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INTELIQUENT, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve substantial risks and uncertainties. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q are forward-looking statements. The words "anticipates," "believes," "efforts," "expects," "estimates," "projects," "proposed," "plans," "intends," "may," "will," "would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Factors that might cause such differences include, but are not limited to: the effects of competition, including direct connects, and downward pricing pressure resulting from such competition; our regular review of strategic alternatives; the impact of current and future regulation, including intercarrier compensation reform enacted by the Federal Communications Commission; the risks associated with our ability to successfully develop and market new voice services, many of which are beyond our control and all of which could delay or negatively affect our ability to offer or market new voice services; the ability to develop and provide other new services; technological developments; the ability to obtain and protect intellectual property rights; the impact of current or future litigation; the impact of any future acquisitions, mergers or divestitures; natural or man-made disasters; the ability to attract, develop and retain executives and other qualified employees; changes in general economic or market conditions; matters arising out of or related to the impairment charge and financial forecasting practices that were the subject of an investigation by the Company's Audit Committee; the possibility that the Securities and Exchange Commission may disagree with the Audit Committee's findings and may require a restatement of financial statements or additional or different remediation; the possibility of litigation or other actions related to the impairment charge and financial forecasting practices that were subject to investigation by the Audit Committee and related matters; and other important factors included in our reports filed with the Securities and Exchange Commission, particularly in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as such risk factors may be updated from time to time in subsequent reports. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. 14-------------------------------------------------------------------------------- Table of Contents Overview We provide voice telecommunications services primarily on a wholesale basis. We offer these services using an all-IP network, which enables us to deliver global connectivity for a variety of media, including voice, and historically data and video. Our solutions enable carriers and other providers to deliver voice telecommunications traffic or other services where they do not have their own network or elect not to use their own network. These solutions are sometimes called "off-net" services. We also provide our solutions to customers, such as "over-the-top" providers, who also typically do not have their own network. We were incorporated in Delaware on April 19, 2001 and commenced operations in 2004. Refer to Note 9, "Business Disposition," for more information regarding the sale of the global data business. Voice Services We provide voice interconnection services primarily to competitive carriers, including wireless, wireline, cable and broadband telephony companies. Competitive carriers use our tandem switches to interconnect and exchange local and long distance traffic between their networks without the need to establish direct switch-to-switch connections. Competitive carriers are carriers that are not Incumbent Local Exchange Carriers, or ILECs, such as AT&T, Verizon and CenturyLink. Prior to the introduction of our local voice service, competitive carriers generally had two alternatives for exchanging traffic with other carriers' networks. The two alternatives were exchanging traffic through the ILEC tandems or directly connecting individual switches, commonly referred to as "direct connects." Given the cost and complexity of establishing direct connects, competitive carriers often elected to utilize the ILEC tandem as the method of exchanging traffic. The ILECs typically required competitive carriers to interconnect to multiple ILEC tandems with each tandem serving a restricted geographic area. In addition, as the competitive telecommunications market grew, the process of establishing interconnections at multiple ILEC tandems became increasingly difficult to manage and maintain, causing delays and inhibiting the growth of competitive carriers while the purchase of ILEC tandem services became an increasingly significant component of a competitive carrier's costs. The tandem switching services offered by ILECs consist of local transit services, which are provided in connection with local calls, and switched access services, which are provided in connection with long distance calls. Under certain interpretations of the Telecommunications Act of 1996 and implementing regulations, ILECs are required to provide local transit services to competitive carriers. ILECs generally set per minute rates and other charges for tandem transit services according to rate schedules approved by state public utility commissions, although the methodology used to review these rate schedules varies from state to state. ILECs are also required to offer switched access services to competing telecommunications carriers under the Telecommunications Act of 1996 and implementing regulations. ILECs generally set per minute rates and other charges for switched access services according to mandated rate schedules set by the Federal Communications Commission for interstate calls and by state public utility commissions for intrastate calls. In November 2011, the FCC released an order setting forth a multi-year transition plan that will reduce, and ultimately lead to elimination of, terminating switched access charges. A loss of ILEC market share to competitive carriers escalated competitive tensions and resulted in an increased demand for tandem switching. Growth in intercarrier traffic switched through ILEC tandems created switch capacity shortages known in the industry as ILEC "tandem exhaust," where overloaded ILEC tandems became a bottleneck for competitive carriers. This increased call blocking and gave rise to service quality issues for competitive carriers. We founded our company to solve these interconnection problems and better facilitate the exchange of traffic among competitive carriers and non-carriers. With the introduction of our services, we believe we became the first carrier to provide alternative tandem services capable of alleviating the ILEC tandem exhaust problem. Our solution enabled competitive carriers to exchange traffic between their networks without using an ILEC tandem for both local and long distance calls. By utilizing our managed tandem service, our customers benefit from a simplified interconnection network solution that reduces costs, increases network reliability, decreases competitive tension and adds network diversity and redundancy. We operated in 190 markets as of June 30, 2014 and have signed voice services agreements with major competitive carriers and non-carriers. Generally, these agreements do not provide for minimum revenue requirements and do not require our customers to continue to use our services. 15-------------------------------------------------------------------------------- Table of Contents Our business originally connected only local traffic among carriers within a single metropolitan market. In 2006, we installed a national IP backbone network connecting our major local markets. In 2008, we began offering terminating switched access services and originating switched access services. Switched access services are provided in connection with long distance calls. Our terminating switched access services allows interexchange carriers to send calls to us, and we then terminate those calls to the appropriate terminating carrier in the local market in which we operate. Our originating switched access service allows the originating carrier in the local market in which we operate to send calls to us that we then deliver to the appropriate interexchange carrier that has been selected to carry that call. In both instances, the interexchange carrier is our customer, which means that it is financially responsible for the call. Finally, we began offering international voice services as we began interconnection with non-United States carriers. As a result of the foregoing, our service offerings now include the capability of switching and carrying local, long distance and international voice traffic. On April 30, 2013, we announced that we sold all assets and liabilities of our global data business to GTT for $54.5 million, subject to certain adjustments. The total consideration consisted of $52.5 million in cash and $2.0 million of non-cash commercial services to be provided by GTT to us. Revenue. We generate revenue from sales of our voice services and historically generated revenue from sales of our IP Transit and Ethernet services. Revenue is recorded each month based upon documented minutes of traffic switched and, historically, data traffic carried for which service is provided, when collection is probable. Voice revenue is recorded each month on an accrual basis based upon minutes of traffic switched by our network for each customer, which we refer to as minutes of use. The rates charged per minute are determined by contracts between us and our customers or by filed and effective tariffs. Minutes of use of voice traffic increase as we increase our number of customers, increase the penetration of existing markets, either with new customers or with existing customers, and increase our service offerings. The minutes of use decrease due to direct connection between existing customers, consolidation between customers, a customer using a different interconnection provider or a customer experiencing a decrease in the volume of traffic it carries. The average rate per minute of voice traffic varies depending on market forces and type of service, such as switched access or local transit. The market rate in each market is based upon competitive conditions along with the switched access or local transit rates offered by the ILECs. Depending on the markets we enter, we may enter into contracts with our customers with either a higher or lower rate per minute than our current average. Our service solution incorporates other components beyond switching. In addition to switching, we generally provision trunk circuits between our customers' switches and our network locations at our own expense and at no direct cost to our customers. We also provide quality of service monitoring, call records and traffic reporting and other services to our customers as part of our service solution. Our per-minute rates are intended to incorporate all of these services. While generally not seasonal in nature, our voice revenues are affected by certain events such as holidays, the unpredictable timing of direct connects between our customers, and installation and implementation delays. These factors can cause our revenue to both increase or decrease unexpectedly. Operating Expense. Operating expense includes network and facilities expense, operations expenses, sales and marketing expenses, general and administrative expenses, depreciation and amortization, loss (gain) on disposal of fixed assets, and loss (gain) on sale of Americas data assets. Network and Facilities Expense. Our network and facilities expense includes transport capacity, or circuits, signaling network costs, facility rents and utilities, and costs to terminate our traffic, together with other costs that directly support our voice services. Prior to the sale of the global data business, our network and facilities expense included transport capacity, or circuits, facility rents and utilities, together with other costs that directly supported our data services. We do not defer or capitalize any costs associated with the start-up of a new point of presence (POP). The start-up of an additional POP can take between three months to six months. During this time, we typically incur facility rent, utilities, payroll and related benefit costs along with initial non-recurring installation costs. Revenues generally follow sometime after the sixth month. Network transport costs typically occur on a repeating monthly basis, which we refer to as recurring transport costs, or on a one-time basis, which we refer to as non-recurring transport costs. Recurring transport costs primarily include monthly usage and other charges from telecommunication carriers and are related to the circuits utilized by us to connect to our customers. As our voice traffic increases, we must utilize additional circuits. Non-recurring transport costs primarily include the initial installation of such circuits. Facility rents include the leases on our POPs, which expire through January 2026. Additionally, we pay the cost of the utilities for all of our POP locations. 16-------------------------------------------------------------------------------- Table of Contents Operations Expense. Operations expense includes payroll and benefits for our POP location personnel as well as individuals located at our offices who are directly responsible for maintaining and expanding our network. Other primary components of operations expenses include repair and maintenance, property taxes, property insurance and supplies. Sales and Marketing Expense. Sales and marketing expense represents the smallest component of our operating expenses and primarily include personnel costs, sales bonuses, marketing programs and other costs related to travel and customer meetings. General and Administrative Expense. General and administrative expense consists primarily of compensation and related costs for personnel and facilities associated with our executive, finance, human resource and legal departments and fees for professional services. Professional services principally consist of outside legal, audit, and tax service fees and may occasionally include consulting and transaction costs. Depreciation and Amortization Expense. Depreciation and amortization expense for voice-related fixed assets is applied using the straight-line method over the estimated useful lives of the assets after they are placed in service, which are five years for network equipment and test equipment, and three years for computer equipment, computer software and furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of five years or the life of the respective leases, whichever is shorter. (Gain) loss on Disposal of Assets. We dispose of network equipment in connection with converting to new technology and computer equipment to replace old or damaged units. When there is a carrying value of these assets, we record the write-off of these amounts to loss on disposal. In some cases, this equipment is sold to a third party. When the proceeds from the sale of equipment identified for disposal exceeds the asset's carrying value, we record a gain on disposal. Loss (gain) on sale of Americas Data Assets. The global data business was sold in 2013 and as a result, a gain of $23.2 million was recorded that related to the disposal of the Americas data assets. During the first quarter of 2014, we recorded a $1.1 million loss on sale of Americas data assets as a result of the settlement with GTT. Refer to Note 9 "Business Disposition" for more information regarding the sale of the global data business. Other Expense (Income). Other expense (income) includes interest expense and income. Provision for Income Taxes. Income tax provision includes United States federal, state and local income taxes and is based on pre-tax income or loss. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which earnings will be generated, the impact of state and local income taxes and our ability to use tax credits and net operating loss carryforwards. Patent Protection Our ability to maintain profitability or positive cash flow depends, in part, on our ability to protect proprietary methods and technologies that we develop under the patent and other intellectual property laws of the United States, so that we can prevent others from using our inventions and proprietary information. If our patents are invalidated or otherwise limited, other companies will be better able to develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. Any resulting increased competition may cause price decreases. If we are unable to offset the effects of any price reductions by carrying higher volumes of traffic, we could experience reduced revenues and gross margins. Critical Accounting Policies and Estimates The preparation of our financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which we filed with the Securities and Exchange Commission on March 11, 2014, includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the first six months of 2014. 17 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our results of continuing operations for the three and six months ended June 30, 2014 and 2013: Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands) 2014 2013 2014 2013 Revenue $ 54,881 $ 53,449 $ 111,098 $ 112,737 Operating expense: Network and facilities expense (excluding depreciation and amortization) 23,129 24,053 48,019 48,689 Operations 7,202 7,508 14,509 15,306 Sales and marketing 818 1,526 1,494 3,560 General and administrative 5,254 4,535 9,054 9,034 Depreciation and amortization 3,010 3,699 6,151 8,212 (Gain) loss on disposal of fixed assets (31 ) 223 (31 ) 223 Loss (gain) on disposal of Americas data assets - (23,171 ) 1,081 (23,171 ) Total operating expense 39,382 18,373 80,277 61,853 Income from operations 15,499 35,076 30,821 50,884 Total other expense (income) 15 (17 ) 17 (51 ) Income from continuing operations before income taxes 15,484 35,093 30,804 50,935 Provision for income taxes 6,036 741 12,163 4,347 Income from continuing operations 9,448 34,352 18,641 46,588 Loss from discontinued operations, net of income tax provision - 1,698 - 7,034 Gain on disposal of discontinued operations - (794 ) - (794 ) Net income $ 9,448 $ 33,448 $ 18,641 $ 40,348 Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 On April 30, 2013, we sold our global data business. As a result, we recorded activity with respect to our global data business for only the one month ended April 30, 2013 within the results for the three months ended June 30, 2013. The results of operations for the three months ended June 30, 2014 do not include any such data activity. The sale of the Americas reporting unit of the global data business did not qualify for discontinued operations treatment and therefore was reflected in continuing operations in the condensed consolidated statement of income. Revenue. Revenue increased to $54.9 million in the three months ended June 30, 2014 from $53.4 million in the three months ended June 30, 2013, representing an increase of 2.8%. The data revenue generated by our Americas reporting unit for the month ended April 30, 2013 was $3.6 million. Excluding data revenue, revenue from continuing operations increased $5.1 million, representing an increase of 10.2%. The increase in voice revenue is primarily due to an increase in minutes of use to 33.9 billion minutes in the three months ended June 30, 2014, compared to 29.4 billion minutes in the three months ended June 30, 2013, an increase of 15.3%. Offsetting the increase in minutes, the average rate per minute decreased to $0.00162 for the three months ended June 30, 2014 from $0.00169 for the three months ended June 30, 2013, a decrease of 4.1%. Operating Expenses. Operating expenses for the three months ended June 30, 2014 of $39.4 million increased $21.0 million, or 114.1%, from $18.4 million for the three months ended June 30, 2013. The components of operating expenses are discussed further below. Network and Facilities Expenses. Network and facilities expenses decreased to $23.1 million in the three months ended June 30, 2014, or 42.1% of revenue, from $24.1 million in the three months ended June 30, 2013, or 45.1% of revenue. The data network and facilities expenses generated by our Americas reporting unit for the month ended April 30, 2013 were $1.6 million. Excluding these data costs, the network expenses increased $0.6 million which was primarily due to an increase in minute volumes. Operations Expenses. Operations expenses decreased to $7.2 million in the three months ended June 30, 2014, or 13.1% of revenue, from $7.5 million in the three months ended June 30, 2013, or 14.0% of revenue. The decrease of $0.3 million in our operations expenses for the three months ended June 30, 2014 primarily resulted from a decrease in payroll and other benefits expenses. Sales and Marketing Expense. Sales and marketing expense decreased to $0.8 million in the three months ended June 30, 2014, or 1.5% of revenue, compared to $1.5 million in the three months ended June 30, 2013, or 2.8% of revenue. The sales and marketing expenses generated by our Americas reporting unit for the month ended April 30, 2013 were $0.6 million. Excluding these data costs, the sales and marketing expenses decreased $0.1 million. 18-------------------------------------------------------------------------------- Table of Contents General and Administrative Expense. General and administrative expense increased to $5.3 million in the three months ended June 30, 2014, or 9.7% of revenue, compared with $4.5 million in the three months ended June 30, 2013, or 8.4% of revenue. The increase of $0.8 million in general and administrative expense for the three months ended June 30, 2014 primarily resulted from a $1.1 million increase in bad debt reserve offset by a $0.3 million decrease in payroll and other benefits expenses. The increase in bad debt expense related to reserves established for various customers' doubtful accounts receivable. Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $3.0 million in the three months ended June 30, 2014, or 5.5% of revenue, compared to $3.7 million in the three months ended June 30, 2013, or 6.9% of revenue. The decrease of $0.7 million in our depreciation and amortization expense resulted from a lower depreciable base of our assets as a result of the sale of the Americas data assets. (Gain) loss on Disposal of Fixed Assets. Gain on disposal of fixed assets was less than $0.1 million for the three months ended June 30, 2014, compared to a loss on disposal of fixed assets of $0.2 million for the three months ended June 30, 2013. Certain network switching equipment was disposed of during the second quarter of 2013 which resulted in a loss, whereas we received proceeds on the sale of fixed assets during the second quarter of 2014 which resulted in a gain. Loss (gain) on Disposal of Americas Data Assets. Gain on disposition of Americas data assets was $23.2 million for the three months ended June 30, 2013. Other Expense (Income). Other expense (income) was less than $0.1 million for each of the three months ended June 30, 2014 and 2013. Provision for Income Taxes. Provision for income taxes of $6.0 million for the three months ended June 30, 2014 reflected an increase of $5.3 million, compared to $0.7 million for the three months ended June 30, 2013. The effective tax rate for the three months ended June 30, 2014 and 2013 was 39.0% and 2.1%, respectively. The difference in the effective tax rate for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is due primarily to the tax impact of the sale of the data business in the prior year. Income from Continuing Operations. We had income from continuing operations before income taxes of $15.5 million for the three months ended June 30, 2014, compared with income from continuing operations before income taxes of $35.1 million for the three months ended June 30, 2013. After taxes, we had income from continuing operations of $9.4 million, or $ 0.28 per diluted share, for the three months ended June 30, 2014, compared to income from continuing operations of $34.4 million, or $1.05 per diluted share, for the three months ended June 30, 2013. Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 On April 30, 2013, we sold our global data business. As a result, we recorded activity with respect to our global data business for only the four months ended April 30, 2013 within the results for the six months ended June 30, 2013. The results of operations for the six months ended June 30, 2014 do not include any such data activity. The sale of the Americas reporting unit of the global data business did not qualify for discontinued operations treatment and therefore was reflected in continuing operations in the condensed consolidated statement of income. Revenue. Revenue decreased to $111.1 million in the six months ended June 30, 2014 from $112.7 million in the six months ended June 30, 2013, representing a decrease of 1.4%. The data revenue generated by our Americas reporting unit for the four months ended April 30, 2013 was $12.3 million. Excluding data revenue, revenue from continuing operations increased $10.7 million, representing an increase of 10.7%. The increase in voice revenue is primarily due to an increase in minutes of use to 67.0 billion minutes in the six months ended June 30, 2014, compared to 60.1 billion minutes in the six months ended June 30, 2013, an increase of 11.5%. Slightly offsetting the increase in minutes, the average rate per minute decreased to $0.00166 for the six months ended June 30, 2014 from $0.00167 for the six months ended June 30, 2013, a decrease of 0.6%. Operating Expenses. Operating expenses for the six months ended June 30, 2014 of $80.3 million increased $18.4 million, or 29.7%, from $61.9 million for the six months ended June 30, 2013. The components of operating expenses are discussed further below. 19 -------------------------------------------------------------------------------- Table of Contents Network and Facilities Expenses. Network and facilities expenses decreased to $48.0 million in the six months ended June 30, 2014, or 43.2% of revenue, from $48.7 million in the six months ended June 30, 2013, or 43.2% of revenue. The data network and facilities expenses generated by our Americas reporting unit for the four months ended April 30, 2013 were $3.4 million. Excluding these data costs, the network expenses increased $2.7 million which was primarily due to an increase in minute volumes, along with changes in the mix of voice services that we provide. Operations Expenses. Operations expenses decreased to $14.5 million in the six months ended June 30, 2014, or 13.1% of revenue, from $15.3 million in the six months ended June 30, 2013, or 13.6% of revenue. The decrease of $0.8 million in our operations expenses for the six months ended June 30, 2014 primarily resulted from a decrease in payroll and other benefits expenses. Sales and Marketing Expense. Sales and marketing expense decreased to $1.5 million in the six months ended June 30, 2014, or 1.4% of revenue, compared to $3.6 million in the six months ended June 30, 2013, or 3.2% of revenue. The sales and marketing expenses generated by our Americas reporting unit for the four months ended April 30, 2013 were $1.4 million. Excluding these data costs, the sales and marketing expenses decreased by $0.7 million which was primarily due to lower payroll and other benefits expenses. General and Administrative Expense. General and administrative expense increased to $9.1 million in the six months ended June 30, 2014, or 8.2% of revenue, compared with $9.0 million in the six months ended June 30, 2013, or 8.0% of revenue. The increase of $0.1 million in our general and administrative expenses for the six months ended June 30, 2014 primarily resulted from a $1.1 million increase in bad debt reserve offset by a $0.5 million decrease in payroll- related expenses and a $0.5 million decrease in professional fees. The increase in bad debt expense related to reserves established for various customers' doubtful accounts receivable. Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $6.2 million in the six months ended June 30, 2014, or 5.6% of revenue, compared to $8.2 million in the six months ended June 30, 2013, or 7.3% of revenue. The decrease of $2.0 million in our depreciation and amortization expense resulted from a lower depreciable base of our assets as a result of the sale of the Americas data assets. (Gain) loss on Disposal of Fixed Assets. Gain on disposal of fixed assets was less than $0.1 million for the six months ended June 30, 2014, compared to a loss on disposal of fixed assets of $0.2 million for the six months ended June 30, 2013. Certain network switching equipment was disposed of during the first six months of 2013 which resulted in a loss, whereas we received proceeds on the sale of fixed assets during the first six months of 2014 which resulted in a gain. Loss (gain) on sale of Americas Data Assets. During the six months ended June 30, 2014, we recorded a $1.1 million loss on sale of Americas data assets as a result of the settlement with GTT, compared to a gain of $23.2 million for the six months ended June 30, 2013. Refer to Note 9 "Business Disposition" for more information regarding the sale of the global data business. Other Expense (Income). Other expense (income) was less than $0.1 million for each of the six months ended June 30, 2014 and 2013. Provision for Income Taxes. Provision for income taxes of $12.2 million for the six months ended June 30, 2014 reflected an increase of $7.9 million, compared to $4.3 million for the six months ended June 30, 2013. The effective tax rate for the six months ended June 30, 2014 and 2013 was 39.5% and 8.5%, respectively. The difference in the effective tax rate for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is due primarily to the tax impact of the sale of the data business in the prior year. Income from Continuing Operations. We had income from continuing operations before income taxes of $30.8 million for the six months ended June 30, 2014, compared with income from continuing operations before income taxes of $50.9 million for the six months ended June 30, 2013. After taxes, we had income from continuing operations of $18.6 million, or $0.57 per diluted share, for the six months ended June 30, 2014, compared to income from continuing operations of $46.6 million, or $1.44 per diluted share, for the six months ended June 30, 2013. 20 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources At June 30, 2014, we had $89.5 million in cash and cash equivalents and $0.3 million in restricted cash. In comparison, at December 31, 2013, we had $77.0 million in cash and cash equivalents and $0.1 million in restricted cash. Cash and cash equivalents include highly liquid money market mutual funds. The restricted cash balance is pledged as collateral for certain commercial letters of credit. Six Months Ended June 30, 2014 June 30, 2013 Cash flows provided by operating activities $ 14,914 $ 30,413 Cash flows (used for) provided by investing activities (5,454 ) 39,684 Cash flows provided by (used for) financing activities 3,071 (44,864 ) Cash flows from operating activities Net cash provided by operating activities was $14.9 million for the first six months of 2014, compared to $30.4 million for the same period last year. Operating cash inflows are largely attributable to payments from customers. Operating cash outflows are largely attributable to personnel-related expenditures and network maintenance costs. The decrease in operating cash flow reflected an increase in accounts receivable offset by a decline in net income resulting from the sale of the business in 2013 as well as a decrease in accrued liabilities. Cash flows from investing activities Net cash used for investing activities was $5.5 million for the first six months of 2014, compared to net cash provided by investing activities of $39.7 million for the same period last year. The change in cash flows from investing activities was primarily a result of the sale of our global data business in 2013. Additionally, we reduced the amount of equipment purchased to support the voice business. In 2014, capital expenditures are expected to be approximately $10.0 million to $12.0 million, mainly due to investment in and maintenance of our voice network. We plan to fund our capital expenditures with cash generated through our ongoing operations. Cash flows from financing activities Net cash provided by financing activities was $3.1 million for the first six months of 2014, compared to net cash used for financing activities of $44.9 million for the same period last year. The changes in cash flows used for financing activities primarily relate to changes in dividend payments as well as exercises of stock options and repurchases of common stock. During the second quarter of 2013, we paid regular dividends and special dividends of $1.25 and $0.06 per outstanding share of common stock, or $42.7 million in aggregate, compared to 2014 in which we paid only regular quarterly dividends totaling $4.9 million. During the first six months of 2013, we also repurchased approximately 0.3 million common shares at an average price of $5.80 per share, for a total cost of $1.6 million. We purchased the common shares using cash on hand. Lastly, we received $7.7 million of cash in the first six months of 2014 due to the exercise of stock options, compared to $0.2 million in the same period last year. We regularly review acquisitions and strategic opportunities, which may require additional debt or equity financing. We currently do not have any pending agreements with respect to any acquisitions or strategic opportunities which would require additional debt or equity financing. Dividends On February 27, 2014, we announced an increase in our regular quarterly dividend to $0.08 per outstanding share of our common stock. With respect to the regular quarterly dividend, the expected future use of cash on an annualized basis would be approximately $9.9 million based upon a full-year dividend rate of $0.30 per share and the June 30, 2014 outstanding common stock share balance of approximately 33.1 million. Investments As of June 30, 2014, we had $51.8 million in cash and cash equivalents invested in three money market mutual funds. As of December 31, 2013, we had $41.8 million in cash and cash equivalents invested in three money market mutual funds. 21 -------------------------------------------------------------------------------- Table of Contents Credit Facility On March 5, 2013, we entered into a $15.0 million revolving credit facility. The credit facility has a term of three years and an interest rate of LIBOR + 3.25%. We have no plans to draw on the facility at this time and remain debt-free. The facility serves to increase our financial flexibility and further strengthens our liquidity position. We are currently in compliance with all of the covenants of the credit facility agreement. Effect of Inflation Inflation generally affects us by increasing our cost of labor and equipment. We do not believe that inflation had any material effect on our results of operations for the three and six months ended June 30, 2014 and 2013. |