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HickoryTech Reports First Quarter 2014 Results

HickoryTech Corporation (NASDAQ:HTCO), doing business as Enventis, today reported net income of $2.1 million for the first quarter ending March 31, 2014, an increase of 27 percent year over year. EBITDA totaled $12.1 million in the first quarter, an increase of 11 percent. Revenue totaled $44.2 million and was down 9 percent from first quarter 2013, primarily due to lower equipment sales, which were down 35 percent year over year. Services revenue, which accounts for 77 percent of the company’s revenue, increased 2 percent year over year.

“We continue to execute on our strategy and were able to grow fiber and data revenue 6 percent in first quarter as we expanded our fiber distribution networks and built fiber to additional business customers,” said John Finke, HickoryTech’s president and chief executive officer. “We delivered four consecutive quarters of consistent outcomes and growth in our fiber and data business. We’ve done a good job managing our costs in the quarter and will continue to work to align our operating costs with our pace of growth, ultimately focused on delivering additional value to our results.”

Fiber and Data Segment (before inter-segment eliminations)

  • First quarter Fiber and Data revenue totaled $17.7 million, up 6 percent year over year. This growth is the result of increased, high-capacity fiber and data sales within retail and wholesale customer segments.
  • Costs and expenses for this segment totaled $14.8 million, a 2 percent reduction from the prior year.
  • Operating income totaled $2.9 million, up 80 percent year over year.
  • Net income totaled $1.7 million, an increase of 81 percent year over year.

As a reminder, first quarter 2013 results included a pre-tax impairment charge of $633,000 related to a write-off of non-strategic wireless assets acquired with the Fargo-based acquisition. The charge, which totaled $380,000 after tax, negatively affected net income in 2013 by approximately $0.03 per share. This non-cash charge was recorded in the Fiber and Data Segment.

Equipment Segment (before inter-segment eliminations)

  • First quarter Equipment Segment revenue totaled $12.2 million, a 29 percent decrease year over year.
  • Equipment sales revenue was $10 million, down 35 percent compared to a year ago. Equipment revenue tends to fluctuate quarter to quarter based on timing of sales and installation periods.
  • Support Services revenue was $2.2 million, a 19 percent increase from first quarter 2013.
  • Operating income totaled $486,000, a 41 percent decrease year over year.
  • Net income totaled $287,000, a 41 percent decrease compared to the first quarter 2013.

Telecom Segment (before inter-segment eliminations)

  • First quarter Telecom Segment revenue totaled $14.4 million, down 2 percent from a year ago. Telecom results were affected by legacy service declines primarily in network access and local service revenue. Broadband service revenue grew 5 percent, offsetting part of the Telecom revenue decline. Competitive price compression is impacting the growth rates of broadband services.
  • DSL subscribers increased 4 percent and Digital TV subscribers were up 8 percent.
  • Costs and expenses totaled $12.5 million, down 3 percent year over year.
  • Operating and Net income were both up 1 percent compared to the first quarter 2013.

Total Capex, Depreciation and Amortization
Total capital expenditures in the first quarter were $4.9 million, compared with $5.8 million in the comparable quarter in 2013, down primarily due to timing of projects year over year.

Depreciation and amortization expense increased $571,000, or 8 percent in the first quarter. The increase is primarily attributed to increased capital expenditures associated with fiber network expansion and success-based capital expenditures supporting Fiber and Data revenue growth.

Debt Position
Long-term debt and current maturities, including capitalized leases, totaled $134.8 million as of March 31, 2014. The first quarter 2014 debt balance represents a year-over-year decrease of $1.6 million and a reduction of $7.1 million since the company’s acquisition of IdeaOne Telecom two years ago. Net debt is a measure of financial balance sheet strength, which subtracts cash on hand from the total debt balance. Net debt as of March 31, 2014 is $122.6 million, the lowest level of net debt for the company since March 2012.

Fiscal Outlook for 2014
HickoryTech confirms its previous fiscal 2014 outlook.

  • Revenue in 2014 is expected to be within a range of $189 million to $199 million. The company expects growth in business and broadband revenue to offset the majority of the declines in legacy Telecom services.
  • Net income is expected to be in a range of $6.4 million to $8.4 million.
  • EBITDA is expected to be in a range of $47.0 million to $49.5 million.
  • Capital expenditures are expected to be between $24 million and $28 million, with approximately 60 percent of capex expected for success-based opportunities.
  • The company expects its year-end 2014 debt balance to be in a range of $133 million to $135 million.

Conference Call and Webcast
HickoryTech will hold a conference call and webcast on Friday, May 2, at 9 a.m. CT to review the company’s first-quarter 2014 results. The conference call dial-in number is 877-372-0867, conference ID 20839064. A webcast with audio and presentation slides will be available at http://investor.hickorytech.com.

HickoryTech Shareholders Asked to Approve Corporate Name Change to Enventis
The corporate name change is the final step in the company’s move to a unified brand following its change to Enventis in October 2013 when the company rebranded its telecom markets to align under its Enventis brand. HickoryTech shareholders are asked to approve a corporate name change to Enventis Corporation, with the vote being solidified at the company’s annual shareholder meeting on May 6. Upon a successful vote, the company’s stock would trade as Enventis on the NASDAQ exchange under ticker symbol “ENVE.”

“Aligning our corporate name with Enventis, the brand we use to serve thousands of customers across the upper Midwest, allows us to gain full recognition as a public company and as a leading business and broadband service provider,” added Finke. “HickoryTech has transformed from a local telephone company into a leading, regional communications provider focused on growing and expanding business and broadband services.”

About HickoryTech Corporation
HickoryTech Corporation is a leading communications provider serving business and residential customers in the upper Midwest and is doing business as Enventis. With headquarters in Mankato, Minn., the corporation has 520 employees and an expanded, multi-state fiber network spanning more than 4,200 route miles serving Minnesota, Iowa, North Dakota and South Dakota. The company provides IP-based voice and data solutions, MPLS networking, data center and managed hosted services and communication systems to businesses across a five-state region. The company also offers broadband Internet, Digital TV, voice and data services to businesses and consumers in southern Minnesota and northwest Iowa. The Company trades on the NASDAQ, symbol: HTCO, and is a member of the Russell 2000 Index. For more information, visit www.enventis.com.

Non-GAAP Measures
To supplement the Company’s financial statements presented in accordance with GAAP, the Company provides certain non-GAAP financial measures of financial performance and position. The Company’s reference to these non-GAAP measures should be considered in addition to results prepared under current accounting standards, but are not a substitute for, or superior to, GAAP results. These non-GAAP measures are provided to enhance investors’ overall understanding of the Company’s current financial performance, financial position and ability to generate cash flows. In many cases non-GAAP financial measures are used by analysts and investors to evaluate the Company’s performance and financial position. Reconciliation to the nearest GAAP measure included in this press release can be found in the financial table included below.

Forward-looking statement
Certain statements included in this press release that are not historical facts are "forward-looking statements." Such forward-looking statements are based on current expectations, estimates and projections about the industry in which HickoryTech operates and management's beliefs and assumptions. The forward-looking statements are subject to uncertainties. These statements are not guarantees of future performance and involve certain risks, uncertainties and probabilities. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. HickoryTech undertakes no obligation to update any of its forward-looking statements, except as required by law.

 
Consolidated Statements of Income
(unaudited)
           
Three Months Ended March 31 %
(Dollars in thousands, except share data) 2014 2013

 Change 

Operating revenue:
Services $ 34,213 $ 33,405 2 %
Equipment   10,027     15,364   -35 %
Total operating revenue 44,240 48,769 -9 %
 
Costs and expenses:
Cost of sales, excluding depreciation and amortization 8,544 13,222 -35 %
Cost of services, excluding depreciation and amortization 16,660 16,599 0 %
Selling, general and administrative expenses 6,963 7,449 -7 %
Asset impairment - 633
Depreciation and amortization   7,580     7,009   8 %
Total costs and expenses   39,747     44,912   -12 %
 
Operating income 4,493 3,857 16 %
 
Interest and other income - 2 -100 %
Interest expense   (979 )   (1,139 ) -14 %
Income before income taxes 3,514 2,720 29 %
Income tax provision   1,441     1,094   32 %
 
Net income $ 2,073   $ 1,626   27 %
 
Basic earnings per share $ 0.15   $ 0.12   25 %
Basic weighted average common shares outstanding   13,596,296     13,556,515  
 
Diluted earnings per share $ 0.15   $ 0.12   25 %
Diluted weighted average common and equivalent shares outstanding   13,659,827     13,578,429  
 
Dividends per share $ 0.15   $ 0.145   3 %
 
 
Consolidated Balance Sheets
(unaudited)
       
(Dollars and Share Data in Thousands) March 31, 2014 December 31, 2013
Assets
Current assets:
Cash and cash equivalents $ 12,243 $ 7,960
Receivables, net of allowance for doubtful accounts of $260 and $370 20,172 26,073
Inventories 1,783 1,668
Income taxes receivable 138 970
Deferred income taxes, net 2,479 2,660
Prepaid expenses 3,096 2,545
Other   900     1,386  
Total current assets 40,811 43,262
 
Investments 3,595 3,414
 
Property, plant and equipment 465,728 461,712
Accumulated depreciation and amortization   (286,987 )   (280,386 )
Property, plant and equipment, net 178,741 181,326
 
Other assets:
Goodwill 29,028 29,028
Intangible assets, net 3,865 4,088
Deferred costs and other   6,077     5,762  
Total other assets   38,970     38,878  
 
Total assets $ 262,117   $ 266,880  
 
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,908 $ 3,163
Extended term payable 6,991 8,879
Deferred revenue 5,681 6,056
Accrued expenses and other 8,431 10,443
Financial derivative instruments 551 242
Current maturities of long-term obligations   1,551     1,586  
Total current liabilities 26,113 30,369
 
Long-term liabilities:
Debt obligations, net of current maturities 133,289 133,621
Accrued income taxes 245 244
Deferred revenue 2,583 2,705
Financial derivative instruments 631 1,184
Accrued employee benefits and deferred compensation 12,175 12,344
Deferred income taxes   37,145     37,103  
Total long-term liabilities 186,068 187,201
 
Total liabilities 212,181 217,570
 
Commitments and contingencies
 
Shareholders' equity:
Common stock, no par value, $0.10 stated value
Shares authorized: 100,000
Shares issued and outstanding: 13,622 in 2014 and 13,569 in 2013 1,362 1,357
Additional paid-in capital 17,148 16,462
Retained earnings 30,813 30,782
Accumulated other comprehensive income   613     709  
Total shareholders' equity   49,936     49,310  
 
Total liabilities and shareholders' equity $ 262,117   $ 266,880  
 
 
Fiber and Data Segment
(unaudited)
     

Three Months Ended
March 31

(Dollars in thousands) 2014 2013

 % Change 

Revenue before intersegment eliminations:
Business $ 9,663 $ 8,825 9 %
Wholesale 7,815 7,646 2 %
Intersegment   221   213 4 %
Total Fiber and Data revenue 17,699 16,684 6 %
 
Cost of services
(excluding depreciation and amortization) 8,206 8,257 -1 %
Selling, general and administrative expenses 3,356 3,360 0 %
Asset impairment - 633
Depreciation and amortization   3,190   2,796 14 %
Total costs and expenses   14,752   15,046 -2 %
 
Operating income $ 2,947 $ 1,638 80 %
Net income $ 1,739 $ 961 81 %
Capital expenditures (A) $ 2,588 $ 2,943 -12 %
 
(A) Does not include change in materials and supplies.
 
 
Equipment Segment
(unaudited)
           

Three Months Ended
March 31

(Dollars in thousands) 2014 2013

 % Change 

Revenue before intersegment eliminations:
Equipment $ 10,027 $ 15,364 -35 %
Services   2,221   1,873 19 %
Total operating revenue 12,248 17,237 -29 %
 
Cost of sales
(excluding depreciation and amortization) 8,544 13,222 -35 %
Cost of services
(excluding depreciation and amortization) 1,777 1,695 5 %
Selling, general and administrative expenses 1,303 1,414 -8 %
Depreciation and amortization   138   85 62 %
Total costs and expenses   11,762   16,416 -28 %
 
Operating income $ 486 $ 821 -41 %
Net income $ 287 $ 485 -41 %
 
Capital expenditures $ 109 $ 558 -81 %
 
 
Telecom Segment
(unaudited)
           

Three Months Ended
March 31

%
(Dollars in thousands) 2014 2013

 Change 

Revenue before intersegment eliminations:
Local Service $ 2,730 $ 2,963 -8 %
Network Access 4,415 4,701 -6 %
Broadband 5,276 5,005 5 %
Other 1,513 1,579 -4 %
Intersegment   434   417 4 %
Total operating revenue $ 14,368 $ 14,665 -2 %
 
Total Telecom revenue before intersegment eliminations
Unaffiliated Customers $ 13,934 $ 14,248
Intersegment   434   417
14,368 14,665
 
Cost of services (excluding depreciation and amortization) 6,809 6,847 -1 %
Selling, general and administrative expenses 1,986 2,245 -12 %
Depreciation and amortization   3,678   3,703 -1 %
Total costs and expenses   12,473   12,795 -3 %
 
Operating income $ 1,895 $ 1,870 1 %
 
Net income $ 1,118 $ 1,104 1 %
 
Capital expenditures (A) $ 1,804 $ 1,760 3 %
 

Key Metrics

Business access lines 18,788 20,016 -6 %
Residential access lines   20,267   21,744 -7 %
Total access lines 39,055 41,760 -6 %
High-speed Internet ("DSL") customers 21,178 20,327 4 %
Digital TV customers 11,788 10,910 8 %
 
(A) Does not include change in materials and supplies.
 
 
Reconciliation of Non-GAAP Measures
                                   
Three Months Ended
March 31
(Dollars in thousands) 2014 2013
Reconciliation of consolidated net income to EBITDA:
Net income $ 2,073 $ 1,626
Add:
Depreciation and amortization 7,580 7,009
Interest expense 979 1,139
Income taxes   1,441   1,094
EBITDA   12,073   10,868
Adjustments allowed under our credit agreement:
Asset impairment   -   633
EBITDA per our credit agreement $ 12,073 $ 11,501
 
 
(Dollars in thousands)
Reconciliation of net debt: Mar-14 Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12
Debt obligations, net of current maturities $ 133,289 $ 133,621 134,018 134,324 134,723 135,133 135,519 139,874 140,272
Current maturities of long-term obligations   1,551   1,586 1,584 1,655 1,648 1,648 1,636 1,614 1,621
Total Debt $ 134,840 $ 135,207 135,602 135,979 136,371 136,781 137,155 141,488 141,893
Less:
Cash and cash equivalents   12,243   7,960 6,516 5,197 4,306 8,305 10,051 14,431 20,724
Net Debt $ 122,597 $ 127,247 129,086 130,782 132,065 128,476 127,104 127,057 121,169
 
 
Reconciliation of Non-GAAP Measures
       
Year Ending
December 31, 2014
(Dollars in thousands) Guidance Range
Reconciliation of net income to 2014 EBITDA guidance: Low High
Projected net income $ 6,400 $ 8,400
Add back:
Depreciation and amortization 31,800 31,400
Interest expense 4,500 4,100
Taxes   4,300   5,600
Projected EBITDA guidance $ 47,000 $ 49,500
 

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