OTEL Otelco Inc

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, 2019. Key operational and financial highlights for Otelco include:

• Total revenues of $15.6 million for fourth quarter 2019 and $62.8 million for 2019.
• Operating income of $3.5 million for fourth quarter 2019 and $14.8 million for 2019.
• Net income of $2.0 million for fourth quarter 2019 and $7.8 million for 2019.
• Consolidated EBITDA (as defined below) of $5.6 million for fourth quarter 2019 and $23.4 million for 2019.
• Scheduled principal payments of $1.1 million in fourth quarter 2019 and $4.4 million for 2019, reduced debt to $70.2 million at the end of 2019.
• Richard A. Clark appointed Chief Executive Officer

FOURTH QUARTER 2019 RESULTS The Company continued to execute on its strategy of fiber deployment and data speed enhancement in fourth quarter 2019. Revenues declined $0.6 million, or 3.8%, primarily from a reduction in customers, voice services and access fees, while operating expenses declined $0.2 million, or 2.1%, compared with the fourth quarter 2018. Interest expense declined $0.2 million reflecting lower interest rates and the reduction in principal under the Company’s credit agreement. Net income was $2.0 million in fourth quarter 2019, compared to $2.2 million in fourth quarter 2018. The Company invested $4.8 million in its network and operations. Consolidated EBITDA was $5.6 million for fourth quarter 2019, compared to $6.0 million for the same period in the previous year. The ratio of debt, net of cash, to Consolidated EBITDA was 2.87, reflecting the scheduled payments made on the debt during the year. Basic net income per share was $0.58 per share for fourth quarter 2019, compared to $0.66 per share in the same period of 2018.

ALABAMA FIBER INSTALLATION NEARING COMPLETION; CABLE UPGRADE TO DOCSIS 3.1 STARTEDIn July 2019, the Company announced plans to install 113 miles of additional fiber in Alabama by early 2020, focusing on the northern part of its territory in and around Arab, Alabama. All of the planned fiber has been engineered and marketing is underway to 3,589 Arab Lightwave locations, with 578 additional locations coming online in March 2020. Fiber-To-The-Premise (“FTTP”) provides up to gigabit speed internet capability. To date, 522 customers have upgraded their existing service or signed up for new service on the newly released fiber. In addition, equipment has been deployed to support higher speed VDSL service in all Alabama and Missouri locations, with work underway to upgrade New England sites.

In the southern part of its Alabama territory in and around Oneonta, Alabama, where Otelco is also the cable provider, the preliminary work is ongoing to upgrade its hybrid fiber coax network to DOCSIS 3.1. Otelco expects that, over the summer of 2020, all of its cable customers will also gain access to gigabit internet speeds, similar to those speeds available over a FTTP network.

Commenting on these developments, Richard Clark, President and Chief Executive Officer of Otelco, pointed out that the Company continues to increase the speed of its Lightwave FTTP service. Clark said, “We are now offering gigabit speeds in several of our FTTP communities in Maine, as well as the FTTP network in Oneonta, Alabama. While gigabit service is probably not necessary for most customers today, it is highly likely that speed requirements will continue to increase in coming years. We are redesigning our network to provide for these future requirements.” Clark indicated that Lightwave Gigabit would be expanded throughout the Company’s FTTP service areas later this year.

NETWORK INVESTMENT Otelco invested $12.4 million in 2019 to grow its fiber distribution network and improve its broadband capabilities. FTTP will be the primary vehicle to increase data capacity for Otelco’s customers, with Fiber-To-The-Node and fixed wireless options being employed in more sparsely populated areas. During 2019 and in January 2020, Otelco added a total of 268 miles of fiber in its service territories, an increase of 50% over its fiber mileage built in 2018. Otelco’s Lightwave FTTP network now passes approximately 12,890 discrete locations. The Company has over 2,500 miles of distribution and transport fiber in its network. During 2020, the Company plans to continue to invest in VDSL technology to meet or exceed its revised federal Alternative Connect America Model requirements while also standardizing on a single company-wide broadband access platform.

CONNECT AMERICA FUND II AND RURAL MUNICIPALITIESOtelco was awarded just over $0.9 million in federal Connect America Fund II (“CAF II”) funds to support the construction of a fixed wireless network to provide improved broadband services to four targeted communities in Western Massachusetts. The CAF II funds will be distributed over a ten-year period and support approximately 1,000 locations in Hawley, Monroe, Florida and Savoy (Massachusetts). The Company has partnered with another firm to build and operate the network. Construction of the network is underway, with completion targeted during 2020. Initial customers are being added as their respective construction phases are finished.

BALANCE SHEET At the end of 2019, the Company reported cash of $3.1 million and a balance on its credit facility of $70.2 million. During 2019, the Company invested $12.4 million in improving its network and operational capabilities, while reducing its loan balance by $4.4 million. Total assets increased from $114.4 million at the end of 2018 to $120.7 million on December 31, 2019. The Company’s ratio of consolidated indebtedness to Consolidated EBITDA was 3.00 at the end of 2019, reflecting the use of additional cash generated from the business to improve its network rather than make additional prepayments on its indebtedness. The interest rate margin on the loan will increase from 4.25% to 4.50% for 2020. The Company and its lender amended the credit agreement on March 2, 2020, to reflect the plans to continue a higher than historical level of investment in the business.

RICHARD CLARK APPOINTED CHIEF EXECUTIVE OFFICER AND ELECTED TO BOARD OF DIRECTORSEffective January 1, 2020, Richard A. Clark, President of Otelco, was also appointed to the additional title of Chief Executive Officer, replacing Robert J. Souza who retired at the end of 2019. Mr. Clark was also elected to the Board of Directors at that time. Clark, formerly Executive Vice President and Chief Financial Officer of TVC Albany, Inc., which does business as FirstLight Fiber, joined Otelco in October 2018 as Chief Operating Officer.

SUMMARY “Otelco targeted significant expansion of its fiber-based Lightwave services, as well as data speed improvements throughout its network in 2019,” noted Clark. “We invested over $12.4 million in our business, and our customers recognized the benefits of our improvements as reflected in a reduction in customer churn, which has declined to 0.5% in the fourth quarter 2019, down from 2.1% in the same period in 2018. This year, additional fiber will be available to our customers and the implementation of DOCSIS 3.1 will be completed – both investments bringing gigabit internet capability to more than 6,000 locations. With these improvements, we are well positioned to further 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 through 2020.” 

FOURTH QUARTER AND YEAR 2019 EARNINGS CONFERENCE CALLOtelco has scheduled a conference call, which will be broadcast live over the internet, on Tuesday, March 10, 2020, at 11:30 a.m. (Eastern Time). To participate in the call, participants should dial (856) 344-9299 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 8318186.

Fourth Quarter and Annual 2019 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
		Three Months Ended December 31,								Change
		2019				2018				Amount				Percent
Revenues		$	15,591			$	16,200			$	(609	)		(3.8	)	%
Operating income		$	3,531			$	4,024			$	(493	)		(12.3	)	%
Interest expense		$	(1,227	)		$	(1,460	)		$	(233	)		(16.0	)	%
Net income available to stockholders		$	1,979			$	2,237			$	(258	)		(11.5	)	%
Basic net income per share		$	0.58			$	0.66			$	(0.08	)		(12.1	)	%
Diluted net income per share		$	0.58			$	0.65			$	(0.07	)		(10.8	)	%
Consolidated EBITDA		$	5,582			$	6,004			$	(422	)		(7.0	)	%
Capital expenditures		$	4,845			$	2,311			$	2,534			109.6		%
		Twelve Months Ended December 31,								Change
		2019				2018				Amount				Percent
Revenues		$	62,766			$	66,068			$	(3,302	)		(5.0	)	%
Operating income		$	14,844			$	17,793			$	(2,949	)		(16.6	)	%
Interest expense		$	(5,271	)		$	(5,844	)		$	(573	)		(9.8	)	%
Net income available to stockholders		$	7,796			$	9,467			$	(1,671	)		(17.7	)	%
Basic net income per share		$	2.28			$	2.79			$	(0.51	)		(18.3	)	%
Diluted net income per share		$	2.27			$	2.76			$	(0.49	)		(17.8	)	%
Consolidated EBITDA		$	23,410			$	25,670			$	(2,260	)		(8.8	)	%
Capital expenditures		$	12,440			$	7,983			$	4,457			55.8		%

ABOUT OTELCOOtelco 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 STATEMENTSStatements 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,
				2019				2018
Assets
Current assets
	Cash and cash equivalents			$	3,113			$	4,657
	Accounts receivable:
		Due from subscribers, net of allowance for doubtful
			accounts of $209 and $577, respectively		3,908				4,183
		Other			1,905				1,899
	Materials and supplies				3,954				2,802
	Prepaid expenses				1,624				1,198
	Other assets				251				-
			Total current assets		14,755				14,739
Property and equipment, net					57,284				52,073
Goodwill					44,976				44,976
Intangible assets, net					530				919
Operating lease right-of-use asset					1,146				-
Investments					1,477				1,498
Interest rate cap					-				4
Other assets					577				143
			Total assets	$	120,745			$	114,352
Liabilities and Stockholders' Equity
Current liabilities
	Accounts payable			$	1,525			$	1,331
	Accrued expenses				4,861				5,054
	Advance billings and payments				1,618				1,614
	Customer deposits				44				48
	Current operating lease liability				296				-
	Current maturity of long-term notes payable, net of debt issuance costs				3,929				3,904
			Total current liabilities		12,273				11,951
Deferred income taxes					21,521				20,145
Advance billings and payments					2,157				2,234
Other liabilities					12				13
Long-term operating lease liability					850				-
Long-term notes payable, less current maturities and debt issuance costs					65,172				69,107
			Total liabilities		101,985				103,450
Stockholders' equity
	Class A Common Stock, $.01 par value-authorized 10,000,000 shares;
		issued and outstanding 3,412,805 and 3,388,624 shares, respectively			34				34
	Additional paid in capital				4,275				4,213
	Retained earnings				14,451				6,655
			Total stockholders' equity		18,760				10,902
			Total liabilities and stockholders' equity	$	120,745			$	114,352

OTELCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
			Three Months EndedDecember 31,								Twelve Months EndedDecember 31,
			2019				2018				2019				2018
Revenues			$	15,591			$	16,200			$	62,766			$	66,068
Operating expenses
	Cost of services			7,445				7,567				30,075				30,592
	Selling, general and administrative expenses			2,669				2,759				10,204				10,451
	Depreciation and amortization			1,946				1,850				7,643				7,232
		Total operating expenses		12,060				12,176				47,922				48,275
	Income from operations			3,531				4,024				14,844				17,793
Other income (expense)
	Interest expense			(1,227	)			(1,460	)			(5,271	)			(5,844	)
	Other income			11				11				616				263
		Total other expenses		(1,216	)			(1,449	)			(4,655	)			(5,581	)
Income before income tax expense				2,315				2,575				10,189				12,212
Income tax expense				(336	)			(338	)			(2,393	)			(2,745	)
Net income			$	1,979			$	2,237			$	7,796			$	9,467
Weighted average number of common shares outstanding:
	Basic			3,412,805				3,388,624				3,412,805				3,388,624
	Diluted			3,430,453				3,443,119				3,430,453				3,434,862
Basic net income per common share			$	0.58			$	0.66			$	2.28			$	2.79
Diluted net income per common share			$	0.58			$	0.65			$	2.27			$	2.76

 

OTELCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
					Years Ended December 31,
					2019				2018
Cash flows from operating activities:
	Net income				$	7,796			$	9,467
	Adjustments to reconcile net income to cash flows provided by operating activities:
		Depreciation				7,344				6,906
		Amortization				299				326
		Amortization of loan costs				452				476
		Non-cash lease amortization				265				-
		Provision for deferred income taxes				1,308				1,062
		Excess tax benefit from stock-based compensation				68				144
		Provision for uncollectible accounts receivable				214				553
		Stock-based compensation				254				308
		Changes in operating assets and liabilities
			Accounts receivable			(196	)			(113	)
			Materials and supplies			(1,152	)			(102	)
			Prepaid expenses and other assets			(860	)			1,982
			Accounts payable and accrued expenses			1				(37	)
			Advance billings and payments			(73	)			(203	)
			Other liabilities			(270	)			(9	)
				Net cash from operating activities		15,450				20,760
Cash flows used in investing activities:
	Acquisition and construction of property and equipment					(12,440	)			(7,983	)
	Retirement of investment					(4	)			(11	)
				Net cash used in investing activities		(12,444	)			(7,994	)
Cash flows used in financing activities:
	Loan origination costs					(12	)			(64	)
	Principal repayment of long-term notes payable					(4,350	)			(11,350	)
	Interest rate cap					4				(4	)
	CoBank equity account retirement					-				119
	Tax withholdings paid on behalf of employees for restricted stock units					(192	)			(380	)
				Net cash used in financing activities		(4,550	)			(11,679	)
Net (decrease) increase in cash and cash equivalents						(1,544	)			1,087
Cash and cash equivalents, beginning of period						4,657				3,570
Cash and cash equivalents, end of period					$	3,113			$	4,657
Supplemental disclosures of cash flow information:
	Interest paid				$	4,834			$	5,383
	Income taxes paid (refunded)				$	1,993			$	(502	)

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,
		2019				2018				2019				2018
Net income		$	1,979			$	2,237			$	7,796			$	9,467
Add:	Depreciation		1,879				1,771				7,344				6,906
	Interest expense less interest income		1,112				1,339				4,803				5,368
	Interest expense - amortize loan cost		110				122				452				476
	Income tax expense		336				338				2,393				2,745
	Amortization - intangibles		67				79				299				326
	Stock-based compensation		82				101				254				308
	Loan fees		17				17				69				74
Consolidated EBITDA		$	5,582			$	6,004			$	23,410			$	25,670

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, 2019.

Ratio of Debt, Net of Cash, to Consolidated EBITDA
as of December 31, 2019
($000)
Notes payable			$	69,101
Debt issuance costs				1,111
		Notes outstanding	$	70,212
Less cash				(3,113	)
Notes outstanding, net of cash			$	67,099
Consolidated EBITDA for the
		last twelve months	$	23,410
Total leverage ratio, net of cash				2.87

Contact:

Curtis GarnerChief Financial OfficerOtelco Inc.205-625-3580Curtis.Garner@Otelco.com