Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 11/03/2011 12:30:56)

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, 2011

 

OR

 

o

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from               to               .

 

COMMISSION FILE NUMBER 000-51446

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

02-0636095

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

121 South 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  x   NO  o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer o

 

Smaller reporting company  o

(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 1, 2011

Common Stock, $0.01 Par Value

 

29,914,005 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 nine month periods ended September 30, 2011 and 2010

1

 

Condensed Consolidated Balance Sheets — September 30, 2011 (Unaudited) and December 31, 2010

2

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) — Nine months ended September 30, 2011

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine month periods ended September 30, 2011 and 2010

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

 

PART II

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3.

Defaults Upon Senior Securities

45

 

 

 

Item 4.

[Removed and Reserved]

45

 

 

 

Item 5.

Other Information

45

 

 

 

Item 6.

Exhibits

46

 



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)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

92,548

 

$

95,576

 

$

280,612

 

$

289,615

 

Operating expense:

 

 

 

 

 

 

 

 

 

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

 

33,913

 

36,371

 

103,864

 

107,960

 

Selling, general and administrative expenses

 

21,148

 

21,686

 

60,994

 

65,879

 

Debt refinancing costs

 

109

 

 

2,649

 

 

Depreciation and amortization

 

22,161

 

21,918

 

66,306

 

64,920

 

Operating income

 

15,217

 

15,601

 

46,799

 

50,856

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(13,447

)

(11,723

)

(37,783

)

(37,675

)

Investment income

 

6,403

 

6,830

 

19,417

 

20,268

 

Other, net

 

516

 

210

 

953

 

(242

)

Income before income taxes

 

8,689

 

10,918

 

29,386

 

33,207

 

Income tax expense (benefit)

 

2,723

 

(1,049

)

10,410

 

7,015

 

Net income

 

5,966

 

11,967

 

18,976

 

26,192

 

Less: net income attributable to noncontrolling interest

 

148

 

130

 

442

 

385

 

Net income attributable to common stockholders

 

$

5,818

 

$

11,837

 

$

18,534

 

$

25,807

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—basic

 

$

0.19

 

$

0.40

 

$

0.61

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted

 

$

0.19

 

$

0.40

 

$

0.61

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.38

 

$

0.38

 

$

1.16

 

$

1.16

 

 

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

 

1



Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

(In thousands, except share and per share amounts)

 

September 30,
2011
(Unaudited)

 

December 31,
2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

92,005

 

$

67,654

 

Accounts receivable, net of allowance for doubtful accounts of $2,824 in 2011 and $2,694 in 2010

 

35,537

 

42,012

 

Inventories

 

7,411

 

7,972

 

Income tax receivable

 

4,452

 

6,490

 

Deferred income taxes

 

6,524

 

5,672

 

Prepaid expenses and other current assets

 

6,580

 

6,450

 

Total current assets

 

152,509

 

136,250

 

 

 

 

 

 

 

Property, plant and equipment, net

 

337,986

 

356,057

 

Investments

 

98,349

 

99,105

 

Goodwill

 

520,562

 

520,562

 

Customer lists, net

 

63,346

 

79,950

 

Tradenames

 

12,347

 

12,347

 

Deferred debt issuance costs, net and other assets

 

5,274

 

5,275

 

Total assets

 

$

1,190,373

 

$

1,209,546

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

11,503

 

$

9,972

 

Advance billings and customer deposits

 

22,209

 

22,088

 

Dividends payable

 

11,588

 

11,530

 

Accrued expenses

 

20,670

 

22,649

 

Current portion of senior secured long-term debt

 

6,600

 

 

Current portion of capital lease obligations

 

181

 

132

 

Current portion of derivative liability

 

 

6,374

 

Current portion of pension and postretirement benefit obligations

 

2,847

 

2,847

 

Total current liabilities

 

75,598

 

75,592

 

Long-term portion of capital lease obligation

 

4,571

 

3,993

 

Senior secured long-term debt

 

873,400

 

880,000

 

Deferred income taxes

 

79,745

 

73,628

 

Pension and other postretirement obligations

 

72,828

 

80,621

 

Other long-term liabilities

 

20,512

 

23,837

 

Total liabilities

 

1,126,654

 

1,137,671

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 29,914,005 and 29,763,122, shares outstanding as of September 30, 2011 and December 31, 2010, respectively

 

299

 

298

 

Additional paid-in capital

 

83,553

 

98,126

 

Retained earnings

 

 

 

Accumulated other comprehensive loss, net

 

(25,497

)

(31,471

)

Noncontrolling interest

 

5,364

 

4,922

 

Total stockholders’ equity

 

63,719

 

71,875

 

Total liabilities and stockholders’ equity

 

$

1,190,373

 

$

1,209,546

 

 

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

 

2



Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed 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, net

 

Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2010

 

29,763,122

 

$

298

 

$

98,126

 

$

 

$

(31,471

)

$

4,922

 

$

71,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(4,234

)

(7,365

)

 

 

(11,599

)

Shares issued under employee plan, net of forfeitures

 

177,817

 

1

 

(1

)

 

 

 

 

Non-cash, stock-based compensation

 

 

 

511

 

 

 

 

511

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,365

 

 

132

 

7,497

 

Change in prior service cost and net loss, net of tax of $287

 

 

 

 

 

492

 

 

492

 

Change in fair value of cash flow hedges, net of tax of $1,704

 

 

 

 

 

2,956

 

 

2,956

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

10,945

 

Balance - March 31, 2011

 

29,940,939

 

$

299

 

$

94,402

 

$

 

$

(28,023

)

$

5,054

 

$

71,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(6,240

)

(5,351

)

 

 

(11,591

)

Shares forfeitures

 

(21,050

)

 

 

 

 

 

 

Non-cash, stock-based compensation

 

 

 

579

 

 

 

 

579

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,351

 

 

162

 

5,513

 

Change in prior service cost and net loss, net of tax of $(207)

 

 

 

 

 

(357

)

 

(357

)

Change in fair value of cash flow hedges, net of tax of $352

 

 

 

 

 

602

 

 

602

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

5,758

 

Balance - June 30, 2011

 

29,919,889

 

$

299

 

$

88,741

 

$

 

$

(27,778

)

$

5,216

 

$

66,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(5,770

)

(5,818

)

 

 

(11,588

)

Shares forfeitures

 

(5,884

)

 

 

 

 

 

 

Non-cash, stock-based compensation

 

 

 

582

 

 

 

 

582

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,818

 

 

148

 

5,966

 

Change in prior service cost and net loss, net of tax of $(19)

 

 

 

 

 

(33

)

 

(33

)

Change in fair value of cash flow hedges, net of tax of $1,349

 

 

 

 

 

2,314

 

 

2,314

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

8,247

 

Balance - September 30, 2011

 

29,914,005

 

$

299

 

$

83,553

 

$

 

$

(25,497

)

$

5,364

 

$

63,719

 

 

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

 

3



Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine months ended
September 30,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

18,976

 

$

26,192

 

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

 

 

 

 

 

Depreciation and amortization

 

66,306

 

64,920

 

Deferred income taxes

 

1,798

 

(24

)

Loss on disposal of assets

 

190

 

902

 

Non-cash change in uncertain tax positions

 

(302

)

(5,186

)

Wireless partnership cash distributions in excess of current earnings

 

212

 

304

 

Stock-based compensation expense

 

1,672

 

1,740

 

Amortization of deferred financing costs

 

1,036

 

970

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

6,475

 

478

 

Income tax receivable

 

2,038

 

(4,936

)

Inventories

 

561

 

(451

)

Other assets

 

(114

)

(732

)

Accounts payable

 

1,531

 

(3,892

)

Accrued expenses and other liabilities

 

(7,070

)

(540

)

Net cash provided by operating activities

 

93,309

 

79,745

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Additions to property, plant and equipment, net

 

(31,246

)

(32,578

)

Proceeds from the sale of assets

 

427

 

997

 

Cash value from termination of life insurance policy

 

83

 

 

Wireless partnership cash distributions in excess of accumulated earnings

 

76

 

 

Proceeds from the sale of investments

 

 

35

 

Net cash used for investing activities

 

(30,660

)

(31,546

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Payment of capital lease obligation

 

(108

)

(344

)

Fees paid for the modification of debt

 

(3,471

)

 

Dividends on common stock

 

(34,719

)

(34,652

)

Net cash used for financing activities

 

(38,298

)

(34,996

)

Net increase in cash and equivalents

 

24,351

 

13,203

 

Cash and equivalents at beginning of year

 

67,654

 

42,758

 

Cash and equivalents at end of period

 

$

92,005

 

$

55,961

 

 

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

 

4



Table of Contents

 

Consolidated Communications Holdings, Inc . and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

1.                                       Nature of Operations

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Consolidated Communications Holdings, Inc. and its subsidiaries, which are collectively referred to as “Consolidated”,  the “Company”, “we”, “our” or “us”, unless the context otherwise requires.  All significant intercompany transactions have been eliminated in consolidation.

 

We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.  These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

The accompanying unaudited condensed consolidated financial statements presented herewith reflect all adjustments (consisting of only normal and recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results of operations for the three and nine month periods ended September 30, 2011 and 2010.  The results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from those estimates.

 

As of September 30, 2011, the Company’s Summary of Critical Accounting Policies for the year ended December 31, 2010, 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

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) .  This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS.  ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements.  This pronouncement is effective for reporting periods beginning on or after December 31, 2011.  The adoption of ASU 2011-04 is not expected to have a significant impact to the Company’s consolidated financial position or results of operations.

 

5



Table of Contents

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Presentation of Income .  ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholder’s equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements.  This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company believes the adoption of ASU 2011-05 concerns presentation and disclosure only and will not have an impact on its consolidated financial position or results of operations.

 

3.                                       Prepaid expenses and other current assets

 

Prepaid expenses and other current assets are as follows:

 

(In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Prepaid maintenance

 

$

1,912

 

$

2,242

 

Prepaid taxes

 

1,078

 

182

 

Deferred charges

 

1,030

 

961

 

Prepaid insurance

 

769

 

392

 

Prepaid expense - other

 

1,752

 

2,603

 

Current portion of swap assets

 

 

20

 

Other current assets

 

39

 

50

 

Total

 

$

6,580

 

$

6,450

 

 

4.                                       Property, plant and equipment, net

 

Property, plant and equipment, net are as follows:

 

(In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Land and buildings

 

$

66,789

 

$

66,499

 

Network and outside plant facilities

 

884,479

 

869,565

 

Furniture, fixtures and equipment

 

80,699

 

81,920

 

Assets under capital lease

 

10,014

 

9,279

 

Less: accumulated depreciation

 

(716,273

)

(675,390

)

 

 

325,708

 

351,873

 

Construction in progress

 

12,278

 

4,184

 

Totals

 

$

337,986

 

$

356,057

 

 

Depreciation expense totaled $16.7 million and $16.4 million for the three month periods ended September 30, 2011 and 2010, respectively and $49.7 million and $48.3 million for the nine months ended September 30, 2011 and 2010, 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

 

6



Table of Contents

 

method to account for both of these investments.  For the three month periods ended September 30, 2011 and 2010, we received cash distributions from these partnerships totaling $2.7 million and $2.9 million, respectively.  For the nine months ended September 30, 2011 and 2010, we received cash distributions from these partnerships totaling $7.7 million and $8.9 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 RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory.  Because we have significant influence over the operating and financial policies of these entities, we account for the investments using the equity method.  For the three months ended September 30, 2011 and 2010, we received cash distributions from these partnerships totaling $4.2 million and $4.0 million, respectively.  For the nine months ended September 30, 2011 and 2010, we received cash distributions from these partnerships totaling $11.9 million and $11.5 million, respectively.

 

Our investments are as follows:

 

(In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Cash surrender value of life insurance policies

 

$

1,474

 

$

1,960

 

Cost method investments:

 

 

 

 

 

GTE Mobilnet of South Texas Limited Partnership (2.34% interest)

 

21,450

 

21,450

 

Pittsburgh SMSA Limited Partnership (3.60% interest)

 

22,950

 

22,950

 

CoBank, ACB Stock

 

3,332

 

3,148

 

Other

 

15

 

25

 

Equity method investments:

 

 

 

 

 

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

 

19,394

 

19,253

 

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

 

7,026

 

7,191

 

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

 

22,708

 

22,971

 

Boulevard Communications, LLP (50% interest)

 

 

157

 

Total

 

$

98,349

 

$

99,105

 

 

CoBank is a cooperative bank owned by its customers.  Annually, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which 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.

 

The income from our investments in RSA #17 and RSA 6(II) each exceeded 10% of our pretax income for the first nine months of 2011.  Below is a summary of unaudited summarized income statement information of both RSA #17 and RSA 6(II):

 

RSA #17

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

29,754

 

$

22,041

 

$

79,227

 

$

62,909

 

Income from operations

 

11,198

 

6,945

 

28,715

 

20,499

 

Net income before taxes

 

11,209

 

7,159

 

28,755

 

21,087

 

Net income

 

11,109

 

7,034

 

28,456

 

20,712

 

 

7



Table of Contents

 

RSA 6(II)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

34,515

 

$

30,746

 

$

99,406

 

$

89,483

 

Income from operations

 

7,551

 

8,831

 

22,877

 

25,096

 

Net income before taxes

 

7,560

 

8,923

 

22,901

 

25,446

 

Net income

 

7,560

 

8,923

 

22.901

 

25,446

 

 

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, 2011 and December 31, 2010 were as follows:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

September 30,
2011

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Long-term interest rate swap liabilities

 

$

(18,751

)

 

$

(18,751

)

 

Totals

 

$

(18,751

)

$

 

$

(18,751

)

$

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

December 31,
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

 

$

20

 

 

$

20

 

 

Current interest rate swap liabilities

 

(6,374

)

 

(6,374

)

 

Long-term interest rate swap liabilities

 

(21,751

)

 

(21,751

)

 

Totals

 

$

(28,105

)

$

 

$

(28,105

)

$

 

 

The change in the fair value of the derivatives is primarily a result of a change in market expectations for future interest rates.

 

We have not elected the fair value option for any of our financial assets or liabilities.  The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.  The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of September 30, 2011 and December 31, 2010.

 

8



Table of Contents

 

 

 

As of September 30, 2011

 

As of December 31, 2010

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

49,128

 

n/a

 

$

49,572

 

n/a

 

Investments, at cost

 

$

47,747

 

n/a

 

$

47,573

 

n/a

 

Long-term debt

 

$

873,400

 

$

873,400

 

$

880,000

 

$

880,000

 

 

The Company’s investments at September 30, 2011 and December 31, 2010 accounted for under both the equity and cost methods consist of minority positions in various cellular telephone limited partnerships.  These investments are recorded using either the equity or cost methods.

 

Our long-term debt allows us to select a one month LIBOR repricing option, which we have elected.  As such, the fair value of this debt approximates its carrying value.

 

7.                                       Goodwill and Other Intangible Assets

 

In accordance with the applicable accounting guidance, goodwill and indefinite lived intangible assets 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,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Telephone Operations

 

$

519,528

 

$

519,528

 

Other Operations

 

1,034

 

1,034

 

Totals

 

$

520,562

 

$

520,562

 

 

Our most valuable tradename is the federally registered mark CONSOLIDATED, which is used in association with our telephone communication services and is a design of interlocking circles.  The 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 name.  These tradenames are indefinitely renewable intangibles.  The carrying value of the tradenames was $12.3 million at both September 30, 2011 and December 31, 2010.

 

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,
2011

 

December 31,
2010

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

193,124

 

$

193,124

 

$

4,405

 

$

4,405

 

Less: accumulated amortization

 

(130,329

)

(114,055

)

(3,854

)

(3,524

)

Net carrying amount

 

$

62,795

 

$

79,069

 

$

551

 

$

881

 

 

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, 2011 and 2010, respectively.

 

9



Table of Contents

 

8.                                       Deferred Debt Issuance Costs, Net and Other Assets

 

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

 

(In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Deferred debt issuance costs, net

 

$

5,207

 

$

5,171

 

Other assets

 

67

 

104

 

Total

 

$

5,274

 

$

5,275

 

 

During the third quarter of 2011, we capitalized an additional $0.1 million in deferred debt issuance costs related to our credit agreement amendment completed on June 8, 2011 (see Note 10 for a more in depth description of this transaction).  For the year 2011, we have capitalized a total of $1.1 million in deferred debt issuance costs related to our credit agreement amendment.  Deferred debt issuance costs are being amortized using the effective interest method over a period corresponding to each of the separate maturity dates.

 

9.                                       Accrued Expenses

 

Accrued expenses are as follows:

 

(In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

8,953

 

$

9,438

 

Taxes payable

 

3,747

 

5,035

 

Accrued interest

 

190

 

104

 

Other accrued expenses

 

7,780

 

8,072

 

Total accrued expenses

 

$

20,670

 

$

22,649

 

 

10.                                Debt

 

Long-term debt consists of the following:

 

(In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Senior secured credit facility - term loan

 

$

880,000

 

$

880,000

 

Senior secured credit facility - revolving loan

 

 

 

Obligations under capital lease

 

4,752

 

4,125

 

 

 

884,752

 

884,125

 

Less: current portion of long-term debt

 

(6,600

)

 

Less: current portion of capital leases

 

(181

)

(132

)

Total long-term debt and capitalized leases

 

$

877,971

 

$

883,993

 

 

Credit Agreement

 

The Company, through certain of its wholly owned subsidiaries, has outstanding a credit agreement with several financial institutions, which consists of a $50 million revolving credit facility (including a $10 million sub-limit for letters of credit) and an $880 million term loan facility.  Borrowings under the credit facility are secured by substantially all of the assets of the Company with the exception of Illinois Consolidated Telephone Company.  The terms of the credit agreement were amended on June 8, 2011.

 

Our $880 million term loan credit facility is made up of two separate tranches, resulting in different maturity dates and interest rate margins for each term loan tranche.  The first term loan tranche

 

10



Table of Contents

 

consists of $470.9 million aggregate principal amount, matures on December 31, 2014 and has an applicable margin (at our election) equal to either 2.50% for a LIBOR-based term loan or 1.50% for an alternative base rate loan.  The second term loan tranche consists of $409.1 million aggregate principal amount, matures on December 31, 2017 and has an applicable margin (at our election) equal to either 3.75% for a LIBOR-based term loan or 2.75% for an alternative base rate term loan.  The applicable margins for each of the term loan tranches are fixed for the duration of the loans.  The amended term loan facility also requires $2.2 million in quarterly principal payments beginning March 31, 2012.

 

Our revolving credit facility has a maturity date of June 8, 2016 and an applicable margin (at our election) of between 2.75% and 3.50% for LIBOR-based borrowings and between 1.75% and 2.50% for alternative base rate borrowings, depending on our leverage ratio.  Based on our leverage ratio of 4.61:1 at September 30, 2011, the borrowing margin for the next three month period ending December 31, 2011 will be at a weighted-average margin of 3.25% for a LIBOR-based loan or 2.25% for an alternative base rate loan.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.  There were no borrowings or letters of credit outstanding under the revolving credit facility as of September 30, 2011 or December 31, 2010, or at any time during the quarter ended September 30, 2011.

 

In connection with amending our credit agreement in June 2011, fees totaling $2.6 million were recognized as expense and recorded in debt refinancing costs in the unaudited Condensed Consolidated Statements of Operations while $1.1 million in fees were capitalized as deferred debt issuance costs in the unaudited Condensed Consolidated Balance Sheets.

 

The weighted-average interest rate incurred on our credit facilities during the three month periods ended September 30, 2011 and 2010, including amounts paid on our interest rate swap agreements and the applicable margin, was 5.73% and 5.58% per annum, respectively.  The weighted-average interest rate incurred on our credit facilities during the nine month periods ended September 30, 2011 and 2010, including amounts paid on our interest rate swap agreements and the applicable margin, was 5.44% and 5.59% per annum, respectively.  Interest is payable at least quarterly.

 

Our 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 amended credit agreement.  As of September 30, 2011, we were in compliance with the credit agreement covenants.

 

Capital Leases

 

The Company has four capital leases, all of which expire in 2021, for the lease of office, warehouse and tech center needs.  As of September 30, 2011, the present value of the minimum remaining lease commitments was approximately $4.8 million, of which $0.2 million is due and payable within the next 12 months.  The leases require total remaining rental payments of approximately $8.8 million over the remaining term of the leases.

 

11.                                Derivatives

 

In order to manage the risk associated with changes in interest rates, we have entered into interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  We account for these transactions as cash flow hedges under the FASB’s ASC Topic 815 (“ASC 815”), Derivatives and Hedging .  The swaps are designated as cash flow hedges of our expected future interest

 

11



Table of Contents

 

payments.  In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

 

We have in place the following interest rate swaps at September 30, 2011:

 

Maturity

 

Notional
Amount

 

Fixed
Rate
Paid

 

LIBOR
Rate
Received

 

 

 

 

 

 

 

 

 

12/31/2012

 

70,000,000

 

4.0925

%

3 month

 

12/31/2012

 

30,000,000

 

4.0925

%

3 month

 

3/31/2013

 

130,000,000

 

4.4975

%

3 month

 

3/31/2013

 

75,000,000

 

1.8300

%

1 month

 

3/31/2013

 

75,000,000

 

1.8300

%

1 month

 

3/31/2013

 

50,000,000

 

1.8300

%

1 month

 

9/13/2013

 

100,000,000

 

1.6500

%

1 month

 

 

 

530,000,000

 

 

 

 

 

 

We also have in place the following basis swaps at September 30, 2011:

 

Maturity

 

Notional
Amount

 

Index
Paid

 

Index
Received

 

 

 

 

 

 

 

 

 

12/31/2012

 

100,000,000

 

3 month LIBOR minus 0.0560%

 

1 month LIBOR

 

3/31/2013

 

130,000,000

 

3 month LIBOR minus 0.0540%

 

1 month LIBOR

 

 

 

230,000,000

 

 

 

 

 

 

In addition, we have also entered into the following floating to fixed interest rate swap agreements that will become effective on the dates indicated:

 

Effective
Date

 

Maturity

 

Notional
Amount

 

Fixed
Rate to
Be Paid

 

LIBOR
Rate to
Be Received

 

 

 

 

 

 

 

 

 

 

 

12/31/2012

 

12/31/2014

 

100,000,000

 

0.8900

%

1 month

 

6/29/2012

 

6/30/2015

 

100,000,000

 

0.9925

%

1 month

 

 

 

 

 

200,000,000

 

 

 

 

 

 

Our credit agreement requires that no less than 50% of our term loan debt be fixed through the use of interest rate swaps.  At September 30, 2011 and December 31, 2010, the interest rate on approximately 60% and 72%, respectively, of our outstanding debt was fixed through the use of interest rate swaps.

 

The counterparties to our various swaps are 5 major U.S. and European banks.  None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties.  The swaps of any counterparty that is a “Lender” as defined in our credit facility are secured along with the other creditors under the credit facility.  Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two

 

12



Table of Contents

 

parties would be offset in order to determine the net amount due between parties.  This provision allows us to partially mitigate the risk of non-performance by a counterparty.

 

We report the gross fair value of our derivatives in either prepaid expenses and other current assets, current portion of derivative liability or other long-term liabilities on our consolidated balance sheets.  The table below shows the balance sheet classification and fair value of our interest rate swaps designated as hedging instruments under ASC 815:

 

 

 

Fair Value

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

 

$

20

 

Current portion of derivative liability

 

 

(6,374

)

Other long-term liabilities

 

(18,751

)

(21,751

)

 

At September 30, 2011 and December 31, 2010, the pretax deferred losses related to our interest rate swap agreements included in other comprehensive income totaled $18.7 million and $28.0 million, respectively.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

 

Information regarding our cash flow hedge transactions is as follows:

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Loss/(gain) recognized in accumulated other comprehensive income (loss) (“AOCI”) (pretax)

 

$

(3,663

)

$

1,677

 

$

(9,278

)

$

3,508

 

Gain arising from ineffectiveness reducing interest expense

 

$

(19

)

$

(62

)

$

(77

)

$

(142

)

Deferred losses reclassed from AOCI to interest expense

 

$

316

 

$

1,037

 

$

1,201

 

$

3,953

 

 

(In thousands, except months)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Aggregate notional value of current derivatives outstanding

 

$

530,000

 

$

630,000

 

Aggregate notional value of forward derivatives outstanding

 

$

200,000

 

$

100,000

 

Period through which derivative positions currently exist

 

June 2015

 

September 2013

 

Loss in fair value of derivatives

 

$

18,751

 

$

28,105

 

Deferred losses included in AOCI (pretax)

 

$

18,686

 

$

27,963

 

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

 

$

20

 

$

1,250

 

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

 

18

 

27

 

 

12.                                Interest Expense, Net of Interest Income

 

The following table summarizes interest expense, net of interest income for the periods indicated:

 

13



Table of Contents

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Interest expense — credit facility

 

$

7,387

 

$

6,325

 

$

19,855

 

$

18,574

 

Payments on swap liabilities, net

 

5,476

 

6,264

 

16,121

 

18,727

 

Interest expense- capital leases

 

164

 

 

485

 

2

 

Uncertain tax position interest reversal, net of accrual

 

(39

)

(1,265

)

(15

)

(1,037

)

Other interest

 

161

 

165

 

532

 

651

 

Amortization of deferred financing fees

 

374

 

323

 

1,036

 

970

 

Capitalized interest

 

(39

)

(48

)

(120

)

(133

)

Total interest expense

 

13,484

 

11,764

 

37,894

 

37,754

 

Less: interest income

 

(37

)

(41

)

(111

)

(79

)

Interest expense, net of interest income

 

$

13,447

 

$

11,723

 

$

37,783

 

$

37,675

 

 

During the third quarters of 2011 and 2010, we reversed $0.1 million and $1.3 million, respectively, of accrued interest previously recorded as a result of a change in our uncertain tax liabilities for which the statute of limitations had expired.

 

13.                                Retirement and Pension Plans

 

We have 401(k) plans covering substantially all of our employees.  Contributions made under our defined contribution plans include a match, at the Company’s discretion, of employee salaries contributed to the plans.  We recognized expense with respect to these plans of $0.6 million for each of the three month periods ended September 30, 2011 and 2010 and $1.9 million for each of the nine month periods ended September 30, 2011 and 2010.

 

Qualified Retirement Plan

 

We sponsor a defined-benefit pension plan (“Retirement Plan”) that is non-contributory covering substantially all of our hourly employees who fulfill minimum age and service requirements.  Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.

 

The following table summarizes the components of net periodic pension cost for the qualified retirement plan for the periods indicated:

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

 (In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

319

 

$

475

 

$

957

 

$

1,409

 

Interest cost

 

2,725

 

2,799

 

8,175

 

8,367

 

Expected return on plan assets

 

(2,723

)

(2,544

)

(8,169

)

(7,636

)

Net amortization loss (gain)

 

188

 

211

 

564

 

590

 

Prior service credit amortization

 

(41

)

(11

)

(123

)

(33

)

Net periodic pension cost

 

$

468

 

$

930

 

$

1,404

 

$

2,697

 

 

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

 

14



Table of Contents

 

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 periods indicated:

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

14

 

$

14

 

$

42

 

$

44

 

Net amortization loss

 

9

 

8

 

27

 

23

 

Net periodic pension cost

 

$

23

 

$

22

 

$

69

 

$

67

 

 

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 $0.1 million for the three month periods ended September 30, 2011 and 2010, and $0.5 million for the nine month periods ended September 30, 2011 and 2010.  The net present value of the remaining obligations was approximately $2.5 million at September 30, 2011 and $2.9 million at December 31, 2010, and is included in pension and postretirement benefit obligations in the accompanying balance sheets.

 

We also maintain 40 life insurance policies on certain of the participating former directors and employees.  We recognized $0.5 million in life insurance proceeds as other non-operating income in the three and nine month periods ended September 30, 2011 due to the death of a covered individual.  We did not recognize any proceeds in other income for the three or nine month periods ended September 30, 2010 due to the receipt of life insurance proceeds.  The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $1.5 million at September 30, 2011 and $2.0 million at December 31, 2010.  These amounts are included in investments in the accompanying balance sheets.  Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the statements of cash flows.

 

14.                                Postretirement Benefit Obligation

 

We sponsor a healthcare plan and life insurance plan that provides postretirement medical benefits and life insurance to certain groups of retired employees.  Retirees share in the cost of healthcare benefits, making contributions that are adjusted 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.

 

15



Table of Contents

 

The following table summarizes the components of the net periodic costs for postretirement benefits for the periods indicated:

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

116

 

$

206

 

$

561

 

$

618

 

Interest cost

 

471

 

530

 

1,269

 

1,591

 

Net prior service cost amortization

 

(47

)

(112

)

(141

)

(336

)

Net amortization gain

 

(160

)

 

(159

)

 

Net periodic postretirement benefit cost

 

$

380

 

$

624

 

$

1,530

 

$

1,873

 

 

15.                                Other Long-term Liabilities

 

Other long-term liabilities are as follows:

 

(In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Long-term derivative liabilities

 

$

18,751

 

$

21,751

 

Uncertain tax positions

 

1,224

 

1,475

 

Accrued interest on uncertain tax positions

 

40

 

56

 

Other long-term liabilities

 

497

 

555

 

Total

 

$

20,512

 

$

23,837

 

 

16.                                Stock-based Compensation Plans

 

Pretax stock-based compensation expense for the periods indicated was as follows:

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Restricted stock

 

$

345

 

$

338

 

$

1,036

 

$

1,015

 

Performance shares

 

237

 

283

 

636

 

725

 

Total

 

$

582

 

$

621

 

$

1,672

 

$

1,740

 

 

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

 

As of September 30, 2011, we had not yet recognized compensation expense on the following non-vested awards.

 

(In thousands)

 

Non-recognized
Compensation

 

Average Remaining
Recognition Period
(years)

 

 

 

 

 

 

 

Restricted stock

 

$

2,764

 

1.3

 

Performance shares

 

1,233

 

1.1

 

Total

 

$

3,997

 

1.2

 

 

16



Table of Contents

 

The following table summarizes unvested restricted stock awards outstanding and changes during the nine months ended September 30:

 

 

 

2011

 

2010

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

Non-vested restricted shares outstanding — January 1

 

101,435

 

$

17.40

 

82,375

 

$

12.08

 

Shares granted

 

127,377

 

17.92

 

115,949

 

18.65

 

Shares cancelled

 

(14,845

)

18.22

 

(2,875

)

14.24

 

Shares vested

 

 

 

(3,000

)

13.00

 

Non-vested restricted shares outstanding — September 30

 

213,967

 

$

17.65

 

192,449

 

$

15.99

 

 


(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 nine months ended September 30:

 

 

 

2011

 

2010

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

 

 

 

 

 

 

 

 

 

 

Non-vested performance shares outstanding — January 1

 

68,880

 

$

15.74

 

46,578

 

$

11.72

 

Shares granted

 

50,440

 

18.65

 

98,002

 

9.05

 

Shares cancelled

 

(12,089

)

16.98

 

(3,070

)

15.75

 

Non-vested performance shares outstanding — September 30

 

107,231

 

$

16.63

 

141,510

 

$

16.43

 

 


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

 

17.                                Income Taxes

 

During the nine months ended September 30, 2011, we recorded a decrease of $0.3 million to our unrecognized tax benefits, which reduced our tax expense by a corresponding amount, due to the expiration of a federal statute of limitations.  As of September 30, 2011 and December 31, 2010, the amount of unrecognized tax benefit was $1.2 million and $1.5 million, respectively.  The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.8 million.  The tax benefit attributable to the $0.3 million decrease in unrecognized tax benefits did not have a significant effect on the company’s effective tax rate.  We do not expect any changes in our uncertain tax positions during the remainder of 2011.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At September 30, 2011 we had recorded $40 thousand of interest and penalties relating to uncertain tax positions, of which a $15 thousand net decrease was recorded during the nine months ended September 30, 2011.  This net decrease included a decrease of $51 thousand due to the expiration of a federal statute of limitations and an increase to interest expense of $36 thousand related to the current year accrual of interest on our uncertain tax positions.

 

The only periods subject to examination for our federal returns are years 2008 through 2010.  The periods subject to examination for our state returns are years 2005 through 2010.  We are not currently under examination by federal taxing authorities.  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.

 

17



Table of Contents

 

In January 2011, Illinois’ Governor signed into law PA. 96-1496. Included as part of the law was an increase in the corporate income tax rate.  This resulted in an increase to our net state deferred tax liabilities and a corresponding increase to our state tax provision of $0.3 million which we recognized in the first quarter of 2011.

 

Our effective tax rate was 31.3% and (9.6)% for the three months ended September 30, 2011 and 2010, respectively and 35.4% and 21.1%, for the nine months ended September 30, 2011 and 2010, respectively.  The effective tax rates in 2011 and 2010 are lower and differ from the federal and state statutory rates primarily due to the reversal in unrecognized tax benefits, non-deductible expenses, state tax planning and reporting structure changes, and a change in the Illinois state income tax rate.

 

We filed 2010 tax returns for the Consolidated Communications Holdings, Inc. consolidated filing group and East Texas Fiber Line during the third quarter of 2011.  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 recognized approximately $69 thousand of tax expense in the third quarter of 2011 to adjust our 2010 provision to match our 2010 returns, and $0.3 million of tax benefit in the third quarter of 2010 to adjust our 2009 provision to match our 2009 returns.

 

18.                                Accumulated Other Comprehensive Loss, Net

 

Accumulated other comprehensive loss, net is comprised of the following components:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Fair value of cash flow hedges

 

$

(18,686

)

$

(27,963

)

Prior service credits and net losses on postretirement plans

 

(21,546

)

(21,709

)

 

 

(40,232

)

(49,672

)

Deferred taxes

 

14,735

 

18,201

 

Totals

 

$

(25,497

)

$

(31,471

)

 

The following table summarizes total comprehensive income for the periods indicated:

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,966

 

$

11,967

 

$

18,976

 

$

26,192

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Prior service cost and net (loss) gain, net of tax

 

(33

)

61

 

102

 

156

 

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

 

2,314

 

(1,061

)

5,872

 

(2,224

)

Total comprehensive income

 

8,247

 

10,967

 

24,950

 

24,124