Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 11/05/2010 09:58:01)

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 September 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.  (check one):

 

Large accelerated filer o

 

Accelerated filer  x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 November 3, 2010

Common Stock, $0.01 Par Value

 

29,816,659 Shares

 

 

 



Table of Contents

 

FORM 10-Q

 

QUARTERLY REPORT

 

TABLE OF C ONTENTS

 

 

 

Page No.

 

 

 

PART I

 

 

 

Item 1.

Financial Statements

 

 

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

1

 

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

2

 

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

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine month periods ended September 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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

PART II

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 3.

Defaults Upon Senior Securities

39

 

 

 

Item 4.

[Removed and Reserved]

39

 

 

 

Item 5.

Other Information

39

 

 

 

Item 6.

Exhibits

40

 



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
September 30,

 

Nine Months Ended
September 30,

 

(In thousands, except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

95,576

 

$

101,590

 

$

289,615

 

$

305,342

 

Operating expense:

 

 

 

 

 

 

 

 

 

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

 

36,371

 

36,151

 

107,960

 

108,595

 

Selling, general and administrative expenses

 

21,686

 

25,600

 

65,879

 

79,327

 

Depreciation and amortization

 

21,918

 

21,341

 

64,920

 

63,999

 

Operating income

 

15,601

 

18,498

 

50,856

 

53,421

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(11,723

)

(14,775

)

(37,675

)

(43,794

)

Investment income

 

6,830

 

6,237

 

20,268

 

18,046

 

Other, net

 

210

 

(183

)

(242

)

1,032

 

Income before income taxes

 

10,918

 

9,777

 

33,207

 

28,705

 

Income tax expense (benefit)

 

(1,049

)

2,494

 

7,015

 

10,066

 

Net income

 

11,967

 

7,283

 

26,192

 

18,639

 

Less: net income attributable to noncontrolling interest

 

130

 

226

 

385

 

769

 

Net income attributable to common stockholders

 

$

11,837

 

$

7,057

 

$

25,807

 

$

17,870

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—basic

 

$

0.40

 

$

0.24

 

$

0.86

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted

 

$

0.40

 

$

0.24

 

$

0.86

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.38

 

$

0.39

 

$

1.16

 

$

1.16

 

 

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)

 

September 30,
2010
(Unaudited)

 

December 31,
2009

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

55,961

 

$

42,758

 

Accounts receivable, net of allowance for doubtful accounts of $3,263 in 2010 and $1,796 in 2009

 

41,647

 

42,125

 

Income taxes receivable

 

5,425

 

3,564

 

Inventories

 

7,339

 

6,874

 

Deferred income taxes

 

6,992

 

5,970

 

Prepaid expenses and other current assets

 

7,440

 

6,639

 

Total current assets

 

124,804

 

107,930

 

Property, plant and equipment, net

 

359,618

 

377,200

 

Investments

 

98,123

 

98,748

 

Goodwill

 

520,562

 

520,562

 

Customer lists, net

 

85,484

 

102,088

 

Tradenames

 

13,446

 

13,446

 

Deferred debt issuance costs, net and other assets

 

6,023

 

6,633

 

Total assets

 

$

1,208,060

 

$

1,226,607

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9,590

 

$

13,482

 

Advance billings and customer deposits

 

21,861

 

20,025

 

Dividends payable

 

11,553

 

11,476

 

Accrued expense

 

19,603

 

23,133

 

Current portion of capital lease obligations

 

 

344

 

Current portion of derivative liability

 

10,176

 

6,074

 

Current portion of pension and postretirement benefit obligations

 

2,908

 

2,908

 

Total current liabilities

 

75,691

 

77,442

 

Senior secured long-term debt

 

880,000

 

880,000

 

Deferred income taxes

 

70,380

 

74,711

 

Pension and other postretirement obligations

 

82,568

 

80,298

 

Other long-term liabilities

 

27,492

 

33,439

 

Total liabilities

 

1,136,131

 

1,145,890

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 29,816,659 and 29,608,653, shares outstanding as of September 30, 2010 and December 31, 2009, respectively

 

298

 

296

 

Additional paid-in capital

 

102,639

 

109,746

 

Retained earnings

 

 

 

Accumulated other comprehensive loss

 

(37,608

)

(35,540

)

Noncontrolling interest

 

6,600

 

6,215

 

Total stockholders’ equity

 

71,929

 

80,717

 

Total liabilities and stockholders’ equity

 

$

1,208,060

 

$

1,226,607

 

 

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

 

 

 

 

 

 

 

Common Stock

 

Additional
Paid in

 

Retained

 

Other
Comprehensive

 

Non-
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

 

 

 

(4,503

)

(7,050

)

 

 

(11,553

)

Non-cash, stock-based compensation

 

 

 

616

 

 

 

 

616

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,050

 

 

124

 

7,174

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

5,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2010

 

29,822,604

 

$

298

 

$

101,734

 

$

 

$

(36,608

)

$

6,470

 

$

71,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

284

 

(11,837

)

 

 

(11,553

)

Share forfeitures

 

(5,945

)

 

 

 

 

 

 

Non-cash, stock-based compensation

 

 

 

621

 

 

 

 

621

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

11,837

 

 

130

 

11,967

 

Change in prior service cost and net loss, net of tax of $35

 

 

 

 

 

61

 

 

61

 

Change in fair value of cash flow hedges, net of tax of $(616)

 

 

 

 

 

(1,061

)

 

(1,061

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

10,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — September 30, 2010

 

29,816,659

 

$

298

 

$

102,639

 

$

 

$

(37,608

)

$

6,600

 

$

71,929

 

 

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)

 

 

 

Nine Months ended
September 30,

 

(In thousands)

 

2010

 

2009

 

Operating Activities

 

 

 

 

 

Net income

 

$

26,192

 

$

18,639

 

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

 

 

 

 

 

Depreciation and amortization

 

64,920

 

63,999

 

Deferred income taxes

 

(24

)

(833

)

Loss on disposal of assets

 

902

 

 

Non-cash change in uncertain tax positions

 

(5,186

)

 

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

 

304

 

(2,299

)

Stock-based compensation expense

 

1,740

 

1,434

 

Amortization of deferred financing costs

 

970

 

978

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

478

 

102

 

Income tax receivable

 

(4,936

)

(1,316

)

Inventories

 

(451

)

364

 

Other assets

 

(732

)

651

 

Accounts payable

 

(3,892

)

(869

)

Accrued expenses and other liabilities

 

(540

)

1,360

 

Net cash provided by operating activities

 

79,745

 

82,210

 

Investing Activities

 

 

 

 

 

Additions to property, plant and equipment, net

 

(32,578

)

(30,952

)

Proceeds from the sale of assets

 

997

 

300

 

Proceeds from the sale of investments

 

35

 

 

Net cash used for investing activities

 

(31,546

)

(30,652

)

Financing Activities

 

 

 

 

 

Payment of capital lease obligation

 

(344

)

(685

)

Repurchase and retirement of common stock

 

 

(9

)

Dividends on common stock

 

(34,652

)

(34,452

)

Net cash used for financing activities

 

(34,996

)

(35,146

)

Net increase in cash and equivalents

 

13,203

 

16,412

 

Cash and equivalents at beginning of year

 

42,758

 

15,471

 

Cash and equivalents at end of period

 

$

55,961

 

$

31,883

 

 

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 nine month periods ended September 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 September 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.

 

Certain prior year amounts have been reclassified to conform to the current year’s presentation.  These reclassifications had no effect on total stockholders equity, total revenue, income from operations or net income.

 

The Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements are issued.

 

2.              Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”).  ASU No. 2010-06 provides amended disclosure requirements related to fair value measurements.  Certain disclosure requirements of ASU No. 2010-06 were effective beginning in the first quarter of 2010, while other disclosure requirements of the ASU are effective for financial statements issued for reporting periods beginning after December 15, 2010.  Since these amended principles require only additional disclosures

 

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concerning fair value measurements, adoption did not and will not affect the Company’s financial condition, results of operations or cash flows.

 

3.              Prepaid expenses and other current assets

 

Prepaid and other current assets are as follows:

 

(In thousands)

 

September 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Prepaid maintenance

 

$

2,279

 

$

3,152

 

Prepaid taxes

 

655

 

43

 

Deferred charges

 

1,003

 

718

 

Prepaid insurance

 

991

 

471

 

Prepaid expense - other

 

2,456

 

2,200

 

Current portion of derivative assets

 

33

 

 

Other current assets

 

23

 

55

 

Total

 

$

7,440

 

$

6,639

 

 

4.              Property, plant and equipment

 

Property, plant and equipment are as follows:

 

(In thousands)

 

September 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Land and buildings

 

$

66,138

 

$

66,700

 

Network and outside plant facilities

 

856,881

 

833,879

 

Furniture, fixtures and equipment

 

80,806

 

80,315

 

Assets under capital lease

 

5,144

 

5,144

 

Less: accumulated depreciation

 

(661,274

)

(617,141

)

 

 

347,695

 

368,897

 

Construction in progress

 

11,923

 

8,303

 

Total

 

$

359,618

 

$

377,200

 

 

Depreciation expense totaled $16.4 million and $15.8 million for the three months ended September 30, 2010 and 2009, respectively, and $48.3 million and $47.4 million for the nine months ended September 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 the three month periods ended September 30, 2010 and 2009, we received cash distributions from these partnerships totaling $2.9 million and $3.0 million, respectively.  For the nine months ended September 30, 2010 and 2009, we received cash distributions from these partnerships totaling $8.9 million and $8.5 million, respectively.

 

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

 

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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 September 30, 2010 and 2009, we received cash distributions from these partnerships totaling $4.0 million and $2.8 million, respectively.  For the nine months ended September 30, 2010 and 2009, we received cash distributions from these partnerships totaling $11.5 million and $7.0 million, respectively.

 

Our investments are as follows:

 

(In thousands)

 

September 30,
2010

 

December 31,
 2009

 

 

 

 

 

 

 

Cash surrender value of life insurance policies

 

$

1,327

 

$

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

 

3,086

 

2,902

 

Other

 

25

 

60

 

Equity method investments:

 

 

 

 

 

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

 

18,989

 

19,080

 

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

 

7,149

 

7,301

 

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

 

22,990

 

23,049

 

Boulevard Communications, LLP (50% interest)

 

157

 

159

 

Total

 

$

98,123

 

$

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 assets and liabilities measured at fair value on a recurring basis subject to disclosure requirements at September 30, 2010 are as follows:

 

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Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

September 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 assets

 

$

33

 

$

 

$

33

 

$

 

Current interest rate swap liabilities

 

(10,176

)

 

(10,176

)

 

Long-term interest rate swap liabilities

 

(25,402

)

 

(25,402

)

 

Totals

 

$

(35,545

)

$

 

$

(35,545

)

$

 

 

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 September 30, 2010 and December 31, 2009.

 

 

 

As of September 30, 2010

 

As of December 31, 2009

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

49,285

 

 

(a)

$

49,589

 

 

(a)

Investments, at cost

 

$

47,511

 

 

(a)

$

47,362

 

 

(a)

Long-term debt

 

$

880,000

 

$

880,000

 

$

880,000

 

$

880,000

 

 


(a)  The Company’s investments at September 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)

 

September 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

 

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Company’s business units and several of our products and services incorporate the CONSOLIDATED name.  These tradenames are indefinitely renewable intangibles.  The carrying value of the tradenames was $13.4 million at both September 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)

 

September 30,
2010

 

December 31,
2009

 

September 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

193,124

 

$

193,124

 

$

11,712

 

$

11,712

 

Less: accumulated amortization

 

(108,632

)

(92,358

)

(10,720

)

(10,390

)

Net carrying amount

 

$

84,492

 

$

100,766

 

$

992

 

$

1,322

 

 

Amortization associated with customer lists totaled approximately $5.5 million and $16.6 million in each of the three and nine month periods ended September 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)

 

September 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Deferred debt issuance costs, net

 

$

5,494

 

$

6,464

 

Other assets

 

529

 

169

 

Total

 

$

6,023

 

$

6,633

 

 

The remaining deferred debt issuance costs at September 30, 2010 of $5.5 million related to our secured credit facility will be amortized over the remaining life of 4.2 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)

 

September 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

9,282

 

$

11,727

 

Taxes payable

 

3,673

 

4,631

 

Accrued interest

 

180

 

1,177

 

Other accrued expenses

 

6,468

 

5,598

 

Total accrued expenses

 

$

19,603

 

$

23,133

 

 

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10.           Debt

 

Long-term debt consists of the following:

 

(In thousands)

 

September 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 September 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 September 30, 2010, the applicable margin for interest rates is 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 4.79:1 at September 30, 2010, borrowings under the revolving credit facility will be priced at a margin of 2.75% for LIBOR-based borrowings and 1.75% for alternative base rate borrowings for the three month period ending December 31, 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 September 30, 2010 and 2009, including amounts paid on our interest rate swap agreements and the applicable margin, was 5.58% and 6.26% per annum, respectively.  The weighted-average interest rate incurred on our term loan facility during the nine months ended September 30, 2010 and 2009, including amounts paid on our interest rate swap agreements and the applicable margin, was 5.59% and 6.28% 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 September 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 4.36% to our swap counterparties on $605 million of notional amount and receive 1-month LIBOR less a fixed percentage.  The weighted average fixed percentage received was 0.06% for the third quarter of 2010.

 

We also have in place $200 million notional amount of forward floating to fixed interest rate swap agreements that will become effective on December 31, 2010 and a $100 million notional amount forward fixed to floating interest rate swap agreement that becomes effective on September 30, 2011.  Under the forward swap agreements that become effective on December 31, 2010, we will make fixed payments to the swap counterparties at a weighted-average fixed rate of 1.83% and receive 1-month LIBOR.  The December 2010 forward swap agreements have a maturity date of March 31, 2013.  For the swap agreement that becomes effective on September 30, 2011, we will make fixed payments to the swap counterparty at a weighted-average fixed rate of 1.65% and receive 1-month LIBOR.  The September 2011 forward swap agreement has a maturity date of September 30, 2013.

 

At September 30, 2010 and December 31, 2009, approximately 68.75% of our outstanding debt was fixed through the use of interest rate swaps.

 

The counterparties to our various swaps are 5 major U.S. and European banks.  None of the swap agreements provide for either 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 Prepaid expenses and other current assets, 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

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

33

 

$

 

Current portion of derivative liability

 

(10,176

)

(6,074

)

Other long-term liabilities

 

(25,402

)

(26,105

)

 

Information regarding our cash flow hedge transactions is as follows:

 

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Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Loss/(gain) recognized in accumulated other comprehensive loss (“OCI”)

 

$

1,677

 

$

(225

)

$

3,508

 

$

10,293

 

Loss/(Gain) arising from ineffectiveness increasing/(reducing) interest expense

 

$

(62

)

$

7

 

$

(142

)

$

(55

)

Losses reclassed from OCI to interest expense

 

$

1,037

 

$

2,884

 

$

3,953

 

$

8,764

 

 

 

 

September 30,

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Aggregate notional value of current derivatives outstanding

 

$

605,000

 

$

680,000

 

Aggregate notional value of forward derivatives outstanding

 

$

300,000

 

$

 

Period through which derivative positions currently exist

 

September 2013

 

March 2013

 

Loss in fair value of derivatives

 

$

35,545

 

$

37,559

 

Deferred losses included in OCI (pretax)

 

$

35,399

 

$

37,219

 

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

 

$

1,990

 

$

6,239

 

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

 

30

 

42

 

 

12.           Interest Expense, Net

 

The following table summarizes interest expense, net:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
 September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Interest expense — credit facility

 

$

6,325

 

$

6,272

 

$

18,574

 

$

19,266

 

Payments on swap liabilities, net

 

6,264

 

7,833

 

18,727

 

22,685

 

Other interest

 

165

 

280

 

653

 

697

 

Amortization of deferred financing fees

 

323

 

323

 

970

 

970

 

Uncertain tax position interest accrual

 

(1,265

)

109

 

(1,037

)

322

 

Capitalized interest

 

(48

)

(32

)

(133

)

(99

)

Total interest expense

 

11,764

 

14,785

 

37,754

 

43,841

 

Less: interest income

 

(41

)

(10

)

(79

)

(47

)

Total interest expense, net

 

$

11,723

 

$

14,775

 

$

37,675

 

$

43,794

 

 

For the three and nine month periods ended September 30, 2010, we reversed a net $1.3 million and $1.0 million, respectively, of accrued interest as a result of a change in our uncertain tax liabilities for which the statue of limitations expired on September 30, 2010.

 

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 for each of the three month periods ended September 30, 2010 and 2009, and $1.9 and $2.0 million for the nine month periods ended September 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.

 

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Table of Contents

 

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 nine month periods ended September 30:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

475

 

$

527

 

$

1,409

 

$

1,582

 

Interest cost

 

2,799

 

2,775

 

8,367

 

8,325

 

Expected return on plan assets

 

(2,544

)

(2,355

)

(7,636

)

(7,066

)

Net amortization loss

 

211

 

668

 

590

 

2,005

 

Prior service credit amortization

 

(11

)

(10

)

(33

)

(32

)

Net periodic pension cost

 

$

930

 

$

1,605

 

$

2,697

 

$

4,814

 

 

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 nine months ended September 30:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

 

$

 

$

 

Interest cost

 

14

 

14

 

44

 

42

 

Net amortization loss

 

8

 

8

 

23

 

24

 

Net periodic pension cost

 

$

22

 

$

22

 

$

67

 

$

66

 

 

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

 

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Table of Contents

 

deferred compensation agreements totaled approximately $0.1 million for the three month periods ended September 30, 2010 and 2009 and $0.4 million for the nine month periods ended September 30, 2010 and 2009.  The net present value of the remaining obligations was approximately $2.9 million at September 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 nine month periods ended September 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 policies is determined by an independent consultant, and totaled $1.3 million at September 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 nine months ended September 30:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

206

 

$

177

 

$

618

 

$

610

 

Interest cost

 

530

 

450

 

1,591

 

1,609

 

Net prior service cost amortization

 

(112

)

(240

)

(336

)

(722

)

Net amortization gain

 

 

(5

)

 

(16

)

Net periodic postretirement benefit cost

 

$

624

 

$

382

 

$

1,873

 

$

1,481

 

 

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 which may cause financial impacts to our postretirement health care liabilities that 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.

 

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Table of Contents

 

15.           Other Long-Term Liabilities

 

Other long-term liabilities are as follows:

 

(In thousands)

 

September 30,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Long-term derivative liabilities

 

$

25,402

 

$

26,105

 

Uncertain tax positions

 

1,475

 

5,638

 

Accrued interest on uncertain tax positions

 

38

 

1,061

 

Other long-term liabilities

 

577

 

635

 

Total

 

$

27,492

 

$

33,439

 

 

16.           Stock-based Compensation Plans

 

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

 

 

 

Three Months Ended
September  30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Restricted stock

 

$

338

 

$

275

 

$

1,015

 

$

826

 

Performance shares

 

283

 

226

 

725

 

608

 

Total

 

$

621

 

$

501

 

$

1,740

 

$

1,434

 

 

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

 

As of September 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

 

$

2,072

 

1.3

 

Performance shares

 

1,425

 

1.0

 

Total

 

$

3,497

 

1.2

 

 

The following table summarizes unvested restricted stock awards outstanding and changes during the nine month periods ended September 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

 

Shares cancelled

 

(2,875

)

14.24

 

(2,375

)

13.04

 

Non-vested restricted shares outstanding — September 30

 

192,449

 

$

15.99

 

162,463

 

$

12.30

 

 


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

 

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The following table summarizes unvested performance share-based restricted stock awards outstanding and changes during the nine month periods ended September 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

 

Shares cancelled

 

(3,070

)

15.75

 

(864

)

12.09

 

Non-vested performance shares outstanding — September 30

 

141,510

 

$

16.43

 

90,615

 

$

11.24

 

 


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

 

17.           Income Taxes

 

During the nine months ended September 30, 2010, we recorded a net decrease of $4.6 million to our liability for uncertain tax positions which reduced our tax expense for the year to date period.  The net decrease included a decrease of $5.4 million due to the expiration of the federal statute of limitations and an increase of $0.8 million related to 2009 state income tax filings.  As of September 30, 2010 and December 31, 2009, we had recorded $1.1 million and $5.7 million, respectively, of uncertain tax positions.  The total amount of uncertain tax positions that, if recognized, would affect the effective tax rate is $1.1 million.  We do not expect any changes in our uncertain tax positions during the remainder of 2010.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  During the nine months ended September 30, 2010, we recorded a net decrease to interest expense of $1.0 million related to uncertain tax positions.  This net decrease included a decrease of $1.4 million in interest expense due to the expiration of the federal statute of limitations in the third quarter of 2010 and an increase to interest expense of $0.4 million during the year related to the current year accrual of interest on our uncertain tax positions.  At September 30, 2010, we had recorded $38 thousand of interest and penalties relating to uncertain tax positions, of which $15 thousand was recorded during the nine months ended September 30, 2010.

 

The only periods subject to examination for our federal returns are years 2007 through 2009.  The periods subject to examination for our state returns are years 2006 through 2009.  We are currently under examination by state tax authorities.  We do not expect any settlement or payment that may result from the audit to have a material effect on our results of operations or cash flows.

 

Our effective tax rate was (9.61)% and 25.5% for the three months ended September 30, 2010 and 2009, respectively and 21.1% and 35.1%, for the nine months ended September 30, 2010 and 2009, respectively.  Our effective tax rate is lower in 2010 due primarily to the reversal of the net $4.6 million in uncertain tax positions.  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.

 

We filed 2009 tax returns for the Consolidated Communications Holdings, Inc. consolidated filing group and East Texas Fiber Line during the third quarter of 2010.  We filed 2008 tax returns for the Consolidated Communications Holding, Inc. consolidated filing group and East Texas Fiber Line

 

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during the third quarter of 2009.  We recognized approximately $0.3 million of tax benefit in the third quarter of 2010 to adjust our 2009 provision to match our 2009 returns, and $0.9 million of tax benefit in the third quarter of 2009 to adjust our 2008 provision to match our 2008 returns.

 

18.                                Accumulated Other Comprehensive Loss,

 

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

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Fair value of cash flow hedges

 

$

(35,399

)

$

(31,891

)

Prior service credits and net losses on postretirement plans

 

(23,985

)

(24,229

)

 

 

(59,384

)

(56,120

)

Deferred taxes

 

21,776

 

20,580

 

Totals

 

$

(37,608

)

$

(35,540

)

 

The components of comprehensive income are as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,967

 

$

7,283

 

$

26,192

 

$

18,639

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Prior service cost and net loss, net of tax

 

61

 

259

 

156

 

780

 

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

 

(1,061

)

(143

)

(2,224

)

6,540

 

Total comprehensive income

 

10,967

 

7,399

 

24,124

 

25,959

 

Less: comprehensive income attributable to noncontrolling interest

 

130

 

226

 

385

 

769

 

Comprehensive income attributable to common stockholders

 

$

10,837

 

$

7,173

 

$

23,739

 

$

25,190

 

 

19.                                Environmental Remediation Liabilities

 

Environmental remediation liabilities were $0.3 million at September 30, 2010 and 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.

 

20.                                Litigation and Contingencies

 

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs.  It claims to have sustained losses of approximately $125 million, but does not request a specific dollar amount in damages.  We believe that these claims are without merit and that the alleged 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

 

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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.

 

21.                                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
September 30,

 

Nine Months Ended
September 30,

 

(In thousands, except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share Using Two-class Method:

 

 

 

 

 

 

 

 

 

Net income

 

$

11,967

 

$

7,283

 

$

26,192

 

$

18,639

 

Less: net income attributable to noncontrolling interest

 

130

 

226

 

385

 

769

 

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

 

11,837

 

7,057

 

25,807

 

17,870

 

Less: earnings allocated to participating securities

 

124

 

90

 

305

 

271

 

Net income attributable to common stockholders

 

$

11,713

 

$

6,967

 

$

25,502

 

$

17,599

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.40

 

$

0.24

 

$

0.86

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share Using Two-class Method:

 

 

 

 

 

 

 

 

 

Net income

 

$

11,967

 

$

7,283

 

$

26,192

 

$

18,639

 

Less: net income attributable to noncontrolling interest

 

130

 

226

 

385

 

769

 

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

 

11,837

 

7,057

 

25,807

 

17,870

 

Less: earnings allocated to participating securities

 

124

 

90

 

305

 

271

 

Net income attributable to common stockholders

 

$

11,713

 

$

6,967

 

$

25,502

 

$

17,599

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

29,483

 

29,389

 

29,483

 

29,388

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common stockholders - diluted

 

$

0.40

 

$

0.24

 

$

0.86

 

$

0.60

 

 

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

 

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22.           Business Segments

 

The Company is viewed and managed as two separate, but highly integrated, reportable business segments: “Telephone Operations” and “Other Operations.”  Telephone Operations consists of a wide range of telecommunications services, including local and long-distance service, 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
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Telephone operations

 

$

87,297

 

$

91,279

 

$

263,793

 

$

274,117

 

Other operations

 

8,279

 

10,311

 

25,822

 

31,225

 

Total net revenue

 

95,576

 

101,590

 

289,615

 

305,342

 

 

 

 

 

 

 

 

 

 

 

Operating expense — telephone operations

 

50,293

 

52,128

 

150,057

 

158,538

 

Operating expense — other operations

 

7,764

 

9,623

 

23,782

 

29,385

 

Total operating expense

 

58,057

 

61,751

 

173,839

 

187,923