Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 08/08/2013 14:20:09)

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, 2013

 

or

 

[     ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

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

 

 

 

(IRS Employer

 

 

of incorporation or organization)

 

 

 

Identification No.)

 

 

 

 

 

 

 

 

 

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 check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes    X            No        

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes    X             No        

 

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

 

Large accelerated filer             Accelerated filer   X  

 

Non-accelerated filer        (Do not check if a smaller reporting company)Smaller reporting company       

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                  No    X

 

On July 26, 2013, the registrant had 40,111,518 shares of Common Stock outstanding.

 

 

 

 

 

 



Table of Contents

 

TABLE OF CO NTENTS

 

 

Page

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

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

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 6.

Exhibits

46

 

 

 

SIGNATURES

47

 



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; Amounts in thousands except per share amounts)

 

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

151,320 

 

$

86,557 

 

$

302,848 

 

$

173,008

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation and amortization)

 

55,942 

 

32,019 

 

110,994 

 

63,073

 

Selling, general and administrative expenses

 

33,544 

 

19,121 

 

66,670 

 

37,804

 

Financing and other transaction costs

 

178 

 

562 

 

357 

 

5,384

 

Depreciation and amortization

 

34,709 

 

21,708 

 

69,550 

 

43,682

 

Income from operations

 

26,947 

 

13,147 

 

55,277 

 

23,065

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(20,697)

 

(16,893)

 

(45,297)

 

(31,493

)

Investment income

 

8,693 

 

6,762 

 

17,477 

 

13,228

 

Other, net

 

82 

 

185 

 

(25)

 

199

 

Income from continuing operations before income taxes

 

15,025 

 

3,201 

 

27,432 

 

4,999

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

5,465 

 

880 

 

11,014 

 

1,501

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

9,560 

 

2,321 

 

16,418 

 

3,498

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations, net of tax

 

(272)

 

585 

 

(248)

 

1,292

 

 

 

 

 

 

 

 

 

 

 

Net income

 

9,288 

 

2,906 

 

16,170 

 

4,790

 

Less: net income attributable to noncontrolling interest

 

94 

 

120 

 

193 

 

245

 

Net income attributable to common shareholders

 

$

9,194 

 

$

2,786 

 

$

15,977 

 

$

4,545

 

 

 

 

 

 

 

 

 

 

 

Net income per common share - basic and diluted

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.23 

 

$

0.07 

 

$

0.40 

 

$

0.11

 

(Loss) income from discontinued operations, net of tax

 

(0.01)

 

0.02 

 

(0.01)

 

0.04

 

Net income per basic and diluted common share attributable to common shareholders

 

$

0.22 

 

$

0.09 

 

$

0.39 

 

$

0.15

 

Dividends declared per common share

 

$

0.38 

 

$

0.38 

 

$

0.77 

 

$

0.77

 

 

See accompanying notes.

 

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; Amounts in thousands)

 

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$

9,288

 

$

2,906 

 

$

16,170

 

$

4,790

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

Amortization of actuarial losses and prior service cost to earnings, net of tax

 

474

 

448 

 

948

 

897

 

Derivative instruments designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of tax

 

719

 

589 

 

1,138

 

1,584

 

Reclassification of realized (gain) loss to earnings, net of tax

 

-

 

(8)

 

1,839

 

-

 

Comprehensive income

 

10,481

 

3,935 

 

20,095

 

7,271

 

Less: comprehensive income attributable to noncontrolling interest

 

94

 

120 

 

193

 

245

 

Total comprehensive income attributable to common shareholders

 

$

10,387

 

$

3,815 

 

$

19,902

 

$

7,026

 

 

See accompanying notes.

 

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands except share and per share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,520 

 

$

17,854

 

Accounts receivable, net

 

56,527 

 

57,957

 

Income tax receivable

 

1,954 

 

12,020

 

Deferred income taxes

 

8,984 

 

8,984

 

Prepaid expenses and other current assets

 

13,761 

 

11,269

 

Assets of discontinued operations

 

714 

 

1,772

 

Total current assets

 

85,460 

 

109,856

 

 

 

 

 

 

 

Property, plant and equipment, net

 

895,597 

 

907,672

 

Investments

 

111,800 

 

109,750

 

Goodwill

 

603,446 

 

603,446

 

Other intangible assets

 

44,994 

 

49,530

 

Deferred debt issuance costs, net and other assets

 

15,992 

 

13,800

 

Total assets

 

$

1,757,289 

 

$

1,794,054

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

7,630 

 

$

14,954

 

Advance billings and customer deposits

 

26,485 

 

27,654

 

Dividends payable

 

15,538 

 

15,463

 

Accrued compensation

 

19,445 

 

21,912

 

Accrued expense

 

33,755 

 

47,225

 

Current portion of long-term debt and capital lease obligations

 

9,849 

 

9,596

 

Current portion of derivative liability

 

371 

 

3,164

 

Liabilities of discontinued operations

 

254 

 

4,209

 

Total current liabilities

 

113,327 

 

144,177

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

1,214,404 

 

1,208,248

 

Deferred income taxes

 

140,320 

 

138,068

 

Pension and other postretirement obligations

 

149,672 

 

156,710

 

Other long-term liabilities

 

12,989 

 

10,746

 

Total liabilities

 

1,630,712 

 

1,657,949

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 40,111,518 and 39,877,998, shares outstanding as of June 30, 2013 and December 31, 2012, respectively

 

401 

 

399

 

Additional paid-in capital

 

163,668 

 

177,315

 

Retained earnings

 

 

-

 

Accumulated other comprehensive loss, net

 

(41,859)

 

(45,784

)

Noncontrolling interest

 

4,367 

 

4,175

 

Total shareholders’ equity

 

126,577 

 

136,105

 

Total liabilities and shareholders’ equity

 

$

1,757,289 

 

$

1,794,054

 

 

See accompanying notes.

 

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

 

 

 

Six Months Ended June 30,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net cash provided by continuing operations

 

$

67,346 

 

$

49,228

 

Net cash (used in) provided by discontinued operations

 

(3,097)

 

912

 

Net cash provided by operating activities

 

64,249 

 

50,140

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment, net

 

(52,623)

 

(20,715

)

Restricted cash for acquisition of SureWest

 

 

(298,035

)

Other

 

(81)

 

(286

)

Net cash used in continuing operations

 

(52,704)

 

(319,036

)

Net cash used in discontinued operations

 

(48)

 

(97

)

Net cash used in investing activities

 

(52,752)

 

(319,133

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds on bond offering

 

 

298,055

 

Restricted cash on bond offering

 

 

(17,047

)

Proceeds from the issuance of long-term debt

 

49,000 

 

-

 

Payment of capital lease obligation

 

(224)

 

(92

)

Payment on long-term debt

 

(43,620)

 

(4,400

)

Payment of financing costs

 

 

(5,070

)

Dividends on common stock

 

(30,987)

 

(23,173

)

Net cash used in financing activities

 

(25,831)

 

248,273

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(14,334)

 

(20,720

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

17,854 

 

105,704

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

3,520 

 

$

84,984

 

 

See accompanying notes.

 

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Accounting

 

Consolidated Communications Holdings, Inc. (the “Company”, “we” or “our”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communications services to residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri.

 

We offer a wide range of telecommunications services to residential and business customers in the areas we serve. Our telecommunications services include local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, directory publishing, Competitive Local Exchange Carrier (“CLEC”) services and equipment sales.  As of June 30, 2013, we had approximately 263 thousand access lines, 126 thousand voice connections, 251 thousand data and Internet connections and 109 thousand video connections.

 

We historically operated our business as two separate reportable segments: Telephone Operations and Other Operations.  Based on recent changes in our business structure, as of the quarter ended June 30, 2013 we concluded that we operate our business as one reportable segment. See the Recent Business Developments section below for a more detailed discussion regarding the circumstances that resulted in the change to our segment reporting.

 

In the opinion of management, the accompanying condensed consolidated balance sheets and related consolidated statements of income, comprehensive income and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2012 Annual Report on Form 10-K filed with the SEC.

 

Recent Business Developments

 

SureWest Merger

 

We completed the acquisition of SureWest Communications on July 2, 2012.  SureWest Communications results of operations are included within our results following the acquisition date.  For a more complete discussion of the transaction, refer to Note 2.

 

Segment Reporting

 

Historically, we have classified our operations into two separate reportable business segments: Telephone Operations and Other Operations.  Our Telephone Operations consisted of a wide range of telecommunications services to residential and business customers, including local and long-distance service, high-speed broadband Internet access, video services, VOIP services, custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  Our Other Operations segment operated two complementary non-core businesses including telephone services to state and county correctional facilities (“Prison Services”) and equipment sales.  As discussed below, our contract to provide telephone services to correctional facilities operated by the Illinois Department of Corrections was not renewed and the process of transitioning these services to another service provider was completed during the quarter ended March 31, 2013.  During the quarter ended June 30, 2013, upon establishing a plan to sell certain assets related to the Prison Services business, we classified the assets

 

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and operations as a discontinued operation.  Prison Services comprised nearly all of the Other Operations segment revenue and results of operations.  Consequently, with the cessation of our Prison Services business and based on the segment accounting guidance, the Company has concluded that it operates as one segment as of the quarter ended June 30, 2013. As required by the authoritative guidance for segment presentation, segment results of operations have been retrospectively adjusted to reflect this change for all periods presented.

 

Prison Services Contract

 

We previously provided telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections and to certain county jails.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace us as the provider of those services with a competitor. Although we challenged our competitor’s bid and the State’s decision to accept that bid in a variety of different forums, during the quarter ended March 31, 2013, the process of transitioning these services to another service provider was completed. All related assets have been assessed for recoverability in light of this change and we determined that no impairment was necessary. During 2012, the prison services contract comprised 5% of consolidated operating revenues and approximately 2% of consolidated operating income, excluding financing and other transaction fees.

 

Discontinued Operations

 

During the quarter ended June 30, 2013, the Company established a plan to sell certain assets related to the Prison Services business.  We expect the plan to be completed by the end of the third quarter of 2013.  In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, “ Discontinued Operations ”, the financial results of these prison services operations have been classified as discontinued operations and are presented in a separate line on the condensed consolidated statements of income for all periods presented.  The related prison services assets have been classified on the condensed consolidated balance sheets as assets of discontinued operations for all periods presented.  For a more complete discussion of the transaction, refer to Note 2.

 

Reclassifications

 

Certain amounts in our 2012 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2013 condensed consolidated financial statements, which consists primarily of the effects of reclassifications from the presentation of prison services as a discontinued operation and the finalization of purchase accounting for the SureWest acquisition.

 

Recent Accounting Pronouncements

 

Effective January 1, 2013, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2012-02 (“ASU 2012-02”), Testing Indefinite-Lived Intangible Assets for Impairment . ASU 2012-02 permits an entity to perform an initial assessment of qualitative factors to determine whether it is more likely than not that a non-goodwill indefinite-lived intangible asset is impaired and thus whether it is necessary to calculate the asset’s fair value for the purpose of comparing it with the asset’s carrying amount. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

 

Effective January 1, 2013, we adopted Accounting Standards Update No. 2013-02 (“ASU 2013-02”), Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which establishes new requirements for disclosing reclassifications of items out of accumulated other comprehensive income (“OCI”). ASU 2013-2 requires disclosures for the (i) changes in components of accumulated OCI, (ii) effects on individual line items in net income for each item of accumulated OCI that is reclassified in its entirety to net income, and (iii) cross references to other disclosures that provide additional details for OCI items that are not reclassified in their entirety to net income. For public companies, amendments are effective prospectively for reporting periods beginning after December 15, 2012, with early adoption permitted. In accordance with the provisions of this guidance, disclosures related to accumulated OCI can be found in Note 8.

 

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2.     ACQUISITION AND DISPOSITIONS

 

Merger With SureWest Communications

 

On July 2, 2012, we completed the merger with SureWest Communications (“SureWest”), which resulted in the acquisition of 100% of all the outstanding shares of SureWest for $23.00 per share in a cash and stock transaction.  SureWest provides telecommunications services in Northern California, primarily in the greater Sacramento region, and in the greater Kansas City, Kansas and Missouri areas. The total purchase price of $550.8 million consisted of cash and assumed debt of $402.4 million and 9,965,983 shares of the Company’s common stock valued at the Company’s opening stock price on July 2, 2012 of $14.89, which totaled $148.4 million. We acquired SureWest to provide additional diversification of our revenues and cash flows.

 

Subsequent to the merger, the financial results of SureWest operations have been included in our condensed consolidated statement of income.  During the quarter and six months ended June 30, 2013, we paid change-in-control obligations to former members of the SureWest management team of $0.8 million and $7.9 million, respectively, that were previously accrued.  At June 30, 2013, unpaid obligations under the change-in-control agreements were $0.3 million, which are expected to be paid during the three months ended September 30, 2013.

 

The acquisition of SureWest has been accounted for using the acquisition method in accordance with the FASB’s ASC Topic 805, Business Combinations .  Accordingly, the net assets acquired were recorded at their estimated fair values at July 2, 2012.  These values were derived from a purchase price allocation, which was finalized during the quarter ended June 30, 2013 with the completion of various tax analysis and adjustments.

 

The following table summarizes the final purchase price allocation:

 

 

 

(In thousands)

 

Current assets

 

$

47,073

 

Property, plant and equipment

 

591,818

 

Goodwill

 

84,016

 

Other intangible assets

 

3,600

 

Other long-term assets

 

4,861

 

Total assets acquired

 

731,368

 

Current liabilities

 

53,566

 

Pension and other post-retirement obligations

 

55,916

 

Deferred income taxes

 

66,976

 

Other long-term liabilities

 

4,114

 

Total liabilities assumed

 

180,572

 

Net assets acquired

 

$

550,796

 

 

As noted above, during the quarter ended June 30, 2013, the Company recorded tax related adjustments to the preliminary purchase price allocation which decreased deferred income taxes by $1.3 million, increased current assets by $0.2 million and decreased goodwill by $1.5 million.  As of June 30, 2013, the Company has completed its accounting for the acquisition of SureWest.  These adjustments were retrospectively applied on the balance sheet to reflect the appropriate balances as of July 2, 2012.  There was no impact to the income statement for the twelve months ended December 31, 2012.

 

Unaudited Pro Forma Results

 

The following unaudited pro forma information presents our results of operations as if the acquisition of SureWest occurred on January 1, 2011.  The adjustments to arrive at the pro forma information below include additional depreciation and amortization expense for the fair value increases to property plant and equipment, software and customer relationships.  Interest expense was increased to reflect the additional debt acquired to finance a portion of the acquisition price.  Shares used in the calculation of basic and diluted earnings per share were adjusted to reflect the additional shares of common stock issued to fund a portion of the acquisition price. The pro forma information below does not purport to present the actual results that would have resulted if the acquisition had in fact occurred at the beginning of the fiscal periods presented, nor does the information project results for any future period.

 

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Quarter Ended

 

Six Months Ended

 

(In thousands, except per share amounts)

 

June 30, 2012

 

June 30, 2012

 

Operating revenues

 

$

151,563 

 

$

300,910

 

Income from operations

 

$

12,037 

 

$

26,113

 

Loss from continuing operations

 

$

(1,659)

 

$

(761

)

Discontinued operations, net of tax

 

$

585 

 

$

1,292

 

Net (loss) income

 

$

(1,074)

 

$

531

 

Less: income attributable to noncontrolling interest

 

120 

 

245

 

Net (loss) income attributable to common shareholders

 

$

(1,194)

 

$

286

 

 

 

 

 

 

 

Net income per common share - basic and diluted

 

 

 

 

 

Loss from continuing operations

 

$

(0.04)

 

$

(0.02

)

Discontinued operations, net of tax

 

0.01 

 

0.03

 

Net (loss) income per basic and diluted common share attributable to common shareholders

 

$

(0.03)

 

$

0.01

 

 

Discontinued Operations

 

During the quarter ended June 30, 2013, the Company established a plan to sell certain assets related to the Prison Services business.  We expect the plan to be completed by the end of the third quarter of 2013. The financial results of the operations for prison services, which were previously reported in the Other Operations segment, have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented.

 

As of June 30, 2013 and December 31, 2012, the major classes of the prison services assets and liabilities included in discontinued operations were as follows:

 

(In thousands)

 

June 30, 2013

 

December 31, 2012

 

Accounts receivable, net

 

$

60

 

$

625

 

Deferred income taxes

 

583

 

583

 

Property, plant and equipment, net

 

71

 

564

 

Total assets

 

$

714

 

$

1,772

 

 

 

 

 

 

 

Accounts payable

 

$

-

 

$

13

 

Advance billings and customer deposits

 

165

 

938

 

Accrued expense

 

89

 

3,258

 

Total liabilities

 

$

254

 

$

4,209

 

 

The following table summarizes the financial information for the prison services operations for the quarters and six months ended June 30, 2013 and 2012:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Operating revenues

 

$

482 

 

$

6,448

 

$

5,249 

 

$

13,361

 

Operating expenses including depreciation and amortization

 

878 

 

5,543

 

5,577 

 

11,361

 

(Loss) income from operations

 

(396)

 

905

 

(328)

 

2,000

 

Income tax (benefit) expense

 

(124)

 

320

 

(80)

 

708

 

(Loss) income from discontinued operations

 

$

(272)

 

$

585

 

$

(248)

 

$

1,292

 

 

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3.  EARNINGS PER SHARE

 

The computation of basic and diluted earnings per share attributable to common shareholders computed using the two-class method is as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

Income from continuing operations

 

$

9,560 

 

$

2,321

 

$

16,418 

 

$

3,498

 

Less: net income attributable to noncontrolling interest

 

94 

 

120

 

193 

 

245

 

Income attributable to common shareholders before allocation of earnings to participating securities

 

9,466 

 

2,201

 

16,225 

 

3,253

 

Less: earnings allocated to participating securities

 

131 

 

95

 

263 

 

160

 

Income from continuing operations attributable to common shareholders

 

9,335 

 

2,106

 

15,962 

 

3,093

 

Net income (loss) from discontinued operations

 

(272)

 

585

 

(248)

 

1,292

 

Net income attributable to common shareholders

 

$

9,063 

 

$

2,691

 

$

15,714 

 

$

4,385

 

Weighted-average number of common shares outstanding

 

39,755 

 

29,689

 

39,755 

 

29,689

 

Basic and diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.23 

 

$

0.07

 

$

0.40 

 

$

0.11

 

Income (loss) from discontinued operations, net of tax

 

(0.01)

 

0.02

 

(0.01)

 

0.04

 

Net income per common share attributable to common shareholders

 

$

0.22 

 

$

0.09

 

$

0.39 

 

$

0.15

 

 

Diluted earnings per common share attributable to common shareholders for the three and six months ended June 30, 2013 excludes 0.4 million shares and 0.2 million shares, respectively, of potential common securities related to our share-based compensation plan, because the inclusion of the potential common shares would have had an antidilutive effect.  For the three and six months ended June 30, 2012, diluted earnings per share excluded 0.3 million potential common shares.

 

4.  INVESTMENTS

 

Our investments are as follows:

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Cash surrender value of life insurance policies

 

$

2,115

 

$

2,045

 

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

 

5,028

 

5,023

 

Other

 

430

 

430

 

Equity method investments:

 

 

 

 

 

GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)

 

26,543

 

25,695

 

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

 

7,434

 

7,286

 

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

 

24,186

 

23,338

 

CVIN, LLC (13.43% interest)

 

1,664

 

1,533

 

Totals

 

$

111,800

 

$

109,750

 

 

Cost Method

 

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

 

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during the quarters or six months ended June 30, 2013 or 2012 as no factors indicating impairment existed.  For the three months ended June 30, 2013 and 2012, we received cash distributions from these partnerships totaling $3.8 million and $3.0 million, respectively. For the six months ended June 30, 2013 and 2012, we received cash distributions from these partnerships totaling $7.8 million and $5.5 million, respectively.

 

CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers.  On an annual basis, 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.

 

Equity Method

 

We own 20.51% 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, 2013 and 2012, we received cash distributions from these partnerships totaling $3.9 million and $2.9 million, respectively. For the six months ended June 30, 2013 and 2012, we received cash distributions from these partnerships totaling $8.0 million and $6.5 million, respectively.

 

We have a 13.43% interest in Central Valley Independent Network, LLC (“CVIN”), a joint enterprise comprised of affiliates of several independent telephone companies located in central and northern California. CVIN provides network services and oversees a broadband infrastructure project designed to expand and improve the availability of network services to counties in central California.  Because we have significant influence over the operating and financial policies of this entity, we account for this investment using the equity method.  During the six months ended June 30, 2013, we made additional capital investments of $0.1 million in this partnership.  We did not receive any distributions from this partnership during the quarters or six months ended June 30, 2013 and 2012.

 

The combined unaudited results of operations and financial position of our three equity investments in the cellular limited partnerships are summarized below:

 

 

 

Quarter Ended

 

Six Months

 

 

 

June 30,

 

Ended June 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Total revenues

 

$

79,342

 

$

73,555

 

$

156,061

 

$

145,890

 

Income from operations

 

24,914

 

22,235

 

48,888

 

41,927

 

Net income before taxes

 

24,926

 

22,247

 

48,911

 

41,956

 

Net income

 

24,926

 

22,143

 

48,911

 

41,748

 

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Current assets

 

$

58,650

 

$

49,982

 

Non-current assets

 

81,826

 

79,529

 

Current liabilities

 

15,798

 

15,417

 

Non-current liabilities

 

1,492

 

1,351

 

Partnership equity

 

123,186

 

112,734

 

 

5.               FAIR VALUE MEASUREMENTS

 

Our 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 valuation models which rely on the expected London Interbank Offered Rate (“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. See Note 7 for further discussion regarding our interest rate swap agreements.

 

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Our interest rate swap liabilities measured at fair value on a recurring basis and subject to disclosure requirements at June 30, 2013 and December 31, 2012 were as follows:

 

 

 

 

 

As of June 30, 2013

 

 

 

 

 

Quoted Prices
In Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Current interest rate swap liabilities

 

$

(371)

 

$

 

$

(371)

 

$

 

Long-term interest rate swap liabilities

 

(2,779)

 

 

(2,779)

 

 

Totals

 

$

(3,150)

 

$

 

$

(3,150)

 

$

 

 

 

 

 

 

 

As of December 31, 2012

 

 

 

 

 

Quoted Prices
In Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Current interest rate swap liabilities

 

$

(3,164)

 

$

 

$

(3,164)

 

$

 

Long-term interest rate swap liabilities

 

(3,919)

 

 

(3,919)

 

 

Totals

 

$

(7,083)

 

$

 

$

(7,083)

 

$

 

 

The change in the fair value of the derivatives is primarily a result of a change in market expectations for future interest rates and the expiration of certain instruments during the six months ended June 30, 2013.

 

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, 2013 and December 31, 2012.

 

 

 

As of June 30, 2013

 

As of December 31, 2012

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

59,827

 

n/a

 

$

57,852

 

n/a

 

Investments, at cost

 

$

49,858

 

n/a

 

$

49,853

 

n/a

 

Long-term debt

 

$

1,218,839

 

$

1,268,870

 

$

1,213,000

 

$

1,231,355

 

 

Cost & Equity Method Investments

 

Our investments at June 30, 2013 and December 31, 2012 accounted for under both the equity and cost methods consists primarily of minority positions in various cellular telephone limited partnerships and our investment in CoBank.  These investments are recorded using either the equity or cost methods. It is impracticable to determine fair value of these investments.

 

Long-term Debt

 

The fair value of our long-term debt was estimated using a discounted cash flow analyses based on incremental borrowing rates for similar types of borrowing arrangements.  We have categorized the long-term debt as Level 2 within the fair value hierarchy.

 

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6.     LONG-TERM DEBT

 

Long-term debt, presented net of unamortized discounts, consisted of the following:

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2013

 

2012

 

Senior secured credit facility:

 

 

 

 

 

Term Loan 2

 

$

402,916

 

$

404,961

 

Term Loan 3, net of discount of $4,714 and $5,088 at June 30, 2013 and December 31, 2012, respectively

 

507,711

 

509,912

 

Revolving loan

 

10,000

 

-

 

Senior notes, net of discount of $1,788 and $1,873 at June 30, 2013 and December 31, 2012, respectively

 

298,212

 

298,127

 

Capital leases

 

5,414

 

4,844

 

 

 

1,224,253

 

1,217,844

 

Less: current portion of long-term debt and capital leases

 

(9,849)

 

(9,596)

 

Total long-term debt

 

$

1,214,404

 

$

1,208,248

 

 

Credit Agreement

 

The Company, through certain of its wholly owned subsidiaries, has an outstanding credit agreement with several financial institutions, which consists of a $50.0 million revolving credit facility and outstanding term loans of $910.6 million at June 30, 2013.  The credit facility also includes an incremental term loan facility which provides the ability to borrow up to $300.0 million of incremental term loans.  As of June 30, 2013, $10.0 million was outstanding under the revolving credit facility.  No amounts were outstanding under the revolving credit facility at December 31, 2012. 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 and our majority-owned subsidiary, East Texas Fiber Line Incorporated.

 

Our term loans under the credit facility, as amended, were issued in separate tranches, resulting in different maturity dates and interest rate margins for each term loan.  The second term loan (“Term 2”) consists of an original aggregate principal amount of $409.1 million, matures on December 31, 2017 and currently has an applicable margin (at our election) equal to either 4.00% for a LIBOR-based term loan or 3.00% for an alternative base rate term loan.  The Term 2 loan requires $1.0 million in quarterly principal payments, which began on March 31, 2012.  The third term loan (“Term 3”) consists of an original aggregate principal amount of $515.0 million, with a maturity date of December 31, 2018.  The Term 3 loan requires quarterly principal payments of $1.3 million which commenced March 31, 2013 and has an applicable margin (at our election) equal to either 4.00% for a LIBOR-based term loan or 3.00% for an alternative base rate term loan subject to a 1.25% LIBOR floor. The Term 3 loan contains an original issuance discount of $5.2 million, which is being amortized over the term of the loan.

 

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 at June 30, 2013, the borrowing margin for the next three month period ending September 30, 2013 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. As of June 30, 2013, $10.0 million was outstanding under the revolving credit facility. There were no borrowings or letters of credit outstanding under the revolving credit facility at December 31, 2012.

 

The weighted-average interest rate on outstanding borrowings under our credit agreement was 4.77% and 4.79% at June 30, 2013 and December 31, 2012, respectively.  Interest is payable at least quarterly.

 

Net proceeds from asset sales exceeding certain thresholds, to the extent not reinvested, are required to be used to repay loans outstanding under the credit agreement.

 

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Credit Agreement Covenant Compliance

 

The credit agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue capital stock.  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, 2013, we were in compliance with the credit agreement covenants.

 

Effective February 17, 2012, we amended our credit facility to provide us with the ability to incur indebtedness necessary to finance the acquisition of SureWest, which enabled us to issue the unsecured Senior Notes (“Senior Notes”), as described below.  In connection with the amendment, fees of $3.5 million were recognized as financing and other transaction costs during the six months ended June 30, 2012.

 

In general, our credit agreement restricts our ability to pay dividends to the amount of our Available Cash as defined in our credit agreement. As of June 30, 2013, and including the $15.5 million dividend declared in May 2013 and paid on August 1, 2013, we had $194.2 million in dividend availability under the credit facility covenant.

 

Under our credit agreement, if our total net leverage ratio (as defined in the credit agreement), as of the end of any fiscal quarter, is greater than 5.10:1.00, we will be required to suspend dividends on our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to fund acquisitions, or make other investments.  During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in Available Cash, among other things.  In addition, we will not be permitted to pay dividends if an event of default under the credit agreement has occurred and is continuing.  Among other things, it will be an event of default if our total net leverage ratio and interest coverage ratio as of the end of any fiscal quarter is greater than 5.25:1.00 and less than 2.25:1.00, respectively.  As of June 30, 2013, our total net leverage ratio under the credit agreement was 4.26:1.00, and our interest coverage ratio was 3.32:1.00.

 

Senior Notes

 

On May 30, 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% unsecured 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 in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) and outside the United States in compliance with Regulation S under the Securities Act.  In addition, some of the Senior Notes were sold to certain “accredited investors” (as defined in Rule 501 under the Securities Act).  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 is being amortized over the term of the Senior Notes.  The proceeds of the sale of the Senior Notes were held in an escrow account prior to the 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.  On August 3, 2012, SureWest and its subsidiaries guaranteed the Senior Notes.

 

During the quarter ended June 30, 2013, we completed an exchange offer to issue registered notes (“Exchange Notes”) for $287.3 million of the original Senior Notes.  The terms of the Exchange Notes are substantially identical to the Senior Notes, except that the Exchange Notes are registered under the Securities Act and the transfer restrictions and registration rights applicable to the Senior Notes do not apply to the Exchange Notes.  The exchange offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.

 

Senior Notes Covenant Compliance

 

The indenture governing the Senior Notes contains customary covenants for high yield notes, which limits Consolidated Communications, Inc.’s and its restricted subsidiaries’ ability to: incur debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions.

 

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Among other matters, the Senior Notes indenture provides that Consolidated Communications, Inc. may not pay dividends or make other “restricted payments” to the Company if its total net leverage ratio is 4.25:1.00 or greater.  At June 30, 2013, this ratio, which is calculated differently than the comparable ratio under the credit agreement, was 4.00:1.00.  If this ratio is met, dividends and other restricted payments may be made from cumulative consolidated cash flow since the date the Senior Notes were issued, less 1.75 times fixed charges, less dividends and other restricted payments made since the date the Senior Notes were issued.  Dividends may be paid and other restricted payments may also be made from a “basket” of $50.0 million, none of which has been used to date, and pursuant to other exceptions identified in the Senior Notes indenture. Since dividends of $77.5 million have been paid since May 30, 2012, at June 30, 2013 there was $115.2 million of the $192.7 million of cumulative consolidated cash flow since May 30, 2012 available to pay dividends.

 

Bridge Loan Facility

 

In connection with the acquisition of SureWest, in February 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 above.  As a result, the $4.2 million commitment fee incurred for the Bridge Facility was capitalized as deferred debt issuance costs in February 2012 and was amortized over the expected life of the Bridge Facility, which was four months.

 

Capital Leases

 

As of June 30, 2013, we had seven capital leases which expire between 2015 and 2021.  As of June 30, 2013, the present value of the minimum remaining lease commitments was approximately $5.4 million, of which $0.6 million was due and payable within the next twelve months.  The leases require total remaining rental payments of $8.5 million as of June 30, 2013, of which $6.1 million will be paid to LATEL LLC, a related party entity.

 

During the quarter ended June 30, 2013, we acquired equipment of $0.8 million through capital lease agreements, which represents a noncash investing activity.

 

7.     DERIVATIVE FINANCIAL INSTRUMENTS

 

We use derivative financial instruments to manage our exposure to the risks associated with fluctuations in interest rates. Our interest rate swap agreements 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.  Derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet.  Certain of our interest rate swaps are designated as cash flow hedges of our expected future interest payments.  For derivative instruments designated as a cash flow hedge, the effective portion of the change in the fair value is recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and is recognized as an adjustment to earnings over the period in which the hedged item impacts earnings. When an interest rate swap agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt obligation.  If a derivative instrument is de-designated, the remaining gain or loss in AOCI on the date of de-designation is amortized to earnings over the remaining term of the hedging instrument. For derivative financial instruments that are not designated as a hedge, changes in fair value are recognized on a current basis in earnings.  The ineffective portion of the change in fair value of any hedging derivative is recognized immediately in earnings.  Cash flows from hedging activities are classified under the same category as the cash flows from the hedged items in our consolidated statement of cash flows.

 

The following interest rate swaps were outstanding at June 30, 2013:

 

(In thousands)

 

Notional
Amount

 

2013 Balance Sheet Location

 

Fair Value

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR

 

$

275,000

 

Other long-term liabilities

 

$

(2,779)

 

Fixed to 1-month floating LIBOR

 

100,000

 

Current portion of derivative liability

 

(371)

 

Total Fair Values

 

 

 

 

 

$

(3,150)

 

 

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The following interest rate swaps were outstanding at December 31, 2012:

 

(In thousands)

 

Notional Amount

 

2012 Balance Sheet Location

 

Fair Value

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR

 

$

200,000

 

Other long-term liabilities

 

$

(2,758)

 

Fixed to 1-month floating LIBOR

 

100,000

 

Current portion of derivative liability

 

(1,069)

 

Forward starting fixed to

 

 

 

 

 

 

 

1-month floating LIBOR

 

75,000

 

Other long-term liabilities

 

(1,161)

 

 

 

 

 

 

 

 

 

De-designated Hedges:

 

 

 

 

 

 

 

Fixed to 3-month floating LIBOR

 

130,000

 

Current portion of derivative liability

 

(1,300)

 

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

 

130,000

 

Current portion of derivative liability

 

(16)

 

Fixed to 1-month floating LIBOR

 

200,000

 

Current portion of derivative liability

 

(779)

 

Total Fair Values

 

 

 

 

 

$

(7,083)

 

 

At June 30, 2013 and December 31, 2012, the interest rate on approximately 41% and 69%, respectively, of our outstanding debt under the term loan credit facility was fixed through the use of interest rate swaps.

 

As of June 30, 2013, the counterparties to our various swaps are four 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 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.

 

On December 4, 2012, $660.0 million notional interest rate swaps designated as cash flow hedges were de-designated in connection with an amendment to our credit agreement.  Prior to the de-designation, the effective portion of the change in fair value of these interest rate swaps were recognized in AOCI.  The balance of the unrealized loss included in AOCI as of the date the swaps were de-designated was amortized to earnings over the remaining term of the swap agreements.  On December 31, 2012, $200.0 million notional interest rate swap agreements expired and the remainder expired on March 31, 2013.  Subsequent to December 4, 2012, changes in fair value of the de-designated swaps were recognized in earnings.  During the six months ended June 30, 2013, a gain of $2.1 million was recognized as a reduction to interest expense for the change in fair value of the de-designated swaps.

 

Information regarding our cash flow hedge transactions is as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Gain recognized in AOCI, pretax

 

$

1,161

 

$

932

 

$

1,838

 

$

2,508

 

Deferred losses reclassed from AOCI to interest expense

 

$

-   

 

$

13

 

$

(2,912)

 

$

1

 

Gain arising from ineffectiveness reducing interest expense

 

$

-   

 

$

15

 

$

-   

 

$

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(In thousands, except months)

 

2013

 

2012

 

Aggregate notional value of current derivatives outstanding

 

$

375,000

 

$

630,000

 

Aggregate notional value of forward derivatives outstanding

 

$

-  

 

$

75,000

 

Period through which derivative positions currently exist

 

March 2016

 

March 2016

 

Fair value of derivatives

 

$

(3,150)

 

$

(7,083)

 

Deferred losses included in AOCI (pretax)

 

$

3,149

 

$

7,899

 

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

 

$

-   

 

$

2,912

 

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

 

N/A

 

3

 

 

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8.     EQUITY

 

Share-Based Compensation

 

The following table summarizes total compensation costs recognized for share-based payments during the quarters and six-month periods ended June 30, 2013 and 2012:

 

 

 

Quarter Ended

 

Six Months

 

 

 

June 30,

 

Ended June 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Restricted stock

 

$

461

 

$

325

 

$

917

 

$

650

 

Performance shares

 

323

 

264

 

523

 

440

 

Total

 

$

784

 

$

589

 

$

1,440

 

$

1,090

 

 

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

 

As of June 30, 2013, total unrecognized compensation costs related to nonvested Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”) was $5.1 million and will be recognized over a weighted-average period of approximately 1.3 years.

 

The following table summarizes the RSA and PSA activity for the six-month period ended June 30, 2013:

 

 

 

RSAs

 

PSAs

 

 

 

 

Shares

 

Weighted
Average Grant
Date Fair Value

 

Shares

 

Weighted
Average Grant
Date Fair Value

 

Non-vested shares outstanding - January 1, 2013

 

 

64,318

 

$

18.33

 

58,221

 

$

18.85

 

Shares granted

 

 

168,516

 

17.13

 

66,504

 

19.30

 

Shares cancelled

 

 

(1,500)

 

17.13

 

-

 

-

 

Shares vested

 

 

-

 

-

 

-

 

-

 

Non-vested shares outstanding - June 30, 2013

 

 

231,334

 

 

 

124,725

 

 

 

 

Accumulated Other Comprehensive Income

 

The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component for the six-month period ended June 30, 2013:

 

 

 

Pension and

 

 

 

 

 

 

 

Post-Retirement

 

Derivative

 

 

 

(In thousands)

 

Obligations

 

Instruments

 

Total

 

Balance at December 31, 2012

 

$

(40,581)

 

$

(5,203)

 

$

(45,784)

 

Other comprehensive income before reclassifications

 

-

 

1,138

 

1,138

 

Amounts reclassified from accumulated other comprehensive income

 

948

 

1,839

 

2,787

 

Net current period other comprehensive income

 

948

 

2,977

 

3,925

 

Balance at June 30, 2013

 

$

(39,633)

 

$

(2,226)

 

$

(41,859)

 

 

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The following table summarizes reclassifications from accumulated other comprehensive loss for the three and six-month periods ended June 30, 2013:

 

 

 

Amount Reclassified from AOCI

 

 

 

 

 

Quarter

 

Six Months

 

 

 

 

 

Ended

 

Ended

 

Affected Line Item in the

 

(In thousands)

 

June 30, 2013

 

June 30, 2013

 

Statement of Income

 

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

Prior service credit

 

$

115

 

$

231

 

(a)

 

Actuarial loss

 

(891)

 

(1,782)

 

(a)

 

 

 

(776)

 

(1,551)

 

Total before tax

 

 

 

302

 

603

 

Tax benefit

 

 

 

$

(474)

 

$

(948)

 

Net of tax

 

 

 

 

 

 

 

 

 

Loss on cash flow hedges:

 

 

 

 

 

 

 

Interest rate derivatives

 

$

-

 

$

(2,912)

 

Interest expense

 

 

 

-

 

1,073

 

Tax benefit

 

 

 

$

-

 

$

(1,839)

 

Net of tax

 

 

(a)          These items are included in the components of net periodic benefit cost for our pension and post-retirement benefit plans.  See Note 9 for additional details.

 

9.               PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

 

Defined Benefit Plans

 

We sponsor a qualified defined benefit pension plan (“Retirement Plan”) that is non-contributory covering certain 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.  In April 2013, the Retirement Plan was amended to among other things: (i) change the benefit formula to a cash balance account as of May 1, 2013 and (ii) freeze entrance into the Retirement Plan so that no person is eligible to become a participant on or following May 1, 2013.

 

In connection with the acquisition of SureWest, we assumed sponsorship in 2012 of a frozen non-contributory defined benefit pension plan (the “SureWest Plan”).  The SureWest Plan covers certain eligible employees and benefits are based on years of service and the employee’s average compensation during the five highest consecutive years of the last ten years of credited service.  This plan has previously been frozen so that no person is eligible to become a new participant and all future benefit accruals for existing participants have ceased.

 

We also have two non-qualified supplemental retirement plans (“Supplemental Plans”): the Restoration Plan, which we acquired as part of our North Pittsburgh Systems, Inc. (“North Pittsburgh”) and TXU Communications Venture Company (“TXUCV”) acquisitions, and a Supplemental Executive Retirement Plan (“SERP”), which we acquired as part of our acquisition of SureWest.  The Supplemental Plans provide supplemental retirement benefits to certain former employees by providing for incremental pension payments to partially offset the reduction that would have been payable under the qualified defined benefit pension plans if it were not for limitations imposed by federal income tax regulations. Both plans have previously been frozen so that no person is eligible to become a new participant in the Supplemental Plans.  These plans are unfunded and have no assets.  The benefits paid under the Supplemental Plans are paid from the general operating funds of the Company.

 

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The following table summarizes the components of net periodic pension cost for our defined benefit plans for the quarters and six-month periods ended June 30, 2013 and 2012:

 

 

 

Quarter Ended

 

Six Months

 

 

 

June 30,

 

Ended June 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$

304

 

$

357

 

$

608

 

$

713

 

Interest cost

 

3,860

 

2,641

 

7,722

 

5,283

 

Expected return on plan assets

 

(5,151)

 

(2,611)

 

(10,302)

 

(5,222)

 

Net amortization loss

 

891

 

809

 

1,782

 

1,618

 

Prior service credit amortization

 

(70)

 

(41)

 

(141)

 

(83)

 

Net periodic pension (benefit) cost

 

$

(166)

 

$

1,155

 

$

(331)

 

$

2,309

 

 

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 period ended June 30, 2013 and 2012, respectively and $0.3 million for the six-month periods ended June 30, 2013 and 2012, respectively.  The net present value of the remaining obligations was approximately $1.9 million and $2.2 million at June 30, 2013 and December 31, 2012, respectively, and is included in pension and post-retirement benefit obligations in the accompanying balance sheets.

 

We also maintain 37 life insurance policies on certain of the participating former directors and employees.  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 $2.1 million at June 30, 2013 and $2.0 million at December 31, 2012. These amounts are included in investments in the accompanying condensed consolidated balance sheets.  Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the condensed consolidated statements of cash flows.

 

Post-retirement Benefit Obligations

 

We sponsor a healthcare and life insurance plan (“Post-retirement Plan”) that provides post-retirement 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.  Covered expenses for retiree health benefits are paid as they are incurred.  Post-retirement life insurance benefits are fully insured.  The Post-retirement Plan is unfunded and has no assets, and benefits are paid from the general operating funds of the Company.

 

In connection with the acquisition of SureWest, we acquired its post-retirement benefit plan which provides life insurance benefits and a stated reimbursement for Medicare supplemental insurance to certain eligible retired participants.  This plan has previously been frozen so that no person is eligible to become a new participant.  Employer contributions for retiree medical benefits are separately designated within the SureWest Plan pension trust for the sole purpose of providing payments of retiree medical benefits.  The nature of the assets used to provide payment of retiree medical benefits is the same as that of the SureWest Plan.

 

 

 

Quarter Ended

 

Six Months

 

 

 

June 30,

 

Ended June 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$

231

 

$

213

 

$

463

 

$

427

 

Interest cost

 

392

 

414

 

783

 

828

 

Expected return on plan assets

 

(58)

 

-

 

(116)

 

-

 

Net prior service credit amortization

 

(45)

 

(47)

 

(90)

 

(95)

 

Net periodic postretirement benefit cost

 

$

520

 

$

580

 

$

1,040

 

$

1,160

 

 

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Contributions

 

We expect to contribute approximately $11.5 million to our pension plans and $2.5 million to our other post-retirement plans in 2013.  As of June 30, 2013, we have contributed $4.6 million and $1.4 million of the annual contribution to the pension plans and other post-retirement plans, respectively.

 

10.  INCOME TAXES

 

There have been no changes to the balance of our unrecognized tax benefits reported at December 31, 2012.  As of June 30, 2013 and December 31, 2012, 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.  A decrease of the full amount of unrecognized tax benefits and $0.2 million of related accrued interest is expected in the third quarter of 2013 due to the expiration of federal and state statute of limitations.  The tax benefit attributable to the decrease in unrecognized tax benefits will not have a significant effect on the Company’s effective tax rate.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At June 30, 2013, we had no material liability for interest or penalties and had no material interest or penalty expense.

 

The periods subject to examination for our federal return are years 2009 through 2012.  The periods subject to examination for our state returns are years 2005 through 2011.  We are currently under examination by federal and 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 36.4% and 27.5% for the three-month periods ended June 30, 2013 and 2012, respectively, and 40.2% and 30.0% for the six-month periods ended June 30, 2013 and 2012, respectively.  For the six-month period ended June 30, 2013, the effective tax rate differed from the federal and state statutory rates primarily due to non-deductible compensation in relation to the acquisition of SureWest.  Exclusive of this adjustment, our effective tax rate for the six months ended June 30, 2013 would have been approximately 36.7%.

 

11.  COMMITMENTS AND CONTINGENCIES

 

Prior to the completion of the SureWest Merger on July 2, 2012, six putative class action lawsuits were filed by alleged SureWest shareholders challenging the Company’s proposed 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 monetary 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.  The federal Court subsequently extended the stay of the Broering action until June 1, 2013.  On June 1, 2012, the parties entered into a proposed settlement of all of the shareholder actions without any admission of

 

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Table of Contents

 

liability by the Company or the other defendants.  Pursuant to the proposed settlement, SureWest agreed to make, and subsequently made, 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 $0.525 million, to be paid by the Company and SureWest and its insurer.  On December 20, 2012, the court issued a ruling preliminarily approving the proposed settlement.  Notice of the proposed settlement was thereafter given to the SureWest shareholders.  Eight shareholders representing approximately 4,500 shares of SureWest stock opted-out of the settlement class.  A final hearing on the proposed settlement was held before the court on March 28, 2013.  On April 5, 2013, the court issued a final judgment for $0.525 million, of which the Company was to pay approximately $0.2 million, with the balance to be paid by SureWest and its insurer.  In accordance with the terms of the final judgment, on April 17, 2013 the Company disbursed its portion of the settlement. Pursuant to the settlement and the terms of the final judgment, the consolidated state court actions are now concluded, and the claims of all shareholders who did not opt-out of the settlement have been released and discharged.  In accordance with the settlement, the Broering action pending in federal court was voluntarily dismissed on April 16, 2013.

 

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. Discovery concluded and Consolidated filed a motion for summary judgment on June 18, 2012 and the court heard oral arguments on August 30, 2012.  On February 12, 2013, the court granted, in part, Consolidated’s motion.  The court ruled that Salsgiver could not recover prejudgment interest and could not use as a basis of liability any actions prior to April 14, 2006. The court has set a tentative trial date for early November 2013.  Additional discovery will be taken prior to that time.

 

In addition, we have asked the Federal Communications Commission (“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.  The Board of Appeals denied CCPA and CCES’s appeals.  On November 13, 2012, CCPA and CCES filed appeals with the Commonwealth’s Board of Finance and Revenue.  These have been stayed pending the outcome of present litigation in the 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 or cash flows.

 

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Table of Contents

 

We previously provided telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace the Company as the provider of those services with a competitor, Securus Technologies, Inc.  Since that decision, Securus has replaced the Company as the provider of telephone service at the Illinois Department of Corrections facilities.  We challenged Securus’ bid, and the State’s decision to accept that bid, in a variety of different forums including: (i) protests with the Chief Procurement Officer of the Illinois Executive Ethics Commission, which were denied, (ii) a lawsuit filed in the Circuit Court of Sangamon County, Illinois that was dismissed, but is now under appeal in the Illinois Appellate Court Fourth District, (iii) a declaratory ruling request filed with the Illinois Commerce Commission, which was granted on April 9, 2013 and (iv) a complaint filed with the Illinois Procurement Policy Board.  In each of those challenges, we claimed either that Securus was not a responsible vendor, as defined by the State’s bid solicitation document, and/or that rates for the services Securus proposes to provide are subject to regulatory limits below those Securus has proposed to charge. Our efforts to challenge our competitors bid and the States decision to accept the bid have not been successful.  As of June 30, 2013 the process to transition these services to our competitor was complete.

 

On January 18, 2012, we filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit to review the FCC’s Order issued November 18, 2011 that reformed intercarrier compensation and core parts of the Universal Service Fund.  We are appealing five core issues in the November 18, 2011 FCC order. The U.S. Court of Appeals for the tenth circuit will hear oral arguments on November 19, 2013.

 

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.

 

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Table of Contents

 

12 .  CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

Consolidated Communications, Inc. is the primary obligor under the unsecured Senior Notes it issued on May 30, 2012. We and the following of our subsidiaries: Consolidated Communications Enterprise Services, Inc., Consolidated Communications Services Company, Consolidated Communications of Fort Bend Company, Consolidated Communications of Texas Company, Consolidated Communications of Pennsylvania Company, LLC, SureWest Communications, Inc., SureWest Broadband, SureWest Communications, SureWest Long Distance, SureWest Telephone, SureWest TeleVideo, SureWest Kansas, Inc., SureWest Kansas Holdings, Inc., SureWest Fiber Ventures, LLC, SureWest Kansas Connections, LLC, SureWest Kansas Licenses, LLC, SureWest Kansas Operations, LLC and SureWest Kansas Purchasing, LLC, have jointly and severally guaranteed the Senior Notes.  All of the subsidiary guarantors are 100% direct or indirect wholly owned subsidiaries of the parent, and all guarantees are full, unconditional and joint and several with respect to principal, interest and liquidated damages, if any.  As such, we present condensed consolidating balance sheets as of June 30, 2013 and December 31, 2012, condensed consolidating statements of operations for the quarters and six-month periods ended June 30, 2013 and 2012 and condensed consolidating statements of cash flows for the six months ended June 30, 2013 and 2012 for each of Consolidated Communications Holdings, Inc. (Parent), Consolidated Communications, Inc. (Subsidiary Issuer), guarantor subsidiaries and other non-guarantor subsidiaries with any consolidating adjustments.  See Note 6 for more information regarding our Senior Notes.

 

Condensed Consolidating Balance Sheet

(amounts in thousands)

 

 

 

June 30, 2013

 

 

 

Parent

 

Subsidiary
Issuer

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

-

 

 

  $

-

 

 

  $

2,166

 

 

  $

1,354

 

 

  $

-

 

 

  $

3,520

 

Accounts receivable, net

 

-

 

 

251

 

 

48,397

 

 

7,879

 

 

-

 

 

56,527

 

Income taxes receivable

 

23,665

 

 

(6,087

)

 

(10,631

)

 

(4,993

)

 

-

 

 

1,954

 

Deferred income taxes

 

(51

)

 

(310

)

 

8,969

 

 

376

 

 

-

 

 

8,984

 

Prepaid expenses and other current assets

 

-

 

 

-

 

 

13,410

 

 

351

 

 

-

 

 

13,761

 

Assets of discontinued operations

 

-

 

 

-

 

 

714

 

 

-

 

 

-

 

 

714

 

Total current assets

 

23,614

 

 

(6,146

)

 

63,025

 

 

4,967

 

 

-

 

 

85,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

-

 

 

-

 

 

843,732

 

 

51,865

 

 

-

 

 

895,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles and other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

-

 

 

3,645

 

 

108,140

 

 

15

 

 

-

 

 

111,800

 

Investments in subsidiaries

 

1,010,284

 

 

258,563

 

 

11,755

 

 

-

 

 

(1,280,602

)

 

-

 

Goodwill

 

-

 

 

-

 

 

537,265

 

 

66,181

 

 

-

 

 

603,446

 

Other intangible assets

 

-

 

 

-

 

 

35,907

 

 

9,087

 

 

-

 

 

44,994

 

Deferred debt issuance costs, net and other assets

 

-

 

 

10,975

 

 

5,017

 

 

-

 

 

-

 

 

15,992

 

Total assets

 

  $

1,033,898

 

 

  $

267,037

 

 

  $

1,604,841

 

 

  $

132,115

 

 

  $

(1,280,602

)

 

  $

1,757,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

  $

-

 

 

  $

169

 

 

  $

7,461

 

 

  $

-

 

 

  $

-

 

 

  $

7,630

 

Advance billings and customer deposits

 

-

 

 

-

 

 

24,085

 

 

2,400

 

 

-

 

 

26,485

 

Dividends payable

 

15,538

 

 

-

 

 

-

 

 

-

 

 

-

 

 

15,538

 

Accrued compensation

 

36

 

 

-

 

 

17,652

 

 

1,757

 

 

-

 

 

19,445

 

Accrued expense

 

2

 

 

3,169

 

 

28,760

 

 

1,824

 

 

-

 

 

33,755

 

Current portion of long term debt and capital lease obligations

 

-

 

 

9,240

 

 

550

 

 

59

 

 

-

 

 

9,849

 

Current portion of derivative liability

 

-

 

 

371

 

 

-

 

 

-

 

 

-

 

 

371

 

Liabilities of discontinued operations

 

-

 

 

-

 

 

254

 

 

-

 

 

-

 

 

254

 

Total current liabilities

 

15,576

 

 

12,949

 

 

78,762

 

 

6,040

 

 

-

 

 

113,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

-

 

 

1,209,599

 

 

3,959

 

 

846

 

 

-

 

 

1,214,404

 

Advances due to/from affiliates, net

 

898,338

 

 

(1,966,776

)

 

1,098,173

 

 

(29,735

)

 

-

 

 

-

 

Deferred income taxes

 

(2,358

)

 

(1,799

)

 

135,406

 

 

9,071

 

 

-

 

 

140,320

 

Pension and postretirement benefit obligations

 

-

 

 

-

 

 

122,091

 

 

27,581

 

 

-

 

 

149,672

 

Other long-term liabilities

 

131

 

 

2,779

 

 

9,794

 

 

285

 

 

-

 

 

12,989

 

Total liabilities

 

911,687

 

 

(743,248

)

 

1,448,185

 

 

14,088

 

 

-

 

 

1,630,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

401

 

 

-

 

 

17,411

 

 

30,000

 

 

(47,411

)

 

401

 

Other shareholders’ equity

 

121,810

 

 

1,010,285