Company Quick10K Filing
Nuvera Communications
Price18.99 EPS1
Shares5 P/E15
MCap99 P/FCF6
Net Debt53 EBIT12
TEV151 TEV/EBIT13
TTM 2019-09-30, in MM, except price, ratios
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NUVR 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation and Consolidation
Note 2 - Fair Value Measurements
Note 3 - Goodwill and Intangibles
Note 4 - Secured Credit Facility
Note 5 - Interest Rate Swaps
Note 6 - Other Investments
Note 7 - Guarantees
Note 8 - Deferred Compensation
Note 9 - Segment Information
Note 10 - Commitments and Contingencies
Note 11 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 exhibit31_1.htm
EX-31.2 exhibit31_2.htm
EX-32.1 exhibit32_1.htm
EX-32.2 exhibit32_2.htm

Nuvera Communications Earnings 2014-06-30

Balance SheetIncome StatementCash Flow
16513299663302012201420172020
Assets, Equity
2015117302012201420172020
Rev, G Profit, Net Income
40236-11-28-452012201420172020
Ops, Inv, Fin

10-Q 1 form10q.htm FORM 10-Q FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_________________

 

FORM 10-Q

 

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended June 30, 2014

 

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 of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

27 North Minnesota Street

New Ulm, Minnesota  56073

(Address of principal executive offices and zip code)

 

(507) 354-4111

(Registrant's telephone number, including area code)

 

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 x  No  o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, 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 x  No   o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer, accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

o Large accelerated filer  o Accelerated filer  o Non-accelerated filer  S Smaller reporting company

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The total number of shares of the Registrant’s common stock outstanding as of August 14, 2014: 5,101,334.

 


 

 

table of contents

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1

Financial Statements

 

 

 

 

 

Consolidated Statements of Income (unaudited) for the Three and Six Months Ended June 30, 2014 and 2013

1

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2014 and 2013

2

 

 

 

Consolidated Balance Sheets (unaudited) as of June 30, 2014 and December 31, 2013

3-4

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2014 and 2013  

5

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Year Ended December 31, 2013 and for the Six Months ended June 30, 2014

6

 

 

 

 

Condensed Notes to Consolidated Financial Statements (unaudited)

7 - 16

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16 - 27

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4

Controls and Procedures

27 - 28

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

28

 

 

 

Item 1A  

Risk Factors

28

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds  

28

 

 

 

Item 3

Defaults Upon Senior Securities

28

 

 

 

Item 4

Mine Safety Disclosures

28

 

 

 

Item 5

Other Information

29

 

 

 

Item 6

Exhibits Listing

29

 

 

 

 

Signatures

30

 

 

 

 

Exhibits

 

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

  

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

                       
 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2014

 

2013

 

2014

 

2013

OPERATING REVENUES:

                     

Local Service

$

1,638,991

 

$

1,661,435

 

$

3,275,340

 

$

3,347,148

Network Access

 

2,885,233

   

3,020,221

   

6,094,347

   

5,991,821

Video

 

2,087,714

   

1,814,064

   

4,016,686

   

3,545,521

Data

 

1,983,727

   

1,906,439

   

3,921,856

   

3,709,519

Long Distance

 

209,160

   

204,959

   

414,358

   

420,399

Other Non-Regulated

 

1,072,162

   

989,855

 

 

2,133,601

   

1,995,010

Total Operating Revenues

 

9,876,987

 

 

9,596,973

 

 

19,856,188

 

 

19,009,418

                       

OPERATING EXPENSES:

                     

Plant Operations (Excluding Depreciation and Amortization)

 

2,015,718

   

1,997,856

   

3,980,295

   

3,879,239

Cost of Video

 

1,692,738

   

1,553,291

   

3,405,922

   

3,149,942

Cost of Data

 

320,745

   

276,331

   

644,283

   

525,606

Cost of Other Nonregulated Services

 

574,867

   

502,576

   

1,109,600

   

990,779

Depreciation and Amortization

 

2,374,748

   

2,224,157

   

4,706,529

   

4,434,657

Selling, General and Administrative

 

1,768,840

   

1,673,597

   

3,602,348

   

3,472,923

Total Operating Expenses

 

8,747,656

 

 

8,227,808

 

 

17,448,977

 

 

16,453,146

                       

OPERATING INCOME

 

1,129,331

 

 

1,369,165

 

 

2,407,211

 

 

2,556,272

                       

OTHER (EXPENSE) INCOME

                     

Interest Expense

 

(234,797)

   

(310,746)

   

(469,904)

   

(881,896)

Interest Income

 

17,878

   

25,466

   

104,000

   

96,193

Interest During Construction

 

4,017

   

2,482

   

7,182

   

5,370

CoBank Patronage Dividends

 

-

   

-

   

435,319

   

521,796

Other Investment Income

 

73,681

   

26,609

   

123,303

   

67,234

Total Other Income (Expense)

 

(139,221)

 

 

(256,189)

 

 

199,900

 

 

(191,303)

                       

INCOME BEFORE INCOME TAXES

 

990,110

   

1,112,976

   

2,607,111

   

2,364,969

                       

INCOME TAXES

 

415,844

 

 

468,483

 

 

1,094,985

 

 

993,287

 

NET INCOME

$

574,266

 

$

644,493

 

$

1,512,126

 

$

1,371,682

                       

BASIC AND DILUTED

                     

NET INCOME PER SHARE

$

0.11

 

$

0.13

 

$

0.30

 

$

0.27

                       

DIVIDENDS PER SHARE

$

0.0850

 

$

0.0850

 

$

0.1700

 

$

0.1675

                       

WEIGHTED AVERAGE SHARES OUTSTANDING

 

5,097,401

 

 

5,113,395

 

 

5,093,467

 

 

5,108,657

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1


 

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

                         
   

Three Months Ended

 

Six Months Ended

   

June 30,

 

June 30,

   

2014

 

2013

 

2014

 

2013

                         

Net Income

$

574,266

 

$

644,493

 

$

1,512,126

 

$

1,371,682

                         

Other Comprehensive Income (Loss):

                     
 

Unrealized Gains on Interest Rate Swaps

 

-

   

31,901

   

-

   

303,851

 

Income Tax Expense Related to Unrealized Gains on Interest Rate Swaps

 

-

   

(14,480)

   

-

   

(124,538)

Other Comprehensive Income

 

-

 

 

17,421

 

 

-

 

 

179,313

                         

Comprehensive Income

$

574,266

 

$

661,914

 

$

1,512,126

 

$

1,550,995

                         

The accompanying notes are an integral part of these consolidated financial statements.

 

2


 

 


Table of Contents

 
           

NEW ULM TELECOM, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

           

ASSETS

           
 

June 30,

 

December 31,

 

2014

 

2013

CURRENT ASSETS:

         

Cash

$

804,836

 

$

964,404

Receivables, Net of Allowance for  Doubtful Accounts of $127,000 and $120,000

 

1,410,698

   

1,458,627

Income Taxes Receivable

 

385,221

   

-

Materials, Supplies, and Inventories

 

2,485,095

   

2,535,046

Deferred Income Taxes

 

759,934

   

761,076

Prepaid Expenses

 

695,626

 

 

778,035

Total Current Assets

 

6,541,410

 

 

6,497,188

           

INVESTMENTS & OTHER ASSETS:

         

Goodwill

 

39,805,349

   

39,805,349

Intangibles

 

24,902,344

   

26,137,960

Other Investments

 

6,989,688

   

6,731,959

Other Assets

 

113,351

 

 

148,477

Total Investments and Other Assets

 

71,810,732

 

 

72,823,745

           

PROPERTY, PLANT & EQUIPMENT:

         

Telecommunications Plant

 

110,666,748

   

108,677,838

Other Property & Equipment

 

12,878,490

   

11,512,589

Video Plant

 

9,451,738

 

 

9,444,324

Total Property, Plant and Equipment

 

132,996,976

   

129,634,751

Less Accumulated Depreciation

 

89,087,500

 

 

86,075,424

Net Property, Plant & Equipment

 

43,909,476

 

 

43,559,327

           

TOTAL ASSETS

$

122,261,618

 

$

122,880,260

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

 

NEW ULM TELECOM, INC.

CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited)

           

LIABILITIES AND STOCKHOLDERS' EQUITY

           
 

June 30,

 

December 31,

 

2014

 

2013

CURRENT LIABILITIES:

         

Current Portion of Long-Term Debt

$

40,439,017

 

$

40,707,730

Accounts Payable

 

1,082,798

   

1,792,608

Accrued Income Taxes

 

-

   

114,017

Other Accrued Taxes

 

198,079

   

190,954

Deferred Compensation

 

62,745

   

65,523

Accrued Compensation

 

457,748

   

605,861

Other Accrued Liabilities

 

1,436,362

   

1,468,010

Total Current Liabilities

 

43,676,749

 

 

44,944,703

           

LONG-TERM DEBT, Less Current Portion

 

-

 

 

-

           

NONCURRENT LIABILITIES:

         

Loan Guarantees

 

259,616

   

274,649

Deferred Income Taxes

 

19,417,108

   

19,418,249

Unrecognized Tax Benefit

 

259,739

   

259,739

Other Accrued Liabilities

 

79,080

   

107,765

Deferred Compensation

 

884,715

 

 

921,446

Total Noncurrent Liabilities

 

20,900,258

 

 

20,981,848

           

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 and 5,089,534 Shares Issued  and Outstanding

 

8,502,223

   

8,482,556

Retained Earnings

 

49,182,388

   

48,471,153

Total Stockholders' Equity

 

57,684,611

 

 

56,953,709

           

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

122,261,618

 

$

122,880,260

           

The accompanying notes are an integral part of these consolidated financial statements.

 

4


 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

           
  Six Months Ended
 

June 30,

2014

 

June 30,

2013

   

CASH FLOWS FROM OPERATING ACTIVITIES:

         

Net Income

$

1,512,126

 

$

1,371,682

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

         

Depreciation and Amortization

 

4,725,897

   

4,454,025

Undistributed Earnings of Other Equity Investments

 

(76,923)

   

(65,848)

Noncash Patronage Refund

 

(148,337)

   

(130,449)

Distributions from Equity Investments

 

-

   

14,616

Stock Issued in Lieu of Cash Payment

 

37,800

   

44,800

Changes in Assets and Liabilities:

         

Receivables

 

63,687

   

(360,984)

Income Taxes Receivable

 

(385,221)

   

(116,034)

Inventories

 

49,951

   

(651,162)

Prepaid Expenses

 

128,609

   

41,333

Accounts Payable

 

(885,791)

   

(96,520)

Accrued Income Taxes

 

(114,017)

   

-

Other Accrued Taxes

 

7,125

   

11,163

Other Accrued Liabilities

 

(208,446)

   

(221,251)

Deferred Income Tax

 

-

   

(1,569)

Deferred Compensation

 

(39,509)

   

(40,390)

Net Cash Provided by Operating Activities

 

4,666,951

 

 

4,253,412

           

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Additions to Property, Plant, and Equipment, Net

 

(3,645,080)

   

(2,688,834)

Other, Net

 

(47,502)

   

(84,067)

Net Cash Used in Investing Activities

 

(3,692,582)

 

 

(2,772,901)

           

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Principal Payments of Long-Term Debt

 

(2,169,000)

   

(1,469,000)

Changes in Revolving Credit Facility

 

1,900,287

   

(1,534,380)

Dividends Paid

 

(865,224)

   

(854,910)

Net Cash Used in Financing Activities

 

(1,133,937)

 

 

(3,858,290)

           

NET INCREASE (DECREASE) IN CASH

 

(159,568)

   

(2,377,779)

           

CASH at Beginning of Period

 

964,404

 

 

2,749,850

           

CASH at End of Period

$

804,836

 

$

372,071

           

Supplemental cash flow information:

         

Cash paid for interest

$

457,399

 

$

874,316

Net cash paid for income taxes

$

1,595,500

 

$

1,110,000

           
 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


 

 

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

                   

YEAR ENDED DECEMBER 31, 2013 AND

SIX MONTHS ENDED JUNE 30, 2014

                   
                   
       

Accumulated

Other

Comprehensive

Income (Loss)

       
       

       
 

Common Stock

Retained

Earnings

Total

Equity

 

Shares

Amount

                   

BALANCE on December 31, 2012

5,103,918

$

8,506,530

$

(179,313)

$

47,403,409

$

55,730,626

                   

Director's Stock Plan

14,216

 

23,693

     

68,707

 

92,400

Retirement of Stock from BCS Holdings

(28,600)

 

(47,667)

     

(132,513)

 

(180,180)

Net Income

           

2,854,115

 

2,854,115

Dividends

           

(1,722,565)

 

(1,722,565)

Other Comprehensive Income

       

179,313

     

179,313

 

 

 

 

 

 

 

 

 

 

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

           

1,512,126

 

1,512,126

Dividends

           

(865,224)

 

(865,224)

 

 

 

 

 

 

 

 

 

 

BALANCE on June 30, 2014

5,101,334

$

8,502,223

$

-

$

49,182,388

$

57,684,611

                   

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


 

 

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 (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, 2013.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could 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 (both dial-up and 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.

 

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 IXC’s. We believe this trend will continue.

 

7


 

 

 

New Ulm Telecom’s and Sleepy Eye Telephone Company’s (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 $3,470,913 and $3,199,041 for the six months ended June 30, 2014 and 2013. We amortize our definite-lived intangible assets over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.

 

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 basis. 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. 

 

8


 

 

 

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 June 30, 2014 and 2013 we had $259,739 and $143,866 of unrecognized tax benefits net of a federal tax benefit of $88,311 and $48,914, which if recognized would affect the effective tax rate. Currently, a petition related to Hector Communications Corporation’s (HCC) 2006 Minnesota tax return has been filed in Minnesota Tax Court. It is unknown when this matter will be resolved.  

 

We are primarily subject to United States, Minnesota, Nebraska and Iowa income taxes. Tax years subsequent to 2009 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 June 30, 2014 and December 31, 2013 we had $68,286 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 other 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.

 

9


 

 

 

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 entity’s 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 in which 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 had entered into interest rate swaps with our lender, CoBank, ACB, 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 remains 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, 2013. 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 borrowing rates 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.

 

10


 

 

 

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 June 30, 2014 and December 31, 2013.    

 

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 unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s 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 2013 and 2012, we engaged an independent valuation firm to complete our annual impairment testing for goodwill. For 2013 and 2012, 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:

 

11


 

Table of Contents
 

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Gross

Carrying

Amount

 

 

 

 

Gross

Carrying

Amount

 

 

 

 

Useful

 

 

Accumulated

Amortization

 

 

Accumulated

Amortization

 

Lives

 

 

 

 

Definite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers Relationships

14-15 yrs

 

$

29,278,445

 

$

10,041,782

 

$

29,278,445

 

$

8,996,498

Regulatory Rights

15 yrs

 

 

4,000,000

 

 

1,733,319

 

 

4,000,000

 

 

1,599,987

Non-Competition Agreement

5 yrs

 

 

800,000

 

 

800,000

 

 

800,000

 

 

800,000

Trade Name

3-5 yrs

 

 

1,370,000

 

 

971,000

 

 

1,370,000

 

 

914,000

Indefinitely-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Video Franchise

 

 

 

3,000,000

 

 

-

 

 

3,000,000

 

 

-

Total

 

 

$

38,448,445

 

$

13,546,101

 

$

38,448,445

 

$

12,310,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Identified Intangible Assets

 

 

 

 

 

$

24,902,344

 

 

 

 

$

26,137,960

 

Amortization expense related to the definite-lived intangible assets was $1,235,616 and $1,235,616 for the six months ended June 30, 2014 and 2013.  

 

Amortization expense for the remaining six months of 2014 and the five years subsequent to 2014 is estimated to be:

 

  • (July 1 – December 31) - $1,235,617
  • 2015 - $2,471,233
  • 2016 - $2,469,256
  • 2017 - $2,469,083
  • 2018 - $2,355,083
  • 2019 - $2,355,083

 

Note 4 – Secured Credit Facility

 

We have a credit facility with CoBank, ACB. Under the credit facility, we entered into separate 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 of the assets of NU Telecom and its respective subsidiaries have been pledged to CoBank, ACB as collateral. In addition, NU Telecom and its respective subsidiaries have guaranteed all obligations under the credit facility.

 

12


 

 

 

Our 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 $2,050,000 in any year and (ii) in any amount if our “Total Leverage Ratio”, that is, the ratio of our “Indebtedness” to “EBITDA” (in each case as defined in the loan documents) is equal to or less than 3:50 to 1:00, and (b) in either case if we are not in default or potential default under our loan agreements. As of June 30, 2014, per our loan agreements, we do not have any restrictions on our ability to pay cash dividends to our stockholders.  

 

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 and maximum annual expenditures tests.

 

Per our MLAs with CoBank, ACB, our current outstanding debt has a balloon maturity date on December 31, 2014. At December 31, 2013, all of our outstanding debt became current. Due to the balloon maturity, we notified CoBank that we would be in violation of our debt service coverage ratio in our loan covenants and also notified them that it is our intent to refinance the debt prior to December 31, 2014. Due to these circumstances, CoBank, ACB provided a waiver letter of the debt service coverage ratio in our loan covenants effective December 31, 2013. With this waiver letter, we are in compliance with all the stipulated financial ratios in our loan agreements as of June 30, 2014. 

 

As described in Note – “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 $44.1 million ($3.7 million available under the revolving credit  facilities and $40.4 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 2.10%, as of June 30, 2014

 

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 facilities with CoBank, ACB required 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 had entered into Interest Rate Swap Agreements with CoBank, ACB. Under these Interest Rate Swap Agreements and subsequent swaps that each covered  a specified notional dollar amount, we ha 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.

 

As previously stated, our last remaining swap matured as of June 30, 2013 and we currently have no interest rate swaps in effect.

 

13


 

 

 

Each month, we made interest payments to CoBank, ACB under its loan agreements based on the current applicable LIBOR Rate plus the contractual LIBOR margin then in effect with respect to each applicable loan, without reflecting any interest rate swaps. At the end of each calendar quarter, CoBank, ACB adjusted our aggregate interest payments based upon 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.

 

Pursuant to these interest rate swap agreements, we entered into interest rate swaps covering (i) $39.0 million of our aggregate indebtedness to CoBank, ACB effective March 19, 2008 and (ii) an additional $6.0 million of our aggregate indebtedness to CoBank, ACB effective June 23, 2008. These swaps effectively locked  in the interest rate on (i) $6.0 million of variable-rate debt through March 2011, (ii) $33.0 million of variable-rate debt through March 2013, (iii) $3.0 million of variable-rate debt through June 2011 and (iv) $3.0 million of variable-rate debt through June 2013.

 

On March 31, 2013, $33,000,000 of our swaps matured on Loan RX0583-T1 ($11,250,000) and Loan RX0584-T1 ($21,750,000). No gain or loss was recognized on these swaps as they had reached their full maturities.

 

On June 30, 2013, $3,000,000 of our swaps matured on Loan RX0583-T2. No gain or loss was recognized on this swap as it had reached its full maturity.

 

These interest rate swaps qualified as cash flow hedges for accounting purposes under GAAP. We 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 have been 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 Company’s interest rate swap agreements were determined based on valuations received from CoBank, ACB 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 new ten-year loan, maturing on September 30, 2021. As of June 30, 2014, we have recorded a liability of $259,616 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.

 

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Note 8 – Deferred Compensation

 

As of June 30, 2014 and December 31, 2013, 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:

       ▪  NU Telecom, 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; and

       ▪  Western Telephone Company, a wholly-owned subsidiary of NU Telecom;

● CLECs:

    ▪  NU Telecom, located in Redwood Falls, Minnesota; and 

    ▪  Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield, Minnesota;

● Our investments and interests in the following entities include certain management responsibilities:

    ▪  FiberComm, LC – 18.27% 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; and

    ▪  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.

 

Note 10  – Commitments and Contingencies

 

We are involved in certain contractual disputes in the ordinary course of business. We do not believe the ultimate resolution of any of these existing matters will have a material adverse effect on our financial position, results of operations or cash flows. We did not experience any changes to material contractual obligations in the first six months of 2014. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for the discussion relating to commitments and contingencies.

 

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Note 11 – Subsequent Events

 

We have evaluated and disclosed subsequent events through the filing date of this Quarterly Report on Form 10-Q.

 

Item 2. Management’s 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

 

Management’s discussion and analysis of financial condition and results of operations stated in this Form 10-Q, are based upon NU Telecom’s 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, 2013, which is incorporated herein by reference.

 

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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, dial-up and 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.

 

Executive Summary

 

  • During 2014 and 2013, NU Telecom continued to integrate the operations of SETC, which NU Telecom acquired in a spin-off agreement with HCC. NU Telecom originally acquired a one-third interest in HCC on November 3, 2006. HCC was equally owned by NU Telecom, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments of HCC and incurred $3.3 million of additional debt to finance the spin-off.

 

  • Net income for the second quarter of 2014 totaled $574,266, which was a $70,227 or 10.90% decrease compared to the second quarter of 2013. This decrease was primarily due to an increase in expenses, partially offset by an increase in revenues and a decrease in interest expense due to the maturing of several of our swap agreements with CoBank, ACB during 2013 as the variable rate we currently pay on that debt portion is lower than the fixed rate we were previously paying, all of which are described below.

 

  • Consolidated revenue for the second quarter of 2014 totaled $9,876,987, which was a $280,014 or 2.92% increase compared to the second quarter of 2013. This increase was primarily due to an increase in video revenues. Video revenues increased primarily due to a combination of rate increases introduced into several of our markets over the course of 2014 and 2013. Also contributing to the increase in video revenues was an increase in demand for our high definition (HD) and digital video recorder (DVR) services. 

 

  • In the first quarter of 2014, NU Telecom signed an agreement with the Little Crow Telemedia Network (Little Crow) and the Minnesota River Valley Education District (MRVED) to provide high capacity video/audio and data switching services and fiber optic cable transport of information between a consortium of school districts in central and southern Minnesota. 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. The contract term was for 10 years and is scheduled to begin in the third quarter of 2014. In the second quarter of 2014, NU Telecom signed a 3-year agreement with the Pioneerland Library System, which is a consortium of public libraries located along the same fiber route as Little Crow and MRVED, to provide high capacity fiber and data services. This service is also scheduled to begin in the third quarter of 2014.

 

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Trends

 

Included below is a synopsis of trends management believes will continue to affect our business in 2014. 

 

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 1,580 or 5.35% for the twelve months ended June 30, 2014 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 a portion of 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, IP Television and hosted and managed services.

 

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.

 

18


 

 

 

Financial results for the Telecom Segment are included below:

 

Telecom Segment

               
   

Three Months Ended

June 30,

   
   

2014

2013

     

Increase (Decrease)

Operating Revenues

               
 

Local Service

$

 1,638,991

      $

 1,661,435

 $

 (22,444)

 

-1.35%

 

Network Access

 

2,885,233

 

3,020,221

 

(134,988)

 

-4.47%

 

Video

 

2,087,714

 

1,814,064

 

273,650

 

15.08%

 

Data

 

1,983,727

   

1,906,439

 

77,288

 

4.05%

 

Long Distance

 

209,160

 

204,959

 

4,201

 

2.05%

 

Other

 

1,072,162

 

989,855

 

82,307

 

8.32%

 

Total Operating Revenues

 

9,876,987

 

9,596,973

 

280,014

 

2.92%

                   

 

             

Cost of Services, Excluding Depreciation and Amortization

 

4,604,068

 

4,330,054

 

274,014

 

6.33%

Selling, General and Administrative

1,768,840

 

1,673,597

 

95,243

 

5.69%

Depreciation and Amortization Expenses

2,374,748

 

2,224,157

 

150,591

 

6.77%

 

Total Operating Expenses

 

8,747,656

 

8,227,808

 

519,848

 

6.32%

                   

Operating Income

$

 1,129,331

$

1,369,165

$

 (239,834)

 

-17.52%

                   

Net Income

$

 574,266

$

644,493

$

(70,227)

 

-10.90%

                   

Capital Expenditures

$

2,304,520

$

1,566,476

$

738,044

 

47.11%

                   

 

19


 
 

Telecom Segment

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

June 30,

 

 

 

 

 

 

2014

 

2013

 

Increase (Decrease)

Operating Revenues

 

 

 

 

 

 

 

 

 

 

Local Service

$

3,275,340

 

$

3,347,148

 

$

(71,808)

 

-2.15%

Network Access

 

6,094,347

 

 

5,991,821

 

 

102,526

 

1.71%

Video

 

4,016,686

 

 

3,545,521

 

 

471,165

 

13.29%

Data

 

3,921,856

 

 

3,709,519

 

 

212,337

 

5.72%

Long Distance

 

414,358

 

 

420,399

 

 

(6,041)

 

-1.44%

Other

 

2,133,601

 

 

1,995,010

 

 

138,591

 

6.95%

Total Operating Revenues

 

19,856,188

 

 

19,009,418

 

 

846,770

 

4.45%

 

 

 

 

 

 

 

 

 

 

 

Cost of Services, Excluding Depreciation and Amortization

 

9,140,100

 

 

8,545,566

 

 

594,534

 

6.96%

Selling, General and Administrative

 

3,602,348

 

 

3,472,923

 

 

129,425

 

3.73%

Depreciation and Amortization Expenses

 

4,706,529

 

 

4,434,657

 

 

271,872

 

6.13%

Total Operating Expenses

 

17,448,977

 

 

16,453,146

 

 

995,831

 

6.05%

 

 

 

 

 

 

 

 

 

 

 

Operating Income

$

2,407,211

 

$

2,556,272

 

$

(149,061)

 

-5.83%

 

 

 

 

 

 

 

 

 

 

 

Net Income

$

1,512,126

 

$

1,371,682

 

$

140,444

 

10.24%

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

$

3,645,080

 

$

2,688,834

 

$

956,246

 

35.56%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key metrics

 

 

 

 

 

 

 

 

 

 

Access Lines

 

27,979

 

 

29,559

 

 

(1,580)

 

-5.35%

Video Customers

 

10,841

 

 

10,987

 

 

(146)

 

-1.33%

Broadband Customers

 

14,307

 

 

13,829

 

 

478

 

3.46%

Dial Up Internet Customers

 

118

 

 

360

 

 

(242)

 

-67.22%

Long Distance Customers

 

14,927

 

 

15,071

 

 

(144)

 

-0.96%

 

 

 

 

 

 

 

 

 

 

 

 

20


 

 

 

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 $1,638,991, which is $22,444 or 1.35% lower in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $3,275,340, which is $71,808 or 2.15% lower in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These decreases were primarily due to the decline in access lines, partially offset by federally mandated local rate floor increases. 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 $2,885,233, which is $134,988 or 4.47% lower in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This decrease was primarily due to lower minutes of use on our network. Network access revenue was $6,094,347, which is $102,526 or 1.71% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase was primarily due to increased sales of special access circuits, partially offset by 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.

 

On April 15, 2014 NU Telecom received a notice of dispute from an IXC regarding traffic exchanged between the two companies and specifically the classification of IntraMTA wireless traffic related to access charges. NU Telecom is currently working towards a resolution of the dispute at both the federal and state levels. We cannot currently predict the outcome of this dispute or its impact to our company.  

 

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 IPTV/digital TV services and four communities with our CATV services. Video revenue was $2,087,714, which is $273,650 or 15.08% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $4,016,686, which is $471,165 or 13.29% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These increases were primarily due to a combination of rate increases introduced into several of our markets over the course of 2014 and 2013.  Also contributing to the increase in video revenue was an increase in demand for our HD and DVR services.

 

21


 

 

 

Data – We provide Internet services, including dial-up and 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 $1,983,727, which is $77,288 or 4.05% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $3,921,856, which is $212,337 or 5.72% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These increases were primarily due to an increase in data customers and increased managed services revenues. We expect continued growth in this area will be driven by expansion of 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 $209,160, which is $4,201 or 2.05% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Despite the decline in customers, our long distance revenue increased in three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to an increase long distance usage by our customers. Long distance revenue was $414,358, which is $6,041 or 1.44% lower in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. 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 $1,072,162, which is $82,307 or 8.32% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $2,133,601, which is $138,591 or 6.95% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These increases were primarily due to increases in the sales of cellular phone and activation revenues, and an increase in the sales of CPE.    

 

Cost of Services (excluding Depreciation and Amortization)

 

Cost of services (excluding depreciation and amortization) was $4,604,068, which is $274,014 or 6.33% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $9,140,100, which is $594,534 or 6.96% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These increases were primarily due to higher programming cost from video content providers and higher costs associated with increased maintenance and support agreements on our equipment and software. 

 

22


 

 

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $1,768,840, which is $95,243 or 5.69% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $3,602,348, which is $129,425 or 3.73% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These increases were primarily due to higher costs associated with professional and consulting services.

 

Depreciation and Amortization

 

Depreciation and amortization was $2,374,748, which is $150,591 or 6.77% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $4,706,529, which is $271,872 or 6.13% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These increases were due to the increase in our assets, which reflects our continual investment in technology and infrastructure in order to meet our customers’ demands for products and services.    

 

Operating Income

 

Operating income was $1,129,331, which is $239,834 or 17.52% lower in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $2,407,211, which is $149,061 or 5.83% lower in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These decreases were 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)

 

Interest Expense and Other Income 

 

Interest expense was $234,797, which is $75,949 or 24.44% lower in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $469,904, which is $411,992 or 46.72% lower in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. These decreases were primarily due to lower outstanding debt balances and the maturing of several of our swap agreements with CoBank, ACB during 2013 as the variable rate we now pay on that portion of our debt is lower than the fixed rate we were previously paying.    

 

Interest income was $17,878, which is $7,588 or 29.80% lower in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This decrease was primarily due to a decrease in dividend income earned on our investments. Interest income was $104,000, which is $7,807 or 8.12% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase was primarily due to an increase in dividend income earned on our investments for the period ended June 30, 2014 as compared to the period ended June 30, 2013.

 

Other income for the six months ended June 30, 2014 and 2013, included a patronage credit earned with CoBank, ACB as a result of our debt agreements with them. The patronage credit allocated and received in 2014 was $435,319, compared to $521,796 allocated and received in 2013. CoBank, ACB 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.

 

23


 

 

 

Other investment income was $73,681, which is $47,072 or 176.90% higher in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $123,303, which is $56,069 or 83.39% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Other investment income is primarily from our equity ownership in several partnerships and limited liability companies.

 

Income Taxes

 

Income tax expense was $415,844, which is $52,639 or 11.24% lower in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 and was $1,094,985, which is $101,698 or 10.24% higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The effective income tax rates for the six months ending June 30, 2014 and 2013 were approximately 42.0% for both periods. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.

 

Liquidity and Capital Resources

 

Capital Structure

 

NU Telecom’s total capital structure (long-term and short-term debt obligations, plus stockholders’ equity) was $98,123,628 at June 30, 2014, reflecting 58.8% equity and 41.2% debt. This compares to a capital structure of $97,661,439 at December 31, 2013, reflecting 58.3% equity and 41.7% 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 2.82 times debt to EBITDA (earnings before interest, taxes, depreciation and amortization) as defined in our credit agreements, 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 and 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 six months ended June 30, 2014 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At June 30, 2014 we had a working capital deficit of $37,135,339. Per our MLAs with CoBank, ACB, our current outstanding debt has a balloon maturity date on December 31, 2014. At December 31, 2013, all of our outstanding debt became current. Due to the balloon maturity, we notified CoBank that we would be in violation of our debt service coverage ratio in our loan covenants and also notified them that it is our intention to refinance the debt prior to December 31, 2014. Due to these circumstances, CoBank, ACB provided a waiver letter of the debt service coverage ratio in our loan covenants effective December 31, 2013. With this waiver letter, we are in compliance with all the stipulated financial ratios in our loan agreements as of June 30, 2014.

 

24


 

 

 

In addition, at June 30, 2014 we also had approximately $3.7 million available under our revolving credit facility to fund any short-term working capital needs.

  

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 feel that 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:

 

 

Six Months Ended

 June 30,

 

2014

    

2013

Net cash provided by (used in):

       

Operating activities

$

 4,666,951

   $

 4,253,412

Investing activities

 

(3,692,582)

 

(2,772,901)

Financing activities

 

(1,133,937)

 

(3,858,290)

Increase (Decrease) in cash

$

 (159,568)

$

 (2,377,779)

         

 

 

Cash Flows from Operating Activities

 

Cash generated by operations in the first six months of 2014 was $4,666,951, compared to cash generated by operations of $4,253,412 in 2013. The increase in cash from operating activities in 2014 was primarily due to a decrease in inventories and accounts receivable, partially offset by a decrease in accounts payable and accrued income taxes.

 

25


 

 

 

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 June 30, 2014 was $804,836, compared to $964,404 at December 31, 2013.

 

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 $3,692,582 in the first six months of 2014 compared to $2,772,901 in the first six months of 2013. Capital expenditures relating to on-going operations were $3,645,080 in the first six months 2014 compared to $2,688,834 in the first six months of 2013. We expect total plant additions to be approximately $9.0 million in 2014. 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. At June 30, 2014, we had approximately $3.7 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 six months ended June 30, 2014 was $1,133,937 and included long-term debt repayments of $2,169,000, draws on our revolving credit facility of $1,900,287 and the distribution of $865,224 of dividends to stockholders. Cash used in financing activities for the six months ended June 30, 2013 was $3,858,290 and included long-term debt repayments of $1,469,000, payments on our revolving credit facility of $1,534,380 and the distribution of $854,910 of dividends to stockholders.

 

Working Capital

 

We had a working capital deficit (i.e. current assets minus current liabilities) of $37,135,339 as of June 30, 2014, with current assets of approximately $6.5 million and current liabilities of approximately $43.7 million, compared to a working capital deficit of $38,447,515 as of December 31, 2013. The ratio of current assets to current liabilities was 0.15 and 0.14 as of June 30, 2014 and December 31, 2013. Per our MLAs with CoBank, ACB, our current outstanding debt has a balloon maturity date on December 31, 2014. At December 31, 2013, all of our outstanding debt became current. Due to the balloon maturity, we notified CoBank that we would be in violation of our debt service coverage ratio in our loan covenants and also notified them that it is our intent to refinance the debt prior to December 31, 2014. Due to these circumstances, CoBank, ACB provided a waiver letter of the debt service coverage ratio in our loan covenants effective December 31, 2013. With this waiver letter, we are in compliance with all the stipulated financial ratios in our loan agreements as of June 30, 2014. In addition, if it becomes necessary, we will have sufficient availability under our revolving credit facility to fund any fluctuations in working capital and other cash needs. 

 

26


 

 

 

Dividends and Restrictions

 

We declared a quarterly dividend of $.0850 per share for both the first and second quarters of 2014, which totaled $432,612 for the second quarter and $432,612 for the first quarter. We declared a quarterly dividend of $.0850 per share for the second quarter of 2013 and a quarterly dividend of $.0825 per share for the first quarter of 2013, which totaled $433,835 for the second quarter and $421,075 for the first quarter.

 

We expect to continue to pay quarterly dividends during 2014, 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.  

 

Our 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 $2,050,000 in any year and (ii) in any amount if our “Total Leverage Ratio”, that is, the ratio of our “Indebtedness” to “EBITDA” (in each case as defined in the loan documents) is equal to or less than 3:50 to 1:00, and (b) in either case, if we were not in default or potential default under the loan agreements. As of June 30, 2014, per our loan agreements, we do not have any restrictions on our ability to pay cash dividends to our stockholders.

 

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.

 

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.

 

 

27


 

 

 

Management’s 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 Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Other than 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. 

 

Item 1A. Risk Factors.

 

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.

 

28


 

 

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

             

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

 

29


 

 

SIGNATURES

 

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: August 14, 2014

By:

/s/ Bill D. Otis

 

 

 

Bill D. Otis,

President and Chief Executive Officer

 

 

 

 

 

 

 

 

Dated: August 14, 2014

 

By:

/s/ Curtis O. Kawlewski

 

 

 

Curtis O. Kawlewski,

Chief Financial Officer

 

30