10-Q 1 ntls-x3312014x10q.htm 10-Q NTLS--3.31.2014-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
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: 000-51798 
 
NTELOS Holdings Corp.
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-4573125
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1154 Shenandoah Village Drive, Waynesboro, Virginia 22980
(Address of principal executive offices) (Zip Code)
(540) 946-3500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
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).    ý  Yes    ¨  No
Indicate by check mark 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
£
 
  
Accelerated filer
 
ý
Non-accelerated filer
£
  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
There were 21,666,882 shares of the registrant’s common stock outstanding as of the close of business on May 2, 2014.


NTELOS HOLDINGS CORP.
TABLE OF CONTENTS
 
Page Number
 

1

PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements.
NTELOS Holdings Corp.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share amounts)
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
Current Assets
 
 
 
Cash
$
121,038

 
$
88,441

Restricted cash
2,167

 
2,167

Accounts receivable, net
36,545

 
37,740

Inventories and supplies
15,663

 
23,962

Deferred income taxes
9,751

 
10,650

Prepaid expenses and other current assets
21,513

 
20,808

 
206,677

 
183,768

Securities and Investments
1,499

 
1,499

Property, Plant and Equipment, net
322,331

 
319,376

Intangible Assets
 
 
 
Goodwill
63,700

 
63,700

Radio spectrum licenses
131,834

 
131,834

Customer relationships and trademarks, net
6,232

 
6,985

Deferred Charges and Other Assets
11,628

 
9,089

TOTAL ASSETS
$
743,901

 
$
716,251

LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Current portion of long-term debt
$
5,824

 
$
5,410

Accounts payable
29,816

 
33,677

Dividends payable
9,096

 
9,034

Advance billings and customer deposits
13,590

 
13,333

Accrued expenses and other current liabilities
17,231

 
18,056

 
75,557

 
79,510

Long-Term Debt
523,036

 
484,956

Retirement Benefits
12,535

 
11,995

Deferred Income Taxes
61,946

 
62,893

Other Long-Term Liabilities
33,133

 
33,104

 
630,650

 
592,948

Commitments and Contingencies


 


Equity


 


Preferred stock, par value $.01 per share, authorized 100 shares, none issued
—

 
—

Common stock, par value $.01 per share, authorized 55,000 shares; 21,666 shares issued and 21,657 shares outstanding (21,519 shares issued and 21,510 shares outstanding at December 31, 2013)
214

 
214

Additional paid in capital
38,198

 
44,462

Treasury stock, at cost, 9 shares (9 shares at December 31, 2013)
(147
)
 
(147
)
Retained earnings
—

 
—

Accumulated other comprehensive loss
(1,517
)
 
(1,246
)
Total NTELOS Holdings Corp. Stockholders’ Equity
36,748

 
43,283

Noncontrolling Interests
946

 
510

 
37,694

 
43,793

TOTAL LIABILITIES AND EQUITY
$
743,901

 
$
716,251

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

NTELOS Holdings Corp.
Condensed Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended March 31,
(In thousands, except per share amounts)
2014
 
2013
Operating Revenues
$
122,082

 
$
119,345

Operating Expenses
 
 
 
Cost of sales and services
47,324

 
44,535

Customer operations
34,091

 
30,954

Corporate operations
9,737

 
7,904

Depreciation and amortization
19,067

 
18,456

 
110,219

 
101,849

Operating Income
11,863

 
17,496

Other Expense
 
 
 
Interest expense
(7,959
)
 
(7,361
)
Other expense, net
(1,072
)
 
(369
)
 
(9,031
)
 
(7,730
)
Income before Income Taxes
2,832

 
9,766

Income Taxes
1,110

 
3,744

Net Income
1,722

 
6,022

Net Income Attributable to Noncontrolling Interests
(436
)
 
(529
)
Net Income Attributable to NTELOS Holdings Corp.
$
1,286

 
$
5,493

Earnings per Share Attributable to NTELOS Holdings Corp.
 
 
 
Basic
$
0.06

 
$
0.26

Weighted average shares outstanding - basic
21,080

 
20,960

Diluted
$
0.06

 
$
0.25

Weighted average shares outstanding - diluted
22,023

 
21,550

Cash Dividends Declared per Share - Common Stock
$
0.42

 
$
0.42

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

NTELOS Holdings Corp.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Net Income Attributable to NTELOS Holdings Corp.
$
1,286

 
$
5,493

Other Comprehensive Income:
 
 
 
Amortization of unrealized (gain)/loss from defined benefit plans, net of $172 of deferred income taxes in 2014 ($42 in 2013)
(271
)
 
66

Comprehensive Income Attributable to NTELOS Holdings Corp.
1,015

 
5,559

Comprehensive Income Attributable to Noncontrolling Interests
436

 
529

Comprehensive Income
$
1,451

 
$
6,088

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

NTELOS Holdings Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
1,722

 
$
6,022

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
19,067

 
18,456

Deferred income taxes
86

 
3,263

Equity-based compensation
1,311

 
1,321

Amortization of loan origination costs and debt discount
801

 
672

Write off of unamortized debt issuance costs
895

 
—

Retirement benefits and other
700

 
774

Changes in operating assets and liabilities
 
 
 
Accounts receivable
1,195

 
7,322

Inventories and supplies
8,299

 
824

Other current assets
(3,609
)
 
(1,993
)
Income taxes
313

 
592

Accounts payable
(11,229
)
 
(3,402
)
Other current liabilities
(1,230
)
 
7,557

Retirement benefit contributions and distributions
173

 
(86
)
Net cash provided by operating activities
18,494

 
41,322

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(13,961
)
 
(16,913
)
Other, net
2,547

 
(33
)
Net cash used in investing activities
(11,414
)
 
(16,946
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt, net of original issue discount
187,655

 
—

Debt issuance and refinancing costs
(3,551
)
 
—

Repayments on senior secured term loans
(149,476
)
 
(1,250
)
Cash dividends paid on common stock
(9,034
)
 
—

Capital distributions to Noncontrolling Interests
—

 
(277
)
Other, net
(77
)
 
410

Net cash provided by/(used in) financing activities
25,517

 
(1,117
)
Increase in cash
32,597

 
23,259

Cash, beginning of period
88,441

 
76,197

Cash, end of period
$
121,038

 
$
99,456

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

NTELOS Holdings Corp.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
 
(In thousands)
Common
Shares
 
Treasury
Shares
 
Common
Stock
 
Additional
Paid In
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
NTELOS
Holdings
Corp.
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
December 31, 2013
21,519

 
9

 
$
214

 
$
44,462

 
$
(147
)
 
$
—

 
$
(1,246
)
 
$
43,283

 
$
510

 
$
43,793

Equity-based compensation *
147

 

 


 
1,594

 


 

 

 
1,594

 

 
1,594

Cash dividends declared

 

 

 
(7,858
)
 

 
(1,286
)
 

 
(9,144
)
 

 
(9,144
)
Net income attributable to NTELOS Holdings Corp.

 

 

 

 

 
1,286

 

 
1,286

 

 
1,286

Amortization of unrealized gain from defined benefit plans, net of $172 of deferred income taxes

 

 

 

 

 

 
(271
)
 
(271
)
 

 
(271
)
Comprehensive income attributable to Noncontrolling Interests

 

 

 

 

 

 

 
—

 
436

 
436

March 31, 2014
21,666

 
9

 
$
214

 
$
38,198

 
$
(147
)
 
$
—

 
$
(1,517
)
 
$
36,748

 
$
946

 
$
37,694

 
*
Includes restricted shares issued, employee stock purchase plan issuances, shares issued through 401(k) matching contributions, stock options exercised and other activity.
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

6

NTELOS Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 1. Organization

NTELOS Holdings Corp. (hereafter referred to as “Holdings Corp.” or the “Company”), through NTELOS Inc., its wholly owned subsidiary (“NTELOS Inc.”) and its subsidiaries, is a regional provider of digital wireless communications services to consumers and businesses primarily in Virginia, West Virginia and certain portions of surrounding states. The Company’s primary services are wireless voice and data digital personal communications services (“PCS”) provided through NTELOS branded retail operations and on a wholesale basis to other PCS providers, most notably through an arrangement with Sprint Spectrum L.P. (“Sprint Spectrum”), and Sprint Spectrum on behalf of and as an agent for SprintCom, Inc. (“SprintCom”)
(Sprint Spectrum and SprintCom collectively, “Sprint”), which arrangement is referred to herein as the “Strategic Network
Alliance” or "SNA." See Note 11 for additional information regarding this arrangement. The Company does not have any
independent operations.
Note 2. Basis of Presentation and Other Information
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position have been included.
The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The accompanying condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”). These financial statements should be read in conjunction with the Company’s 2013 Form 10-K.
Cash
The Company’s cash was held in market rate savings accounts and non-interest bearing deposit accounts. The total held in the market rate savings accounts at March 31, 2014 and December 31, 2013 was $66.5 million and $36.5 million, respectively. The remaining $54.5 million and $51.9 million of cash at March 31, 2014 and December 31, 2013, respectively, was held in non-interest bearing deposit accounts.

Restricted Cash
The Company is eligible to receive up to $5.0 million in connection with its winning bid in the Connect America Fund's Mobility Fund Phase I Auction ("Auction 901"). Pursuant to the terms of Auction 901, the Company was required to obtain a Letter of Credit (“LOC”) for the benefit of the Universal Service Administrative Company (“USAC”) to cover each disbursement plus the amount of the performance default penalty (10% of the total eligible award). USAC may draw upon the LOC in the event the Company fails to demonstrate the required coverage by the applicable deadline in 2016. The Company obtained the LOC in the amount of $2.2 million, representing the first disbursement of $1.7 million received in September 2013, plus the performance default penalty of $0.5 million. In accordance with the terms of the LOC, the Company deposited $2.2 million into a separate account at the issuing bank to serve as cash collateral. Such funds will be released when the LOC is terminated without being drawn upon by USAC.

Allowance for Doubtful Accounts
The Company includes bad debt expense in customer operations expense in the unaudited condensed consolidated statements of operations. Bad debt expense for the three months ended March 31, 2014 and 2013 was $4.0 million and $3.2 million, respectively. The Company’s allowance for doubtful accounts was $6.2 million and $6.5 million at March 31, 2014 and December 31, 2013, respectively.




7

Accrued Expenses and Other Current Liabilities
 
(In thousands)
March 31, 2014
 
December 31, 2013
Accrued interest
5,103

 
4,584

Accrued payroll
4,237

 
5,760

Accrued taxes
4,421

 
3,842

Other
3,470

 
3,870

Total
$
17,231

 
$
18,056


Pension Benefits and Retirement Benefits Other Than Pensions
For the three months ended March 31, 2014 and 2013, the components of the Company’s net periodic benefit cost for its defined benefit pension plan were as follows:
 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Service cost
$
—

 
$
—

Interest cost
344

 
331

Recognized net actuarial loss
—

 
76

Expected return on plan assets
(472
)
 
(399
)
Net periodic benefit cost
$
(128
)
 
$
8

Pension plan assets were valued at $25.0 million at March 31, 2014.
For the three months ended March 31, 2014 and 2013, the components of the Company’s net periodic benefit cost for its other postretirement benefit plans were as follows:
 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Service cost
$
10

 
$
14

Interest cost
24

 
21

Recognized net actuarial loss
8

 
4

Fees
8

 
—

Net periodic benefit cost
$
50

 
$
39

The total expense recognized for the Company’s nonqualified pension plans was $0.1 million for each of the three months ended March 31, 2014 and 2013, a portion of which related to the amortization of unrealized loss.
The total amount reclassified out of accumulated other comprehensive income related to actuarial losses from the defined benefit plans was $0.3 million and $0.1 million for the three months ended March 31, 2014 and 2013, respectively, all of which has been reclassified to cost of sales and services, customer operations, and corporate operations on the unaudited condensed consolidated statement of income for the respective periods.
The Company also sponsors a contributory defined contribution plan under Internal Revenue Code (“IRC”) Section 401(k) for substantially all employees. The Company’s current policy is to make matching contributions in shares of the Company’s common stock.

Equity-Based Compensation
The Company accounts for equity-based compensation plans under FASB Accounting Standards Codification (“ASC”) 718, Stock Compensation. Equity-based compensation expense from stock-based awards is recorded with an offsetting increase to additional paid in capital on the unaudited condensed consolidated balance sheet. The Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.


8

Total equity-based compensation expense related to all of the Company’s stock-based equity awards for the three months ended March 31, 2014 and 2013 and the Company’s 401(k) matching contributions was allocated as follows:
 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Cost of sales and services
$
151

 
$
141

Customer operations
250

 
247

Corporate operations
910

 
933

Equity-based compensation expense
$
1,311

 
$
1,321

Future charges for equity-based compensation related to securities outstanding at March 31, 2014 for the remainder of 2014 and for the years 2015 through 2018 are estimated to be $3.2 million, $3.1 million, $1.4 million, $0.2 million and less than $0.1 million, respectively.

Note 3. Supplemental Cash Flow Information
The following information is presented as supplementary disclosures for the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Cash payments for:
 
 
 
Interest (net of amounts capitalized)
$
6,771

 
$
2,591

Income taxes
11

 
13

Cash received from income tax refunds
—

 
288

Supplemental investing and financing activities:
 
 
 
Additions to property, plant and equipment included in accounts payable
16,244

 
4,551

Dividends declared not paid
9,142

 
9,053


The amount of interest capitalized was immaterial for each of the three months ended March 31, 2014 and 2013.

Note 4. Property, Plant and Equipment
The components of property, plant and equipment, and the related accumulated depreciation, were as follows:
 
(In thousands)
Estimated Useful
Life
 
March 31, 2014
 
December 31, 2013
Land and buildings *
39 to 50 years
 
$
33,079

 
$
34,223

Network plant and equipment
5 to 17 years
 
474,174

 
471,032

Furniture, fixtures and other equipment
2 to 18 years
 
93,674

 
103,181

 
 
 
600,927

 
608,436

Under construction
 
 
23,987

 
6,430

 
 
 
624,914

 
614,866

Less: accumulated depreciation
 
 
302,583

 
295,490

Property, plant and equipment, net
 
 
$
322,331

 
$
319,376

* Leasehold improvements, which are categorized in land and buildings, are depreciated over the shorter of the estimated useful lives or the remaining lease terms.
Depreciation expense for the three months ended March 31, 2014 and 2013 was $18.3 million and $17.7 million, respectively. During the quarter ended March 31, 2014, the Company revised the estimated useful lives of certain assets in order to better match our depreciation expense with the periods these assets are expected to generate revenue based on planned and historical service periods. The new estimated useful lives were established based on historical service periods and external benchmark data of these assets. The increase in depreciation expense resulting from this change for the three months ended March 31, 2014

9

was approximately $0.4 million. The Company believes that no impairment indicators existed as of March 31, 2014 that would require it to perform impairment testing.
 
Note 5. Intangible Assets
Indefinite-Lived Intangible Assets
Goodwill and radio spectrum licenses are considered indefinite-lived intangible assets. Indefinite-lived intangible assets are not subject to amortization but instead are tested for impairment annually, on October 1, or more frequently if an event indicates that the asset might be impaired. The Company believes that no impairment indicators existed as of March 31, 2014 that would require it to perform impairment testing.
Intangible Assets Subject to Amortization
Customer relationships and trademarks are considered amortizable intangible assets. At March 31, 2014 and December 31, 2013, customer relationships and trademarks were comprised of the following:
 
 
 
 
March 31, 2014
 
December 31, 2013
(In thousands)
Estimated
Useful Life
 
Gross Amount
 
Accumulated
Amortization
 
Net
 
Gross Amount
 
Accumulated
Amortization
 
Net
Customer relationships
7 to 8 years
 
$
36,900

 
$
(33,507
)
 
$
3,393

 
$
36,900

 
$
(32,871
)
 
$
4,029

Trademarks
15 years
 
7,000

 
(4,161
)
 
2,839

 
7,000

 
(4,044
)
 
2,956

Total
 
 
$
43,900

 
$
(37,668
)
 
$
6,232

 
$
43,900

 
$
(36,915
)
 
$
6,985

The Company amortizes its amortizable intangible assets using the straight-line method. Amortization expense for both the three months ended March 31, 2014 and 2013 was $0.8 million.

Note 6. Long-Term Debt
At March 31, 2014 and December 31, 2013, the Company’s outstanding long-term debt consisted of the following:
 
(In thousands)
March 31, 2014
 
December 31, 2013
Senior secured term loans, net of unamortized debt discount
$
528,041

 
$
489,441

Capital lease obligations
819

 
925

 
528,860

 
490,366

Less: current portion of long-term debt
5,824

 
5,410

Long-term debt
$
523,036

 
$
484,956

Long-Term Debt, Excluding Capital Lease Obligations
On November 9, 2012, NTELOS Inc. entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”), which amended and restated, in its entirety, that certain Credit Agreement dated August 7, 2009 (the “Original Credit Agreement”). The Amended and Restated Credit Agreement provided for (1) a term loan A in the aggregate amount of $150.0 million (the “Term Loan A”); and (2) a term loan B in the aggregate amount of $350.0 million (the “Term Loan B” and, together with the Term Loan A, the “Term Loans”).
On January 31, 2014, the Company completed the refinancing of Term Loan A, which converted the outstanding principal balance of $148.1 million of Term Loan A into Term Loan B, and borrowed an additional $40.0 million under Term Loan B. The additional Term Loan B borrowings bear the same interest rate, maturity and other terms as the Company’s existing Term Loan B borrowings. In connection with the refinancing, the Company incurred approximately $3.8 million in creditor and third party fees, of which $3.7 million was deferred and is being amortized to interest expense over the life of the debt using the effective interest method. The Company also deferred $0.5 million in debt discounts related to the new Term Loan B borrowings, which are being accreted to the Term Loan B using the effective interest method over the life of the debt and are reflected in interest expense. Additionally, the Company wrote off a proportionate amount of the unamortized deferred fees and debt discount from the Amended and Restated Credit Agreement totaling $0.5 million and $0.2 million, respectively, which are reflected in other expenses in the condensed consolidated statements of income.

10



The aggregate maturities of long-term debt outstanding at March 31, 2014, excluding capital lease obligations, based on the contractual terms of the instruments were as follows:
 
(In thousands)
Term Loan
Remainder of 2014
$
4,054

2015
5,405

2016
5,405

2017
5,405

2018
5,405

Thereafter
506,725

Total
$
532,399

The Company’s blended average effective interest rate on its long-term debt was approximately 6.3% and 6.0% for the three months ended March 31, 2014 and 2013, respectively.
The Amended and Restated Credit Agreement has a Restricted Payments basket, which can be used to make Restricted Payments (as defined in the Amended and Restated Credit Agreement), including the ability to pay dividends, repurchase stock or advance funds to the Company. This Restricted Payments basket increases by $6.5 million per quarter and decreases by any actual Restricted Payments and by certain investments and any mandatory prepayments on the Term Loans, to the extent the lenders decline to receive such prepayment. In addition, on a quarterly basis the Restricted Payments basket increases by the positive amount, if any, of the Excess Cash Flow (as defined in the Amended and Restated Credit Agreement). For the three months ended March 31, 2014 there was no excess cash flow. The balance of the Restricted Payments basket as of March 31, 2014 was $58.8 million.
Capital Lease Obligations
In addition to the long-term debt discussed above, the Company has entered into capital leases on vehicles with original lease terms of four to five years. At March 31, 2014, the carrying value and accumulated depreciation of these assets was $2.6 million and $1.5 million, respectively. The total net present value of the Company’s future minimum lease payments is $0.8 million. At March 31, 2014, the principal portion of these capital lease obligations was payable as follows: $0.3 million for the remainder of 2014, $0.3 million in 2015 and $0.2 million in 2016.

11

Note 7. Financial Instruments
The Company is exposed to market risks with respect to certain of the financial instruments that it holds. Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the unaudited condensed consolidated financial statements at cost, which approximates fair value because of the short-term nature of these instruments. The fair values of other financial instruments are determined using observable market prices or using a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of current market conditions. The following is a summary by balance sheet category:
Long-Term Investments
At March 31, 2014 and December 31, 2013, the Company had an investment in CoBank, ACB (“CoBank”) of $1.5 million. This investment is primarily related to a required investment under the Original Credit Agreement and declared and unpaid patronage distributions of restricted equity related to the portion of the term loans previously held by CoBank. This investment is carried under the cost method as it is not practicable to estimate fair value. This investment is subject to redemption in accordance with CoBank’s capital recovery plans.
Interest Rate Derivatives
In February 2013, the Company purchased an interest rate cap for $0.9 million with a notional amount of $350.0 million, which caps the three month Eurodollar rate at 1.0% and expires in August 2015. The Company did not designate the interest rate cap agreement as a cash flow hedge for accounting purposes. Therefore, the change in market value of the agreement is recorded as a gain or loss in other expense. The Company recorded a $0.1 million loss for the three months ended March 31, 2014.
The following table indicates the difference between face amount, carrying amount and fair value of the Company’s financial instruments at March 31, 2014 and December 31, 2013.
 
 
Face
 
 
 
Carrying
 
Fair
(In thousands)
Amount
 
 
 
Amount
 
Value
March 31, 2014
 
 
 
 
 
 
 
Nonderivatives:
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash
$
121,038

 
  
 
$
121,038

 
$
121,038

Restricted cash
2,167

 
 
 
2,167

 
2,167

Long-term investments for which it is not practicable to estimate fair value
N/A

 
  
 
1,499

 
N/A

Financial liabilities:
 
 
 
 
 
 
 
Senior secured term loan, net of unamortized debt discount
532,399

 
  
 
528,041

 
527,075

Capital lease obligations
819

 
  
 
819

 
819

Derivative related to debt:
 
 
 
 
 
 
 
Interest rate cap asset
350,000

 
* 
 
82

 
82

December 31, 2013
 
 
 
 
 
 
 
Nonderivatives:
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash
$
88,441

 
  
 
$
88,441

 
$
88,441

Restricted cash
2,167

 
 
 
2,167

 
2167

Long-term investments for which it is not practicable to estimate fair value
N/A

 
  
 
1,499

 
N/A

Financial liabilities:
 
 
 
 
 
 
 
Senior secured term loan, net of unamortized debt discount
493,750

 
  
 
489,441

 
495,848

Capital lease obligations
925

 
  
 
925

 
925

Derivative related to debt:
 
 
 
 
 
 
 
Interest rate cap asset
350,000

 
* 
 
229

 
229

* Notional amount

12


The fair values of the Term Loans under the Amended and Restated Credit Agreement were derived based on bid prices at March 31, 2014 and December 31, 2013, respectively. The fair value of the derivative instrument was based on a quoted market price at March 31, 2014 and December 31, 2013, respectively. These instruments are classified within Level 2 of the fair value hierarchy described in FASB ASC 820, Fair Value Measurements and Disclosures.
 
Note 8. Equity and Earnings Per Share
On May 1, 2014, the board of directors declared a cash dividend in the amount of $0.42 per share to be paid on July 11, 2014 to stockholders of record on June 13, 2014.
The computations of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013 were as follows:
 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Numerator:
 
 
 
Net income applicable to common shares for earnings per share computation
$
1,286

 
$
5,493

Denominator:
 
 
 
Total shares outstanding
21,657

 
21,446

Less: unvested shares
(570
)
 
(478
)
Less: effect of calculating weighted average shares
(7
)
 
(8
)
Denominator for basic earnings per common share - weighted average shares outstanding
21,080

 
20,960

Plus: weighted average unvested shares
628

 
374

Plus: common stock equivalents of stock options
315

 
216

Denominator for diluted earnings per common share - weighted average shares outstanding
22,023

 
21,550


In accordance with FASB ASC 260, Earnings Per Share, unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents, whether paid or unpaid, are considered a “participating security” for purposes of computing earnings or loss per common share pursuant to the two-class method. The Company's unvested restricted stock awards have rights to receive non-forfeitable dividends. For the three months ended March 31, 2014 and 2013, the Company has calculated basic earnings per share using weighted average shares outstanding and the two-class method and determined there was no significant difference in the per share amounts calculated under the two methods.

For the three months ended March 31, 2014 and 2013, the denominator for diluted earnings per common share excludes approximately 1.8 million shares and 2.6 million shares, respectively, related to stock options that were antidilutive for the respective periods presented. In addition, the performance-based portion of the performance stock units ("PSUs") is excluded from diluted earnings per share until the performance criteria are satisfied.
 
Note 9. Stock Plans
The Company has employee equity incentive plans (referred to as the “Employee Equity Incentive Plans”) administered by the Compensation Committee of the Company’s board of directors (the “Committee”), which permits the grant of long-term incentives to employees, including stock options, stock appreciation rights, restricted stock awards, restricted stock units, incentive awards, other stock-based awards and dividend equivalents. The Company also has a non-employee director equity plan (the “Non-Employee Director Equity Plan”). The Non-Employee Director Equity Plan together with the Employee Equity Incentive Plans are referred to as the “Equity Incentive Plans.” Awards under these plans are issuable to employees or non-employee directors as applicable.
During the three months ended March 31, 2014, the Company issued 347,023 stock options under the Employee Equity Incentive Plans and 27,170 stock options under the Non-Employee Director Equity Plan. The options issued under the Employee Equity Incentive Plans vest one-fourth annually beginning one year after the grant date, and the options issued under the Non-Employee Director Equity Plan cliff vest on the first anniversary of the grant date.

13

During the three months ended March 31, 2014, the Company issued 118,146 shares of restricted stock under the Employee Equity Incentive Plans and 10,095 shares of restricted stock under the Non-Employee Director Equity Plan. The restricted shares granted under the Employee Equity Incentive Plans cliff vest on the third anniversary of the grant date. The restricted shares granted under the Non-Employee Director Equity Plan cliff vest on the first anniversary of the grant date. Dividend and voting rights applicable to restricted stock are equivalent to the Company’s common stock.
During the three months ended March 31, 2014, the Company granted 83,151 PSUs under the Employee Equity Incentive Plans to certain key employees. These PSUs vest on December 31, 2016 and are subject to certain performance and market conditions. Each PSU represents the contingent right to receive one share (or more based on maximum achievement) of the Company’s common stock if vesting is satisfied. The PSUs have no voting rights. Dividends, if any, that would have been paid on the underlying shares will be paid as dividend equivalent units on PSUs that vest, on or after the vesting date. At March 31, 2014, the Company had accrued approximately $0.2 million in dividend equivalent units.
The summary of the activity and status of the Company’s stock option awards for the three months ended March 31, 2014 is as follows:
 
(In thousands, except per share amounts)
Options
 
Weighted
Average
Exercise
Price per
Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Stock options outstanding at January 1, 2014
2,603

 
$
19.45

 
 
 
 
Granted during the period
374

 
13.42

 
 
 
 
Exercised during the period
—

 
—

 
 
 
 
Forfeited during the period
—

 
—

 
 
 
 
Stock options outstanding at March 31, 2014
2,977

 
$
18.69

 
7.7 years
 
$
—

Exercisable at March 31, 2014
1,465

 
$
21.11

 
6.6 years
 
$
—

Total expected to vest after March 31, 2014
1,361

 
$
18.16

 
 
 
 
The fair value of each common stock option award granted during the three months ended March 31, 2014 was estimated on the respective grant date using a generally accepted valuation model with assumptions related to risk-free interest rate, expected volatility, expected dividend yield and expected terms. The weighted average grant date fair value per share of stock options granted during the three months ended March 31, 2014 and 2013 was $1.02 and $0.71, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2014 and 2013 was less than $0.1 million. The total fair value of options that vested during the three months ended March 31, 2014 and 2013 was $1.1 million and $1.3 million, respectively. As of March 31, 2014, there was $2.4 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.3 years.
The summary of the activity and status of the Company’s restricted stock awards for the three months ended March 31, 2014 is as follows:
(In thousands, except per share amounts)
Shares
 
Weighted Average  Grant
Date Fair Value per
Share
Restricted stock awards outstanding at January 1, 2014
325

 
$
17.41

Granted during the period
128

 
13.50

Vested during the period
(50
)
 
20.47

Forfeited during the period
(1
)
 
12.47

Restricted stock awards outstanding at March 31, 2014
402

 
$
15.80


At March 31, 2014, there was $3.9 million of total unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a weighted average period of 2.1 years. The fair value of the restricted stock award is equal to the market value of common stock on the date of grant.



14

The summary of the activity and status of the Company’s performance stock unit awards for the three months ended March 31, 2014 is as follows:
(In thousands, except per share amounts)
Units
 
Weighted Average  Grant
Date Fair Value per
PSU
Performance stock units outstanding at January 1, 2014
110

 
$
12.79

Granted during the period
83

 
9.10

Vested during the period
—

 
—

Forfeited during the period
—

 
—

Performance stock units outstanding at March 31, 2014
193

 
$
11.20

At March 31, 2014, there was $1.7 million of total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.2 years. The fair value of the PSU is estimated at the grant date using a Monte Carlo simulation model.
In addition to the Equity Incentive Plans discussed above, the Company has an employee stock purchase plan, which commenced in July 2006 with 100,000 shares available. Shares are priced at 85% of the closing price on the last trading day of the month and generally settle on the second business day of the following month. During the three months ended March 31, 2014 and 2013, 2,108 shares and 1,816 shares, respectively, were issued under the employee stock purchase plan. Compensation expense associated with the employee stock purchase plan for the three months ended March 31, 2014 and 2013 was immaterial.
 
Note 10. Income Taxes
Income tax expense for the three months ended March 31, 2014 was $1.1 million representing the statutory tax rate applied to pre-tax income and the effects of certain non-deductible compensation, non-controlling interest, and state minimum taxes. The Company expects its recurring non-deductible expenses to relate primarily to certain non-cash equity-based compensation and other non-deductible compensation.
 
Note 11. Strategic Network Alliance
The Company provides wireless digital PCS services on a wholesale basis to other PCS providers, most notably through the Strategic Network Alliance ("SNA") with Sprint in which the Company is the exclusive PCS service provider in the Company’s western Virginia and West Virginia service area for all Sprint Code Division Multiple Access (“CDMA”) wireless customers through July 31, 2015, subject to subsequent automatic three-year extensions unless the non-renewal notice provisions are exercised.
The Company generated 32.2% and 33.6% of its revenue from the SNA for the three months ended March 31, 2014 and 2013, respectively.
 
Note 12. Commitments and Contingencies

On occasion, the Company makes claims or receives disputes related to its billings to other carriers, including billings under the SNA agreement, for access to the Company’s network. These disputes may involve amounts which, if resolved unfavorably to the Company, could have a material effect on the Company’s financial statements. The Company does not recognize revenue related to such matters until the period that it is reasonably assured of the collection of these claims. In the event that a claim is made related to revenues previously recognized, the Company assesses the validity of the claim and adjusts the amount of revenue recognized to the extent that the claim adjustment is considered probable and reasonably estimable.

The Company is involved in disputes, claims, either asserted or unasserted, and legal and tax proceedings and filings arising from normal business activities. While the outcome of such matters is currently not determinable, and it is reasonably possible that the cost to resolve such matters could be material, management believes that adequate provision for any probable and reasonably estimable losses has been made in the Company’s unaudited condensed consolidated financial statements.
 

15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We use words such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “predict,” “project,” “target,” and similar terms and phrases, including references to assumptions, to identify forward-looking statements. These forward-looking statements are based on information available to us as of the date any such statements are made, and we assume no obligation to update these forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A, Risk Factors" and elsewhere in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2013 and those described from time to time in our future reports filed with the Securities and Exchange Commission ("SEC").
OVERVIEW
Our summary operating results presented below are before the impact of income taxes and amounts attributable to noncontrolling interests.
Our Business
We are a leading regional provider of digital wireless communications services to consumers and businesses primarily in Virginia and West Virginia, as well as parts of Maryland, North Carolina, Pennsylvania, Ohio and Kentucky. We offer wireless voice and digital data PCS products and services to retail and business customers under the “NTELOS Wireless” and “FRAWG Wireless” brand names. We conduct our business through NTELOS-branded retail operations, which sell our products and services via direct and indirect distribution channels, and provide network access to other telecommunications carriers, most notably through an arrangement with Sprint Spectrum L.P. (“Sprint Spectrum”), and Sprint Spectrum on behalf of and as an agent for SprintCom, Inc. (“SprintCom”) (Sprint Spectrum and SprintCom collectively, “Sprint”), which arrangement is referred to herein as the “Strategic Network Alliance” or the "SNA."
At March 31, 2014, our wireless retail business had approximately 468,000 subscribers, representing a penetration of approximately 7.8% of our total covered population. Of the 468,000 total retail subscribers, total postpay subscribers were 307,000 at March 31, 2014 compared to 300,000 at March 31, 2013 and total prepay subscribers were 161,000 at March 31, 2014 compared to 151,000 at March 31, 2013.
Our postpay subscriber base has increased by 2% from March 31, 2013 to March 31, 2014 and we have expanded our prepay subscriber base by 7% during the same time period. The retail market for wireless broadband mobile services continues to be highly competitive. Our competitors are generally nationwide in scope and have significantly greater resources than us and can be extremely aggressive in product and service pricing as well as promotional initiatives to existing and potential customers.
Strategic Network Alliance
We have an agreement with Sprint under the SNA in which we are the exclusive PCS service provider in our western Virginia and West Virginia service area to Sprint for all Sprint CDMA wireless customers through July 31, 2015. For the three months ended March 31, 2014 and 2013, we realized wholesale revenues of $40.2 million and $41.2 million, respectively, of which $39.3 million and $40.2 million, respectively, related to the SNA.
Our Operations
We are continuing to make network improvements, particularly within our existing service coverage areas, which includes upgrading portions of our network to fourth generation mobile communications standards / Long Term Evolution wireless technology (“4G LTE”). We launched 4G LTE in several markets in the fourth quarter of 2013. We anticipate completing our initial 4G LTE build out of approximately 70% of our covered POPs in 2014 and will continue to add capacity to support increased subscribers and growth in data and voice usage.
We currently offer 19 devices across 11 brands, including Apple iPhone, Motorola, LG, Samsung and HTC products, and offer our customers smartphone operating systems such as Android and iOS. All devices are available for both postpay and prepay/no contract services. We also continue to be committed to improving our distribution strategy with respect to both postpay and prepay service offerings. We have focused resources on enhancing our direct distribution channel by refining our store locations, appearance and customer service experience. We have also expanded our indirect distribution channel by using regional master agents and exclusive NTELOS-branded dealers, thus increasing both the points of distribution and the quality of the indirect locations.


16

RESULTS OF OPERATIONS – OVERVIEW
Three-Month Results
Operating revenues increased $2.8 million, or 2.3%, to $122.1 million for the three months ended March 31, 2014 compared to $119.3 million for the three months ended March 31, 2013 consisting of a $3.8 million increase in retail revenues and a $1.1 million decrease in wholesale and other revenues. Operating income decreased $5.6 million, or 32.0%, to $11.9 million for the three months ended March 31, 2014 compared to $17.5 million for the three months ended March 31, 2013 primarily reflecting an increase in operating expenses related to increased equipment costs and customer retention expenses. Income before income taxes decreased $7.0 million, or 71.0%, to $2.8 million for the three months ended March 31, 2014 compared to $9.8 million for the three months ended March 31, 2013 for the reasons discussed above and an increase in interest expense.

Other Overview Discussion
To supplement our financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we reference the non-GAAP measure Average Revenue per Account ("ARPA") to measure our postpay wireless performance. We use this measure, along with other performance metrics such as subscribers and churn, to gauge operating performance for which our operating managers are responsible and upon which we evaluate their performance.

Our new postpay pricing structure, nControl, introduced in late 2013, is customizable for families and individuals with multiple devices and facilitates the sharing of data, minutes and SMS allowances among these devices. As our customers continue to adopt these plans and add smartphone devices, we focus on ARPA as a leading metric for postpay service revenue. We closely monitor the effects of new rate plans and service offerings on ARPA in order to determine their effectiveness. We believe ARPA provides management useful information concerning the appeal of our rate plans and service offerings and our performance in attracting and retaining high-value customers. ARPA as calculated below may not be similar to ARPA measures of other wireless companies, is not a measurement under GAAP and should be considered in addition to, but not as a substitute for, the information contained in our unaudited condensed consolidated statements of operations.
The table below provides a reconciliation of operating revenues to postpay subscriber revenues used to calculate ARPA for the three months ended March 31, 2014 and 2013.
 
Three Months Ended March 31,
(Dollars in thousands, except ARPA)
2014
 
2013
 
 
 
 
Operating revenues
$
122,082

 
$
119,345

Less: prepay service revenues
(16,960
)
 
(15,684
)
Less: equipment revenues
(7,491
)
 
(6,638
)
Less: wholesale and other adjustments
(40,018
)
 
(40,918
)
Postpay service revenues
$
57,613

 
$
56,105

 

 

Account Statistics:

 

Postpay ARPA
$
137.47

 
$
130.69

Postpay accounts (1)
138,400

 
143,300

Postpay subscribers per account (1)
2.2

 
2.1


(1) End of period

ARPA increased for the three months ended March 31, 2014, as compared to the same period in 2013, as a result of the increase in subscribers per account and the increase in smartphone adoption and usage, both driven by our recently launched nControl plans and our device line up.  We expect ARPA to stabilize as increased price competition puts downward pressure on service pricing, offset by an increase in our average lines per account. Prepay service revenues increased for the three months ended March 31, 2014, as compared to the same period in 2013, as a result of an increase in our prepay subscriber base.




17

Operating Revenues
Our revenues are generated from the following sources:
•
Retail – subscriber revenues from network access, data services, feature services and equipment sales; and
•
Wholesale and other – primarily wholesale revenue from the SNA and roaming revenue from other telecommunications carriers. Other revenues relate to rent from leasing excess tower and building space.
Operating Expenses
Our operating expenses are categorized as follows:
•
Cost of sales and services – includes handset equipment costs which, in keeping with industry practice, particularly with handsets sold with service contracts, we sell to our customers at a price below our cost; usage-based access charges, including long distance, roaming charges, and other direct costs incurred in accessing other telecommunications providers’ networks in order to provide telecommunication services to our end-user customers; leased facility expenses for connection to other carriers, cell sites and switch locations; and engineering and repairs and maintenance expenses related to property, plant and equipment;
•
Customer operations – includes marketing, product management, product advertising, selling, billing, customer care, customer retention and bad debt expenses;
•
Corporate operations – includes taxes other than income; executive, accounting, legal, purchasing, information technology, human resources and other general and administrative expenses, including bonuses and equity-based compensation expense related to stock and option instruments held by certain members of corporate management; accretion of asset retirement obligations; and
•
Depreciation and amortization – includes depreciable long-lived property, plant and equipment and amortization of intangible assets where applicable.
Other Expense
Other expense includes interest expense on debt instruments, corporate financing costs and debt discounts associated with the repricing and refinancing of our debt instruments and, as appropriate, related charges or amortization of such costs and discounts, changes in the fair value of our interest rate cap and other items such as interest income and fees.
Income Taxes
Income tax expense and effective tax rate increase or decrease based upon changes in a number of factors, including our pre-tax income or loss, non-controlling interest, state minimum tax assessments, and non-deductible expenses.
Noncontrolling Interests in Earnings of Subsidiaries
We own 97% of Virginia PCS Alliance, L.C. (the “VA Alliance”), which provides PCS services to an estimated two million populated area in central and western Virginia. In accordance with the noncontrolling interest requirements in FASB ASC 810-10-45-21, we attribute approximately 3% of VA Alliance net income to these noncontrolling interests. No capital contributions from the minority owners were made during the three months ended March 31, 2014 and 2013. The VA Alliance made $0.3 million of capital distributions to the minority owners during the three months ended March 31, 2013.

RESULTS OF OPERATIONS – COMPARISON OF THREE MONTHS ENDED MARCH 31, 2014 AND 2013
OPERATING REVENUES
The following table identifies our operating revenues for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
 
 
 
 
(In thousands)
2014
 
2013
 
$ Variance
 
% Variance
Retail revenue
$
81,367

 
$
77,574

 
$
3,793

 
4.9
 %
Wholesale and other revenue
40,715

 
41,771

 
(1,056
)
 
(2.5
)%
Total operating revenues
$
122,082

 
$
119,345

 
$
2,737

 
2.3
 %

Retail Revenue
Retail revenue improved primarily due to an increase in subscriber service revenues of $2.9 million, or 4.1%, and an increase in equipment revenues of $0.9 million, or 12.9%. The increase in postpay service revenue is a result of an increase in subscribers and an increase in ARPA. ARPA increased for the three months ended March 31, 2014, as compared to the same period in 2013,

18

as a result of the increase in subscribers per account and the increase in smartphone adoption and usage, both driven by our recently launched nControl plans and our device line up.  We expect ARPA to stabilize as increased price competition puts downward pressure on service pricing, offset by an increase in our average lines per account. Prepay service revenues increased for the three months ended March 31, 2014, as compared to the same period in 2013, as a result of an increase in our prepay subscriber base. Increase in equipment revenues for the three months ended March 31, 2014 reflected an increase in devices sold combined with an increase in retail pricing.
Wholesale and Other Revenue
Wholesale and roaming revenues from the SNA decreased $0.9 million, or 2.2%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease is primarily the result of the amended terms of the SNA that took effect in September 2013. Roaming revenues from carriers other than Sprint remained relatively consistent for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.
OPERATING EXPENSES
The following table identifies our operating expenses for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
 
 
 
 
(In thousands)
2014
 
2013
 
$ Variance
 
% Variance
Cost of sales and services
$
47,324

 
$
44,535

 
$
2,789

 
6.3
%
Customer operations
34,091

 
30,954

 
3,137

 
10.1
%
Corporate operations
9,737

 
7,904

 
1,833

 
23.2
%
Depreciation and amortization
19,067

 
18,456

 
611

 
3.3
%
Total operating expenses
$
110,219

 
$
101,849

 
$
8,370

 
8.2
%
Cost of Sales and Services – Cost of sales and services increased $2.8 million, or 6.3%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to increases in cell site expenses, data roaming expense and equipment cost of sales, totaling $2.6 million, or 7.6%, as a result of on-going costs to support subscriber and usage growth.
Customer Operations – Customer operations expense increased $3.1 million, or 10.1%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Retention expenses increased $2.2 million, or 31.5%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 driven by an increase in upgrades. In addition, bad debt expense increased $0.8 million, or 25.9%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to an increase in the average balances per account written off.
Corporate Operations – Corporate operations expense increased $1.8 million, or 23.2%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily driven by certain employee separation charges of $1.5 million for the three months ended March 31, 2014.
Depreciation and Amortization – Depreciation and amortization expenses increased $0.6 million, or 3.3%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to revision of estimated useful lives along with an increase in the depreciable assets placed in service.
OTHER EXPENSE
Interest expense increased $0.6 million, or 8.1%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 is due to the increased loan amount and a higher blended average effective interest rate associated with the January 2014 debt refinancing.
Other expenses increased $0.7 million primarily as a result of a $0.9 million charge related to the write off of a proportionate amount of the unamortized deferred debt issuance costs associated with the refinancing in January 2014.

INCOME TAXES
Income tax expense for the three months ended March 31, 2014 and 2013 was $1.1 million and $3.7 million, respectively, representing the statutory tax rate applied to pre-tax income and the effects of certain non-deductible compensation, non-controlling interest, and state minimum taxes.


19

LIQUIDITY AND CAPITAL RESOURCES
Overview
We historically have funded our working capital requirements, capital expenditures and other payments from cash on hand and net cash provided from operating activities.
As of March 31, 2014, we had $121.0 million of cash, compared to $88.4 million as of December 31, 2013, of which $66.5 million was held in market rate savings accounts (including $9.5 million held by the Company which is not restricted for certain payments by the Amended and Restated Credit Agreement). The remaining balance of $54.5 million was held in non-interest bearing accounts. The commercial bank that held substantially all of our cash at March 31, 2014 has a rating A1 on long term deposits by Moody’s. Our working capital (current assets minus current liabilities) was $131.1 million as of March 31, 2014 compared to $104.3 million as of December 31, 2013.
As of March 31, 2014, we had $630.7 million in aggregate long-term liabilities, compared to $592.9 million as of December 31, 2013, consisting of $523.0 million in long-term debt, including capital lease obligations, and approximately $107.6 million in other long-term liabilities consisting primarily of retirement benefits, deferred income taxes and asset retirement obligations. Further information regarding long-term debt obligations at March 31, 2014 is provided in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements.
We have a Restricted Payments basket under the terms of the Amended and Restated Credit Agreement, which can be used to make Restricted Payments, including dividends and stock repurchases. The Restricted Payments basket increases by $6.5 million per quarter plus an additional quarterly amount for Excess Cash Flow, if any (as defined in the Amended and Restated Credit Agreement) and decreases by any actual Restricted Payments and by certain investments and debt prepayments made after the date of the Amended and Restated Credit Agreement. For the quarter ended March 31, 2014 there was no excess cash flow. The balance of the Restricted Payments basket as of March 31, 2014 was $58.8 million.
The Amended and Restated Credit Agreement also permits incremental commitments of up to $125.0 million (the “Incremental Commitments”) of which up to $35.0 million can be in the form of a revolving credit facility. The ability to incur the Incremental Commitments is subject to various restrictions and conditions, including having a Leverage Ratio (as defined in the Amended and Restated Credit Agreement) not in excess of 4.50:1.00 at the time of incurrence (calculated on a pro forma basis). As of March 31, 2014, there were no commitments associated with the Incremental Commitments.
We are a holding company that does not operate any business of our own. As a result, we are dependent on cash dividends and distributions and other transfers from our subsidiaries in order to make dividend payments or to make other distributions to our stockholders, including by means of a stock repurchase. Amounts that can be made available to us to pay cash dividends or repurchase stock are restricted by the Amended and Restated Credit Agreement.
Cash Flows from Operations
The following table summarizes our cash flows from operations for the three months ended March 31, 2014 and 2013, respectively: 
 
Three Months Ended March 31,
(In thousands)
2014
 
2013
Net cash provided by operating activities
$
18,494

 
$
41,322

Net cash used in investing activities
(11,414
)
 
(16,946
)
Net cash provided by/(used in) financing activities
25,517

 
(1,117
)

Operating Activities
Our cash flows from operating activities for the three months ended March 31, 2014 of $18.5 million decreased $22.8 million, or 55.2%, compared to the cash flows from operating activities of $41.3 million for the three months ended March 31, 2013. The decrease is due to a decrease in operating income and cash used by changes in working capital. Changes in working capital decreased $16.9 million, due to timing of payments received under the SNA during the three months ended March 31, 2013, a decrease in accounts payable due to timing of payments on invoices related to our 4G LTE expansion and a decrease in inventory due to lower purchases of devices.
Investing Activities
As we continue to upgrade our network, we invested $14.0 million in capital expenditures for the three months ended March 31, 2014. This was lower than the $16.9 million of capital expenditures for the same period last year. Included in the capital spending for the three months ended March 31, 2014 was $10.8 million of expenditures for additional capacity to support our

20

projected growth, and $3.2 million to maintain our existing networks and other business needs. We currently expect capital expenditures for 2014 to be in the range of $85.0 million to $95.0 million.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2014 was $25.5 million compared to net cash used in financing activities of $1.1 million for the three months ended March 31, 2013. Included in the financing activity for the three months ended March 31, 2014 was $39.5 million net proceeds from the January 2014 debt refinancing, offset by $9.0 million in cash dividends, $3.5 million in debt issuance costs and $1.4 million of principal payments on the long term debt. On May 1, 2014, the board of directors declared a cash dividend in the amount of $0.42 per share to be paid on July 11, 2014 to stockholders of record on June 13, 2014. Consistent with our existing practice, any decision to declare future dividends will be made at the discretion of the board of directors and will depend on, among other things, our results of operations, cash requirements, investment opportunities, financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We believe that our current cash balances of $121.0 million and our cash flows from operations will be sufficient to satisfy our working capital requirements, capital expenditures, interest costs, required debt principal payments prior to maturity, cash dividend payments and stock repurchases, if any, through our stock repurchase plan for the foreseeable future.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements or financing activities with special purpose entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks primarily related to interest rates. Aggregate maturities of long-term debt outstanding under the Amended and Restated Credit Agreement, based on the contractual terms of the instruments, were $532.4 million at March 31, 2014. Under this facility the Term Loan bears interest at a rate equal to either 4.75% above the Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) or 3.75% above the Base Rate (as defined in the Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement provides that the Eurodollar Rate shall never be less than 1.00% per annum and the Base Rate shall never be less than 2.00% per annum. We also have other fixed rate, long-term debt in the form of capital leases totaling $0.8 million as of March 31, 2014.
In February 2013, we purchased an interest rate cap for $0.9 million with a notional amount of $350.0 million. The interest rate cap reduces our exposure to changes in the three-month Eurodollar rate by capping the rate at 1.0%. The interest rate cap agreement expires in August 2015.
At March 31, 2014, our financial assets included cash of $121.0 million and restricted cash of $2.2 million. Securities and investments totaled $1.5 million at March 31, 2014.

The following sensitivity analysis estimates the impact on the fair value of certain financial instruments, which are potentially subject to material market risks, at March 31, 2014, assuming a ten percent increase and a ten percent decrease in the levels of our interest rates:
 
(In thousands)
Book Value
 
Fair Value
 
Estimated fair
value  assuming
noted decrease
in  market
pricing
 
Estimated fair
value  assuming
noted increase
in  market
pricing
Senior secured term loan, net of unamortized debt discount
$
528,041

 
$
527,075

 
$
542,891

 
$
511,803

Capital lease obligations
819

 
819

 
901

 
737

Our Amended and Restated Credit Agreement accrues interest based on the Eurodollar Rate plus an applicable margin (currently 475 bps). LIBOR for purposes of this facility floats when it exceeds the floor of 1.00%. At March 31, 2014, an immediate 10% increase or decrease to LIBOR would not have an effect on our interest expense as the variable LIBOR component would remain below the floor. In addition, at March 31, 2014 we had approximately $54.5 million of cash held in a market rate savings account. An immediate 10% increase or decrease to the market interest rate would not have a material effect on our cash flows.
 


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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of the end of the period covered by this quarterly report of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and our principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during the three months ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings.
We are involved in routine litigation in the ordinary course of our business. We do not believe that any pending or threatened litigation of which we are aware would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
In addition to the other information set forth in this quarterly report as well as other information in our subsequent filings with the SEC, you should carefully consider the risks discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in this quarterly report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse affect on our business, financial condition and/or future results.

We do not believe that there have been any changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In August 2009, the Company’s board of directors authorized management to repurchase up to $40.0 million of the Company’s common stock. The Company did not purchase any shares of its common stock during the three months ended March 31, 2014 under the authorization. The approximate dollar value of shares that may yet be purchased under the plan was $23.1 million at March 31, 2014. Amounts available to the Company to repurchase stock are restricted by the Amended and Restated Credit Agreement. The authorization does not have an expiration date.
 
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.

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Item 6.
Exhibits.
 
Exhibit
No.
  
Description
 
 
10.1(1)
 
Second Amendment and Restatement Agreement to the Amended and Restated Credit Agreement, with the Second Amended and Restated Credit Agreement, dated as of January 31, 2014, attached as Exhibit A thereto.
 
 
 
10.2*
 
Agreement, dated March 13, 2014, between NTELOS Holdings Corp. and Conrad J. Hunter.
 
 
 
31.1*
  
Certification of James A. Hyde, Chief Executive Officer and President, Pursuant to Rule 13a-14(a).
 
 
31.2*
  
Certification of Stebbins B. Chandor Jr., Executive Vice President and Chief Financial Officer, Treasurer and Asst. Secretary, Pursuant to Rule 13a-14(a).
 
 
32.1*
  
Certification of James A. Hyde, Chief Executive Officer and President, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2*
  
Certification of Stebbins B. Chandor Jr., Executive Vice President and Chief Financial Officer, Treasurer and Asst. Secretary, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS*
  
XBRL Instance Document.
 
 
101.SCH*
  
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL*
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF*
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB*
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE*
  
XBRL Taxonomy Extension Presentation Linkbase Document.
*
Filed herewith.
(1)
Filed as an exhibit to Current Report on Form 8-K filed February 6, 2014.

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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.
 
 
NTELOS HOLDINGS CORP.
 
 
 
Dated: May 7, 2014
By:
/s/ James A. Hyde
 
 
James A. Hyde
 
 
Chief Executive Officer and President
 
 
(Principal Executive Officer)
 
 
 
Dated: May 7, 2014
By:
/s/ Stebbins B. Chandor
 
 
Stebbins B. Chandor Jr.
 
 
Executive Vice President and Chief Financial Officer, Treasurer and Asst. Secretary
 
 
(Principal Financial Officer)
 
 
 
Dated: May 7, 2014
By:
/s/ John Turtora
 
 
John Turtora
 
 
Vice President and Controller
 
 
(Principal Accounting Officer)

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