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ATLANTIC TELE NETWORK INC /DE - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The discussion and analysis of our financial condition and results of operations
that follows are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of our financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ significantly from these estimates under different
assumptions or conditions. This discussion should be read in conjunction with
our condensed consolidated financial statements herein and the accompanying
notes thereto, and our Annual Report on Form 10-K for the year ended
December 31, 2011, in particular, the information set forth therein under
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
Overview
We provide wireless and wireline telecommunications services in North America,
Bermuda and the Caribbean. Through our operating subsidiaries, we offer the
following principal services:
† Wireless. In the United States, we offer wireless voice and data
services to retail customers under the "Alltel" name in rural markets located
principally in the Southeast and Midwest. Additionally, we offer wholesale
wireless voice and data roaming services to national, regional and local
wireless carriers and selected international wireless carriers in rural markets
located principally in the Southwest and Midwest. We also offer wireless voice
and data services to retail customers in Bermuda under the "CellOne" name, in
Guyana under the "Cellink" name, and in other smaller markets in the Caribbean
and the United States under other tradenames.
† Wireline. Our local telephone and data services include our
operations in Guyana and the mainland United States. We are the exclusive
licensed provider of domestic wireline local and long distance telephone
services in Guyana and international voice and data communications into and out
of Guyana. We also offer facilities-based integrated voice and data
communications services to enterprise and residential customers in New England,
primarily in Vermont, and wholesale transport services in New York State and New
England.
In the second quarter of 2011, we completed the merger of our Bermuda operations
with M3 Wireless, Ltd., a leading retail wireless provider in Bermuda. We
actively evaluate additional investment and acquisition opportunities in the
United States and the Caribbean that meet our return-on-investment and other
acquisition criteria.
The following chart summarizes the operating activities of our principal
subsidiaries, the segments in which we report our revenue and the markets we
served as of September 30, 2012:
Services Segment Markets Tradenames
Wireless United States (rural
U.S. Wireless markets) Alltel, Choice
Island Wireless Aruba, Bermuda, Turks Mio,
and Caicos, U.S. CellOne, Islandcom,
Virgin Islands Choice
International
Integrated Telephony Guyana Cellink
Wireline International
Integrated Telephony Guyana GT&T, Emagine
U.S. Wireline United States (New Sovernet, ION
England and New York
State)
We provide management, technical, financial, regulatory, and marketing services
to our subsidiaries and typically receive a management fee equal to a percentage
of their respective revenue. Management fees from consolidated subsidiaries are
eliminated in consolidation.
We are dependent on our U.S. Wireless segment for the substantial majority of
our revenue and profits. For the quarter and nine months ended September 30,
2012, approximately 77% of our consolidated revenue was generated by our U.S.
Wireless segment.
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Our U.S. retail wireless revenue is primarily driven by the number of
subscribers to our services, their adoption of our enhanced service offerings
and their related voice and data usage. The number of subscribers and their
usage volumes and patterns also has a major impact on the profitability of our
U.S. retail wireless operations. As of September 30, 2012, our U.S. retail
wireless services were provided to approximately 585,000 customers under the
"Alltel" brand name. Our wireless licenses provide mobile data and voice
coverage to a network footprint covering a population of approximately four and
a half million people as of September 30, 2012. Through the acquisition of a
portion of the former Alltel network from Verizon Wireless (the "Alltel
Acquisition"), we acquired a regional, non-contiguous wireless network that we
anticipate will require continued network expansion and improvements as well as
roaming support to ensure ongoing nationwide coverage. In late July 2011, we
completed the transition of our Alltel customers from the legacy Alltel
information technology systems, platforms and customer care centers to our own
(the "Alltel Transition") and as a result, eliminated many of the duplicate
costs associated with the migration in the third quarter of 2011.
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Our retail wireless business competes with national, regional and local wireless
providers offering both prepaid and postpaid services such as our primary
competitor, Verizon Wireless.
We provide wholesale roaming services in a number of areas in the U.S.,
including in areas in which we also have retail wireless operations. Our
wholesale wireless revenue is an important part of our overall U.S. Wireless
segment revenue because this revenue has a higher margin of profitability than
our retail revenue. Wholesale wireless revenue is primarily driven by the number
of sites and base stations we operate, the amount of voice and data traffic from
the subscribers of other carriers that each of these sites generates, and the
rate we get paid from other carrier customers for serving that traffic.
The most significant competitive factors we face in our U.S. wholesale wireless
business is the extent to which our carrier customers choose to roam on our
networks or elect to build or acquire their own infrastructure in a market,
reducing or eliminating their need for our services in those markets.
Merger with M3 Wireless, Ltd.
On May 2, 2011, we completed the merger of our Bermuda wireless operations,
Bermuda Digital Communications, Ltd. ("BDC"), with that of M3 Wireless, Ltd.
("M3"), a wireless provider in Bermuda (the "CellOne Merger"). As part of the
CellOne Merger, M3 merged with and into BDC, and the combined entity continues
to operate under BDC's CellOne brand. As a result of the CellOne Merger, our 58%
ownership interest in BDC was reduced to a controlling 42% interest in the
combined entity. Since we have the right to designate the majority of seats on
the combined entity's board of directors and therefore control its management
and policies, we have consolidated the results of the combined entity in our
consolidated financial statements effective on the date of the CellOne Merger.
Stimulus Grants
We were awarded several federal stimulus grants in 2009 and 2010 by the U.S.
Government under provisions of the American Recovery and Reinvestment Act of
2009 intended to stimulate the deployment of broadband infrastructure and
services to rural, unserved and underserved areas. As of September 30, 2012, we
have spent (i) $22.4 million in capital expenditures (of which $17.9 million has
been or will be funded by the federal stimulus grant) in connection with our ION
Upstate New York Rural Broadband Initiative, which involves building ten new
segments of fiber-optic, middle-mile broadband infrastructure in upstate New
York and parts of Pennsylvania and Vermont; (ii) $5.4 million in capital
expenditures (of which $3.8 million has been or will be funded by the federal
stimulus grant) in connection with our last-mile broadband infrastructure
buildout in the Navajo Nation across Arizona, New Mexico and Utah; and
(iii) $19.2 million in capital expenditures (of which $13.4 million has been or
will be funded by the federal stimulus grant) in connection with our fiber-optic
middle mile network buildout to provide broadband and transport services to over
340 community anchor institutions in Vermont. For more information on these
stimulus projects, please refer to Item 7. - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in our Annual Report
on Form 10-K for the year ended December 31, 2011, filed with the SEC on
March 15, 2012. The results of our New York and Vermont stimulus projects are
included in our "U.S. Wireline" segment and the results of our Navajo stimulus
project are included in our "U.S. Wireless" segment.
Mobility Fund Grants
In November 2011, the Federal Communications Commission ("FCC") released an
Order reforming its Universal Service Fund ("USF") program, which previously
provided support to carriers seeking to offer telecommunications services in
high-cost areas and to low-income households. In 2011, we received
approximately $9.9 million in USF support to our U.S. wireless businesses
relating to high-cost areas. Beginning in June 2012, the FCC began phasing out
this existing USF support at a rate of 20% per year over the next five years as
part of its reform program.
Also as part of the USF reform program, the FCC created two new funds, including
the Mobility Fund, a one-time grant meant to support wireless coverage in
underserved geographic areas in the United States. On October 3, 2012, we were
provisionally awarded approximately $68.8 million by the FCC under the new
Mobility Fund (the "Mobility Fund Grants"). Although our receipt of the Mobility
Fund Grants are still subject to FCC approval, we currently expect to receive
approximately $68.8 million in support, to be received from time to time,
beginning in 2013 to expand our voice and broadband networks in certain
geographic areas to offer either 3G or 4G coverage pursuant to certain FCC
construction and other requirements. The results of our Mobility Fund projects,
once initiated, will be included in our "U.S. Wireless" segment.
On October 29, 2012, we further amended our Amended Credit Facility to provide
for a letter of credit sub-facility to our revolver loan, to be available for
issuance in connection with the Company's Mobility Fund Grant obligations.
Under the amendment, we have the
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ability to use up to $55 million of our revolving credit facility for the
issuance of letters of credit, which, when issued, will accrue a fee at a rate
of 1.75% per annum on the outstanding amounts. We currently have no Mobility
Fund letters of credit outstanding. Any actual award of Mobility Fund Grants is
subject to certain conditions, including the issuance of a letter of credit. If
we fail to comply with any of the terms and conditions upon which the Mobility
Fund Grants were granted, or if we lose eligibility for Mobility Fund support,
the FCC will be entitled to draw the entire amount of the letter of credit
applicable to the affected project and may disqualify us from the receipt of
additional Mobility Fund support.
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Results of Operations
Three Months Ended September 30, 2011 and 2012
Three Months Ended Amount of Percent
September 30, Increase Increase
2011 2012 (Decrease) (Decrease)
(In thousands)
REVENUE:
US Wireless:
Retail $ 89,143 $ 83,269 $ (5,874 ) (6.6 )%
Wholesale 57,048 54,918 (2,130 ) (3.7 )
International wireless 20,377 21,048 671 3.3
Wireline 21,748 21,120 (628 ) (2.9 )
Equipment and other 6,030 8,443 2,413 40.0
Total revenue 194,346 188,798 (5,548 ) (2.9 )
OPERATING EXPENSES:
Termination and access fees 48,764 38,790 (9,974 ) (20.5 )
Engineering and operations 20,165 20,796 631 3.1
Sales and marketing 33,965 27,929 (6,036 ) (17.8 )
Equipment expense 14,379 23,408 9,029 62.8
General and administrative 25,014 22,195 (2,819 ) (11.3 )
Acquisition-related charges 98 2 (96 ) (98.0 )
Depreciation and amortization 26,712 26,048 (664 ) (2.5 )
Gain on disposition of
long-lived assets (2,397 ) - (2,397 ) (100.0 )
Total operating expenses 166,700 159,168 (7,532 ) (4.5 )
Income from operations 27,646 29,630 1,984 7.2
OTHER INCOME (EXPENSE):
Interest expense (4,320 ) (2,986 ) 1,334 30.9
Interest income 99 3 (96 ) (97.0 )
Equity in earnings of
unconsolidated affiliate 729 679 (50 ) (6.9 )
Other income(expense), net 255 199 (56 ) (22.0 )
Other, net (3,237 ) (2,105 ) 1,132 35.0
INCOME BEFORE INCOME TAXES 24,409 27,525 3,116 12.8
Income taxes 11,193 9,513 (1,680 ) (15.0 )
NET INCOME 13,216 18,012 4,796 36.3
Net income attributable to
non-controlling interests (1,880 ) (2,047 ) (167 ) 8.9
NET INCOME ATTRIBUTABLE TO
ATLANTIC TELE-NETWORK, INC.
STOCKHOLDERS $ 11,336 $ 15,965 $ 4,629 40.8
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U.S. wireless revenue. U.S. Wireless revenue includes voice and data services
revenue from our prepaid and postpaid retail operations as well as our wholesale
roaming operations. Retail revenue is derived from subscriber fees for use of
our networks and facilities, including airtime, roaming and long distance as
well as enhanced services such as caller identification, call waiting, voicemail
and other features. Retail revenue also includes amounts received from the
Universal Service Fund ("USF"). Wholesale revenue is generated from providing
mobile voice or data services to the customers of other wireless carriers and
also includes revenue from other related wholesale services such as the
provision of network switching services and certain wholesale transport services
using our wireless subsidiaries' networks.
Retail revenue
The retail portion of our U.S. Wireless revenue was $83.3 million for the three
months ended September 30, 2012, as compared to $89.1 million for the three
months ended September 30, 2011, a decrease of $5.8 million, or 6.5%. This
decrease was primarily the result of net subscriber attrition especially in our
post-paid subscriber base and $1.8 million of revenue received in the third
quarter of 2011 from the Universal Service Fund relating to a previous period.
The decrease was partially offset by a $2.3 million increase in usage charges in
2011 for which we were temporarily not able to bill customers immediately
following the completion of an Alltel system conversion.
As of September 30, 2012, we had approximately 585,000 U.S. retail wireless
subscribers (including 432,000 postpaid subscribers and 153,000 prepaid
subscribers), a decrease of 8,000 from the approximately 593,000 subscribers we
had as of September 30, 2011 and an increase of 1,000 from the approximately
584,000 subscribers we had as of June 30, 2012. Gross additions to the U.S.
retail wireless subscriber base increased to 67,000 for the three months ended
September 30, 2012, as compared to approximately 30,000 for the three months
ended September 30, 2011. We will continue to focus on improving gross
additions to our subscriber base in future periods as we concentrate our efforts
on increasing distribution, by means such as our re-launch of our U-Prepaid
branded offering in Walmart stores in our markets, and increasing awareness of
our value proposition to potential customers in our markets. However, we
believe that the gross additions to our subscriber base could be hindered by our
challenges in obtaining some of the more popular handset devices.
Our overall U.S. retail wireless churn decreased from 4.05% for the three months
ended September 30, 2011 to 3.70% for the three months ended September 30,
2012. This improvement was the result of fewer postpaid customer contract
expirations as well as our ability to better control customer care and other
churn factors since the end of the Alltel Transition period. However, our churn
may increase in the near term as we are in a period of higher than normal
contract expirations and seasonally higher churn. This, along with our
challenges in obtaining popular handset devices, could lead to a decline in
subscriber levels.
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Wholesale revenue
The wholesale portion of our U.S. Wireless revenue decreased to $54.9 million
for the three months ended September 30, 2012 from $57.0 million for the three
months ended September 30, 2011, a reduction of $2.1 million or 4%. The
decrease was the result of a reduction in voice traffic, a trend seen throughout
the industry, expansion of the networks of our carrier customers and a decline
in the average rates we charge these customers. Such decreases, however, were
partially offset by growth in the volume of data, also a trend seen throughout
the industry.
In 2007, we entered into a license purchase agreement with a roaming partner
whereby we agreed to purchase and build out a wireless network in the midwestern
United States and our roaming partner retained a call option to repurchase the
spectrum and the related cell sites within a specified number of years. Since
that time, we have generated wholesale revenue from our roaming partners' use of
this network, which accounted for approximately $15.1 million in wholesale
revenue during the year ended December 31, 2011 and $12.1 million during the
nine months ended September 30, 2012. Following the exercise of this call
option in July 2012, we entered into a definitive agreement to sell the spectrum
and related sites for approximately $15.8 million. We currently expect to close
the transaction in late 2012 and to record a gain on the transaction of
approximately $11.0 million. The spectrum and related sites are being accounted
for as held for sale and are included in other assets on our balance sheet and
applicable depreciation has been suspended. With the exception of one similar
call option involving a smaller portion of our wholesale roaming network, no
other roaming partner has the right to acquire any portion of our existing
roaming network.
We expect that data volume may increase in the next several quarters as customer
usage of data and smart phone penetration continues to increase. Such increase,
however, may be completely offset by a number of factors, including decisions by
our roaming partners to no longer roam on our networks or to expand their
networks in areas where we operate. In addition, any reductions in the roaming
rates that we charge or any continued declines in overall voice traffic would
also reduce our wholesale revenue. Further, the replacement of the wholesale
revenue related to our midwestern United States sites, which we have agreed to
sell in connection with the call option described above, will be unlikely to be
entirely offset by future growth in other areas.
International wireless revenue. International Wireless revenue includes retail
and wholesale voice and data wireless revenue from international operations in
Bermuda and the Caribbean, including our operations in the U.S. Virgin Islands.
International wireless revenue increased by $0.6 million, or 3%, to $21.0
million for the three months ended September 30, 2012, from $20.4 million for
the three months ended September 30, 2011. International Wireless revenue
increased as a result of subscriber growth in certain island markets partially
offset by a decrease in subscribers in our other international operations.
While we have experienced subscriber growth in a number of our international
markets, competition remains strong, and due to the fact that the majority of
our international wireless subscribers are prepaid subscribers, revenue and
subscriber levels could shift relatively quickly in future periods.
Wireline revenue. Wireline revenue is generated by our wireline operations in
Guyana, including international telephone calls into and out of that country,
our integrated voice and data operations and our wholesale transport operations
in the United States, primarily in New England and New York State. This revenue
includes basic service fees, measured service revenue and internet access fees,
as well as installation charges for new lines, monthly line rental charges, long
distance or toll charges, maintenance and equipment sales.
Wireline revenue decreased by $0.6 million, or 3%, from $21.7 million to $21.1
million for the three months ended September 30, 2011 and 2012, respectively.
The reductions of revenue in our integrated voice and data operations in New
England and in our international long distance business in Guyana were partially
offset by the growth in our data revenue in Guyana and in our wholesale
transport revenue in New York State.
We anticipate that wireline revenue from our international long distance
business in Guyana will be negatively impacted, principally through the loss of
market share, if we cease to be the exclusive provider of domestic fixed and
international long distance service in Guyana, whether by reason of the
Government of Guyana enacting legislation to such effect or a modification,
early termination or other revocation or lack of enforcement of our exclusive
rights. While the loss of our exclusive rights will likely cause an immediate
reduction in our wireline revenue, over the longer term such pressure on our
wireline revenue may be offset by increased revenue from data services to
consumers and enterprises in Guyana, and wholesale transport services and large
enterprise and agency sales in the United States. We currently cannot predict
when or if the Government of Guyana will enact such legislation or take, or fail
to take, any action that would otherwise affect our exclusive rights in Guyana.
See Note 11 to our Condensed Consolidated Financial Statements for more
information regarding GT&T's exclusive license in Guyana.
Equipment and other revenue. Equipment and other revenue represent revenue from
wireless equipment sales, primarily handsets to retail customers, and other
miscellaneous revenue items.
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Equipment and other revenue increased by $2.4 million, or 40% to $8.4 million
for the three months ended September 30, 2012, from $6.0 million for the three
months ended September 30, 2011. Equipment revenue in our U.S. Wireless segment
increased as the result of an increase in gross subscriber additions and an
increase in smartphone sales. Equipment and other revenue also increased in our
International Integrated Telephony segment due to increased smartphone sales.
We believe that equipment and other revenue could continue to increase in 2012
as a large portion of the two-year contracts with Alltel subscribers continue to
expire, resulting in increased upgrades as compared to 2011. In addition, an
increase in gross subscriber additions, more aggressive device subsidies and the
continued growth in smartphone penetration could result in increased equipment
revenues in future periods. Such increases in both gross subscriber additions
and equipment revenues could be hindered by our challenges in obtaining some of
the more popular handset devices.
Termination and access fee expenses. Termination and access fee expenses are
charges that we pay for voice and data transport circuits (in particular, the
circuits between our wireless sites and our switches), internet capacity and
other access fees we pay to terminate our calls, as well as customer bad debt
expense.
Termination and access fees decreased by $10.0 million, or 20% from $48.8
million for the three months ended September 30, 2011 to $38.8 million for the
three months ended September 30, 2012. The decrease in such fees was primarily
the result of a reduction in roaming expenses and the completion of the Alltel
Transition in our U.S. Wireless segment. Termination and access fees also
decreased in our Island Wireless segment as the result of reduced roaming rates
and cost synergies experienced in Bermuda subsequent to the CellOne Merger.
These decreases were partially offset by an increase in circuit costs within our
U.S. Wireline segment as our networks in New York and Vermont continue to
expand. Termination and access fees may increase in future periods with expected
growth in data volume, but should remain fairly proportionate to their related
revenue.
Engineering and operations expenses. Engineering and operations expenses
include the expenses associated with developing, operating and supporting our
expanding networks, including the salaries and benefits paid to employees
directly involved in the development and operation of our networks.
Engineering and operations expenses increased $0.6 million, or 3%, from $20.2
million to $20.8 million for the three months ended September 30, 2011 and 2012,
respectively. Increased expenses in our U.S. Wireless and International
Integrated Telephony segments, which experienced expansions in their respective
networks in comparison with 2011, were partially offset by the completion of the
Alltel Transition which reduced our engineering and operations expenses by
eliminating duplicate costs.
We expect that engineering and operations expenses will increase over time due
to ongoing network upgrades, including upgrades to a next generation mobile
wireless technology and an increase in our network capacity if we choose to
geographically expand our network.
Sales and marketing expenses. Sales and marketing expenses include salaries and
benefits we pay to sales personnel, customer service expenses, sales commissions
and the costs associated with the development and implementation of our
promotion and marketing campaigns.
Sales and marketing expenses decreased by $6.1 million, or 18%, from $34.0
million for the three months ended September 30, 2011 to $27.9 million for the
three months ended September 30, 2012. The decrease in sales and marketing
expenses was the result of the elimination of duplicate expenses associated with
the Alltel Transition, higher than usual customer service expenses in 2011
subsequent to the completion of the Alltel Transition and a reduction in
expenses in our Island Wireless segment from the increased promotional expenses
we incurred in 2011 relating to the CellOne Merger and brand re-launch in
Bermuda.
We expect that sales and marketing expenses will remain relatively constant as a
percentage of revenue for the short term as we continue to incur promotional and
retention costs in an attempt to offset customer churn and increase gross
customer additions. In the longer term, these costs should decrease as a
percentage of revenue.
Equipment expenses. Equipment expenses include the costs of our handset and
customer resale equipment at our retail wireless businesses.
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Equipment expenses increased by $9.0 million, or 63%, from $14.4 million for the
three months ended September 30, 2011 to $23.4 million for the three months
ended September 30, 2012. The increase was the result of an increase in gross
subscriber additions and an increase in smartphone sales in both our U.S.
Wireless business and in our International Integrated Telephony segment. These
increases were partially offset by decreased equipment expenses in Bermuda as a
result of the CellOne Merger which caused higher than usual equipment expenses
in 2011. We believe that equipment expenses could continue to increase in 2012
as a result of seasonal handset promotions and also increase in the first half
of 2013 as a large portion of our two-year contracts with Alltel subscribers
will be expiring, resulting in increased upgrades as compared to 2011 and due to
increased demand for more expensive smartphone handset devices. We may also
choose, from time to time, to increase device subsidies to attract and retain
customers.
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General and administrative expenses. General and administrative expenses
include salaries, benefits and related costs for general corporate functions
including executive management, finance and administration, legal and
regulatory, facilities, information technology and human resources. General and
administrative expenses also include internal costs associated with our
performance of due-diligence on our pending or completed acquisitions.
General and administrative expenses decreased by $2.8 million, or 11%, from
$25.0 million for the three months ended September 30, 2011 to $22.2 million for
the three months ended September 30, 2012 primarily as a result of the
completion of the Alltel Transition, as well as increased operating efficiencies
in our U.S. Wireless segment. These expense decreases were partially offset by
an increase in corporate overhead expenses.
We expect that general and administrative expenses will remain fairly consistent
as a percentage of revenues in future periods.
Acquisition-related charges. Acquisition-related charges include the external
costs, such as legal, accounting, and consulting fees directly associated with
acquisition-related activities, which are expensed as incurred.
Acquisition-related charges do not include internal costs, such as employee
salary and travel-related expenses, incurred in connection with acquisitions or
any integration-related costs.
We incurred $0.1 million of acquisition-related charges for the three months
ended September 30, 2011 and a nominal amount of acquisition-related charges for
the three months ended September 30, 2012. We expect that acquisition-related
expenses will be incurred from time to time as we continue to explore additional
acquisition opportunities.
Depreciation and amortization expenses. Depreciation and amortization expenses
represent the depreciation and amortization charges we record on our property
and equipment and on certain intangible assets.
Depreciation and amortization expenses decreased by $0.7 million, or 2.6%, from
$26.7 million for the three months ended September 30, 2011 to $26.0 million for
the three months ended September 30, 2012. The decrease is primarily due to the
elimination of depreciation expense on U.S. Wireless assets to be sold to a
roaming partner in the Midwestern United States as well as a reduction in the
amortization of certain intangible assets which are being amortized on an
accelerated basis.
We expect depreciation expense on our tangible assets to increase as a result of
ongoing network investments in our businesses. Such increase, however, will be
partially offset by a future decrease in the amortization of our intangible
assets, which are being amortized using an accelerated amortization method.
Interest expense. Interest expense represents interest incurred on our
outstanding credit facilities including our interest rate swaps.
Interest expense decreased from $4.3 million for the three months ended
September 30, 2011 to $3.0 million for the three months ended September 30, 2012
due to a reduction in our outstanding debt and decreases in applicable margins
as a result of amendments to our credit facilities effective September 16, 2011
and May 18, 2012. As of September 30, 2012, we had $276.0 million in
outstanding debt as compared to $298.9 million as of September 30, 2011.
Interest income. Interest income represents interest earned on our cash and
cash equivalents. Interest income decreased from $0.1 million for the three
months ended September 30, 2011 to a negligible amount for the three months
ended September 30, 2012.
Equity in earnings of an unconsolidated affiliate. Equity in earnings of an
unconsolidated affiliate is related to a minority-owned investment in our U.S.
Wireless segment and was $0.7 million for the three months ended September 30,
2011 and 2012.
Other income (expense), net. Other income (expense), net represents
miscellaneous non-operational income we earned or expenses we incurred. Other
income (expense), net was $0.3 million and $0.2 million for the three months
ended September 30, 2011 and 2012 respectively.
Income taxes. Our effective tax rates for the three months ended September 30,
2011 and 2012 were 46% and 35%, respectively. Our effective tax rate declined in
2012 as the result of increased income in lower taxed jurisdictions, such as
Bermuda and the U.S., as compared to 2011. In addition, we recorded a $1.3
million benefit, net of reserves, relating to U.S. research and development tax
credits claimed for 2010 and 2011 that positively impacted the effective tax
rate by approximately 4.8%. Excluding the research and development tax credits,
our effective tax rates were higher than the statutory federal income tax rate
of 35% due primarily to (i) the portion of our earnings that are taxed in Guyana
at 45%, and (ii) the portion of our earnings that include losses generated in
non-tax foreign jurisdictions for which we receive no tax benefit. Our
consolidated tax rate will continue to be impacted by the shift in the mix of
income generated in the jurisdictions in which we operate.
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Net loss attributable to non-controlling interests. Net loss attributable to
non-controlling interests reflected an allocation of $1.9 million and $2.0
million of income generated by our less than wholly-owned subsidiaries for the
three months ended September 30, 2011 and 2012, respectively.
Net income attributable to Atlantic Tele-Network, Inc. stockholders. Net income
attributable to Atlantic Tele-Network, Inc. stockholders increased to $16.0
million for the three months ended September 30, 2012 from $11.3 million for the
three months ended September 30, 2011. On a per share basis, net income
increased to $1.02 per diluted share from $0.73 per diluted share for the three
months ended September 30, 2012 and 2011, respectively.
Nine Months Ended September 30, 2011 and 2012
Nine Months Ended Amount of Percent
September 30, Increase Increase
2011 2012 (Decrease) (Decrease)
(In thousands)
REVENUE:
US Wireless:
Retail $ 284,221 $ 254,081 $ (30,140 ) (10.6 )%
Wholesale 153,615 153,854 240 -
International Wireless 52,874 60,318 7,444 14.1
Wireline 63,305 63,573 268 0.4
Equipment and Other 22,238 25,155 2,917 13.1
Total revenue 576,253 556,981 (19,272 ) (3.3 )
OPERATING EXPENSES:
Termination and access fees 155,077 118,224 (36,853 ) (23.8 )
Engineering and operations 63,967 64,077 110 0.2
Sales and marketing 101,874 91,307 (10,567 ) (10.4 )
Equipment expense 54,447 65,747 11,300 20.8
General and administrative 81,405 67,102 (14,303 ) (17.6 )
Acquisition-related charges 664 7 (657 ) (98.9 )
Depreciation and amortization 76,903 79,654 2,751 3.6
Gain on disposition of long-lived
assets (2,397 ) - (2,397 ) (100.0 )
Total operating expenses 531,940 486,117 (45,823 ) (8.6 )
Income from operations 44,313 70,864 26,551 59.9
OTHER INCOME (EXPENSE):
Interest expense (12,743 ) (10,953 ) 1,790 14.0
Interest income 680 200 (480 ) (70.6 )
Equity in earnings of
unconsolidated affiliate 1,484 3,011 1,527 102.9
Other income, net 854 (133 ) (987 ) (115.6 )
Other, net (9,725 ) (7,875 ) 1,850 19.0
INCOME BEFORE INCOME TAXES 34,588 62,989 28,401 82.1
Income taxes 16,074 24,273 8,199 51.0
NET INCOME 18,514 38,716 20,202 109.1
Net income attributable to
non-controlling interests (866 ) (2,900 ) (2,034 ) (234.9 )
NET INCOME ATTRIBUTABLE TO ATLANTIC
TELE-NETWORK, INC. STOCKHOLDERS $ 17,648 $ 35,816 $ 18,168 102.9
U.S. wireless revenue.
Retail revenue
The retail portion of our U.S. Wireless revenue was $254.1 million for the nine
months ended September 30, 2012, as compared to $284.2 million for the nine
months ended September 30, 2011, a decrease of $30.1 million, or 11%. The
decrease in retail U.S. Wireless revenues was primarily the result of a decline
in subscribers we experienced during the past year due to post-Alltel
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Acquisition initiatives to tighten credit and contract policies, the loss of a
significant prepaid distribution channel and a number of other factors,
including the effects of the separation of our markets from the formerly unified
Alltel market, leaving many of our subscribers near the edge or outside of our
licensed territory. In late July 2011, we completed the Alltel Transition. As a
result, we are now able to better enhance our service offerings which we believe
will enable us to drive improved gross subscriber additions, further control
churn and optimize our service offerings. These subscriber-related functions had
been somewhat constrained during the transition period and contributed to a
continued decline in our U.S. retail wireless revenue.
Wholesale revenue
The wholesale portion of our U.S. Wireless revenue remained relatively unchanged
at $153.9 million for the nine months ended September 30, 2012 as compared to
$153.6 million for the nine months ended September 30, 2011. The increase in
wireless wholesale revenue was due to an increase in data volume and a slightly
larger network coverage area. This increase was partially offset by a decrease
in voice traffic largely as a result of the industry trend of lower voice
traffic as compared to data volume and, to some extent, Verizon and AT&T's
network overbuilds following their acquisitions of certain Alltel properties.
International wireless revenue. International wireless revenue increased by
$7.4 million, or 14%, to $60.3 million for the nine months ended September 30,
2012, from $52.9 million for the nine months ended September 30, 2011 due mainly
to our CellOne Merger in Bermuda and subscriber growth in the U.S. Virgin
Islands. This increase was partially offset by a decrease in roaming revenue and
subscribers in certain of our international operations.
Wireline revenue. Wireline revenue increased by $0.3 million from $63.3 million
to $63.6 million for the nine months ended September 30, 2011 and 2012,
respectively. The growth in our data revenue in Guyana and in our wholesale
transport revenue in New York State was offset by the reductions of revenue in
our integrated data and voice operations in Vermont and in our international
long distance business in Guyana.
Equipment and other revenue. Equipment and other revenue increased by $3.0
million, or 14% to $25.2 million for the nine months ended September 30, 2012,
from $22.2 million for the nine months ended September 30, 2011. Equipment
revenue increased due to an increase in gross subscriber additions and related
handset sales in our U.S. Wireless segment. Equipment and other revenue also
increased in our International Integrated Telephony segment due to increased
promotional campaigns that included increased handset subsidies.
Termination and access fee expenses. Termination and access fees decreased by
$36.9 million, or 24% from $155.1 million for the nine months ended
September 30, 2011 to $118.2 million for the nine months ended September 30,
2012. The decrease was primarily the result of a reduction in roaming expenses,
decreased customer bad debt expense, and the elimination of duplicate costs upon
the completion of the Alltel Transition in our U.S. Wireless segment. These
decreases were partially offset by an increase in data usage volume which
increases "backhaul" costs as well as an increase in circuit costs within our
U.S. Wireline segment as our networks in New York and Vermont continue to
expand.
Engineering and operations expenses. Engineering and operations expenses
remained unchanged at $64.0 million for the nine months ended September 30,
2011. Increased expenses in our International Integrated Telephony and Island
Wireless segments which experienced network expansions as compared to 2011,
including an expansion of our network in Bermuda following our CellOne Merger in
May 2011, were partially offset by the completion of the Alltel Transition which
reduced our engineering and operations expenses by eliminating redundant costs.
Sales and marketing expenses. Sales and marketing expenses decreased by $10.6
million, or 10% from $101.9 million for the nine months ended September 30, 2011
to $91.3 million for the nine months ended September 30, 2012. The decrease in
sales and marketing expenses was the result of the elimination of expenses
associated with the Alltel Transition and the culmination of increased
promotional expenses in 2011 relating to the CellOne Merger in Bermuda. These
decreases, however, were partially offset by an increase in sales and marketing
expenses in our International Integrated Telephony segment as a result of
increased promotional campaigns.
Equipment expenses. Equipment expenses increased by $11.3 million, or 21%, from
$54.4 million for the nine months ended September 30, 2011 to $65.7 million for
the nine months ended September 30, 2012. This increase is largely the result of
an increase in gross subscriber additions and an increase in smartphone sales in
our U.S. wireless business and in our International Integrated Telephony
segment. These increases were partially offset by decreased equipment expenses
in Bermuda in 2012 as compared to the increased equipment expenses resulting
from the CellOne Merger in 2011.
General and administrative expenses. General and administrative expenses
decreased by $14.3 million, or 18% from $81.4 million for the nine months ended
September 30, 2011 to $67.1 million for the nine months ended September 30, 2012
primarily as a result of the completion of the Alltel Transition. During this
transition period, we incurred a significant overlap of certain general and
administrative expenses. These expense decreases were partially offset by an
increase in expenses in Bermuda as a result of the CellOne Merger in 2011 and an
increase in corporate overhead expenses.
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Acquisition-related charges. We incurred $0.7 million of acquisition-related
charges during the nine months ended September 30, 2011 and a nominal amount of
acquisition-related charges for the nine months ended September 30, 2012.
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Depreciation and amortization expenses. Depreciation and amortization expenses
increased by $2.8 million, or 4% from $76.9 million for the nine months ended
September 30, 2011 to $79.7 million for the nine months ended September 30,
2012. The increase is primarily due to additional fixed assets associated with
the development of operational and business support systems which were put in
service at the end of the Alltel Transition as well as the addition of tangible
and intangible assets acquired with the CellOne Merger.
Interest expense. Interest expense decreased from $12.8 million for the nine
months ended September 30, 2011 to $11.0 million for the nine months ended
September 30, 2012 due to a reduction in our outstanding debt and decreases in
applicable margins as a result of amendments to our credit facilities effective
September 16, 2011 and May 18, 2012. As of September 30, 2012, we had $276.0
million in outstanding debt as compared to $298.9 million as of September 30,
2011.
Interest income. Interest income decreased from $0.7 million for the nine
months ended September 30, 2011 to $0.2 million for the nine months ended
September 30, 2012.
Equity in earnings of an unconsolidated affiliate. Equity in earnings of an
unconsolidated affiliate was $3.0 million for the nine months ended
September 30, 2012 as compared to $1.5 million for the nine months ended
September 30, 2011.
Other income (expense), net. Other income (expense), net was $0.9 million of
income for the nine months ended September 30, 2011. For the nine months ended
September 30, 2012, we recorded $0.1 million of expense primarily as a result of
$0.7 million of deferred financing costs being expensed in connection with an
amendment to our credit facility effective May 18, 2012.
Income taxes. Our effective tax rates for the nine months ended September 30,
2011 and 2012 were 46% and 39%, respectively. Our effective tax rate declined in
2012 as the result of (i) increased income in lower taxed jurisdictions, such as
Bermuda, as compared to 2011 and (ii) a $1.3 million benefit, net of tax,
resulting from U.S. research and development tax credits claimed for 2010 and
2011. Excluding the research and development tax credits, our effective tax
rates were higher than the statutory federal income tax rate of 35% due
primarily to (i) the portion of our earnings that are taxed in Guyana at 45%,
and (ii) the portion of our earnings that include losses generated in non-tax
foreign jurisdictions for which we receive no tax benefit.
Net loss attributable to non-controlling interests. Net loss attributable to
non-controlling interests reflected an allocation of $0.9 million and $2.9
million of income generated by our less than wholly owned subsidiaries for the
nine months ended September 30, 2011 and 2012, respectively.
Net income attributable to Atlantic Tele-Network, Inc. stockholders. Net income
attributable to Atlantic Tele-Network, Inc. stockholders increased to $35.8
million for the nine months ended September 30, 2012 from $17.6 million for the
nine months ended September 30, 2011. On a per share basis, net income
increased to $2.30 per diluted share from $1.14 per diluted share for the nine
months ended September 30, 2012 and 2011, respectively.
Regulatory and Tax Issues
We are involved in a number of regulatory and tax proceedings. A material and
adverse outcome in one or more of these proceedings could have a material
adverse impact on our financial condition and future operations. For a
discussion of ongoing proceedings, see Note 11 to the Consolidated Financial
Statements included in this Report.
Liquidity and Capital Resources
Historically, we have met our operational liquidity needs through a combination
of cash on hand and internally generated funds and have funded capital
expenditures and acquisitions with a combination of internally generated funds,
cash on hand and borrowings under our credit facilities. We believe our current
cash, cash equivalents and availability under our current credit facility will
be sufficient to meet our cash needs for the next twelve months for working
capital and capital expenditures.
Uses of Cash
Capital expenditures. A significant use of our cash has been for capital
expenditures to expand and upgrade our networks.
For the nine months ended September 30, 2011 and 2012, we spent approximately
$65.9 million and $50.5 million, respectively, on capital expenditures. The
following notes our capital expenditures, by operating segment, for these
periods:
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Capital Expenditures
International
Integrated Island U.S. Reconciling
U.S. Wireless Telephony Wireless Wireline Items Consolidated
Nine Months Ended September 30,
2011 $ 44,532 $ 12,697 $ 5,812 $ 1,805 $ 2,004 $ 65,850
2012 29,446 7,362 3,915 7,280 2,502 50,505
We are continuing to invest in expanding our networks in many of our markets and
updating our operating and business support systems. We expect to incur capital
expenditures between $65 million and $85 million during 2012. Of this amount, we
anticipate capital expenditures of between $35 million to $50 million in our
U.S. Wireless business. Our 2012 capital expenditures are lower than our
previously disclosed forecast of $90 million to $100 million primarily as a
result of a delay in certain 2012 capital projects which are now forecasted for
2013.
We expect to fund our current capital expenditures primarily from cash generated
from our operations and borrowings under our credit facilities.
Acquisitions and investments. Historically, we have funded our acquisitions
with a combination of cash on hand and borrowings under our credit facilities.
We continue to explore opportunities to acquire or expand our existing
communications properties and licenses in the United States, the Caribbean and
elsewhere. Such acquisitions may require external financing. While there can be
no assurance as to whether, when or on what terms we will be able to acquire any
such businesses or licenses or make such investments, such acquisitions may be
accomplished through the issuance of shares of our capital stock, payment of
cash or incurrence of additional debt. From time to time, we may raise capital
ahead of any definitive use of proceeds to allow us to move more quickly and
opportunistically if an attractive investment materializes.
Dividends. We use cash-on-hand to make dividend payments to our common
stockholders when declared by our Board of Directors. For the nine months ended
September 30, 2012, dividends to our stockholders were approximately $10.7
million, which reflects dividends declared on September 14, 2012 and paid on
October 10, 2012. We have paid quarterly dividends for the last 56 fiscal
quarters.
Stock repurchase plan. Our Board of Directors approved a $5.0 million stock
buyback plan in September 2004 pursuant to which we have spent approximately
$2.1 million as of September 30, 2012 repurchasing our common stock. Our last
repurchase of our common stock was in 2007. We may repurchase shares at any
time depending on market conditions, our available cash and our cash needs.
Sources of Cash
Total liquidity at September 30, 2012. As of September 30, 2012, we had
approximately $111.4 million in cash and cash equivalents, an increase of $62.7
million from the December 31, 2011 balance of $48.7 million. The increase in our
cash and cash equivalents is attributable to the cash provided by our operating
activities partially offset by investments in capital expenditures and dividends
paid to our stockholders.
Cash generated by operations. Cash provided by operating activities was $84.7
million for the nine months ended September 30, 2011 and $137.5 million for the
nine months ended September 30, 2012, an increase of $52.8 million. Net income
increased $20.5 million to $39.0 million for the nine months ended September 30,
2012 from $18.5 million for the nine months ended September 30, 2011. The
remainder of the increase in cash generated by operations was the result of an
$11.5 million income tax refund as well as increases in depreciation and
amortization, the provision for doubtful accounts and changes in our working
capital.
Cash used in financing activities. Cash used in financing activities increased
by $14.4 million from $9.9 million to $24.3 million for the nine months ended
September 30, 2011 and 2012, respectively. The increase was primarily the
result of increased principal repayments on our credit facility and the payment
of debt issuance costs, both in connection with an amendment to our credit
facility effective May 18, 2012.
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Loan Facilities-Bank
On May 18, 2012, we amended and restated our existing credit facility with
CoBank, ACB (the "Amended Credit Facility") providing for $275.0 million in two
term loans and a revolver loan of up to $100.0 million (which includes a $10.0
million swingline sub-facility) and additional term loans up to an aggregate of
$100.0 million, subject to lender approval.
On October 29, 2012, we further amended our Amended Credit Facility to provide
for an additional letter of credit sub-facility to our revolver loan, to be
available for issuance in connection with the Company's Mobility Fund Grant
obligations. Under the amendment, we have the ability to use up to $55 million
of our revolving credit facility for the issuance of letters of credit, which,
when issued, will accrue a fee at a rate of 1.75% per annum on the outstanding
amounts. We currently have no Mobility Fund letters of credit outstanding. Any
actual award of Mobility Fund Grants is subject to certain conditions, including
the issuance of a letter of credit. If we fail to comply with any of the terms
and conditions upon which the Mobility Fund Grants were granted, or if we lose
eligibility for Mobility Fund support, the FCC will be entitled to draw the
entire amount of the letter of credit applicable to the affected project and may
disqualify us from the receipt of additional Mobility Fund support.
The term loan A-1 is $125 million and matures on June 30, 2017 (the "Term Loan
A-1"). The term loan A-2 is $150 million and matures on June 30, 2019 (the "Term
Loan A-2" and collectively with the Term Loan A-1, the "Term Loans"). Each of
the Term Loans require certain quarterly repayment obligations. The revolver
loan matures on June 30, 2017. We may prepay the Amended Credit Facility at any
time without premium or penalty, other than customary fees for the breakage of
London Interbank Offered Rate (LIBOR) loans.
Amounts borrowed under the Term Loan A-1 and the revolver loan bear interest at
a rate equal to, at our option, either (i) LIBOR plus an applicable margin
ranging between 2.00% to 3.50% or (ii) a base rate plus an applicable margin
ranging from 1.00% to 2.50% (or, in the case of amounts borrowed under the
swingline sub-facility, an applicable margin ranging from 0.50% to 2.00%).
Amounts borrowed under the Term Loan A-2 bear interest at a rate equal to, at
our option, either (i) the LIBOR plus an applicable margin ranging between 2.50%
to 4.00% or (ii) a base rate plus an applicable margin ranging from 1.50% to
3.00%. The base rate is equal to the higher of (i) 1.50% plus the higher of
(x) the one-week LIBOR and (y) the one-month LIBOR; and (ii) the prime rate (as
defined in the Amended Credit Facility). The applicable margin is determined
based on the ratio of our indebtedness (as defined in the Amended Credit
Facility) to its EBITDA (as defined in the Amended Credit Facility).
Borrowings as of September 30, 2012, after considering the effect of the
interest rate swap agreements as described in Note 7, bore a weighted-average
interest rate of 4.36%. Availability under the revolver loan, net of an
outstanding letter of credit of $0.1 million, was $99.9 million as of
September 30, 2012. Upon completing the Amended Credit Facility, we expensed
$0.7 million of deferred financing costs which are included in other income
(expense) within the statement of operations for the nine months ended
September 30, 2012.
Under the terms of the Amended Credit Facility, we must also pay a fee ranging
from 0.25% to 0.50% of the average daily unused portion of the revolver loan
over each calendar quarter, which fee is payable in arrears on the last day of
each calendar quarter.
The Amended Credit Facility contains customary representations, warranties and
covenants, including covenants by the Company limiting additional indebtedness,
liens, guaranties, mergers and consolidations, substantial asset sales,
investments and loans, sale and leasebacks, transactions with affiliates and
fundamental changes. In addition, the Amended Credit Facility contains financial
covenants by the Company that (i) impose a maximum leverage ratio of
indebtedness to EBITDA, (ii) require a minimum debt service ratio of EBITDA to
principal, interest and taxes payments and (iii) require a minimum ratio of
equity to consolidated assets. As of September 30, 2012, the Company was in
compliance with all of the financial covenants of the Amended Credit Facility.
Prior to the execution of the Amended Credit Facility, our existing credit
facility with CoBank, ACB, entered into on September 30, 2010 (the "Previous
Credit Facility") provided for $275.0 million in term loans and a revolver loan
of up to $100.0 million (which includes a $10.0 million swingline sub-facility)
and additional term loans up to an aggregate of $50.0 million, subject to lender
approval. These term loans were scheduled to mature on September 30, 2014 and
required certain quarterly repayment obligations. The revolver loan was
scheduled to mature on September 10, 2014. As a result of an amendment entered
into on September 16, 2011, amounts borrowed under the Previous Credit Facility
bore interest at a rate equal to, at our option, either (i) LIBOR plus an
applicable margin ranging between 2.75% to 4.25% or (ii) a base rate plus an
applicable margin ranging from 1.75% to 3.25% (or, in the case of amounts
borrowed under the swingline sub-facility, an applicable margin ranging from
1.25% to 2.75%). The applicable margin was determined based on the ratio of our
indebtedness to its EBITDA (each as defined in the Previous Credit Facility
agreement).
Factors Affecting Sources of Liquidity
Internally generated funds. The key factors affecting our internally generated
funds are demand for our services, competition, regulatory developments,
economic conditions in the markets where we operate our businesses and industry
trends within the telecommunications industry. For a discussion of regulatory
risks in Guyana that could have an adverse impact on our liquidity, see "Risk
Factors-Risks Relating to Our Wireless and Wireline Services in Guyana", and
"Business-Guyana Regulation" in our Annual Report on Form 10-K for the year
ended December 31, 2011.
Restrictions under credit facility. The Amended Credit Facility contains
customary representations, warranties and covenants, including covenants by us
limiting additional indebtedness, liens, guaranties, mergers and consolidations,
substantial asset
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sales, investments and loans, sale and leasebacks, transactions with affiliates
and fundamental changes. In addition, the Amended Credit Facility contains
financial covenants by us that (i) impose a maximum ratio of indebtedness to
EBITDA (ii) require a minimum ratio of EBITDA to principal and interest payments
and cash taxes and, (iii) require a minimum ratio of equity to consolidated
assets. As of September 30, 2012, we were in compliance with all of the
financial covenants of the Amended Credit Facility, as amended.
Capital markets. Our ability to raise funds in the capital markets depends on,
among other things, general economic conditions, the conditions of the
telecommunications industry, our financial performance, the state of the capital
markets and our compliance with Securities and Exchange Commission ("SEC")
requirements for the offering of securities. On May 13, 2010, the SEC declared
effective our "universal" shelf registration statement. This filing registered
potential future offerings of our securities.
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Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued a new
accounting standard that eliminates the option to present other comprehensive
income ("OCI") in the statement of stockholders' equity and instead requires net
income, the components of OCI, and total comprehensive income to be presented in
either one continuous statement or in two separate, but consecutive, statements.
The standard also requires that items reclassified from OCI to net income be
presented on the face of the financial statements. However, in December 2011,
the FASB finalized a proposal to defer the requirement to present
reclassifications from OCI to net income on the face of the financial statements
and require that reclassification adjustments be disclosed in the notes to the
financial statements, consistent with the existing disclosure requirements. The
deferral does not change the requirement to present net income, components of
OCI, and total comprehensive income in either one continuous statement or two
separate but consecutive statements. The standard, which we adopted during the
first quarter of 2012, did not have a material impact on our financial position,
results of operations or liquidity.
In May 2011, the FASB issued amended guidance that clarifies the application of
existing fair value measurement and increases certain related disclosure
requirements about measuring fair value. The standard, which we adopted during
the first quarter of 2012, did not have a material impact on our financial
position, results of operations or liquidity.
Other new pronouncements issued but not effective until after September 30,
2012, are not expected to have a material impact on our financial position,
results of operations or liquidity.
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