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Other Revenue – We generate revenue from directory publishing, sales and service of customer premise equipment (CPE), bill processing and add/move/change services. Our directory publishing revenue for Yellow Page advertising in our telephone directories recurs monthly. We also provide the 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 the wireless product, as well as revenue collected for the sale of wireless phones and accessories. Other revenue was $1,005,155, which is $34,871 or 3.59% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This increase was primarily due to additional revenues associated with the HCC spin-off on December 31, 2012 and increases in the sales of cellular phone and activation revenues, partially offset by a decrease in the sales of CPE.
Cost of Services (excluding Depreciation and Amortization)
Cost of services (excluding depreciation and amortization) was $4,215,512, which is $594,486 or 16.42% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase was primarily due to higher expenses associated with the HCC spin-off on December 31, 2012, higher programming cost from video content providers and higher costs associated with increased maintenance and support agreements on our equipment and software.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,799,326, which is $166,354 or 10.19% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase was primarily due to higher expenses and one-time costs associated with the HCC spin-off on December 31, 2012.
Depreciation and Amortization
Depreciation and amortization was $2,210,500, which is $193,081 or 9.57% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This increase was primarily due to tangible and intangible asset additions received in the HCC spin-off and other increases in our plant and broadband network. The spin-off was accounted for using the acquisition method of accounting for business combinations, and accordingly, based upon our preliminary spin-off price allocation, the acquired assets were recorded at estimated fair values as of the date of acquisition. Details of the fair value recorded on the tangible and intangible assets acquired in the HCC spin-off are included in Note 2 – “Acquisitions and Dispositions”.
Operating Income
Operating income was $1,187,107, which is $292,996 or 32.77% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This increase was primarily due to an increase in revenues, offset by an increase in expenses resulting from the acquisition of one-third of the net assets of HCC on December 31, 2012.
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See Consolidated Statements of Income on Page 3 (for discussion below)
Other Income and Interest Expense
Interest expense was $571,150, which is $14,868 or 2.7% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This increase was primarily due to higher outstanding debt balances due to the additional debt incurred in connection with the HCC spin-off.
Interest income was $70,727, which is $680 or 1.0% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012.
Our equity portion of HCC’s net income was $243,486 for the three months ended March 31, 2012. On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt. The operating results of SETC for the first quarter of 2013 are included in the operating results of NU Telecom.
Other income for the three months ended March 31, 2013 and 2012, included a patronage credit earned with CoBank, ACB as a result of our debt agreements with them. The patronage credit allocated and received in 2013 was $521,796, compared to $449,878 allocated and received in 2012. CoBank, ACB determines and pays the patronage credit annually, generally in the first quarter of the year, based on its results from the prior year. We record these patronage credits as income when they are received.
Other investment income was $40,625, which is $1,907 or 4.5% lower in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Other investment income is primarily from our equity ownership in several partnerships and limited liability companies.
Income Taxes
Income tax expense was $524,804, which is $43,018 or 8.9% higher in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The effective income tax rates for the three months ending March 31, 2013 and 2012 were approximately 41.9% and 42.0%. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.
Liquidity and Capital Resources
Capital Structure
NU Telecom’s total capital structure (long-term and short-term debt obligations, plus stockholders’ equity) was $99,882,649 at March 31, 2013, reflecting 56.3% equity and 43.7% debt. This compares to a capital structure of $102,338,011 at December 31, 2012, reflecting 54.5% equity and 45.5% 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 2.94 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.
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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 common stock and (v) potential acquisitions.
Our primary sources of liquidity for the three months ended March 31, 2013 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At March 31, 2013 we had a working capital deficit of $1,729,593. However, at March 31, 2013 we also had approximately $6.1 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 for us 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. We were in full compliance with our debt covenants as of March 31, 2013, 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 either 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:
| | | | | | | |
| | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
Net cash provided by (used in): | | | | | | | |
Operating activities | | $ | 2,831,854 | | $ | 2,990,303 | |
Investing activities | | | (1,203,994 | ) | | (1,148,784 | ) |
Financing activities | | | (3,344,443 | ) | | (1,733,198 | ) |
Increase (Decrease) in cash | | $ | (1,716,583 | ) | $ | 108,321 | |
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Cash Flows from Operating Activities
Cash generated by operations for the three months ended March 31, 2013 was $2,831,854, compared to cash generated by operations of $2,990,303 in 2012. The decrease in cash from operating activities in 2013 was primarily due to an increase in inventories and decrease in accounts payable.
Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to stockholders. Cash at March 31, 2013 was $1,033,267, compared to $2,749,850 at December 31, 2012.
Cash Flows Used in Investing Activities
We operate in a capital intensive business. We continue to upgrade our local networks for changes in technology in order to provide advanced services to our customers.
Cash used in investing activities was $1,203,994 in the first three months of 2013 compared to $1,148,784 in the first three months of 2012. Capital expenditures relating to on-going operations were $1,122,358 for the three months ended March 31, 2013, compared to $1,106,784 for the three months ended March 31, 2012. We expect total plant additions to be approximately $6.0 million in 2013. Our investing expenditures have been 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. We currently have approximately $6.1 million available under our existing credit facility to fund capital expenditures and other operating needs.
Cash Flows Used in Financing Activities
Cash used in financing activities for the three months ended March 31, 2013 was $3,344,443 and included long-term debt repayments of $609,500, payments on our revolving credit facility of $2,313,868 and the distribution of $421,075 of dividends to stockholders.
Working Capital
We had working capital deficit (i.e. current assets minus current liabilities) of $1,729,593 as of March 31, 2013, with current assets of approximately $7.0 million and current liabilities of approximately $8.7 million, compared to a working capital deficit of $4,947 as of December 31, 2012. The ratio of current assets to current liabilities was 0.80 and 1.00 as of March 31, 2013 and December 31, 2012. 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.
Dividends and Restrictions
We declared a quarterly dividend of $.0825 per share for the first quarter of 2013 and 2012, which totaled $421,075 for the first quarter of 2013 and $422,025 for the first quarter of 2012. Our Board of Directors consider dividend payment practices that reflect its judgment that our stockholders would be better served if we retained a higher portion of the cash generated by our business in excess of our expected cash needs to use for other purposes, such as to make investments in our business, rather than distribute cash to our stockholders. We expect to continue to pay quarterly dividends during 2013, 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.
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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. If we fail to comply with these covenants, our ability to pay dividends would be limited. At March 31, 2012 we were in compliance with all the stipulated financial ratios in our loan agreements.
Our Board of Directors reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions. The cash requirements of our current dividend payment practices are in addition to our other expected cash needs. Should our Board of Directors determine a dividend will be declared, we expect we will have sufficient availability from our current cash flows from operations to fund our existing cash needs and the payment of our dividends. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any fluctuations in working capital and other cash needs
Long-Term Debt
See Note 5 – “Secured Credit Facility” for information pertaining to our long-term debt.
Federal Regulation and Legislation
Intercarrier Compensation and Universal Service Fund (USF) Reform
The FCC released the National Broadband Plan in April 2010 recommending significant changes in the Access Charge policy and processes. This was followed on November 18, 2011, by FCC Order 11-161 (the Transformation Order), with comprehensive rules reforming all forms of intercarrier compensation and implementing a new support mechanism for the deployment of broadband. Generally, the intercarrier compensation reform sets forth a path towards a “bill & keep” regime where there is no compensation for termination of traffic received from another carrier. The timeline for this transition has numerous steps depending on the type of traffic exchanged and the regulated status of the affected local exchange carrier.
These rules have been clarified in several orders on Reconsideration, and while they are being challenged through appeals in Federal Appellate courts, we are already experiencing their impact on our companies. If they remain in place, they will force a substantial reduction of our terminating intercarrier compensation, including intrastate and interstate access charges, over the next nine years and provide for certain support mechanisms and end user charges as a means of offsetting compensation.
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The Transformation Order also confirmed the applicability of access charges on VoIP traffic and eliminated reciprocal compensation charges for termination of local wireless traffic. Despite these changes IXCs and others are still quite aggressive in disputing carrier access charges and/or the applicability of access charges to their traffic.
Due to the combination of rate reforms instituted by the FCC, competitive substitution by wireless and other carriers and decreased use of the switched network, the aggregate amount of interstate network access charges paid by long distance carriers to access providers such as our ILECs and CLECs, has decreased and we project that this decline will continue.
The Minnesota Public Utilities Commission has considered intrastate access reform and universal service for several years, but has not yet taken action. On August 25, 2010 the Iowa Utilities Board closed a docket on exploration of a state USF. We are actively participating in access reform proceedings in the regulatory and legislative arenas on both the state and federal level. We cannot estimate the impact, if any, of future potential state access revenue changes or the availability of state universal service support.
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. A prime example of this is the claim that companies who provide VoIP technology services are exempt from having to pay access charges. 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 LECs. To date, no long distance or other carriers have made a claim to us contesting the applicability of access charges on VoIP traffic. We cannot predict the likelihood of future claims and cannot estimate the impact.
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.
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.
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Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2013 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
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| | | |
Exhibit
Number | | Description | |
| | |
10.4.1 | | New Ulm Telecom, Inc. Amended Management Incentive Plan |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101.INS | | XBRL Instance Document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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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: May 15, 2013 | | By | /s/ Bill D. Otis |
| | | Bill D. Otis, President and Chief Executive Officer |
| | | |
Dated: May 15, 2013 | | By | /s/ Curtis O. Kawlewski |
| | | Curtis O. Kawlewski, Chief Financial Officer |
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