|By Business Wire||
|August 6, 2014 05:01 PM EDT||
Otelco Inc. (NASDAQ: OTEL), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia and a provider of cloud hosting and managed services, today announced results for its second quarter ended June 30, 2014. Key highlights for Otelco include:
- Total revenues of $18.5 million for second quarter 2014.
- Operating income of $4.5 million for second quarter 2014.
- Adjusted EBITDA (as defined below) of $7.4 million for second quarter 2014.
“The second quarter of 2014 produced adjusted EBITDA of $7.4 million,” said Mike Weaver, Chief Executive Officer of Otelco. “Access line equivalent losses continued to improve as we experienced a loss of less than 1% for second quarter when compared to the first quarter of 2014. Business access line equivalents, driven by the growth of fiber transport and circuits, grew 0.3% over first quarter 2014 while residential access lines declined by 1.6% over first quarter. During second quarter, we reduced our senior debt by $6.1 million to $117.1 million, and our cash balance at June 30, 2014 was $4.8 million.
“During second quarter, we implemented the network efficiencies in New England that we announced in May,” Weaver continued. “We also reduced our cable programming costs and made additional operational reductions throughout the Company. These actions reduced costs by $0.3 million in this quarter, and we expect to see approximately $1.3 million in savings from these initiatives in 2014.
“Capital investment in our business was $1.5 million for second quarter,” noted Weaver. “These expenditures included enhancements to our New England network and switching facilities in anticipation of growth in Reliable Networks, the cloud hosting and managing services provider we acquired in January. We expect a similar rate of capital expenditures for the balance of the year.”
|Second Quarter 2014 Financial Summary|
|(Dollars in thousands, except per share amounts)|
|Three Months Ended June 30,||Change|
|Net income available to stockholders||$||109,648||$||1,308||$||(108,340||)||*|
|Basic net income per share||$||38.80||$||0.42||$||(38.38||)||*|
|* Not a meaningful calculation|
|Six Months Ended June 30,||Change|
|Net income available to stockholders||$||107,874||$||2,702||$||(105,172||)||*|
|Basic net income per share||$||39.43||$||0.87||$||(38.56||)||*|
|* Not a meaningful calculation|
|Reconciliation of Adjusted EBITDA to Net Income|
|Three Months Ended June 30,||Six Months Ended June 30,|
|Interest expense - net of premium||1,991||2,009||7,204||4,091|
|Interest expense - amortize loan cost||233||236||575||475|
|Income tax expense (benefit)||4,942||881||4,871||1,792|
|Amortization - intangibles||908||469||2,093||911|
|Stock-based compensation (earn out)||-||57||-||169|
|Stock-based compensation (senior management)||-||72||-||72|
|Cancellation of debt||(114,210||)||-||(114,210||)||-|
(a) Adjusted EBITDA is defined as consolidated net income (loss) plus interest expense, depreciation and amortization, income taxes and certain fees, expenses or non-cash charges reducing consolidated net income. Adjusted EBITDA is not a measure calculated in accordance with generally accepted accounting principles (GAAP). While providing useful information, Adjusted EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations data prepared in accordance with GAAP. The Company believes Adjusted EBITDA is useful as a tool to analyze the Company on the basis of operating performance and leverage. The definition of Adjusted EBITDA corresponds to the definition of Adjusted EBITDA in the Company’s credit facility and certain of the covenants contained therein. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.
Otelco Inc. - Key Operating Statistics (2)
|As of||December 31,||March 31,||June 30,||from|
|2012||2013||2014||2014||March 31, 2014|
|Wholesale network lines||2,289||2,817||2,846||2,850||0.1||%|
Access line equivalents(1)
|Access line equivalents(1)||53,330||49,644||49,021||48,256||(1.6||)%|
Otelco access line equivalents(1)
|Cable, IPTV & satellite||4,388||4,164||4,128||3,903||(5.5||)%|
|Other internet lines||4,506||3,750||3,585||3,458||(3.5||)%|
(1) We define access line equivalents as voice lines and data lines (including cable modems, digital subscriber lines, and dedicated data access trunks).
(2) Excludes Time Warner Cable which comprised 98% of the wholesale network connections on December 31, 2012 and none of the wholesale connections in 2013.
FINANCIAL DISCUSSION FOR SECOND QUARTER 2014:
Total revenues decreased 6.0% in the three months ended June 30, 2014 to $18.5 million from $19.7 million in the three months ended June 30, 2013. The non-renewal of the Time Warner Cable (“TWC”) contract accounted for $0.4 million or approximately 32% of the decline. The decrease in residential RLEC access line equivalents and revenue decreases due to the FCC’s InterCarrier Compensation reform order (the “FCC’s order) account for the majority of the remaining decline which was partially offset by cloud hosting and managed services revenue of $0.2 million relating to Reliable Networks, which we acquired on January 2, 2014. The table below provides the components of our revenues for the three months ended June 30, 2014 compared to the same period of 2013.
|Three Months Ended June 30,||Change|
|(dollars in thousands)|
|Cable, IP and satellite television||746||716||(30||)||(4.0||)|
Local services revenue decreased 16.9% in the quarter ended June 30, 2014 to $6.7 million from $8.0 million in the quarter ended June 30, 2013. TWC accounted for a decrease of $0.4 million. The decline in RLEC residential voice access lines, the impact of the FCC’s ICC order which reduces or eliminates intrastate and local cellular revenue, and CLEC market pricing accounted for a decrease of $0.4 million. A portion of the RLEC decrease is recovered through the Connect America Fund which is categorized as interstate access revenue. Carrier settlement agreements in 2013 provided one-time revenue of $0.5 million with no comparable revenue in 2014. Hosted PBX revenue increased by $0.1 million. Network access revenue increased 3.2% in the second quarter 2014 to $6.0 million from $5.8 million in the quarter ended June 30, 2013. The Connect America Fund, user-based fees and cost study adjustments increased by $0.8 million. These increases were partially offset by lower state and special access charges of $0.6 million. Internet revenue for the second quarter 2014 decreased 1.7% to $3.6 million from $3.7 million in the three months ended June 30, 2013. A decrease in residential dial-up internet and data lines was partially offset by an increase in fiber rental. Transport services revenue decreased 9.1% in the quarter ended June 30, 2014 to $1.3 million from $1.4 million in the quarter ended June 30, 2013 from customer churn and pricing actions. Cable, IP and satellite television revenue in the three months ended June 30, 2014 decreased 4.0% to $0.7 million in the three months ended June 30, 2014 and 2013 due to subscriber attrition. Cloud hosting and managed services revenue, associated with the acquisition of Reliable Networks, increased revenue $0.2 million for second quarter 2014 with no comparable revenue for the year earlier period.
Operating expenses in the three months ended June 30, 2014 decreased 3.9% to $14.0 million from $14.5 million in the three months ended June 30, 2013. Cost of services decreased 5.4% to $8.6 million in the quarter ended June 30, 2014 from $9.1 million in the quarter ended June 30, 2013. Expenses related to professional services, cloud computing and Hosted PBX increased $0.1 million. Access and circuit costs decreased by $0.3 million, cable and toll costs decreased by $0.1 million, sales and customer services costs decreased by $0.1 million and operational costs decreased by $0.1 million. Selling, general and administrative expenses increased 19.0% to $2.6 million in the three months ended June 30, 2014, from $2.2 million in the three months ended June 30, 2013. Cloud hosting expense associated with our acquisition of Reliable Networks, including an accrual for non-cash stock compensation, increased costs $0.2 million. One-time carrier settlements and property tax reductions of $0.4 million were reflected in 2013 costs with no comparable reductions in 2014. These increases were partially offset by lower insurance and legal expenses of $0.2 million. Depreciation and amortization for second quarter 2014 decreased 14.8% to $2.8 million from $3.3 million in second quarter 2013. Amortization associated with the TWC contract intangible asset decreased by just under $0.4 million as the contract value was fully amortized in June 2013. The amortization of other intangible assets in New England and CLEC depreciation decreased $0.1 million.
Interest expense was unchanged at $2.2 million in the three months ended June 30, 2014 and June 30, 2013. The higher interest rate on the debt in the revised credit agreement beginning May 24, 2013 was offset by lower outstanding loan principal.
Separate classification of reorganization items began in first quarter 2013 when we filed for Chapter 11 bankruptcy. There were no reorganization expenses during the second quarter of 2014.
Adjusted EBITDA for the three months ended June 30, 2014 was $7.4 million compared to $8.5 million for the same period in 2013 and $7.5 million in the first quarter of 2014. Restructuring, non-cash and certain one-time expenses are added back in the calculation of Adjusted EBITDA. See financial tables for a reconciliation of Adjusted EBITDA to net income.
As of June 30, 2014, the Company had cash and cash equivalents of $4.8 million compared to $9.9 million at the end of 2013. During second quarter 2014, the Company reduced its credit facility balance by $6.1 million through voluntary, Excess Cash and required quarterly payments. The Company’s senior credit facility extends through April 2016 and includes a $5.0 million undrawn revolver.
Capital expenditures were $1.5 million for the second quarter 2014 compared to $0.8 million in the same period in 2013.
Second Quarter Earnings Conference Call
Otelco has scheduled a conference call, which will be broadcast live over the internet, on Thursday, August 7, 2014, at 11:30 a.m. ET. To participate in the call, participants should dial (719) 325-2361 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the internet by visiting the Company’s website at www.OtelcoInc.com. To listen to the live call online, please visit the website at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live webcast, a replay of the webcast will be available on the Company's website at www.OtelcoInc.com for 30 days. A two-week telephonic replay may also be accessed by calling (719) 457-0820 and using the Confirmation Code 6782085.
Otelco Inc. provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia. The Company’s services include local and long distance telephone, digital high-speed data lines, transport services, network access, cable television and other related services. With approximately 98,000 voice and data access lines, which are collectively referred to as access line equivalents, Otelco is among the top 25 largest local exchange carriers in the United States based on number of access lines. Otelco operates eleven incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services and technology consulting, managed services and private/hybrid cloud hosting services through several subsidiaries. For more information, visit the Company’s website at www.OtelcoInc.com.
FORWARD LOOKING STATEMENTS
Statements in this press release that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms “believes,” “belief,” “expects,” ‘intends,” “anticipates,” “plans,” or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company’s filings with the Securities and Exchange Commission.
|CONSOLIDATED BALANCE SHEETS|
|(in thousands, except share par value and share amounts)|
|December 31,||June 30,|
|Cash and cash equivalents||$||9,916||$||4,807|
Due from subscribers, net of allowance for doubtful accounts of $274 and $271, respectively
|Materials and supplies||1,654||1,642|
|Deferred income taxes||905||905|
|Total current assets||22,024||16,628|
|Property and equipment, net||54,462||52,575|
|Intangible assets, net||4,074||3,718|
|Deferred financing costs, net||2,097||1,622|
|Deferred income taxes||1,606||1,606|
|Liabilities and Stockholders' Deficit|
|Advance billings and payments||1,422||1,416|
|Deferred income taxes||469||469|
|Current maturity of long-term notes payable||7,441||6,665|
|Total current liabilities||16,109||16,115|
|Deferred income taxes||23,181||23,181|
|Advance billings and payments||736||708|
|Long-term notes payable, less current maturities||121,192||110,394|
Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 2,870,948 shares
Class B Common Stock, $.01 par value-authorized 250,000 shares; issued and outstanding 232,780 shares
|Additional paid in capital||2,876||2,876|
|Total stockholders' deficit||(29,679||)||(26,977||)|
|Total liabilities and stockholders' deficit||$||131,678||$||123,544|
|CONSOLIDATED STATEMENTS OF OPERATIONS|
|(in thousands, except share and per share amounts)|
Three Months Ended
Six Months Ended
|Cost of services||9,087||8,599||18,741||17,996|
|Selling, general and administrative expenses||2,162||2,572||5,042||5,200|
|Depreciation and amortization||3,296||2,807||6,862||5,592|
|Total operating expenses||14,545||13,978||30,645||28,788|
|Income from operations||5,121||4,510||10,009||8,483|
|Other income (expense)|
|Other income (expense)||18||(77||)||262||577|
|Total other expenses||(2,207||)||(2,321||)||(7,517||)||(3,989||)|
|Income before reorganization items and income tax||2,914||2,189||2,492||4,494|
|Income before income tax||114,590||2,189||112,745||4,494|
|Income tax expense||(4,942||)||(881||)||(4,871||)||(1,792||)|
|Weighted average number of common shares outstanding:||2,826,040||3,103,728||2,735,663||3,103,728|
|Net income per common share||$||38.80||$||0.42||$||39.43||$||0.87|
|CONSOLIDATED STATEMENTS OF CASH FLOWS|
|Six Months Ended|
|Cash flows from operating activities:|
|Adjustments to reconcile net income to cash flows provided by operating activities:|
|Amortization of loan costs||575||475|
|Amortization of notes payable premium||(31||)||-|
|Provision for deferred income taxes||4,790||-|
|Provision for uncollectible accounts receivable||122||227|
|Changes in operating assets and liabilities|
|Material and supplies||31||12|
|Prepaid expenses and other assets||(168||)||312|
|Accounts payable and accrued expenses||2,760||797|
|Advance billings and payments||(114||)||(34||)|
|Non-cash reorganization income||(114,210||)||-|
|Net cash provided by operating activities||10,533||9,819|
|Cash flows used in investing activities:|
|Acquisition and construction of property and equipment||(1,582||)||(2,913||)|
|Proceeds from sale of property and equipment||-||58|
|Cash paid for the purchase of Reliable Networks net of cash acquired||-||(500||)|
|Net cash used in investing activities||(1,582||)||(3,355||)|
|Cash flows used in financing activities:|
|Principal repayment of long-term notes payable||(28,700||)||(11,573||)|
|Loan origination costs||(1,647||)||-|
|Net cash used in financing activities||(30,347||)||(11,573||)|
|Net decrease in cash and cash equivalents||(21,396||)||(5,109||)|
|Cash and cash equivalents, beginning of period||32,516||9,916|
|Cash and cash equivalents, end of period||$||11,120||$||4,807|
|Supplemental disclosures of cash flow information:|
|Income taxes paid||$||144||$||616|
|Loan fees paid via issuance of Class B common stock||$||2,772||$||-|
|Cancellation of Class A common stock||$||132||$||-|
|Issuance of Class A common stock||$||29||$||-|