Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2013

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation and Principles of Consolidation

Our accounting policies conform with accounting principles generally accepted in the United States of America and, where applicable, to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate in preparing general purpose financial statements for most public utilities. In general, the type of regulation covered permits rates (prices) for some services to be set at levels intended to recover the estimated costs of providing regulated services or products, including the cost of capital (interest costs and a provision for earnings on shareholders' investments).

Our consolidated financial statements report the financial condition and results of operations for Hickory Tech Corporation and its subsidiaries in three reportable segments: Fiber and Data, Equipment and Telecom. Intercompany transactions were eliminated upon consolidation of the financial statements.

Use of Estimates

Preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from these estimates and assumptions.

Government Grants

In August of 2010, we were awarded a grant administered by the National Telecommunications and Information Administration ("NTIA") Broadband Technology Opportunity Program ("BTOP") to extend our middle mile fiber-optic network across greater Minnesota. The grant money received for reimbursement of capital expenditures was accounted for as a deduction from the cost of the asset. The resulting balance sheet presentation reflects our 30% investment in the assets in property, plant and equipment. Depreciation is calculated and recorded based on our portion of the investment. The three-year grant period came to an end July 31, 2013 and all construction was completed as required under the grant agreement. Total allowable costs of $21,096,000 were incurred during the three-year grant period, of this amount $14,767,000 has been reimbursed by the NTIA.

Revenue Recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or service has been provided, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Revenue is reported net of all applicable sales tax.

Fiber and Data Revenue Recognition: Revenue is generated from the following primary sources: i) the sale of fiber and data services over the Company-owned and leased fiber optic network, and ii) the sale of managed voice and data services, including long distance services.

Fiber and data services are sold primarily through a contractual flat monthly fee. Monthly billings for our commercial customer base include charges for voice and long distance services. The revenue generated for these services is typically billed at the beginning of the month for the coming month's services and recognized during the month in which services are provided.

We manage customer voice and/or data services. Under these arrangements, we bill either a flat monthly fee or a fee that is variable based on the number of "seats" the customer has. This revenue is recognized on a monthly basis as the services are provided.

Equipment Revenue Recognition: Revenue is generated from the following primary sources: i) the sale of voice and data communications equipment, ii) design, configuration and installation services related to voice and data equipment, iii) the provision of Cisco maintenance support contracts, and iv) the sale of professional support services related to customer voice and data systems. We often enter into arrangements which include multiple deliverables. Our revenue recognition policy for each of these types of products and services along with an overview of multiple-deliverable arrangements follows:

When we sell Cisco voice and data communications equipment with no installation obligations (equipment only sales), all warranty obligations reside with Cisco and our performance obligation is complete upon delivery of the equipment to the customer. Therefore, we recognize revenue when the equipment is delivered to the customer site.

When we sell Cisco voice and data communications equipment with third-party installation obligations, terms of the agreements may include customer-specific acceptance provisions. For arrangements with no customer-specific acceptance arrangements, we recognize revenue when title passes to the customer. For contracts with customer specific acceptance provisions, we defer revenue recognition until we receive formal customer acceptance and after all other revenue recognition criteria have been met.

When we sell equipment to customers, we also often sell Cisco support contracts ("SmartNet" contracts). These support contracts state that Cisco will provide all support services, product warranty and updates directly to the customer. Because we have no service obligations under these types of contracts, the earnings process has culminated for us upon the sale of the contract and therefore revenue is recognized immediately. Further, we are serving in an agency relationship to the customer for the sale of the contract and therefore the revenue is recorded net of the cost that we pay Cisco for the contract.

Support services revenue also includes "24x7" support of a customer's voice and data networks. Most of these contracts are billed on a time and materials basis and revenue is recognized either as services are provided or over the term of the contract. Support services also include professional support services, which are typically sold on a time and materials basis, but may be sold as a prepaid block of time. This revenue is recognized as the services are provided (deferred and recognized as utilized if prepaid).

Multiple-deliverable arrangements primarily include the sale of Cisco communications equipment and associated support contracts, along with professional services providing design, configuration and installation consulting. When an equipment sale involves multiple deliverables, revenue is allocated to each respective element. When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple-deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence ("VSOE") of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence ("TPE") of selling price is used to establish the selling price if it exists. If VSOE or TPE of selling price are not available, the best estimate of selling price ("BESP") must be used.

Allocation of revenue to deliverables of an arrangement is based on the relative selling price of the element being sold on a stand-alone basis. Cisco equipment, maintenance contracts and professional services each qualify as separate units of accounting. We utilize BESP for stand-alone value for our equipment and maintenance contracts, taking into consideration market conditions and entity-specific factors. We evaluate BESP by reviewing historical data related to sales of our deliverables. We analyze professional services billings quarterly to determine VSOE of selling price. We calculate the median of all services performed on a stand-alone basis and consider the standalone value of professional services performed as part of a multiple deliverable arrangement to be any rate that is within 15% of the median.

Telecom Revenue Recognition: Revenue is earned from monthly billings to customers for local voice services, long distance, digital TV, high-speed Internet, Internet services, hardware and other services. Revenue is also derived from charges for network access to our local exchange telephone network from subscriber line charges and from contractual arrangements for services such as billing and collection and directory advertising. Revenue is recognized in the period in which service is provided to the customer. With multiple billing cycles, we accrue revenue earned but not yet billed at the end of a quarter. We also defer services billed in advance and recognize them as income when earned.

Our Telecom Segment markets competitive service bundles which may include multiple deliverables. Our base bundles consist of voice services (including a business or residential phone line), calling features and long distance. Customers may choose to add additional services including high-speed Internet and digital/IP TV services to the base bundle packages. Separate units of accounting within the bundled packages include voice services, high-speed Internet, and digital/IP TV services. Revenue for all services included in our bundles is recognized over the same service period, which is the time period in which service is provided to the customer. Service bundle discounts are recognized concurrently with the associated revenue and are allocated to the various services in the bundled offering based on the relative selling price of the services included in each bundled combination.

Some revenue is realized under pooling arrangements with other service providers and is divided among the companies based on respective costs and investments to provide the services. The companies that take part in pooling arrangements may adjust their costs and investments for a period of two years, which causes the dollars distributed by the pool to be adjusted retroactively. We believe that recorded amounts represent reasonable estimates of the final distribution from these pools. However, to the extent that the companies participating in these pools make adjustments, there will be corresponding adjustments to our recorded revenue in future periods.

Classification of Costs and Expenses

Cost of sales for the Equipment Segment is primarily for equipment and materials associated with the installation of products for customers. Labor associated with installation work is not included in this category, but is included in cost of services (excluding depreciation and amortization) described below.

Cost of services includes all costs related to delivery of communication services and products for all segments. These operating costs include all costs of performing services and providing related products including engineering, customer service, billing and collections, network monitoring and transport costs.

Selling, general and administrative expenses include direct and indirect selling expenses, advertising and all other general and administrative costs associated with the operations of the business.

Shipping and Handling

Shipping and handling amounts billed to a customer in a sales transaction are classified as revenue. Shipping and handling costs are included in cost of services.

Cash and Cash Equivalents

We consider highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates its fair value due to the short maturity of the instruments. As of December 31, 2013, our cash deposits, which are held primarily with one institution, exceeded federally insured limits.

Receivables and Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of our customers to make required payments. To estimate the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs, changes in customer financial condition and credit worthiness and concentrations of credit risk. Specific accounts receivable are charged against the allowance and removed from accounts receivable once we determine the account is uncollectible. We routinely monitor our accounts receivable and adjust the allowance for doubtful accounts when certain events occur that may potentially impact the collection of accounts receivable.

The activity in our accounts receivable allowance is presented in the following table:

	Year Ended December 31
(Dollars in thousands)	2013				2012				2011

Balance at beginning of year		$	278			$	436			$	570
Additions charged to expense			272				290				299
Write-offs			(180	)			(448	)			(433	)
Balance at end of year		$	370			$	278			$	436

Inventories

The inventory balance is associated with the Equipment Segment and is primarily comprised of finished goods in our warehouse, in-transit to customer locations or at customers' locations pending the title transfer. Inventory levels are subject to the fluctuations in equipment sales activity and timing of individual customer orders and installations.

We value inventory using the lower of cost (specific identification) or market method. We adjust our inventory carrying value for estimated excess obsolete or unmarketable inventory to the estimated market value based on replacement costs or upon assumptions about future consumption, technology changes, customer demands and market conditions.

Investments

Investments are accounted for under the cost method of accounting. This method requires us to periodically evaluate whether a non-temporary decrease in the value of the investment has occurred, and if so, to write this investment down to its net realizable value.

(Dollars in thousands)	2013		2012
CoBank, ACB Stock	$	2,357	$	2,180
RTFC Subordinated Capital Certificates		842		837
Other		215		196
Total investments	$	3,414	$	3,213

Property, Plant and Equipment

Property, plant and equipment are recorded at original cost of acquisition or construction. The costs of additions, replacements and major improvements are capitalized while maintenance and repairs are charged to expense as incurred. We have determined interest costs associated with capital projects to be immaterial and no interest costs have been capitalized.

Property, plant and equipment includes fiber optic cable, indefeasible rights of use of fiber installed by others accompanied by ownership rights, equipment and software supporting our internal networking lab and system monitoring services, copper infrastructure, central office equipment, outside communications plant, customer premise equipment, furniture, fixtures, vehicles, machinery and other equipment.

(Dollars in thousands)	2013			2012			Estimated Useful Lives
Land	$	1,102		$	1,102
Buildings		21,180			21,142		28-40 years
Leasehold improvements		5,829			4,680		3-39 years
Network and outside plant facilities		390,054			366,097		3-50 years
Furniture, fixtures and equipment		40,726			37,756		3-15 years
Construction in progress		2,821			6,846
		461,712			437,623
Less: Accumulated depreciation and amortization		(280,386	)		(254,664	)
Property, plant and equipment, net	$	181,326		$	182,959

Depreciation for financial statement purposes is determined using the straight-line method based on the lives of the various classes of depreciable assets using either the group or unit method. The group method is used for depreciable assets associated with the regulated incumbent local exchange carriers' ("ILEC") plant and equipment. A depreciation rate for each asset group is determined based on the group's average useful life. The composite depreciation rates on ILEC telephone plant were 3.7%, 3.3% and 4.1% for 2013, 2012 and 2011, respectively. When regulated ILEC assets are sold or retired, the assets and related accumulated depreciation are removed from the accounts and any gains or losses on disposition are amortized with the remaining net investment in telephone plant. The unit method is applicable to non-regulated operations. When non-regulated assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss on disposition are included in operating income. Depreciation expense was $28,439,000, $25,943,000 and $22,702,000 in 2013, 2012 and 2011, respectively.

We lease certain computer equipment under capital lease arrangements. We have recorded the present value or fair value of the future minimum lease payments as a capitalized asset and related lease obligation. Assets under this capital lease are included in furniture, fixtures and equipment and amounted to:

(Dollars in thousands)	2013			2012
Capital leases	$	1,041		$	2,405
Less accumulated depreciation		(798	)		(1,994	)
Capital leases, net	$	243		$	411

Capitalized Software Costs

We capitalize costs, including right to use fees, associated with acquired software for internal use. Costs associated with internally developed software are segregated into three project stages: preliminary project stage, application development stage and post-implementation stage. Costs associated with both the preliminary project stage and post-implementation stages are expensed as incurred. Costs associated with the application development stage are capitalized. Software maintenance and training costs are expensed as incurred. Amortization of software costs commences when the software is ready for its intended use and is amortized over a period of three to ten years.

During 2013, 2012 and 2011, we capitalized $2,120,000, $1,602,000, and $755,000, respectively, of costs associated with software purchased or developed for internal use. The 2013 costs are primarily related to the purchase of inventory management software and business intelligence and performance software. The 2012 costs primarily relate to the purchase of applications related to enterprise software for contract management. The 2011 costs primarily relate to the purchase of web content management and document management systems. Capitalized internal software costs, net of accumulated amortization are included in property, plant and equipment at December 31, 2013, 2012 and 2011, respectively. Amortization expense relating to these costs amounted to $1,574,000, $936,000 and $675,000 in 2013, 2012 and 2011, respectively.

The components of capitalized software for internal use are summarized below:

(Dollars in thousands)	2013		2012		2011
Capitalized software for internal use	$	13,578	$	11,578	$	9,976
Accumulated amortization		9,969		8,515		7,579
Net capitalized software for internal use	$	3,609	$	3,063	$	2,397

Financial Derivative Instruments

We enter into interest rate swap agreements (financial derivative instruments) to manage our exposure to interest rate fluctuations on a portion of our variable interest rate debt. See Note 12 "Financial Derivative Instruments."

Goodwill

We have goodwill in each of our reportable segments. Fiber and Data Segment goodwill resulted from our acquisition of IdeaOne Telecom in 2012, CP Telecom in 2009 and Enventis Telecom in 2005. Equipment Segment goodwill resulted from our acquisition of Enventis Telecom and the Telecom Segment goodwill resulted from our acquisition of Heartland Telecommunications in 1997. The tax deductible portion of goodwill is $26,964,000.

The components of goodwill are:

(Dollars in thousands)	2013		2012
Fiber and Data	$	5,384	$	5,384
Equipment		596		596
Telecom		23,048		23,048
Total Goodwill	$	29,028	$	29,028

Goodwill is not amortized, but tested for impairment at least annually or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. We test goodwill for impairment by first comparing the carrying value of net assets to the fair value of our reporting units. If it is determined that the fair value of a reporting unit is less than its carrying amount, including goodwill, we perform a second step to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of our reporting units using discounted cash flows, industry and peer-specific valuation methods and trading multiples common to our industry. No goodwill impairment charges were recorded during the periods presented.

Long-Lived Assets

We review long-lived assets, including intangible assets subject to amortization, for impairment if certain events or changes in circumstances indicate impairment may be present. Impairment exists if the carrying value of a long-lived asset exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset at the date it is tested.

In the first quarter of 2013, an impairment test was performed in response to indicators that the carrying value of certain customer relationship intangible assets and property, plant and equipment related to providing wireless Internet to customers in the Fargo, North Dakota market may not be recoverable due to our decision to phase out this service. During the impairment review, we determined the carrying value of these particular assets were impaired. Fair value was calculated using the income approach of valuation. The income approach utilized the discounted cash flow method. It requires the use of estimates and judgments about the future income expected to be derived from the use or ownership of an asset. Total impairment charges of $638,000 were recognized during the year ended December 31, 2013 within our Fiber and Data Segment. There were no such charges during the years ended December 31, 2012 and 2011.

Materials and Supplies

Materials and supplies, which are stated at weighted average cost, consist primarily of network construction materials and supplies, that when, issued are predominately capitalized as part of new customer installations and the construction of the network. Materials and supplies are presented in Deferred Costs and Other Assets on the Consolidated Balance Sheets and were $1,762,000 and $2,178,000 at December 31, 2013 and 2012, respectively.

Post-Retirement Benefits

We provide retirement savings benefits and post-retirement health care and life insurance benefits for eligible employees. We are not currently funding the post-retirement benefits, but have accrued these liabilities. The post-retirement health care and life insurance benefits expense and liability are calculated utilizing various actuarial assumptions and methodologies. These assumptions include, but are not limited to, the discount rate and the expected health care cost trend rate. We use qualified independent actuaries to assist us with measuring the expense and liabilities associated with employee post-retirement benefits.

Post-retirement benefits were calculated according to ASC 715, "Compensation - Retirement Benefits." As prescribed by ASC 715, prior service cost or credit is amortized over the average future service period of participants to reach full eligibility. Cumulative net gains and losses in excess of 10% of the corridor are amortized on a straight-line basis over the average future service lives of the covered group. There are no substantive commitments for benefits other than as stated in the plan. The assumed discount rate represents the discounted value of necessary future cash flows required to pay the accumulated benefits when due. The rate was determined based on high-quality fixed income securities, which provide cash flows at the same time and in the same amount as the projected cash flows of the plan.

We utilized national market-based data in developing the health care cost trend rate. The health care cost trend rate represents the expected annual rate of change in the cost of health care benefits currently provided due to factors other than changes in the demographics of plan participants. If the assumptions utilized in determining the post-retirement benefit expense and liability differ from actual events, the results of operations for future periods could be impacted.

In December 2012, we adopted an amendment to the plan, effective January 1, 2014, which establishes a fixed dollar benefit for both future and current post-65 Medicare eligible retirees. The amendment reduced the Accumulated Post-Retirement Benefit Obligation as of December 31, 2012, which will be recognized as part of Prior Service Cost over the average future service period of participants to reach full eligibility (approximately 8 years from the amendment date).

When actual events differ from the assumptions or when the assumptions used change, an unrecognized actuarial gain or loss results. As of December 31, 2013, the unrecognized net actuarial loss was $5,505,000. The unrecognized net actuarial loss outside the allowable corridor is amortized over approximately 11 years. This amount will change in future years as economic and market conditions generate further gains and losses.

Income Taxes

We account for income taxes using an asset and liability approach to financial accounting and reporting. Accordingly, deferred tax assets and liabilities arise from the difference between the tax basis of an asset or liability and its reported amount in the financial statements and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We recognize interest and penalties related to income tax matters as income tax expense. Income tax expense or benefit is the tax payable or refundable, respectively, for the period plus or minus the change in deferred tax assets and liabilities during the period.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. See Note 11 "Income Taxes."

Advertising Expense

Advertising is expensed as incurred. Advertising expense charged to operations was $1,008,000, $871,000 and $908,000 in 2013, 2012 and 2011, respectively.

Stock-Based Compensation

Share-based payments are recognized as compensation expense based on their grant date or settlement date fair value, as applicable. We measure share-based payments as a single award and recognize stock compensation expense for awards with service and/or performance conditions ratably over the requisite service period for each separately vesting tranche of the award. The amount recognized is based on management's best estimates and assumptions that the performance and service requirements of the plan will be achieved. To the extent actual performance and service requirements achieved is different, share-based compensation expense is adjusted accordingly. See Note 7 "Stock Compensation."

Accrued Expenses and Other

The following table shows the Company's consolidated balance sheet details for accrued expenses and other:

(Dollars in thousands)
Year Ended	2013		2012
Accrued incentive compensation	$	1,792	$	2,005
Accrued wages and commissions		3,543		2,644
Other		5,108		6,232
Total accrued expense and other	$	10,443	$	10,881

Our employee incentive compensation plans provide for cash distributions based on achievement of specific organizational operating results or individual employee objectives.

Other accrued expenses are primarily made up of accrued real estate and use taxes, accrued interest, the current portion of post-retirement benefits, and the Long-Term Executive Incentive Plan expense and other accrued expenses.

Earnings and Dividends Per Share

Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the year. Shares used in the diluted earnings per share calculation are based on the weighted average number of shares outstanding during the year increased by potentially dilutive common equivalent shares. Potentially dilutive common shares include stock options, stock subscribed under the HickoryTech Corporation Amended and Restated Employee Stock Purchase Plan ("ESPP"), retention stock awards and stock awards subscribed under the Long-Term Executive Incentive Program ("LTEIP"). Dilution is determined using the treasury stock method.

(Dollars in thousands, except share and earnings per share amounts)	2013		2012		2011

Net income	$	7,732	$	8,298	$	8,401

Weighted average shares outstanding		13,548,007		13,409,743		13,296,668
Stock options (dilutive only)		7,538		12,254		12,531
Stock subscribed (ESPP)		-		2,185		-
Retention awards		26,101		31,416		23,899
Stock subscribed (LTEIP)		24,571		72,441		86,549
Total dilutive shares outstanding		13,606,217		13,528,039		13,419,647

Earnings per share:
Basic	$	0.57	$	0.62	$	0.63
Diluted	$	0.57	$	0.61	$	0.63

Dividends per share	$	0.585	$	0.565	$	0.545

Diluted earnings per share excludes 44,640, 77,150 and 169,450 shares as of December 31, 2013, 2012 and 2011, respectively because their effect on earnings per share would have been anti-dilutive.

Dividends per share are based on the quarterly dividend per share as declared by our Board of Directors. In 2013 and 2011, we acquired and retired 124,285 and 36,248 shares, respectively. There were no share repurchases during 2012.

Reclassifications

Certain amounts in our 2013 and 2012 Consolidated Balance Sheets have been reclassified to conform to the current year presentation. This reclassification had no effect on previously reported results of operations, total shareholders' equity or total revenue.

During 2013, inventories associated with our Fiber and Data and Telecom Segment were reclassified from current assets to other long-term assets on the Consolidated Balance Sheets. Those inventories consist primarily of construction materials and supplies which, when issued, are capitalized as part of customer installations and network construction. The reclassification of inventories impacts the calculation of net cash provided by operating activities and net cash used in investing activities as presented on the Consolidated Statements of Cash Flow. The reclassification of inventories also impacts the calculation of certain financial ratios. Prior period calculations have been revised to conform to the current year presentation.

Recent Accounting Developments

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" to bring conformity in the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 becomes effective for us on January 1, 2014. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements or notes to the consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" to improve the disclosure of reclassifications out of accumulated other comprehensive income. The update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Also, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income (only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period) either on the face of the statement where net income is presented or in the notes thereto. The additional reclassification disclosure requirements have been incorporated in Note 5 "Accumulated Other Comprehensive Income (Loss)."

We reviewed other recently issued accounting pronouncements and determined they are either not applicable to our business or that no material effect is expected on our financial position, results of operations or disclosures.