerated filer x |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company o |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
Indicate the number of shares outstanding of each class of Common Stock, as of the latest practicable date
Class |
|
Outstanding as of May 6, 2011 |
Common Stock, $0.01 Par Value |
|
29,940,939 Shares |
FORM 10-Q
QUARTERLY REPORT
Consolidated Communications Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three months ended March 31, |
| ||||
(In thousands, except per share amounts) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Net revenues |
|
$ |
95,441 |
|
$ |
98,302 |
|
Operating expense: |
|
|
|
|
| ||
Cost of services and products (exclusive of depreciation and amortization shown separately below) |
|
35,684 |
|
35,940 |
| ||
Selling, general and administrative expenses |
|
20,699 |
|
22,803 |
| ||
Depreciation and amortization |
|
22,158 |
|
21,542 |
| ||
Operating income |
|
16,900 |
|
18,017 |
| ||
Other income (expense): |
|
|
|
|
| ||
Interest expense, net of interest income |
|
(11,939 |
) |
(12,905 |
) | ||
Investment income |
|
6,917 |
|
6,302 |
| ||
Other, net |
|
227 |
|
64 |
| ||
Income before income taxes |
|
12,105 |
|
11,478 |
| ||
Income tax expense |
|
4,608 |
|
4,427 |
| ||
Net income |
|
7,497 |
|
7,051 |
| ||
Less: net income attributable to noncontrolling interest |
|
132 |
|
131 |
| ||
Net income attributable to common stockholders |
|
$ |
7,365 |
|
$ |
6,920 |
|
|
|
|
|
|
| ||
Net income per common sharebasic |
|
$ |
0.25 |
|
$ |
0.23 |
|
|
|
|
|
|
| ||
Net income per common sharediluted |
|
$ |
0.25 |
|
$ |
0.23 |
|
|
|
|
|
|
| ||
Cash dividends per common share |
|
$ |
0.39 |
|
$ |
0.39 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Consolidated Communications Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts) |
|
March 31, |
|
December 31, |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
77,241 |
|
$ |
67,654 |
|
Accounts receivable, net of allowance for doubtful accounts of $2,871 in 2011 and $2,694 in 2010 |
|
39,285 |
|
42,012 |
| ||
Inventories |
|
8,732 |
|
7,972 |
| ||
Income tax receivable |
|
4,679 |
|
6,490 |
| ||
Deferred income taxes |
|
5,736 |
|
5,672 |
| ||
Prepaid expenses and other current assets |
|
8,126 |
|
6,450 |
| ||
Total current assets |
|
143,799 |
|
136,250 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment, net |
|
350,206 |
|
356,057 |
| ||
Investments |
|
98,969 |
|
99,105 |
| ||
Goodwill |
|
520,562 |
|
520,562 |
| ||
Customer lists, net |
|
74,415 |
|
79,950 |
| ||
Tradenames |
|
12,347 |
|
12,347 |
| ||
Deferred debt issuance costs, net and other assets |
|
4,907 |
|
5,275 |
| ||
Total assets |
|
$ |
1,205,205 |
|
$ |
1,209,546 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
10,777 |
|
$ |
9,972 |
|
Advance billings and customer deposits |
|
22,997 |
|
22,088 |
| ||
Dividends payable |
|
11,599 |
|
11,530 |
| ||
Accrued expense |
|
19,746 |
|
22,649 |
| ||
Current portion of capital lease obligations |
|
160 |
|
132 |
| ||
Current portion of derivative liability |
|
4,344 |
|
6,374 |
| ||
Current portion of pension and postretirement benefit obligations |
|
2,847 |
|
2,847 |
| ||
Total current liabilities |
|
72,470 |
|
75,592 |
| ||
Long-term portion of capital lease obligation |
|
4,666 |
|
3,993 |
| ||
Senior secured long-term debt |
|
880,000 |
|
880,000 |
| ||
Deferred income taxes |
|
75,986 |
|
73,628 |
| ||
Pension and other postretirement obligations |
|
79,213 |
|
80,621 |
| ||
Other long-term liabilities |
|
21,138 |
|
23,837 |
| ||
Total liabilities |
|
1,133,473 |
|
1,137,671 |
| ||
|
|
|
|
|
| ||
Stockholders equity: |
|
|
|
|
| ||
Common stock, par value $0.01 per share; 100,000,000 shares authorized, 29,940,939 and 29,763,122, shares outstanding as of March 31, 2011 and December 31, 2010, respectively |
|
299 |
|
298 |
| ||
Additional paid-in capital |
|
94,402 |
|
98,126 |
| ||
Retained earnings |
|
|
|
|
| ||
Accumulated other comprehensive loss, net |
|
(28,023 |
) |
(31,471 |
) | ||
Noncontrolling interest |
|
5,054 |
|
4,922 |
| ||
Total stockholders equity |
|
71,732 |
|
71,875 |
| ||
Total liabilities and stockholders equity |
|
$ |
1,205,205 |
|
$ |
1,209,546 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Consolidated Communications Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| ||||||
|
|
Common Stock |
|
Additional |
|
Retained |
|
Other |
|
Non- |
|
|
| ||||||||
(In thousands, except share amounts) |
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Loss, net |
|
Interest |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance - December 31, 2010 |
|
29,763,122 |
|
$ |
298 |
|
$ |
98,126 |
|
$ |
|
|
$ |
(31,471 |
) |
$ |
4,922 |
|
$ |
71,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividends on common stock |
|
|
|
|
|
(4,234 |
) |
(7,365 |
) |
|
|
|
|
(11,599 |
) | ||||||
Shares issued under employee plan, net of forfeitures |
|
177,817 |
|
1 |
|
(1 |
) |
|
|
|
|
|
|
|
| ||||||
Non-cash, stock-based compensation |
|
|
|
|
|
511 |
|
|
|
|
|
|
|
511 |
| ||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
7,365 |
|
|
|
132 |
|
7,497 |
| ||||||
Change in prior service cost and net loss, net of tax of $287 |
|
|
|
|
|
|
|
|
|
492 |
|
|
|
492 |
| ||||||
Change in fair value of cash flow hedges, net of tax of $1,703 |
|
|
|
|
|
|
|
|
|
2,956 |
|
|
|
2,956 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,945 |
| ||||||
Balance - March 31, 2011 |
|
29,940,939 |
|
$ |
299 |
|
$ |
94,402 |
|
$ |
|
|
$ |
(28,023 |
) |
$ |
5,054 |
|
$ |
71,732 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Consolidated Communications Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three months ended March 31, |
| ||||
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
|
$ |
7,497 |
|
$ |
7,051 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
22,158 |
|
21,542 |
| ||
Deferred income taxes |
|
298 |
|
80 |
| ||
Loss on disposal of assets |
|
4 |
|
4 |
| ||
Cash distributions from wireless partnerships in excess of earnings |
|
2 |
|
705 |
| ||
Stock-based compensation expense |
|
511 |
|
503 |
| ||
Amortization of deferred financing costs |
|
324 |
|
324 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable, net |
|
2,727 |
|
(510 |
) | ||
Income tax receivable |
|
1,811 |
|
(1,163 |
) | ||
Inventories |
|
(760 |
) |
(708 |
) | ||
Other assets |
|
(1,646 |
) |
(2,126 |
) | ||
Accounts payable |
|
805 |
|
(952 |
) | ||
Accrued expenses and other liabilities |
|
(2,652 |
) |
(961 |
) | ||
Net cash provided by operating activities |
|
31,079 |
|
23,789 |
| ||
Investing Activities |
|
|
|
|
| ||
Additions to property, plant and equipment, net |
|
(10,043 |
) |
(10,935 |
) | ||
Proceeds from the sale of assets |
|
115 |
|
|
| ||
Proceeds from the sale of investments |
|
|
|
514 |
| ||
Net cash used for investing activities |
|
(9,928 |
) |
(10,421 |
) | ||
Financing Activities |
|
|
|
|
| ||
Payment of capital lease obligation |
|
(34 |
) |
(241 |
) | ||
Dividends on common stock |
|
(11,530 |
) |
(11,546 |
) | ||
Net cash used for financing activities |
|
(11,564 |
) |
(11,787 |
) | ||
Net increase in cash and equivalents |
|
9,587 |
|
1,581 |
| ||
Cash and equivalents at beginning of year |
|
67,654 |
|
42,758 |
| ||
Cash and equivalents at end of period |
|
$ |
77,241 |
|
$ |
44,339 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Consolidated Communications Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Nature of Operations
The accompanying unaudited condensed consolidated financial statements include the accounts of Consolidated Communications Holdings, Inc. and its subsidiaries, which are collectively referred to as Consolidated, the Company, we, our or us, unless the context otherwise requires. All significant intercompany transactions have been eliminated in consolidation.
We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.
The accompanying unaudited condensed consolidated financial statements presented herewith reflect all adjustments (consisting of only normal and recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results of operations for the three month periods ended March 31, 2011 and 2010. The results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
As of March 31, 2011, the Companys Summary of Critical Accounting Policies for the year ended December 31, 2010, which are detailed in the Companys Annual Report on Form 10-K, have not changed.
The Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements are issued.
2. Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements. The ASU amends Accounting Standards Codification (ASC) Topic 820-10 to require a number of additional disclosures regarding fair value measurements. The update requires new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. ASU 2010-06 also clarifies disclosures required about inputs, valuation techniques and the level of disaggregation applied to each class of assets and liabilities. These updates are effective for interim and annual reporting periods beginning after December 15, 2009. ASU 2010-06 had no material impact on the Companys financial results given that the update is related to disclosure and presentation only.
3. Prepaid and other current assets
Prepaid and other current assets are as follows:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Prepaid maintenance |
|
$ |
2,168 |
|
$ |
2,242 |
|
Prepaid taxes |
|
1,833 |
|
182 |
| ||
Deferred charges |
|
759 |
|
961 |
| ||
Prepaid insurance |
|
879 |
|
392 |
| ||
Prepaid expense - other |
|
2,369 |
|
2,603 |
| ||
Current portion of swap assets |
|
5 |
|
|
| ||
Other current assets |
|
113 |
|
70 |
| ||
Total |
|
$ |
8,126 |
|
$ |
6,450 |
|
4. Property, plant and equipment
Property, plant and equipment are as follows:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Land and buildings |
|
$ |
66,520 |
|
$ |
66,499 |
|
Network and outside plant facilities |
|
872,578 |
|
869,565 |
| ||
Furniture, fixtures and equipment |
|
81,321 |
|
81,920 |
| ||
Assets under capital lease |
|
10,014 |
|
9,279 |
| ||
Less: accumulated depreciation |
|
(689,923 |
) |
(675,390 |
) | ||
|
|
340,510 |
|
351,873 |
| ||
Construction in progress |
|
9,696 |
|
4,184 |
| ||
Totals |
|
$ |
350,206 |
|
$ |
356,057 |
|
Depreciation expense totaled $16.6 million and $16.0 million for the three month periods ended March 31, 2011 and 2010, respectively.
Effective March 1, 2011, we renewed a lease for approximately 4,800 square feet of space in Pittsburgh, PA which we have treated as a capital lease in accordance with ASC Topic 840, Leases. The expiration date of this capital lease is February 2021. As of March 31, 2011, the present value of the minimum lease payments was $0.7 million, $19 thousand of which is due and payable within the next twelve months. The lease requires total rental payments to the lessor of approximately $1.6 million over the term of the lease.
5. Investments
We own 2.34% of GTE Mobilnet of South Texas Limited Partnership (the Mobilnet South Partnership). The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas. We also own 3.60% of Pittsburgh SMSA Limited Partnership (Pittsburgh SMSA), which provides cellular service in and around the Pittsburgh metropolitan area. Because of our limited influence over these partnerships, we use the cost method to account for both of these investments. For each of the three month periods ended March 31, 2011 and 2010, we received cash distributions from these partnerships totaling $3.0 million.
We also own 17.02% of GTE Mobilnet of Texas RSA #17 Limited Partnership (RSA 17), 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (RSA 6(I)), and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (RSA 6(II)). RSA 17 provides cellular service to a limited rural area in Texas. RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory. Because we have some influence over the operating and financial policies of these three entities, we account for the investments using the equity method. For each of the three month periods ended March 31, 2011 and 2010, we received cash distributions from these partnerships totaling $3.9 million.
Our investments are as follows:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Cash surrender value of life insurance policies |
|
$ |
1,764 |
|
$ |
1,960 |
|
Cost method investments: |
|
|
|
|
| ||
GTE Mobilnet of South Texas Limited Partnership (2.34% interest) |
|
21,450 |
|
21,450 |
| ||
Pittsburgh SMSA Limited Partnership (3.60% interest) |
|
22,950 |
|
22,950 |
| ||
CoBank, ACB Stock |
|
3,209 |
|
3,148 |
| ||
Other |
|
25 |
|
25 |
| ||
Equity method investments: |
|
|
|
|
| ||
GTE Mobilnet of Texas RSA #17 Limited Partnership (17.02% interest) |
|
19,077 |
|
19,253 |
| ||
Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest) |
|
7,131 |
|
7,191 |
| ||
Pennsylvania RSA 6(II) Limited Partnership (23.67% interest) |
|
23,206 |
|
22,971 |
| ||
Boulevard Communications, LLP (50% interest) |
|
157 |
|
157 |
| ||
Total |
|
$ |
98,969 |
|
$ |
99,105 |
|
CoBank is a cooperative bank owned by its customers. Annually, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Companys outstanding loan balance with CoBank, which has traditionally been a significant lender in the Companys credit facility. The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.
Because the income from our investment in RSA 6(II) for the first quarter of 2011 exceeds 10% of our pretax income, below is a summary of unaudited summarized income statement information of RSA 6(II):
|
|
Three months ended March 31, |
| ||||
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Total revenues |
|
$ |
31,061 |
|
$ |
28,973 |
|
Income from operations |
|
7,853 |
|
7,871 |
| ||
Net income before taxes |
|
7,862 |
|
8,045 |
| ||
Net income |
|
7,862 |
|
8,045 |
| ||
6. Fair Value Measurements
The Companys derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis. The fair values of the interest rate swaps are determined using an internal valuation model which relies on the expected LIBOR based yield curve and estimates of counterparty and Consolidateds non-performance risk as the most significant inputs. Because each
of these inputs are directly observable or can be corroborated by observable market data, we have categorized these interest rate swaps as Level 2 within the fair value hierarchy.
The Companys swap assets and liabilities measured at fair value on a recurring basis subject to disclosure requirements at March 31, 2011 and December 31, 2010 were as follows:
|
|
|
|
Fair Value Measurements at Reporting Date Using |
| ||||||||
(In thousands) |
|
March 31, 2011 |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Current interest rate swap assets |
|
$ |
5 |
|
|
|
$ |
5 |
|
|
| ||
Current interest rate swap liabilities |
|
(4,344 |
) |
|
|
(4,344 |
) |
|
| ||||
Long-term interest rate swap liabilities |
|
(19,072 |
) |
|
|
(19,072 |
) |
|
| ||||
Totals |
|
$ |
(23,411 |
) |
$ |
|
|
$ |
(23,411 |
) |
$ |
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
| ||||||||
(In thousands) |
|
December 31, |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Current interest rate swap assets |
|
$ |
20 |
|
|
|
$ |
20 |
|
|
| ||
Current interest rate swap liabilities |
|
(6,374 |
) |
|
|
(6,374 |
) |
|
| ||||
Long-term interest rate swap liabilities |
|
(21,751 |
) |
|
|
(21,751 |
) |
|
| ||||
Totals |
|
$ |
(28,105 |
) |
$ |
|
|
$ |
(28,105 |
) |
$ |
|
|
The change in the fair value of the derivatives is primarily a result of a change in market expectations for future interest rates.
We have not elected the fair value option for any of our financial assets or liabilities. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances. The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of March 31, 2011 and December 31, 2010.
|
|
As of March 31, 2011 |
|
As of December 31, 2010 |
| ||||||||
(In thousands) |
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
| ||||
Investments, equity basis |
|
$ |
49,571 |
|
n/a |
|
$ |
49,572 |
|
n/a |
| ||
Investments, at cost |
|
$ |
47,634 |
|
n/a |
|
$ |
47,573 |
|
n/a |
| ||
Long-term debt |
|
$ |
880,000 |
|
$ |
880,000 |
|
$ |
880,000 |
|
$ |
880,000 |
|
The Companys investments at March 31, 2011 and December 31, 2010 accounted for under both the equity and cost methods consist of minority positions in various cellular telephone limited partnerships. These investments are recorded using either the equity or cost methods.
Our long-term debt allows us to select a one month LIBOR repricing option, which we have elected. As such, the fair value of this debt approximates its carrying value.
7. Goodwill and Other Intangible Assets
In accordance with the applicable accounting guidance, goodwill and tradenames are not amortized but are subject to impairment testingno less than annually or more frequently if circumstances indicate potential impairment.
The following table presents the carrying amount of goodwill by segment:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Telephone Operations |
|
$ |
519,528 |
|
$ |
519,528 |
|
Other Operations |
|
1,034 |
|
1,034 |
| ||
Totals |
|
$ |
520,562 |
|
$ |
520,562 |
|
Our most valuable tradename is the federally registered mark CONSOLIDATED, which is used in association with our telephone communication services and is a design of interlocking circles. The Companys corporate branding strategy leverages a CONSOLIDATED naming structure. All of the Companys business units and several of our products and services incorporate the CONSOLIDATED name. These tradenames are indefinitely renewable intangibles. The carrying value of the tradenames was $12.3 million at both March 31, 2011 and December 31, 2010.
The Companys customer lists consist of an established base of customers that subscribe to its services. The carrying amount of customer lists is as follows:
|
|
Telephone Operations |
|
Other Operations |
| ||||||||
(In thousands) |
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross carrying amount |
|
$ |
193,124 |
|
$ |
193,124 |
|
$ |
4,405 |
|
$ |
4,405 |
|
Less: accumulated amortization |
|
(119,480 |
) |
(114,055 |
) |
(3,634 |
) |
(3,524 |
) | ||||
Net carrying amount |
|
$ |
73,644 |
|
$ |
79,069 |
|
$ |
771 |
|
$ |
881 |
|
Amortization associated with customer lists totaled approximately $5.5 million in each of the three month periods ended March 31, 2011 and 2010.
8. Deferred Debt Issuance Costs, Net and Other Assets
Deferred financing costs, net and other assets are as follows:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Deferred debt issuance costs, net |
|
$ |
4,847 |
|
$ |
5,171 |
|
Other assets |
|
60 |
|
104 |
| ||
Total |
|
$ |
4,907 |
|
$ |
5,275 |
|
Deferred debt issuance costs are subject to amortization. Remaining deferred debt issuance costs of $4.8 million at March 31, 2011 related to our secured credit facility will be amortized utilizing a method which approximates the effective interest method over the remaining life of 3.75 years, resulting in annual amortization expense of $1.3 million unless the facility is extinguished earlier.
9. Accrued Expenses
Accrued expenses are as follows:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Salaries and employee benefits |
|
$ |
9,260 |
|
$ |
9,438 |
|
Taxes payable |
|
1,936 |
|
5,035 |
| ||
Accrued interest |
|
127 |
|
104 |
| ||
Other accrued expenses |
|
8,423 |
|
8,072 |
| ||
Total accrued expenses |
|
$ |
19,746 |
|
$ |
22,649 |
|
10. Debt
Long-term debt consists of the following:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Senior secured credit facility - revolving loan |
|
$ |
|
|
$ |
|
|
Senior secured credit facility - term loan |
|
880,000 |
|
880,000 |
| ||
Obligations under capital lease |
|
4,826 |
|
4,125 |
| ||
|
|
884,826 |
|
884,125 |
| ||
Less: current portion |
|
(160 |
) |
(132 |
) | ||
Total long-term debt |
|
$ |
884,666 |
|
$ |
883,993 |
|
Credit Agreement
The Company, through certain of its wholly owned subsidiaries, has outstanding a credit agreement with several financial institutions, which consists of a $50 million revolving credit facility (including a $10 million sub-limit for letters of credit) and an $880 million term loan facility. Borrowings under the credit facility are secured by substantially all of the assets of the Company with the exception of Illinois Consolidated Telephone Company. The term loan requires no principal reductions prior to maturity and thus matures in full on December 31, 2014. The revolving credit facility matures on December 31, 2013. There were no borrowings or letters of credit outstanding under the revolving credit facility as of March 31, 2011 or December 31, 2010, or at any time during the quarter ended March 31, 2011.
At our election, borrowings under the credit facilities bear interest at a rate equal to an applicable margin plus either a base rate or LIBOR. As of March 31, 2011, the applicable margin for interest rates was 2.50% per year for the LIBOR-based term loans and 1.50% for alternative base rate loans. The applicable margin for our $880 million term loan is fixed for the duration of the loan. The applicable margin for borrowings on the revolving credit facility is determined via a pricing grid. Based on our leverage ratio of 4.85:1 at March 31, 2011, borrowings under the revolving credit facility will be priced at a margin of 2.75% for LIBOR-based borrowings and 1.75% for alternative base rate borrowings for the three month period ending June 30, 2011. The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.
The weighted-average interest rate incurred on our credit facilities during the three month periods ended March 31, 2011 and 2010, including amounts paid on our interest rate swap agreements
and the applicable margin, was 5.15% and 5.57% per annum, respectively. Interest is payable at least quarterly.
The credit agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, issue capital stock, and commit to future capital expenditures. We have agreed to maintain certain financial ratios, including interest coverage, and total net leverage ratios, all as defined in the credit agreement. As of March 31, 2011, we were in compliance with the credit agreement covenants.
Capital Leases
The Company has four capital leases, all of which expire in 2021, for the lease of office, warehouse and tech center needs. As of March 31, 2011, the present value of the minimum remaining lease commitments was approximately $4.9 million, of which $0.2 million is due and payable within the next 12 months. The leases require total remaining rental payments of approximately $9.2 million over the remaining term of the leases.
11. Derivatives
In order to manage the risk associated with changes in interest rates, we have entered into interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments. We account for these transactions as cash flow hedges under the FASBs ASC Topic 815 (ASC 815), Derivatives and Hedging. The swaps are designated as cash flow hedges of our expected future interest payments. In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.
We currently have in place interest rate swap agreements whereby we receive 3-month LIBOR-based interest payments from the swap counterparties and pay a fixed rate. We also have interest rate swap agreements whereby we make 3-month LIBOR-based payments, less a fixed percentage to a counterparty and receive 1-month LIBOR. The combination effectively hedges the interest payments based on 1-month LIBOR resets on a portion of our credit facility. During the first quarter of 2011, the net effect of these swaps is that we paid a weighted-average fixed rate of 3.64% to our swap counterparties on $430 million of notional amount and received 1-month LIBOR less a fixed percentage. The weighted-average fixed percentage received was 0.06% for the first quarter of 2011. We have outstanding $430 million notional value of these swaps in place as of March 31, 2011.
We also have in place $200 million notional amount of floating to fixed interest rate swap agreements. Under these swap agreements, we will make fixed payments to the swap counterparties at a weighted-average fixed rate of 1.83% and receive 1-month LIBOR. These swap agreements have a maturity date of March 31, 2013.
In addition, we also have entered into a $100 million notional amount forward starting floating to fixed interest rate swap agreement that will become effective on September 30, 2011. For this swap agreement, we will make fixed payments to the swap counterparty at a weighted-average fixed rate of 1.65% and receive 1-month LIBOR. The September 2011 forward starting swap agreement has a maturity date of September 30, 2013.
At both March 31, 2011 and December 31, 2010, approximately 71.59% of our outstanding debt was fixed through the use of interest rate swaps.
The counterparties to our various swaps are 5 major U.S. and European banks. None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties. The swaps of any counterparty that is a Lender as defined in our credit facility are secured along with the other creditors under the credit facility. Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties. This provision allows us to partially mitigate the risk of non-performance by a counterparty.
We report the gross fair value of our derivatives in either prepaid expenses and other current assets, current portion of derivative liability or other long-term liabilities on our consolidated balance sheets. The table below shows the balance sheet classification and fair value of our interest rate swaps designated as hedging instruments under ASC 815:
|
|
Fair Value |
| ||||
|
|
March 31, |
|
December 31, |
| ||
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Prepaid expenses and other current assets |
|
$ |
5 |
|
$ |
20 |
|
Current portion of derivative liability |
|
(4,344 |
) |
(6,374 |
) | ||
Other long-term liabilities |
|
(19,072 |
) |
(21,751 |
) | ||
At March 31, 2011 and December 31, 2010, the pretax deferred losses related to our interest rate swap agreements included in other comprehensive income totaled $23.3 million and $28.0 million, respectively. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.
Information regarding our cash flow hedge transactions at March 31 are as follows:
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Loss/(gain) recognized in accumulated other comprehensive income (loss) (AOCI) (pretax) |
|
$ |
(4,659 |
) |
$ |
(144 |
) |
Loss/(gain) arising from ineffectiveness increasing/(reducing) interest expense |
|
$ |
(34 |
) |
$ |
29 |
|
Deferred losses reclassed from AOCI to interest expense |
|
$ |
483 |
|
$ |
1,582 |
|
(In thousands, except months) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Aggregate notional value of current derivatives outstanding |
|
$ |
630,000 |
|
$ |
630,000 |
|
Aggregate notional value of forward derivatives outstanding |
|
$ |
100,000 |
|
$ |
100,000 |
|
Period through which derivative positions currently exist |
|
September 2013 |
|
September 2013 |
| ||
Loss in fair value of derivatives |
|
$ |
23,411 |
|
$ |
28,105 |
|
Deferred losses included in AOCI (pretax) |
|
$ |
23,304 |
|
$ |
27,963 |
|
Losses included in AOCI to be recognized in the next 12 months |
|
$ |
780 |
|
$ |
1,250 |
|
Number of months over which loss in OCI is to be recognized |
|
24 |
|
27 |
|
12. Interest Expense, Net of Interest Income
The following table summarizes interest expense for the three month periods end March 31:
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Interest expense credit facility |
|
$ |
6,087 |
|
$ |
6,020 |
|
Payments on swap liabilities, net |
|
5,257 |
|
6,246 |
| ||
Interest expense- capital leases |
|
156 |
|
2 |
| ||
Uncertain tax position interest accrual |
|
12 |
|
118 |
| ||
Other interest |
|
173 |
|
242 |
| ||
Amortization of deferred financing fees |
|
324 |
|
324 |
| ||
Capitalized interest |
|
(33 |
) |
(31 |
) | ||
Total interest expense |
|
11,976 |
|
12,921 |
| ||
Less: interest income |
|
(37 |
) |
(16 |
) | ||
Interest expense, net of interest income |
|
$ |
11,939 |
|
$ |
12,905 |
|
13. Retirement and Pension Plans
We have 401(k) plans covering substantially all of our employees. Contributions made under our defined contribution plans include a match, at the Companys discretion, of employee salaries contributed to the plans. We recognized expense with respect to these plans of $0.7 million for each of the three month periods ended March 31, 2011 and 2010.
Qualified Retirement Plan
We sponsor a defined-benefit pension plan (Retirement Plan) that is non-contributory covering substantially all of our hourly employees who fulfill minimum age and service requirements. Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.
The following table summarizes the components of net periodic pension cost for the qualified retirement plan for the three months ended March 31:
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Service cost |
|
$ |
416 |
|
$ |
467 |
|
Interest cost |
|
2,549 |
|
2,784 |
| ||
Expected return on plan assets |
|
(2,494 |
) |
(2,546 |
) | ||
Net amortization loss |
|
870 |
|
189 |
| ||
Prior service credit amortization |
|
(51 |
) |
(11 |
) | ||
Net periodic pension cost |
|
$ |
1,290 |
|
$ |
883 |
|
Non-qualified Pension Plan
The Company also has non-qualified supplemental pension plans (Restoration Plans), which we acquired as part of our North Pittsburgh Systems, Inc. (North Pittsburgh) and TXU Communications Venture Company (TXUCV) acquisitions. The Restoration Plans cover certain former employees of our North Pittsburgh and TXUCV operations. The Restoration Plans restore benefits that were precluded under the Retirement Plan by Internal Revenue Service limits on compensation and benefits applicable to qualified pension plans, and by the exclusion of bonus
compensation from the Retirement Plans definition of earnings. The Restoration Plans are unfunded and have no assets, and benefits paid under the Restoration Plans come from the general operating funds of the Company.
The following table summarizes the components of net periodic pension cost for the Restoration Plans for the three months ended March 31:
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Interest cost |
|
$ |
14 |
|
$ |
15 |
|
Net amortization loss |
|
12 |
|
8 |
| ||
Net periodic pension cost |
|
$ |
26 |
|
$ |
23 |
|
Other Non-qualified Deferred Compensation Agreements
We also are liable for deferred compensation agreements with former members of the board of directors and certain other former employees of a subsidiary of TXUCV, which was acquired in 2004. The benefits are payable for up to the life of the participant and may begin as early as age 65 or upon the death of the participant. Participants accrue no new benefits as these plans had previously been frozen by TXUCVs predecessor company prior to our acquisition of TXUCV. Payments related to the deferred compensation agreements totaled approximately $0.2 million for the three month period ended March 31, 2011 and $0.1 million for the three month period ended March 31, 2010. The net present value of the remaining obligations was approximately $2.7 million at March 31, 2011 and $2.9 million at December 31, 2010, and is included in pension and postretirement benefit obligations in the accompanying balance sheets.
We also maintain 40 life insurance policies on certain of the participating former directors and employees. We did not recognize any proceeds in other income for the three month periods ended March 31, 2011 or 2010 due to the receipt of life insurance proceeds. The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $1.8 million at March 31, 2011 and $2.0 million at December 31, 2010. These amounts are included in investments in the accompanying balance sheets. Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the statements of cash flows.
14. Postretirement Benefit Obligation
We sponsor a healthcare plan and life insurance plan that provides postretirement medical benefits and life insurance to certain groups of retired employees. Retirees share in the cost of healthcare benefits, making contributions that are adjusted periodicallyeither based upon collective bargaining agreements or because total costs of the program have changed. We generally pay the covered expenses for retiree health benefits as they are incurred. Postretirement life insurance benefits are fully insured. Our postretirement plan is unfunded and has no assets, and the benefits paid under the postretirement plan come from the general operating funds of the Company.
The following table summarizes the components of the net periodic costs for postretirement benefits for the three months ended March 31:
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Service cost |
|
$ |
223 |
|
$ |
206 |
|
Interest cost |
|
392 |
|
530 |
| ||
Net prior service cost amortization |
|
(47 |
) |
(112 |
) | ||
Net periodic postretirement benefit cost |
|
$ |
568 |
|
$ |
624 |
|
15. Other Long-term Liabilities
Other long-term liabilities are as follows:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Long-term derivative liabilities |
|
$ |
19,072 |
|
$ |
21,751 |
|
Uncertain tax positions |
|
1,475 |
|
1,475 |
| ||
Accrued interest on uncertain tax positions |
|
67 |
|
56 |
| ||
Other long-term liabilities |
|
524 |
|
555 |
| ||
Total |
|
$ |
21,138 |
|
$ |
23,837 |
|
16. Stock-based Compensation Plans
Pretax stock-based compensation expense for the three month periods ended March 31 was as follows:
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Restricted stock |
|
$ |
349 |
|
$ |
338 |
|
Performance shares |
|
162 |
|
165 |
| ||
Total |
|
$ |
511 |
|
$ |
503 |
|
Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying statements of operations.
As of March 31, 2011, we had not yet recognized compensation expense on the following non-vested awards.
(In thousands) |
|
Non-recognized |
|
Average Remaining |
| |
|
|
|
|
|
| |
Restricted stock |
|
$ |
3,615 |
|
1.8 |
|
Performance shares |
|
2,010 |
|
1.6 |
| |
Total |
|
$ |
5,625 |
|
1.7 |
|
The following table summarizes unvested restricted stock awards outstanding and changes during the three months ended March 31:
|
|
2011 |
|
2010 |
| ||||||
|
|
# of |
|
Price(1) |
|
# of |
|
Price(1) |
| ||
Non-vested restricted shares outstanding January 1 |
|
101,435 |
|
$ |
17.40 |
|
82,375 |
|
$ |
12.08 |
|
Shares granted |
|
127,377 |
|
17.92 |
|
115,949 |
|
18.65 |
| ||
Shares vested |
|
|
|
|
|
(3,000 |
) |
13.00 |
| ||
Non-vested restricted shares outstanding March 31 |
|
228,812 |
|
$ |
17.69 |
|
195,324 |
|
$ |
15.97 |
|
(1) Represents the weightedaverage fair value on date of grant.
The following table summarizes unvested performance share-based restricted stock awards outstanding and changes during the three months ended March 31:
|
|
2011 |
|
2010 |
| ||||||
|
|
# of |
|
Price(1) |
|
# of |
|
Price(1) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Non-vested performance shares outstanding January 1 |
|
68,880 |
|
$ |
15.74 |
|
46,578 |
|
$ |
11.72 |
|
Shares granted |
|
50,440 |
|
18.65 |
|
98,002 |
|
9.05 |
| ||
Shares vested |
|
|
|
|
|
|
|
|
| ||
Non-vested performance shares outstanding March 31 |
|
119,320 |
|
$ |
16.66 |
|
144,580 |
|
$ |
16.42 |
|
(1) Represents the weightedaverage fair value on date of grant.
17. Income Taxes
There have been no changes to the balance of our unrecognized tax benefits as reported at December 31, 2010. As of March 31, 2011 and December 31, 2010, the amount of unrecognized tax benefits was $1.5 million. The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is $1.0 million. A decrease in unrecognized tax benefits of $0.3 million and less than $0.1 million of related accrued interest is expected in the third quarter of 2011 due to the expiration of a state statute of limitations. The tax benefit attributable to the $0.3 million decrease in unrecognized tax benefits will not have a significant effect on the Companys effective tax rate.
Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively. At March 31, 2011, we had recorded $67 thousand of interest and penalties relating to uncertain tax positions, of which $12 thousand was recorded during the three months ended March 31, 2011.
The only periods subject to examination for our federal return are years 2007 through 2009. The periods subject to examination for our state returns are years 2005 through 2009. We are not currently under examination by federal taxing authorities. We are currently under examination by state taxing authorities. We do not expect any settlement or payment that may result from the audit to have a material effect on our results of operations or cash flows.
Our effective tax rate was 38.1% and 38.6%, for the three months ended March 31, 2011 and 2010, respectively. The effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses and a change in the Illinois state income tax rate.
In January 2011, Illinois Governor signed into law PA. 96-1496. Included as part of the law was an increase in the corporate income tax rate. This resulted in an increase of our net deferred tax liabilities and corresponding increase to our state tax provision of $0.3 million recognized in the first
quarter of 2011. Exclusive of this adjustment, our effective tax rate for the first quarter of 2011 would have been approximately 35.6%.
18. Accumulated Other Comprehensive Loss, Net
Accumulated other comprehensive loss, net is comprised of the following components:
|
|
March 31, |
|
December 31, |
| ||
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Fair value of cash flow hedges |
|
$ |
(23,304 |
) |
$ |
(27,962 |
) |
Prior service credits and net losses on postretirement plans |
|
(20,925 |
) |
(21,709 |
) | ||
|
|
(44,229 |
) |
(49,672 |
) | ||
Deferred taxes |
|
16,206 |
|
18,201 |
| ||
Totals |
|
$ |
(28,023 |
) |
$ |
(31,471 |
) |
The following table summarizes total comprehensive income for the three month periods ended March 31:
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Net income |
|
$ |
7,497 |
|
$ |
7,051 |
|
Other comprehensive income: |
|
|
|
|
| ||
Prior service cost and net loss, net of tax |
|
492 |
|
47 |
| ||
Change in fair value of cash flow hedges, net of tax |
|
2,956 |
|
90 |
| ||
Total comprehensive income |
|
10,945 |
|
7,188 |
| ||
Less: comprehensive income attributable to noncontrolling interest |
|
132 |
|
131 |
| ||
Comprehensive income attributable to common stockholders |
|
$ |
10,813 |
|
$ |
7,057 |
|
19. Environmental Remediation Liabilities
Environmental remediation liabilities were $0.3 million at March 31, 2011 and December 31, 2010, and are included in other long-term liabilities. These liabilities relate to anticipated remediation and monitoring costs with respect to two small vacant sites and are undiscounted. The Company believes the amount accrued is adequate to cover the remaining anticipated costs of remediation.
20. Litigation and Contingencies
On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles. Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs. It claims to have sustained losses of approximately $125 million, but does not request a specific dollar amount in damages. We believe that these claims are without merit and that the alleged losses are completely unfounded. We intend to defend against these claims vigorously. In the third quarter of 2008, we filed preliminary objections and responses to Salsgivers complaint. However, the court ruled against our preliminary objections. On November 3, 2008, we responded to Salsgivers amended complaint and filed a counter-claim for trespass, alleging that Salsgiver attached cables to our poles without an authorized agreement and in an unsafe manner. We are currently in the discovery and deposition stage. In addition, we have asked the FCC Enforcement Bureau to address Salsgivers unauthorized pole attachments and safety
violations on those attachments. We believe that these are violations of an FCC order regarding Salsgivers complaint against us. We do not believe that these claims will have a material adverse impact on our financial results.
We are from time to time involved in various other legal proceedings and regulatory actions arising out of our operations. We do not believe that any of these, individually or in the aggregate, will have a material adverse effect upon our business, operating results or financial condition
21. Net Income per Common Share
The following illustrates the earnings allocation method as required by the FASBs authoritative guidance on the treatment of participating securities in the calculation of earnings per share which we utilize in the calculation of basic and diluted earnings per share.
|
|
For the Three Months |
| ||||
(In thousands, except per share amounts) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Basic Earnings Per Share Using Two-class Method: |
|
|
|
|
| ||
Net income |
|
$ |
7,497 |
|
$ |
7,051 |
|
Less: net income attributable to noncontrolling interest |
|
132 |
|
131 |
| ||
Net income attributable to common shareholders before allocation of earnings to participating securities |
|
7,365 |
|
6,920 |
| ||
Less: earnings allocated to participating securities |
|
127 |
|
43 |
| ||
Net income attributable to common stockholders |
|
$ |
7,238 |
|
$ |
6,877 |
|
|
|
|
|
|
| ||
Weighted-average number of common shares outstanding |
|
29,593 |
|
29,483 |
| ||
|
|
|
|
|
| ||
Net income per common share attributable to common stockholders - basic |
|
$ |
0.25 |
|
$ |
0.23 |
|
|
|
|
|
|
| ||
Diluted Earnings Per Share Using Two-class Method: |
|
|
|
|
| ||
Net income |
|
$ |
7,497 |
|
$ |
7,051 |
|
Less: net income attributable to noncontrolling interest |
|
132 |
|
131 |
| ||
Net income attributable to common shareholders before allocation of earnings to participating securities |
|
7,365 |
|
6,920 |
| ||
Less: earnings allocated to participating securities |
|
127 |
|
43 |
| ||
Net income attributable to common stockholders |
|
$ |
7,238 |
|
$ |
6,877 |
|
|
|
|
|
|
| ||
Weighted-average number of common shares outstanding |
|
29,593 |
|
29,483 |
| ||
|
|
|
|
|
| ||
Net income per common share attributable to common stockholders - diluted |
|
$ |
0.25 |
|
$ |
0.23 |
|
We had additional potential dilutive securities including unvested restricted shares and performance shares outstanding representing 0.3 million common shares that were not included in the computation of potentially dilutive securities at March 31, 2011 and 2010 because they were anti-dilutive or the achievement of performance conditions had not been met at the end of the period.
22. Business Segments
The Company is viewed and managed as two separate, but highly integrated, reportable business segments: Telephone Operations and Other Operations. Telephone Operations consists of a wide range of telecommunications services, including local and long-distance service, high-speed broadband Internet access, standard and high-definition digital television, digital telephone service
(VOIP), custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, directory publishing and Competitive Local Exchange Carrier (CLEC) services. We also operate two non-core complementary businesses that comprise our Other Operations segment, including telephone services to correctional facilities and equipment sales. Management evaluates the performance of these business segments based upon net revenue, operating income, and income before extraordinary items.
|
|
Three Months Ended |
| ||||
(In thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Telephone operations |
|
$ |
87,394 |
|
$ |
88,783 |
|
Other operations |
|
8,047 |
|
9,519 |
| ||
Total net revenue |
|
95,441 |
|
98,302 |
| ||
|
|
|
|
|
| ||
Operating expense telephone operations |
|
48,945 |
|
49,974 |
| ||
Operating expense other operations |
|
7,438 |
|
8,769 |
| ||
Total operating expense |
|
56,383 |
|
58,743 |
| ||
|
|
|
|
|
| ||
Depreciation and amortization expense telephone operations |
|
21,947 |
|
21,326 |
| ||
Depreciation and amortization expense other operations |
|
211 |
|
216 |
| ||
Total depreciation expense |
|
22,158 |
|
21,542 |
| ||
|
|
|
|
|
| ||
Operating income telephone operations |
|
16,502 |
|
17,483 |
| ||
Operating income - other operations |
|
398 |
|
534 |
| ||
Total operating income |
|
16,900 |
|
18,017 |
| ||
|
|
|
|
|
| ||
Interest expense, net of interest income |
|
(11,939 |
) |
(12,905 |
) | ||
Investment income |
|
6,917 |
|
6,302 |
| ||
Other, net |
|
227 |
|
64 |
| ||
Income before taxes |
|
$ |
12,105 |
|
$ |
11,478 |
|
|
|
|
|
|
| ||
Capital expenditures: |
|
|
|
|
| ||
Telephone operations |
|
$ |
9,987 |
|
$ |
10,912 |
|
Other operations |
|
56 |
|
23 |
| ||
Total |
|
$ |
10,043 |
|
$ |
10,935 |
|
|
|
March 31, |
|
December 31, |
| ||
|
|
2011 |
|
2010 |
| ||
Goodwill: |
|
|
|
|
| ||
Telephone operations |
|
$ |
519,528 |
|
$ |
519,528 |
|
Other operations |
|
1,034 |
|
1,034 |
| ||
Total |
|
$ |
520,562 |
|
$ |
520,562 |
|
|
|
|
|
|
| ||
Total assets: |
|
|
|
|
| ||
Telephone operations (1) |
|
$ |
1,197,967 |
|
$ |
1,201,545 |
|
Other operations |
|
7,238 |
|
8,001 |
| ||
Total |
|
$ |
1,205,205 |
|
$ |
1,209,546 |
|
(1) Included within the telephone operations segment assets are our equity method investments totaling $49.6 million at both March 31, 2011 and December 31, 2010.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our consolidated operating results and financial condition for the three month periods ended March 31, 2011 and 2010 should be read in conjunction with the unaudited condensed consolidated financial statements and related notes contained elsewhere in this report.
Consolidated Communications or the Company refers to Consolidated Communications Holdings, Inc. alone or with its wholly owned subsidiaries as the context requires. When this report uses the words we, our, or us, they refer to the Company and its subsidiaries.
Forward-Looking Statements
Any statements contained in this Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words anticipates, believes, expects, intends, plans, estimates, targets, projects, should, may, will and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are contained throughout this Report, including, but not limited to, statements found in this Part I Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations, Part I Item 3 Quantitative and Qualitative Disclosures about Market Risk and Part II Item 1 Legal Proceedings. Such forward-looking statements reflect, among other things, our current expectations, plans, strategies, and anticipated financial results and involve a number of known and unknown risks, uncertainties, and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:
· various risks to stockholders of not receiving dividends and risks to our ability to pursue growth opportunities if we continue to pay dividends according to our current dividend policy;
· the current volatility in economic conditions and the financial markets;
· adverse changes in the value of assets or obligations associated with our employee benefit plans;
· various risks to the price and volatility of our common stock;
· our substantial amount of debt and our ability to refinance it or to incur additional debt in the future;
· our need for a significant amount of cash to service our debt and to pay dividends on our common stock;
· restrictions contained in our debt agreements that limit the discretion of our management in operating our business;
· the ability to refinance our existing debt as necessary;
· rapid development and introduction of new technologies and intense competition in the telecommunications industry;
· risks associated with our possible pursuit of future acquisitions;
· the length and severity of weakened economic conditions in our service areas in Illinois, Texas and Pennsylvania;
· system failures;
· loss of large customers or government contracts;
· risks associated with the rights-of-way for our network;
· disruptions in our relationship with third party vendors;
· loss of key management personnel and the inability to attract and retain highly qualified management and personnel in the future;
· changes in the extensive governmental legislation and regulations governing telecommunications providers, the provision of telecommunications services and access charges and subsidies, which are a material part of our revenues;
· telecommunications carriers disputing and/or avoiding their obligations to pay network access charges for use of our network;
· high costs of regulatory compliance;
· the competitive impact of legislation and regulatory changes in the telecommunications industry;
· liability and compliance costs regarding environmental regulations; and
· the additional risk factors outlined in Part I Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and the other documents that we file with the SEC from time to time that could cause our actual results to differ from our current expectations and from the forward-looking statements discussed in this Report.
Many of these risks are beyond our ability to control or predict. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Report. Because of these risks, uncertainties, and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the U.S. Securities and Exchange Commission, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Overview
We are an established rural local exchange carrier that provides communications services to residential and business customers in Illinois, Texas and Pennsylvania. We offer a wide range of telecommunications services, including local and long-distance service, high-speed broadband Internet access (DSL), standard and high-definition digital television (IPTV), digital telephone service (VOIP), custom calling features, private line services, carrier access services, network capacity services over our regional fiber optic network, directory publishing and Competitive Local Exchange Carrier (CLEC) services. We also operate two non-core complementary businesses: telephone services to correctional facilities and equipment sales.
Executive Summary
We generated net income attributable to common stockholders of $7.4 million, or $0.25 per diluted share, in the first three months of 2011, as compared to net income attributable to common stockholders of $6.9 million, or $0.23 per diluted share, in the first three months of 2010. The improvement in net income in 2011 is primarily related to lower interest expense and increased earnings from our wireless partnerships. However, we were also able to continue our focus of reducing operating expenditures (excluding those associated with the sale of our telemarketing and operator services businesses) as a result of previous and ongoing cost reduction efforts which helped us offset revenue declines. During the first quarter of 2011, reductions in salaries, professional fees, supplies, occupancy costs and SG&A taxes were partially offset by higher depreciation, pension, advertising and video programming costs, along with higher commission payments to the State of Illinois necessitated by an increase in revenue from our prison services business.
Revenue in the first quarter of 2011 decreased to $95.4 million as compared to $98.3 million in the first quarter of 2010. Revenue declines in the first three months of 2011 relating to the sale late in
the first quarter of 2010 of our telemarketing business and from the sale of our operator services business in the fourth quarter of 2010 totaled approximately $2.3 million. We also experienced revenue declines in our traditional wireline business, which was offset partially by increases in DSL and IPTV subscriptions and increased revenue from our prison services business.
We completed the sale of our telemarketing business late in the first quarter of 2010 and our operator services business in the fourth quarter of 2010, the assets and revenues of which were immaterial to our overall results of operations.
General
The following general factors should be considered in analyzing our results of operations:
Revenues
Our revenues are derived primarily from the sale of voice and data communication services to residential and business customers in our rural telephone companies service areas. Because we operate primarily in rural service areas, we do not anticipate significant growth in revenues in either of our two operating segments except through acquisitions. However, we do expect to maintain relatively consistent cash flow from year to year as demand for our data and Internet services grows, and we continue to gain efficiencies and take costs out of our business.
Local access lines and bundled services. An access line is the telephone line connecting a home or business to the public switched telephone network. The number of local access lines in service directly affects the monthly recurring revenue we generate from end users, the amount of traffic on our network, the access charges we receive from other carriers, the federal and state subsidies we receive, and most other revenue streams. We had 234,928, 237,141 and 244,696 local access lines in service as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively.
Most wireline telephone companies have experienced a loss of local access lines due to increased competition from wireless providers, competitive local exchange carriers and, in some cases, cable television operators, along with challenging economic conditions. We have not been immune to these conditions. Cable competitors in all of our markets offer a competing voice product. We estimate that cable companies offer voice service to all of their addressable customers, covering 85% of our entire service territory.
In addition, we expect to continue to experience modest erosion in access lines both due to market forces and through our own competing VOIP product.
We have been able in some instances to offset the decline in local access lines with increased average revenue per access line by:
· Aggressively promoting DSL service, including selling DSL as a stand-alone offering;
· Value bundling services, such as DSL or IPTV, with a combination of local service and custom calling features;
· Maintaining excellent customer service standards; and
· Keeping a strong local presence in the communities we serve.
We have implemented a number of initiatives to gain new local access lines and retain existing lines by making bundled service packages more attractive (for example, by adding unlimited long-distance) and by announcing special promotions, like discounted second lines. We also market a triple
play bundle, which includes local telephone service, DSL, and IPTV. As of March 31, 2011, IPTV was available to approximately 205,000 homes in our markets. Our IPTV subscriber base continues to grow and totaled 30,380, 29,236 and 24,898 subscribers as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively.
We also continue to experience growth in the number of DSL subscribers we serve. We had 107,634, 106,387 and 102,132 DSL lines in service as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively. Currently, over 96% of our rural telephone companies local access lines are DSL-capable.
In addition to our access line, DSL and video initiatives, we intend to continue to integrate best practices across our markets. We also continue to look for ways to enhance current products and introduce new services to ensure that we remain competitive and continue to meet our customers needs. These initiatives have included:
· Hosted VOIP service in all of our markets to meet the needs of small- to medium-sized business customers that want robust functionality without having to purchase a traditional key or PBX phone system;
· VOIP service for residential customers, which is being offered to our customers as a growth opportunity and as an alternative to the traditional phone line for customers who are considering a switch to a cable competitor. Since we began to more aggressively promote our VOIP service in situations in which we are attempting to save or win back customers, we estimate that the product has allowed us to reduce our residential customer loss by 10%;
· DSL serviceeven to users who do not have our access linewhich expands our customer base and creates additional revenue-generating opportunities;
· Metro-Ethernet services delivered over our copper infrastructure with speeds of 25 mega-bits per second (mbps) to 40 mbps;
· DSL product with speeds up to 20 mbps for those customers desiring greater Internet speed; and
· High definition video service and digital video recorders in all of our IPTV markets.
These efforts may mitigate the financial impact of any access line loss we experience.
Expenses
Our primary operating expenses consist of the cost of services; selling, general and administrative expenses; and depreciation and amortization expenses.
Cost of services and products. Our cost of services includes the following:
· Operating expenses relating to plant costs, including those related to the network and general support costs, central office switching and transmission costs, and cable and wire facilities;
· General plant costs, such as testing, provisioning, network, administration, power, and engineering;
· The cost of transport and termination of long-distance and private lines outside our rural telephone companies service area; and
· Costs associated with our standard and high definition video products.
We have agreements with various carriers to provide long-distance transport and termination services. We believe we will meet all of our commitments in these agreements and will be able to
procure services for periods after our current agreements expire. We do not expect any material adverse effects from any changes in any new service contract.
Selling, general and administrative expenses. Selling, general and administrative expenses include expenses associated with customer care; billing and other operating support systems; and corporate expenses, such as professional service fees and non-cash, stock-based compensation.
Our operating support and back-office systems enter, schedule, provision, and track customer orders; test services and interface with trouble management; and operate inventory, billing, collections, and customer care service systems for the local access lines in our operations. We have migrated most key business processes onto a single company-wide system and platform. We hope to improve profitability by reducing individual company costs through centralizing, standardizing, and sharing best practices.
Depreciation and amortization expenses. The provision for depreciation on property and equipment is recorded using the straight-line method based upon the following useful lives:
Years |
|
|
|
Buildings |
|
18 - 40 |
|
Network and outside plant facilities |
|
3 - 50 |
|
Furniture, fixtures and equipment |
|
3 - 15 |
|
Capital leases |
|
11 |
|
Amortization expenses are recognized primarily for our intangible assets considered to have finite useful lives on a straight-line basis. In accordance with the applicable authoritative guidance, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. Because tradenames have been determined to have indefinite lives, they are not amortized. Customer relationships are amortized over their useful life. The net carrying value of customer lists at March 31, 2011 is being amortized at a weighted-average life of approximately 2.6 years.
Results of Operations
Segments
We have two reportable business segments, Telephone Operations and Other Operations. The discussion below covers our consolidated results and results by segment.
For the Three Months Ended March 31, 2011 Compared to March 31, 2010
The following summarizes our revenues and operating expenses on a consolidated basis for the three months ended March 31, 2011 and 2010:
|
|
2011 |
|
2010 |
| ||||||
(In millions, except for percentages) |
|
$ |
|
% |
|
$ |
|
% |
| ||
Revenue |
|
|
|
|
|
|
|
|
| ||
Telephone operations |
|
|
|
|
|
|
|
|
| ||
Local calling services |
|
$ |
22.1 |
|
23.2 |
|
$ |
23.8 |
|
24.2 |
|
Network access services |
|
21.4 |
|
22.4 |
|
21.2 |
|
21.6 |
| ||
Subsidies |
|
11.5 |
|
12.1 |
|
12.2 |
|
12.4 |
| ||
Long-distance services |
|
4.3 |
|
4.5 |
|
4.6 |
|
4.7 |
| ||
Data and Internet services |
|
19.6 |
|
20.5 |
|
18.0 |
|
18.3 |
| ||
Other services |
|
8.5 |
|
8.9 |
|
9.0 |
|
9.1 |
| ||
Total telephone operations |
|
87.4 |
|
91.6 |
|
88.8 |
|
90.3 |
| ||
Other operations |
|
8.0 |
|
8.4 |
|
9.5 |
|
9.7 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total operating revenue |
|
95.4 |
|
100.0 |
|
98.3 |
|
100.0 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Expenses |
|
|
|
|
|
|
|
|
| ||
Telephone operations |
|
48.9 |
|
51.3 |
|
50.0 |
|
50.9 |
| ||
Other operations |
|
7.4 |
|
7.7 |
|
8.8 |
|
8.9 |
| ||
Depreciation and amortization |
|
22.2 |
|
23.3 |
|
21.5 |
|
21.9 |
| ||
Total operating expense |
|
78.5 |
|
82.3 |
|
80.3 |
|
81.7 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Income from operations |
|
16.9 |
|
17.7 |
|
18.0 |
|
18.3 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Interest expense, net |
|
11.9 |
|
12.5 |
|
12.9 |
|
13.1 |
| ||
Other income |
|
7.1 |
|
7.4 |
|
6.3 |
|
6.4 |
| ||
Income tax expense |
|
4.6 |
|
4.8 |
|
4.4 |
|
4.5 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Net income |
|
7.5 |
|
7.8 |
|
7.0 |
|
7.1 |
| ||
Net income attributable to noncontrolling interest |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
7.4 |
|
7.7 |
|
$ |
6.9 |
|
7.0 |
|
Revenue
Revenue in the first three months of 2011 declined by $2.9 million, or 3.0%, to $95.4 million from $98.3 million in the first three months of 2010. Overall, the decline in revenue was principally due to the sales late in the first quarter of 2010 of our telemarketing business and in the fourth quarter of 2010 of operator service business. This lowered revenue in our Other Operations segment by approximately $2.3 million quarter over quarter. In addition to the sale of these businesses, year over year revenue was negatively impacted by a decline in revenues related to our traditional wireline telephone business, which impacted revenue for local calling services, subsidies, long-distance services and directory. Revenue was positively impacted in 2011 by continued growth in our data and Internet services (including DSL and IPTV), and by revenue growth in our prison services business.
Access line loss continues to moderate and is being offset by growth in our number of broadband connections. VOIP, DSL and IPTV connections all increased during the first three months of 2011 as compared to 2010. Connections by type are as follows:
|
|
March 31, |
| ||
|
|
2011 |
|
2010 |
|
|
|
|
|
|
|
Residential access lines in service |
|
139,707 |
|
144,855 |
|
Business access lines in service |
|
95,221 |
|
99,841 |
|
Total local access lines in service |
|
234,928 |
|
244,696 |
|
IPTV subscribers |
|
30,380 |
|
24,898 |
|
ILEC DSL subscribers |
|
107,634 |
|
102,132 |
|
Total broadband connections |
|
138,014 |
|
127,030 |
|
|
|
|
|
|
|
VOIP subscribers |
|
8,665 |
|
8,529 |
|
CLEC access line equivalents (1) |
|
81,631 |
|
73,413 |
|
|
|
|
|
|
|
Total connections |
|
463,238 |
|
453,668 |
|
|
|
|
|
|
|
Long-distance lines (2) |
|
173,944 |
|
170,765 |
|
(1) CLEC access line equivalents represent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line.
(2) Reflects the inclusion of long-distance service provided as part of our VOIP offering while excluding CLEC long-distance subscribers.
Telephone Operations Revenue
Local calling services revenue decreased by $1.7 million, or 7.1%, to $22.1 million in the first three months of 2011 compared to $23.8 million in the first three months of 2010. The decrease is primarily due to the decline in local access lines.
Network access services revenue increased by $0.2 million, or 0.9%, to $21.4 million in the first three months of 2011 compared to $21.2 million in the first three months of 2010. The increase is primarily due to a one-time increase in switched and special access revenues partially offset by a decrease in end-user subscriber line charges.
Subsidy revenue decreased by $0.7 million, or 5.7%, to $11.5 million in the first three months of 2011 compared to $12.2 million in the first three months of 2010. The decrease is principally the result of a decrease in interstate high cost fund support.
Long-distance services revenue decreased by $0.3 million, or 6.5%, to $4.3 million in the first three months of 2011 as compared to $4.6 million in the first three months of 2010. The decrease is primarily due to a decline in billable minutes.
Data and Internet revenue increased by $1.6 million, or 8.9%, to $19.6 million in the first three months of 2011 as compared to $18.0 million in the first three months of 2010. The increase is primarily due to an increase in the number of DSL and IPTV subscribers.
Other services revenue declined by $0.5 million, or 5.6%, to $8.5 million in the first three months of 2011 as compared to $9.0 million in the first three months of 2010. Declines primarily in directory revenue were partially offset by an increase in transport revenues.
Other Operations Revenue
Other Operations revenue decreased by $1.5 million, or 15.8%, to $8.0 million in the first three months of 2011 as compared to $9.5 million in the first three months of 2010. Declines in revenue from the sale of our telemarketing business and operator services business were partially offset by an increase in revenue from our prison services business.
Operating Expenses
Operating expenses decreased in the first three months of 2011 by $2.5 million, or 4.3%, to $56.3 million as compared to $58.8 million in the first three months of 2010. Reductions in operating expenses by segment are discussed below.
Telephone Operations Operating Expenses
Operating expenses for Telephone Operations decreased by $1.1 million, or 2.2%, to $48.9 million in the first three months of 2011 as compared to $50.0 million in the first three months of 2010. The overall decrease in operating expense was principally driven by previous and ongoing cost reduction efforts, including: reductions in salaries, occupancy costs, supplies, professional fees and SG&A taxes. The benefit of these cost structure improvements were partially offset by higher costs related to our video product (as a result of both increased subscribers and higher programming costs), along with higher advertising and pension costs.
Other Operations Operating Expenses
Operating expenses for Other Operations decreased by $1.4 million, or 15.9%, to $7.4 million in the first three months of 2011 as compared to $8.8 million in the first three months of 2010. Operating expenses in our other Operations Segment declined as a result of the elimination of costs totaling $2.5 million related to the sale of our telemarketing and operator service businesses. This decrease in cost was partially offset by higher commission payments to the State of Illinois necessitated by an increase in revenue from our prison services business.
Depreciation and Amortization
Depreciation and amortization expense increased by $0.7 million, or 3.3%, to $22.2 million in the first three months of 2011 as compared to $21.5 million in the first three months of 2010. The increase in depreciation expense was principally the result of increases in capitalized equipment related to the growth in video services which has a shorter life.
Interest Expense, Net
Interest expense, net of interest income, declined by $1.0 million, or 7.8%, to $11.9 million for the first three months of 2011 as compared to $12.9 million for the first three months of 2010. Interest expense in the first quarter of 2011 benefited from the expiration at December 31, 2010 of $175 million notional amount of interest rates swaps that required fixed interest payments to our swap counterparties at a weighted-average fixed rate of 4.28%. These higher fixed rate swaps were replaced at December 31, 2010 with $200 million notional amount of fixed interest rate swaps at a weighted-average rate of 1.83%.
Other Income (Expense)
Other income (expense) increased $0.8 million to $7.1 million in the first three months of 2011 compared to $6.3 million in the first three months of 2010. The increase was principally due to improved earnings from our wireless partnership interests.
Income Taxes
Our provision for income taxes in the first quarter of 2011 was $4.6 million compared to $4.4 million in the first quarter of 2010. The effective tax rate for the three months ended March 31, 2011 and 2010 was 38.1% and 38.6%, respectively. Our effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses and a change in Illinois state income tax rates.
In January 2011, Illinois Governor signed into law PA. 96-1496. Included as part of the law was an increase in the corporate income tax rate. This resulted in an increase to our net deferred tax liabilities and with a corresponding increase to our state tax provision of $0.3 million recognized in the first quarter of 2011. Exclusive of this adjustment, our effective tax rate for the first quarter of 2011 would have been approximately 35.6%.
Net Income Attributable to Noncontrolling Interest
The net income attributable to noncontrolling interest totaled $0.1 million in the first three months of both 2011 and 2010. The income for our East Texas Fiber Line, Inc. subsidiary (a joint venture owned 63% by the Company and 37% by Eastex Celco) was relatively stable period over period.
Liquidity and Capital Resources
Outlook and Overview
The following table sets forth selected information concerning our financial condition.
(In thousands, except for ratio) |
|
March 31, |
|
December 31, |
| ||
Cash and cash equivalents |
|
$ |
77,241 |
|
$ |
67,654 |
|
Working capital |
|
71,329 |
|
60,658 |
| ||
Total debt |
|
884,666 |
|
884,125 |
| ||
Current ratio |
|
1.98 |
|
1.80 |
| ||
Our operating requirements have historically been funded from cash flows generated from our business and borrowings under our credit facilities. We expect that our future operating requirements will continue to be funded from cash flows generated from our business and, if needed, from borrowings under our revolving credit facility.
As a general matter, we expect that our liquidity needs for the remainder of 2011 will arise primarily from: (i) dividend payments of between $34.0 million and $35.0 million; (ii) interest payments on our indebtedness of between $33.0 million and $37.0 million; (iii) capital expenditures of between $28.0 million and $31.0 million; (iv) cash income tax payments; (v) pension, 401(k) and other post retirement contributions of approximately $11.5 million; and (vi) certain other costs. In addition, we may use cash and incur additional debt to fund selective acquisitions. However, our ability to use cash may be limited by our other expected uses of cash, including our dividend policy, and our ability to incur additional debt will be limited by our existing and future debt agreements.
We believe that cash flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for approximately the next twelve months to fund our current anticipated uses of cash. After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will
depend on the results of future operations, performance and cash flow. Our ability to do so will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control.
We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries ability to pay dividends or advance cash in any other manner to us.
To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities. There can be no assurance that we will be able to generate sufficient cash flows from operations in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash. Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures which could have a material adverse effect on our financial condition and the results of operations.
As discussed below, our term loan has been fully funded at a fixed spread above LIBOR and we have $50 million available under our revolving credit facility. Based on our discussion with banks participating in the bank group, we expect that the funds will be available under the revolving credit facility if necessary.
Sources of Liquidity
Our current principal sources of liquidity are cash and cash equivalents, working capital, and cash available under our secured revolving credit facility.
Cash and cash equivalents. For the first quarter of 2011, cash and cash equivalents increased by $9.6 million as compared to an increase in cash and cash equivalents of $1.6 million during the first quarter of 2010. The increase in cash and cash equivalents quarter over quarter reflects our improved operating performance, a lower level of estimated tax payments, lower capital expenditures and improved collections of receivables.
Working capital (excluding cash and cash equivalents). Our net working capital position (excluding cash and cash equivalents) decreased by $1.4 million at March 31, 2011 versus March 31, 2010 as a result of a more intense focus on collection of receivables along with an increase in the number of days taken to pay our vendors.
Cash available under our secured revolving credit facility. At March 31, 2011 and 2010, we had no borrowings outstanding under our secured revolving credit facility and $50 million of availability.
Uses of Liquidity
Our principal uses of liquidity are dividend payments, interest expense and other payments on our debt, capital expenditures and payments made to fund our pension and other postretirement obligations.
Dividend payments. During the first quarter of 2011 and 2010, we used $11.5 million of cash to make dividend payments to shareholders. Our current quarterly dividend rate is approximately $0.39 per share.
Interest and other payments related to outstanding debt and capital leases. During the first quarter of 2011, we used $11.4 million of cash to make required interest payments on our outstanding debt. We also used $34 thousand of cash in the first quarter of 2011 to reduce our capital lease obligations. During the first quarter of 2010, we used $12.3 million of cash to make required interest payments on our outstanding debt. We also used $0.2 million of cash in the first quarter of 2010 to reduce our capital lease obligations.
Pension and postretirement obligations. In the first quarter of 2011, we used $3.4 million of cash to fund pension, 401(k) and other postretirement obligations. In the first quarter of 2010, we used $1.5 million of cash to fund pension, 401(k) and other postretirement obligations. The increase in pension and postretirement payments in 2011 versus 2010 reflects a $1.9 million payment to our qualified pension plan made in the first quarter of 2011. We made no payments to our qualified pension plan during the first quarter of 2010.
Capital expenditures. During the first quarter of 2011, we spent approximately $10.0 million on capital projects. During the first quarter of 2010, we spent approximately $10.9 million on capital projects.
Debt
The following table summarizes our indebtedness as of March 31, 2011:
(In thousands) |
|
Balance |
|
Maturity Date |
|
Rate (1) |
| |
|
|
|
|
|
|
|
| |
Capital leases |
|
$ |
4,826 |
|
May 31, 2021 |
|
13.7% (2) |
|
Revolving credit facility |
|
|
|
December 31, 2013 |
|
LIBOR plus 2.75% |
| |
Term loan |
|
$ |
880,000 |
|
December 31, 2014 |
|
LIBOR plus 2.50% |
|
(1) As of March 31, 2011, the 1-month LIBOR rate in effect on our borrowings was 0.27%.
(2) Weighted-average rate.
Credit Facilities
Borrowings under our credit agreement are secured by substantially all of our assets (other than our Illinois Consolidated Telephone Company subsidiary, and certain future subsidiaries). The credit agreement contains customary affirmative covenants, which require us and our subsidiaries to furnish specified financial information to the lenders, comply with applicable laws, maintain our properties and assets and maintain insurance on our properties, among others, and contains customary negative covenants which restrict our and our subsidiaries ability to incur additional debt and issue capital stock, create liens, repay other debt, sell assets, make investments, loans, guarantees or advances, pay dividends, repurchase equity interests or make other restricted payments, engage in affiliate transactions, make capital expenditures, engage in mergers, acquisitions or consolidations, enter into
sale-leaseback transactions, amend specified documents, enter into agreements that restrict dividends from subsidiaries and change the business we conduct. In addition, the credit agreement requires us to comply with specified financial ratios that are summarized below under Covenant Compliance.
As of March 31, 2011, we had no borrowings outstanding under the revolving credit facility. Borrowings under our credit facilities bear interest at a rate equal to an applicable margin plus, at the borrowers election, either a base rate or LIBOR. As of March 31, 2011, the applicable margin for interest rates was 2.50% per year for the LIBOR-based term loans and 1.50% for alternative base rate loans. The applicable margin for our $880 million term loan is fixed for the duration of the loan. The applicable margin for borrowings on the revolving credit facility is determined via a pricing grid. Based on our leverage ratio of 4.85:1 at March 31, 2011, borrowings under the revolving credit facility will be priced at a margin of 2.75% for LIBOR-based borrowings and 1.75% for alternative base rate borrowings for the three month period ending June 30, 2011. The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.
For the quarter ended March 31, 2011, the weighted-average interest rate incurred on our credit facilities, including payments made under our interest rate swap agreement, was 5.15% per annum.
Derivative Instruments
At March 31, 2011, we had $630 million notional amount of floating to fixed interest rate swap agreements outstanding and $430 million notional amount of basis swaps outstanding. In addition, we also have entered into a $100 million notional amount forward starting floating to fixed interest rate swap agreement that will become effective on September 30, 2011. The swaps are in place to hedge the change in overall cash flows related to our term loan, the driver of which is changes in the underlying variable interest rate.
We have $430 million notional amount of floating to fixed swap agreements outstanding whereby we receive 3-month LIBOR-based interest payments from the swap counterparties and pay a fixed rate. The basis swap agreements are structured so that we pay 3-month LIBOR-based payments less a fixed percentage to the basis swap counterparties, and receive 1-month LIBOR. Concurrent with the execution of the basis swaps, we began electing 1-month LIBOR resets on our credit facility.
We also have in place $200 million notional amount of floating to fixed interest rate swap agreements. Under these swap agreements, we make fixed payments to the swap counterparties at a weighted-average fixed rate of 1.83% and receive 1-month LIBOR. These swap agreements have a maturity date of March 31, 2013.
In addition, we also have entered into a $100 million notional amount of forward starting floating to fixed interest rate swap agreement that will become effective on September 30, 2011. For this swap agreement, we will make fixed payments to the swap counterparty at a weighted-average fixed rate of 1.65% and receive 1-month LIBOR. The September 2011 forward swap agreement has a maturity date of September 30, 2013.
Covenant Compliance
In general, our credit agreement restricts our ability to pay dividends to the amount of our Available Cash accumulated after October 1, 2005, plus $23.7 million and minus the aggregate amount of dividends paid after July 27, 2005. Available Cash for any period is defined in our credit facility as Consolidated EBITDA (a) minus, to the extent not deducted in the determination of Consolidated EBITDA, (i) non-cash dividend income for such period; (ii) consolidated interest expense for such
period net of amortization of debt issuance costs incurred (A) in connection with or prior to the consummation of the acquisition of North Pittsburgh or (B) in connection with the redemption of our then outstanding senior notes; (iii) capital expenditures from internally generated funds; (iv) cash income taxes for such period; (v) scheduled principal payments of Indebtedness, if any; (vi) voluntary repayments of indebtedness, mandatory prepayments of term loans and net increases in outstanding revolving loans during such period; (vii) the cash costs of any extraordinary or unusual losses or charges; and (viii) all cash payments made on account of losses or charges expensed prior to such period (b) plus, to the extent not included in Consolidated EBITDA, (i) cash interest income; (ii) the cash amount realized in respect of extraordinary or unusual gains; and (iii) net decreases in revolving loans. Based on the results of operations from October 1, 2005 through March 31, 2011, and after taking into consideration dividend payments (including the $11.6 million dividend declared in March 2011 and paid on May 1, 2011), we continue to have $135.9 million in dividend availability under the credit facility covenant.
Under our credit agreement, if our total net leverage ratio (as such term is defined in the credit agreement), as of the end of any fiscal quarter, is greater than 5.10:1.00, we will be required to suspend dividends on our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to make mandatory prepayments of loans and not used to fund acquisitions, capital expenditures or make other investments. During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in available cash (as such term is defined in our credit agreement) during such dividend suspension period, among other things. In addition, we will not be permitted to pay dividends if an event of default under the credit agreement has occurred and is continuing. Among other things, it will be an event of default if our interest coverage ratio as of the end of any fiscal quarter is below 2.25:1.00. As of March 31, 2011, our total net leverage ratio was 4.85:1.00 and our interest coverage ratio was 3.66:1.00.
The descriptions of the covenants above and of our credit agreement generally in this Report are summaries only. They do not contain a full description, including definitions, of the provisions summarized. As such, these summaries are qualified in their entirety by these documents, which are filed as exhibits to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Dividends
The cash required to fund dividend payments is in addition to our other expected cash needs, which we expect to fund with cash flows from our operations. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any expected fluctuations in working capital and other cash needs, although we do not intend to borrow under this facility to pay dividends.
We believe that our dividend policy will limit, but not preclude, our ability to grow. If we continue paying dividends at the level currently anticipated under our dividend policy, we may not retain a sufficient amount of cash, and may need to seek refinancing, to fund a material expansion of our business, including any significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current expectations. In addition, because we expect a significant portion of cash available will be distributed to holders of common stock under our dividend policy, our ability to pursue any material expansion of our business will depend more than it otherwise would on our ability to obtain third-party financing.
Capital Leases
The Company has four capital leases, all of which expire in 2021, for the lease of office, warehouse and tech center space. As of March 31, 2011, the present value of the minimum remaining lease commitments was approximately $4.9 million, of which $0.2 million is due and payable within the next 12 months. The leases require total remaining rental payments of approximately $9.2 million over the remaining term of the leases.
Surety Bonds
In the ordinary course of business, we enter into surety, performance, and similar bonds. As of March 31, 2011, we had approximately $2.0 million of these bonds outstanding.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates. Market risk is the potential loss arising from adverse changes in market interest rates on our variable rate obligations. We calculate the potential change in interest expense caused by changes in market interest rates by determining the effect of the hypothetical rate increase on the portion of our variable rate debt that is not hedged through the interest rate swap agreements.
During the first three months of 2011, the interest rate on approximately $250.0 million of our floating rate debt was not fixed through the use of interest rate swaps, thereby subjecting this portion of our debt to potential changes in interest rates. If market interest rates changed by 1.0% from the average rates that prevailed during the first three months of this year, interest expense would have increased or decreased by approximately $0.6 million for this three month period.
As of March 31, 2011, the fair value of our interest rate swap agreements amounted to a net liability of $14.8 million, net of deferred taxes, which is recognized as a deferred loss within accumulated other comprehensive loss.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles. Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs. It claims to have sustained losses of approximately $125 million, but does not request a specific dollar amount in damages. We believe that these claims are without merit and that the alleged losses are completely unfounded. We intend to defend against these claims vigorously. In the third quarter of 2008, we filed preliminary objections and responses to Salsgivers complaint. However, the court ruled against our preliminary objections. On November 3, 2008, we responded to Salsgivers amended complaint and filed a counter-claim for trespass, alleging that Salsgiver attached cables to our poles without an authorized agreement and in an unsafe manner. We are currently in the discovery and deposition stage. In addition, we have asked the FCC Enforcement Bureau to address Salsgivers unauthorized pole attachments and safety violations on those attachments. We believe that these are violations of an FCC order regarding Salsgivers complaint against us. We do not believe that these claims will have a material adverse impact on our financial results.
We are from time to time involved in various other legal proceedings and regulatory actions arising out of our operations. We do not believe that any of these, individually or in the aggregate, will have a material adverse effect upon our business, operating results or financial condition
The Company included in its Annual Report on Form 10-K as of December 31, 2010 a description of certain risks and uncertainties that could affect the Companys business, future performance or financial condition (Risk Factors).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. [Removed and Reserved]
None
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
|
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. | ||
|
| ||
May 6, 2011 |
|
By: |
/s/ Robert J. Currey |
|
|
|
Robert J. Currey |
|
|
|
President and Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
|
| |
May 6, 2011 |
|
By: |
/s/ Steven L. Childers |
|
|
|
Steven L. Childers |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial Officer and Chief Accounting Officer) |
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Robert J. Currey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Consolidated Communications Holdings, Inc.,
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report,
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report,
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d) 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared,
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting, and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information, and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
May 6, 2011 |
/s/ Robert J. Currey |
|
Robert J. Currey |
|
President and Chief Executive Officer |
|
(Principal Executive Officer) |
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Steven L. Childers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Consolidated Communications Holdings, Inc.,
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report,
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report,
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d) 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared,
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting, and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information, and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
May 6, 2011 |
/s/ Steven L. Childers |
|
Steven L. Childers |
|
Chief Financial Officer |
|
(Principal Financial Officer and Chief Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 906), Robert J. Currey and Steven L. Childers, President and Chief Executive Officer and Chief Financial Officer, respectively, of Consolidated Communications Holdings, Inc., each certify that to his knowledge (i) the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Consolidated Communications Holdings, Inc.
|
/s/ Robert J. Currey |
|
Robert J. Currey |
|
President and Chief Executive Officer |
|
(Principal Executive Officer) |
|
May 6, 2011 |
|
|
|
/s/ Steven L. Childers |
|
Steven L. Childers |
|
Senior Vice President and Chief Financial Officer |
|
(Principal Financial Officer and Chief Accounting Officer) |
|
May 6, 2011 |