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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, 2012, 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, local and selected international wireless carriers in rural markets located principally in the Southwest and Midwest United States. We also offer wireless voice and data services to retail customers in Guyana, the Caribbean and smaller markets in the United States. †††††††††††††††††† 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 Vermont and New York State. 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 March 31, 2013: Services Segment Markets Tradenames Wireless U.S. Wireless United States (rural Alltel, Commnet, markets) Choice Island Wireless Aruba, Bermuda, Turks and Mio, Caicos, U.S. Virgin CellOne, Islandcom, Islands Choice International Guyana Cellink Integrated Telephony Wireline International Guyana GT&T, eMagine Integrated Telephony U.S. Wireline United States (New England Sovernet, ION 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. 18 -------------------------------------------------------------------------------- Table of Contents We are dependent on our U.S. Wireless segment for the substantial majority of our revenue and profits. For the year ended March 31, 2013, approximately 75% of our consolidated revenue was generated by our U.S. Wireless segment. 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 March 31, 2013, predominantly all of our U.S. retail wireless services were provided to approximately 590,000 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 March 31, 2013. Through the acquisition of a portion of the former Alltel network from Verizon Wireless in April 2010 (the "Alltel Acquisition") we acquired a regional, non-contiguous wireless network that requires continued network expansion and improvements as well as roaming support to ensure ongoing nationwide coverage. 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 factor 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. Pending Sale of U.S. Retail Wireless Business In the second quarter of 2010, we completed the Alltel acquisition and, in the third quarter of 2011, completed the migration of the Alltel assets to our own information technology systems, telecommunications networks and platforms (the "Alltel Transition"). On January 21, 2013, we entered into a Purchase Agreement with AT&T Mobility LLC ("AT&T") to sell substantially all of the assets used in our Alltel business (the "Alltel Sale"). Under the terms of the agreement, AT&T will purchase the operations in an all-cash transaction valued at approximately $780 million. For the three months ended March 31, 2013, our Alltel business constituted approximately $108.0 million, or 62%, of our consolidated revenues and $4.2 million, or 24% of our consolidated operating income. Although the consummation of the Alltel Sale is subject to customary closing conditions, including approval of the Federal Communications Commission, the required waiting period under the Hart Scott Rodino Antitrust Improvements Act of 1976 has expired and we currently anticipate completing the transaction in the second half of 2013. Since the Company's application for FCC approval is still pending, the Company has reported the Alltel results in continuing operations. For the purpose of clarity and consistency, and except where expressly indicated, each of the forward-looking statements made regarding our operations in this Item 2 assumes that the Alltel Sale has not yet been consummated. 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 March 31, 2013, we have spent (i) $28.3 million in capital expenditures (of which $22.7 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) $6.9 million in expenditures (of which $4.8 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) $30.9 million in capital expenditures (of which $21.6 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. 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. We anticipate that the remaining capital expenditures for all three projects is $20.5 million of which $14.7 million is expected to be funded by the federal stimulus grants. 19 -------------------------------------------------------------------------------- Table of Contents 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. 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. For the three months ended March 31, 2013, we received approximately $2.0 million in USF support to our U.S. wireless businesses relating to high-cost areas. Also as part of the USF reform program, the FCC created two new funds, including the Mobility Fund, meant to support wireless coverage in unserved and 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 receipt of the Mobility Fund I support is still subject to additional filing requirements, including letters of credit and final FCC approval, our Alltel business expects to receive approximately $47 million and our legacy wholesale wireless business expects to receive approximately $21.7 million in support beginning in 2013. To expand voice and broadband networks in certain geographic areas in order to offer either 3G or 4G coverage. As part of the receipt of these funds, we committed to comply with certain additional FCC construction and other requirements. The results of our Mobility Fund projects, once initiated, will be included in our "U.S. Wireless" segment. Any actual award of Mobility Fund Grants is subject to certain conditions, including the issuance of a letter of credit under our Amended Credit Facility. 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. Results of Operations Three Months Ended March 31, 2012 and 2013 Three Months Ended Amount of Percent March 31, Increase Increase 2012 2013 (Decrease) (Decrease) (In thousands) REVENUE: U.S. Wireless: Retail $ 86,683 $ 81,282 $ (5,401 ) (6.2 )% Wholesale 47,384 40,302 (7,082 ) (14.9 ) International Wireless 18,900 21,430 2,530 13.4 Wireline 21,731 20,564 (1,167 ) (5.4 ) Equipment and Other 8,389 9,290 901 10.7 Total revenue 183,087 172,868 (10,219 ) (5.6 ) OPERATING EXPENSES: Termination and access fees 40,562 34,254 (6,308 ) (15.6 ) Engineering and operations 21,945 22,132 187 0.9 Sales, marketing and customer services 32,005 29,502 (2,503 ) (7.8 ) Equipment expense 20,692 24,557 3,865 18.7 General and administrative 22,724 19,146 (3,578 ) (15.7 ) Transaction-related charges 5 782 777 15,540.0 Depreciation and amortization 27,024 25,802 (1,222 ) (4.5 ) Gain on disposition of long lived assets - (1,076 ) (1,076 ) (100 ) Total operating expenses 164,957 155,099 (9,858 ) (6.0 ) Income from operations 18,130 17,769 (361 ) (2.0 ) OTHER INCOME (EXPENSE): Interest expense (3,970 ) (2,360 ) 1,610 40.6 Interest income 93 88 (5 ) (5.4 ) Equity in earnings of unconsolidated affiliate 1,402 582 (820 ) (58.5 ) Other income, net 63 201 138 219.0 Other income (expense), net (2,412 ) (1,489 ) 923 38.3 INCOME BEFORE INCOME TAXES 15,718 16,280 562 3.6 Income taxes 6,781 6,362 (419 ) (6.2 ) NET INCOME 8,937 9,918 981 11.0 Net income(loss) attributable to non-controlling interests 384 (1,142 ) (1,526 ) (397.4 ) NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS $ 9,321 $ 8,776 $ (545 ) (5.8 )% 20 -------------------------------------------------------------------------------- Table of Contents 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 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 networks. Retail Revenue The retail portion of our U.S. Wireless revenue was $81.3 million for the three months ended March 31, 2013, as compared to $86.7 million for the three months ended March 31, 2012, a decrease of $5.4 million, or 6%. The decrease in retail U.S. Wireless revenues was primarily the result of a decline in postpaid subscribers which typically generate higher average revenues than prepaid customers. As of March 31, 2013, we had approximately 590,000 U.S. retail wireless subscribers (including 413,000 postpaid subscribers and 177,000 prepaid subscribers), an increase of 11,000 subscribers from the approximately 579,000 subscribers we had as of March 31, 2012. Despite our net increase in total subscribers, postpaid subscribers have declined in the past year from 448,000 postpaid subscribers at March 31, 2012. We expect to continue to incur decreases in our postpaid subscribers as we are currently in a period of higher than normal postpaid customer contract expirations which we expect will continue into the third quarter of 2013. As a result, our customer churn was 4.07% for the three months ended March 31, 2013 compared to a churn rate of 3.22% for the three months ended March 31, 2012. Although the ability to now offer iPhone devices, which occurred towards the end of the first quarter of 2013, may improve customer churn, we expect that further declines in postpaid subscribers will result in lower revenues in future periods. Wholesale Revenue The wholesale portion of our U.S. Wireless revenue decreased by 15% from $47.4 million for the three months ended March 31, 2012 to $40.3 million for the three months ended March 31, 2013. The decrease was partially the result of the sale of certain spectrum and related cell sites in the Midwestern U.S. which was completed late in the fourth quarter of 2012. Additionally, wholesale revenues declined, primarily in the Alltel markets, as a result of roaming partners moving traffic off our network. We expect that data volume may increase in the next several quarters as customer usage of data and smart phone penetration in future periods continues to increase. Such increase, however, may be completely offset by a number of factors, including reductions in the roaming rates that we charge, continued declines in overall voice traffic on our networks or decisions by our roaming partners to no longer roam on our networks or to continue to expand their networks in areas where we operate. International Wireless revenue. International Wireless revenue includes retail and wholesale voice and data wireless revenue from our operations in Bermuda and the Caribbean, including the U.S. Virgin Islands and Guyana. International wireless revenue increased by $2.5 million, or 13%, to $21.4 million for the three months ended March 31, 2013, from $18.9 million for the three months ended March 31, 2012. International Wireless revenue increased as a result of subscriber growth and seasonal roaming revenues within the Island Wireless segment. International wireless subscribers rose from 314,000 as of March 31, 2012 to 335,000 as of March 31, 2013 of which 88% were prepaid subscribers. The increase in international wireless revenue was also due in part to higher wholesale revenues at several of our international markets due to increased roaming volumes. While we have experienced subscriber growth in a number of our international markets, competition remains strong, and the high proportion of prepaid subscribers means that subscribers and revenue could shift relatively quickly in future periods. Additionally, wholesale revenues in these markets are subject to seasonality and can fluctuate between quarters. 21 -------------------------------------------------------------------------------- Table of Contents 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 and wholesale transport operations in New England. 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 $1.1 million, or 5%, to $20.6 million for the three months ended March 31, 2013, from $21.7 million in the prior year period. Reductions in revenue from our local calling and international long services businesses in Guyana were partially offset by the growth in data revenue in Guyana. If we cease to be the exclusive provider of domestic fixed and international long distance services in Guyana, whether by reason of the Government of Guyana enacting legislation to such effect or a modification, revocation or lack of enforcement of our exclusive rights. We anticipate that wireline revenue from our international long distance business in Guyana will be negatively impacted, principally through the loss of market share and rate changes, any loss of our exclusive rights will likely cause an immediate reduction in our wireline revenue, however 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 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. Revenues from our integrated voice and data and wholesale transport operations in New England were relatively unchanged between the three months ending March 31, 2012 and 2013. We are in the process of expanding our fiber networks in New York and Vermont and as of March 31, 2013 have or will received $22.7 million of the $39.7 million New York-based stimulus grant awarded to us in late 2009 and have or will receive $21.6 million of the $33.4 million stimulus grant in connection with the expansion of our fiber network in Vermont. We expect to complete the construction of these expansions by the end of 2013. Equipment and other revenue. Equipment and other revenue represent revenue from wireless equipment sales, primarily handsets to retail customers, and other miscellaneous revenue items. Equipment and other revenue increased by $0.9 million, or 11%, to $9.3 million for the three months ended March 31, 2013, from $8.4 million for the three months ended March 31, 2012. Equipment revenue increased as the result of increased contract renewals with our Alltel subscribers and an increase in the demand for more expensive smartphone handset devices. We believe that equipment and other revenue will continue to increase in coming quarters as the two-year contracts with Alltel subscribers continue to expire at an accelerated pace until the latter half of 2013 resulting in increased upgrades as compared to 2012. In addition, an increase in gross subscriber additions and more aggressive device subsidies as well as the continued growth in smartphone penetration could result in increased equipment revenues in future periods. 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 $6.3 million, or 16%, from $40.6 million for the three months ended March 31, 2012 to $34.3 million for the three months ended March 31, 2013. The decrease was primarily the result of a reduction in roaming expenses partially offset by an increase in data usage volume which increases backhaul costs and roaming expense. Termination and access fees may increase in future periods with expected growth in data volume and the expansion of our networks but 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 by $0.2 million, or 1%, from $21.9 million for the three months ended March 31, 2012 to $22.1 million for the three months ended March 31, 2013, primarily as a result of the expansions of our networks partially offset by the realization of operational synergies following our 2011 merger in Bermuda. We expect that engineering and operations expenses will increase over time due to an expected increase in our network capacity and geographic expansion of our network, both of which will require additional support. 22 -------------------------------------------------------------------------------- Table of Contents Sales, marketing and customer service expenses. Sales, marketing and customer service 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, marketing and customer service expenses decreased by $2.5 million, or 8%, from $32.0 million for the three months ended March 31, 2012 to $29.5 million for the three months ended March 31, 2013 as a result of a reduction in advertising and promotional costs as well as lower customer care costs as compared to 2012. We expect that sales, marketing and customer service expenses will remain fairly consistent as a percentage of revenues in future periods. Equipment expenses. Equipment expenses include the costs of our handset and customer resale equipment at our retail wireless businesses. Equipment expenses increased by $3.9 million, or 19%, from $20.7 million for the three months ended March 31, 2012 to $24.6 million for the three months ended March 31, 2013. This increase is largely the result of an increase in customer contract renewals in 2013 in our U.S. Wireless business as a higher than normal portion of our two-year contracts with Alltel subscribers expired. The increase in equipment expenses is also the result of increased demand for more expensive smartphone handset devices. We believe that equipment expenses will continue to increase in 2013 as our two-year contracts with Alltel subscribers will continue to expire, resulting in increased upgrades as compared to 2012. Also, the addition of more expensive handsets to our device lineup, such as the iPhone which we began selling at the end of the first quarter of 2013, could cause the equipment expenses to increase significantly in coming quarters. We may also choose to increase device subsidies to attract and retain customers. 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 $3.6 million, or 16%, from $22.7 million for the three months ended March 31, 2012 to $19.1 million for the three months ended March 31, 2013 primarily as a result of certain information technology projects, relating to our transition from the legacy Alltel systems to our own, being completed in 2012. We expect that these general and administrative expenses will remain fairly consistent as a percentage of revenues in future periods. Transaction-related charges. Transaction-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. For the three months ended March 31, 2012, we incurred a nominal amount of acquisition-related charges and $0.8 million for the three months ended March 31, 2013. We expect that acquisition-related expenses will continue to be incurred prepare for the Alltel sale and as we continue to explore additional acquisition opportunities. 23 -------------------------------------------------------------------------------- Table of Contents 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 $1.2 million, or 4%, from $27.0 million for the three months ended March 31, 2012 to $25.8 million for the three months ended March 31, 2013. The decrease is primarily due to the sale of certain network assets in our U.S. Wireless segment in late 2012 as well as certain assets in our Island Wireless segment becoming fully depreciated in 2012. We expect depreciation expense on our tangible assets to continue 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. Gain on disposal of long lived asset. During the three months ended March 31, 2013, we sold certain network assets and telecommunications licenses in our U.S. Wireless segment for proceeds of $1.5 million and recognized a gain on such disposition of $1.1 million. Interest expense. Interest expense represents interest incurred on our outstanding credit facilities including our interest rate swaps. Interest expense decreased from $4.0 million for the three months ended March 31, 2012 to $2.4 million for the three months ended March 31, 2013. The decrease was the result of a reduction in our outstanding debt and a decrease in applicable margins effective with the amendment to our credit facilities on May 18, 2012. As of March 31, 2013, we had $272.1 million in outstanding debt as compared to $292.6 million as of March 31, 2012. Interest income. Interest income represents interest earned on our cash and cash equivalents. Interest income was $0.1 million for the three months ended March 31, 2012 and 2013. 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 $1.4 million for the three months ended March 31, 2012 as compared to $0.6 million for the three months ended March 31, 2013. 24 -------------------------------------------------------------------------------- Table of Contents Other income (expense), net. Other income (expense), net represents miscellaneous non-operational income we earned or expenses we incurred. Other income (expense), net was a nominal amount for the three months ended March 31, 2012 and 2013. Income taxes. Our effective tax rates for the three months ended March 31, 2012 and 2013 were 43% and 39%, respectively. Our effective tax rate declined in 2013 as the result of increased income in lower taxed jurisdictions, such as Bermuda, as compared to 2012. Our effective tax rate in 2012 was higher than the statutory federal income tax rate of 35% (plus applicable statutory state income tax rates) due primarily to (i) the portion of our earnings that are taxed in Guyana at 45%, and (ii) a portion of our earnings that include losses generated in foreign jurisdictions for which we receive no tax benefit since these are non-tax jurisdictions. Our consolidated tax rate will continue to be impacted by the mix of income generated in those jurisdictions. Net loss (income) attributable to non-controlling interests. Net loss (income) attributable to non-controlling interests reflected an allocation of $0.4 million of losses and $1.1 million of income for the three months ended March 31, 2012 and 2013, respectively. Net income attributable to Atlantic Tele-Network, Inc. stockholders. Net income attributable to Atlantic Tele-Network, Inc. stockholders decreased to $8.8 million for the three months ended March 31, 2013 from $9.3 million for the three months ended March 31, 2012. On a per share basis, net income decreased to $0.56 per diluted share from $0.60 per diluted share for the three months ended March 31, 2013 and 2012, 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 discussion of ongoing proceedings, see Note 10 to the Consolidated Financial Statements 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 three months ended March 31, 2012 and 2013, we spent approximately $19.1 million and $20.9 million, respectively, on capital expenditures. The following notes our capital expenditures, by operating segment, for these periods: Capital Expenditures (in thousands) International Integrated Island U.S. Reconciling U.S. Wireless Telephony Wireless Wireline Items Consolidated Three Months Ended March 31, 2012 $ 12,547 $ 2,561 $ 1,430 $ 1,859 $ 658 $ 19,055 2013 10,001 4,120 1,111 5,095 549 20,876 We are continuing to invest in expanding our networks in many of our markets and updating our operating and business support systems. We currently anticipate that capital expenditures for the year ended December 31, 2013 will be between $95 million and $105 million, assuming the Alltel Sale transaction is completed as anticipated in 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, 25 -------------------------------------------------------------------------------- Table of Contents 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 three months ended March 31, 2013, dividends to our stockholders, which includes a $0.25 per share dividend declared on March 28, 2013, and paid on April 15, 2013, was $3.9 million. We have declared quarterly dividends for the last 58 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 March 31, 2013 repurchasing our common stock. Our last repurchase of our common stock under this plan 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. As of March 31, 2013, we had approximately $140.8 million in cash and cash equivalents, an increase of $4.2 million from the December 31, 2012 balance of $136.6 million. The increase in our cash and cash equivalents is attributable to an increase in cash provided by our operating activities and the sale of certain telecommunications licenses and network assets in our U.S. Wireless segment partially offset by investments in capital expenditures and a decrease in borrowings and dividends paid as compared to 2012. Cash generated by operations. Cash provided by operating activities was $25.0 million for the three months ended March 31, 2013 and $21.0 million for the three months ended March 31, 2012, an increase of $4.0 million. The increase was predominantly driven by a decrease in accounts receivable and an increase in accounts payable and accrued liabilities during the three months ended March 31, 2013. Such items, however, were partially offset by a decrease in accrued taxes during the three months ended March 31, 2013. Cash used in financing activities. Cash used in financing activities decreased by $4.5 million, from $3.0 million of cash provided by financing activities for the three months ended March 31, 2012 to $1.5 million of cash used by financing activities for the three months ended March 31, 2013. The decrease was primarily the result of fewer borrowings, net of principal repayments, on our credit facility partially offset by the timing impact of paying a dividend declared by our Board of Directors on December 6, 2012 in the fourth quarter of 2012 as opposed to in the first quarter of 2013. Credit facilities. 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 Grant 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 Grant 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 Grant 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 26 -------------------------------------------------------------------------------- Table of Contents 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 our EBITDA (as defined in the Amended Credit Facility. Certain of our domestic subsidiaries, including our principal operating subsidiaries, are guarantors of our obligations under the Credit Agreement. Further, our obligations are secured by (i) a first priority, perfected lien on substantially all of our property and assets and that of the guarantor subsidiaries, including our principal wholly-owned domestic operating subsidiaries and (ii) a pledge of 100% of our equity interests in certain domestic subsidiaries and up to 65% of the equity interests outstanding of certain foreign subsidiaries, in each case, including our principal operating subsidiaries. Borrowings as of March 31, 2013, after considering the effect of the interest rate swap agreements as described in Note 6, bore a weighted-average interest rate of 4.37%. Availability under the revolver loan, net of an outstanding letter of credit of $0.1 million, was $99.9 million as of March 31, 2013. 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 March 31, 2013, we were in compliance with all of the financial covenants of the Amended Credit Facility. 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. 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 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 March 31, 2013, we were in compliance with all of the financial covenants of the Amended Credit Facility. 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. We currently intend to renew this shelf registration statement on or before its scheduled expiration date. Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board (FASB) issued new guidance which requires companies to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. This new guidance is effective for fiscal periods beginning after December 15, 2012. The adoption of the new guidance did not have an impact on our consolidated balance sheet, income statement or cash flows. In July 2012, the FASB issued new guidance intended to simplify the impairment testing of indefinite-lived intangible assets other than goodwill. Under this guidance, an entity is allowed to perform a qualitative assessment about the likelihood of impairment of an indefinite-lived intangible asset to determine whether further impairment testing is necessary, similar in approach to the goodwill 27 -------------------------------------------------------------------------------- Table of Contents impairment test. This new guidance is effective for fiscal years beginning after September 15, 2012. We do not believe the adoption of the new guidance will have an impact on our consolidated balance sheet, income statement or cash flows |