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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 June 30, 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 22,002,800 shares of the registrant’s common stock outstanding as of the close of business on July 29, 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.

29 

Item 4.  Controls and Procedures.

30 

 

 

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings.

30 

Item 1A.  Risk Factors.

30 

Item 5.  Other Information.

31 

Item 6.  Exhibits.

32 

 

Signatures 

 

 

 

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Part I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

(In thousands)

June 30, 2013

 

December 31, 2012

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash

$

62,834 

 

$

Restricted cash

 

4,324 

 

 

5,303 

Accounts receivable, net of allowance of $1,078 ($1,822 in 2012)

 

25,565 

 

 

22,676 

Other receivables

 

1,207 

 

 

2,400 

Income tax receivable

 

1,164 

 

 

954 

Prepaid expenses and other

 

3,699 

 

 

5,136 

Deferred income taxes

 

3,807 

 

 

3,357 

Total Current Assets

 

102,600 

 

 

39,828 

 

 

 

 

 

 

Securities and Investments

 

509 

 

 

462 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land and buildings

 

18,713 

 

 

19,489 

Network plant and equipment

 

439,221 

 

 

419,176 

Furniture, fixtures and other equipment

 

30,349 

 

 

22,070 

Total in service

 

488,283 

 

 

460,735 

Under construction

 

23,296 

 

 

19,764 

 

 

 

 

 

 

 

 

511,579 

 

 

480,499 

Less accumulated depreciation and amortization

 

158,780 

 

 

143,910 

 

 

 

 

 

 

Total Property, Plant and Equipment, net

 

352,799 

 

 

336,589 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

100,297 

 

 

100,297 

Other intangibles, less accumulated amortization of $76,688 ($72,876 in 2012)

 

29,983 

 

 

34,895 

Deferred charges and other assets

 

7,930 

 

 

4,448 

Total Other Assets

 

138,210 

 

 

139,640 

 

 

 

 

 

 

Total Assets

$

594,118 

 

$

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)

June 30, 2013

 

December 31, 2012

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

$

5,178 

 

$

7,900 

Accounts payable

 

9,982 

 

 

17,453 

Dividends payable

 

3,062 

 

 

3,013 

Advance billings and customer deposits

 

13,591 

 

 

13,527 

Accrued compensation

 

2,461 

 

 

1,742 

Accrued operating taxes

 

4,912 

 

 

3,838 

Other accrued liabilities

 

5,938 

 

 

6,284 

Total Current Liabilities

 

45,124 

 

 

53,757 

 

 

 

 

 

 

Long-term Liabilities

 

 

 

 

 

Long-term debt

 

377,216 

 

 

304,325 

Retirement benefits

 

29,586 

 

 

30,413 

Deferred income taxes

 

66,590 

 

 

59,313 

Other long-term liabilities

 

2,247 

 

 

3,500 

Income tax payable

 

709 

 

 

609 

Total Long-term Liabilities

 

476,348 

 

 

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; 22,042 shares issued and 22,002 shares outstanding (21,610 shares issued and 21,498 shares outstanding in 2012)

 

220 

 

 

216 

Additional paid in capital

 

132,160 

 

 

129,570 

Treasury stock, 40 shares at cost (112 shares in 2012)

 

(84)

 

 

 -

Accumulated deficit

 

(48,009)

 

 

(53,060)

Accumulated other comprehensive loss, net of tax

 

(12,298)

 

 

(12,676)

Total Lumos Networks Corp. Stockholders' Equity

 

71,989 

 

 

64,050 

Noncontrolling Interests

 

657 

 

 

552 

 

 

 

 

 

 

Total Equity

 

72,646 

 

 

64,602 

 

 

 

 

 

 

Total Liabilities and Equity

$

594,118 

 

$

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 June 30,

 

Six Months Ended June 30,

(In thousands, except per share amounts)

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

$

52,311 

 

$

50,803 

 

$

104,845 

 

$

102,215 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Network access costs

 

10,501 

 

 

12,177 

 

 

21,655 

 

 

23,941 

Selling, general and administrative

 

18,896 

 

 

20,777 

 

 

36,916 

 

 

39,590 

Depreciation and amortization

 

10,796 

 

 

8,803 

 

 

20,359 

 

 

18,023 

Accretion of asset retirement obligations

 

33 

 

 

31 

 

 

64 

 

 

61 

Restructuring charges

 

 -

 

 

 -

 

 

40 

 

 

 -

Total Operating Expenses, net

 

40,226 

 

 

41,788 

 

 

79,034 

 

 

81,615 

Operating Income

 

12,085 

 

 

9,015 

 

 

25,811 

 

 

20,600 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(3,406)

 

 

(2,929)

 

 

(6,534)

 

 

(5,916)

Gain (loss) on interest rate derivatives

 

267 

 

 

(438)

 

 

454 

 

 

(292)

Other (expense) income, net

 

(907)

 

 

23 

 

 

(882)

 

 

31 

Total Other Expenses, net

 

(4,046)

 

 

(3,344)

 

 

(6,962)

 

 

(6,177)

Income Before Income Tax Expense

 

8,039 

 

 

5,671 

 

 

18,849 

 

 

14,423 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

3,241 

 

 

2,953 

 

 

7,573 

 

 

6,396 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

4,798 

 

 

2,718 

 

 

11,276 

 

 

8,027 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Income) Loss Attributable to Noncontrolling Interests

 

(36)

 

 

57 

 

 

(105)

 

 

35 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Lumos Networks Corp.

$

4,762 

 

$

2,775 

 

$

11,171 

 

$

8,062 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

$

0.22 

 

$

0.13 

 

$

0.51 

 

$

0.39 

Earnings per share - diluted

$

0.22 

 

$

0.13 

 

$

0.51 

 

$

0.38 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared per Share - Common Stock

$

0.14 

 

$

0.14 

 

$

0.28 

 

$

0.28 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30,

 

Six Months Ended June 30,

(In thousands)

2013

 

2012

 

2013

 

2012

Net Income

$

4,798 

 

$

2,718 

 

$

11,276 

 

$

8,027 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of actuarial loss from defined benefit plans included in net income, net of $120 and $173 of deferred tax asset for the three months ended June 30, 2013 and 2012, respectively, and $241 and $346 of deferred tax asset for the six months ended June 30, 2013 and 2012, respectively (see Note 2)

 

189 

 

 

445 

 

 

378 

 

 

544 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income, net of tax

 

189 

 

 

445 

 

 

378 

 

 

544 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

4,987 

 

 

3,163 

 

 

11,654 

 

 

8,571 

 

 

 

 

 

 

 

 

 

 

 

 

(Less) Plus:  Comprehensive (Income) Loss Attributable to Noncontrolling Interests

 

(36)

 

 

57 

 

 

(105)

 

 

35 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Lumos Networks Corp.

$

4,951 

 

$

3,220 

 

$

11,549 

 

$

8,606 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

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Condensed Consolidated Statements of Cash Flows

Lumos Networks Corp. 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

(In thousands)

2013

 

2012

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

$

11,276 

 

$

8,027 

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

 

 

 

 

 

Depreciation

 

15,447 

 

 

12,457 

Amortization

 

4,912 

 

 

5,566 

Accretion of asset retirement obligations

 

64 

 

 

61 

Deferred income taxes

 

6,765 

 

 

6,086 

(Gain) loss on interest rate derivatives

 

(454)

 

 

292 

Equity-based compensation expense

 

2,353 

 

 

1,788 

Amortization of debt issuance costs

 

472 

 

 

403 

Write off of unamortized debt issuance costs

 

890 

 

 

 -

Retirement benefits, net of cash contributions and distributions

 

(208)

 

 

(470)

Excess tax benefits from share-based compensation

 

(179)

 

 

 -

Other

 

(84)

 

 

(42)

Changes in assets and liabilities from operations:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(2,889)

 

 

1,260 

Decrease (increase) in other current assets

 

1,475 

 

 

(1,557)

Changes in income taxes

 

(110)

 

 

28 

Decrease in accounts payable

 

(4,358)

 

 

(1,301)

Increase in other current liabilities

 

60 

 

 

1,982 

Net Cash Provided by Operating Activities

 

35,432 

 

 

34,580 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(26,724)

 

 

(28,988)

Broadband network expansion funded by stimulus grant

 

(30)

 

 

(847)

Change in restricted cash

 

979 

 

 

804 

Cash reimbursement received from broadband stimulus grant

 

979 

 

 

804 

Purchase of tradename asset

 

 -

 

 

(333)

Other

 

 -

 

 

(26)

Net Cash Used in Investing Activities

 

(24,796)

 

 

(28,586)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

375,000 

 

 

 -

Payment of debt issuance costs

 

(4,849)

 

 

 -

Principal payments on senior secured term loans

 

(307,500)

 

 

(1,000)

Borrowings from revolving credit facility

 

15,000 

 

 

6,566 

Principal payments on revolving credit facility

 

(18,521)

 

 

(13,066)

Termination payments of interest rate swaps

 

(858)

 

 

 -

Cash dividends paid on common stock

 

(6,071)

 

 

(5,945)

Principal payments under capital lease obligations

 

(194)

 

 

(404)

Proceeds from stock option exercises and employee stock purchase plan

 

101 

 

 

74 

Excess tax benefits from share-based compensation

 

179 

 

 

 -

Other

 

(91)

 

 

10 

Net Cash Provided by (Used in) Financing Activities

 

52,196 

 

 

(13,765)

Increase (decrease) in cash

 

62,832 

 

 

(7,771)

Cash:

 

 

 

 

 

Beginning of Period

 

 

 

10,547 

 

 

 

 

 

 

End of Period

$

62,834 

 

$

2,776 

 

 

 

 

 

 

 

 

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 and six months ended June 30, 2013 and for the three and six months ended June 30, 2012 contain all adjustments  necessary to present fairly in all material respects the financial position as of June 30, 2013, and the results of operations and cash flows for all periods presented on the respective condensed consolidated financial statements included herein.  The results of operations for the three and six months ended June 30, 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, 2012Beginning in 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 any period presented.

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 June 30, 2013 and December 31, 2012, the Company did not have any cash equivalents.  As of June 30, 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 and six months ended June 30, 2013 and 2012.

The Company previously utilized a zero balance arrangement for its master cash account against a swingline credit facility that the Company had with its primary commercial bank.  This swingline facility was terminated on April 30, 2013, concurrent with the closing of the Company’s debt refinancing (see Note 4).  As  of 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 changes in book overdraft amounts in cash flows from operating activities on the condensed consolidated statements of cash flows for the six months ended June 30, 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 received $1.0 million in the six months ended June 30, 2013.  The Company has a $0.6 million receivable for the reimbursable portion of the qualified recoverable expenditures as of June 30, 2013.  At June 30, 2013, the Company’s pledged account balance was  $4.3 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 June 30, 2013 and 2012 was $0.1 million and less than $0.1 million, respectively, and bad debt expense for each of the six months ended June 30, 2013 and 2012 was $0.1 million.  The Company’s allowance for doubtful accounts was $1.1 million and $1.8 million as of June 30, 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 June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

(In thousands)

 

December 31, 2012

 

Charged to Expense

 

Charged to Other Accounts

 

Deductions

 

June 30, 2013

Allowance for doubtful accounts

 

$

1,822 

 

$

45 

 

$

 -

 

$

(789)

 

$

1,078 

 

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 June 30, 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, including certain software licenses, 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 June 30, 2013 and December 31, 2012, other intangibles were comprised of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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 

 

$

(74,567)

 

$

103,153 

 

$

(69,734)

Trademarks

0.5 to 15 yrs

 

 

3,518 

 

 

(2,121)

 

 

3,518 

 

 

(2,042)

Non-compete agreements

2 yrs

 

 

 -

 

 

 -

 

 

1,100 

 

 

(1,100)

Total

 

 

$

106,671 

 

$

(76,688)

 

$

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 or six months ended June 30, 2013.  Amortization expense for the three months ended June 30, 2013 and 2012 was $2.5 million and $2.8 million, respectively, and amortization expense for the six months ended June 30, 2013 and 2012 was $4.9 million and $5.6 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

 

$

4,833 

 

$

79 

 

$

4,912 

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 goodwill during the six months ended June 30, 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.

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For the three and six months ended June 30, 2013 and 2012, the components of the Company’s net periodic benefit cost for the Pension Plan were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(In thousands)

2013

 

2012

 

2013

 

2012

Service cost

$

 -

 

$

511 

 

$

 -

 

$

1,021 

Interest cost

 

608 

 

 

674 

 

 

1,216 

 

 

1,349 

Expected return on plan assets

 

(975)

 

 

(879)

 

 

(1,951)

 

 

(1,759)

Amortization of loss

 

229 

 

 

370 

 

 

459 

 

 

741 

Net periodic benefit cost (benefit)

$

(138)

 

$

676 

 

$

(276)

 

$

1,352 

 

Pension plan assets were valued at $54.1 million and $51.7 million at June 30, 2013 and December 31, 2012, respectively.  No funding contributions were made in the three or six months ended June 30, 2013, and the Company does not expect to make a funding contribution during the remainder of 2013.

For the three and six months ended June 30, 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 June 30,

 

Six Months Ended June 30,

(In thousands)

2013

 

2012

 

2013

 

2012

Service cost

$

23 

 

$

20 

 

$

46 

 

$

39 

Interest cost

 

121 

 

 

131 

 

 

242 

 

 

263 

Amortization of loss

 

 

 

 -

 

 

14 

 

 

 -

Net periodic benefit cost

$

151 

 

$

151 

 

$

302 

 

$

302 

 

The total expense recognized for the Company’s nonqualified pension plans for the three months ended June 30, 2013 and 2012, was $0.1 million and $0.2 million, respectively, and less than $0.1 million and $0.1 million of this expense for the same respective periods  relates to the amortization of actuarial loss.  The total expense recognized for the Company’s nonqualified pension plans for the six months ended June 30, 2013 and 2012 was $0.2 million and $0.4 million, respectively, and $0.1 million and $0.2 million of this expense for the same respective periods relates to the amortization of actuarial 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 for the three months ended June 30, 2013 and 2012 was $0.3 million and $0.4 million, respectively, all of which has been reclassified to selling, general and administrative expenses on the condensed consolidated statement of income for the respective periods.

The total amount reclassified out of accumulated other comprehensive income related to amortization of actuarial losses for the pension and other postretirement benefit plans for the six months ended June 30, 2013 and 2012 was $0.6 million and $0.9 million, 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 and six months ended June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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 and restricted shares was adjusted to reflect the probability of the achievement of the market condition based on management’s best estimate using a  Monte Carlo model (see Note 9).  The Company initially 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.  The Company would accelerate expense recognition if the market conditions are achieved prior to the end of the derived requisite service period. 

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Total equity-based compensation expense related to all of the share-based awards and the Company’s 401(k) matching contributions was $1.3 million and $0.8 million for the three months ended June 30, 2013 and 2012, respectively, and $2.4 million and $1.8 million for the six months ended June 30, 2013 and 2012, respectively, 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 June 30, 2013 for the remainder of 2013 and for the years 2014 through 2018 are estimated to be $2.3 million, $3.4 million, $2.3 million, $0.9 million, $0.6 million and $0.3 million, respectively.

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”).  The Company’s 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 and six months ended June 30, 2012 based on the restructuring of our operating segments in the first quarter of 2013:    

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(In thousands)

 

Strategic
Data

 

Legacy Voice

 

Access

 

Corporate (Unallocated)

 

Total

For the three months ended June 30, 2013

Operating revenues

 

$

29,954 

 

$

14,329 

 

$

8,028 

 

$

 -

 

$

52,311 

Network access costs

 

 

5,355 

 

 

4,834 

 

 

312 

 

 

 -

 

 

10,501 

Network operating costs

 

 

7,467 

 

 

2,509 

 

 

704 

 

 

 -

 

 

10,680 

Selling, general and administrative expenses

 

 

3,801 

 

 

1,807 

 

 

971 

 

 

1,637 

 

 

8,216 

Adjusted EBITDA(1)

 

 

13,331 

 

 

5,178 

 

 

6,042 

 

 

 -

 

 

24,551 

Capital expenditures

 

 

11,205 

 

 

329 

 

 

454 

 

 

(296)

 

 

11,692 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2013

Operating revenues

 

$

59,615 

 

$

29,213 

 

$

16,017 

 

$

 -

 

$

104,845 

Network access costs

 

 

10,925 

 

 

10,080 

 

 

650 

 

 

 -

 

 

21,655 

Network operating costs

 

 

14,085 

 

 

5,277 

 

 

1,360 

 

 

 -

 

 

20,722 

Selling, general and administrative expenses

 

 

7,552 

 

 

3,689 

 

 

1,981 

 

 

2,972 

 

 

16,194 

Adjusted EBITDA(1)

 

 

27,054 

 

 

10,166 

 

 

12,026 

 

 

 -

 

 

49,246 

Capital expenditures

 

 

22,982 

 

 

453 

 

 

623 

 

 

2,666 

 

 

26,724 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Strategic
Data

 

Legacy Voice

 

Access

 

Corporate (Unallocated)

Total

For the three months ended June 30, 2012

Operating revenues

 

$

26,531 

 

$

16,186 

 

$

8,086 

 

$

 -

 

$

50,803 

Network access costs

 

 

5,323 

 

 

6,493 

 

 

361 

 

 

 -

 

 

12,177 

Network operating costs

 

 

5,470 

 

 

4,172 

 

 

1,079 

 

 

 -

 

 

10,721 

Selling, general and administrative expenses

 

 

3,408 

 

 

2,120 

 

 

1,271 

 

 

3,257 

 

 

10,056 

Adjusted EBITDA(1)

 

 

12,330 

 

 

3,401 

 

 

5,375 

 

 

 -

 

 

21,106 

Capital expenditures

 

 

11,836 

 

 

56 

 

 

68 

 

 

(341)

 

 

11,619 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2012

Operating revenues

 

$

52,402 

 

$

32,930 

 

$

16,883 

 

$

 -

 

$

102,215 

Network access costs

 

 

10,369 

 

 

12,851 

 

 

721 

 

 

 -

 

 

23,941 

Network operating costs

 

 

10,967 

 

 

8,482 

 

 

2,179 

 

 

 -

 

 

21,628 

Selling, general and administrative expenses

 

 

6,640 

 

 

4,132 

 

 

2,477 

 

 

4,713 

 

 

17,962 

Adjusted EBITDA(1)

 

 

24,427 

 

 

7,464 

 

 

11,506 

 

 

 -

 

 

43,397 

Capital expenditures

 

 

26,420 

 

 

283 

 

 

375 

 

 

1,910 

 

 

28,988 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)    The Company evaluates performance based upon Adjusted EBITDA (a non-GAAP measure), 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 or loss 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.  See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosures, including the Company’s reasons for using this non-GAAP financial measure.

 

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.

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The following table provides a reconciliation of operating income to Adjusted EBITDA, as defined by the Company, on a consolidated basis for the three and six months ended June 30, 2013 and 2012:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(In thousands)

 

2013

 

2012

 

 

2013

2012

Operating income

 

$

12,085 

 

$

9,015 

 

$

25,811 

 

$

20,600 

Depreciation and amortization and accretion of asset

 

 

 

 

 

 

 

 

 

 

 

 

retirement obligations

 

 

10,829 

 

 

8,834 

 

 

20,423 

 

 

18,084 

Sub-total:

 

 

22,914 

 

 

17,849 

 

 

46,234 

 

 

38,684 

Amortization of actuarial losses

 

 

309 

 

 

445 

 

 

619 

 

 

890 

Equity-based compensation

 

 

1,328 

 

 

777 

 

 

2,353 

 

 

1,788 

Restructuring charges

 

 

 -

 

 

 -

 

 

40 

 

 

 -

Employee separation charges

 

 

 -

 

 

2,035 

 

 

 -

 

 

2,035 

Adjusted EBITDA

 

$

24,551 

 

$

21,106 

 

$

49,246 

 

$

43,397 

 

Revenues from Verizon accounted for approximately 10% of the Company’s total revenues for each of the three and six months ended June 30, 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 June 30, 2013 and December 31, 2012, the Company’s outstanding long-term debt consisted of the following: 

 

 

 

 

 

 

 

 

 

(In thousands)

 

June 30, 2013

 

December 31, 2012

Credit facility

 

$

375,000 

 

$

311,022 

Capital lease obligations

 

 

7,394 

 

 

1,203 

 

 

 

382,394 

 

 

312,225 

 

 

 

 

 

 

 

Less:  current portion of long term debt

 

 

5,178 

 

 

7,900 

 

 

$

377,216 

 

$

304,325 

 

Credit Facility

On April 30, 2013, Lumos Networks Operating Company, a wholly-owned subsidiary of Lumos Networks Corp., entered into a $425 million credit facility (the “Credit Facility”).  The Credit Facility consists of a $100 million senior secured five-year term loan (the “Term Loan A”), a $275 million senior secured six-year term loan (the “Term Loan B”); and a $50 million senior secured five-year revolving credit facility (the “Revolver”).  The proceeds from the Term Loan A and the Term Loan B were used to retire the prior first lien credit facility outstanding amount of approximately $311 million and to pay closing costs and other expenses related to the transaction, with the remaining proceeds available for working capital purposes.  As of June 30, 2013, no borrowings are outstanding under the Revolver.

Pricing of the Credit Facility is currently LIBOR plus 3.25% for the Revolver and Term Loan A and LIBOR plus 3.50% for Term Loan B.  The Credit Facility does not require a minimum LIBOR rate.  The Term Loan A matures in 2018 with quarterly payments of 1.25% per annum from September 30, 2014 through December 31, 2016 and 2.50% per annum thereafter.  The Term Loan B matures in 2019 with quarterly payments of 1% per annum beginning on September 30, 2013.  The Revolver matures in full in 2018.  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.

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The Credit Facility includes various restrictions and conditions, including a maximum leverage ratio of 4.75:1.00 through December 31, 2013, 4.50:1.00 for the period from January 1, 2014 through December 31, 2014, 4.25:1.00 for the period from January 1, 2015 through December 31, 2015 and 4.00:1.00 thereafter.  The Credit Facility also sets a minimum interest rate coverage ratio of 3.25:1.00.  At June 30, 2013, the Company’s leverage ratio was 4.02:1.00 and its interest coverage ratio was 8.08:1.00.  The Company was in compliance with its restrictive debt covenants as of June 30, 2013.  The Credit Facility has a maximum distributable amount available for restricted payments, including the payment of dividends.  The distributable amount was initially set at $12 million and will be reduced by future restricted payments and certain other items set forth in the Credit Agreement.  The distributable amount is increased annually by the greater of $12 million or 75% of free cash flow (as defined under the Credit Agreement).  The distributable amount as of June 30, 2013 was $12.0 million.

Mandatory prepayments include an excess cash flow sweep equal to 50% of Excess Cash Flow, as defined under the Credit Agreement, for each fiscal year commencing in 2013 for so long as the leverage ratio exceeds 3.25:1.00.

The Company entered into an interest rate swap agreement in 2012, which expires December 31, 2015, whereby the Company swaps one-month LIBOR with a fixed rate of approximately 0.8%.  In connection with the aforementioned debt refinancing, the Company paid $0.9 million to terminate a portion of this interest rate swap agreement. The notional amount remaining under the existing swap agreement was $87.7 million at June 30, 2013.  The Company recognized a gain on interest rate derivatives of $0.3 million and $0.5 million for the three and six months ended June 30, 2013, respectively.  The Company recognized a loss on interest rate derivatives of $0.4 million and $0.3 million for the three and six months ended June 30, 2012, respectively.  In accordance with the terms of the Credit Facility, the Company entered into additional swap agreements in July 2013 to bring the combined notional amount of the swap agreements up to 50 percent of the aggregate outstanding balance of Term Loan A and Term Loan B.  Under the new swap agreements, the Company swaps one-month LIBOR with a fixed rate of approximately 0.5%.  

In connection with the refinancing, the Company deferred an additional $4.9 million in debt issuance costs and expensed approximately $0.9 million of unamortized debt issuance costs associated with the previous credit facility, which expense is included in other expense on the condensed consolidated statements of income for the three and six months ended June 30, 2013.  Total unamortized debt issuance costs were $7.4 million and $3.9 million as of June 30, 2013 and December 31, 2012, respectively, which amounts are included in deferred charges and other assets on the condensed consolidated balance sheets and are being amortized to interest expense over the life of the debt using the effective interest method.  Amortization of debt issuance costs for the three and six months ended June 30, 2013 was $0.3 million and $0.5 million, respectively.  Amortization of debt issuance costs for the three and six months ended June 30, 2012 was $0.2 million and $0.4 million, respectively.

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 were $0.3 million and $0.6 million for the three and six months ended June 30, 2013, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 2012, respectively. 

The aggregate maturities of the Term Loan A and Term Loan B under the 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 million thereafter.  The revolver under the Credit Facility, under which no borrowings are outstanding as of June 30, 2013, matures in full in 2018.

The Company’s blended average interest rate on its long-term debt for the six months ended June 30, 2013 was 3.86%.

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 June 30, 2013, the carrying value and accumulated amortization of the related assets were $3.0 million and $1.6 million, respectively.  In June 2013, the Company entered into a financing arrangement with a software vendor related to the acquisition of certain software licenses, which the Company classified as a capital lease.  The agreement extends through 2015 with payments due annually.  As of June 30, 2013, the carrying value and accumulated depreciation of the related asset were $5.9 million and $0.1 million, respectively.  As of June 30, 2013, the combined total net present value of the Company’s future minimum lease payments is $7.4 million and the principal portion of these capital lease obligations is due as follows:  $1.3 million in the remainder of 2013, $1.3 million in 2014, $2.3 million in 2015, $2.4 million in 2016 and $0.1 million thereafter.

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Table Of Contents

 

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 six months ended June 30, 2013 and 2012

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

(In thousands)

 

 

2013

 

 

2012

Cash payments for:

 

 

 

 

 

 

Interest (net of amounts capitalized)

 

$

5,793 

 

$

5,602 

Income taxes

 

 

933 

 

 

1,149 

Cash receipts for:

 

 

 

 

 

 

Income tax refunds

 

 

16 

 

 

215 

Supplemental investing and financing activities:

 

 

 

 

 

 

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

 

 

4,989 

 

 

1,868 

Borrowings under capital leases

 

 

6,384 

 

 

137 

Dividend declared not paid

 

 

3,062 

 

 

3,000 

 

Cash payments for interest for the six months ended June 30, 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 six months ended June 30, 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 June 30, 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 June 30, 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 June 30, 2013 and December 31, 2012.  

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments

 

 

 

 

 

 

 

 

 

(In thousands)

 

Face Amount

 

Carrying Amount

 

Fair Value

June 30, 2013

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash

 

$

62,834 

 

$

62,834 

 

$

62,834 

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

 

 

N/A

 

 

509 

 

 

N/A

Financial liabilities:

 

 

 

 

 

 

 

 

 

Senior credit facility

 

 

375,000 

 

 

375,000 

 

 

366,457 

Capital lease obligations

 

 

7,394 

 

 

7,394 

 

 

7,394 

Derivatives related to debt:

 

 

 

 

 

 

 

 

 

Interest rate swap liability

 

 

87,668 

*

 

560 

 

 

560