UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33778
INTELIQUENT, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
31-1786871 |
(State or other Jurisdiction of
Incorporation or Organization) |
|
(IRS Employer
Identification No.) |
550 West Adams Street
Suite 900
Chicago, IL 60661
(Address of principal executive offices, including zip code)
(312) 384-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
|
¨ |
|
Accelerated filer |
|
x |
|
|
|
|
Non-accelerated filer |
|
¨ (Do not check if a smaller reporting company) |
|
Smaller reporting company |
|
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 15, 2014, 33,115,097 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.
INTELIQUENT, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
INTELIQUENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
September 30, |
|
|
December 31, |
|
(In thousands, except per share amounts) |
2014 |
|
|
2013 |
|
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
99,376 |
|
|
$ |
77,004 |
|
Receivables — net of allowance of $2,238 and $900, respectively |
|
31,300 |
|
|
|
22,200 |
|
Deferred income taxes-current |
|
1,037 |
|
|
|
720 |
|
Prepaid expenses |
|
3,020 |
|
|
|
2,375 |
|
Other current assets |
|
1,591 |
|
|
|
1,977 |
|
Total current assets |
|
136,324 |
|
|
|
104,276 |
|
Property and equipment—net |
|
22,617 |
|
|
|
25,815 |
|
Restricted cash |
|
345 |
|
|
|
125 |
|
Deferred income taxes-noncurrent |
|
4,833 |
|
|
|
5,495 |
|
Other assets |
|
1,324 |
|
|
|
1,534 |
|
Total assets |
$ |
165,443 |
|
|
$ |
137,245 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
$ |
1,682 |
|
|
$ |
2,176 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
Taxes payable |
|
2,965 |
|
|
|
2,437 |
|
Circuit cost |
|
9,058 |
|
|
|
8,987 |
|
Rent |
|
2,046 |
|
|
|
2,071 |
|
Payroll and related items |
|
4,603 |
|
|
|
3,079 |
|
Other |
|
1,041 |
|
|
|
1,674 |
|
Total current liabilities |
|
21,395 |
|
|
|
20,424 |
|
Shareholders’ equity: |
|
|
|
|
|
|
|
Preferred stock—par value of $.001; 50,000 authorized shares; no shares issued and
outstanding at September 30, 2014 and December 31, 2013, |
|
— |
|
|
|
— |
|
Common stock—par value of $.001; 150,000 authorized shares; 33,118 shares and 32,215 shares
issued and outstanding at September 30, 2014 and December 31, 2013, respectively |
|
33 |
|
|
|
32 |
|
Less treasury stock, at cost; 3,351 shares at September 30, 2014 and December 31, 2013 |
|
(51,668 |
) |
|
|
(51,668 |
) |
Additional paid-in capital |
|
212,698 |
|
|
|
203,989 |
|
Accumulated deficit |
|
(17,015 |
) |
|
|
(35,532 |
) |
Total shareholders’ equity |
|
144,048 |
|
|
|
116,821 |
|
Total liabilities and shareholders' equity |
$ |
165,443 |
|
|
$ |
137,245 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INTELIQUENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30, |
|
|
September 30, |
|
(In thousands, except per share amounts) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Revenue |
$ |
54,045 |
|
|
$ |
50,396 |
|
|
$ |
165,143 |
|
|
$ |
163,133 |
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network and facilities expense (excluding depreciation and amortization) |
|
23,016 |
|
|
|
22,027 |
|
|
|
71,035 |
|
|
|
70,716 |
|
Operations |
|
7,432 |
|
|
|
7,182 |
|
|
|
21,941 |
|
|
|
22,488 |
|
Sales and marketing |
|
1,048 |
|
|
|
1,090 |
|
|
|
2,542 |
|
|
|
4,650 |
|
General and administrative |
|
3,645 |
|
|
|
6,071 |
|
|
|
12,699 |
|
|
|
15,105 |
|
Depreciation and amortization |
|
2,985 |
|
|
|
3,293 |
|
|
|
9,136 |
|
|
|
11,505 |
|
Loss (gain) on disposal of assets |
|
2 |
|
|
|
3 |
|
|
|
(29 |
) |
|
|
226 |
|
Loss (gain) on sale of Americas data assets |
|
— |
|
|
|
— |
|
|
|
1,081 |
|
|
|
(23,171 |
) |
Total operating expense |
|
38,128 |
|
|
|
39,666 |
|
|
|
118,405 |
|
|
|
101,519 |
|
Income from operations |
|
15,917 |
|
|
|
10,730 |
|
|
|
46,738 |
|
|
|
61,614 |
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income) |
|
18 |
|
|
|
(1 |
) |
|
|
37 |
|
|
|
(53 |
) |
Other expense (income) |
|
— |
|
|
|
4 |
|
|
|
(2 |
) |
|
|
5 |
|
Total other expense (income) |
|
18 |
|
|
|
3 |
|
|
|
35 |
|
|
|
(48 |
) |
Income from continuing operations before income taxes |
|
15,899 |
|
|
|
10,727 |
|
|
|
46,703 |
|
|
|
61,662 |
|
Provision for income taxes |
|
6,123 |
|
|
|
4,177 |
|
|
|
18,286 |
|
|
|
8,524 |
|
Income from continuing operations |
|
9,776 |
|
|
|
6,550 |
|
|
|
28,417 |
|
|
|
53,138 |
|
Loss from discontinued operations, net of income tax provision |
|
— |
|
|
|
68 |
|
|
|
— |
|
|
|
7,102 |
|
Loss (gain) on disposal of discontinued operations |
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
(783 |
) |
Net income |
$ |
9,776 |
|
|
$ |
6,471 |
|
|
$ |
28,417 |
|
|
$ |
46,819 |
|
Earnings per share - continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.30 |
|
|
$ |
0.20 |
|
|
$ |
0.87 |
|
|
$ |
1.64 |
|
Diluted |
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.86 |
|
|
$ |
1.63 |
|
Loss per share - discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.20 |
) |
Diluted |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.19 |
) |
Earnings per share - net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.30 |
|
|
$ |
0.20 |
|
|
$ |
0.87 |
|
|
$ |
1.45 |
|
Diluted |
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.86 |
|
|
$ |
1.44 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
33,115 |
|
|
|
32,262 |
|
|
|
32,743 |
|
|
|
32,344 |
|
Diluted |
|
33,343 |
|
|
|
32,557 |
|
|
|
33,033 |
|
|
|
32,548 |
|
Dividends paid per share: |
$ |
0.15 |
|
|
$ |
0.06 |
|
|
$ |
0.30 |
|
|
$ |
1.38 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
INTELIQUENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Net income |
$ |
9,776 |
|
|
$ |
6,471 |
|
|
$ |
28,417 |
|
|
$ |
46,819 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustments |
— |
|
|
— |
|
|
— |
|
|
|
4,904 |
|
Total other comprehensive income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,904 |
|
Comprehensive income |
$ |
9,776 |
|
|
$ |
6,471 |
|
|
$ |
28,417 |
|
|
$ |
51,723 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
INTELIQUENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended |
|
|
September 30, |
|
(In thousands) |
2014 |
|
|
2013 |
|
Operating |
|
|
|
|
|
|
|
Net income |
$ |
28,417 |
|
|
$ |
46,819 |
|
Adjustments to reconcile net income to net cash flows provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
9,136 |
|
|
|
12,747 |
|
Deferred income taxes |
|
345 |
|
|
|
(1,934 |
) |
(Gain) loss on disposal of fixed assets |
|
(29 |
) |
|
|
493 |
|
Loss (gain) on disposal of Americas data assets |
|
1,081 |
|
|
|
(23,171 |
) |
Gain on disposal of discontinued operations |
|
— |
|
|
|
(783 |
) |
Non-cash share-based compensation |
|
3,268 |
|
|
|
5,169 |
|
Gain on intercompany foreign exchange transactions |
|
— |
|
|
|
56 |
|
Excess tax (benefit) deficiency associated with share-based payments |
|
(896 |
) |
|
|
982 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Receivables |
|
(9,100 |
) |
|
|
(3,636 |
) |
Other current assets |
|
(1,340 |
) |
|
|
1,340 |
|
Other noncurrent assets |
|
210 |
|
|
|
(147 |
) |
Accounts payable |
|
(162 |
) |
|
|
(739 |
) |
Accrued liabilities |
|
(138 |
) |
|
|
3,552 |
|
Net cash provided by operating activities |
|
30,792 |
|
|
|
40,748 |
|
Investing |
|
|
|
|
|
|
|
Purchase of equipment |
|
(6,279 |
) |
|
|
(9,906 |
) |
Proceeds from sale of equipment |
|
41 |
|
|
|
28 |
|
Proceeds from disposition of discontinued operations, net of transaction costs |
|
— |
|
|
|
9,698 |
|
Proceeds from disposition of Americas data assets, net of transaction costs |
|
— |
|
|
|
37,092 |
|
(Increase) decrease in restricted cash |
|
(220 |
) |
|
|
837 |
|
Net cash (used for) provided by investing activities |
|
(6,458 |
) |
|
|
37,749 |
|
Financing |
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
7,728 |
|
|
|
279 |
|
Restricted shares withheld to cover employee taxes paid |
|
(686 |
) |
|
|
(508 |
) |
Dividends paid |
|
(9,900 |
) |
|
|
(44,145 |
) |
Payments made for repurchase of common stock |
|
— |
|
|
|
(1,565 |
) |
Excess tax benefit (deficiency) associated with share-based payments |
|
896 |
|
|
|
(982 |
) |
Net cash used for financing activities |
|
(1,962 |
) |
|
|
(46,921 |
) |
Effect of exchange rate changes on cash |
|
— |
|
|
|
6 |
|
Net increase in cash and cash equivalents |
|
22,372 |
|
|
|
31,582 |
|
Cash and cash equivalents — Beginning |
|
77,004 |
|
|
|
31,479 |
|
Cash and cash equivalents — End |
$ |
99,376 |
|
|
$ |
63,061 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid for taxes |
$ |
20,053 |
|
|
$ |
6,070 |
|
Supplemental disclosure of noncash flow items: |
|
|
|
|
|
|
|
Investing activity — Accrued purchases of equipment |
$ |
1,410 |
|
|
$ |
1,372 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
INTELIQUENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Organization — Inteliquent, Inc. (the Company) provides voice telecommunications services primarily on a wholesale basis. The Company offers these services using an all-IP network, which enables the Company to deliver global connectivity for a variety of media, including voice and, historically, data and video. The Company’s solutions enable carriers and other providers to deliver voice 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.
On April 30, 2013, the Company sold its global data business to Global Telecom & Technology, Inc. (GTT) for $54.5 million, subject to certain adjustments. The total consideration consisted of $52.5 million in cash, subject to net working capital adjustments, and $2.0 million of non-cash commercial IP Transit and point-to-point Ethernet data network services to be provided to the Company by GTT free-of-charge for a three-year period. The $2.0 million of non-cash commercial services was calculated based upon the discounted present value of the market cost of such services as of the date on which the commercial services agreement was signed with GTT. In addition, the Company recorded in its condensed consolidated statement of income, as part of its gain amount on the sale of its global data business, approximately $2.4 million for divestiture-related costs, including legal and advisory services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation — The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Interim Condensed Consolidated Financial Statements — The accompanying condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013, the condensed consolidated statements of income for the three and nine months ended September 30, 2014 and 2013, the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2014 and 2013, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013 are unaudited. The condensed consolidated balance sheet data as of December 31, 2013 was derived from the audited consolidated financial statements which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission applicable to interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 have been prepared on the same basis as the audited consolidated statements and reflect all adjustments, which are normal recurring adjustments, necessary for the fair presentation of its statement of financial position, results of operations and cash flows. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any future periods.
Changes in Presentation — On April 30, 2013, the Company sold its global data business to GTT for $54.5 million, subject to certain adjustments. The Company determined that the appropriate level in which to assess discontinued operations was at its reporting unit level. As such, the Company’s Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) reporting units of the global data business consist of results of operations and cash flows that can be clearly distinguished from the rest of the entity and are therefore reflected in the condensed consolidated statements of income and in the condensed consolidated balance sheets as discontinued operations. Historical information related to these reporting units have been reclassified accordingly. The Americas reporting unit of the global data business does not consist of results of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. This reporting unit does not qualify for discontinued operations accounting treatment. Therefore, the Americas reporting unit of the global data business is reported in continuing operations in the condensed consolidated statements of income and in the condensed consolidated balance sheets. Refer to Note 9, “Business Disposition,” for more information regarding the sale of the global data business.
7
Cash and Cash Equivalents — The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The carrying values of the Company’s cash and cash equivalents approximate fair value. At September 30, 2014, the Company had $37.5 million of cash in banks and $61.8 million in three money market mutual funds. At December 31, 2013, the Company had $35.2 million of cash in banks and $41.8 million in three money market mutual funds.
Fair Value Measurements — Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used. The fair value of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:
Level 1— Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2— Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3— Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
Property and Equipment — Property and equipment is recorded at cost. These values are depreciated over the estimated useful lives of the individual assets using the straight-line method. Any gains and losses from the disposition of property and equipment are included in operations as incurred. The estimated useful life for network equipment and tools and test equipment is five years. The estimated useful life for computer equipment, computer software and furniture and fixtures is three years. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of five years or the life of the lease, whichever is less. The impairment of long-lived assets is periodically evaluated when events or changes in circumstances indicate that a potential impairment has occurred.
Revenue Recognition — The Company generates revenue from sales of its voice services. The Company maintains tariffs and executed service agreements with each of its customers in which specific fees and rates are determined. Voice revenue is recorded each month on an accrual basis based upon minutes of traffic switched by the Company’s network by each customer, which is referred to as minutes of use. The rates charged per minute are determined by contracts between the Company and its customers, or by filed and effective tariffs.
Prior to the sale of the Company’s global data business in April 2013, IP Transit and Ethernet services revenues related to the Company’s Americas reporting unit for the first four months of 2013 were recorded each month on an accrual basis based upon bandwidth used by each customer. The rates charged were the total of a monthly fee for bandwidth (the Committed Traffic Rate) plus additional charges for the sustained peak bandwidth used monthly in excess of the Committed Traffic Rate.
Earnings (Loss) per Share — Basic earnings (loss) per share is computed based on the weighted average number of common shares and participating securities outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of common shares and participating securities outstanding adjusted by the number of additional shares that would have been outstanding during the period had the potentially dilutive securities been issued. Because the Company has capital that is made up of both common shares and participating securities (non-vested shares), it is required to utilize the two-class method to calculate basic and diluted earnings (loss) per share. During the nine months periods ended September 30, 2013, the Company distributed more cash, in the form of a dividend, than its current earnings for these periods, which resulted in negative undistributed earnings.
8
The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings (loss) per share of common stock based upon the two-class method:
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30, |
|
|
September 30, |
|
(In thousands, except per share amounts) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
$ |
9,776 |
|
|
$ |
6,550 |
|
|
$ |
28,417 |
|
|
$ |
53,138 |
|
Loss from discontinued operations, net of income tax provision |
|
— |
|
|
|
68 |
|
|
|
— |
|
|
|
7,102 |
|
Loss (gain) on disposal of discontinued operations |
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
(783 |
) |
Net income |
$ |
9,776 |
|
|
$ |
6,471 |
|
|
$ |
28,417 |
|
|
$ |
46,819 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
33,115 |
|
|
|
32,262 |
|
|
|
32,743 |
|
|
|
32,344 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
228 |
|
|
|
295 |
|
|
|
290 |
|
|
|
204 |
|
Denominator for diluted earnings per share |
|
33,343 |
|
|
|
32,557 |
|
|
|
33,033 |
|
|
|
32,548 |
|
Earnings per share - continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - as reported |
$ |
0.30 |
|
|
$ |
0.20 |
|
|
$ |
0.87 |
|
|
$ |
1.64 |
|
Diluted - as reported |
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.86 |
|
|
$ |
1.63 |
|
Loss per share - discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - as reported |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.20 |
) |
Diluted - as reported |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.19 |
) |
Earnings per share - net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - as reported |
$ |
0.30 |
|
|
$ |
0.20 |
|
|
$ |
0.87 |
|
|
$ |
1.45 |
|
Diluted - as reported |
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.86 |
|
|
$ |
1.44 |
|
Certain awards were not included in the computation of diluted earnings per share because the effect would have been antidilutive. Outstanding share-based awards of $1.5 million for both the three and nine months ended September 30, 2014 were considered antidilutive. Outstanding share-based awards of $2.4 million for both the three and nine months ended September 30, 2013 were considered antidilutive.
The undistributed earnings allocable to participating securities were $0.1 million and $0.3 million for the three months and nine months ended September 30, 2014, respectively. The undistributed earnings allocable to participating securities were $0.1 million and less than $0.1 million for the three months and nine months ended September 30, 2013, respectively.
Accounting for Stock-Based Compensation — The fair value of stock options is determined using the Black-Scholes valuation model. This model takes into account the exercise price of the stock option, the fair value of the common stock underlying the stock option as measured on the date of grant and an estimation of the volatility of the common stock underlying the stock option. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight line method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Actual results, and future changes in estimates, may differ from the Company’s current estimates.
The amount of non-cash share-based expense recorded in the three months ended September 30, 2014 and 2013 was $1.2 million and $1.3 million, respectively. The amount of non-cash share-based expense recorded in the nine months ended September 30, 2014 and 2013 was $3.3 million and $5.2 million, respectively.
Compensation expense for non-vested shares is measured based upon the quoted closing market price for the stock on the date of grant. The compensation cost is recognized on a straight-line basis over the vesting period. Refer to Note 5, “Stock Options and Non-Vested Shares.”
Stock Repurchase — On August 7, 2012, the Company announced that its Board of Directors authorized the repurchase of up to $50.0 million of its outstanding common stock as part of a stock repurchase program. During the nine months ended September 30, 2013, the Company repurchased approximately 0.3 million shares for $1.6 million under the program at an average cost of $5.80 per share. The Company funded the purchase of the common shares using cash on hand. The stock repurchase was accounted for under the cost method, whereby the entire cost of the repurchased shares was recorded to treasury stock.
9
Foreign Currency Translation — As a result of the sale of the global data business, the Company now operates substantially within the United States and is no longer exposed to any material foreign currency risk.
Recent Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company has assessed the impact of this standard and does not believe that it will have a material impact on the Company’s financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to assess, at each annual and interim reporting period, the entity's ability to continue as a going concern within one year after the date that the financial statements are issued and provide related disclosures. The ASU is effective for the year ended December 31, 2016, with early adoption permitted. The Company has assessed the impact of this standard and does not believe that it will have a material impact on the Company’s consolidated financial statements or disclosures.
3. LEGAL PROCEEDINGS
From time to time, the Company is a party to legal proceedings arising in the normal course of its business. The Company does not believe that it is a party to any pending legal action that could reasonably be expected to have a material effect on its business or operating results, financial position or cash flows.
4. INCOME TAXES
Income taxes were computed using an effective tax rate, which is subject to ongoing review and evaluation by the Company. The Company’s estimated effective income tax rate was 38.5% and 39.2% for the three and nine months ended September 30, 2014, compared to 38.9% and 13.8% for the same respective periods last year.
The difference in the effective tax rate for the three and nine months ended September 30, 2014 as compared to the three and nine months ended September 30, 2013 is due primarily to the tax impact of the sale of the data business in the prior year.
The Company has recorded a valuation allowance against the capital loss created by the sale of its global data business and the Illinois EDGE Credit. The Company believes it is more likely than not that these assets will not be fully realized in the foreseeable future. The realization of deferred tax assets is dependent upon whether the Company can generate future taxable income in the appropriate character and jurisdiction to utilize the assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods.
5. STOCK OPTIONS AND NON-VESTED SHARES
In 2003, the Company established the 2003 Stock Option and Stock Incentive Plan (2003 Plan), which provided for the issuance of up to 4.7 million options and non-vested shares to eligible employees and officers of the Company. In 2007, the Company adopted the 2007 Equity Incentive Plan (2007 Plan) and ceased awarding equity grants under the 2003 Plan. As of September 30, 2014, the Company had granted a total of 2.1 million options and 0.5 million non-vested shares that remained outstanding under the 2007 Plan. Awards for 1.6 million shares, representing approximately 5.0% of the Company’s outstanding common stock as of September 30, 2014, remained available for additional grants under the 2007 Plan.
The Company records non-cash share-based compensation expense in connection with any grant of options and non-vested shares to its employees. The Company calculates the expense associated with its stock options and non-vested shares by determining the fair value of the options and non-vested shares.
10
Options
All options granted under the 2003 Plan and the 2007 Plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. During the three months ended September 30, 2014, the Company did not grant any options. During the nine months ended September 30, 2014, the Company granted less than 0.1 million options at a weighted average exercise price of $13.86. During the three months ended September 30, 2013, the Company did not grant any options. During the nine months ended September 30, 2013, the Company granted 0.7 million options at a weighted average exercise price of $3.40.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes the assumptions used for estimating the fair value of options for the nine months ended September 30, 2014 and September 30, 2013:
|
September 30, |
|
|
September 30, |
|
|
2014 |
|
|
2013 |
|
Expected life |
7.2 years |
|
|
7.3 years |
|
Risk-free interest rate |
|
2.1% |
|
|
|
1.3% |
|
Expected dividends |
|
2.1% |
|
|
|
0.0% |
|
Volatility |
|
60.0% |
|
|
|
45.0% |
|
The weighted average fair value of options granted, as determined by using the Black-Scholes valuation model, during the nine months ended September 30, 2014 and 2013 was $6.90 and $1.64, respectively. The total grant date fair value of options that vested during the nine months ended September 30, 2014 and 2013 was approximately $0.9 million and $2.2 million, respectively. The total intrinsic value (market value of stock option less option exercise price) of stock options exercised was $3.0 million and $0.7 million during the nine months ended September 30, 2014 and 2013, respectively.
The following table summarizes activity under the Company’s stock option plan for the nine months ended September 30, 2014:
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Intrinsic |
|
|
Average |
|
|
Shares |
|
|
Exercise |
|
|
Value |
|
|
Remaining |
|
|
(000) |
|
|
Price |
|
|
($000) |
|
|
Term (yrs) |
|
Options outstanding — January 1, 2014 |
|
2,991 |
|
|
$ |
12.91 |
|
|
|
|
|
|
|
|
|
Granted |
|
40 |
|
|
|
13.86 |
|
|
|
|
|
|
|
|
|
Exercised |
|
(739 |
) |
|
|
10.51 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
(221 |
) |
|
|
20.08 |
|
|
|
|
|
|
|
|
|
Options outstanding — September 30, 2014 |
|
2,071 |
|
|
$ |
13.03 |
|
|
$ |
5,095 |
|
|
|
5.21 |
|
Vested or expected to vest — September 30, 2014 |
|
2,058 |
|
|
$ |
13.08 |
|
|
$ |
4,990 |
|
|
|
5.19 |
|
Exercisable — September 30, 2014 |
|
1,547 |
|
|
$ |
15.98 |
|
|
$ |
783 |
|
|
|
4.16 |
|
The unrecognized compensation cost associated with options outstanding at September 30, 2014 and December 31, 2013 was $1.2 million and $1.7 million, respectively. The weighted average remaining term that the compensation will be recorded is 2.1 years and 2.1 years as of September 30, 2014 and December 31, 2013, respectively.
Non-vested Shares
During the three and nine months ended September 30, 2014, the Company granted less than 0.1 million and 0.2 million of non-vested shares, respectively, to members of the Company’s executive management team as well as various employees within the Company. During the three and nine months ended September 30, 2013, the Company granted less than 0.1 million and 0.3 million non-vested shares, respectively, to members of the Company’s executive management team as well as various employees within the Company. The non-vested shares were issued as part of the 2007 Plan. The shares typically vest over a four-year period. The fair value of the non-vested shares is determined using the Company’s closing stock price on the grant date. Compensation cost, measured using the grant date fair value, is recognized over the requisite service period on a straight-line basis.
11
A summary of the Company’s non-vested share activity and related information for the nine months ended September 30, 2014 is as follows:
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
Average |
|
|
Intrinsic |
|
|
Shares |
|
|
Grant Date |
|
|
Value |
|
|
(000) |
|
|
Fair Value |
|
|
($000) |
|
Non-vested shares outstanding — January 1, 2014 |
|
477 |
|
|
$ |
9.66 |
|
|
|
|
|
Granted |
|
216 |
|
|
|
12.82 |
|
|
|
|
|
Vested |
|
(234 |
) |
|
|
10.12 |
|
|
|
|
|
Cancelled |
|
— |
|
|
|
— |
|
|
|
|
|
Non-vested shares outstanding — September 30, 2014 |
|
459 |
|
|
$ |
10.91 |
|
|
$ |
5,715 |
|
Non-vested shares vested or expected to vest —September 30, 2014 |
|
429 |
|
|
$ |
10.91 |
|
|
$ |
5,341 |
|
The aggregate intrinsic value represents the total pre-tax intrinsic value based on the Company’s closing stock price of $12.45 on September 30, 2014. The amount changes based upon the fair market value of the Company’s common stock.
The unrecognized compensation cost associated with non-vested shares was $3.9 million at both September 30, 2014 and December 31, 2013. The weighted average remaining term that the compensation will be recorded was 2.0 years and 1.7 years as of September 30, 2014 and December 31, 2013, respectively.
6. FAIR VALUE MEASUREMENT
The Company’s money market funds are recognized and disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about current market conditions. The prescribed fair value hierarchy and related valuation methodologies are as follows:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.
The fair value of the Company’s financial asset by level in the fair value hierarchy as of September 30, 2014 and December 31, 2013 was as follows:
September 30, 2014 |
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds |
$ |
61,831 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
61,831 |
|
December 31, 2013 |
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds |
$ |
41,827 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
41,827 |
|
Valuation methodology
Level 1—Quoted market prices in active markets are available for investments in money market funds. As such, these investments are classified within Level 1.
12
7. CREDIT FACILITY
On March 5, 2013, the Company 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%. The Company may use any borrowings under the revolving credit facility for general corporate purposes. No obligations were outstanding under the revolving credit facility at any time during the year ended December 31, 2013 or during the nine months ended September 30, 2014. As of September 30, 2014, the Company is currently in compliance with all of the covenants of the credit facility agreement.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
There were no balances of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014. Changes in the balance of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2013 are summarized in the following table:
|
September 30, 2013 |
|
|
Three Months |
|
|
Nine Months |
|
(In thousands) |
Ended |
|
|
Ended |
|
Beginning balance |
$ |
— |
|
|
$ |
(4,904 |
) |
Other comprehensive loss before reclassifications |
|
— |
|
|
|
(29 |
) |
Less: Amounts reclassified from AOCI |
|
|
|
|
|
|
|
Foreign currency adjustments |
|
— |
|
|
|
(4,933 |
) |
Net other comprehensive income |
|
— |
|
|
|
4,904 |
|
Ending balance |
$ |
— |
|
|
$ |
— |
|
9. BUSINESS DISPOSITION
On April 30, 2013, the Company sold its global data business to GTT and, as a result, no longer provides data services. The transaction consisted of the Americas, EMEA and APAC reporting units’ data assets and liabilities. The Americas reporting unit of the global data business did not qualify for discontinued operations because it did not constitute a separate component of the Company. The data activity associated with the Americas reporting unit is reported in continuing operations in the consolidated statements of income and consolidated balance sheets. The data activity associated with the EMEA and APAC reporting units is reflected in the consolidated statements of income and in the consolidated balance sheets as discontinued operations. Historical information related to these reporting units has been reclassified accordingly.
The Company sold its global data business for $54.5 million which consisted of $52.5 million in cash, subject to net working capital adjustments, and $2.0 million of non-cash commercial services to be provided by GTT to the Company over a three-year period. After an initial net working capital reduction of $3.3 million based on the balance sheet information as of March 31, 2013, the Company received $51.2 million of cash and non-cash services from GTT. Transaction costs and the additional net working capital adjustment, resulting from balance sheet changes during the month of April following the initial calculation, amounted to approximately $2.4 million and $1.0 million, respectively, reducing net cash and non-cash consideration to approximately $47.8 million. Of this amount, $43.5 million was allocated to the sale of the Americas reporting unit of the global data business and the remaining amount of $4.3 million was allocated to the EMEA and APAC reporting units of the global data business. The Company based its allocation of the $47.8 million amount based upon the relative percentage of the fair value of the Americas reporting unit and the EMEA and APAC reporting units, to the total fair value of these three reporting units combined.
The Company and GTT disagreed over the amount of certain post-closing purchase price adjustment provisions in the agreement governing the sale of the Company’s global data business to GTT. GTT claimed that the Company owed GTT $3.8 million. The Company, however, believed that GTT owed the Company $1.1 million. During the three months ended March 31, 2014, the parties tentatively agreed to resolve their differences with respect to the post-closing adjustments to the purchase price in a manner that would require neither party to make a payment to the other and would waive all other claims. As a result of the tentative agreement, the Company reduced other assets by $1.1 million and charged $1.1 million to continuing operations within loss on sale of Americas data assets. During the three months ended September 30, 2014, the agreement was finalized. There were no accounting impacts as a result of the final agreement.
13
Disposition Not Qualifying for Discontinued Operations
The Americas reporting unit assets, which were sold as part of the sale of the global data business, had an approximate net book value of $14.7 million at the time of the sale. The purchase price allocation of $37.9 million for this portion of the global data business, reflected as of June 30, 2013, less its net book basis of assets and liabilities yielded a gain from sale of $23.2 million. As a result of a final true-up to the purchase price allocation recorded in the three months ended December 31, 2013, the gain from sale of $23.2 million increased by $5.6 million, bringing the cumulative gain to $28.8 million. As a result, the gain on sale of discontinued operations at June 30, 2013 of $0.8 million decreased $5.6 million to a loss on sale of discontinued operations of $4.8 million at December 31, 2013.
Discontinued Operations
The net book basis of the assets and liabilities for the EMEA and APAC reporting units of the global data business at the date of sale was approximately $10.1 million. In addition, the Company was entitled to approximately $1.0 million of cash that remained with the EMEA and APAC reporting units of the global data business at the time of the transaction. The purchase price allocation of $4.3 million for this portion of the global data business plus the additional $1.0 million of cash yielded a loss on the sale from discontinued operations of $4.8 million.
The following table displays summarized activity in the Company’s condensed consolidated statements of income for discontinued operations during the three and nine months ended September 30, 2013.
|
September 30, 2013 |
|
|
Three Months |
|
|
Nine Months |
|
(In thousands) |
Ended |
|
|
Ended |
|
Revenue |
$ |
— |
|
|
$ |
13,493 |
|
Operating loss |
|
68 |
|
|
|
6,376 |
|
Loss before income taxes |
|
68 |
|
|
|
6,875 |
|
Provision for income tax |
|
— |
|
|
|
227 |
|
Loss from discontinued operations |
|
68 |
|
|
|
7,102 |
|
Loss (gain) on disposal of discontinued operations |
$ |
11 |
|
|
$ |
(783 |
) |
10. SEGMENT AND GEOGRAPHIC INFORMATION
Segment reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision maker is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis. The Company operates in one industry segment which is to provide voice interconnection services via the Company’s international telecommunications network to fulfill customer agreements. Therefore, the Company has concluded that it has one operating segment.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 “FCC”); 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.
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.
15
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 FCC 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. For a further discussion on the FCC’s order, see “Regulatory Treatment of Certain Intercarrier Compensation” below.
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 September 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.
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.
Regulatory Treatment of Certain Intercarrier Compensation. We receive intercarrier compensation from long distance carriers when we receive terminating access traffic from those carriers. The intercarrier compensation we receive is based on either agreements we have with the respective carriers or rates set forth in our tariffs.
Along with addressing other matters, on November 18, 2011, the FCC issued an order establishing an intercarrier compensation framework for terminating switched access traffic. Under the framework, when an end user subscribes to a local carrier’s services, most intercarrier compensation that the local carrier receives from long distance carriers for terminating access traffic will be reduced to zero over a transition period which began on July 1, 2012 and culminates on July 1, 2018.
Where a carrier only provides the terminating tandem access service, or intermediate interconnection between the long distance carrier and the terminating local carrier, the tandem provider’s rates are not reduced to zero under the FCC’s November 18, 2011 order. However, under the FCC’s order, the intercarrier compensation that the tandem carrier receives for terminating this access traffic was capped at the interstate rate in effect as of July 1, 2013.
We provide terminating access services in both of the manners described above. We earn the majority of our terminating access service revenue from providing intermediate terminating tandem access service, as opposed to providing terminating service for traffic bound for end users that we serve. Several states, industry groups, and other telecommunications carriers have filed petitions in federal court for reconsideration of the framework with the FCC, although the outcome of those petitions is unpredictable.
16
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 March 2026. Additionally, we pay the cost of the utilities for all of our POP locations.
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, software licenses, property taxes, property insurance, professional fees 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 as well as fees for professional services and bad debt expense. 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
17
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.
Loss (gain) 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 three months ended March 31, 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.
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 nine months of 2014.
Results of Operations
The following table sets forth our results of continuing operations for the three and nine months ended September 30, 2014 and 2013:
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30, |
|
|
September 30, |
|
(Dollars in thousands) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Revenue |
$ |
54,045 |
|
|
$ |
50,396 |
|
|
$ |
165,143 |
|
|
$ |
163,133 |
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network and facilities expense (excluding depreciation and amortization) |
|
23,016 |
|
|
|
22,027 |
|
|
|
71,035 |
|
|
|
70,716 |
|
Operations |
|
7,432 |
|
|
|
7,182 |
|
|
|
21,941 |
|
|
|
22,488 |
|
Sales and marketing |
|
1,048 |
|
|
|
1,090 |
|
|
|
2,542 |
|
|
|
4,650 |
|
General and administrative |
|
3,645 |
|
|
|
6,071 |
|
|
|
12,699 |
|
|
|
15,105 |
|
Depreciation and amortization |
|
2,985 |
|
|
|
3,293 |
|
|
|
9,136 |
|
|
|
11,505 |
|
Loss (gain) on disposal of assets |
|
2 |
|
|
|
3 |
|
|
|
(29 |
) |
|
|
226 |
|
Loss (gain) on sale of Americas data assets |
|
— |
|
|
|
— |
|
|
|
1,081 |
|
|
|
(23,171 |
) |
Total operating expense |
|
38,128 |
|
|
|
39,666 |
|
|
|
118,405 |
|
|
|
101,519 |
|
Income from operations |
|
15,917 |
|
|
|
10,730 |
|
|
|
46,738 |
|
|
|
61,614 |
|
Total other expense (income) |
|
18 |
|
|
|
3 |
|
|
|
35 |
|
|
|
(48 |
) |
Income from continuing operations before income taxes |
|
15,899 |
|
|
|
10,727 |
|
|
|
46,703 |
|
|
|
61,662 |
|
Provision for income taxes |
|
6,123 |
|
|
|
4,177 |
|
|
|
18,286 |
|
|
|
8,524 |
|
Income from continuing operations |
|
9,776 |
|
|
|
6,550 |
|
|
|
28,417 |
|
|
|
53,138 |
|
Loss from discontinued operations, net of income tax provision |
|
— |
|
|
|
68 |
|
|
|
— |
|
|
|
7,102 |
|
Loss (gain) on disposal of discontinued operations |
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
(783 |
) |
Net income |
$ |
9,776 |
|
|
$ |
6,471 |
|
|
$ |
28,417 |
|
|
$ |
46,819 |
|
18
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
Revenue. Revenue increased to $54.0 million in the three months ended September 30, 2014 from $50.4 million in the three months ended September 30, 2013, representing an increase of 7.1%.
The increase in voice revenue is primarily due to an increase in minutes of use to 34.6 billion minutes in the three months ended September 30, 2014, compared to 30.4 billion minutes in the three months ended September 30, 2013, an increase of 13.8%. Offsetting the increase in minutes, the average rate per minute decreased to $0.00156 for the three months ended September 30, 2014 from $0.00165 for the three months ended September 30, 2013, a decrease of 5.5%.
Operating Expenses. Operating expenses for the three months ended September 30, 2014 of $38.1 million decreased $1.6 million, or 4.0%, from $39.7 million for the three months ended September 30, 2013. The components of operating expenses are discussed further below.
Network and Facilities Expenses. Network and facilities expenses increased to $23.0 million in the three months ended September 30, 2014, or 42.6% of revenue, from $22.0 million in the three months ended September 30, 2013, or 43.7% of revenue. The $1.0 million increase was primarily due to an increase in minute volumes, partially offset by savings from network optimization.
Operations Expenses. Operations expenses increased to $7.4 million in the three months ended September 30, 2014, or 13.7% of revenue, from $7.2 million in the three months ended September 30, 2013, or 14.3% of revenue. The increase of $0.2 million in our operations expenses for the three months ended September 30, 2014 primarily resulted from a non-recurring $0.4 million insurance settlement benefit received in the three months ended September 30, 2013 partially offset by decreases in payroll and other benefits expense in the three months ended September 30, 2014.
Sales and Marketing Expense. Sales and marketing expense decreased to $1.0 million in the three months ended September 30, 2014, or 1.9% of revenue, compared to $1.1 million in the three months ended September 30, 2013, or 2.2% of revenue. Payroll and other benefits expense decreased approximately $0.4 million, which was almost equally offset by a $0.3 million increase in marketing expenses.
General and Administrative Expense. General and administrative expense decreased to $3.6 million in the three months ended September 30, 2014, or 6.7% of revenue, compared with $6.1 million in the three months ended September 30, 2013, or 12.0% of revenue. The decrease of $2.5 million in general and administrative expense for the three months ended September 30, 2014 primarily resulted from a $2.8 million decrease in professional fees, partially offset by a $0.4 million benefit received in the three months ended September 30, 2013 from a vendor settlement. The decrease in professional fees was primarily due to special work pertaining to the internal investigation in 2013.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $3.0 million in the three months ended September 30, 2014, or 5.6% of revenue, compared to $3.3 million in the three months ended September 30, 2013, or 6.5% of revenue. The decrease of $0.3 million in our depreciation and amortization expense resulted from a lower depreciable base of our assets due to less capital expenditures.
Loss (gain) on Disposal of Fixed Assets. Loss on disposal of fixed assets was less than $0.1 million for each of the three months ended September 30, 2014 and 2013.
Other Expense (Income). Other expense (income) was less than $0.1 million for each of the three months ended September 30, 2014 and 2013.
Provision for Income Taxes. Provision for income taxes of $6.1 million for the three months ended September 30, 2014 reflected an increase of $1.9 million, compared to $4.2 million for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 and 2013 was 38.5% and 38.9%, respectively.
Income from Continuing Operations. We had income from continuing operations before income taxes of $15.9 million for the three months ended September 30, 2014, compared with income from continuing operations before income taxes of $10.7 million for the three months ended September 30, 2013. After taxes, we had income from continuing operations of $9.8 million, or $0.29 per diluted share, for the three months ended September 30, 2014, compared to income from continuing operations of $6.6 million, or $0.20 per diluted share, for the three months ended September 30, 2013.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 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 nine months ended September 30, 2013. The results of
19
operations for the nine months ended September 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 $165.1 million in the nine months ended September 30, 2014 from $163.1 million in the nine months ended September 30, 2013, representing an increase of 1.2%. 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 $14.3 million, representing an increase of 9.5%.
The increase in voice revenue is primarily due to an increase in minutes of use to 101.7 billion minutes in the nine months ended September 30, 2014, compared to 90.5 billion minutes in the nine months ended September 30, 2013, an increase of 12.4%. Slightly offsetting the increase in minutes, the average rate per minute decreased to $0.00162 for the nine months ended September 30, 2014 from $0.00166 for the nine months ended September 30, 2013, a decrease of 2.4%.
Operating Expenses. Operating expenses for the nine months ended September 30, 2014 of $118.4 million increased $16.9 million, or 16.7%, from $101.5 million for the nine months ended September 30, 2013. The components of operating expenses are discussed further below.
Network and Facilities Expenses. Network and facilities expenses increased to $71.0 million in the nine months ended September 30, 2014, or 43.0% of revenue, from $70.7 million in the nine months ended September 30, 2013, or 43.3% 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 $3.7 million, which was primarily due to an increase in minute volumes, partially offset by savings from network optimization.
Operations Expenses. Operations expenses decreased to $21.9 million in the nine months ended September 30, 2014, or 13.3% of revenue, from $22.5 million in the nine months ended September 30, 2013, or 13.8% of revenue. The decrease of $0.6 million in our operations expenses for the nine months ended September 30, 2014 primarily resulted from a decrease in payroll and other benefits expenses.
Sales and Marketing Expense. Sales and marketing expense decreased to $2.5 million in the nine months ended September 30, 2014, or 1.5% of revenue, compared to $4.7 million in the nine months ended September 30, 2013, or 2.9% 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 $0.8 million, which was primarily due to lower payroll and other benefits expenses.
General and Administrative Expense. General and administrative expense decreased to $12.7 million in the nine months ended September 30, 2014, or 7.7% of revenue, compared with $15.1 million in the nine months ended September 30, 2013, or 9.3% of revenue. General and administrative expenses for the nine months ended September 30, 2013 included $2.4 million associated with the Company’s internal investigation. Additionally, in 2014, there was a $1.0 million increase in bad debt expense related to reserves established for various customers’ doubtful accounts receivable, which was almost fully offset by a $0.9 million decrease in non-cash compensation expense.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $9.1 million in the nine months ended September 30, 2014, or 5.5% of revenue, compared to $11.5 million in the nine months ended September 30, 2013, or 7.1% of revenue. The decrease of $2.4 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.
Loss (gain) on Disposal of Fixed Assets. Gain on disposal of fixed assets was less than $0.1 million for the nine months ended September 30, 2014, compared to a loss on disposal of fixed assets of $0.2 million for the nine months ended September 30, 2013. Certain network switching equipment was disposed of during the first nine months of 2013 which resulted in a loss, whereas we received proceeds on the sale of fixed assets during the first nine months of 2014 which resulted in a gain.
Loss (gain) on sale of Americas Data Assets. During the nine months ended September 30, 2014, we recorded a $1.1 million loss on sale of Americas data assets as a result of our settlement with GTT, compared to a gain of $23.2 million for the nine months ended September 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 nine months ended September 30, 2014 and 2013.
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Provision for Income Taxes. Provision for income taxes of $18.3 million for the nine months ended September 30, 2014 reflected an increase of $9.8 million, compared to $8.5 million for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014 and 2013 was 39.2% and 13.8%, respectively. The difference in the effective tax rate for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 is due primarily to the tax impact of the sale of the global data business in 2013.
Income from Continuing Operations. We had income from continuing operations before income taxes of $46.7 million for the nine months ended September 30, 2014, compared with income from continuing operations before income taxes of $61.7 million for the nine months ended September 30, 2013. After taxes, we had income from continuing operations of $28.4 million, or $0.86 per diluted share, for the nine months ended September 30, 2014, compared to income from continuing operations of $53.1 million, or $1.63 per diluted share, for the nine months ended September 30, 2013.
Liquidity and Capital Resources
At September 30, 2014, we had $99.4 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.
|
Nine Months Ended |
|
|
September 30, |
|
|
September 30, |
|
|
2014 |
|
|
2013 |
|
Cash flows provided by operating activities |
$ |
30,792 |
|
|
$ |
40,748 |
|
Cash flows (used for) provided by investing activities |
|
(6,458 |
) |
|
|
37,749 |
|
Cash flows used for financing activities |
|
(1,962 |
) |
|
|
(46,921 |
) |
Cash flows from operating activities
Net cash provided by operating activities was $30.8 million for the first nine months of 2014, compared to $40.7 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 is primarily due to increase in accounts receivable.
Cash flows from investing activities
Net cash used for investing activities was $6.5 million for the first nine months of 2014, compared to net cash provided by investing activities of $37.7 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 used for financing activities was $2.0 million for the first nine months of 2014, compared to net cash used for financing activities of $46.9 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 first nine months of 2013, we paid two regular dividends and one special dividend of $0.06 and $1.25 per outstanding share of common stock, respectively, or $44.7 million in aggregate, compared to 2014 in which we paid three regular quarterly dividends totaling $9.9 million. There were $0.6 million of forfeitures of non-vested shares that were recognized as compensation expense during the first nine months of 2013, compared to less than $0.1 million during the first nine months of 2014. During the first nine 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 nine months of 2014 due to the exercise of stock options, compared to $0.3 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.
21
Dividends
On February 27, 2014, we announced an increase in our regular quarterly dividend to $0.075 per outstanding share of our common stock. On August 13, 2014, we announced a further increase to our regular quarterly dividend to $0.15 per outstanding share of our common stock. Assuming our board of directors does not make any change to the current regular quarterly dividend, the expected future use of cash on an annualized basis using the current full-year dividend rate of $0.60 per outstanding share and an outstanding common stock share balance of approximately 33.1 million is $19.9 million.
Cash and Cash Equivalents
As of September 30, 2014, we had $61.8 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.
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 nine months ended September 30, 2014 and 2013.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
Interest rate exposure
We had cash, cash equivalents and restricted cash totaling $99.7 million at September 30, 2014. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for speculative purposes.
Based upon our overall interest rate exposure at September 30, 2014, we do not believe that a hypothetical 10% change in interest rates over a one year period would have a material impact on our earnings, fair values or cash flows from interest rate risk sensitive instruments.
Foreign Currency
As a result of the sale of the global data business, the Company now operates substantially within the United States and is no longer exposed to any material foreign currency risk.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Inteliquent, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports, is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to Inteliquent’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2014 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a party to legal proceedings arising in the normal course of our business. We do not believe that we are a party to any pending legal action that could reasonably be expected to have a material effect on our business or operating results, financial position or cash flows.
Item 1A. Risk Factors
See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. As of September 30, 2014, there had been no material change in this information.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
None
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
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Exhibit 31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Exhibit 32.1 |
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS |
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XBRL Instance Document. |
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101.SCH |
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XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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INTELIQUENT, INC. |
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Date: October 30, 2014 |
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By: |
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/S/ G. EDWARD EVANS |
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G. Edward Evans, Chief Executive Officer (Principal Executive Officer) |
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Date: October 30, 2014 |
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By: |
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/S/ KURT J. ABKEMEIER |
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Kurt J. Abkemeier, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
24
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, G. Edward Evans, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Inteliquent, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 30, 2014 |
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/S/ G. EDWARD EVANS |
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G. Edward Evans |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kurt J. Abkemeier, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Inteliquent, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 30, 2014 |
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/S/ KURT J. ABKEMEIER |
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Kurt J. Abkemeier |
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Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report on Form 10-Q of Inteliquent, Inc. (the “Company”) for the quarter ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned Chief Executive Officer and Chief Financial Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/S/ G. EDWARD EVANS |
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/S/ KURT J. ABKEMEIER |
Chief Executive Officer |
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Executive Vice President and Chief Financial Officer |
Date: October 30, 2014 |
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Date: October 30, 2014 |
The certification set forth above is being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-Q or as a separate disclosure document of the Company or the certifying officers.
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