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Otelco Reports Fourth Quarter and 2018 Operational and Financial Results

ONEONTA, Ala., March 04, 2019 (GLOBE NEWSWIRE) -- Otelco Inc. (OTEL), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia, today announced operational and financial results for its fourth quarter and year ended December 31, 2018. Key operational and financial highlights for Otelco include:

  • Total revenues of $16.2 million for fourth quarter 2018 and $66.1 million for 2018.
  • Operating income of $4.0 million for fourth quarter 2018 and $17.8 million for 2018.
  • Net income of $2.2 million for fourth quarter 2018 and $9.5 million for 2018.
  • Consolidated EBITDA (as defined below) of $6.0 million for fourth quarter 2018 and $25.7 million for 2018.
  • Voluntary principal prepayments reduced debt by $1.0 million in fourth quarter 2018 and $7.0 million for 2018, in addition to $4.4 million in scheduled principal payments in 2018.

FOURTH QUARTER RESULTS
The Company continued to execute on its strategy of fiber deployment and debt reduction in fourth quarter 2018. The impact of the Tax Cuts and Jobs Act significantly reduced the provision for income taxes due to the reduction of deferred taxes in fourth quarter 2017. The Company’s new credit agreement with CoBank in fourth quarter 2017 increased interest expense associated with the extinguishment of its former debt. Both changes limit the comparability of net income for fourth quarter and the year. Net income was $2.2 million in fourth quarter 2018, compared to $7.4 million in fourth quarter 2017. Revenues declined $0.6 million, or 3.7%, primarily from a reduction in residential customers and access fees, while expenses declined $0.1 million, or 0.6%, compared with the prior year period. Interest expense declined $4.0 million reflecting the write-off of unamortized loan costs in 2017 and lower interest expense associated with the reduction in principal under the Company’s new credit agreement. The Company invested $2.3 million in its network and operations. Consolidated EBITDA (as defined below) was $6.0 million for fourth quarter 2018, compared to $6.5 million for the same period in the previous year. The ratio of debt, net of cash, to Consolidated EBITDA was 2.72, reflecting the mandatory payments and voluntary prepayments made on the debt during the year. Basic net income per share was $0.61 per share for fourth quarter 2018, compared to $2.21 per share in the same period of 2017.

CONNECT AMERICA FUND II AND RURAL MUNICIPALITIES
Otelco was awarded just over $0.9 million over a ten-year period from the FCC’s reverse auction for three census blocks in Western Massachusetts. The funding will support the construction of a fixed wireless network to provide improved data services to four targeted communities. Approximately 1,000 locations in Hawley, Monroe, Florida and Savoy (Massachusetts) will have access to the network. The Company is partnering with another firm to build and operate the network, with construction expected to begin in second quarter 2019 once final contract negotiations are completed with the municipalities. The Company is working with the FCC staff to update its application information and be confirmed for grant release.

“We look forward to bringing improved broadband services to four more communities in New England,” commented Robert J. Souza, President and Chief Executive of Otelco. “The new network will enhance the residents’ voice and data service options with service levels not currently available in their markets. A number of other municipalities are exploring options with Otelco to improve digital service availability in their jurisdictions, based on our previous work with the town of Leverett, Massachusetts.”

NETWORK INVESTMENT
Otelco invested $8.0 million in 2018 to grow its fiber distribution network and improve its support systems, including the $2.3 million invested during fourth quarter 2018. Fiber-to-the-premise (“FTTP”) will be the primary vehicle to increase data capacity for Otelco’s customers, with fiber-to-the-node (“FTTN”) and fixed wireless options being employed in more sparsely populated areas. During 2018, Otelco added 135 miles of fiber in its service territories, an increase of 12% from 2017, and now passes approximately 7,250 discrete locations with fiber. The Company has over 2,200 miles of distribution and transport fiber in its network. During 2019, the Company plans to increase its investment in the business by 12% to $9.0 million, which is expected to expand the reach of its broadband network. In addition, the Company is evaluating the FCC’s revised Alternative Connect America Model (“A-CAM”) program which includes approximately $440,000 per year of additional funding and extends the program through 2028, representing two additional years of funding.

BALANCE SHEET
At the end of 2018, the Company reported cash of $4.7 million, an increase of $1.1 million from the end of 2017. During fourth quarter 2018, the Company reduced the outstanding principal on its credit facility by $2.1 million, including a $1.0 million voluntary prepayment. Otelco made more than $11.4 million in scheduled and voluntary payments on its debt during 2018. The remaining balance on the loan at the end of 2018 was $74.6 million, excluding loan origination costs, down 14.3% since the origination of the $87.0 million loan on November 2, 2017. At current interest rates, the payments made during 2018 will lower annual interest expense by just under $0.8 million. The interest rate on the loan reflects a reduction in the interest rate margin from 4.50% to 4.25%, which occurred when the Company brought its ratio of consolidated indebtedness to Consolidated EBITDA below 3.0 at the end of third quarter 2018. The lower margin will save the Company approximately $0.2 million in interest expense on an annual basis.

RICHARD CLARK JOINS OTELCO AS CHIEF OPERATING OFFICER
On October 15, 2018, Richard Clark joined the Company as Chief Operating Officer. Clark formerly was Executive Vice President and Chief Financial Officer of TVC Albany, Inc., which does business as FirstLight Fiber. Since joining Otelco, Clark has worked closely with the Company’s technical and engineering teams in determining a short and long-term broadband and fiber deployment strategy to optimize the use of A-CAM funding.

BILLING/OPERATIONS SUPPORT SYSTEM REPLACEMENT
During 2018, Otelco completed the conversion of three billing systems into a single new billing and operations support system. All carrier and end user activity - from ordering to provisioning to billing to collecting – is being handled in the new system. The next stage of the implementation will be the completion of geocoded maps that will improve Otelco’s ability to serve its customers and deploy capital as effectively as possible. Implementation of the system has reduced annual maintenance costs and, through consolidation of work groups, eliminated the need to backfill open positions within the organization, representing over $0.7 million in expense reductions.

SUMMARY
“The flexibility provided by our new debt agreement and completion of the billing system conversion, coupled with Otelco’s participation in the FCC’s A-CAM program with its focus on broadband and fiber deployment, provides a solid foundation for our business,” noted Souza. “Our marketing, sales and customer service teams are targeted in their approach to offering fiber-based Lightwave services to every location we pass with each new mile of fiber. With these improvements, we are well positioned to enhance our customers’ experience, improve available data speeds and product offerings, and add new customers to the Otelco family of companies. Focusing on both cost management and our revenue trajectory should continue to serve our employees, customers and stockholders well as we move into 2019.” 

FOURTH QUARTER EARNINGS CONFERENCE CALL
Otelco has scheduled a conference call, which will be broadcast live over the internet, on Tuesday, March 5, 2019, at 11:30 a.m. (Eastern Time). To participate in the call, participants should dial (334) 323-0522 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.Otelco.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.Otelco.com for 30 days. A two-week telephonic replay may also be accessed by calling (719) 457-0820 and entering the Confirmation Code 2948716.

ABOUT OTELCO
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. Otelco is among the top 20 largest local exchange carriers in the United States. 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.Otelco.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. The Company assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

OTELCO INC.   
CONSOLIDATED BALANCE SHEETS  
(in thousands, except share par value and share amounts)  
                       
                  As of December 31,    
                  2018     2017      
Assets          
  Current assets                  
    Cash and cash equivalents       $   4,657   $   3,570      
    Accounts receivable:                
      Due from subscribers, net of allowance for doubtful            
          accounts of $577 and $226, respectively       4,183       4,647      
      Other             1,899       1,875      
    Materials and supplies           2,802       2,700      
    Prepaid expenses              1,198       3,122      
      Total current assets           14,739       15,914      
                           
  Property and equipment, net           52,073       50,888      
  Goodwill               44,976       44,976      
  Intangible assets, net             919       1,328      
  Investments             1,498       1,632      
  Interest rate cap             4       -      
  Other assets             143       201      
      Total assets         $   114,352   $   114,939      
                           
  Liabilities and Stockholders' Equity          
  Current liabilities                  
    Accounts payable         $   1,331   $   1,619      
    Accrued expenses             5,054       4,803      
    Advance billings and payments           1,614       1,684      
    Customer deposits             48       58      
    Current maturity of long-term notes payable, net of debt issuance costs     3,904       3,891      
      Total current liabilities           11,951       12,055      
                           
  Deferred income taxes             20,145       18,939      
  Advance billings and payments           2,234       2,367      
  Other liabilities             13       13      
  Long-term notes payable, less current maturities and debt issuance costs     69,107       80,058      
      Total liabilities             103,450       113,432      
                           
  Stockholders' equity                  
    Class A Common Stock, $.01 par value-authorized 10,000,000 shares;        
      issued and outstanding 3,388,624 and 3,346,689 shares, respectively     34       34      
    Additional paid in capital           4,213       4,285      
    Retained earnings (accumulated deficit)         6,655       (2,812 )    
      Total stockholders' equity           10,902       1,507      
      Total liabilities and stockholders' equity     $   114,352   $   114,939      
                           

 

OTELCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
                             
              Three Months Ended
December 31,
  Twelve Months Ended
December 31,
 
                2018       2017       2018       2017    
                             
Revenues         $   16,200     $   16,793     $   66,068     $   68,526    
                             
Operating expenses                  
  Cost of services       7,567         7,927         30,592         31,395    
  Selling, general and administrative expenses     2,759         2,461         10,451         10,147    
  Depreciation and amortization       1,850         1,861         7,232         7,377    
    Total operating expenses       12,176         12,249         48,275         48,919    
                             
  Income from operations       4,024         4,544         17,793         19,607    
                             
Other income (expense)                  
  Interest expense       (1,460 )       (5,500 )       (5,844 )       (13,249 )  
  Loss on debt prepayment penalty       -          (2,228 )       -         (2,303 )  
  Other income         11         1         263         204    
    Total other expenses       (1,449 )       (7,727 )       (5,581 )       (15,348 )  
                             
Income (loss) before income tax (expense) benefit      2,575         (3,183 )       12,212         4,259    
Income tax (expense) benefit        (338 )       10,565         (2,745 )       7,856    
                             
Net income       $   2,237     $   7,382     $   9,467     $   12,115    
                             
Weighted average number of common shares outstanding:              
  Basic             3,388,624         3,346,689         3,388,624         3,346,689    
  Diluted           3,443,119         3,445,632         3,434,862         3,445,632    
Basic net income per common share   $   0.66     $   2.21     $   2.79     $   3.62    
Diluted net income per common share   $   0.65     $   2.14     $   2.76     $   3.52    
                             

 

OTELCO INC. AND SUBSIDIARIES  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(in thousands)  
                         
                 Years Ended December 31,   
                  2018       2017      
Cash flows from operating activities:          
  Net income       $   9,467     $   12,115      
  Adjustments to reconcile net income to cash flows provided by operating activities:        
    Depreciation         6,906         7,001      
    Amortization         326         376      
    Amortization of loan costs     476         4,823      
    Loss on debt prepayment penalty     -         2,303      
    Provision (benefit) for deferred income taxes     1,062         (9,393 )    
    Excess tax benefit from stock-based compensation     144         52      
    Provision for uncollectible accounts receivable     553         357      
    Stock-based compensation     308         308      
    Payment in kind interest - subordinated debt     -         266      
    Changes in operating assets and liabilities          
      Accounts receivable       (113 )       (316 )    
      Materials and supplies     (102 )       (516 )    
      Prepaid expenses and other assets     1,982         (189 )    
      Accounts payable and accrued expenses     (37 )       215      
      Advance billings and payments     (203 )       577      
      Other liabilities       (9 )       (17 )    
        Net cash from operating activities     20,760         17,962      
                         
Cash flows used in investing activities:          
  Acquisition and construction of property and equipment     (7,983 )       (8,510 )    
  Retirement of investment       (11 )       (1 )    
        Net cash used in investing activities     (7,994 )       (8,511 )    
                         
Cash flows used in financing activities:          
  Loan origination costs       (64 )       (2,144 )    
  Principal repayment of long-term notes payable     (11,350 )       (98,927 )    
  Proceeds from loan refinancing     -         87,000      
  Debt prepayment penalty fees     -         (2,303 )    
  Interest rate cap         (4 )       -      
  CoBank equity account retirement     119         164      
  Tax withholdings paid on behalf of employees for restricted stock units     (380 )       (209 )    
        Net cash used in financing activities     (11,679 )       (16,419 )    
                         
Net increase (decrease) in cash and cash equivalents     1,087         (6,968 )    
Cash and cash equivalents, beginning of period     3,570         10,538      
                         
Cash and cash equivalents, end of period $   4,657     $   3,570      
                         
Supplemental disclosures of cash flow information:          
  Interest paid       $   5,383     $   9,287      
                         
  Income taxes (refund) paid   $   (502 )   $   1,802      
                         
  Issuance of Class A common stock $   -     $   1      
                         

CONSOLIDATED EBITDA – Consolidated EBITDA is defined as consolidated net income plus consolidated net interest expense, depreciation and amortization, income taxes and certain other fees, expenses and non-cash charges reducing consolidated net income. Consolidated EBITDA is a supplemental measure of the Company’s performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). Consolidated EBITDA corresponds to the definition of Consolidated EBITDA in the Company’s credit facility. The lenders under the Company’s credit facility utilize this measure to determine compliance with credit facility requirements. The Company uses Consolidated EBITDA as an operational performance measurement to focus attention on the operational generation of cash, which is used for reinvestment into the business; to repay its debt and to pay interest on its debt; to pay income taxes; and for other corporate requirements. The Company reports Consolidated EBITDA to allow current and potential investors to understand this performance metric and because the Company believes that it provides current and potential investors with helpful information with respect to the Company’s operating performance. However, Consolidated EBITDA should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP. The Company’s presentation of Consolidated EBITDA may not be comparable to similarly titled measures used by other companies.

Reconciliation of Consolidated EBITDA to Net Income                  
                   
    Three Months Ended December 31,   Twelve Months Ended December 31,      
      2018     2017       2018     2017        
Net income $   2,237   $   7,382     $   9,467   $   12,115        
Add:  Depreciation     1,771       1,776         6,906       7,001        
  Interest expense less interest income     1,339       1,605         5,368       8,426        
  Interest expense - amortize loan cost     122       3,896         476       4,823        
  Loan termination fees     -        2,228         -        2,303        
  Income tax expense (benefit)     338       (10,565 )       2,745       (7,856 )      
  Amortization - intangibles     79       85         326       376        
  Stock-based compensation     100       71         308       308        
  Loan fees     18       26         74       144        
Consolidated EBITDA $   6,004   $   6,504     $   25,670   $   27,640        
                       

LEVERAGE RATIO – The Company uses the ratio of debt, net of cash, to Consolidated EBITDA for the last twelve months as an operational performance measurement of Otelco’s leverage. Such ratio is a supplemental measure of the Company’s performance that is not required by, or presented in accordance with, GAAP. The Company reports such ratio to allow current and potential investors to understand this performance metric. The Company also believes that it provides current and potential investors with helpful information with respect to the Company’s operating performance, including the Company’s ability to generate earnings sufficient to service its debt, and enhances understanding of the Company’s financial performance and highlights operational trends. However, such ratio should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP. The Company’s presentation of such ratio may not be comparable to similarly titled ratios used by other companies. The table below provides the calculation of such ratio as of December 31, 2018.

Ratio of Debt, Net of Cash, to Consolidated EBITDA
as of December 31, 2018
($ 000)
       
Notes payable   $   73,011  
Debt issuance costs       1,551  
     Notes outstanding     74,562  
       
Less cash         (4,657 )
Notes outstanding, net of cash $   69,905  
Consolidated EBITDA for the  
     last twelve months $   25,670  
       
Leverage ratio       2.72  

 

 

Contact:   Curtis Garner
                  Chief Financial Officer
                  Otelco Inc.
                  205-625-3580
                  Curtis.Garner@Otelco.com