Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 08/06/2010 09:31:28)

Table of Contents

 

 

 

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 June 30, 2010

 

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 17 th  Street

 

 

Mattoon, Illinois

 

61938-3987

(Address of Principal Executive Offices)

 

(Zip Code)

 

(217) 235-3311

(Registrant’s 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

(Do not check if a smaller reporting company)

 

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 August 6, 2010

Common Stock, $0.01 Par Value

 

29,822,604 Shares

 

 

 



Table of Contents

 

FORM 10-Q

 

QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Statements of Operations (Unaudited) - Three and six month periods ended June 30, 2010 and 2009

1

 

Condensed Consolidated Balance Sheets — June 30, 2010 (Unaudited) and December 31, 2009

2

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) — Six months ended June 30, 2010

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited) - Six month periods ended June 30, 2010 and 2009

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

PART II

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

Item 3.

Defaults Upon Senior Securities

37

 

 

 

Item 4.

[Removed and Reserved]

37

 

 

 

Item 5.

Other Information

37

 

 

 

Item 6.

Exhibits

38

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In thousands except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

95,737

 

$

102,042

 

$

194,039

 

$

203,752

 

Operating expense:

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation and amortization shown separately below)

 

35,649

 

36,344

 

71,589

 

72,444

 

Selling, general and administrative expenses

 

21,390

 

25,850

 

44,193

 

53,727

 

Depreciation and amortization

 

21,460

 

20,981

 

43,002

 

42,658

 

Operating income

 

17,238

 

18,867

 

35,255

 

34,923

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

22

 

15

 

38

 

37

 

Interest expense

 

(13,069

)

(14,564

)

(25,990

)

(29,056

)

Investment income

 

7,136

 

6,761

 

13,438

 

11,809

 

Other, net

 

(516

)

1,766

 

(452

)

1,215

 

Income before income taxes

 

10,811

 

12,845

 

22,289

 

18,928

 

Income tax expense

 

3,638

 

5,186

 

8,064

 

7,572

 

Net income

 

7,173

 

7,659

 

14,225

 

11,356

 

Less: net income attributable to noncontrolling interest

 

124

 

136

 

255

 

543

 

Net income attributable to common stockholders

 

$

7,049

 

$

7,523

 

$

13,970

 

$

10,813

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—basic

 

$

0.24

 

$

0.25

 

$

0.47

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted

 

$

0.24

 

$

0.25

 

$

0.47

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.38

 

$

0.38

 

$

0.77

 

$

0.77

 

 

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

 

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Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

(In thousands except share and per share amounts)

 

June 30,
2010
(Unaudited)

 

December 31,
2009

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

53,574

 

$

42,758

 

Accounts receivable, net of allowance for doubtful accounts of $1,931 in 2010 and $1,796 in 2009

 

41,898

 

42,125

 

Inventories

 

7,671

 

6,874

 

Deferred income taxes

 

5,970

 

5,970

 

Prepaid expenses and other current assets

 

7,802

 

6,639

 

Total current assets

 

116,915

 

104,366

 

Property, plant and equipment, net

 

365,195

 

377,200

 

Investments

 

98,277

 

98,748

 

Goodwill

 

520,562

 

520,562

 

Customer lists, net

 

91,019

 

102,088

 

Tradenames

 

13,446

 

13,446

 

Deferred debt issuance costs, net and other assets

 

5,838

 

6,633

 

Total assets

 

$

1,211,252

 

$

1,223,043

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

15,265

 

$

13,482

 

Advance billings and customer deposits

 

21,797

 

20,025

 

Dividends payable

 

11,553

 

11,476

 

Accrued expense

 

17,249

 

26,268

 

Current portion of capital lease obligations

 

 

344

 

Current portion of derivative liability

 

3,308

 

6,074

 

Current portion of pension and postretirement benefit obligations

 

2,908

 

2,908

 

Total current liabilities

 

72,080

 

80,577

 

Senior secured long-term debt

 

880,000

 

880,000

 

Deferred income taxes

 

74,095

 

74,711

 

Pension and other postretirement obligations

 

81,972

 

80,298

 

Other long-term liabilities

 

31,212

 

26,740

 

Total liabilities

 

1,139,359

 

1,142,326

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 29,822,604 and 29,608,653, shares outstanding as of June 30, 2010 and December 31, 2009, respectively

 

298

 

296

 

Additional paid-in capital

 

101,733

 

109,746

 

Retained earnings

 

 

 

Accumulated other comprehensive loss

 

(36,608

)

(35,540

)

Noncontrolling interest

 

6,470

 

6,215

 

Total stockholders’ equity

 

71,893

 

80,717

 

Total liabilities and stockholders’ equity

 

$

1,211,252

 

$

1,223,043

 

 

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

 

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Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Non-

 

 

 

 

 

Common Stock

 

Paid in

 

Retained

 

Comprehensive

 

controlling

 

 

 

(In thousands, except share amounts)

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2009

 

29,608,653

 

$

296

 

$

109,746

 

$

 

$

(35,540

)

$

6,215

 

$

80,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(4,626

)

(6,920

)

 

 

(11,546

)

Shares issued under employee plan, net of forfeitures

 

213,951

 

2

 

(2

)

 

 

 

 

Non-cash, stock-based compensation

 

 

 

503

 

 

 

 

503

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

6,920

 

 

131

 

7,051

 

Change in prior service cost and net loss, net of tax of $26

 

 

 

 

 

47

 

 

47

 

Change in fair value of cash flow hedges, net of tax of $54

 

 

 

 

 

90

 

 

90

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

7,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2010

 

29,822,604

 

$

298

 

$

105,621

 

$

 

$

(35,403

)

$

6,346

 

$

76,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(4,504

)

(7,049

)

 

 

(11,553

)

Non-cash, stock-based compensation

 

 

 

616

 

 

 

 

616

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,049

 

 

124

 

7,173

 

Change in prior service cost and net loss, net of tax of $26

 

 

 

 

 

48

 

 

48

 

Change in fair value of cash flow hedges, net of tax of $(722)

 

 

 

 

 

(1,253

)

 

(1,253

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

5,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2010

 

29,822,604

 

$

298

 

$

101,733

 

$

 

$

(36,608

)

$

6,470

 

$

71,893

 

 

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

 

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Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six Months ended June 30,

 

(In thousands)

 

2010

 

2009

 

Operating Activities

 

 

 

 

 

Net income

 

$

14,225

 

$

11,356

 

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

 

 

 

 

 

Depreciation and amortization

 

43,002

 

42,658

 

Deferred income taxes

 

616

 

1,392

 

Loss on disposal of assets

 

888

 

 

Cash distributions from wireless partnerships in excess of/(less than) current earnings

 

177

 

(1,972

)

Stock-based compensation expense

 

1,119

 

932

 

Amortization of deferred financing costs

 

647

 

655

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

227

 

(1,137

)

Inventories

 

(797

)

414

 

Other assets

 

(1,015

)

1,678

 

Accounts payable

 

1,783

 

(1,546

)

Accrued expenses and other liabilities

 

(5,800

)

(6,432

)

Net cash provided by operating activities

 

55,072

 

47,998

 

Investing Activities

 

 

 

 

 

Additions to property, plant and equipment, net

 

(21,820

)

(20,375

)

Proceeds from the sale of assets

 

972

 

300

 

Proceeds from the sale of investments

 

35

 

 

Net cash used for investing activities

 

(20,813

)

(20,075

)

Financing Activities

 

 

 

 

 

Payment of capital lease obligation

 

(344

)

(453

)

Repurchase and retirement of common stock

 

 

(9

)

Dividends on common stock

 

(23,099

)

(22,907

)

Net cash used for financing activities

 

(23,443

)

(23,369

)

Net increase in cash and equivalents

 

10,816

 

4,554

 

Cash and equivalents at beginning of year

 

42,758

 

15,471

 

Cash and equivalents at end of period

 

$

53,574

 

$

20,025

 

 

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

 

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Table of Contents

 

Consolidated Communications Holdings, Inc . and Subsidiaries

Notes to 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 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, 2009.

 

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 and six month periods ended June 30, 2010 and 2009.  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 U.S. generally accepted accounting principles 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 June 30, 2010, the Company’s Summary of Critical Accounting Policies for the year ended December 31, 2009, which are detailed in the Company’s 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

 

Effective January 1, 2010, we adopted the Financial Accounting Standards Board’s (“FASB”) updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of the Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers.  In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number).  The updated guidance also requires that an entity provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring Level 2 and Level 3 fair value measurements.  The guidance was effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and

 

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Table of Contents

 

settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.  Therefore, we have not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements.  We have updated our disclosures to comply with the updated guidance.  Adoption of the updated guidance did not have an impact on our consolidated results of operations or financial condition.

 

3.                                       Prepaid and other current assets

 

Prepaid and other current assets are as follows:

 

(In thousands)

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Prepaid maintenance

 

$

2,532

 

$

3,152

 

Prepaid taxes

 

1,012

 

43

 

Deferred charges

 

1,178

 

718

 

Prepaid insurance

 

622

 

471

 

Prepaid expense - other

 

2,393

 

2,200

 

Other current assets

 

65

 

55

 

Total

 

$

7,802

 

$

6,639

 

 

4.                                       Property, plant and equipment

 

Property, plant and equipment are as follows:

 

(In thousands)

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Land and buildings

 

$

65,623

 

$

66,700

 

Network and outside plant facilities

 

846,349

 

833,879

 

Furniture, fixtures and equipment

 

80,123

 

80,315

 

Assets under capital lease

 

5,144

 

5,144

 

Less: accumulated depreciation

 

(646,052

)

(617,141

)

 

 

351,187

 

368,897

 

Construction in progress

 

14,008

 

8,303

 

Totals

 

$

365,195

 

$

377,200

 

 

Depreciation expense totaled $15.9 million and $15.4 million for the three months ended June 30, 2010 and 2009, respectively, and $31.9 million and $31.6 million for the six months ended June 30, 2010 and 2009, respectively.

 

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 June 30, 2010 and 2009, we received cash distributions from these partnerships totaling $3.0 million.  For the six months ended June 30, 2010 and 2009, we received cash distributions from these partnerships totaling $6.0 million and $5.5 million, respectively.

 

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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.  In addition, we have a 50% ownership interest in Boulevard Communications LLP, a competitive access provider in western Pennsylvania.  Because we have significant influence over the operating and financial policies of these four entities, we account for the investments using the equity method.  For the three months ended June 30, 2010 and 2009, we received cash distributions from these partnerships totaling $3.6 million and $1.5 million, respectively.  For the six months ended June 30, 2010 and 2009, we received cash distributions from these partnerships totaling $7.5 million and $4.2 million, respectively.

 

Our investments are as follows:

 

(In thousands)

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Cash surrender value of life insurance policies

 

$

1,415

 

$

1,797

 

Cost method investments:

 

 

 

 

 

GTE Mobilnet of South Texas Limited Partnership (2.34%)

 

21,450

 

21,450

 

Pittsburgh SMSA Limited Partnership (3.60%)

 

22,950

 

22,950

 

CoBank, ACB Stock

 

3,025

 

2,902

 

Other

 

25

 

60

 

Equity method investments:

 

 

 

 

 

GTE Mobilnet of Texas RSA #17 Limited Partnership (17.02% interest)

 

18,984

 

19,080

 

Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest)

 

7,187

 

7,301

 

Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)

 

23,084

 

23,049

 

Boulevard Communications, LLP (50% interest)

 

157

 

159

 

Total

 

$

98,277

 

$

98,748

 

 

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 Company’s outstanding loan balance with CoBank, who has traditionally been a significant lender in the Company’s credit facility.   The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.

 

6.                                       Fair Value Measurements

 

The Company’s 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 Consolidated’s 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 Company’s swap liabilities measured at fair value on a recurring basis subject to disclosure requirements at June 30, 2010 are as follows:

 

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Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

June 30, 2010

 

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Current interest rate swap liabilities

 

$

(3,308

)

$

 

$

(3,308

)

$

 

Long-term interest rate swap liabilities

 

(30,623

)

 

(30,623

)

 

Totals

 

$

(33,931

)

$

 

$

(33,931

)

$

 

 

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 June 30, 2010 and December 31, 2009.

 

 

 

As of June 30, 2010

 

As of December 31, 2009

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

49,412

 

 

(a)

$

49,589

 

 

(a)

Investments, at cost

 

$

47,450

 

 

(a)

$

47,362

 

 

(a)

Long-term debt

 

$

880,000

 

$

880,000

 

$

880,000

 

$

880,000

 

 


(a)  The Company’s investments at June 30, 2010 and December 31, 2009 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, and it is not practical to estimate a fair value for these non-publicly traded entities.

 

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 testing—no less than annually or more frequently if circumstances indicate potential impairment.

 

The following table presents the carrying amount of goodwill by segment:

 

(In thousands)

 

June 30, 
2010

 

December 31, 
2009

 

 

 

 

 

 

 

Telephone Operations

 

$

519,541

 

$

519,541

 

Other Operations

 

1,021

 

1,021

 

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 Company’s corporate branding strategy leverages a CONSOLIDATED naming structure.  All of the Company’s business units and several of our products and services incorporate the CONSOLIDATED

 

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name.  These tradenames are indefinitely renewable intangibles.  The carrying value of the tradenames was $13.4 million at both June 30, 2010 and December 31, 2009.

 

The Company’s 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)

 

June 30,
2010

 

December 31,
2009

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

193,124

 

$

193,124

 

$

11,712

 

$

11,712

 

Less: accumulated amortization

 

(103,207

)

(92,358

)

(10,610

)

(10,390

)

Net carrying amount

 

$

89,917

 

$

100,766

 

$

1,102

 

$

1,322

 

 

Amortization associated with customer lists totaled approximately $5.6 million and $11.1 million in each of the three and six month periods ended June 30, 2010 and 2009, respectively.

 

8.                                       Deferred Debt Issuance Costs, Net and Other Assets

 

Deferred financing costs, net and other assets are as follows:

 

(In thousands)

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Deferred debt issuance costs, net

 

$

5,817

 

$

6,464

 

Other assets

 

21

 

169

 

Total

 

$

5,838

 

$

6,633

 

 

Deferred debt issuance costs are subject to amortization.  Remaining deferred debt issuance costs of $5.8 million at June 30, 2010 related to our secured credit facility will be amortized over the remaining life of 4.5 years, resulting in amortization expense of $1.3 million yearly unless the facility is extinguished earlier.

 

9.                                       Accrued Expenses

 

Accrued expenses are as follows:

 

(In thousands)

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

8,511

 

$

11,727

 

Taxes payable

 

936

 

7,766

 

Accrued interest

 

1,458

 

1,177

 

Other accrued expenses

 

6,344

 

5,598

 

Total accrued expenses

 

$

17,249

 

$

26,268

 

 

10.                                Debt

 

Long-term debt consists of the following:

 

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(In thousands)

 

June 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Senior secured credit facility — revolving loan

 

$

 

$

 

Senior secured credit facility - term loan

 

880,000

 

880,000

 

Obligations under capital lease

 

 

344

 

 

 

880,000

 

880,344

 

Less: current portion

 

 

(344

)

Total long-term debt

 

$

880,000

 

$

880,000

 

 

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 agreement 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 outstanding under the revolving credit facility as of June 30, 2010.

 

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 June 30, 2010, 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 4.73:1 at June 30, 2010, borrowings under the revolving credit facility will be priced at a margin of 2.50% for LIBOR-based borrowings and 1.50% for alternative base rate borrowings for the three month period ending September 30, 2010.  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 term loan facility during the three months ended June 30, 2010 and 2009, including amounts paid on our interest rate swap agreements and the applicable margin, was 5.61% and 6.27% per annum, respectively.  The weighted-average interest rate incurred on our term loan facility during the six months ended June 30, 2010 and 2009, including amounts paid on our interest rate swap agreements and the applicable margin, was 5.59% and 6.29% 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 June 30, 2010, we were in compliance with our credit agreement covenants.

 

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 FASB’s Accounting Standards Codification Topic 815 (“ASC 815”), Derivatives and Hedging .  The swaps are designated as cash flow

 

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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 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.  The net effect of these swaps is that we pay a weighted-average fixed rate of 4.42% to our swap counterparties on $605 million of notional amount and receive 1-month LIBOR less a fixed percentage, which amounted to 0.06% for the second quarter of 2010.  At both June 30, 2010 and December 31, 2009, interest on 68.75% of our outstanding debt was fixed through the use of interest rate swap agreements.

 

Our credit facility requires us to maintain a minimum floating to fixed ratio of no less than 50%.  On December 31, 2010, $175 million notional amount of existing interest rate swap agreements will expire, which would reduce our floating to fixed ratio to less than 50%.  As a result of this, and because interest rates continue to be near historic lows, we have entered into $200 million notional amount of forward floating to fixed interest rate swap agreements which become effective on December 31, 2010.  Under these floating to fixed rate forward 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 forward swap agreements have a maturity date of March 31, 2013.

 

The counterparties to our various swaps are 5 major U.S. and European banks.  None of the swap agreements provide for either Consolidated 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 Current portion of derivative liability or Other long-term liabilities on our Condensed 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

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Current portion of derivative liability

 

$

(3,308

)

$

(6,074

)

Other long-term liabilities

 

(30,623

)

(26,105

)

 

Information regarding our cash flow hedge transactions is as follows:

 

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Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Gain arising from ineffectiveness included in interest expense

 

$

(107

)

$

(39

)

$

(78

)

$

(62

)

Losses reclassed from accumulated other comprehensive loss (“OCI”) to interest expense

 

$

1,334

 

$

3,025

 

$

2,916

 

$

5,880

 

 

 

 

June 30,

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Aggregate notional value of derivatives outstanding

 

$

605,000

 

$

740,000

 

Period through which derivative positions currently exist

 

March 2013

 

March 2013

 

Loss in fair value of derivatives

 

$

33,931

 

$

37,326

 

Deferred losses included in OCI (pretax)

 

$

33,721

 

$

36,993

 

Losses included in OCI to be recognized in the next 12 months

 

$

2,711

 

$

8,086

 

Number of months over which loss in OCI is to be recognized

 

33

 

45

 

 

12.                                Interest Expense

 

The following table summarizes interest expense:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Interest expense — credit facility

 

$

6,229

 

$

6,492

 

$

12,249

 

$

12,994

 

Payments on swap liabilities, net

 

6,217

 

7,497

 

12,463

 

14,852

 

Other interest

 

354

 

282

 

717

 

631

 

Amortization of deferred financing fees

 

323

 

323

 

646

 

647

 

Capitalized interest

 

(54

)

(30

)

(85

)

(68

)

Total interest expense

 

$

13,069

 

$

14,564

 

$

25,990

 

$

29,056

 

 

13.                                Retirement and Pension Plans

 

We have 401(k) plans covering substantially all of our employees.  We recognized expense with respect to these plans of $0.6 million and $0.7 million for the three month periods ended June 30, 2010 and 2009 respectively, and $1.3 and $1.4 million for the six month periods ended June 30, 2010 and 2009, respectively.  Contributions made under our defined contribution plans include a match, at the Company’s discretion, of employee salaries contributed to the plans.

 

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 and six month periods ended June 30:

 

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Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

467

 

$

527

 

$

934

 

$

1,054

 

Interest cost

 

2,784

 

2,775

 

5,568

 

5,550

 

Expected return on plan assets

 

(2,546

)

(2,355

)

(5,092

)

(4,710

)

Net amortization loss

 

189

 

668

 

378

 

1,336

 

Prior service credit amortization

 

(11

)

(10

)

(22

)

(20

)

Net periodic pension cost

 

$

883

 

$

1,605

 

$

1,766

 

$

3,210

 

 

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 Plan’s 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 and six months ended June 30:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

 

$

 

$

 

Interest cost

 

15

 

14

 

30

 

28

 

Net amortization loss

 

8

 

8

 

16

 

16

 

Net periodic pension cost

 

$

23

 

$

22

 

$

46

 

$

44

 

 

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 TXUCV’s predecessor company prior to our acquisition of TXUCV.  Payments related to the deferred compensation agreements totaled approximately $0.2 million for the three month periods ended June 30, 2010 and 2009 and $0.3 million for the six month periods ended June 30, 2010 and 2009.  The net present value of the remaining obligations was approximately $3.0 million at June 30, 2010 and $3.1 million at December 31, 2009, 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 or six month periods ended June 30, 2010 or 2009 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

 

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policies is determined by an independent consultant, and totaled $1.4 million at June 30, 2010 and $1.8 million at December 31, 2009.  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 periodically—either 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 and six months ended June 30:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

206

 

$

216

 

$

412

 

$

433

 

Interest cost

 

530

 

580

 

1,060

 

1,159

 

Net prior service cost amortization

 

(112

)

(241

)

(224

)

(482

)

Net amortization gain

 

 

(6

)

 

(11

)

Net periodic postretirement benefit cost

 

$

624

 

$

549

 

$

1,248

 

$

1,099

 

 

In March 2010, President Obama signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “Acts”).  Based on our analyses to date, we do not currently believe the provisions within the Acts will result in a material remeasurement of our postretirement health care liabilities.  We will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available.  The actual extent of impact cannot be actuarially determined until related regulations are promulgated under the Acts and additional interpretations of the Acts become available.  Provisions within the Acts for which financial impacts to our postretirement health care liabilities are possible, but not currently determinable, include application of the excise tax on high-cost employer coverage.  We do not expect the other provisions within the Acts to materially impact our postretirement health care liabilities or results of operations.

 

15.                                Stock-based Compensation Plans

 

Pretax stock-based compensation expense for the three and six month periods ended June 30 was as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Restricted stock

 

$

339

 

$

275

 

$

677

 

$

551

 

Performance shares

 

277

 

225

 

442

 

381

 

Total

 

$

616

 

$

500

 

$

1,119

 

$

932

 

 

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Stock-based compensation expense is included in “selling, general and administrative expenses” in the accompanying statements of operations.

 

As of June 30, 2010, we had not yet recognized compensation expense on the following non-vested awards.

 

(Dollars in thousands)

 

Non-recognized 
Compensation

 

Average Remaining 
Recognition Period 
(years)

 

 

 

 

 

 

 

Restricted stock

 

$

2,410

 

1.6

 

Performance shares

 

1,709

 

1.3

 

Total

 

$

4,119

 

1.5

 

 

The following table summarizes unvested restricted stock awards outstanding and changes during the six month periods ended June 30:

 

 

 

2010

 

2009

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

Non-vested restricted shares outstanding — January 1

 

82,375

 

$

12.08

 

74,391

 

$

16.62

 

Shares granted

 

115,949

 

18.65

 

96,447

 

9.05

 

Shares vested

 

(3,000

)

13.00

 

(6,000

)

13.45

 

Non-vested restricted shares outstanding — June 30

 

195,324

 

$

15.97

 

164,838

 

$

12.31

 

 


(1)            Represents the weighted—average fair value on date of grant.

 

The following table summarizes unvested performance share-based restricted stock awards outstanding and changes during the six month periods ended June 30:

 

 

 

2010

 

2009

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

 

 

 

 

 

 

 

 

 

 

Non-vested performance shares outstanding — January 1

 

46,578

 

$

11.72

 

31,137

 

$

15.68

 

Shares granted

 

98,002

 

18.65

 

61,544

 

9.05

 

Shares vested

 

 

 

(1,202

)

13.42

 

Non-vested performance shares outstanding — June 30

 

144,580

 

$

16.42

 

91,479

 

$

11.25

 

 


(1)           Represents the weighted—average fair value on date of grant.

 

16.                                Income Taxes

 

There have been no changes to the balance of our unrecognized tax benefits reported at December 31, 2009.  As of June 30, 2010 and December 31, 2009, the amount of unrecognized tax benefits was $5.7 million.  The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is $5.7 million.  A decrease in unrecognized tax benefits of $5.4 million and $1.4 million of related accrued interest is expected in the third quarter of 2010 due to the expiration of the federal statute of limitation.  This decrease will significantly reduce our 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.  We had $1.3 million of interest and

 

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penalties relating to unrecognized tax benefits recorded as of June 30, 2010, of which $0.1 million was recorded during the three months ended June 30, 2010.

 

The only periods subject to examination for our federal return are years 2006 through 2008.  The periods subject to examination for our state returns are years 2005 through 2008.  We are not currently under examination by either federal or state taxing authorities.

 

Our effective tax rate was 33.7% and 40.4%, for the three months ended June 30, 2010 and 2009, respectively and 36.2% and 40.0%, for the six months ended June 30, 2010 and 2009, respectively.  Our effective tax rates differ from the federal and state statutory rates primarily due to state tax planning and the changes to our state tax reporting structure resulting from the completion of internal restructuring and related intercompany agreements.

 

During the quarter ended March 31, 2009 we settled an IRS exam covering years 2005 through 2007.  As a result, we recorded additional income tax expense of $0.1 million.

 

17.                                Accumulated Other Comprehensive Loss,

 

Accumulated other comprehensive loss is comprised of the following components at June 30, 2010 and December 31, 2009:

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Fair value of cash flow hedges

 

$

(33,721

)

$

(31,891

)

Prior service credits and net losses on postretirement plans

 

(24,082

)

(24,229

)

 

 

(57,803

)

(56,120

)

Deferred taxes

 

21,195

 

20,580

 

Totals

 

$

(36,608

)

$

(35,540

)

 

The components of comprehensive income are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended June 
30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,173

 

$

7,659

 

$

14,225

 

$

11,356

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Prior service cost and net loss, net of tax

 

48

 

261

 

95

 

521

 

Change in fair value of cash flow hedges, net of tax

 

(1,253

)

5,539

 

(1,163

)

6,683

 

Comprehensive income

 

5,968

 

13,459

 

13,157

 

18,560

 

Less: comprehensive income attributable to noncontrolling interest

 

124

 

136

 

255

 

543

 

Comprehensive income attributable to common stockholders

 

$

5,844

 

$

13,323

 

$

12,902

 

$

18,017

 

 

18.                                Environmental Remediation Liabilities

 

Environmental remediation liabilities were $0.4 million at June 30, 2010 and $0.3 million at December 31, 2009, and are included in other liabilities.  These liabilities, which relate to anticipated remediation and monitoring costs, are undiscounted.  The Company believes the amount accrued is adequate to cover the remaining anticipated costs of remediation.

 

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19.                                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 damages are completely unfounded.  We intend to defend against these claims vigorously.  In the third quarter of 2008, we filed preliminary objections and responses to Salsgiver’s complaint.  However, the court ruled against our preliminary objections.  On November 3, 2008, we responded to Salsgiver’s 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 Salsgiver’s unauthorized pole attachments and safety violations on those attachments.  We believe that these are violations of an FCC order regarding Salsgiver’s 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.

 

20.                                Net Income per Common Share

 

The following illustrates the earnings allocation method as required by the FASB’s 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.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands, except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share Using Two-class Method:

 

 

 

 

 

 

 

 

 

Net income

 

$

7,173

 

$

7,659

 

$

14,225

 

$

11,356

 

Less: net income attributable to noncontrolling interest

 

124

 

136

 

255

 

543

 

Net income attributable to common shareholders before allocation of earnings to participating securities

 

7,049

 

7,523

 

13,970

 

10,813

 

Less: earnings allocated to participating securities

 

132

 

146

 

182

 

181

 

Net income attributable to common stockholders

 

$

6,917

 

$

7,377

 

13,788

 

$

10,632

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

29,483

 

29,389

 

29,483

 

29,388

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common stockholders - basic

 

$

0.24

 

$

0.25

 

$

0.47

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share Using Two-class Method:

 

 

 

 

 

 

 

 

 

Net income

 

$

7,173

 

$

7,659

 

$

14,225

 

$

11,356

 

Less: net income attributable to noncontrolling interest

 

124

 

136

 

255

 

543

 

Net income attributable to common shareholders before allocation of earnings to participating securities

 

7,049

 

7,523

 

13,970

 

10,813

 

Less: earnings allocated to participating securities

 

132

 

146

 

182

 

181

 

Net income attributable to common stockholders

 

$

6,917

 

$

7,377

 

13,788

 

$

10,632

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

29,483

 

29,674

 

29,483

 

29,620

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common stockholders - diluted

 

$

0.24

 

$

0.25

 

$

0.47

 

$

0.36

 

 

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We had additional potential dilutive securities including unvested restricted shares and performance shares outstanding representing 0.3 million and 0.2 million common shares that were not included in the computation of potentially dilutive securities at June 30, 2010 and 2009, respectively, because they were anti-dilutive or the achievement of performance conditions had not been met at the end of the period.

 

21.                                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, VOIP service, custom calling features, private line services, dial-up and DSL Internet access, IPTV, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  The Company also operates a number of complementary non-core businesses that comprise “Other Operations,” including telephone services to county jails and state prisons, equipment sales and operator services.  Management evaluates the performance of these business segments based upon net revenue, operating income, and income before extraordinary items.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Telephone operations

 

$

87,713

 

$

91,143

 

$

176,496

 

$

182,838

 

Other operations

 

8,024

 

10,899

 

17,543

 

20,914

 

Total net revenue

 

95,737

 

102,042

 

194,039

 

203,752

 

 

 

 

 

 

 

 

 

 

 

Operating expense — telephone operations

 

49,790

 

52,101

 

99,764

 

106,409

 

Operating expense — other operations

 

7,249

 

10,093

 

16,018

 

19,762

 

Total operating expense

 

57,039

 

62,194

 

115,782

 

126,171

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization — telephone operations

 

21,247

 

20,670

 

42,573

 

42,029

 

Depreciation and amortization — other operations

 

213

 

311

 

429

 

629

 

Total depreciation expense

 

21,460

 

20,981

 

43,002

 

42,658

 

 

 

 

 

 

 

 

 

 

 

Operating income — telephone operations

 

16,676

 

18,372

 

34,159

 

34,400

 

Operating income - other operations

 

562

 

495

 

1,096

 

523

 

Total operating income

 

17,238

 

18,867

 

35,255

 

34,923

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

22

 

15

 

38

 

37

 

Interest expense

 

(13,069

)

(14,564

)

(25,990

)

(29,056

)

Investment income

 

7,136

 

6,761

 

13,438

 

11,809

 

Other, net

 

(516

)

1,766

 

(452

)

1,215

 

Income before income taxes

 

$

10,811

 

$

12,845

 

$

22,289

 

$

18,928

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

Telephone operations

 

$

10,833

 

$

10,118

 

$

21,744

 

$

20,305

 

Other operations

 

53

 

100

 

76

 

70

 

Total

 

$

10,886

 

$

10,218

 

$

21,820

 

$

20,375

 

 

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June 30,

 

December 31,

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Goodwill:

 

 

 

 

 

Telephone operations

 

$

519,541

 

$

519,541

 

Other operations

 

1,021

 

1,021

 

Total

 

$

520,562

 

$

520,562

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

Telephone operations (1)

 

$

1,201,454

 

$

1,210,765

 

Other operations

 

9,798

 

12,278

 

Total

 

$

1,211,252

 

$

1,223,043

 

 


(1)  Included within the telephone operations segment assets are our equity method investments totaling $49.4 million and $49.6 million at June 30, 2010 and December 31, 2009, respectively.

 

22.                                Subsequent  Event

 

On July 16, 2010, we entered into a $100 million forward interest rate swap agreement which becomes effective on September 30, 2011 and matures on September 30, 2013.  Under this forward interest rate swap agreement, we will pay a fixed rate of 1.65% and receive 1-month LIBOR.

 

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Item 2.  Management’s 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 and six month periods ended June 30, 2010 and 2009 should be read in conjunction with the 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 — “Management’s 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 incur additional debt in the future;

·                   our need for a significant amount of cash to service and repay 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;

·       &