Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 08/06/2012 10:48:37)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

 

for the quarterly period ended June 30, 2012

 

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 August 3, 2012

Common Stock, $0.01 Par Value

 

39,917,265 Shares

 

 

 



Table of Contents

 

FORM 10-Q

 

QUARTERLY REPORT

 

TA BLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Statements of Operations (Unaudited) - Three and six month periods ended June 30, 2012 and 2011

1

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) — Six month period ended June 30, 2012

2

 

Condensed Consolidated Balance Sheets — June 30, 2012 (Unaudited) and December 31, 2011

3

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) — Six months ended June 30, 2012

4

 

Condensed Consolidated Statements of Cash Flows (Unaudited) - Six month periods ended June 30, 2012 and 2011

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

25

 

 

 

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

46

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosures

47

 

 

 

Item 5.

Other Information

47

 

 

 

Item 6.

Exhibits

47

 



Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

(In thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

93,005

 

$

92,623

 

$

186,369

 

$

188,064

 

Operating expense:

 

 

 

 

 

 

 

 

 

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

 

36,526

 

34,267

 

72,390

 

69,951

 

Selling, general and administrative expenses

 

19,996

 

19,147

 

39,524

 

39,846

 

Financing and other transactions

 

562

 

2,540

 

5,384

 

2,540

 

Depreciation and amortization

 

21,869

 

21,987

 

44,006

 

44,145

 

Operating income

 

14,052

 

14,682

 

25,065

 

31,582

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(16,893

)

(12,397

)

(31,493

)

(24,336

)

Investment income

 

6,762

 

6,097

 

13,228

 

13,014

 

Other, net

 

185

 

210

 

199

 

437

 

Income before income taxes

 

4,106

 

8,592

 

6,999

 

20,697

 

Income tax expense

 

1,200

 

3,079

 

2,209

 

7,687

 

Net income

 

2,906

 

5,513

 

4,790

 

13,010

 

Less: net income attributable to noncontrolling interest

 

120

 

162

 

245

 

294

 

Net income attributable to common stockholders

 

$

2,786

 

$

5,351

 

$

4,545

 

$

12,716

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—basic

 

$

0.09

 

$

0.18

 

$

0.15

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted

 

$

0.09

 

$

0.18

 

$

0.15

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.38

 

$

0.38

 

$

0.77

 

$

0.77

 

 

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

 

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Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,906

 

$

5,513

 

$

4,790

 

$

13,010

 

Change in prior service cost and net of loss, net of tax of $273 and ($207) for three months ended June 30, 2012 and 2011, and $543 and $80 for the six months ended June 30, 2012 and 2011

 

448

 

(357

)

897

 

135

 

Change in fair value of cash flow hedges, net of tax of $339 and $352 for the three months ended June 30, 2012 and 2011, and $924 and $2,056 for the six months ended June 30, 2012 and 2011

 

581

 

602

 

1,584

 

3,558

 

Comprehensive income

 

3,935

 

5,758

 

7,271

 

16,703

 

Less: comprehensive income attributable to noncontrolling interest

 

120

 

162

 

245

 

294

 

Total comprehensive income attributable to common stockholders

 

$

3,815

 

$

5,596

 

$

7,026

 

$

16,409

 

 

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

 

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Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

(In thousands, except share and per share amounts)

 

June 30,
2012
(Unaudited)

 

December 31,
2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

84,984

 

$

105,704

 

Restricted cash — see footnote 4

 

315,082

 

 

Accounts receivable, net of allowance for doubtful accounts of $2,743 in 2012 and $2,547 in 2011

 

35,165

 

35,492

 

Inventories

 

7,233

 

7,151

 

Income tax receivable

 

11,276

 

8,988

 

Deferred income taxes

 

4,825

 

4,825

 

Prepaid expenses and other current assets

 

7,769

 

6,170

 

Total current assets

 

466,334

 

168,330

 

Property, plant and equipment, net

 

321,047

 

332,046

 

Investments

 

99,423

 

98,069

 

Goodwill

 

520,562

 

520,562

 

Customer lists, net

 

46,742

 

57,811

 

Tradenames

 

12,347

 

12,347

 

Deferred debt issuance costs, net and other assets

 

12,981

 

4,904

 

Total assets

 

$

1,479,436

 

$

1,194,069

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

15,128

 

$

13,673

 

Advance billings and customer deposits

 

20,974

 

20,324

 

Dividends payable

 

11,603

 

11,571

 

Accrued expense

 

34,640

 

24,571

 

Current portion of senior secured term debt

 

8,800

 

8,800

 

Current portion of capital lease obligations

 

216

 

192

 

Current portion of derivative liability

 

8,340

 

3,580

 

Current portion of pension and postretirement benefit obligations

 

2,579

 

2,579

 

Total current liabilities

 

102,280

 

85,290

 

Long-term portion of capital lease obligation

 

4,403

 

4,519

 

Long-term debt

 

1,164,855

 

871,200

 

Deferred income taxes

 

78,794

 

77,327

 

Pension and other postretirement obligations

 

89,587

 

93,754

 

Other long-term liabilities

 

6,863

 

14,167

 

Total liabilities

 

1,446,782

 

1,146,257

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 29,951,282 and 29,869,512, shares outstanding as of June 30, 2012 and December 31, 2011, respectively

 

299

 

299

 

Additional paid-in capital

 

61,968

 

79,852

 

Retained earnings

 

 

 

Accumulated other comprehensive loss, net

 

(35,352

)

(37,833

)

Noncontrolling interest

 

5,739

 

5,494

 

Total stockholders’ equity

 

32,654

 

47,812

 

Total liabilities and stockholders’ equity

 

$

1,479,436

 

$

1,194,069

 

 

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

 

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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, 2011

 

29,869,512

 

$

299

 

$

79,852

 

$

 

$

(37,833

)

$

5,494

 

$

47,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(9,843

)

(1,759

)

 

 

(11,602

)

Shares issued under employee plan, net of forfeitures

 

81,770

 

 

 

 

 

 

 

Non-cash, stock-based compensation

 

 

 

501

 

 

 

 

501

 

Comprehensive income

 

 

 

 

1,759

 

1,452

 

125

 

3,336

 

Balance - March 31, 2012

 

29,951,282

 

$

299

 

$

70,510

 

$

 

$

(36,381

)

$

5,619

 

$

40,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(8,817

)

(2,786

)

 

 

(11,603

)

Other

 

 

 

(314

)

 

 

 

(314

)

Non-cash, stock-based compensation

 

 

 

589

 

 

 

 

589

 

Comprehensive income

 

 

 

 

2,786

 

1,029

 

120

 

3,935

 

Balance — June 30, 2012

 

29,951,282

 

$

299

 

$

61,968

 

$

 

$

(35,352

)

$

5,739

 

$

32,654

 

 

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

 

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Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six months ended June 30,

 

(In thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

4,790

 

$

13,010

 

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

 

 

 

 

 

Depreciation and amortization

 

44,006

 

44,145

 

Deferred income taxes

 

 

298

 

Loss on disposal of assets

 

206

 

4

 

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

 

(1,171

)

(300

)

Stock-based compensation expense

 

1,090

 

1,090

 

Amortization of deferred financing costs

 

5,020

 

662

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

327

 

4,954

 

Income tax receivable

 

(2,288

)

2,564

 

Inventories

 

(82

)

(285

)

Other assets

 

(1,599

)

(982

)

Accounts payable

 

1,455

 

827

 

Accrued expenses and other liabilities

 

(275

)

(4,784

)

Net cash provided by operating activities

 

51,479

 

61,203

 

Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(22,151

)

(20,704

)

Proceeds from the sale of assets

 

28

 

396

 

Restricted cash for acquisition of SureWest

 

(298,035

)

 

Other

 

(314

)

56

 

Net cash used for investing activities

 

(320,472

)

(20,252

)

Financing Activities

 

 

 

 

 

Proceeds on bond offering

 

298,055

 

 

Restricted cash on bond offering

 

(17,047

)

 

Payment of capital lease obligation

 

(92

)

(71

)

Payment on long term debt

 

(4,400

)

 

Payment of financing costs

 

(5,070

)

(3,399

)

Dividends on common stock

 

(23,173

)

(23,128

)

Net cash used for financing activities

 

248,273

 

(26,598

)

Net increase in cash and equivalents

 

(20,720

)

14,353

 

Cash and equivalents at beginning of year

 

105,704

 

67,654

 

Cash and equivalents at end of period

 

$

84,984

 

$

82,007

 

 

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

 

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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, 2011.

 

The accompanying unaudited condensed consolidated financial statements presented herewith reflect all adjustments (consisting of only normal and recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results of operations for the three and six month periods ended June 30, 2012 and 2011.  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 June 30, 2012, the Company’s Summary of Critical Accounting Policies for the year ended December 31, 2011, 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.

 

Reclassifications

 

Certain prior-quarter amounts have been reclassified in the statement of cash flows from financing activities to operating activities.  These reclassifications had no impact on net cash flows.

 

2.                                       Recent Accounting Pronouncements

 

Effective January 1, 2012, we adopted 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

 

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the disclosure requirements particularly for Level 3 fair value measurements.  The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Effective January 1, 2012, we adopted the FASB issued Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Presentation of Comprehensive Income .  ASU 2011-05 requires an entity to either present components of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. Accordingly, we have presented net income and other comprehensive income in two consecutive statements.

 

3.             Agreement and Plan of Merger with SureWest Communications

 

On February 5, 2012, we entered into a definitive agreement to acquire all the outstanding shares of SureWest Communications (“SureWest”) for $23.00 per share in a cash and stock transaction.  SureWest provides a wide range of telecommunications, digital video, Internet, data and other facilities-based communications services in Northern California, primarily in the greater Sacramento region, and in the greater Kansas City, Kansas and Missouri areas.

 

The merger agreement provided that each record holder of SureWest common stock could make one of the following elections, or a combination of the two, at or prior to the election deadline provided for in the merger agreement, regarding the type of merger consideration they wish to receive in exchange for shares of SureWest common stock:

 

·                                     a cash election to receive $23.00 in cash, without interest, for each share of SureWest common stock, or

·                                     a stock election to receive shares of our common stock having an equivalent value based on average trading prices for the 20-day period ending two days before the closing date of the merger, subject to a collar so that there would be a maximum exchange ratio of 1.40565 shares of our common stock for each share of SureWest common stock and a minimum of 1.03896 shares of our common stock for each share of SureWest common stock.

 

Overall elections were subject to a proration so that approximately 50% of the SureWest shares (treating equity award shares as outstanding shares) would be exchanged for cash and approximately 50% for our stock.

 

The California PUC approved the merger on June 7, 2012.  On June 12, 2012, SureWest shareholders and Consolidated’s stockholders approved the issuance of our common stock to SureWest shareholders.  Final closing on the SureWest transaction occurred July 2, 2012.  The price in the acquisition, excluding debt assumed, consisted of cash of $176.7 million and 9,965,983 shares of the Company’s common stock (based on average trading prices for the Company’s common stock over the 20-day period ending two days before the closing date of the merger), totaled $320.7 million.

 

The cash portion of the merger consideration and the funds required to repay SureWest outstanding debt was financed with $300.0 million in aggregate principal amount of 10.875% Senior Notes due 2020 (“Senior Notes”).  We also used cash on hand and approximately $35.0 million in borrowings from our revolving credit facility to fund the acquisition.

 

The acquisition of SureWest will be recorded in accordance with the acquisition method, and it is expected that goodwill and intangible assets will be recorded on the consolidated balance sheets. However, as the initial accounting for the business combination has not been completed as of August 6, 2012, including the measurement of certain intangible assets and goodwill.

 

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4.             Restricted cash

 

At June 30, 2012, the Company had restricted cash of $315.1 million on deposit with an Escrow Agent in connection with the acquisition of SureWest.  The restricted cash included $298.0 million of net proceeds from the issuance of Senior Notes for the SureWest acquisition and $17.1 million of cash escrowed to ensure coverage of a redemption fee and interest accruing on the financing through November 5, 2012 for the repayment of the financing in the event the SureWest acquisition were not consummated by that date.  There was no such restricted cash at December 31, 2011.

 

5.             Prepaid expense and other current assets

 

Prepaid and other current assets are as follows:

 

(In thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Prepaid maintenance

 

$

2,360

 

$

1,980

 

Prepaid taxes

 

1,784

 

440

 

Deferred charges

 

672

 

784

 

Prepaid insurance

 

470

 

313

 

Prepaid expense - other

 

2,438

 

2,607

 

Other current assets

 

45

 

46

 

Total

 

$

7,769

 

$

6,170

 

 

6.             Property, plant and equipment, net

 

Property, plant and equipment are as follows:

 

(In thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Land and buildings

 

$

65,282

 

$

66,704

 

Network and outside plant facilities

 

904,711

 

897,140

 

Furniture, fixtures and equipment

 

50,516

 

73,185

 

Assets under capital lease

 

10,014

 

10,014

 

Less: accumulated depreciation

 

(722,696

)

(721,527

)

 

 

307,827

 

325,516

 

Construction in progress

 

13,220

 

6,530

 

Totals

 

$

321,047

 

$

332,046

 

 

Depreciation expense totaled $16.3 million and $16.5 million for the three month periods ended June 30, 2012 and 2011, respectively and $32.9 million and $33.1 million for the six months ended June 30, 2012 and 2011, respectively.

 

7.             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.  It is not practicable to estimate fair value of these investments.  We did not evaluate any of the investments for impairment as no factors indicating

 

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impairment existed during the year.  For the three month periods ended June 30, 2012 and 2011, we received cash distributions from these partnerships totaling $3.0 million and $2.0 million, respectively.  For the six months ended June 30, 2012 and 2011, we received cash distributions from these partnerships totaling $5.5 million and $5.0 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 three entities, we account for the investments using the equity method.  For the three months ended June 30, 2012 and 2011, we received cash distributions from these partnerships totaling $2.9 million and $3.8 million, respectively.  For the six months ended June 30, 2012 and 2011, we received cash distributions from these partnerships totaling $6.5 million and $7.7 million, respectively.

 

Our investments are as follows:

 

(In thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Cash surrender value of life insurance policies

 

$

2,037

 

$

1,978

 

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

 

3,518

 

3,394

 

Other

 

15

 

15

 

Equity method investments:

 

 

 

 

 

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

 

19,226

 

19,422

 

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

 

7,300

 

7,063

 

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

 

22,927

 

21,797

 

Total

 

$

99,423

 

$

98,069

 

 

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.

 

Because the income from our equity method investments exceeded 10% of our pretax income for the first six months of 2012, below is a summary of unaudited summarized income statement and balance sheet information for the three equity investments:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

73,555

 

$

74,485

 

$

145,890

 

$

143,548

 

Income from operations

 

22,235

 

20,631

 

41,927

 

40,796

 

Net income before taxes

 

22,247

 

20,656

 

41,956

 

40,848

 

Net income

 

22,143

 

20,556

 

41,748

 

40,648

 

 

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June 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Current assets

 

$

51,801

 

$

44,739

 

Non-current assets

 

76,771

 

79,432

 

Current liabilities

 

12,163

 

14,523

 

Non-current liabilities

 

1,210

 

1,096

 

Partnership equity

 

115,199

 

108,552

 

 

8.             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 interest rate swap assets and liabilities measured at fair value on a recurring basis subject to disclosure requirements at June 30, 2012 and December 31, 2011 were as follows:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

June 30,
2012

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Current interest rate swap liabilities

 

$

(8,340

)

$

 

$

(8,340

)

$

 

Long-term interest rate swap liabilities

 

(5,103

)

 

(5,103

)

 

Totals

 

$

(13,443

)

$

 

$

(13,443

)

$

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

December 31,
2011

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Current interest rate swap liabilities

 

$

(3,580

)

$

 

$

(3,580

)

$

 

Long-term interest rate swap liabilities

 

(12,401

)

 

(12,401

)

 

Totals

 

$

(15,981

)

$

 

$

(15,981

)

$

 

 

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

 

We have not elected the fair value option for any of our financial assets or liabilities.  The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.  The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of June 30, 2012 and December 31, 2011.

 

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As of June 30, 2012

 

As of December 31, 2011

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

49,453

 

n/a

 

$

48,282

 

n/a

 

Investments, at cost

 

$

47,933

 

n/a

 

$

47,809

 

n/a

 

Long-term debt

 

$

1,173,655

 

$

1,173,655

 

$

880,000

 

$

880,000

 

 

The Company’s investments at June 30, 2012 and December 31, 2011 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 senior secured long-term debt of $875.6 million 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.  Based upon the inputs of the LIBOR based yield curve, which can be corroborated by observable market data, we have categorized the long-term debt as Level 2 within the fair value hierarchy.

 

Our Senior Notes long term debt of $298.1 million earns interest at a rate of 10.875% per year.  The fair value of this debt approximates its carrying value.  We have categorized the Senior Notes long-term debt as Level 2 within the fair value hierarchy.

 

9.             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)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Telephone Operations

 

$

519,542

 

$

519,542

 

Other Operations

 

1,020

 

1,020

 

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 June 30, 2012 and December 31, 2011.

 

The Company’s customer lists consist of an established base of customers that subscribe to its services.  The carrying amount of customer lists is as follows:

 

 

 

Telephone Operations

 

Other Operations

 

(In thousands)

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

193,124

 

$

193,124

 

$

4,405

 

$

4,405

 

Less: accumulated amortization

 

(146,602

)

(135,754

)

(4,185

)

(3,964

)

Net carrying amount

 

$

46,522

 

$

57,370

 

$

220

 

$

441

 

 

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Amortization associated with customer lists totaled approximately $5.6 million and $11.1 million in each of the three and six month periods ended June 30, 2012 and 2011, respectively.

 

10.          Deferred Debt Issuance Costs, Net and Other Assets

 

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

 

(In thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Deferred debt issuance costs, net

 

$

12,927

 

$

4,833

 

Other assets

 

54

 

71

 

Total

 

$

12,981

 

$

4,904

 

 

Deferred debt issuance costs are subject to amortization.  Deferred debt issuance costs of $5.1 million at June 30, 2012 related to our secured credit facility will be amortized over the term of the corresponding debt.  The remaining $7.8 million deferred costs relate to the acquisition of SureWest which include $6.8 million of an underwriting commission and $1.0 million for issuance of Senior Notes.  The deferred cost associated with the acquisition of SureWest will be amortized over the term of the maturity of the Senior Notes through June 2020.

 

11.          Accrued Expenses

 

Accrued expenses are as follows:

 

(In thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Accrued salaries

 

$

4,258

 

$

5,851

 

Accrued employee benefits

 

4,341

 

4,384

 

Accrued financing fees

 

10,910

 

 

Taxes payable

 

2,754

 

4,599

 

Accrued interest

 

3,034

 

237

 

Accrued site commissions

 

2,452

 

3,559

 

Other accrued expenses

 

6,891

 

5,941

 

Total accrued expenses

 

$

34,640

 

$

24,571

 

 

12.          Debt

 

Long-term debt consists of the following:

 

(In thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Senior secured credit facility — term loan

 

$

875,600

 

$

880,000

 

Senior notes — net of discount

 

298,055

 

 

Senior secured credit facility — revolving loan

 

 

 

 

 

1,173,655

 

880,000

 

Less: current portion of long-term debt

 

(8,800

)

(8,800

)

Total long-term debt

 

$

1,164,855

 

$

871,200

 

 

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Credit Agreement

 

The Company, through certain of its wholly owned subsidiaries, has an outstanding credit agreement with several financial institutions, which consists of a $50 million revolving credit facility, $875.6 million term loan facility, and $300.0 million of Senior Notes.  On July 2, 2012, we used $35 million on the revolving credit facility in connection with the SureWest acquisition. Borrowings under the senior secured credit facility are secured by substantially all of the assets of the Company with the exception of Illinois Consolidated Telephone Company.  The Senior Notes are unsecured.

 

Our 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 consists of $468.6 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 $407.0 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 which began on 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 4.61:1.00 at June 30, 2012, the borrowing margin for the next three month period ending September 30, 2012 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 June 30, 2012 or December 31, 2011, or at any time during the quarter ended June 30, 2012.  On July 2, 2012, we borrowed $35.0 million of the revolving credit facility for the acquisition of SureWest.

 

The weighted-average interest rate incurred on our credit facilities during the three month periods ended June 30, 2012 and 2011, including amounts paid on our interest rate swap agreements and the applicable margin, was 4.90% and 5.45% per annum, respectively.  Interest is payable at least quarterly.

 

The credit agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, issue capital stock, and commit to future capital expenditures.  We have agreed to maintain certain financial ratios, including interest coverage, and total net leverage ratios, all as defined in the credit agreement.  As of June 30, 2012, we were in compliance with the credit agreement covenants.

 

In connection with the acquisition of SureWest described in Note 3, on February 5, 2012 the Company received committed financing for a total of $350.0 million to fund the cash portion of the anticipated transaction, to refinance SureWest’s debt and to pay for certain transaction costs. The financing package included a $350.0 million Senior Unsecured Bridge Loan Facility (“Bridge Facility”). As anticipated, permanent financing for the SureWest acquisition was funded by our Senior Note offering, as described below.  As a result, the $4.1 million commitment fee incurred for the Bridge Facility was capitalized as deferred debt issuance costs and was amortized over the expected life of the Bridge Facility, which was four months.

 

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Effective February 17, 2012, we amended our credit facility to provide us with the ability to escrow proceeds from a high-yield note offering prior to closing the SureWest acquisition and, until closing, exclude the debt from current leverage calculations.  The amendment also permitted us additional flexibility for future high yield notes issuances with the same subsidiary guarantees required by our current credit facility, which enabled us to issue the Senior Notes described below.  All other terms, coverage and leverage ratios of the credit facility were unchanged.  Fees totaling $3.5 million were recognized as expense in connection with the amendment while $1.2 million in fees were capitalized as deferred debt issuance costs and amortized over the remaining life of the term debt.

 

On May 30, 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% Senior Notes, due 2020 through our wholly-owned subsidiary, Consolidated Communications Finance Co. (“Finance Co.”) for the acquisition of SureWest.  The Senior Notes will mature on June 1, 2020 and earn interest at a rate of 10.875% per year, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2012.  The Senior Notes were sold to investors at a price equal to 99.345% of the principal amount thereof, for a yield to maturity of 11.00%.  This discount will be amortized over the term of the Senior Notes.  The proceeds of the sale of the Senior Notes were held in an escrow account pending closing of the SureWest transaction.  Upon closing of the SureWest acquisition on July 2, 2012, Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., which assumed the Senior Notes, and we and certain of our subsidiaries fully and unconditionally guaranteed the Senior Notes.

 

13.          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 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.

 

The following interest rate swaps, all designated as cash flow hedges, were outstanding at June 30, 2012:

 

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Table of Contents

 

(In thousands)

 

Notional
Amount

 

2012 Balance Sheet Location

 

Fair
Value

 

Fixed to 3-month floating LIBOR

 

$

100,000

 

Current portion of long-term liabilities

 

$

(1,842

)

Fixed to 3-month floating LIBOR

 

130,000

 

Current portion of long-term liabilities

 

(3,880

)

3-month floating LIBOR minus spread to 1-month floating LIBOR

 

100,000

 

Current portion of long-term liabilities

 

(89

)

3-month floating LIBOR minus spread to 1-month floating LIBOR

 

130,000

 

Current portion of long-term liabilities

 

(168

)

Fixed to 1-month floating LIBOR

 

200,000

 

Other long-term liabilities

 

(3,337

)

Fixed to 1-month floating LIBOR

 

200,000

 

Current portion of long-term liabilities

 

(2,361

)

Forward starting fixed to 1-month floating LIBOR

 

175,000

 

Other long-term liabilities

 

(1,766

)

Total Fair Values

 

 

 

 

 

$

(13,443

)

 

The following interest rate swaps, all designated as cash flow hedges, were outstanding at December 31, 2011:

 

(In thousands)

 

Notional
Amount

 

2011 Balance Sheet Location

 

Fair Value

 

 

 

 

 

 

 

 

 

Fixed to 3-month floating LIBOR

 

$

100,000

 

Current portion of long-term liabilities

 

$

(3,401

)

Fixed to 3-month floating LIBOR

 

130,000

 

Other long-term liabilities

 

(6,053

)

3-month floating LIBOR minus spread to 1-month floating LIBOR

 

100,000

 

Current portion of long-term liabilities

 

(179

)

3-month floating LIBOR minus spread to 1-month floating LIBOR

 

130,000

 

Other long-term liabilities

 

(269

)

Fixed to 1-month floating LIBOR

 

300,000

 

Other long-term liabilities

 

(5,343

)

Forward starting fixed to 1-month floating LIBOR

 

200,000

 

Other long-term liabilities

 

(736

)

Total Fair Values

 

 

 

 

 

$

(15,981

)

 

At June 30, 2012 and December 31, 2011, the interest rate on approximately 72% and 60%, respectively, of our outstanding debt (excluding the Senior Notes) 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

 

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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.

 

At June 30, 2012 and December 31, 2011, the pretax deferred losses related to our interest rate swap agreements included in other comprehensive income totaled $13.4 million and $15.9 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 June 30,

 

For the six months
ended June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(581

)

$

(953

)

$

(1,584

)

$

(5,614

)

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

 

(15

)

(24

)

(31

)

(59

)

Deferred losses/(gains) reclassed from AOCI to interest expense

 

(14

)

402

 

(1

)

885

 

 

(In thousands, except months)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Aggregate notional value of current derivatives outstanding

 

$

630,000

 

$

530,000

 

Aggregate notional value of forward derivatives outstanding

 

$

175,000

 

$

200,000

 

Period through which derivative positions currently exist

 

March 2016

 

June 2015

 

Fair value of derivatives

 

$

13,443

 

$

15,981

 

Deferred losses included in AOCI (pretax)

 

$

13,425

 

$

15,932

 

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

 

$

41

 

$

65

 

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

 

9

 

15

 

 

14.          Interest Expense, Net of Interest Income

 

The following table summarizes interest expense for the periods indicated:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Interest expense — credit facility

 

$

7,377

 

$

6,382

 

$

14,837

 

$

12,468

 

Payments on swap liabilities, net

 

3,502

 

5,388

 

6,963

 

10,645

 

Interest expense — capital leases

 

160

 

165

 

321

 

321

 

Amortization of deferred financing costs — bridge facility

 

1,098

 

 

4,160

 

 

Interest expense — bridge facility

 

1,458

 

 

1,458

 

 

Interest expense — Senior Notes

 

2,750

 

 

2,750

 

 

Uncertain tax position interest accrual

 

10

 

12

 

19

 

24

 

Other interest

 

162

 

188

 

291

 

362

 

Amortization of deferred financing fees

 

460

 

338

 

860

 

662

 

Capitalized interest

 

(42

)

(39

)

(82

)

(72

)

Total interest expense

 

16,935

 

12,434

 

31,577

 

24,410

 

Less: interest income

 

(42

)

(37

)

(84

)

(74

)

Interest expense, net of interest income

 

$

16,893

 

$

12,397

 

$

31,493

 

$

24,336

 

 

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Table of Contents

 

15.          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 June 30, 2012 and 2011 and $1.3 million for each of the six month periods ended June 30, 2012 and 2011.

 

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
June 30,

 

For the six months ended
June 30,

 

 (In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

357

 

$

222

 

$

713

 

$

638

 

Interest cost

 

2,627

 

2,902

 

5,255

 

5,451

 

Expected return on plan assets

 

(2,611

)

(2,952

)

(5,222

)

(5,446

)

Net amortization loss (gain)

 

798

 

(495

)

1,596

 

375

 

Prior service credit amortization

 

(41

)

(32

)

(83

)

(83

)

Net periodic pension cost

 

$

1,130

 

$

(355

)

$

2,259

 

$

935

 

 

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 Pennsylvania and Texas operations.  The Restoration Plans restores 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 following table summarizes the components of net periodic pension cost for the Restoration Plans for the periods indicated:

 

 

 

For the three months ended
June 30,

 

For the six months ended
June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

14

 

$

15

 

$

28

 

$

29

 

Net amortization loss

 

11

 

5

 

22

 

17

 

Net periodic pension cost

 

$

25

 

$

20

 

$

50

 

$

46

 

 

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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 both the three month periods ended June 30, 2012 and 2011, respectively, and $0.3 million for both six month periods ended June 30, 2012 and 2011, respectively.  The net present value of the remaining obligations was approximately $2.3 million at June 30, 2012 and $2.5 million at December 31, 2011, and is included in pension and postretirement benefit obligations in the accompanying balance sheets.

 

We also maintain 38 life insurance policies on certain of the participating former directors and employees.  We recognized $0.2 million in life insurance proceeds as other non-operating income in the three and six month periods ended June 30, 2012.  We did not recognize any proceeds in other income for the three or six month periods ended June 30, 2011 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 $2.0 million at June 30, 2012 and $2.0 million at December 31, 2011.  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.

 

16.          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.

 

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

 

 

 

For the three months
ended June 30,

 

For the six months
ended June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

213

 

$

223

 

$

427

 

$

446

 

Interest cost

 

414

 

398

 

828

 

796

 

Net prior service cost amortization

 

(47

)

(47

)

(95

)

(94

)

Net periodic postretirement benefit cost

 

$

580

 

$

574

 

$

1,160

 

$

1,148

 

 

17.          Other Long-term Liabilities

 

Other long-term liabilities are as follows:

 

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(In thousands)

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Long-term derivative liabilities

 

$

5,103

 

$

12,401

 

Uncertain tax positions

 

1,224

 

1,224

 

Accrued interest on uncertain tax positions

 

70

 

50

 

Other long-term liabilities

 

466

 

492

 

Total

 

$

6,863

 

$

14,167

 

 

18.          Stock-based Compensation Plans

 

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

 

 

 

For the three months
ended June 30,

 

For the six months
ended June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Restricted stock

 

$

325

 

$

342

 

$

650

 

$

691

 

Performance shares

 

264

 

237

 

440

 

399

 

Total

 

$

589

 

$

579

 

$

1,090

 

$

1,090

 

 

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

 

As of June 30, 2012, 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

 

$

1,852

 

1.2

 

Performance shares

 

1,510

 

1.2

 

Total

 

$

3,362

 

1.2

 

 

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

 

 

 

2012

 

2011

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

Non-vested restricted shares outstanding — January 1

 

129,203

 

$

17.79

 

101,435

 

$

17.40

 

Shares granted

 

14,732

 

19.30

 

127,377

 

17.92

 

Shares cancelled

 

 

 

(10,282

)

18.48

 

Shares vested

 

 

 

 

 

Non-vested restricted shares outstanding — June 30

 

143,935

 

$

17.94

 

218,530

 

$

17.65

 

 


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

 

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

 

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2012

 

2011

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

 

 

 

 

 

 

 

 

 

 

Non-vested performance shares outstanding — January 1

 

50,879

 

$

17.04

 

68,880

 

$

15.74

 

Shares granted

 

67,040

 

17.92

 

50,440

 

17.92

 

Shares canceled

 

 

 

(10,768

)

16.95

 

Non-vested performance shares outstanding — June 30

 

117,919

 

$

17.54

 

108,552

 

$

16.63

 

 


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

 

19.          Income Taxes

 

There have been no changes to the balance of our unrecognized tax benefits reported at December 31, 2011.  As of June 30, 2012 and December 31, 2011, the amount of unrecognized tax benefits was $1.2 million.  The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is $0.8 million.  We do not expect any changes in our unrecognized tax benefits during the remainder of 2012.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At June 30, 2012, we had no material liability for interest or penalties and had no material interest or penalty expense.

 

The only periods subject to examination for our federal return 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 taxing authorities.  We do not expect any settlement or payment that may result from the audit to have a material effect on our results of operations or cash flows.

 

Our effective tax rate was 29.2% and 35.8% for the three month periods ended June 30, 2012 and 2011, respectively and 31.6% and 37.1% for the six month periods ended June 30, 2012 and 2011, respectively.  The effective tax rates differ from the federal and state statutory rates primarily due to lower forecasted income due to the acquisition of SureWest, state income taxes owed in certain states where we are required to file on a separate legal entity basis, non-deductible expenses and a change in the Illinois state income tax rate.

 

20.          Accumulated Other Comprehensive Loss, Net

 

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

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Fair value of cash flow hedges

 

$

(13,425

)

$

(15,932

)

Prior service credits and net losses on postretirement plans

 

(42,661

)

(44,102

)

 

 

(56,086

)

(60,034

)

Deferred taxes

 

20,734

 

22,201

 

Totals

 

$

(35,352

)

$

(37,833

)

 

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21.          Environmental Remediation Liabilities

 

Environmental remediation liabilities were $0.2 million at June 30, 2012 and $0.3 million at December 31, 2011, and are included in other long-term liabilities.  These liabilities relate to anticipated remediation and monitoring costs with respect to two small vacant sites and are undiscounted.  The Company believes the amount accrued is adequate to cover the remaining anticipated costs of remediation.

 

22.          Capital Leases

 

The Company has four capital leases, all of which expire in 2021, for the lease of office, warehouse and tech center space.  As of June 30, 2012, the present value of the minimum remaining lease commitments was approximately $4.6 million, of which $0.2 million is due and payable within the next 12 months.  The leases will require total remaining rental payments to LATEL, a related party entity, of approximately $6.8 million and total remaining rental payments to Spruce of approximately $1.4 million over the term of the leases.  These leases have total payments of $8.2 million on the remaining terms of the leases.

 

23.          Litigation and Contingencies

 

Six putative class action lawsuits were filed by alleged SureWest shareholders challenging the Company’s merger with SureWest in which the Company, WH Acquisition Corp.  and WH Acquisition II Corp, SureWest and members of the SureWest board of directors have been named as defendants.  Five shareholder actions were filed in the Superior Court of California, Placer County, and one shareholder action was filed in the United States District Court for the Eastern District of California.  The actions are called Needles v. SureWest Communications, et al., filed February 17, 2012, Errecart v. Oldham, et al., filed February 24, 2012, Springer v. SureWest Communications, et al., filed March 9, 2012, Aievoli v. Oldham, et al., filed March 15, 2012, and Waterbury v. SureWest Communications, et al., filed March 26, 2012, and the federal action is called Broering v. Oldham, et al., filed April 18, 2012.  The actions generally allege, among other things, that each member of the SureWest board of directors breached fiduciary duties to SureWest and its shareholders by authorizing the sale of SureWest to the Company for consideration that allegedly was unfair to the SureWest shareholders and agreed to terms that allegedly unduly restrict other bidders from making a competing offer.  The complaints also allege that the Company and SureWest aided and abetted the breaches of fiduciary duties allegedly committed by the members of the SureWest board of directors.  The Broering complaint also alleges, among other things, that the joint proxy statement/prospectus filed with the SEC on March 28, 2012 did not make sufficient disclosures regarding the merger, that SureWest’s board should have appointed an independent committee to negotiate the transaction and that SureWest should have gone back to another bidder to create a competitive bid process.  The lawsuits seek equitable relief, including an order to prevent the defendants from consummating the merger on the agreed-upon terms and/or an award of unspecified money damages.  On March 14, 2012, the Placer County Superior Court entered an order consolidating the Needles, Errecart and Springer actions into a single action under the caption In re SureWest Communications Shareholder Litigation.  Under the terms of this order, all cases subsequently filed in the Superior Court for the State of California, County of Placer, that relate to the same subject matter and involve similar questions of law or fact were to be consolidated with these cases as well.  This included the Aievoli and Waterbury cases.  On April 10, 2012, the plaintiff in Waterbury filed a request for voluntary dismissal of her complaint without prejudice.  On May 18, 2012, pursuant to the parties’ stipulation, the federal court entered an order staying the Broering action for 90 days. On June 1, 2012, the parties entered into a proposed settlement of all of the shareholder actions without any admission of liability by the Company or the other defendants.  Pursuant to the proposed settlement, SureWest agreed to make, and subsequently made,

 

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certain additional disclosures in a Current Report on Form 8-K filed with the SEC in advance of the special meeting of SureWest shareholders held on June 12, 2012.  The proposed settlement also provided that plaintiffs’ counsel collectively are to receive attorneys’ fees of $525,000, of which the Company is to pay $36,250, with the balance to be paid by SureWest and its insurer.  The proposed settlement is subject to approval by the Placer County Superior Court.  Upon approval by the court, the consolidated state court actions and the federal action will be dismissed with prejudice.

 

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.  Salsgiver originally claimed to have sustained losses of approximately $125 million and did 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.  Consolidated filed a motion for summary judgment on June 18, 2012 and the court is scheduled to hear oral arguments on August 30, 2012.  In addition, we have asked the FCC Enforcement Bureau to address Salsgiver’s unauthorized pole attachments and safety violations on those attachments.  We believe that these are violations of an FCC order regarding Salsgiver’s complaint against us.  We do not believe that these claims will have a material adverse impact on our financial results.

 

Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), received assessment notices from the Commonwealth of Pennsylvania Department of Revenue increasing the amounts owed for Pennsylvania Gross Receipt Taxes for the tax period ending December 31, 2009.  These two assessments adjusted the subsidiaries’ combined total outstanding taxable gross receipts liability (with interest) to approximately $2.3 million.  In addition, based upon recently completed audits of CCES for 2008, 2009 and 2010, we believe the Commonwealth of Pennsylvania may issue additional assessments totaling approximately $1.7 million for Gross Receipt Taxes allegedly owed.  Our CCPA subsidiary has also been notified by the Commonwealth of Pennsylvania that they will conduct a gross receipts audit for the calendar year 2008.  An appeal challenging the 2009 CCPA assessment was filed with the Department of Revenue’s Board of Appeals on September 15, 2011, and we filed a similar appeal for CCES with the Board of Appeals on November 11, 2011 challenging the 2009 CCES assessment.  We also intend to appeal any adverse decisions from the Board of Appeals involving CCPA or CCES to the Commonwealth’s Board of Finance and Revenue.  At the Board of Finance and Revenue, we anticipate that these matters will be continued pending the outcome of present litigation in Commonwealth Court between Verizon Pennsylvania, Inc. and the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  The Gross Receipts Tax issues in the Verizon Pennsylvania case are substantially the same as those presently facing CCPA and CCES.  In addition, there are numerous telecommunications carriers with Gross Receipts Tax matters dealing with the same issues that are in various stages of appeal before the Board of Finance and Revenue and the Commonwealth Court.  Those appeals by other similarly situated telecommunications carriers have been continued until resolution of the Verizon Pennsylvania case.  We believe that these assessments and the positions taken by the Commonwealth of Pennsylvania are without substantial merit.  We do not believe that the outcome of these claims will have a material adverse impact on our financial results.

 

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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.

 

24.          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.

 

 

 

For the three months
ended June 30,

 

For the six months
ended June 30,

 

(In thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Share Using Two-class Method:

 

 

 

 

 

 

 

 

 

Net income

 

$

2,906

 

$

5,513

 

$

4,790

 

$

13,010

 

Less: net income attributable to noncontrolling interest

 

120

 

162

 

245

 

294

 

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

 

2,786

 

5,351

 

4,545

 

12,716

 

Less: earnings allocated to participating securities

 

95

 

119

 

160

 

246

 

Net income attributable to common stockholders

 

$

2,691

 

$

5,232

 

$

4,385

 

$

12,470

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding (1)

 

29,689

 

29,593

 

29,689

 

29,593

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common stockholders — basic and diluted

 

$

0.09

 

$

0.18

 

$

0.15

 

$

0.42

 

 


(1)  To the extent that restricted shares are anti-dilutive, they have been excluded from the calculation of diluted earnings per share in accordance with the applicable accounting guidance.

 

An additional 0.3 million and 0.4 million shares were not included in the computation of potentially dilutive securities at June 30, 2012 and 2011, because they were anti-dilutive.

 

25.          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, DSL Internet access, IPTV, VOIP service, custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  The Company also operates two complementary non-core businesses that comprise “Other Operations,” including telephone services to correctional facilities and equipment sales.  Management evaluates the performance of these business segments based upon net revenue and operating income.

 

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For the three months ended
June 30,

 

For the six months
ended June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Telephone operations

 

$

85,012

 

$

84,809

 

$

170,095

 

$

172,203

 

Other operations

 

7,993

 

7,814

 

16,274

 

15,861

 

Total net revenue

 

93,005

 

92,623

 

186,369

 

188,064

 

 

 

 

 

 

 

 

 

 

 

Operating expense — telephone operations

 

50,011

 

48,797

 

102,899

 

97,742

 

Operating expense — other operations

 

7,073

 

7,157

 

14,399

 

14,595

 

Total operating expense

 

57,084

 

55,954

 

117,298

 

112,337

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization — telephone operations

 

21,664

 

21,778