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

FORM 10Q

(Mark One)

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

For the quarterly period ended March 31, 2015

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.    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).   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

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  No

There were 22,753,503 shares of the registrant’s common stock outstanding as of the close of business on April 30, 2015.

 

 

 

2


 

Part I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

(In thousands)

March 31, 2015

 

December 31, 2014

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

12,654 

 

$

14,140 

Marketable securities

 

29,433 

 

 

16,870 

Restricted cash

 

3,154 

 

 

4,208 

Accounts receivable, net of allowance of $1,321 ($1,217 in 2014)

 

22,409 

 

 

22,925 

Other receivables

 

1,289 

 

 

2,113 

Income tax receivable

 

221 

 

 

172 

Prepaid expenses and other

 

4,719 

 

 

4,321 

Deferred income taxes

 

8,350 

 

 

5,601 

Total Current Assets

 

82,229 

 

 

70,350 

 

 

 

 

 

 

Securities and Investments

 

1,021 

 

 

914 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land and buildings

 

20,129 

 

 

19,726 

Network plant and equipment

 

555,885 

 

 

540,108 

Furniture, fixtures and other equipment

 

46,154 

 

 

45,729 

Total in service

 

622,168 

 

 

605,563 

Under construction

 

42,746 

 

 

34,426 

 

 

 

 

 

 

 

 

664,914 

 

 

639,989 

Less accumulated depreciation and amortization

 

220,254 

 

 

210,538 

 

 

 

 

 

 

Total Property, Plant and Equipment, net

 

444,660 

 

 

429,451 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

100,297 

 

 

100,297 

Other intangibles, less accumulated amortization of $92,232 ($90,086 in 2014)

 

13,738 

 

 

15,884 

Deferred charges and other assets

 

6,107 

 

 

5,718 

Total Other Assets

 

120,142 

 

 

121,899 

 

 

 

 

 

 

Total Assets

$

648,052 

 

$

622,614 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3

 


 

Condensed Consolidated Balance Sheets

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

(In thousands, except par value per share amounts)

March 31, 2015

 

December 31, 2014

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

$

10,506 

 

$

10,227 

Accounts payable

 

14,520 

 

 

20,257 

Dividends payable

 

 -

 

 

3,152 

Advance billings and customer deposits

 

13,733 

 

 

14,029 

Accrued compensation

 

1,197 

 

 

1,516 

Accrued operating taxes

 

5,257 

 

 

4,618 

Other accrued liabilities

 

4,162 

 

 

4,223 

Total Current Liabilities

 

49,375 

 

 

58,022 

 

 

 

 

 

 

Long-term Liabilities

 

 

 

 

 

Long-term debt, excluding current portion

 

388,872 

 

 

363,156 

Retirement benefits

 

17,812 

 

 

18,257 

Deferred income taxes

 

92,663 

 

 

87,864 

Other long-term liabilities

 

1,728 

 

 

1,746 

Income tax payable

 

93 

 

 

110 

Total Long-term Liabilities

 

501,168 

 

 

471,133 

 

 

 

 

 

 

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; 22,795 shares issued and 22,747 shares outstanding (22,579 shares issued and 22,544 shares outstanding in 2014)

 

228 

 

 

226 

Additional paid-in capital

 

144,797 

 

 

143,545 

Treasury stock, 48 shares at cost (35 shares in 2014)

 

(216)

 

 

(41)

Accumulated deficit

 

(35,843)

 

 

(38,567)

Accumulated other comprehensive loss, net of tax

 

(12,273)

 

 

(12,486)

Total Lumos Networks Corp. Stockholders' Equity

 

96,693 

 

 

92,677 

Noncontrolling Interests

 

816 

 

 

782 

 

 

 

 

 

 

Total Equity

 

97,509 

 

 

93,459 

 

 

 

 

 

 

Total Liabilities and Equity

$

648,052 

 

$

622,614 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

4

 


 

Condensed Consolidated Statements of Income

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands, except per share amounts)

2015

 

2014

 

 

 

 

 

 

Operating Revenues

$

50,495 

 

$

50,090 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Network access costs

 

9,712 

 

 

10,714 

Selling, general and administrative

 

19,834 

 

 

17,932 

Depreciation and amortization

 

11,868 

 

 

10,659 

Accretion of asset retirement obligations

 

34 

 

 

27 

Restructuring charges

 

633 

 

 

 -

Total Operating Expenses

 

42,081 

 

 

39,332 

Operating Income

 

8,414 

 

 

10,758 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

Interest expense

 

(3,486)

 

 

(3,974)

Gain on interest rate swap derivatives

 

82 

 

 

109 

Other (expenses) income , net

 

(243)

 

 

180 

Total Other Expenses, net

 

(3,647)

 

 

(3,685)

Income Before Income Taxes

 

4,767 

 

 

7,073 

 

 

 

 

 

 

Income Tax Expense

 

2,009 

 

 

2,978 

 

 

 

 

 

 

Net Income

 

2,758 

 

 

4,095 

 

 

 

 

 

 

Net Income Attributable to Noncontrolling Interests

 

(34)

 

 

(33)

 

 

 

 

 

 

Net Income Attributable to Lumos Networks Corp.

$

2,724 

 

$

4,062 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic and diluted

$

0.12 

 

$

0.18 

 

 

 

 

 

 

Cash Dividends Declared per Share - Common Stock

$

 -

 

$

0.14 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

 


 

Condensed Consolidated Statements of Comprehensive Income

Lumos Networks Corp.

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

(In thousands)

2015

 

2014

 

Net Income

$

2,758 

 

$

4,095 

 

 

 

 

 

 

 

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

Reclassification adjustment for amortization of actuarial loss from defined benefit plans included in net income, net of $131 and $25 of income taxes for the three months ended March 31, 2015 and 2014, respectively (see Note 2)

 

206 

 

 

39 

 

Unrealized holding gain on available-for-sale marketable securities, net of $4 and $10 of income taxes for the three months ended March 31, 2015 and 2014, respectively

 

 

 

15 

 

 

 

 

 

 

 

 

Other Comprehensive Income, Net of Tax

 

213 

 

 

54 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

2,971 

 

 

4,149 

 

 

 

 

 

 

 

 

Less:  Comprehensive Income Attributable to Noncontrolling Interests

 

(34)

 

 

(33)

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Lumos Networks Corp.

$

2,937 

 

$

4,116 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

6

 


 

Condensed Consolidated Statements of Cash Flows

Lumos Networks Corp. 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

2015

 

2014

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

$

2,758 

 

$

4,095 

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

 

 

 

 

 

Depreciation

 

9,722 

 

 

8,364 

Amortization

 

2,146 

 

 

2,295 

Accretion of asset retirement obligations

 

34 

 

 

27 

Deferred income taxes

 

1,916 

 

 

2,803 

Gain on interest rate swap derivatives

 

(82)

 

 

(109)

Equity-based compensation expense

 

1,225 

 

 

834 

Amortization of debt issuance costs

 

413 

 

 

371 

Retirement benefits, net of cash contributions and distributions

 

(108)

 

 

(475)

Excess tax benefits from share-based compensation

 

 -

 

 

(148)

Other

 

158 

 

 

135 

Changes in assets and liabilities from operations:

 

 

 

 

 

Decrease in accounts receivable

 

270 

 

 

902 

Decrease in other current assets

 

21 

 

 

613 

Changes in income taxes

 

(66)

 

 

166 

Decrease in accounts payable

 

(2,504)

 

 

(1,258)

Increase in other current liabilities

 

1,197 

 

 

1,152 

Net Cash Provided by Operating Activities

 

17,100 

 

 

19,767 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(29,224)

 

 

(18,117)

Broadband network expansion funded by stimulus grant

 

(649)

 

 

196 

Purchases of available-for-sale marketable securities

 

(22,853)

 

 

(7,003)

Proceeds from sale or maturity of available-for-sale marketable securities

 

10,220 

 

 

7,804 

Change in restricted cash

 

1,054 

 

 

 -

Cash reimbursement received from broadband stimulus grant

 

1,054 

 

 

 -

Net Cash Used in Investing Activities

 

(40,398)

 

 

(17,120)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

28,000 

 

 

 -

Payment of debt issuance costs

 

(861)

 

 

 -

Principal payments on senior secured term loans

 

(1,938)

 

 

(688)

Cash dividends paid on common stock

 

(3,152)

 

 

(3,091)

Principal payments under capital lease obligations

 

(98)

 

 

(112)

Proceeds from stock option exercises and employee stock purchase plan

 

17 

 

 

20 

Excess tax benefits from share-based compensation

 

 -

 

 

148 

Other

 

(156)

 

 

(21)

Net Cash Provided by (Used in) Financing Activities

 

21,812 

 

 

(3,744)

Decrease in cash and cash equivalents

 

(1,486)

 

 

(1,097)

Cash and Cash Equivalents:

 

 

 

 

 

Beginning of Period

 

14,140 

 

 

14,114 

 

 

 

 

 

 

End of Period

$

12,654 

 

$

13,017 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

e accompanying

 

 

7

 


 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

Lumos Networks Corp.

 

Note 1.  Organization

Lumos Networks Corp. (“Lumos Networks” or the “Company”) is a fiber-based bandwidth infrastructure and 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 Maryland, Pennsylvania, Ohio and Kentucky.  The Company serves carrier, business and residential customers over its fiber network offering data, voice and IP services.  The Company’s principal products and services include Multiprotocol Label Switching (“MPLS”) based Ethernet, Metro Ethernet (“Metro E”), Fiber to the Cell (“FTTC”) wireless backhaul and fiber transport services, wavelength transport services, IP services and other voice services.

On March 17, 2015, in a secondary offering of the Company’s common stock, Quadrangle Capital Partners LP. (“Quadrangle”) sold 1,600,000 shares on an underwritten basis.  This resulted in Quadrangle’s ownership declining from 12.3% to 5.3%. Quadrangle has a shareholder agreement that was subsequently amended and the Company did not receive any proceeds from the offering.   The Company’s total shares outstanding did not change as a result of this offering. All direct costs of this offering, which were primarily legal and accounting fees, totaled $0.3 million and are included in other expenses in the condensed consolidated statement of income for the three months ended March 31, 2015.

Note 2.  Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The condensed 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.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2015 and for the three months ended March 31, 2014 contain all adjustments necessary to present fairly in all material respects the Company’s financial position 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 months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year.  The accompanying condensed consolidated balance sheet as of December 31, 2014 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, 2014.

Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (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.  Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the valuation of interest rate swap derivatives, deferred tax assets, marketable securities, asset retirement obligations and equity-based compensation; goodwill impairment assessments and reserves for employee benefit obligations and income tax uncertainties.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, services are rendered or products are delivered, installed and functional, as applicable, the price to the buyer is fixed and determinable and collectability is reasonably assured.  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 to other carriers.  Revenues for equipment sales are recognized at the point of sale. 

8

 


 

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 revenue in the period when it is determined that the amounts can be estimated and collection is reasonably assured.

Cash Equivalents and Marketable Securities

The Company considers its investment in all highly liquid debt instruments with an original maturity of three months or less, when purchased, to be cash equivalents.  The Company’s marketable securities at March 31, 2015 and December 31, 2014 consist of debt securities not classified as cash equivalents. The Company classifies such debt securities as either held-to-maturity, when the Company has the positive intent and ability to hold the securities to maturity, or available-for-sale.  Held-to-maturity debt securities are carried at amortized cost, adjusted for the amortization of premiums or accretion of discounts.  Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in other comprehensive income or loss, net of tax.  All of the Company’s debt securities not classified as cash equivalents were classified as available-for-sale securities as of March 31, 2015 and December 31, 2014.

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  $1.1 million in cash reimbursements during the three months ended March 31, 2015.  As of March 31, 2015, the Company had a $0.9 million receivable for the reimbursable portion of the qualified recoverable expenditures, and the Company’s pledged account balance was $3.2 million. The escrow account is a non-interest bearing account with the Company’s primary commercial bank. 

Trade Accounts Receivable

The Company sells its services to other communication carriers and to business and residential customers primarily in Virginia and West Virginia and portions of Maryland, Pennsylvania, Ohio and Kentucky.  The Company has credit and collection policies to maximize collection of trade receivables and requires deposits on certain sales.  The Company estimates 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 receivables.  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, 2015 and 2014 was $0.1 million and $0.2 million, respectively.  The Company’s allowance for doubtful accounts was $1.3 million and $1.2 million as of March 31, 2015 and December 31, 2014, respectively.

The following table presents a roll-forward of the Company’s allowance for doubtful accounts from December 31, 2014 to March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

(In thousands)

 

December 31, 2014

 

Charged to Expense

 

Charged to Other Accounts

 

Deductions

 

March 31, 2015

Allowance for doubtful accounts

 

$

1,217 

 

$

136 

 

$

34 

 

$

(66)

 

$

1,321 

 

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, 2015 that would require the Company 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

9

 


 

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.

Intangibles with a finite life are classified as other intangibles on the condensed consolidated balance sheets.  At March 31, 2015 and December 31, 2014, other intangibles were comprised of the following: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

(Dollars in thousands)

Estimated Life

 

Gross Amount

 

Accumulated

 Amortization

 

Gross Amount

 

Accumulated

 Amortization

Customer relationships

5 to 15 yrs

 

$

103,108 

 

$

(90,512)

 

$

103,108 

 

$

(88,406)

Trademarks and franchise rights

10 to 15 yrs

 

 

2,862 

 

 

(1,720)

 

 

2,862 

 

 

(1,680)

Total

 

 

$

105,970 

 

$

(92,232)

 

$

105,970 

 

$

(90,086)

 

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, 2015Amortization expense for the three months ended March 31, 2015 and 2014 was $2.1 million and $2.3 million, respectively.

Amortization expense for the remainder of 2015 and for the next five years is expected to be as follows:

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Customer Relationships

 

Trademarks and Franchise Rights

 

Total

Remainder of 2015

 

$

2,538 

 

$

122 

 

$

2,660 

2016

 

 

2,412 

 

 

163 

 

 

2,575 

2017

 

 

2,093 

 

 

163 

 

 

2,256 

2018

 

 

1,781 

 

 

163 

 

 

1,944 

2019

 

 

1,513 

 

 

152 

 

 

1,665 

2020

 

 

1,146 

 

 

48 

 

 

1,194 

 

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 intangible assets annually on October 1 and whenever adverse events or changes in circumstances indicate that impairment may have occurred.    The Company believes there have been no events or circumstances to cause it to evaluate the carrying amount of goodwill or indefinite-lived intangible assets during the three months ended March 31, 2015.

 

Pension Benefits and Retirement Benefits Other Than Pensions

The Company sponsors a non-contributory defined benefit pension plan (the “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 Company froze the Pension Plan effective December 31, 2012. As such, no further benefits are being accrued by participants for services rendered beyond that date.

For the three months ended March 31, 2015 and 2014, the components of the Company’s net periodic benefit income for the Pension Plan were as follows: 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

2015

 

2014

Service cost

$

 -

 

$

 -

Interest cost

 

666 

 

 

656 

Expected return on plan assets

 

(1,028)

 

 

(1,093)

Amortization of loss

 

248 

 

 

 -

Net periodic benefit income

$

(114)

 

$

(437)

10

 


 

 

Pension plan assets were valued at $57.9 million and $58.4 million at March 31, 2015 and December 31, 2014, respectively.  No funding contributions were made during the three months ended March 31, 2015, and the Company does not expect to make a funding contribution during the remainder of 2015.

The Company also provides life insurance benefits for retired employees that meet eligibility requirements through two postretirement welfare benefit plans (the “Other Postretirement Benefit Plans”).  The Company had provided retiree medical benefits under these plans until those benefits were terminated effective December 31, 2014The net periodic benefit cost for the Other Postretirement Benefit Plans was $0.2 million for the three months ended March 31, 2014, which included interest cost of $0.1 million and less than $0.1 million of service cost and amortization of actuarial losses. The Company did not incur any significant costs associated with these plans during the three months ended March 31, 2015.

The Company recognized expense for certain nonqualified pension plans for each of the three months ended March 31, 2015 and 2014 of $0.1 million, and $0.1 million and less than $0.1 million of this expense for each period, respectively, relates to the amortization of actuarial loss.

The total amount reclassified out of accumulated other comprehensive loss related to amortization of actuarial losses for retirement plans for the three months ended March 31, 2015 and 2014 was $0.3 million and $0.1 million, respectively, all of which has been reclassified to selling, general and administrative expenses on the condensed consolidated statements of income.

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 common stock options granted with service-only conditions is 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 with service-only conditions is 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 by the Company 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 is 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 10).  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 accelerates expense recognition if the market conditions are achieved prior to the end of the derived requisite service period.  

Total equity-based compensation expense related to all of the share-based awards and the Company’s 401(k) matching contributions was $1.2 million and $0.8 million for the three months ended March 31, 2015 and 2014, 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 March 31, 2015 are estimated to be $3.6 million for the remainder of 2015, $3.3 million in 2016, $2.5 million in 2017, $0.6 million in 2018,  and less than $0.1 million thereafter.

 

Fair Value Measurements

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required to be recorded at fair value or for certain financial instruments for which disclosure of fair value is required, the Company uses fair value techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.  However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability.  Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs.

GAAP establishes a fair value hierarchy with three levels of inputs that may be used to measure fair value:

·

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

·

Level 2 – Unadjusted quoted prices for similar assets or liabilities in active markets, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs other than quoted prices that are observable for the asset or liability.

11

 


 

·

Level 3 – Unobservable inputs for the asset or liability.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  The new standard is effective for the Company on January 1, 2017.  Early application is not permitted.  The standard permits the use of either the retrospective or cumulative effect transition method.  The Company has not yet selected a transition method and is still evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and disclosures.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 820): Amendments to the Consolidation Analysis (“ASU 2015-02”).  ASU 2015-02 provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities.  All legal entities will be subject to reevaluation under this revised consolidation model.  The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships.  ASU 2015-02 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after September 1, 2016.  The Company is still evaluating what impact, if any, ASU 2015-02 will have on the Company’s consolidated financial statements and disclosures. 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 requires retrospective adoption and will be effective for the company beginning January 1, 2016.  Early adoption is permitted.  The Company is still evaluating the effect that ASU 2015-03 will have on the Company’s consolidated financial statements and disclosures.

 

Note 3.  Cash Equivalents and Marketable Securities

The Company’s cash equivalents and available-for-sale securities reported at fair value as of March 31, 2015 and December 31, 2014 are summarized below:

 

 

 

 

 

 

 

 

(In thousands)

March 31, 2015

 

December 31, 2014

Cash equivalents:

 

 

 

 

 

Money market mutual funds

$

390 

 

$

49 

Corporate debt securities

 

 -

 

 

1,357 

Total cash equivalents

 

390 

 

 

1,406 

Marketable securities:

 

 

 

 

 

Commercial paper

 

1,348 

 

 

998 

Debt securities issued by U.S. Government agencies

 

6,172 

 

 

2,734 

Municipal bonds

 

352 

 

 

353 

Corporate debt securities

 

21,561 

 

 

12,785 

Total marketable securities, available-for-sale

 

29,433 

 

 

16,870 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

29,823 

 

$

18,276 

At March 31, 2015 and December 31, 2014, the carrying values of the investments included in cash and cash equivalents approximated fair value.  The aggregate amortized cost of the available-for-sale securities was not materially different from the aggregate fair value.

The contractual maturities of the Company’s available-for-sale debt securities were as follows as of March 31, 2015:

 

 

 

 

(In thousands)

Total

Due in one year or less

$

18,447 

Due after one year through two years

 

10,986 

Total debt securities

$

29,433 

12

 


 

The Company received total proceeds of $10.2 million and $7.8 million from the sale or maturity of available-for-sale marketable securities during the three months ended March 31, 2015 and 2014, respectively.  The Company did not recognize any material realized net gains or losses and net unrealized holding gains on available-for-sale marketable securities were less than $0.1 million for each of the three months ended March 31, 2015 and 2014, respectively.  Unrealized holding gains or losses are included in accumulated other comprehensive loss on the condensed consolidated balance sheets.

Note 4.  Disclosures About Segments of an Enterprise and Related Information

The Company’s operating segments generally align with its major product and service offerings and coincide 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 data, residential and small business (“R&SB”) and RLEC access.  A general description of the products and services offered and the customers served by each of these segments is as follows:

·

DataThis segment includes the Company’s enterprise data (metro Ethernet, dedicated Internet, voice over IP (“VoIP”) and private line),  transport, and FTTC product and service 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.

·

R&SBThis segment includes the following voice products:  local lines, primary rate interface (“PRI”), long distance, toll and directory advertising and other voice services (excluding VoIP which are typically provided to enterprise customers and are included in the Company’s data segment) and the following IP services products: fiber-to-the-premise broadband XL, DSL, integrated access and video.  These products are sold to residential and small business customers on the Company’s network and within the Company’s footprint.  This segment also provides carrier customers access to our network located in competitive markets.

·

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

 

Summarized financial information concerning the Company’s reportable segments is presented in the following table: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Data

 

R&SB

 

RLEC Access

 

Corporate (Unallocated)

 

Total

For the three months ended March 31, 2015:

Operating revenues

 

$

27,767 

 

$

17,265 

 

$

5,463 

 

$

 -

 

$

50,495 

Network access costs

 

 

3,645 

 

 

6,067 

 

 

 -

 

 

 -

 

 

9,712 

Network operating and selling costs

 

 

7,868 

 

 

3,548 

 

 

275 

 

 

 -

 

 

11,691 

Other general and administrative expenses

 

 

3,887 

 

 

2,023 

 

 

671 

 

 

1,562 

 

 

8,143 

Adjusted EBITDA(1)

 

 

12,367 

 

 

5,627 

 

 

4,517 

 

 

 -

 

 

22,511 

Capital expenditures

 

 

23,343 

 

 

2,123 

 

 

 -

 

 

3,758 

 

 

29,224 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Data

 

R&SB

 

RLEC Access

 

Corporate (Unallocated)

 

Total

For the three months ended March 31, 2014:

Operating revenues

 

$

26,137 

 

$

18,647 

 

$

5,306 

 

$

 -

 

$

50,090 

Network access costs

 

 

4,174 

 

 

6,540 

 

 

 -

 

 

 -

 

 

10,714 

Network operating and selling costs

 

 

5,922 

 

 

4,115 

 

 

326 

 

 

 -

 

 

10,363 

Other general and administrative expenses

 

 

3,324 

 

 

2,448 

 

 

674 

 

 

1,123 

 

 

7,569 

Adjusted EBITDA(1)

 

 

12,717 

 

 

5,544 

 

 

4,306 

 

 

 -

 

 

22,567 

Capital expenditures

 

 

11,337 

 

 

2,388 

 

 

 -

 

 

4,392 

 

 

18,117 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)     The Company evaluates performance based upon Adjusted EBITDA (a non-GAAP measure), defined by the Company as net income or 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 swap derivatives.

13

 


 

 

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, 2015 and 2014:


 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

 

2015

 

2014

Operating income

 

$

8,414 

 

$

10,758 

Depreciation and amortization and accretion

 

 

 

 

 

 

of asset retirement obligations

 

 

11,902 

 

 

10,686 

Sub-total:

 

 

20,316 

 

 

21,444 

Amortization of actuarial losses

 

 

337 

 

 

64 

Equity-based compensation

 

 

1,225 

 

 

834 

Restructuring charges

 

 

633 

 

 

 -

Employee separation charges

 

 

 -

 

 

225 

Adjusted EBITDA

 

$

22,511 

 

$

22,567 

 

One of the Company’s carrier customers, AT&T, individually accounted for 9% and 10%  of the Company’s total revenues for the three months ended March 31, 2015 and 2014, respectively.    Revenues from this carrier customer were derived primarily from network access, data transport and fiber to the cell site services.
 

 

Note 5.  Long-Term Debt

As of March 31, 2015 and December 31, 2014, the Company’s outstanding long-term debt consisted of the following: 

 

 

 

 

 

 

 

 

(In thousands)

 

March 31, 2015

 

December 31, 2014

Credit Facility

 

$

394,438 

 

$

368,375 

Capital lease obligations

 

 

4,940 

 

 

5,008 

Long-term debt

 

 

399,378 

 

 

373,383 

Less:  current portion of long-term debt

 

 

10,506 

 

 

10,227 

Long-term debt, excluding current portion

 

$

388,872 

 

$

363,156 

 

Credit Facility

On April 30, 2013, Lumos Networks Operating Company, a wholly-owned subsidiary of the Company, entered into a $425 million credit facility (the “Credit Facility”).  The Credit Facility consists of a $100 million senior secured five-year term loan (“Term Loan A”), a $275 million senior secured six-year term loan (“Term Loan B”); a $28 million senior secured incremental term loan facility under the existing credit facility (“Term Loan C”); and a $50 million senior secured five-year revolving credit facility (the “Revolver”).  The proceeds from Term Loan A and 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 normal course capital expenditures and working capital purposes.  As of March 31, 2015, no borrowings were outstanding under the Revolver.

On January 2, 2015, the Company entered into the Term Loan C and amended certain terms of the Credit Facility.  The Company will use the net proceeds from Term Loan C to fund new FTTC projects.  The amendment included changes to the maximum leverage ratio and the pricing of the Credit Facility as discussed below.   

Pricing of the Credit Facility is LIBOR plus 3.00% for the Revolver and Term Loan A and LIBOR plus 3.25% for Term Loan B and C.    The Credit Facility does not require a minimum LIBOR rate.  Term Loan A matures in 2018 with quarterly payments of 1.25% per annum through December 31, 2016 and 2.50% per annum thereafter.  Term Loan B matures in 2019 with quarterly payments of 1% per annum.  Term Loan C matures in full in 2019 with quarterly payments of 1% per annum beginning on June 30, 2015.  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.

14

 


 

The Credit Facility includes various restrictions and conditions, including a maximum leverage ratio of 5.00:1.00 through December 31, 2015,  4.75:1.00 through December 31, 2016, 4.50:1.00 through December 31, 2017, 4.25:1.00 through December 31, 2018, and 4.00:1.00 thereafter.  The Credit Facility also sets a minimum interest rate coverage ratio of 3.25:1.00.  At March 31, 2015, the Company’s leverage ratio was 4.00:1.00 and its interest coverage ratio was 7.08:1.00.  The Company was in compliance with its debt covenants as of March 31, 2015.  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 is reduced by 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).  Based on the excess cash flow calculation for the year ended December 31, 2014, the distributable amount was increased by $12 million on January 1, 2015.  The distributable amount as of March 31, 2015 was $14.2 million.

In accordance with the terms of the Credit Facility, the Company entered into interest rate swap agreements with a combined notional amount of 50 percent of the aggregate outstanding balance of Term Loan A and Term Loan B.  Under the interest rate swap agreements, the Company swaps one-month LIBOR with a fixed rate of approximately 0.5% for certain agreements entered into in 2012 and 0.8% for certain agreements entered into in 2013.  The combined notional amount under the swap agreements was $183.2 million at March 31, 2015.  The Company recognized a gain on interest rate swap derivatives of $0.1 million  for each the three months ended March 31, 2015 and 2014.

In connection with Term Loan C financing in January 2015, the Company deferred an additional $0.9 million in debt issuance costs. Total unamortized debt issuance costs associated with the Credit Facility were $5.7 million and $5.2 million as of March 31, 2015 and December 31, 2014, 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 were $0.4 million for each the three months ended March 31, 2015 and 2014, 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 banksThese credits are recorded in the condensed consolidated statements of income as an offset to interest expense.  The Patronage credits were $0.4 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively

The aggregate maturities of Term Loan A, Term Loan B and Term Loan C under the Credit Facility are $6.0 million in the remainder of 2015, $8.0 million in 2016, $13.0 million in 2017, $80.5 million in 2018 and  $286.8 million in 2019.    The Revolver under the Credit Facility, under which no borrowings are outstanding as of March 31, 2015, matures in full in 2018.

The Company’s blended average interest rate on its long-term debt for the three months ended March 31, 2015 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 March 31, 2015, the carrying value and accumulated amortization of the related assets were $3.3 million and $2.0 million, respectively.  The Company also has a financing arrangement with a provider of software services related to the upgrading of internal infrastructure, including certain software licenses, which is classified as a capital lease.  The agreement extends through 2015 with payments due annually.  As of March 31, 2015, the carrying value and accumulated depreciation of the related assets were $5.9 million and $2.1 million, respectively.  As of March 31, 2015, the combined total net present value of the Company’s future minimum lease payments is $4.9 million and the principal portion of these capital lease obligations is due as follows:  $2.4 million in the remainder of 2015, $2.3 million in 2016, $0.1 million in 2017, $0.1 million in 2018 and less than $0.1 million thereafter.

 

 

15

 


 

Note 6.  Supplementary Disclosures of Cash Flow Information

The following information is presented as supplementary disclosures for the condensed consolidated statements of cash flows for the three months ended March 31, 2015 and 2014

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

 

 

2015

 

 

2014

Cash payments for:

 

 

 

 

 

 

Interest (net of amounts capitalized)

 

$

2,533 

 

$

2,723 

Income taxes

 

 

172 

 

 

31 

Supplemental investing and financing activities:

 

 

 

 

 

 

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

 

 

3,800 

 

 

3,151 

Obligations incurred under capital leases

 

 

 -

 

 

36 

Dividends declared on common stock not paid

 

 

 -

 

 

3,104 

 

Cash payments for interest for the three months ended March 31, 2015 and 2014 in the table above are net of $0.8 million and $0.9 million, respectively, of cash received from CoBank for patronage credits (Note 5).  The amount of interest capitalized was $0.3 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively.  

 

Note 7.  Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, restricted cash, accounts receivable, accounts payable, capital lease obligations (including the current portion), accrued liabilities, interest rate swap derivatives and the Credit Facility (including the current portion) as of March 31, 2015 and December 31, 2014.  The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, capital lease obligations and accrued liabilities approximated their fair values at March 31, 2015 and December 31, 2014.  Marketable securities and interest rate swap derivatives are recorded in the condensed consolidated balance sheets at fair value (see Notes 3 and 5).

16

 


 

The following tables present the placement in the fair value hierarchy of financial assets and liabilities that are measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at
March 31, 2015

 

 

 

(In thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total Fair Value

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

390 

 

$

 -

 

$

 -

 

$

390 

Total cash equivalents

 

 

390 

 

 

 -

 

 

 -

 

 

390 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 -

 

 

1,348 

 

 

 -

 

 

1,348 

Debt securities issued by U.S. Government agencies

 

 

 -

 

 

6,172 

 

 

 -

 

 

6,172 

Municipal bonds

 

 

 -

 

 

352 

 

 

 -

 

 

352 

Corporate debt securities

 

 

 -

 

 

21,561 

 

 

 -

 

 

21,561 

Total marketable securities

 

 

 -

 

 

29,433 

 

 

 -

 

 

29,433 

Total financial assets

 

$

390 

 

$

29,433 

 

$

 -

 

$

29,823 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivatives

 

$

 -

 

$

583 

 

$

 -

 

$

583 

Total financial liabilities

 

$

 -

 

$

583 

 

$

 -

 

$

583 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at
December 31, 2014

 

 

 

(In thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total Fair Value

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

49 

 

$

 -

 

$

 -

 

$

49 

Corporate debt securities

 

 

 -

 

 

1,357 

 

 

 -

 

 

1,357 

Total cash equivalents

 

 

49 

 

 

1,357 

 

 

 -

 

 

1,406 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 -

 

 

998 

 

 

 -

 

 

998 

Debt securities issued by U.S. Government agencies

 

 

 -

 

 

2,734 

 

 

 -

 

 

2,734 

Municipal bonds

 

 

 -

 

 

353 

 

 

 -

 

 

353 

Corporate debt securities

 

 

 -

 

 

12,785 

 

 

 -

 

 

12,785 

Total marketable securities

 

 

 -

 

 

16,870 

 

 

 -

 

 

16,870 

Total financial assets

 

$

49 

 

$

18,227 

 

$

 -

 

$

18,276 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivatives

 

$

 -

 

$

665 

 

$

 -

 

$

665 

Total financial liabilities

 

$

 -

 

$

665 

 

$

 -

 

$

665 

 

The fair value of certificates of deposits and corporate, municipal and U.S. government debt securities are provided by a third-party pricing service and are estimated using pricing models.  The underlying inputs to the pricing models are directly observable from active markets.  However, the pricing models used do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.  As such, the Company classifies these fair value measurements as Level 2 within the fair value hierarchy.  The fair value of interest rate derivatives were derived based on bid prices obtained from the administrative agents as of the measurement date.

17

 


 

The following table summarizes the carrying amounts and estimated fair values of the components included in the Company’s long-term debt, including the current portion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

(In thousands)

 

Carrying Value

 

Fair Value
(Level 2)

 

Carrying Value

 

Fair Value
(Level 2)

Credit Facility

 

$

394,438 

 

$

382,127 

 

$

368,375 

 

$

370,769 

Capital lease obligations

 

 

4,940 

 

 

4,940 

 

 

5,008 

 

 

5,008 

 

The fair value of the Credit Facility was estimated based on an internal discounted cash flows analysis that schedules out the estimated cash flows for the future debt and interest repayments and applies a discount factor that is adjusted to reflect estimated changes in market conditions and credit factors.

 

The Company also has certain non-marketable long-term investments for which it is not practicable to estimate fair value with a total carrying value of $1.0 million as of March 31, 2015 and $0.9 million as of December 31, 2014, respectively, of which $0.9 million and $0.8 million represents the Company’s investment in CoBank for the respective periods.  This investment is primarily related to patronage distributions of restricted equity and is a required investment related to the portion of the Credit Facility held by CoBank.  This investment is carried under the cost method.

Note 8.  Equity

 

 

Below is a summary of the activity and status of equity as of and for the three months ended March 31, 2015: