OTEL - Otelco Reports Fourth Quarter and 2018 Operational and Financial Results

March, 04 2019 05:00 PM Otelco Inc.

ONEONTA, Ala., March 04, 2019 (GLOBE NEWSWIRE) -- Otelco Inc. (NASDAQ: 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 Companyâ€™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 Companyâ€™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 FCCâ€™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.

â€œWe look forward to bringing improved broadband services to four more communities in New England,â€ commented Robert J. Souza, President and Chief Executive of Otelco. â€œThe new network will enhance the residentsâ€™ 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.â€

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 (â€œFTTPâ€) will be the primary vehicle to increase data capacity for Otelcoâ€™s customers, with fiber-to-the-node (â€œFTTNâ€) 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 FCCâ€™s revised Alternative Connect America Model (â€œA-CAMâ€) 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 Companyâ€™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 â€“ is being handled in the new system. The next stage of the implementation will be the completion of geocoded maps that will improve Otelcoâ€™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
â€œThe flexibility provided by our new debt agreement and completion of the billing system conversion, coupled with Otelcoâ€™s participation in the FCCâ€™s A-CAM program with its focus on broadband and fiber deployment, provides a solid foundation for our business,â€ noted Souza. â€œOur 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 customersâ€™ 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.â€

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 Companyâ€™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 Companyâ€™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 Companyâ€™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 â€œbelieves,â€ â€œbelief,â€ â€œexpects,â€ â€œintends,â€ â€œanticipates,â€ â€œplans,â€ 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 Companyâ€™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 â€“ 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 Companyâ€™s performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (â€œGAAPâ€). Consolidated EBITDA corresponds to the definition of Consolidated EBITDA in the Companyâ€™s credit facility. The lenders under the Companyâ€™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 Companyâ€™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 Companyâ€™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 â€“ The Company uses the ratio of debt, net of cash, to Consolidated EBITDA for the last twelve months as an operational performance measurement of Otelcoâ€™s leverage. Such ratio is a supplemental measure of the Companyâ€™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 Companyâ€™s operating performance, including the Companyâ€™s ability to generate earnings sufficient to service its debt, and enhances understanding of the Companyâ€™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 Companyâ€™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

Company Name:	Otelco Inc.
Stock Symbol:	OTEL
Market:	NASDAQ
Website:	otelco.com

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