Otelco Reports Third Quarter 2009 Results

ONEONTA, AL, Nov. 4 /CNW/ - Otelco Inc. (NASDAQ: OTT; TSX: OTT.un), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia, today announced results for its third quarter ended September 30, 2009. Key quarterly highlights for Otelco include:

    
    -   Total revenues of $26.4 million.
    -   Operating income of $6.2 million.
    -   Adjusted EBITDA (as defined below) of $12.8 million.
    

"Otelco delivered another quarterly increase in revenue and EBITDA while the economy continued to struggle," said Mike Weaver, President and Chief Executive Officer of Otelco. "We experienced growth in our revenue of $8.2 million over the third quarter of 2008 and $0.6 million over second quarter 2009. We had our best quarterly results with Adjusted EBITDA at $12.8 million, an increase of $3.8 million and $0.4 million over the same quarter last year and the second quarter of 2009, respectively. Revenue growth and effective cost management, coupled with a focus on the integration of acquisitions, are the drivers behind the results.

"Our capital expenditures for the quarter were $2.8 million, returning to our more typical level of approximately 10% of revenue after a conservative first half of 2009. After reflecting a voluntary prepayment of $5.0 million to reduce our senior debt made during third quarter, cash grew $2.9 million during the quarter.

"The integration of the Country Road entities is complete with the successful billing system conversion this quarter," Weaver concluded. "With the integration behind us, our focus will be on CLEC growth by expanding our operations in northern Maine and neighboring New England states. As evidenced by our nineteenth consecutive IDS dividend, we remain committed to returning cash to our shareholders."

    
    Distribution to Income Deposit Security Holders
    -----------------------------------------------
    

Each quarter, the Board will consider the declaration of dividends during its normally scheduled meeting. For this quarter, the Board is meeting on November 12, 2009. The scheduled interest and any dividend declared will be paid on December 30, 2009 to holders of record as of the close of business on December 15, 2009. The interest payment will cover the period from September 30, 2009 through December 29, 2009. Currently, it is anticipated that the Company's dividends in 2009 will continue to be treated as a return of capital for tax purposes. The Company has made nineteen successive quarterly distributions of dividends and interest since its IDS units were originally offered to the public in December 2004.

    
                     Third Quarter 2009 Financial Summary
               (Dollars in thousands, except per share amounts)

                                 Three Months Ended            Change
                                     Sept. 30,           --------------------
                                 2008         2009       Amount      Percent
    -------------------------------------------------------------------------
    Revenues              $    18,238  $    26,403  $     8,165        44.8%
    Operating income      $     5,665  $     6,209  $       544         9.6%
    Interest expense      $    (4,774) $    (6,469) $     1,695        35.5%
    Net income (loss)
     available to
     stockholders         $       789  $       (12) $      (801)         *
      Basic net income
       (loss) per share   $      0.06  $     (0.00) $     (0.06)         *
      Diluted net income
       (loss) per share   $      0.04  $     (0.01) $     (0.05)         *
    Adjusted EBITDA(a)    $     9,013  $    12,784  $     3,771        41.8%
    Capital expenditures  $     2,901  $     2,815  $       (86)      (3.0)%


                                 Nine Months Ended             Change
                                     Sept. 30,           --------------------
                                 2008         2009       Amount      Percent
    -------------------------------------------------------------------------
    Revenues              $    53,766  $    77,700  $    23,934        44.5%
    Operating income      $    15,811  $    16,390  $       579         3.7%
    Interest expense      $   (14,230) $   (19,515) $     5,285        37.1%
    Net income (loss)
     available to
     stockholders         $     1,603  $    (1,599) $    (3,202)         *
    Basic net income
     (loss) per share     $      0.13  $     (0.13) $     (0.26)         *
    Diluted net income
     (loss) per share     $      0.10  $     (0.13) $     (0.23)         *
    Adjusted EBITDA(a)    $    26,345  $    36,637  $    10,292        39.1%
    Capital expenditures  $     6,849  $     6,392  $      (457)      (6.7)%

    * Not a meaningful calculation



    Reconciliation of Adjusted EBITDA to Net Income (Loss)
    ------------------------------------------------------

                                Three Months Ended         Nine Months Ended
                                   September 30,             September 30,
                                2008          2009         2008         2009
                          ------------ ------------ ------------ ------------
    Adjusted EBITDA
    Net income (loss)     $       789  $       (12) $     1,603  $    (1,599)
    Add: Depreciation           2,748        3,417        8,276       10,594
         Interest expense -
          net of premium        4,167        5,683       12,443       17,393
         Interest expense -
          caplet cost             253          469          723        1,169
         Interest expense -
          bond premium            (19)         (21)         (54)         (61)
         Interest expense -
          amortize loan
          cost                    373          338        1,118        1,014
         Gain/loss from
          investment                -            -          (45)           -
         Income tax expense
          (benefit)               464         (144)         696       (1,109)
         Change in fair
          value of
          derivative             (174)         (74)        (100)        (149)
         Loan fees                 19           19           57           57
         Amortization -
          intangibles             393        3,109        1,628        9,328
                          ------------ ------------ ------------ ------------
    Adjusted EBITDA       $     9,013  $    12,784  $    26,345  $    36,637
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    (a) Adjusted EBITDA is defined as consolidated net income (loss) plus
        interest expense, depreciation and amortization, income taxes and
        certain non-recurring fees, expenses or charges and other non-cash
        charges reducing consolidated net income. Adjusted EBITDA is not a
        measure calculated in accordance with generally acceptable 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 indenture governing the
        Company's senior subordinated notes and its 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. (including Acquired Entities at date of acquisition)
    ----------------------------------------------------------------

                                                                    June 30 -
                                                                    Sept. 30
                                            March     June     Sept.       %
    Key Operating          December 31,        31,      30,      30,  Change
     Statistics            2007     2008     2009     2009     2009     2009
                        -------- -------- -------- -------- -------- --------
    RLEC access lines:
      Voice lines        36,687   51,530   50,807   50,078   48,998   (2.2)%
      Data lines         12,160   18,709   19,365   19,596   19,784     1.0%
                        -------- -------- -------- -------- -------- --------
      RLEC access line
       equivalents(1)    48,847   70,239   70,172   69,674   68,782   (1.3)%

    CLEC access
     lines:
      Voice lines        16,973   26,558   26,744   27,110   28,153     3.8%
      Data lines          2,571    3,246    3,228    3,298    3,297   (0.0)%
                        -------- -------- -------- -------- -------- --------
      CLEC access line
       equivalents(1)    19,544   29,804   29,972   30,408   31,450     3.4%

    Otelco access line
     equivalents(1)      68,391  100,043  100,144  100,082  100,232     0.1%
                        -------- -------- -------- -------- -------- --------
                        -------- -------- -------- -------- -------- --------
    Cable television
     customers            4,169    4,082    4,132    4,114    4,126     0.3%
    Wholesale network
     connections              -   98,187  113,855  122,471  127,317     4.0%
    Dial-up internet
     customers           15,249   11,864   10,885   10,165    9,651   (5.1)%

    (1) We define access line equivalents as voice access lines and data
        access lines (including cable modems, digital subscriber lines, and
        dedicated data access trunks).


    FINANCIAL DISCUSSION FOR THIRD QUARTER 2009:

    All financial information includes three entities acquired from Country
    -----------------------------------------------------------------------
    Road Communications LLC on and as of October 31, 2008.
    ------------------------------------------------------

    Revenue
    -------
    

Total revenues grew 44.8% in the three months ended September 30, 2009 to $26.4 million from $18.2 million in the three months ended September 30, 2008. The growth in revenue was primarily associated with the acquisition and growth in CLEC sales. Local services revenue grew 85.6% in the third quarter to $12.4 million from $6.7 million in the quarter ended September 30, 2008. The acquisition provided an increase of $6.0 million for the quarter, partially offset by lower RLEC lines and the termination of a third-party billing services agreement. Network access revenue increased 27.2% in the third quarter to $8.5 million from $6.7 million in the quarter ended September 30, 2008. The acquisition provided an increase of $2.9 million for the quarter, partially offset by a decrease of $0.8 million in switched and special access. Cable television revenue in the three months ended September 30, 2009 increased 2.2% to just over $0.6 million from $0.6 million in the three months ended September 30, 2008. Internet revenue for the third quarter 2009 increased 15.6% to $3.5 million from $3.0 million in the quarter ended September 30, 2008, primarily associated with the acquisition. Transport services revenue grew 11.3% to $1.4 million in the three months ended September 30, 2009 from $1.2 million in the same period in 2008.

    
    Operating Expenses
    ------------------
    

Operating expenses in the three months ended September 30, 2009 increased 60.6% to $20.2 million from $12.6 million in the three months ended September 30, 2008. Cost of services increased 56.9% to $10.4 million in the quarter ending September 30, 2009 from $6.7 million in the same period last year, reflecting the acquisition. Increases in long distance and CLEC related costs in the balance of the Company were offset by reduced circuit expense and other network efficiencies. Selling, general and administrative expenses increased 16.1% to $3.2 million in the three months ended September 30, 2009 from $2.8 million in the three months ended September 30, 2008. The acquisition provided for an increase of $0.8 million, which was partially offset by lower external relations, legal and employee costs. Depreciation and amortization for third quarter increased 107.8% to $6.5 million from $3.1 million. Depreciation and amortization included $3.6 million from assets acquired in the acquisition including amortization of intangible assets acquired and a reduction of $0.2 million from the existing units.

    
    Interest Expense
    ----------------
    

Interest expense increased 35.5% to $6.5 million in the quarter ended September 30, 2009 from $4.8 million a year ago. The results reflect $1.5 million in interest on the increased senior debt associated with the acquisition and $0.2 million in caplet cost amortization associated with the interest rate cap. The Company has two interest rate swaps to limit its exposure to changes in interest rates through February 2012.

    
    Adjusted EBITDA
    ---------------
    

Adjusted EBITDA for the three months ended September 30, 2009 was $12.8 million compared to $9.0 million for the same period in 2008 and $12.4 million in the second quarter of 2009. Adjusted EBITDA included approximately $4.9 million from the acquisition. See financial tables for a reconciliation of Adjusted EBITDA to net income.

    
    Balance Sheet
    -------------
    

As of September 30, 2009, the Company had cash and cash equivalents of $16.7 million compared to $13.5 million at the end of 2008. Total long-term notes payable was reduced to $273.7 million, reflecting a voluntary prepayment of $5.0 million made in August. The Company continues to meet all of its loan covenants. The third quarter distribution of $5.3 million in interest and dividends to our share owners and $0.3 million in interest to our bond holders occurred on September 30, 2009. This represents the nineteenth consecutive quarterly distribution since going public in December 2004.

    
    Capital Expenditures
    --------------------
    

Capital expenditures were $2.8 million for the quarter, reflecting a return to a more normal level of investment in the business. The Company is upgrading and expanding its soft switching infrastructure in Maine and Missouri; enhancing DSL capacity; expanding IPTV capability in Alabama; and investing in competitive customer specific equipment to support the growth of our CLEC customers.

    
    Third Quarter Earnings Conference Call
    --------------------------------------
    

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Thursday, November 5, 2009, at 11:00 a.m. ET. To participate in the call, dial (913) 312-1236 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 Web site at www.OtelcoInc.com or www.earnings.com. To listen to the live call online, please visit the Web site at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live Web cast, a replay of the Web cast will be available on the Company's website at www.OtelcoInc.com or www.earnings.com for 30 days. A one-week telephonic replay may also be accessed by calling 719-457-0820 and using the confirmation code 9894405.

ABOUT OTELCO

Otelco Inc., headquartered in Oneonta, Alabama, provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia. The Company's services include local and long distance telephone, network access, transport, digital high-speed data lines and dial-up Internet access, cable television and other telephone related services. With more than 100,000 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 ten incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services through several subsidiaries. For more information, visit the Company's web site 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.

    
                                 OTELCO INC.
                         Consolidated Balance Sheets

                                                     As of         As of
                                                  December 31,  September 30,
                                                     2008           2009
                                                -------------- --------------
                                                                 (unaudited)
    Assets
      Current assets
        Cash and cash equivalents               $  13,542,255  $  16,717,829
        Accounts receivable:
          Due from subscribers, net of allowance
           for doubtful accounts of $318,446 and
           $365,076 respectively                    5,207,731      4,707,292
          Unbilled receivables                      2,567,730      2,488,917
          Other                                     4,348,044      3,327,553
      Materials and supplies                        2,305,755      2,092,842
      Prepaid expenses                              1,141,908      1,052,704
      Income tax receivable                           181,644          6,000
      Deferred income taxes                           827,686        827,686
                                                -------------- --------------
        Total current assets                       30,122,753     31,220,823
                                                -------------- --------------

      Property and equipment, net                  75,407,062     70,057,795
      Goodwill                                    189,334,837    188,190,078
      Intangible assets, net                       44,390,644     36,261,961
      Investments                                   2,015,583      1,996,451
      Deferred financing costs                      8,315,921      7,301,991
      Deferred income taxes                         5,897,382      6,123,703
      Interest rate cap                                 7,765              -
      Other assets                                     49,540        203,233
                                                -------------- --------------
        Total assets                            $ 355,541,487  $ 341,356,035
                                                -------------- --------------
                                                -------------- --------------

    Liabilities and Stockholders' Equity
      Current liabilities
        Accounts payable                        $   2,312,920  $   2,304,996
        Accrued expenses                            6,632,287      5,853,988
        Advance billings and payments               2,024,123      1,660,142
        Customer deposits                             180,582        191,324
                                                -------------- --------------
          Total current liabilities                11,149,912     10,010,450
                                                -------------- --------------
      Deferred income taxes                        45,962,402     45,328,310
      Interest rate swaps                                   -      1,318,608
      Advance billings and payments                   739,736        708,698
      Other liabilities                               188,346        158,387
      Long-term notes payable                     278,799,513    273,738,754
                                                -------------- --------------
        Total liabilities                         336,839,909    331,263,207
                                                -------------- --------------

      Derivative liability                            238,054         89,318
      Class B common convertible to senior
       subordinated notes                           4,085,033      4,085,033

      Stockholders' equity
        Class A Common stock, $.01 par value-
         authorized 20,000,000 shares; issued
         and outstanding 12,676,733 shares            126,767        126,767
        Class B Common stock, $.01 par value-
         authorized 800,000 shares; issued and
         outstanding 544,671 shares                     5,447          5,447
        Additional paid in capital                 19,277,959     12,575,136
        Retained deficit                           (3,870,923)    (5,470,262)
        Accumulated other comprehensive loss       (1,160,759)    (1,318,611)
                                                -------------- --------------
          Total stockholders' equity               14,378,491      5,918,477
                                                -------------- --------------
          Total liabilities and stockholders'
           equity                               $ 355,541,487  $ 341,356,035
                                                -------------- --------------
                                                -------------- --------------



                                 OTELCO INC.
                    Consolidated Statements of Operations
                                 (unaudited)

                           Three Months Ended           Nine Months Ended
                              September 30,               September 30,
                      --------------------------- ---------------------------
                           2008          2009          2008          2009
                      ------------- ------------- ------------- -------------
    Revenues
      Local services  $  6,678,826  $ 12,396,806  $ 20,116,902  $ 36,315,205
      Network access     6,694,486     8,517,512    19,237,269    24,876,708
      Cable television     601,025       614,114     1,713,457     1,833,164
      Internet           3,028,963     3,500,870     9,060,822    10,542,696
      Transport
       services          1,234,274     1,373,832     3,637,276     4,132,208
                      ------------- ------------- ------------- -------------
        Total revenues  18,237,574    26,403,134    53,765,726    77,699,981
                      ------------- ------------- ------------- -------------

    Operating expenses
      Cost of services
       and products      6,654,860    10,445,442    20,052,583    31,245,153
      Selling, general
       and
       administrative
       expenses          2,777,411     3,222,825     7,998,818    10,142,354
      Depreciation and
       amortization      3,140,688     6,525,796     9,903,702    19,922,383
                      ------------- ------------- ------------- -------------
        Total operating
         expenses       12,572,959    20,194,063    37,955,103    61,309,890
                      ------------- ------------- ------------- -------------

    Income from
     operations          5,664,615     6,209,071    15,810,623    16,390,091
                      ------------- ------------- ------------- -------------
    Other income
     (expense)
      Interest expense  (4,773,647)   (6,468,875)  (14,229,727)  (19,514,730)
      Change in fair
       value of
       derivative          173,842        74,274        99,787       148,736
      Other income         188,160        29,540       618,785       267,911
                      ------------- ------------- ------------- -------------
        Total other
         expenses       (4,411,645)   (6,365,061)  (13,511,155)  (19,098,083)
                      ------------- ------------- ------------- -------------
    Income (loss)
     before income tax   1,252,970      (155,990)    2,299,468    (2,707,992)
    Income tax
     (expense) benefit    (463,727)      144,251      (696,049)    1,108,652
                      ------------- ------------- ------------- -------------
    Net income (loss)
     available to
     common
     stockholders     $    789,243  $    (11,739) $  1,603,419  $ (1,599,340)
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------
    Weighted average
     shares outstanding:
      Basic             12,676,733    12,676,733    12,676,733    12,676,733
      Diluted           13,221,404    13,221,404    13,221,404    13,221,404

    Net income (loss)
     per share:
      Basic           $       0.06  $      (0.00) $       0.13  $      (0.13)
      Diluted         $       0.04  $      (0.01) $       0.10  $      (0.13)

    Dividends declared
     per share        $       0.18  $       0.18  $       0.53  $       0.53



                                 OTELCO INC.
                    Consolidated Statements of Cash Flows
                                 (unaudited)
                                                       Nine Months Ended
                                                         September 30,
                                                      2008           2009
                                                -------------- --------------
    Cash flows from operating activities:
      Net income (loss)                         $   1,603,419  $  (1,599,340)
      Adjustments to reconcile net income to
       cash flows from operating activities:
        Depreciation                                8,275,580     10,594,257
        Amortization                                1,628,122      9,328,126
        Interest rate caplet                          722,527      1,168,521
        Amortization of debt premium                  (54,117)       (60,759)
        Amortization of loan costs                  1,118,481      1,013,930
        Change in fair value of derivative            (99,787)      (148,736)
        Provision for deferred income taxes                 -        114,171
        Provision for uncollectible revenue           229,404        271,536
        Gain on early lease termination              (121,124)             -
        Changes in assets and liabilities; net
         of assets and liabilities acquired:
          Accounts receivables                       (582,528)     1,147,822
          Material and supplies                      (268,213)       212,913
          Prepaid expenses and other assets           601,101         89,204
          Income tax receivable                       255,106        175,644
          Accounts payable and accrued
           liabilities                              1,302,625       (616,048)
          Advance billings and payments              (181,015)      (395,019)
          Other liabilities                             5,539        (19,216)
                                                -------------- --------------
            Net cash from operating activities     14,435,120     21,277,006
                                                -------------- --------------

    Cash flows from investing activities:
      Acquisition and construction of property
       and equipment                               (6,848,799)    (6,392,058)
      Deferred charges                               (533,098)        (6,551)
                                                -------------- --------------
        Net cash used in investing activities      (7,381,897)    (6,398,609)
                                                -------------- --------------

    Cash flows from financing activities:
      Cash dividends paid                          (6,702,822)    (6,702,823)
      Repayment of long-term notes payable                  -     (5,000,000)
                                                -------------- --------------
        Net cash used in financing activities      (6,702,822)   (11,702,823)
                                                -------------- --------------

    Net increase in cash and cash equivalents         350,401      3,175,574
    Cash and cash equivalents, beginning of
     period                                        12,810,497     13,542,255
                                                -------------- --------------

    Cash and cash equivalents, end of period    $  13,160,898  $  16,717,829
                                                -------------- --------------
                                                -------------- --------------
    Supplemental disclosures of cash flow
     information:
      Interest paid                             $  12,705,214  $  17,763,703
                                                -------------- --------------
                                                -------------- --------------

      Income taxes paid (received)              $    (122,606) $      53,658
                                                -------------- --------------
                                                -------------- --------------

      Non-cash gain on early lease termination  $    (121,124) $           -
                                                -------------- --------------
    

SOURCE Otelco Inc.

For further information: For further information: Curtis Garner, Chief Financial Officer, Otelco Inc., (205) 625-3571, Curtis@otelcotel.com

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