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Section 1: 10-Q (10-Q)

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Table Of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,  D.C. 20549


FORM 10Q


(Mark One)

[X]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

or

[   ]            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:  000-35180


Lumos Networks Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 

(State or other jurisdiction of incorporation or organization)

80-0697274

(I.R.S. Employer Identification No.)

 

One Lumos Plaza, Waynesboro, Virginia 22980

(Address of principal executive offices) (Zip Code)

 

(540) 946-2000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

Name of each exchange on which registered

Common stock, $0.01 par value

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None


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.   [ X ]  Yes   [ ]  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).  [X]  Yes   [ ]  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 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 [ ]

Smaller reporting company [ ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes  [X] No

There were 21,940,663 shares of the registrant’s common stock outstanding as of the close of business on April 30, 2013.

 


 

Table Of Contents

 

 

LUMOS NETWORKS CORP.
2013 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

Part I – FINANCIAL INFORMATION

 

 

 

Item 1.  Financial Statements.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

27 

Item 4.  Controls and Procedures

28 

 

 

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

28 

Item 1A.  Risk Factors.

28 

Item 5.  Other Information

29 

Item 6.  Exhibits

30 

 

Signatures 

 

 

 

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Table Of Contents

 

Part I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

(In thousands)

March 31, 2013

 

December 31, 2012

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash

$

 

$

Restricted cash

 

5,303 

 

 

5,303 

Accounts receivable, net of allowance of $1,316 ($1,822 in 2012)

 

23,499 

 

 

22,676 

Other receivables

 

1,992 

 

 

2,400 

Income tax receivable

 

463 

 

 

954 

Prepaid expenses and other

 

4,652 

 

 

5,136 

Deferred income taxes

 

4,752 

 

 

3,357 

Total Current Assets

 

40,663 

 

 

39,828 

 

 

 

 

 

 

Securities and Investments

 

425 

 

 

462 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land and buildings

 

19,525 

 

 

19,489 

Network plant and equipment

 

426,748 

 

 

419,176 

Furniture, fixtures and other equipment

 

22,691 

 

 

22,070 

Total in service

 

468,964 

 

 

460,735 

Under construction

 

22,163 

 

 

19,764 

 

 

 

 

 

 

 

 

491,127 

 

 

480,499 

Less accumulated depreciation and amortization

 

150,621 

 

 

143,910 

 

 

 

 

 

 

Total Property, Plant and Equipment, net

 

340,506 

 

 

336,589 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

100,297 

 

 

100,297 

Other intangibles, less accumulated amortization of $74,232 ($72,876 in 2012)

 

32,439 

 

 

34,895 

Deferred charges and other assets

 

4,263 

 

 

4,448 

Total Other Assets

 

136,999 

 

 

139,640 

 

 

 

 

 

 

Total Assets

$

518,593 

 

$

516,519 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

(In thousands, except par value per share amounts)

March 31, 2013

 

December 31, 2012

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

$

2,630 

 

$

7,900 

Accounts payable

 

10,496 

 

 

17,453 

Dividends payable

 

3,058 

 

 

3,013 

Advance billings and customer deposits

 

13,471 

 

 

13,527 

Accrued compensation

 

1,754 

 

 

1,742 

Accrued operating taxes

 

4,381 

 

 

3,838 

Other accrued liabilities

 

5,495 

 

 

6,284 

Total Current Liabilities

 

41,285 

 

 

53,757 

 

 

 

 

 

 

Long-term Liabilities

 

 

 

 

 

Long-term debt

 

309,568 

 

 

304,325 

Retirement benefits

 

30,024 

 

 

30,413 

Deferred income taxes

 

64,518 

 

 

59,313 

Other long-term liabilities

 

3,330 

 

 

3,500 

Income tax payable

 

665 

 

 

609 

 

 

 

 

 

 

Total Long-term Liabilities

 

408,105 

 

 

398,160 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Preferred stock, par value $0.01 per share, authorized 100 shares, none issued

 

 -

 

 

 -

Common stock, par value $0.01 per share, authorized 55,000 shares; 22,021 shares issued and 21,953 shares outstanding (21,610 shares issued and 21,498 shares outstanding in 2012)

 

220 

 

 

216 

Additional paid in capital

 

130,650 

 

 

129,570 

Treasury stock, 68 shares at cost (112 shares in 2012)

 

(92)

 

 

 -

Accumulated deficit

 

(49,709)

 

 

(53,060)

Accumulated other comprehensive loss, net of tax

 

(12,487)

 

 

(12,676)

Total Lumos Networks Corp. Stockholders' Equity

 

68,582 

 

 

64,050 

Noncontrolling Interests

 

621 

 

 

552 

 

 

 

 

 

 

Total Equity

 

69,203 

 

 

64,602 

 

 

 

 

 

 

Total Liabilities and Equity

$

518,593 

 

$

516,519 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

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Condensed Consolidated Statements of Income

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

(In thousands, except per share amounts)

2013

 

2012

 

 

 

 

 

 

 

 

Operating Revenues

$

52,534 

 

$

51,412 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

Network access costs

 

11,154 

 

 

11,764 

 

Selling, general and administrative

 

18,020 

 

 

18,813 

 

Depreciation and amortization

 

9,563 

 

 

9,220 

 

Accretion of asset retirement obligations

 

31 

 

 

30 

 

Restructuring charges

 

40 

 

 

 -

 

Total Operating Expenses, net

 

38,808 

 

 

39,827 

 

Operating Income

 

13,726 

 

 

11,585 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

Interest expense

 

(3,128)

 

 

(2,987)

 

Gain on interest rate derivatives

 

187 

 

 

146 

 

Other income, net

 

25 

 

 

 

Total Other Expenses, net

 

(2,916)

 

 

(2,833)

 

Income Before Income Tax Expense

 

10,810 

 

 

8,752 

 

 

 

 

 

 

 

 

Income Tax Expense

 

4,332 

 

 

3,443 

 

 

 

 

 

 

 

 

Net Income

 

6,478 

 

 

5,309 

 

 

 

 

 

 

 

 

Net Income Attributable to Noncontrolling Interests

 

(69)

 

 

(22)

 

 

 

 

 

 

 

 

Net Income Attributable to Lumos Networks Corp.

$

6,409 

 

$

5,287 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Common Share Attributable to Lumos Networks Corp. Stockholders:

Earnings per share - basic

$

0.30 

 

 

0.25 

 

Earnings per share - diluted

$

0.30 

 

 

0.25 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

21,186 

 

 

20,850 

 

Weighted average shares outstanding - diluted

 

21,693 

 

 

21,237 

 

 

 

 

 

 

 

 

Cash Dividends Declared per Share - Common Stock

$

0.14 

 

 

0.14 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Condensed Consolidated Statements of Comprehensive Income

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

(In thousands)

2013

 

2012

 

Net income

$

6,478 

 

$

5,309 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

Reclassification adjustment for amortization of unrealized loss from defined benefit plans included in net income, net of $120 and $173 of deferred tax asset for the three months ended March 31, 2013 and 2012, respectively

 

189 

 

 

272 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

189 

 

 

272 

 

 

 

 

 

 

 

 

Total comprehensive income

 

6,667 

 

 

5,581 

 

 

 

 

 

 

 

 

Less:  comprehensive income attributable to noncontrolling interests

 

(69)

 

 

(22)

 

 

 

 

 

 

 

 

Comprehensive income attributable to Lumos Networks Corp.

$

6,598 

 

$

5,559 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

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Condensed Consolidated Statements of Cash Flows

Lumos Networks Corp. 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

2013

 

2012

Cash flows from operating activities

 

 

 

 

 

Net income

$

6,478 

 

$

5,309 

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

 

 

 

 

 

Depreciation

 

7,107 

 

 

6,439 

Amortization

 

2,456 

 

 

2,781 

Accretion of asset retirement obligations

 

31 

 

 

30 

Deferred income taxes

 

3,768 

 

 

3,267 

Gain on interest rate derivatives

 

(187)

 

 

(146)

Equity-based compensation expense

 

1,025 

 

 

1,011 

Amortization of loan origination costs

 

208 

 

 

199 

Retirement benefits, net of cash contributions and distributions

 

(80)

 

 

(1,382)

Excess tax benefits from share-based compensation

 

(78)

 

 

 -

Other

 

(20)

 

 

(90)

Changes in assets and liabilities from operations:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(823)

 

 

1,392 

Decrease (increase) in other current assets

 

923 

 

 

(959)

Changes in income taxes

 

547 

 

 

296 

(Decrease) increase in accounts payable

 

(2,908)

 

 

1,308 

Increase (decrease) in other current liabilities

 

130 

 

 

(228)

Net cash provided by operating activities

 

18,577 

 

 

19,227 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(15,032)

 

 

(17,369)

Broadband network expansion funded by stimulus grant

 

(31)

 

 

(511)

Change in restricted cash

 

 -

 

 

332 

Cash reimbursement received from broadband stimulus grant

 

 -

 

 

332 

Other

 

 -

 

 

(27)

Net cash used in investing activities

 

(15,063)

 

 

(17,243)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Principal payments on senior secured term loans

 

(1,875)

 

 

(500)

Borrowings from revolving credit facility

 

3,000 

 

 

2,066 

Principal payments on revolving credit facility

 

(1,523)

 

 

(11,000)

Cash dividends paid on common stock

 

(3,013)

 

 

(2,965)

Principal payments under capital lease obligations

 

(113)

 

 

(172)

Proceeds from stock option exercises and employee stock purchase plan

 

20 

 

 

36 

Excess tax benefits from share-based compensation

 

78 

 

 

 -

Other

 

(88)

 

 

Net cash used in financing activities

 

(3,514)

 

 

(12,529)

Decrease in cash

 

 -

 

 

(10,545)

Cash:

 

 

 

 

 

Beginning of period

 

 

 

10,547 

 

 

 

 

 

 

End of period

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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See accompanying

Notes to Unaudited Condensed Consolidated Financial Statements 

Lumos Networks Corp.

 

Note 1.  Organization

Lumos Networks Corp. (the “Company”) is a fiber-based network service provider in the Mid-Atlantic region with a network of long-haul fiber, metro Ethernet and Ethernet rings located primarily in Virginia and West Virginia, and portions of Pennsylvania, Maryland, Ohio and Kentucky.    The Company serves carrier, business and residential customers over its fiber network offering data, voice and IP services.  Our principal products and services include metro Ethernet, which provides Ethernet connectivity among multiple locations in the same city or region over our fiber optic network, high-capacity private line and wavelength services, which provide a means to efficiently utilize fiber in broadband applications and provide high-capacity bandwidth, IP services and business and residential local and long-distance services. 

Note 2Summary of Significant Accounting Policies

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2013 and for the three months ended March 31, 2012 contain all adjustments  necessary to present fairly in all material respects the financial position as of March  31, 2013, and the results of operations and cash flows for all periods presented on the respective financial statements included herein.  The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year.  The accompanying condensed consolidated balance sheet as of December 31, 2012 has been derived from the audited consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  During the first quarter of 2013, the Company revised the presentation of current deferred tax assets in its condensed consolidated balance sheet and made conforming changes to the presentation of current deferred tax assets in the condensed consolidated balance sheet as of December 31, 2012.  These changes did not have a material impact on the Company’s consolidated financial condition for either period.

Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.    

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Lumos Networks Operating Company, a wholly-owned subsidiary of the Company, and all of Lumos Networks Operating Company’s wholly-owned subsidiaries and those limited liability corporations where Lumos Networks Operating Company or certain of its subsidiaries, as managing member, exercise control.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

The Company recognizes revenue when services are rendered or when products are delivered, installed and functional, as applicable.  Certain services of the Company require payment in advance of service performance.  In such cases, the Company records a service liability at the time of billing and subsequently recognizes revenue ratably over the service period.  The Company bills customers certain transactional taxes on service revenues.  These transactional taxes are not included in reported revenues as they are recognized as liabilities at the time customers are billed.

The Company earns revenue by providing services through access to and usage of its networks.  Local service revenues are recognized as services are provided.  Carrier data revenues are earned by providing switched access and other switched and dedicated services, including wireless roamer management, to other carriers.  Revenues for equipment sales are recognized at the point of sale. 

The Company periodically makes claims for recovery of access charges on certain minutes of use terminated by the Company on behalf of other carriers.  The Company recognizes such revenue in the period in which it is determined that the amounts can be estimated and collection is reasonably assured.

Cash and Cash Equivalents

The Company considers its investment in all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.  The Company places its temporary cash investments with high credit quality financial institutions with a maturity date of not greater than 90 days from acquisition and all are investments held by commercial banks.  At times, such investments may be in

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excess of the FDIC insurance limit.  At March 31, 2013 and December 31, 2012, the Company did not have any cash equivalents.  As of March 31, 2013, all of the Company’s cash was held in non-interest bearing deposit accounts.  Total interest income related to cash was negligible for the three months ended March 31, 2013 and 2012.

The Company utilizes a zero balance arrangement for its master cash account against a swingline credit facility that the Company has with its primary commercial bank.  As  of March 31, 2013 and December 31, 2012, the Company reclassified its book overdraft related to this master cash account of $1.8 million to Accounts Payable on the condensed consolidated balance sheets.  The Company has classified the respective book overdraft amounts in cash flows from operating activities on the condensed consolidated statements of cash flows for the three months ended March 31, 2013 and 2012.

Restricted Cash

During 2010, the Company received a federal broadband stimulus award to bring broadband services and infrastructure to Alleghany County, Virginia.  The total project is $16.1 million, of which 50% (approximately $8 million) is being funded by a grant from the federal government.  The project is expected to be completed before September 30, 2015.  The Company was required to deposit 100% of its portion for the grant (approximately $8 million) into a pledged account in advance of any reimbursements, which can be drawn down ratably following the grant reimbursement approvals, which are contingent on adherence to the program requirements.  The Company did not receive any reimbursements during the three months ended March  31, 2013.  The Company has a $1.6 million receivable for the reimbursable portion of the qualified recoverable expenditures as of March 31, 2013.  At March 31, 2013, the Company’s pledged account balance was  $5.3 million.  This escrow account is a non-interest bearing account with the Company’s primary commercial bank. 

Trade Accounts Receivable

The Company sells its services to commercial and residential end-users and to other communication carriers primarily in Virginia, West Virginia and in portions of Maryland, Pennsylvania, Ohio and Kentucky and to residential end users in the Company’s Rural Local Exchange Carrier (RLEC) service areas of Virginia.  The Company has credit and collection policies to maximize collection of trade accounts receivable and requires deposits on certain sales.  The Company maintains an allowance for doubtful accounts based on a review of specific customers with large receivable balances and for the remaining customer receivables the Company uses historical results, current and expected trends and changes in credit policies.  Management believes the allowance adequately covers all anticipated losses with respect to trade accounts receivable.  Actual credit losses could differ from such estimates.  The Company includes bad debt expense in selling, general and administrative expense in the condensed consolidated statements of income.  Bad debt expense for the three months ended March 31, 2013 and 2012 was less than $0.1 million and $0.2 million, respectively.  The Company’s allowance for doubtful accounts was $1.3 million and $1.8 million as of March 31, 2013 and December 31, 2012, respectively.

The following table presents a roll-forward of the Company’s allowance for doubtful accounts from December 31, 2012 to March 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

(In thousands)

 

December 31, 2012

 

Charged to Expense

 

Charged to Other Accounts

 

Deductions

 

March 31, 2013

Allowance for doubtful accounts

 

$

1,822 

 

$

 -

 

$

 -

 

$

(506)

 

$

1,316 

 

Property, Plant and Equipment and Other Long-Lived Assets (Excluding Goodwill and Indefinite-Lived Intangible Assets)

Property, plant and equipment, finite-lived intangible assets and long-term deferred charges are recorded at cost and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated pursuant to the subsequent measurement guidance described in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35.  Impairment is determined by comparing the carrying value of these long-lived assets to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets.  If the carrying value exceeds the estimated undiscounted cash flows, the excess of the asset’s carrying value over the estimated fair value is recorded as an impairment charge.  The Company believes that no impairment indicators exist as of March 31, 2013 that would require it to perform impairment testing for long-lived assets, including property, plant and equipment, long-term deferred charges and finite-lived intangible assets to be held and used.

Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets, which the Company periodically reviews and updates based on historical experiences and future expectations.  Plant and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.  Amortization of assets held under capital leases is included with depreciation expense.

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Intangibles with a finite life are classified as other intangibles on the condensed consolidated balance sheets.  At March 31, 2013 and December 31, 2012, other intangibles were comprised of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

December 31, 2012

(Dollars in thousands)

Estimated Life

 

Gross Amount

 

Accumulated Amortization

 

Gross Amount

 

Accumulated Amortization

Customer relationships

3 to 15 yrs

 

$

103,153 

 

$

(72,150)

 

$

103,153 

 

$

(69,734)

Trademarks

0.5 to 15 yrs

 

 

3,518 

 

 

(2,082)

 

 

3,518 

 

 

(2,042)

Non-compete agreement

2 yrs

 

 

 -

 

 

 -

 

 

1,100 

 

 

(1,100)

Total

 

 

$

106,671 

 

$

(74,232)

 

$

107,771 

 

$

(72,876)

 

The Company amortizes its finite-lived intangible assets using the straight-line method unless it determines that another systematic method is more appropriate.  The amortization for certain customer relationship intangibles is being recognized using an accelerated amortization method based on the pattern of estimated earnings from these assets.

The estimated life of amortizable intangible assets is determined from the unique factors specific to each asset, and the Company periodically reviews and updates estimated lives based on current events and future expectations.  The Company capitalizes costs incurred to renew or extend the term of a recognized intangible asset and amortizes such costs over the remaining life of the asset. No such costs were incurred during the three months ended March 31, 2013 or 2012.    Amortization expense for the three months ended March 31, 2013 and 2012 was $2.5 million and $2.8 million, respectively.

Amortization expense for the remainder of 2013 and for the next five years is expected to be as follows:

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Customer Relationships

 

Trademarks

 

Total

Remainder of 2013

 

$

7,249 

 

$

119 

 

$

7,368 

2014

 

 

9,028 

 

 

159 

 

 

9,187 

2015

 

 

4,648 

 

 

159 

 

 

4,807 

2016

 

 

2,416 

 

 

159 

 

 

2,575 

2017

 

 

2,097 

 

 

159 

 

 

2,256 

2018

 

 

1,785 

 

 

159 

 

 

1,944 

 

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and certain trademarks are considered to be indefinite-lived intangible assets.  Indefinite-lived intangible assets are not subject to amortization but are instead tested for impairment annually or more frequently if an event indicates that the asset might be impaired.  The Company’s policy is to assess the recoverability of indefinite-lived assets annually on October 1 and whenever adverse events or changes in circumstances indicate that impairment may have occurred.    The Company uses a two-step process to test for goodwill impairment.  Step one requires a determination of the fair value of each of the reporting units and, to the extent that this fair value of the reporting unit exceeds its carrying value (including goodwill), the step two calculation of implied fair value of goodwill is not required and no impairment loss is recognized.  In testing for goodwill impairment, the Company utilizes a combination of a discounted cash flow model and an analysis which allocates enterprise value to the reporting units.  The Company believes there have been no events or circumstances to cause management to evaluate the carrying amount of its goodwill during the three months ended March 31, 2013.

 

Pension Benefits and Retirement Benefits Other Than Pensions

The Company sponsors a non-contributory defined benefit pension plan (“Pension Plan”) covering all employees who meet eligibility requirements and were employed prior to October 1, 2003.  Pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65.  The Pension Plan was frozen as of December 31, 2012. As such, no further benefits will be accrued by participants for services rendered beyond that date.

For the three months ended March 31, 2013 and 2012, the components of the Company’s net periodic benefit cost for the Pension Plan were as follows: 

 

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Three Months Ended March 31,

(In thousands)

2013

 

2012

Service cost

$

 -

 

$

511 

Interest cost

 

608 

 

 

674 

Expected return on plan assets

 

(975)

 

 

(879)

Amortization of loss

 

229 

 

 

370 

Net periodic benefit cost (benefit)

$

(138)

 

$

676 

 

Pension plan assets were valued at $54.5 million and $51.7 million at March 31, 2013 and December 31, 2012, respectively.  No funding contributions were made in the three months ended March 31, 2013 and the Company does not expect to make a funding contribution during the remainder of 2013.

For the three months ended March 31, 2013 and 2012, the components of the Company’s net periodic benefit cost for its Other Postretirement Benefit Plans were as follows:

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

2013

 

2012

Service cost

$

23 

 

$

20 

Interest cost

 

121 

 

 

131 

Amortization of loss

 

 

 

 -

Net periodic benefit cost

$

151 

 

$

151 

 

The total expense recognized for the Company’s nonqualified pension plans for the three months ended March 31, 2013 and 2012, was $0.1 million and $0.2 million, respectively, and less than $0.1 million of this expense for each period relates to the amortization of unrealized loss.

The total amount reclassified out of accumulated other comprehensive income related to amortization of actuarial losses for the pension and other postretirement benefit plans was $0.3 million and $0.4 million for the three months ended March 31, 2013 and 2012, respectively, all of which has been reclassified to selling, general and administrative expenses on the condensed consolidated statement of income for the respective periods.

Equity-based Compensation

The Company accounts for share-based employee compensation plans under FASB ASC 718, Stock Compensation.  Equity-based compensation expense from share-based equity awards is recorded with an offsetting increase to additional paid-in capital on the condensed consolidated balance sheet.  For equity awards with only service conditions, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.

The fair value of the common stock options granted during the three months ended March 31, 2013 and 2012 with service-only conditions was estimated at the respective measurement date using the Black-Scholes option-pricing model with assumptions related to risk-free interest rate, expected volatility, dividend yield and expected term.    The fair value of restricted stock awards granted during the three-months ended March 31, 2013 and 2012 with service-only conditions was estimated based on the market value of the common stock on the date of grant reduced by the present value of expected dividends as applicable.  Certain stock options and restricted shares granted during the three months ended March 31, 2013 contain vesting provisions that are conditional on achievement of a target market price for the Company’s common stock.  The grant date fair value of these options was adjusted to reflect the probability of the achievement of the market condition based on management’s best estimate using a series of stock price path scenarios (see Note 8).  The Company recognizes the related compensation cost for these awards that contain a market condition on a straight-line basis over the requisite service period as derived from the valuation model.

Total equity-based compensation expense related to all of the share-based awards and the Company’s 401(k) matching contributions was $1.0 million for each of the three-month periods ended March 31, 2013 and 2012, which amounts are included in selling, general and administrative expenses on the condensed consolidated statements of income.  

Future charges for equity-based compensation related to instruments outstanding at March 31, 2013 for the remainder of 2013 and for the years 2014 through 2018 are estimated to be $3.3 million, $3.0 million, $2.0 million, $0.7 million, $0.5 million and $0.2 million, respectively.

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Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02,  Reporting Amounts Reclassified out of Accumulated Other Comprehensive Income.    This ASU requires entities to disclose the effect of the reclassification on each affected income statement line item of items reclassified out of accumulated other comprehensive income (AOCI) and into net income in their entirety.  A cross reference to other required U.S. GAAP disclosures is required for AOCI reclassification items that are not reclassified in their entirety into net income.  This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The Company has complied with the requirements of this pronouncement by providing disclosure of the income statement line items affected by reclassifications out of other comprehensive income during the periods presented, which consist of reclassification adjustments for the amortization of actuarial losses on pension and other postretirement plans (within this Note 2).      

 

 

Note 3.  Disclosures About Segments of an Enterprise and Related Information

The Company has historically managed its business with separate products and services in two segments:  Competitive and RLEC.  Beginning in the first quarter of 2013, the Company restructured its operating segments to more closely align with its product and service offerings, which coincides with the way that the Company’s chief operating decision makers measure performance and allocate resources.  The Company’s chief operating decision makers are its Chief Executive Officer and its Chief Financial Officer (collectively, the “CODMs”).    Our current reportable operating segments are strategic data, legacy voice and access.  A  general description of the products and services offered and the customers served by each of these segments is as follows:

·

Strategic data:  This segment includes the Company’s enterprise data, carrier data, fiber to the cell site (“FTTC”) and IP services product groups.  These businesses primarily serve enterprise and carrier customers utilizing the Company’s network of long-haul fiber, metro Ethernet and Ethernet rings located primarily in Virginia and West Virginia, and portions of Pennsylvania, Maryland, Ohio and Kentucky.  IP services are also provided to a residential base of customers by this segment.

·

Legacy voice:  This segment includes the following products:  local lines, PRI, long distance, toll and directory advertising and other voice services (excluding voice over IP (“VoIP”) which are typically provided to enterprise customers and are included in our strategic data segment).  These products are sold to enterprise and residential customers on the Company’s network and within the Company’s footprint.

·

Access:  This segment provides carrier customers access to the Company’s network and within the Company’s footprint and primarily includes switched access and reciprocal compensation products.

 

Summarized financial information concerning the Company’s reportable segments is presented in the following table, including restated segment results for the three months ended March 31, 2012 based on the restructuring of our operating segments in the first quarter of 2013:    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Strategic Data

 

Legacy Voice

 

Access

 

Corporate (Unallocated)

 

Total

For the three months ended March 31, 2013

Operating revenues

 

$

29,661 

 

$

14,884 

 

$

7,989 

 

$

 -

 

$

52,534 

Network access costs

 

 

5,570 

 

 

5,246 

 

 

338 

 

 

 -

 

 

11,154 

Network operating costs

 

 

6,618 

 

 

2,768 

 

 

656 

 

 

 -

 

 

10,042 

Selling, general and administrative expenses

 

 

3,751 

 

 

1,882 

 

 

1,010 

 

 

1,335 

 

 

7,978 

Adjusted EBITDA(1)

 

 

13,723 

 

 

4,988 

 

 

5,984 

 

 

 -

 

 

24,695 

Capital expenditures

 

 

11,777 

 

 

124 

 

 

169 

 

 

2,962 

 

 

15,032 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Strategic Data

 

Legacy Voice

 

Access

 

Corporate
(Unallocated)

Total

For the three months ended March 31, 2012

Operating revenues

 

$

25,871 

 

$

16,744 

 

$

8,797 

 

$

 -

 

$

51,412 

Network access costs

 

 

5,046 

 

 

6,358 

 

 

360 

 

 

 -

 

 

11,764 

Network operating costs

 

 

5,497 

 

 

4,310 

 

 

1,100 

 

 

 -

 

 

10,907 

Selling, general and administrative expenses

 

 

3,232 

 

 

2,012 

 

 

1,206 

 

 

1,456 

 

 

7,906 

Adjusted EBITDA(1)

 

 

12,097 

 

 

4,063 

 

 

6,131 

 

 

 -

 

 

22,291 

Capital expenditures

 

 

14,584 

 

 

227 

 

 

307 

 

 

2,251 

 

 

17,369 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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(1)

The Company evaluates performance based upon Adjusted EBITDA, defined by the Company as net income (loss) attributable to Lumos Networks Corp. before interest, income taxes, depreciation and amortization, accretion of asset retirement obligations, net income attributable to noncontrolling interests, other income or expenses, equity-based compensation charges, acquisition-related charges, amortization of actuarial losses on retirement plans, employee separation charges, restructuring-related charges, gain or loss on settlements and gain or loss on interest rate derivatives.

 

The Company’s CODMs do not currently review total assets by segment since the majority of the assets are shared by the segments and centrally-managed.    However, total assets may be allocated to the segments in the future should the CODMs decide to manage the business in that manner.  Management does review capital expenditures using success-based metrics that allow the Company to determine which segment product groups are driving investment in the network.  Depreciation and amortization expense and certain corporate expenses that are excluded from the measurement of segment profit or loss are not allocated to the operating segments.

 

The following table provides a reconciliation of operating income to Adjusted EBITDA, as defined by the Company, on a consolidated basis for the three months ended March 31, 2013 and 2012:


 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

 

2013

 

2012

Operating income

 

$

13,726 

 

$

11,585 

Depreciation and amortization and accretion of asset

 

 

 

 

 

 

retirement obligations

 

 

9,594 

 

 

9,250 

Sub-total:

 

 

23,320 

 

 

20,835 

Amortization of actuarial losses

 

 

310 

 

 

445 

Equity-based compensation

 

 

1,025 

 

 

1,011 

Restructuring charges

 

 

40 

 

 

 -

Adjusted EBITDA

 

$

24,695 

 

$

22,291 

 

Revenues from Verizon accounted for approximately 10% of the Company’s total revenues for each of the three months ended March 31, 2013 and 2012.  Revenue from Verizon was derived primarily from network access and fiber to the cell site services.   

 

 

Note 4.  Long-Term Debt

As of March 31, 2013 and December 31, 2012, the Company’s outstanding long-term debt consisted of the following: 

 

 

 

 

 

 

 

 

 

(In thousands)

 

March 31, 2013

 

December 31, 2012

Credit facility

 

$

310,625 

 

$

311,022 

Capital lease obligations

 

 

1,573 

 

 

1,203 

 

 

 

312,198 

 

 

312,225 

 

 

 

 

 

 

 

Less:  current portion of long term debt

 

 

2,630 

 

 

7,900 

 

 

$

309,568 

 

$

304,325 

 

Credit Facility

On September 8, 2011, Lumos Networks Operating Company, a wholly-owned subsidiary of Lumos Networks, entered into a $370 million post-Business Separation credit facility (the “Credit Facility”).  The Credit Facility consists of a $60 million senior secured five year revolving credit facility (the “Revolver”), $5.0 million of which was outstanding at March 31, 2013; a $110 million senior

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secured five year amortizing term loan (the “Term Loan A”); and a $200 million senior secured six year amortizing term loan (the “Term Loan B”). The proceeds of the Credit Facility were made available to Lumos Networks Operating Company on the effective date of the spin-off from NTELOS Holdings Corp. (“NTELOS”) and were used to fund a working capital cash reserve at Lumos Networks and to pay $315 million to NTELOS Inc. (i) to settle with cash the intercompany debt owed to NTELOS as of the spin-off date ($177.1 million) and, with the balance, (ii) to fund a mandatory repayment on NTELOS’s credit facility resulting from the spin-off.  Pricing of the Lumos Networks Operating Company credit facility is LIBOR plus 3.25% for the Revolver (and 2.25% above the Federal Funds rate for borrowings against the swingline facility) and the Term Loan A and LIBOR plus 3.50% for the Term Loan B.  The Credit Facility does not require a minimum LIBOR rate.  The Credit Facility is secured by a first priority pledge of substantially all property and assets of Lumos Networks Operating Company and all material subsidiaries, as guarantors, excluding the RLECs. 

The Credit Facility includes various restrictions and conditions, including covenants relating to leverage and interest coverage ratio requirements.  The Company was in compliance with its restrictive debt covenants as of March 31, 2013.

In accordance with the terms of the Credit Facility, the Company entered into an interest rate swap agreement in 2012, which expires December 31, 2015, whereby the Company swaps three-month LIBOR with a fixed rate of approximately 0.8%.  The Company recognized a $0.2 million gain on derivative instruments as a result of changes in the fair value of the interest rate swap during the three months ended March 31, 2013.

In connection with entering into the Credit Facility, the Company deferred $4.9 million in debt issuance costs which are being amortized to interest expense over the life of the debt using the effective interest method.  Amortization of these costs for each of the three months ended March 31, 2013 and 2012 was $0.2 million.

The Company receives patronage credits from CoBank and certain other of the Farm Credit System lending institutions (collectively referred to as “patronage banks”) which are not reflected in the interest rates above.  The patronage banks hold a portion of the credit facility and are cooperative banks that are required to distribute their profits to their members.  Patronage credits are calculated based on the patronage banks’ ownership percentage of the credit facility and are received by the Company as either a cash distribution or as equity in the patronage banks.  The current patronage credit percentages are 75% in cash and 25% in equity.  These credits are recorded in the condensed consolidated statement of income as an offset to interest expense.  The Patronage credits for the three months ended March 31, 2013 and 2012 were $0.2 million and $0.3 million, respectively.

The Company’s blended average interest rate on its long-term debt for the three months ended March 31, 2013 was 4.09%.

On April 30, 2013, Lumos Networks Operating Company entered into a $425 million credit facility (the “New Credit Facility”) consisting of a $50 million senior secured five year revolving credit facility, a $100 million senior secured five year amortizing term loan and a $275 million senior secured six year amortizing term loan.  The Company used the net proceeds to refinance and extend the maturity of the Credit Facility and for general corporate purposes.

The aggregate maturities of the Term Loan A and Term Loan B under the New Credit Facility are $1.4 million in the remainder of 2013, $5.3 million in 2014, $7.7 million in 2015, $7.7 million in 2016,  $12.8 million in 2017 and $340.1 thereafterThe revolver under the New Credit Facility, under which no borrowings are outstanding, matures in full in 2018.

Capital lease obligations

In addition to the long-term debt discussed above, the Company has capital leases on vehicles with original lease terms of four to five years.  At March 31, 2013, the carrying value and accumulated amortization of these assets was $3.0 million and $1.5 million, respectively.  As of March 31, 2013, the total net present value of the Company’s future minimum lease payments is $1.6 million.  As of March 31, 2013, the principal portion of these capital lease obligations is due as follows:  $0.5 million in the remainder of 2013, $0.4 million in 2014, $0.4 million in 2015, $0.2 million in 2016 and $0.1 million thereafter.

 

Note 5.  Supplementary Disclosures of Cash Flow Information

The following information is presented as supplementary disclosures for the consolidated statements of cash flows for the three months ended March 31, 2013 and 2012

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

 

 

2013

 

 

2012

Cash payments for:

 

 

 

 

 

 

Interest (net of amounts capitalized)

 

$

2,296 

 

$

2,972 

Income taxes

 

 

17 

 

 

Cash receipts for:

 

 

 

 

 

 

Income tax refunds

 

 

 -

 

 

214 

Supplemental investing and financing activities:

 

 

 

 

 

 

Additions to property and equipment included in accounts payable and other accrued liabilities

 

 

2,128 

 

 

3,389 

Borrowings under capital leases

 

 

478 

 

 

21 

Dividend declared not paid

 

 

3,058 

 

 

2,979 

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Cash payments for interest for the three months ended March 31, 2013 in the table above is net of $0.7 million of cash received from CoBank for patronage credits (Note 4).  The amount of interest capitalized was less than $0.1 million for each of the three months ended March 31, 2013 and 2012.

 

Note 6.  Financial Instruments

The Company is exposed to market risks with respect to certain of the financial instruments that it holds.  Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the condensed consolidated balance sheets at cost which approximates fair value because of the short-term maturity of these instruments.  The fair value of the senior credit facility was estimated based on an analysis of the forward-looking interest rates as of March 31, 2013 compared to the forward-looking interest rates at inception, assuming no change in the credit profile of the Company or market demand of similar instrumentsThe Company’s valuation technique for this instrument is considered to be a level three fair value measurement within the fair value hierarchy described in FASB ASC 820. The fair values of the derivative instruments (Note 4) were derived based on quoted trading prices obtained from the administrative agents as of March 31, 2013The Company’s valuation technique for these instruments is considered to be level two fair value measurements within the fair value hierarchy described in FASB ASC 820.  The fair values of other financial instruments, if applicable, are based on quoted market prices or discounted cash flows based on current market conditions.

 

The following table presents the face amount, carrying amount and fair value of the Company’s financial instruments at March 31, 2013 and December 31, 2012.  

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments

 

 

 

 

 

 

 

 

 

(In thousands)

 

Face Amount

 

Carrying Amount

 

Fair Value

March 31, 2013

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

 

$

Long-term investments for which it is not practicable to estimate fair value

 

 

N/A

 

 

425 

 

 

N/A

Financial liabilities:

 

 

 

 

 

 

 

 

 

Senior credit facility

 

 

310,625 

 

 

310,625 

 

 

319,290 

Capital lease obligations

 

 

1,573 

 

 

1,573 

 

 

1,573 

Derivatives related to debt:

 

 

 

 

 

 

 

 

 

Interest rate swap liability

 

 

152,813 

*

 

1,684 

 

 

1,684 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

Financial assets :

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

 

$

Long-term investments for which it is not practicable to estimate fair value

 

 

N/A

 

 

462 

 

 

N/A

Financial liabilities:

 

 

 

 

 

 

 

 

 

Senior credit facility

 

 

311,022 

 

 

311,022 

 

 

320,739 

Capital lease obligations

 

 

1,203 

 

 

1,203 

 

 

1,203 

Derivatives related to debt:

 

 

 

 

 

 

 

 

 

Interest rate swap liability

 

 

153,750 

*

 

1,871 

 

 

1,871 

 

*notional amount

 

Of the long-term investments for which it is not practicable to estimate fair value in the table above, $0.4 million as of March 31, 2013 and December 31, 2012 represents the Company’s investment in CoBank (Note 4).  This investment is primarily related to patronage distributions of restricted equity and is a required investment related to the portion of the credit facility loan held by CoBank.  This investment is carried under the cost method.

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Note 7.  Stockholders’ Equity

On May  1, 2013, the Company’s board of directors declared a quarterly dividend on its common stock in the amount of $0.14 per share, which is to be paid on July 11, 2013 to stockholders of record on June 13, 2013.

The computations of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012 are detailed in the following table.

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

 

2013

 

2012

Numerator:

 

 

 

 

 

 

Income applicable to common shares for earnings-per-share computation

 

$

6,409 

 

$

5,287 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Total shares outstanding

 

 

21,953 

 

 

21,277 

Less:  unvested shares

 

 

(745)

 

 

(386)

Less:  effect of calculating weighted average shares

 

 

(22)

 

 

(41)

Denominator for basic earnings per common share - weighted average shares outstanding

 

 

21,186 

 

 

20,850 

Plus:  weighted average unvested shares

 

 

461 

 

 

368 

Plus:  common stock equivalents of stock options outstanding

 

 

46 

 

 

19 

Denominator for diluted earnings per common share – weighted average shares outstanding

 

 

21,693 

 

 

21,237 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2013 and 2012, the denominator for diluted earnings per common share excludes 1,597,777 shares and 1,462,038 shares related to stock options which would be antidilutive for the period, respectively.

 

 

 

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Below is a summary of the activity and status of equity as of and for the three months ended March 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share amounts)

Common Shares

 

Treasury Shares

 

Common Stock

 

Additional Paid-in Capital

 

Treasury Stock

 

Accumulated Deficit

 

Accumulated Other Comprehensive Loss, net of tax

 

Total Lumos Networks Corp. Stockholders' Equity

 

Noncontrolling Interests

 

Total Equity

Balance, December 31, 2012

21,610 

 

112 

 

$

216 

 

$

129,570 

 

$

 -

 

$

(53,060)

 

$

(12,676)

 

$

64,050 

 

$

552 

 

$

64,602 

Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lumos Networks Corp.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,409 

 

 

 

 

 

6,409 

 

 

 

 

 

6,409 

Other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

189 

 

 

189 

 

 

 

 

 

189 

Equity-based compensation expense

 

 

 

 

 

 

 

 

784 

 

 

 

 

 

 

 

 

 

 

 

784 

 

 

 

 

 

784 

Adjustments to excess tax benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

from stock-based compensation

 

 

 

 

 

 

 

 

78 

 

 

 

 

 

 

 

 

 

 

 

78 

 

 

 

 

 

78 

Restricted shares issued, shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

issued through the employee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock purchase plan, shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

issued through 401(k) matching

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

contributions and stock options