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 second quarter ended June 30, 2011. Key highlights for Otelco include:
  • Total revenues of $25.5 million for second quarter 2011.
  • Operating income of $7.3 million for second quarter 2011.
  • Adjusted EBITDA (as defined below) of $11.9 million for second quarter 2011.

“After a slow start in the first quarter of the year, our second quarter results generated growth in revenue, operating margin and EBITDA when compared to first quarter. The management team focused on delivering superior service and controlling costs. With our expanded CLEC sales and marketing capability finally in place and the completion of our six colocation facilities in New Hampshire, we are in a position to begin to see growth in our non-regulated business.

“Our cash position remains strong,” continued Weaver. “In May, we made another voluntary repayment on our senior debt of $0.4 million representing a reduction of $11.5 million since the credit facility was renewed in October 2008. Capital investments of $3.5 million in our business infrastructure during the quarter, including approximately $0.7 million to replace assets damaged by spring tornadoes in Alabama, will support both growth and cost improvements in all of our service territories.

“The planned acquisition of Shoreham Telephone Company in Vermont is on schedule to close in fourth quarter,” added Weaver. “Shoreham will also anchor our CLEC expansion into the fourth New England state.

“The strength of our commitment to building value for and returning cash to our shareholders is unwavering, as evidenced by our twenty-sixth consecutive IDS dividend,” Weaver concluded.

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 August 11, 2011. The scheduled interest and any dividend declared will be paid on September 30, 2011, to holders of record as of the close of business on September 15, 2011. The interest payment will cover the period from June 30, 2011 through September 29, 2011. Currently, it is anticipated that the Company’s dividends in 2011 will continue to be treated as a return of capital for tax purposes. The Company has made twenty-six successive quarterly distributions of dividends and interest since its IDSs were originally offered to the public in December 2004.
Second Quarter 2011 Financial Summary
(Dollars in thousands, except per share amounts)
 
   

Three Months Ended June 30,
    Change
      2010     2011     Amount     Percent
Revenues $ 26,511     $ 25,501 $ (1,010 )     (3.8 )%
Operating income $ 7,011 $ 7,327 $ 316 4.5 %
Interest expense $ (6,179 ) $ (6,199 ) $ 20 0.3 %
Net income available to stockholders $ 417 $ 1,283 $ 866 *
Basic net income per share $ 0.03 $ 0.10 $ 0.07 *
Diluted net income per share $ 0.03 $ 0.10 $ 0.07 *
 
Adjusted EBITDA (a) $ 12,890 $ 11,887 $ (1,003 ) (7.8 )%
Capital expenditures $ 2,333 $ 3,508 $ 1,175 50.4 %
 
* Not a meaningful calculation
 

Six Months Ended June 30,
Change
      2010     2011     Amount     Percent
Revenues $ 52,305 $ 50,893 $ (1,412 ) (2.7 )%
Operating income $ 12,880 $ 12,647 $ (233 ) (1.8 )%
Interest expense $ (12,168 ) $ (12,369 ) $ 201 1.7 %
Net income available to stockholders $ 32 $ 1,288 $ 1,256 *
Basic net income per share $ - $ 0.10 $ 0.10 *
Diluted net income per share $ - $ 0.10 $ 0.10 *
 
Adjusted EBITDA (a) $ 25,220 $ 23,300 $ (1,920 ) (7.6 )%
Capital expenditures $ 4,087 $ 6,351 $ 2,264 55.4 %
 
* Not a meaningful calculation
 
Reconciliation of Adjusted EBITDA to Net Income
Three Months ended June 30, Six Months ended June 30,
      2010     2011     2010     2011
Net income $ 417 $ 1,283 $ 32 $ 1,288
Add: Depreciation 3,327 2,307 6,900 5,829
Interest expense - net of premium 5,840 5,857 11,491 11,685
Interest expense - amortize loan cost 339 342 677 684
Income tax expense 262 357 1 359
Change in fair value of derivatives 176 (480 ) 1,062 (986 )
Loan fees 19 19 38 38
Amortization - intangibles   2,510     2,202     5,019     4,403  
Adjusted EBITDA $ 12,890   $ 11,887   $ 25,220   $ 23,300  
 

(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. - Key Operating Statistics                      
   
Quarterly
% Change
December 31, March 31, June 30, from
2009 2010 2011 2011 March 31, 2011
Otelco access line equivalents (1) 100,356 99,639 99,271 98,304 (1.0 )%
 
RLEC and other services:
Voice access lines 48,215 45,461 44,770 44,113 (1.5 )%
Data access lines   20,066   20,852   21,158   21,137 (0.1 )%
Access line equivalents (1) 68,281 66,313 65,928 65,250 (1.0 )%
Cable television customers 4,195 4,227 4,029 4,054 0.6 %
Satellite television customers 100 125 217 222 2.3 %
Additional internet customers 9,116 6,975 6,435 6,046 (6.0 )%
RLEC dial-up 786 393 341 307 (10.0 )%
Other dial-up 6,439 4,300 3,786 3,403 (10.1 )%
Other data lines 1,891 2,282 2,308 2,336 1.2 %
 
CLEC:
Voice access lines 28,647 29,944 30,084 29,842 (0.8 )%
Data access lines   3,428   3,382   3,259   3,212 (1.4 )%
Access line equivalents (1) 32,075 33,326 33,343 33,054 (0.9 )%
Wholesale network connections 132,324 149,043 152,101 154,785 1.8 %
 
 
For the Years Ended For the Three Months Ended
December 31, March 31, June 30,
2009 2010 2011 2011
Total Revenues (in millions): $ 103.8 $ 104.4 $ 25.4 $ 25.5
RLEC $ 60.8 $ 58.4 $ 14.2 $ 14.3
CLEC $ 43.0 $ 46.0 $ 11.2 $ 11.2
 

(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 SECOND QUARTER 2011:

Revenues

Total revenues decreased 3.8% in the three months ended June 30, 2011, to $25.5 million from $26.5 million in the three months ended June 30, 2010. A one-time settlement in 2010 accounted for the majority of the difference. In addition, declines from the traditional loss of RLEC voice access line related revenues were not fully offset by growth in CLEC and cable television revenues. The table below provides the components of our revenues for the three months ended June 30, 2011 compared to the same period of 2010.

 
    Three Months Ended June 30,     Change
2010     2011 Amount     Percent
(dollars in thousands)
Local services $ 12,286 $ 11,940 $ (346 ) (2.8 )%
Network access 8,604 8,076 (528 ) (6.1 )
Cable television 699 707 8 1.1
Internet 3,527 3,458 (69 ) (2.0 )
Transport services   1,395   1,320   (75 ) (5.4 )
Total $ 26,511 $ 25,501 $ (1,010 ) (3.8 )
 

Local services revenue decreased 2.8% in the second quarter to $11.9 million from $12.3 million in the quarter ended June 30, 2010. The growth in CLEC revenue accounted for an increase of $0.1 million. RLEC revenue decreased $0.4 million reflecting the decline in RLEC voice access lines. Network access revenue decreased 6.1% in the second quarter to $8.1 million from $8.6 million in the quarter ended June 30, 2010. Interstate and intrastate switched access declined $0.1 million. A one-time settlement in 2010 accounted for the remainder of the difference. Cable television revenue in the three months ended June 30, 2011, increased 1.1% to remain at $0.7 million in the same periods for 2011 and 2010. Growth in IPTV subscribers and the shift to high-definition packages in Alabama was offset by the decline in revenue associated with the conversion of our Missouri cable customers to satellite services during first quarter 2011. Internet revenue for the second quarter 2011 decreased 2.0% to stay at $3.5 million in the three months ended June 30, 2011 and 2010. Growth in broadband data lines offset the loss of dial-up subscribers. Transport services revenue decreased 5.4% to $1.3 million in the three months ended June 30, 2011 from $1.4 million for the same period in 2010. Market price changes for new and existing customers caused the decline.

Operating Expenses

Operating expenses in the three months ended June 30, 2011, decreased 6.8% to $18.2 million from $19.5 million in the three months ended June 30, 2010. Cost of services and products increased 3.2% to $10.8 in the quarter ended June 30, 2011, from $10.4 million in the quarter ended June 30, 2010. Higher costs associated with the hosted PBX product support were partially offset by reduced overhead expenses. Selling, general and administrative expenses decreased 10.1% to $2.9 million in the three months ended June 30, 2011, from $3.2 million in the three months ended June 30, 2010, primarily related to a non-recurring reduction in employee and benefit costs and operating taxes plus lower legal expenses, partially offset by higher uncollectible expenses associated with carrier billing and customer credits. Depreciation and amortization for second quarter 2011 decreased 22.7% to $4.5 million from $5.8 million in second quarter 2010. Amortization of intangible assets associated with the Country Road acquisition decreased $0.3 million, including contract and customer base intangible assets. The remaining decrease of $1.0 million reflects lower depreciation of plant assets in Otelco’s regulated entities as assets become fully depreciated.

Interest Expense

Interest expense was constant at $6.2 million in the quarter ended June 30, 2011 compared to a year ago. The increase in interest expense associated with the additional senior subordinated notes issued in the exchange of our Class B shares in June 2010 was offset by lower interest costs on our senior long-term notes resulting from voluntary principal prepayments of $6.5 million since second quarter 2010.

Change in Fair Value of Derivatives

As a requirement of the existing senior debt, the Company has two interest rate swap agreements intended to hedge changes in interest rates on its senior debt. The swap agreements do not qualify for hedge accounting under the technical requirements of Accounting Standards Codification 815. Changes in value for the two swaps are reflected in change in the fair value of derivatives on the income statement and have no impact on cash. Over the life of the swaps, the change in value will be zero, with no impact on Adjusted EBITDA or operations. The liability for the swap decreased $0.5 million in second quarter 2011 compared to an increase in the liability for the swap of $0.2 million in the second quarter of 2010.

Adjusted EBITDA

Adjusted EBITDA for the three months ended June 30, 2011, was $11.9 million compared to $12.9 million for the same period in 2010 and $11.4 million in the first quarter of 2011. A one-time settlement in 2010 was a significant factor in the difference. See financial tables for a reconciliation of Adjusted EBITDA to net income.

Balance Sheet

As of June 30, 2011, the Company had cash and cash equivalents of $16.4 million compared to $18.2 million at the end of 2010. The Company made a $0.4 million voluntary prepayment in May 2011 on its senior long-term notes payable, reducing the balance to $162.0 million. This represents a combined reduction of $11.5 million since October 2008. The second quarter distribution of $5.6 million in interest and dividends to our shareowners, and $0.3 million in interest to our bond holders, occurred on June 30, 2011. This represents the twenty-sixth consecutive quarterly distribution since going public in December 2004.

Capital Expenditures

Capital expenditures were $3.5 million for the quarter as the Company continues to grow and invest in its infrastructure; implement cost saving projects; and complete the repairs associated with the spring tornados in Alabama and Missouri.

Second Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Thursday, August 4, 2011, at 11:00 a.m. ET. To participate in the call, participants should dial (719) 457-2679 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 or www.earnings.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 or www.earnings.com for 30 days. A one-week telephonic replay may also be accessed by calling (719) 457-0820 and using the passcode 5292035.

ABOUT OTELCO

Otelco Inc. 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 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 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 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.
 
OTELCO INC.
CONSOLIDATED BALANCE SHEETS
       
December 31,     June 30,
2010 2011
Assets (unaudited)
Current assets
Cash and cash equivalents $ 18,226,374 $ 16,433,171
Accounts receivable:

Due from subscribers, net of allowance for doubtful accounts of $230,752 and $280,924, respectively
4,406,257 3,981,258
Unbilled receivables 2,161,277 2,182,458
Other 4,299,088 5,209,607
Materials and supplies 1,817,311 1,905,575
Prepaid expenses 1,305,028 946,894
Deferred income taxes   626,267     626,267  
Total current assets   32,841,602     31,285,230  
 
Property and equipment, net 63,887,213 63,644,065
Goodwill 188,190,078 188,190,078
Intangible assets, net 25,934,042 22,312,111
Investments 1,967,095 1,954,340
Deferred financing costs 5,757,825 5,073,776
Deferred income taxes 4,415,097 4,415,097
Other assets   183,946     142,326  
Total assets $ 323,176,898   $ 317,017,023  
 
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 768,055 $ 657,999
Accrued expenses 7,926,954 6,769,695
Advance billings and payments 1,595,133 1,525,201
Deferred income taxes 353,285 353,285
Customer deposits   172,479     183,349  
Total current liabilities   10,815,906     9,489,529  
Deferred income taxes 42,512,576 42,512,576
Interest rate swaps 2,471,331 1,485,090
Advance billings and payments 656,968 636,276
Other liabilities 368,349 350,543
Long-term notes payable   271,595,855     271,159,708  
Total liabilities 328,420,985 325,633,722
 
Stockholders' Deficit

Class A Common Stock, $.01 par value-authorized 20,000,000 shares; issued and outstanding 13,221,404 shares
132,214 132,214
Additional paid in capital 921,718 -
Retained deficit   (6,298,019 )   (8,748,913 )
Total stockholders' deficit   (5,244,087 )   (8,616,699 )
Total liabilities and stockholders' deficit $ 323,176,898   $ 317,017,023  
 
OTELCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    Three months ended

June 30,
    Six months ended

June 30,
2010     2011 2010     2011
Revenues $ 26,510,944 $ 25,501,062 $ 52,305,153 $ 50,893,060
 
Operating expenses
Cost of services and products 10,427,781 10,756,512 21,037,973 21,776,724
Selling, general and administrative expenses 3,236,515 2,909,960 6,467,512 6,237,017
Depreciation and amortization   5,835,311     4,507,979     11,919,602     10,231,997  
Total operating expenses   19,499,607     18,174,451     39,425,087     38,245,738  
 
Income from operations   7,011,337     7,326,611     12,880,066     12,647,322  
 
Other income (expense)
Interest expense (6,179,470 ) (6,199,172 ) (12,168,112 ) (12,369,303 )
Change in fair value of derivatives (176,279 ) 480,086 (1,062,449 ) 986,241
Other income   24,027     33,148     382,859     382,497  
Total other expenses   (6,331,722 )   (5,685,938 )   (12,847,702 )   (11,000,565 )
 
Income before income tax 679,615 1,640,673 32,364 1,646,757
Income tax expense   (262,339 )   (357,396 )   (744 )   (358,828 )
 
Net income available to common stockholders $ 417,276   $ 1,283,277   $ 31,620   $ 1,287,929  
 
Weighted average common shares outstanding:
Basic 12,812,901 13,221,404 12,747,540 13,221,404
Diluted 13,221,404 13,221,404 13,221,404 13,221,404
Basic net income per common share $ 0.03 $ 0.10 $ - $ 0.10
Diluted net income per common share $ 0.03 $ 0.10 $ - $ 0.10
 
Dividends declared per common share $ 0.18 $ 0.18 $ 0.35 $ 0.35
 
OTELCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
    Six months ended
June 30,
2010     2011
Cash flows from operating activities:
Net income $ 31,620 $ 1,287,929
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation 6,900,218 5,829,266
Amortization 5,019,383 4,402,731
Amortization of debt premium (44,820 ) (50,319 )
Amortization of loan costs 677,302 684,048
Change in fair value of derivatives 1,062,449 (986,241 )
Provision for uncollectible revenue 65,581 322,029
Changes in operating assets and liabilities; net of operating assets and liabilities acquired:
Accounts receivable (16,151 ) (778,135 )
Material and supplies (25,002 ) (88,264 )
Prepaid expenses and other assets 373,651 345,828
Income tax receivable 389,486 -
Accounts payable and accrued liabilities (358,957 ) (1,267,317 )
Advance billings and payments (58,444 ) (90,624 )
Other liabilities   (2,041 )   (6,935 )
 
Net cash from operating activities   14,014,275     9,603,996  
 
Cash flows used in investing activities:
Acquisition and construction of property and equipment (4,087,263 ) (6,350,827 )
Deferred charges   (1,041 )   -  
 
Net cash used in investing activities   (4,088,304 )   (6,350,827 )
 
Cash flows used in financing activities:
Cash dividends paid (4,564,546 ) (4,660,544 )
Direct cost of exchange of Class B shares for Class A common shares (194,053 ) -
Principal repayment of long-term debt - (385,828 )
Loan origination costs   (155,160 )   -  
 
Net cash used in financing activities   (4,913,759 )   (5,046,372 )
 
Net increase (decrease) in cash and cash equivalents 5,012,212 (1,793,203 )
Cash and cash equivalents, beginning of period   17,731,044     18,226,374  
 
Cash and cash equivalents, end of period $ 22,743,256   $ 16,433,171  
 
Supplemental disclosures of cash flow information:
Interest paid $ 11,535,629   $ 11,735,574  
 
Income taxes paid (received) $ (289,163 ) $ 158,003  

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