Nuvera Communications, Inc. - Quarter Report: 2015 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________
FORM 10-Q
(Mark One)
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the transition period from_____to_____.
Commission File Number 0-3024
NEW ULM TELECOM, INC.
(Exact name of Registrant as specified in its charter)
Minnesota | 41-0440990 | |
(State or other jurisdiction | (I.R.S. Employer |
New Ulm, Minnesota 56073
(Address of principal executive offices)
Registrants telephone number, including area code: (507) 354-4111
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes S No £
Indicate by check mark whether the Registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. See the definition of large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
£Large accelerated filer £Accelerated filer £Non-accelerated filer SSmaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ NoS
The total number of shares of the Registrants common stock outstanding as of May 15, 2015: 5,101,334.
2
PART I FINANCIAL INFORMATION
NEW ULM TELECOM, INC. | |||||
(Unaudited) | |||||
Three Months Ended | |||||
March 31, | |||||
| 2015 |
| 2014 | ||
OPERATING REVENUES: |
|
|
|
|
|
Local Service | $ | 1,613,794 |
| $ | 1,636,349 |
Network Access |
| 3,071,854 |
|
| 3,209,114 |
Video | 2,193,916 | 1,928,972 | |||
Data |
| 2,436,246 |
|
| 1,938,129 |
Long Distance | 187,748 | 205,198 | |||
Other Non-Regulated |
| 984,059 |
|
| 1,061,439 |
Total Operating Revenues |
| 10,487,617 |
| 9,979,201 | |
|
|
|
|
|
|
OPERATING EXPENSES: | |||||
|
|
|
|
|
|
Plant Operations (Excluding Depreciation and Amortization) | 1,990,277 | 1,964,577 | |||
Cost of Video |
| 1,967,378 |
|
| 1,713,184 |
Cost of Data | 525,753 | 323,538 | |||
Cost of Other Nonregulated Services |
| 489,242 |
|
| 534,733 |
Depreciation and Amortization | 2,430,081 | 2,331,781 | |||
Selling, General and Administrative |
| 1,940,565 |
|
| 1,833,508 |
Total Operating Expenses |
| 9,343,296 |
| 8,701,321 | |
|
|
|
|
|
|
OPERATING INCOME |
| 1,144,321 |
| 1,277,880 | |
|
|
|
|
|
|
OTHER (EXPENSE) INCOME | |||||
Interest Expense |
| (359,341) |
|
| (235,107) |
Interest Income | 55,152 | 86,122 | |||
Interest During Construction |
| 4,482 |
|
| 3,165 |
CoBankPatronage Dividends | 409,132 | 435,319 | |||
Other Investment Income |
| 48,533 |
|
| 49,622 |
Total Other Income (Expense) |
| 157,958 |
| 339,121 | |
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES | 1,302,279 | 1,617,001 | |||
|
|
|
|
|
|
INCOME TAXES |
| 469,059 |
| 679,141 | |
|
|
|
|
|
|
NET INCOME | $ | 833,220 | $ | 937,860 | |
|
|
|
|
|
|
BASIC AND DILUTED | |||||
NET INCOME PER SHARE | $ | 0.16 |
| $ | 0.18 |
DIVIDENDS PER SHARE | $ | 0.0850 |
| $ | 0.0850 |
WEIGHTED AVERAGE SHARES OUTSTANDING |
| 5,101,334 |
|
| 5,089,534 |
The accompanying notes are an integral part of these consolidated financial statements.
3
NEW ULM TELECOM, INC. | |||||
(Unaudited) | |||||
Three Months Ended | |||||
March 31, | |||||
2015 | 2014 | ||||
Net Income | $ | 833,220 |
| $ | 937,860 |
Other Comprehensive Income (Loss): | |||||
Unrealized Gain on Interest Rate Swaps |
| - |
|
| - |
Income Tax Expense Related to Unrealized | |||||
Gain on Interest Rate Swaps |
| - |
|
| - |
Other Comprehensive Income |
| - |
| - | |
|
|
|
|
|
|
Comprehensive Income | $ | 833,220 | $ | 937,860 |
The accompanying notes are an integral part of these consolidated financial statements.
4
NEW ULM TELECOM, INC. | |||||
(Unaudited) | |||||
ASSETS | |||||
March 31, 2015 | December 31, 2014 | ||||
CURRENT ASSETS: |
|
|
|
|
|
Cash and Cash Equivalents | $ | 98,025 | $ | 945,087 | |
Receivables, Net of Allowance for |
|
|
|
|
|
Doubtful Accounts of $60,000 and $60,500 | 1,225,848 | 1,442,477 | |||
Income Taxes Receivable |
| 50,934 |
|
| 847,893 |
Materials, Supplies, and Inventories | 2,423,610 | 2,227,925 | |||
Deferred Income Taxes |
| 787,660 |
|
| 785,605 |
Prepaid Expenses |
| 832,260 |
| 714,372 | |
Total Current Assets |
| 5,418,337 |
|
| 6,963,359 |
INVESTMENTS & OTHER ASSETS: |
|
|
|
|
|
|
|
| |||
Goodwill |
| 39,805,349 |
|
| 39,805,349 |
Intangibles | 23,048,919 | 23,666,728 | |||
Other Investments |
| 7,300,319 |
|
| 7,079,362 |
Deferred Charges and Other Assets |
| 424,003 |
| 475,936 | |
Total Investments and Other Assets |
| 70,578,590 |
|
| 71,027,375 |
PROPERTY, PLANT & EQUIPMENT: |
|
|
|
|
|
Telecommunications Plant | 115,744,744 | 115,100,273 | |||
Other Property & Equipment |
| 14,156,948 |
|
| 13,713,496 |
Video Plant |
| 9,863,927 |
| 9,566,806 | |
Total Property, Plant and Equipment |
| 139,765,619 |
|
| 138,380,575 |
Less Accumulated Depreciation |
| 94,109,924 |
| 92,297,652 | |
Net Property, Plant & Equipment |
| 45,655,695 |
|
| 46,082,923 |
TOTAL ASSETS | $ | 121,652,622 |
| $ | 124,073,657 |
The accompanying notes are an integral part of these consolidated financial statements.
5
NEW ULM TELECOM, INC. | |||||
CONSOLIDATED BALANCE SHEETS (continued) | |||||
(Unaudited) | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
March 31, 2015 | December 31, 2014 | ||||
CURRENT LIABILITIES: |
|
|
|
|
|
Current Portion of Long-Term Debt | $ | 2,700,000 |
| $ | 2,700,000 |
Accounts Payable | 951,452 | 3,049,999 | |||
Other Accrued Taxes |
| 239,426 |
|
| 180,818 |
Deferred Compensation | 62,906 | 63,428 | |||
Accrued Compensation |
| 386,654 |
|
| 692,974 |
Other Accrued Liabilities | 1,749,677 | 1,528,499 | |||
Total Current Liabilities |
| 6,090,115 |
|
| 8,215,718 |
LONG-TERM DEBT, Less Current Portion |
| 36,263,090 |
|
| 36,944,471 |
NONCURRENT LIABILITIES: |
|
|
|
|
|
Loan Guarantees | 280,356 | 297,475 | |||
Deferred Income Taxes |
| 19,203,329 |
|
| 19,161,144 |
Unrecognized Tax Benefit | 163,333 | 281,363 | |||
Other Accrued Liabilities |
| 374,028 |
|
| 276,857 |
Deferred Compensation | 828,768 |
| 846,631 | ||
Total Noncurrent Liabilities |
| 20,849,814 |
|
| 20,863,470 |
COMMITMENTS AND CONTINGENCIES: |
| - |
|
| - |
STOCKHOLDERS' EQUITY: |
|
|
|
|
|
| |||||
Preferred Stock - $1.66 Par Value, 10,000,000 Shares Authorized, None Issued |
| - |
|
| - |
Common Stock - $1.66 Par Value, 90,000,000 Shares Authorized, 5,101,334 Shares Issued and Outstanding | 8,502,223 | 8,502,223 | |||
Retained Earnings |
| 49,947,380 |
|
| 49,547,775 |
Total Stockholders' Equity |
| 58,449,603 |
| 58,049,998 | |
|
|
|
|
|
|
TOTAL LIABILITIES AND | |||||
STOCKHOLDERS' EQUITY | $ | 121,652,622 |
| $ | 124,073,657 |
The accompanying notes are an integral part of these consolidated financial statements.
6
NEW ULM TELECOM, INC. | |||||
(Unaudited) | |||||
Three Months Ended | |||||
March 31, 2015 |
| March 31, 2014 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
Net Income | $ | 833,220 | $ | 937,860 | |
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
Depreciation and Amortization | 2,444,271 | 2,341,465 | |||
Undistributed Earnings of Other Equity Investments |
| (29,443) |
|
| (46,291) |
Noncash Patronage Refund | (102,283) | (108,830) | |||
Stock Issued in Lieu of Cash Payment |
| 12,600 |
|
| 16,800 |
Changes in Assets and Liabilities: |
| ||||
Receivables |
| 225,023 |
|
| (376,701) |
Income Taxes Receivable | 796,959 | (60,901) | |||
Inventories |
| (195,685) |
|
| (27,571) |
Prepaid Expenses | (130,488) | (26,753) | |||
Deferred Charged and Other Assets |
| 39,696 |
|
| - |
Accounts Payable | (1,690,098) | (751,622) | |||
Accrued Income Taxes |
| - |
|
| (114,017) |
Other Accrued Taxes | 58,608 | 59,609 | |||
Other Accrued Liabilities |
| 12,029 |
|
| (502,609) |
Deferred Income Tax | (77,900) | - | |||
Deferred Compensation |
| (18,385) |
|
| (19,135) |
Net Cash Provided by Operating Activities |
| 2,178,124 |
| 1,321,304 | |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||
Additions to Property, Plant, and Equipment, Net |
| (1,793,493) |
|
| (1,340,560) |
Other, Net | (106,350) | (43,499) | |||
Net Cash Used in Investing Activities |
| (1,899,843) |
|
| (1,384,059) |
| |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
Principal Payments of Long-Term Debt | (675,000) | (1,084,500) | |||
Loan Origination Fees |
| (10,347) |
|
| - |
Changes in Revolving Credit Facility | (6,381) | 1,239,037 | |||
Dividends Paid |
| (433,615) |
|
| (432,612) |
Net Cash Used in Financing Activities |
| (1,125,343) |
| (278,075) | |
|
|
|
|
|
|
NET DECREASE IN CASH | (847,062) | (340,830) | |||
|
|
|
|
|
|
CASH at Beginning of Period |
| 945,087 |
| 964,404 | |
|
|
|
|
|
|
CASH at End of Period | $ | 98,025 | $ | 623,574 | |
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
Cash paid for interest | $ | 301,543 | $ | 221,882 | |
Net cash paid (received) for income taxes | $ | (250,000) |
| $ | 855,500 |
The accompanying notes are an integral part of these consolidated financial statements.
7
NEW ULM TELECOM, INC. | |||||||||||||
(Unaudited) | |||||||||||||
YEAR ENDED DECEMBER 31, 2014, AND | |||||||||||||
THREE MONTHS ENDED MARCH 31, 2015 | |||||||||||||
Accumulated Other Comprehensive Income (Loss) | |||||||||||||
Common Stock Shares | Retained Earnings | Total Equity | |||||||||||
Amount |
|
| |||||||||||
BALANCE on December 31, 2013 | 5,089,534 |
| $ | 8,482,556 |
| $ | - |
| $ | 48,471,153 |
| $ | 56,953,709 |
Director's Stock Plan | 11,800 |
|
| 19,667 |
|
|
|
|
| 64,333 |
|
| 84,000 |
Net Income | 2,744,744 | 2,744,744 | |||||||||||
Dividends |
|
|
|
|
|
|
|
|
| (1,732,455) |
|
| (1,732,455) |
|
|
|
|
|
|
|
| ||||||
BALANCE on December 31, 2014 | 5,101,334 |
|
| 8,502,223 |
|
| - |
|
| 49,547,775 |
|
| 58,049,998 |
Net Income |
|
|
|
|
|
|
|
|
| 833,220 |
|
| 833,220 |
Dividends | (433,615) | (433,615) | |||||||||||
BALANCE on March 31, 2015 | 5,101,334 |
| $ | 8,502,223 |
| $ | - |
| $ | 49,947,380 |
| $ | 58,449,603 |
The accompanying notes are an integral part of these consolidated financial statements.
8
NEW ULM TELECOM, INC.
CONDENSED NOTES TO CONSOLID ATED FINANCIAL STATEMENTS
March 31, 2015 (Unaudited)
Note 1 Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements of New Ulm Telecom, Inc. and its subsidiaries (NU Telecom) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2014.
The preparation of our financial statements in conformity with GAAP requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results may differ from these estimates. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.
Our consolidated financial statements report the financial condition and results of operations for NU Telecom and its subsidiaries in one business segment: the Telecom Segment. Inter-company transactions have been eliminated from the consolidated financial statements.
Revenue Recognition
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or a service has been provided, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.
Revenues are earned from our customers primarily through the connection to our networks, digital and commercial television programming, Internet services (high-speed broadband), and hosted and managed services. Revenues for these services are billed based on set rates for monthly service or based on the amount of time the customer is utilizing our facilities. The revenue for these services is recognized when the service is rendered.
Revenues earned from interexchange carriers (IXC) accessing our network are based on the utilization of our network by these carriers as measured by minutes of use on the network or special access to the network by the individual carriers. Revenues are billed at tariffed access rates for both interstate and intrastate calls. Revenues for these services are recognized based on the period the access is provided.
9
Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The Federal Communications Commission (FCC) established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company's actual or average costs. There has been a change in the composition of interstate access charges in recent years, shifting more of the charges to the end user and reducing the amount of access charges paid by the IXCs. We believe this trend will continue.
New Ulm Telecoms and Sleepy Eye Telephone Companys (SETC) settlements from the pools are based on their actual costs to provide service, while the settlements for NU Telecom subsidiaries Western Telephone Company, Peoples Telephone Company and Hutchinson Telephone Company (HTC) are based on nationwide average schedules. Access revenues for New Ulm Telecom and SETC include an estimate of a cost study each year that is trued-up subsequent to the end of any given year. Our management believes the estimates included in our preliminary cost study are reasonable. We cannot predict the future impact that industry or regulatory changes will have on interstate access revenues.
Intrastate access rates are filed with state regulatory commissions in Minnesota and Iowa.
We derive revenues from the sale, installation and servicing of communication systems. In accordance with GAAP, these deliverables are accounted for separately. We recognize revenue from customer contracts for sales and installations using the completed-contract method, which recognizes income when the contract is substantially complete. We recognize rental revenues over the rental period.
Cost of Services (excluding depreciation and amortization)
Cost of services includes all costs related to delivery of communication services and products. These operating costs include all costs of performing services and providing related products including engineering, network monitoring and transport cost.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include direct and indirect selling expenses, customer service, billing and collections, advertising and all other general and administrative costs associated with the operations of the business.
Depreciation and Amortization Expense
We use the group life method (mass asset accounting) to depreciate the assets of our telephone companies. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. Depreciation expense was $1,812,272 and $1,713,973 for the three months ended March 31, 2015 and 2014. We amortize our definite-lived intangible assets over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.
10
Income Taxes
The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Significant components of our deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnership investments and intangible assets due to the difference between book and tax basis. Our effective income tax rate is normally higher than the United States tax rate due to state income taxes and permanent differences.
We account for income taxes in accordance with GAAP. As required by GAAP, we recognize the financial statement benefit of tax positions only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
As of March 31, 2015 and 2014 we had $163,333 and $259,739 of unrecognized tax benefits net of a federal tax benefit of $55,533 and $88,311, which if recognized would affect the effective tax rate. A petition related to Hector Communications Corporations (HCC) 2006 Minnesota tax return was previously filed in Minnesota Tax Court. This matter was resolved in April 2015.
We are primarily subject to United States, Minnesota, Nebraska and Iowa income taxes. Tax years subsequent to 2010 remain open to examination by federal and state tax authorities. Our policy is to recognize interest and penalties related to income tax matters as income tax expense. As of March 31, 2015 and December 31, 2014 we had $0 and $89,910 of accrued interest that related to income tax matters.
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers and created a new topic in the FASB Accounting Standards Codification, Topic 606. The new standard provides a single comprehensive revenue recognition framework for all entities and supersedes nearly all existing United States GAAP revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and also requires enhanced disclosures. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within the reporting period. Early application is not permitted. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related disclosures.
In the first quarter of 2013, the FASB issued ASU 2013-02 to improve the disclosure of reclassifications out of accumulated other comprehensive income. The Update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Also, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income (only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period) either on the face of the statement where net income is presented or in the notes. The adoption of this guidance did not have a material impact on our disclosures or consolidated financial statements.
We have reviewed all significant newly issued accounting pronouncements and determined they are either not applicable to our business or that no material effect is expected on our financial position and results of operations.
11
Note 2 Fair Value Measurements
We have adopted the rules prescribed under GAAP for our financial assets and liabilities. GAAP includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entitys pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1: | Inputs are quoted prices in active markets for identical assets or liabilities. |
Level 2: | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs that are derived principally from or corroborated by observable market data. |
Level 3: | Inputs are derived from valuation techniques where one or more significant inputs or value drivers are unobservable. |
We have used financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We accounted for derivative instruments in accordance with GAAP that requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case, the gains and losses are included in other comprehensive income rather than in earnings.
We previously had entered into interest rate swaps with our lender, CoBank, ACB (CoBank), to manage our cash flow exposure to fluctuations in interest rates. These instruments were designated as cash flow hedges and were effective at mitigating the risk of fluctuations on interest rates in the market place. Any gains or losses related to changes in the fair value of these derivatives were accounted for as a component of accumulated other comprehensive income (loss) for as long as the hedge remained effective.
The fair value of our interest rate swap agreements is discussed in Note 5 Interest Rate Swaps. The fair value of our swap agreements were determined based on Level 2 inputs.
Other Financial Instruments
Other Investments - It is difficult to estimate a fair value for equity investments in companies carried on the equity or cost basis due to a lack of quoted market prices. We conducted an evaluation of our investments in all of our companies in connection with the preparation of our audited financial statements at December 31, 2014. We believe the carrying value of our investments is not impaired.
Debt We estimate the fair value of our long-term debt based on the discounted future cash flows we expect to pay using current rates of borrowing for similar types of debt. Fair value of the debt approximates carrying value.
Other Financial Instruments - Our financial instruments also include cash equivalents, trade accounts receivable and accounts payable where the current carrying amounts approximate fair market value.
12
Note 3 Goodwill and Intangibles
We account for goodwill and other intangible assets under GAAP. Under GAAP, goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that the fair value of goodwill may be below its carrying value. Our goodwill totaled $39,805,349 at March 31, 2015 and December 31, 2014.
As required by GAAP, we do not amortize goodwill and other intangible assets with indefinite lives, but test for impairment on an annual basis or earlier if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. These circumstances include, but are not limited to (i) a significant adverse change in the business climate, (ii) unanticipated competition or (iii) an adverse action or assessment by a regulator. Determining impairment involves estimating the fair value of a reporting unit using a combination of (i) the income or discounted cash flows approach and (ii) the market approach that utilizes comparable companies data. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting units goodwill to its carrying amount. In calculating the implied fair value of the reporting units goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. We recognize impairment loss when the carrying amount of goodwill exceeds its implied fair value.
In 2014 and 2013, we engaged an independent valuation firm to complete our annual impairment testing for existing goodwill. For 2014 and 2013, the testing results indicated no impairment charge to goodwill as the determined fair value was sufficient to pass the first step of the impairment test.
Our intangible assets subject to amortization consist of acquired customer relationships, regulatory rights, trade name and a non-competition agreement. We amortize intangible assets with finite lives over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment. In addition, we periodically reassess the carrying value, useful lives and classifications of our identifiable intangible assets. The components of our identified intangible assets are as follows:
| March 31, 2015 |
| December 31, 2014 | ||||||||||
Gross Carrying Amount | Gross Carrying Amount | ||||||||||||
Useful Lives | Accumulated Amortization | Accumulated Amortization | |||||||||||
|
| ||||||||||||
Definite-Lived Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Relationships | 14-15 yrs | $ | 29,278,445 | $ | 11,609,709 | $ | 29,278,445 | $ | 11,087,066 | ||||
Regulatory Rights | 15 yrs |
|
| 4,000,000 |
|
| 1,933,317 |
|
| 4,000,000 |
|
| 1,866,651 |
Trade Name | 3-5 yrs | 570,000 | 256,500 | 570,000 | 228,000 | ||||||||
Indefinitely-Lived Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Video Franchise |
| 3,000,000 | - |
| 3,000,000 |
|
| - | |||||
Total |
|
| $ | 36,848,445 |
| $ | 13,799,526 |
| $ | 36,848,445 |
| $ | 13,181,717 |
|
| ||||||||||||
Net Identified Intangible Assets |
|
|
|
|
| $ | 23,048,919 |
|
|
|
| $ | 23,666,728 |
Amortization expense related to the definite-lived intangible assets was $617,809 and $617,808 for the three months ended March 31, 2015 and 2014.
Amortization expense for the remaining nine months of 2015 and the five years subsequent to 2015 is estimated to be:
● | (April 1 December 31) - $1,853,424 | |
● | 2016 - $2,469,256 | |
● | 2017 - $2,469,083 | |
● | 2018 - $2,355,083 | |
● | 2019 - $2,355,083 | |
● | 2020 - $2,355,083 |
13
Note 4 Secured Credit Facility
We have a credit facility with CoBank. Under the credit facility, we entered into Master Loan Agreements (MLAs) and a series of supplements to the respective MLAs.
NU Telecom and its respective subsidiaries also have entered into security agreements under which substantially all the assets of NU Telecom and its respective subsidiaries have been pledged to CoBank as collateral. In addition, NU Telecom and its respective subsidiaries have guaranteed all the obligations under the credit facility. These mortgage notes are required to be paid in quarterly installments covering principal and interest, beginning in the year of issue and maturing on December 31, 2021.
On December 31, 2014, NU Telecom entered into an Amended and Restated MLA with CoBank. The new MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. NU Telecoms subsidiary HTC was a borrower under the prior credit facility, but NU Telecom is now the sole borrower under the new MLA. There are two loans under the new MLA, which include a $35 million term loan and a $9 million revolver loan. Also, under the new MLA, NU Telecom has the ability to either increase the amount of the commitment under the revolver loan by up to $6 million in a single increase, or add an incremental term loan up to $6 million.
Within 180 days after the closing date of December 31, 2014, NU Telecom must enter into interest rate protection agreements in form and substance reasonably satisfactory to CoBank so as to fix or limit interest rates payable by NU Telecom at all times to at least 40% of the outstanding principal balance of the $35 million term loan for an initial average weighted life of at least three years.
Our new loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,100,000 in any year if our Total Leverage Ratio, that is, the ratio of our Indebtedness to EBITDA as defined in the loan documents) is greater than 2.50 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.50 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements.
Our credit facility requires us to comply with specified financial ratios and tests. These financial ratios and tests include total leverage ratio, debt service coverage ratio, equity to total assets ratio, fixed coverage ratio and maximum annual capital expenditures tests.
As described in Note 5 Interest Rate Swaps, we had entered into interest rate swaps that effectively fixed our interest rates. As of June 30, 2013 the remaining swap matured and we currently have no interest rate swaps in effect. The remaining debt of $43.3 million ($4.3 million available under the revolving credit facilities and $39.0 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 2.78%, as of March 31, 2015. Our debt as of March 31, 2014 was subject to variable interest rates at an effective weighted average interest rate of 2.10%. This increase in the weighted average interest rate at March 31, 2015 was due to the new Amended and Restated MLA with CoBank mentioned above.
14
Note 5 Interest Rate Swaps
We assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.
We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facility with CoBank require that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility.
To meet this objective, we previously had entered into Interest Rate Swap Agreements with CoBank. Under these Interest Rate Swap Agreements and subsequent swaps that each covered a specified notional dollar amount, we had changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of those interest rate swaps, we paid a fixed contractual interest rate and (i) made an additional payment if the LIBOR variable rate payment was below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment was above the contractual rate.
Each month, we made interest payments to CoBank under its loan agreements based on the current applicable LIBOR Rate, plus the contractual LIBOR margin in effect with respect to each applicable loan, without reflecting any interest rate swaps. At the end of each calendar quarter, CoBank adjusted our aggregate interest payments based on the difference, if any, between the amounts paid by us during the quarter and the current effective interest rate. Net interest payments are reported in our consolidated income statement as interest expense.
Our last remaining swap under our old credit facility with CoBank matured as of June 30, 2013 and we currently have no interest rate swaps in effect. However, as previously stated, within 180 days after the closing date of December 31, 2014, NU Telecom must enter into interest rate protection agreements in form and substance reasonably satisfactory to CoBank so as to fix or limit interest rates payable by NU Telecom at all times to at least 40% of the outstanding principal balance of the $35 million term loan for an initial average weighted life of at least three years.
Our interest rate swaps under our previous credit facilities qualified as cash flow hedges for accounting purposes under GAAP. We had reflected the effect of these hedging transactions in the financial statements. The unrealized gains were reported in other comprehensive income. If we had terminated our interest rate swap agreements, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income, which is classified in stockholders equity, into earnings on the consolidated statements of income.
The fair value of the Companys interest rate swap agreements were determined based on valuations received from CoBank and were based on the present value of expected future cash flows using discount rates appropriate with the terms of the swap agreements. The fair value indicates an estimated amount we would be required to pay if the contracts were canceled or transferred to other parties.
Note 6 Other Investments
We are a co-investor with other rural telephone companies in several partnerships and limited liability companies. These joint ventures make it possible to offer services to customers, including digital video services and fiber optic transport services that we would have difficulty offering on our own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. We recognize income and losses from these investments on the equity method of accounting. For a listing of our investments, see Note 9 Segment Information.
Note 7 Guarantees
On September 30, 2011, FiberComm, LC refinanced two existing loans with American State Bank into a ten-year loan, maturing on September 30, 2021. As of March 31, 2015, we have recorded a liability of $280,356 in connection with the guarantee on this new loan. This guarantee may be exercised if FiberComm, LC does not make its required payments on this note.
15
Note 8 Deferred Compensation
As of March 31, 2015 and December 31, 2014, we have recorded other deferred compensation relating to executive compensation payable to certain former executives of past acquisitions.
Note 9 Segment Information
We operate in the Telecom Segment and have no other significant business segments. The Telecom Segment consists of voice, data and video communication services delivered to the customer over our local communications network. No single customer accounted for a material portion of our consolidated revenues.
The Telecom Segment operates the following incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) and has investment ownership interests as follows:
Telecom Segment
● |
| ILECs: |
▪ | New Ulm Telecom, Inc., the parent company; | |
▪ | Hutchinson Telephone Company, a wholly-owned subsidiary of NU Telecom; | |
▪ | Peoples Telephone Company, a wholly-owned subsidiary of NU Telecom; | |
▪ | Sleepy Eye Telephone Company, a wholly-owned subsidiary of NU Telecom; | |
▪ | Western Telephone Company, a wholly-owned subsidiary of NU Telecom. | |
● | CLECs: | |
▪ | NU Telecom, located in Redwood Falls, Minnesota; | |
▪ | Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield, Minnesota. | |
● | Our investments and interests in the following entities include some management responsibilities: | |
▪ | FiberComm, LC 19.99% subsidiary equity ownership interest. FiberComm, LC is located in Sioux City, Iowa; | |
▪ | Broadband Visions, LLC 24.30% subsidiary equity ownership interest. Broadband Visions, LLC provides video headend and Internet services; | |
▪ | Independent Emergency Services, LLC 14.29% subsidiary equity ownership interest. Independent Emergency Services, LLC is a provider of E-911 services to the State of Minnesota as well as a number of counties located in Minnesota; | |
▪ | SM Broadband, LLC 12.50% subsidiary equity ownership interest. SM Broadband Services, LLC provides network connectivity for regional businesses. |
Note 10 Commitments and Contingencies
Over the course of 2014, NU Telecom received notice of disputes from several IXCs, and has subsequently been named in litigation regarding traffic exchanged between our companies and specifically the classification of IntraMTA wireless traffic related to access charges. This litigation is an industry-wide dispute affecting numerous telecom companies. NU Telecom is working with other telecom companies towards a resolution of the litigation at both the federal and state levels. We cannot currently predict the outcome of this litigation or its impact to our company. Refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2014 for the discussion relating to commitments and contingencies.
Note 11 Subsequent Events
On April 28, 2015, NU Telecoms Board of Directors declared a regular quarterly dividend on our common stock of $0.085 per share, payable on June 15, 2015 to stockholders of record at the close of business on May 8, 2015.
We have evaluated and disclosed subsequent events through the filing date of this Quarterly Report on Form 10-Q.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such as expects, anticipates, intends, plans, believes, seeks, estimates, targets, projects, will, may, continues, and should, and variations of these words and similar expressions, are intended to identify these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from such statements.
Because of these risks, uncertainties and assumptions and the fact that any forward-looking statements made by us and our management are based on estimates, projections, beliefs and assumptions of management, they are not guarantees of future performance and you should not place undue reliance on them. In addition, forward-looking statements speak only as of the date they are made, which is the filing date of this Form 10-Q. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
Managements discussion and analysis of financial condition and results of operations stated in this Form 10-Q, are based on NU Telecoms consolidated unaudited financial statements that have been prepared in accordance with GAAP and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate. The preparation of our financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Our senior management has discussed the development and selection of accounting estimates and the related Management Discussion and Analysis disclosure with our Audit Committee. For a summary of our significant accounting policies, see Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference.
Results of Operations
Overview
NU Telecom has a state-of-the-art; fiber-rich communications network and offers a diverse array of communications products and services. Our ILEC and CLEC businesses provide local telephone service and network access to other telecommunications carriers for connections to our networks. In addition, we provide long distance service, broadband Internet access, video services, and managed and hosted solutions services. On December 31, 2012 NU Telecom completed a spin-off agreement with HCC, continuing the expansion of our service area into the Minnesota communities and surrounding areas of Bellechester, Goodhue, Hanska, Mazzepa, Sleepy Eye and White Rock. As a one-stop shopping experience for our customers, we sell and service other communications products.
Our operations consist primarily of providing services to customers for a monthly charge. Because many of these services are recurring in nature, backlog orders and seasonality are not significant factors. Our working capital requirements include financing the construction of our networks, which consists of switches and cable, data, Internet protocol (IP) and digital TV. We also require capital to maintain our networks and infrastructure; fund the payroll costs of our highly skilled labor force; maintain inventory to service capital projects, our network and our telephone equipment customers; pay dividends and provide for the carrying value of trade accounts receivable, some of which may take several months to collect in the normal course of business.
17
Executive Summary
· In the third quarter of 2014, NU Telecom completed construction of an expansion in our fiber optic cable network and began providing Little Crow and Minnesota River Valley Education District (MRVED), which are a consortium of school districts in central and southern Minnesota, with high capacity video/audio and data switching services and fiber optic cable transport of information between its members. This agreement allowed us to expand our state-of-the art; fiber-rich communications network outside of our traditional service territories and will allow us access to new markets that we have not originally served. This contract term is for ten years. In addition, NU Telecom began providing high capacity fiber and data services to Pioneerland Library System, which is a consortium of public libraries located along the same fiber route as Little Crow and MRVED. This contract term is for three years.
· On December 31, 2014, NU Telecom entered into an Amended and Restated MLA with CoBank. The new MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. NU Telecoms subsidiary HTC was a borrower under the prior credit facility, but NU Telecom is now the sole borrower under the new MLA. There are two loans under the new MLA, which include a $35 million term loan and a $9 million revolver loan. The term loan requires payments of $675,000 per quarter, beginning March 2015, with the final installment due December 31, 2021. NU Telecom may borrow from time to time under the revolver loan, which also matures on December 31, 2021. Also, under the new MLA, NU Telecom has the ability to either increase the amount of the commitment under the revolver loan by up to $6 million in a single increase, or add an incremental term loan up to $6 million. See Note 4 Secured Credit Facility for additional information.
· Net income for the first quarter of 2015 totaled $833,220 which was a $104,640 or 11.16% decrease compared to the first quarter of 2014. This decrease was primarily due to an increase in interest expense resulting from our new Amended and Restated MLA with CoBank, which is described above.
· Consolidated revenue for the first quarter of 2015 totaled $10,487,617, which was a $508,416 or 5.09% increase compared to the first quarter of 2014. This increase was primarily due to increases in data and video revenues. Data revenues increased primarily due to the addition of Little Crow/MRVED and Pioneerland on our newly expanded fiber optic cable network, an increase in data customers and increased managed service revenues. Video revenue increased primarily due to increased demand for our high definition (HD) and digital video recorder (DVR) services. Also contributing to the increase in video revenue was a combination of rate increases introduced into several of our markets over the course of the last couple of years.
Business Trends
Included below is a synopsis of business trends management believes will continue to affect our business in 2015.
Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the telecommunications industry from cable television providers (CATV), Voice over Internet Protocol (VoIP) providers, wireless, other competitors and emerging technologies. As we experience access line losses, our switched access revenue will continue to decline consistent with industry-wide trends. A combination of changing minutes of use, carriers optimizing their network costs and lower demand for dedicated lines may affect our future voice and switched access revenues. Voice and switched access revenues may also be significantly affected by potential changes in rate regulation at the state and federal levels. We continue to monitor regulatory changes as we believe that rate regulation will continue to be scrutinized and may be subject to change. Access line decreases totaled 1,381 or 4.86% for the twelve months ended March 31, 2015 due to the reasons mentioned above.
The expansion of our state-of-the-art; fiber-rich communications network, growth in broadband customer sales along with continued migration to higher connectivity speeds and the sales of Internet value-added services such as on-line data backup, and hosted and managed service solutions are expected to continue to offset the revenue declines from the access line trends discussed above.
To be competitive, we continue to emphasize the bundling of our products and services. Our customers have the option to bundle local phone, high-speed Internet, long distance and video services. These bundles provide our customers with one convenient location to obtain all of their communications and entertainment options, a convenient billing solution and bundle discounts. We believe that product bundles positively impact our customer retention, and the associated discounts provide our customers the best value for their communications and entertainment options. We have a state-of-the-art, fiber-rich broadband network, which, along with the bundling of our voice, Internet and video services allows us to meet customer demands for products and services. We continue to focus on the research and deployment of advanced technological products that include broadband services, private line, VoIP, digital video, IPTV and hosted and managed services.
18
We continue to evaluate our operating structure to identify opportunities for increased operational efficiencies and effectiveness. This involves evaluating opportunities for task automation, network efficiency and the balancing of our workforce based on the current needs of our customers.
Financial results for the Telecom Segment are included below:
Telecom Segment | ||||||||||
| Three Months Ended March 31, | |||||||||
2015 | 2014 | Increase (Decrease) | ||||||||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
Local Service | $ | 1,613,794 | $ | 1,636,349 | $ | (22,555) | -1.38% | |||
Network Access |
| 3,071,854 |
|
| 3,209,114 |
|
| (137,260) |
| -4.28% |
Video | 2,193,916 | 1,928,972 | 264,944 | 13.73% | ||||||
Data |
| 2,436,246 |
|
| 1,938,129 |
|
| 498,117 |
| 25.70% |
Long Distance | 187,748 | 205,198 | (17,450) | -8.50% | ||||||
Other |
| 984,059 |
|
| 1,061,439 |
|
| (77,380) |
| -7.29% |
Total Operating Revenues |
| 10,487,617 |
| 9,979,201 |
| 508,416 | 5.09% | |||
|
|
|
|
|
|
|
|
|
|
|
Cost of Services, Excluding Depreciation and Amortization | 4,972,650 | 4,536,032 | 436,618 | 9.63% | ||||||
Selling, General and Administrative |
| 1,940,565 |
|
| 1,833,508 |
|
| 107,057 |
| 5.84% |
Depreciation and Amortization Expenses |
| 2,430,081 |
| 2,331,781 |
| 98,300 | 4.22% | |||
Total Operating Expenses |
| 9,343,296 |
|
| 8,701,321 |
|
| 641,975 |
| 7.38% |
Operating Income | $ | 1,144,321 |
| $ | 1,277,880 |
| $ | (133,559) |
| -10.45% |
Net Income | $ | 833,220 |
| $ | 937,860 |
| $ | (104,640) |
| -11.16% |
Capital Expenditures | $ | 1,793,493 |
| $ | 1,340,560 |
| $ | 452,933 |
| 33.79% |
|
|
|
|
|
|
|
| |||
Key metrics | ||||||||||
Access Lines |
| 27,051 |
|
| 28,432 |
|
| (1,381) |
| -4.86% |
Video Customers | 10,737 | 10,894 | (157) | -1.44% | ||||||
Broadband Customers |
| 14,662 |
|
| 14,196 |
|
| 466 |
| 3.28% |
Long Distance Customers | 14,638 | 14,876 | (238) | -1.60% | ||||||
19
Revenue
Local Service We receive recurring revenue for basic local services that enable customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. In addition to subscribing to basic local telephone services, our customers may choose from a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. Local service revenue was $1,613,794, which is $22,555 or 1.38% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This decrease was primarily due to the decline in access lines, partially offset by federally mandated rate increases implemented over the past several years. The number of access lines we serve as an ILEC and CLEC have been decreasing, which is consistent with a general industry trend, as customers are increasingly utilizing other technologies, such as wireless phones and IP services, as well as customers eliminating second phone lines when they move their Internet service from a dial-up platform to a broadband platform. To help offset declines in local service revenue, we implemented an overall strategy that continues to focus on selling a competitive bundle of services. Our focus on marketing competitive service bundles to our customers creates value for the customer and aids in the retention of our voice lines.
Network Access We provide access services to other telecommunications carriers for the use of our facilities to terminate or originate traffic on our network. Additionally, we bill subscriber line charges (SLCs) to substantially all of our customers for access to the public switched network. These monthly SLCs are regulated and approved by the FCC. In addition, network access revenue is derived from several federally administered pooling arrangements designed to provide network support and distribute funding to the ILECs. Network access revenue was $3,071,854, which is $137,260 or 4.28% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This decrease was primarily due to lower minutes of use on our network.
In recent years, IXCs and others have become more aggressive in disputing both interstate carrier access charges and the applicability of access charges to their network traffic. We believe that long distance and other communication providers will continue to challenge the applicability of access charges either before the FCC or directly with the local exchange carriers. We cannot predict the likelihood of future claims and cannot estimate the impact.
Video We receive monthly recurring revenue from our subscribers for providing commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve seventeen communities with our Internet Protocol TV/digital TV services and four communities with our CATV services. Video revenue was $2,193,916, which is $264,944 or 13.73% higher in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This increase was primarily due to increased demand for our HD and DVR services. Also contributing to the increase in video revenue was a combination of rate increases introduced into several of our markets over the course of the last couple of years.
Data We provide high speed Internet to business and residential customers. Our revenue is earned based on the offering of various flat rate packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage. Data revenue was $2,436,246, which is $498,117 or 25.70% higher in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This increase was primarily due to the addition of Little Crow/MRVED and Pioneerland on our newly expanded fiber optic cable network, an increase in data customers and increased managed services revenues. We expect continued growth in this area will be driven by expansion of our service areas, our aggressively packaging service bundles and marketing managed service solutions to businesses.
Long Distance Our customers are billed for toll or long-distance services on either a per call or flat-rate basis. This also includes the offering of directory assistance, operator service and long distance private lines. Long distance revenue was $187,748, which is $17,450 or 8.50% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This decrease was primarily due to the decline in the number of customers subscribing to our long distance service.
Other Revenue We generate revenue from directory publishing, sales and service of customer premise equipment (CPE), bill processing and other customer services. Our directory publishing revenue for Yellow Page advertising in our telephone directories recurs monthly. We also provide retail sales and service of cellular phones and accessories through Telespire, a national wireless provider. We resell these wireless services as TechTrends Wireless, our branded product. We receive both recurring revenue for our wireless services, as well as revenue collected for the sales of wireless phones and accessories. Other revenue was $984,059, which is $77,380 or 7.29% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This decrease was primarily due to a decrease in the sales of CPE, partially offset by increases in the sales of cellular phone and activation revenues.
20
Cost of Services (excluding Depreciation and Amortization)
Cost of services (excluding depreciation and amortization) was $4,972,650, which is $436,618 or 9.63% higher in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This increase was primarily due to higher programming costs from video content providers, increased costs associated with providing service and support for Little Crow/MRVED and Pioneerland, and higher costs associated with increased maintenance and support agreements on our equipment and software.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,940,565, which is $107,057 or 5.84% higher in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This increase was primarily due to higher costs associated with professional and consulting services.
Depreciation and Amortization
Depreciation and amortization was $2,430,081, which is $98,300 or 4.22% higher in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This increase was primarily due to depreciation recognized on the expansion of our new fiber optic cable network in 2014.
Operating Income
Operating income was $1,144,321, which is $133,559 or 10.45% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This decrease was primarily due to an increase in expenses, partially offset by an increase in revenues, all of which are described above.
See Consolidated Statements of Income on Page 3 (for discussion below)
Other Income and Interest Expense
Interest expense was $359,341, which is $124,234 or 52.84% higher in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This increase was primarily due to the increased interest rates charged on the Amended and Restated MLA with CoBank entered into on December 31, 2014.
Interest income was $55,152, which is $30,970 or 35.96% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. This decrease was primarily due to a decrease in dividend income earned on our investments.
Other income for the three months ended March 31, 2015 and 2014 included a patronage credit earned with CoBank as a result of our debt agreements with them. The patronage credit allocated and received in 2015 was $409,132, compared to $435,519 allocated and received in 2014. CoBank determines and pays the patronage credit annually, generally in the first quarter of the calendar year, based on its results from the prior year. We record these patronage credits as income when they are received.
Other investment income was $48,533, which is $1,089 or 2.19% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. Other investment income is primarily from our equity ownership in several partnerships and limited liability companies.
Income Taxes
Income tax expense was $469,059, which is $210,082 or 30.93% lower in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The decrease in income taxes was primarily due to the recognition of unrealized tax benefits associated with the HCC Minnesota tax issue, which was resolved in April 2015. The effective income tax rates for the three months ending March 31, 2015 and 2014 were approximately 36.0% and 42.0%. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.
21
Liquidity and Capital Resources
Capital Structure
NU Telecoms total capital structure (long-term and short-term debt obligations, plus stockholders equity) was $97,412,693 at March 31, 2015, reflecting 60.0% equity and 40.0% debt. This compares to a capital structure of $97,694,469 at December 31, 2014, reflecting 59.4% equity and 40.6% debt. In the telecommunications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately 2.78 times debt to EBITDA (earnings before interest, taxes, depreciation and amortization) as defined in the loan documents, which is well within acceptable limits for our agreements and our industry. Our management believes adequate operating cash flows and other internal and external resources, such as our cash on hand and revolving credit facility, are available to finance ongoing operating requirements, including capital expenditures, business development, debt service, temporary financing of trade accounts receivable and dividends.
Liquidity Outlook
Our short-term and long-term liquidity needs arise primarily from (i) capital expenditures; (ii) working capital requirements needed to support the growth of our business; (iii) debt service; (iv) dividend payments on our stock and (v) potential acquisitions.
Our primary sources of liquidity for the three months ended March 31, 2015 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At March 31, 2015 we had a working capital deficit of $671,778. However, at March 31, 2015, we also had approximately $4.3 million available under our revolving credit facility to fund any short-term working capital needs. The working capital deficit was primarily the result of a reduction in cash to fund operations and purchase capital equipment in lieu of using our revolving credit facility.
On December 31, 2014, NU Telecom entered into an Amended and Restated MLA with CoBank. The new MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. NU Telecoms subsidiary HTC was a borrower under the prior credit facility, but NU Telecom is now the sole borrower under the new MLA. There are two loans under the new MLA, which include a $35 million term loan and a $9 million revolver loan. The term loan requires payments of $675,000 per quarter, beginning March 2015, with the final installment due December 31, 2021. NU Telecom may borrow from time to time under the revolver loan, which also matures on December 31, 2021. Also, under the new MLA, NU Telecom has the ability to either increase the amount of the commitment under the revolver loan by up to $6 million in a single increase, or add an incremental term loan up to $6 million.
Cash Flows
We expect our liquidity needs to include capital expenditures, payment of interest and principal on our indebtedness, income taxes and dividends. We use our cash inflow to manage the temporary increases in cash demand and utilize our revolving credit facility to manage more significant fluctuations in liquidity caused by growth initiatives.
While it is often difficult to predict the impact of general economic conditions on our business, we believe that we will be able to meet our current and long-term cash requirements primarily through our operating cash flows, and anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.
We periodically seek to add growth initiatives by expanding our network or our markets through organic or internal investments or through strategic acquisitions. We believe we can adjust the timing or the number of our initiatives according to any limitations which may be imposed by our capital structure or sources of financing. At this time, we do not anticipate our capital structure will limit our growth initiatives over the next twelve months.
The following table summarizes our cash flow:
| Three Months Ended March 31, | ||||
2015 | 2014 | ||||
Net cash provided by (used in): |
|
|
|
|
|
Operating activities | $ | 2,178,124 | $ | 1,321,304 | |
Investing activities |
| (1,899,843) |
|
| (1,384,059) |
Financing activities |
| (1,125,343) |
| (278,075) | |
Increase (Decrease) in cash | $ | (847,062) |
| $ | (340,830) |
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Cash Flows from Operating Activities
Cash generated by operations in the first three months of 2015 was $2,178,124, compared to cash generated by operations of $1,321,304 in the first three months of 2014. The increase in cash from operating activities in 2015 was primarily due to a decrease in receivables and income taxes receivable.
Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to stockholders. Cash at March 31, 2015 was $98,025, compared to $945,087 at December 31, 2014.
Cash Flows Used in Investing Activities
We operate in a capital intensive business. We continue to upgrade our local networks for changes in technology to provide advanced services to our customers.
Cash used in investing activities was $1,899,843 during the first three months of 2015 compared to $1,384,059 for the first three months of 2014. Capital expenditures relating to on-going operations were $1,793,493 for the three months ended March 31, 2015, compared to $1,340,560 for the three months ended March 31, 2014. We expect total plant additions to be approximately $6.6 million in 2015. Our investing expenditures are financed with cash flows from our current operations and advances on our line of credit. We believe that our current operations will provide adequate cash flows to fund our plant additions for the remainder of this year; however, funding from our revolving credit facility is available if the timing of our cash flows from operations does not match our cash flow requirements. As of March 31, 2015, we had approximately $4.3 million available under our existing credit facility to fund capital expenditures and other operating needs.
Cash Flows Used in Financing Activities
Cash used in financing activities for the three months ended March 31, 2015 was $1,125,343 and included long-term debt repayments of $675,000, payment of loan origination costs of $10,347, net payments on our revolving credit facility of $6,381 and the distribution of $433,615 of dividends to our stockholders. Cash used in financing activities for the three months ended March 31, 2014 was $278,075 and included long-term debt repayments of $1,084,500, net advances on our revolving credit facility of $1,239,037 and the distribution of $432,612 of dividends to our stockholders.
Working Capital
We had a working capital deficit (i.e. current assets minus current liabilities) of $671,778 as of March 31, 2015, with current assets of approximately $5.4 million and current liabilities of approximately $6.1 million, compared to a working capital deficit of $1,252,359 as of December 31, 2014. The ratio of current assets to current liabilities was 0.89 and 0.85 as of March 31, 2015 and December 31, 2014. The working capital deficit at March 31, 2015 was primarily the result of a reduction in cash to fund operations and purchase capital equipment in lieu of using our revolving credit facility.
At March 31, 2015 and December 31, 2014 we are in compliance with all stipulated financial ratios in our loan agreements.
Dividends and Restrictions
We declared a quarterly dividend of $.0850 per share for the first quarter of 2015 and 2014, which totaled $433,615 for the first quarter of 2015 and $432,612 for the first quarter of 2014.
We expect to continue to pay quarterly dividends during 2015, but only if and to the extent declared by our Board of Directors on a quarterly basis and subject to various restrictions on our ability to do so (described below). Dividends on our common stock are not cumulative.
There are security and loan agreements underlying our current CoBank credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. See below and Note 4 Secured Credit Facility for additional information.
On December 31, 2014, we entered into an Amended and Restated MLA with CoBank. The MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. NU Telecoms subsidiary HTC was a borrower under the prior credit facility, but NU Telecom is now the sole borrower under the new MLA.
Our new loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,100,000 in any year if our Total Leverage Ratio, that is, the ratio of our Indebtedness to EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the loan documents) is greater than 2.50 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.50 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements.
Our Board of Directors reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions. The cash requirements of our current dividend payment practices are in addition to our other expected cash needs. Should our Board of Directors determine a dividend will be declared, we expect we will have sufficient availability from our current cash flows from operations to fund our existing cash needs and the payment of our dividends. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any fluctuations in working capital and other cash needs.
Long-Term Debt
See Note 4 Secured Credit Facility for information pertaining to our long-term debt.
Recent Accounting Developments
See Note 1 Basis of Presentation and Consolidation for a discussion of recent accounting developments.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for a smaller reporting company.
Item 4. Controls and Procedures
Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) or Rule 15d-15(e), as of the end of the period subject to this Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.
Managements Report on Internal Control over Financial Reporting
As of the end of the period covered by this Quarterly Report on Form 10-Q (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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Over the course of 2014, NU Telecom received notice of disputes from several IXCs, and has subsequently been named in litigation regarding traffic exchanged between our companies and specifically the classification of IntraMTA wireless traffic related to access charges. This litigation is an industry-wide dispute affecting numerous telecom companies. NU Telecom is working with other telecom companies towards a resolution of the litigation at both the federal and state levels. We cannot currently predict the outcome of this litigation or its impact to our company.
Other than the litigation mentioned above and other routine litigation incidental to our business, there are no pending material legal proceedings to which we are a party or to which any of our property is subject.
Not required for a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
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Exhibit
Number Description
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEW ULM TELECOM, INC. | ||
Dated: May 15, 2015 | By: | /s/ Bill D. Otis |
Bill D. Otis, President and Chief Executive Officer | ||
Dated: May 15, 2015 | By: | /s/ Curtis O. Kawlewski |
Curtis O. Kawlewski, Chief Financial Officer |
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