Iowa Telecom Svcs : Iowa Telecom Reports Results for Fourth Quarter and Year Ended December 31, 2006

March 02, 2007 at 11:00 am

MarketScreener.com By

Iowa Telecommunications Services, Inc. (NYSE: IWA) today announced operating results for the fourth quarter and year ended December 31, 2006. Quarterly highlights for the Company include:

Operating revenues were $59.8 million.
Operating income was $15.4 million.
Net income was $3.5 million or $0.11 per diluted share.
Adjusted EBITDA (as defined herein) was $28.8 million.

?We're very pleased with our financial and operating performance during both the fourth quarter and the year," said Alan L. Wells, Iowa Telecom chairman and chief executive officer. "Our results were very strong, and were in line with our expectations for our rural telecommunications business. Operationally, sales of our DSL product were again outstanding as we added 5,000 new customers during the quarter. Our rate of access line loss was also in line with our expectations, as we experienced a decline of only 1,600 total lines during the fourth quarter, as compared to a decline of 2,000 access lines during the year ago quarter. We believe these results illustrate the positive impact that our bundled product offerings are having on our pace of access line losses. Our financial performance was also strong, with revenues for both the quarter and the year growing 2.8% and 1.1%, respectively, over the year ago periods. These increases are attributable to the success of our bundled product offerings, our DSL growth, and our expanded CPE and data business.

?Our adjusted EBITDA for the fourth quarter and for the year was $28.8 million and $124.3 million, respectively. As we've previously noted, in the fourth quarter we recognized a pension settlement charge associated with amendments to our pension plan, which lowered to approximately 40 the number of employees that continue to accrue pension benefits. While the $2.7 million charge we recorded was less than we originally estimated, it nonetheless negatively impacted our reported results for the quarter. In addition, during the fourth quarter our provision for income tax expense was $3.9 million, as compared to zero in the year-ago quarter. Excluding the effect of the pension plan costs and the income tax provision, our results for the quarter and year were consistent with past performance and were in line with our expectations.

?While we recorded a provision for income tax expense of $12.3 million in 2006, the recorded tax expense had little impact on our cash flow, or more importantly, on our ability to pay our dividends to shareholders,? Wells said. ?Despite the income tax charge for accounting purposes, both the continued utilization of our net operating loss carry forwards and our continued goodwill amortization for tax purposes serve to minimize our cash tax obligations. As a result of utilizing these tax attributes, our actual cash taxes paid in 2006 were only $964,000. As of December 31, 2006, our net operating loss carry forward balance was $185 million.

?Our capital expenditures were $7.7 million for the fourth quarter and $28.1 million for 2006, which was on the low end of our guidance,? Wells continued. ?Our cash interest expense for the year was $31.1 million, in line with our prior guidance. We expect cash interest expense to be between $30.0 million and $32.0 million in 2007. For 2007 we expect our capital expenditures to range between $25.0 million and $27.0 million, including approximately $2.0 million related to the purchase and move to our new headquarters location.

?Overall, we are very pleased with our results for the quarter and year,? Wells concluded. ?We believe that during 2006 we strengthened our competitive and strategic position in our markets through several acquisitions. Our DSL subscribers grew by over 60% during the year, and we also were successful in slowing our rate of access line declines. We significantly enhanced our ability to meet the data needs of our business customers through the acquisition of Baker Communications. Looking ahead, we intend to continue to pursue opportunities to profitably grow our business, while at the same time returning a significant portion of our cash flow back to our shareholders in the form of dividends.?

FINANCIAL DISCUSSION FOR FOURTH QUARTER 2006:

Operating Revenues were $59.8 million in the fourth quarter compared to $58.2 million in the fourth quarter of 2005. Network access services revenues decreased $1.3 million, or 4.9%, for the fourth quarter. The decrease in access services revenue is primarily the result of a combination of a decrease in access lines and an increase in cellular traffic for which we receive lower rates of compensation. These decreases were offset by a $3.2 million, or 39.6%, increase in other sales and services. The revenue increase was primarily due to growth of our CPE and data business. DSL and dial up Internet access service revenues also increased $1.1 million, or 19.1%, due primarily to customer growth.
Operating Costs and Expenses increased $5.1 million, or 13.0%, in the fourth quarter of 2006 as compared to the fourth quarter of 2005. Selling, general and administrative costs increased $3.6 million, or 32.5%, for the fourth quarter, primarily as a result of a $2.7 million pension settlement charge related to amendments to our defined pension plans compared to a similar $435,000 charge during the 2005 period. Cost of service and sales increased $1.0 million, or 6.4%, principally due to the growth of our CPE and data business. Depreciation and amortization increased $482,000, or 4.0%, during the fourth quarter compared to 2005.
Operating Income was $15.4 million in the fourth quarter of 2006 as compared to $18.9 million in the same period in 2005. The decrease in operating income was primarily the result of the $2.2 million increase in the pension settlement charge related to amendments to our defined benefit pension plans.
Interest Expense for the fourth quarter increased $234,000, or 3.0%, to $8.1 million compared to $7.9 million in the same period in 2005. The increase was the result of higher interest rates on our variable rate debt and an increase in the rate on our interest rate swap agreement.
Interest and Dividend Income decreased to $426,000 during the fourth quarter, due primarily to higher RTFC dividend income during 2005.
Earnings Before Income Taxes for the fourth quarter of 2006 were $7.4 million compared to $11.6 million in the fourth quarter of 2005.
Income Tax Expense for the fourth quarter was $3.9 million compared to zero in the fourth quarter of 2005. The Company estimates that book income tax expense will be recorded at an effective tax rate of approximately 41% in future periods. The recorded book tax expense did not impact the cash taxes paid during the quarter. The Company paid actual cash income taxes for Alternative Minimum Taxes during the quarter of $310,000, reflecting the continued utilization of net operating loss carry forwards and continued goodwill amortization for tax purposes. At the end of the quarter, the Company had a net operating loss carry forward balance of approximately $185 million.
Net Income was $3.5 million for the quarter compared to net income of $11.6 million in the fourth quarter of 2005.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA as defined herein) was $28.8 million for the fourth quarter of 2006 as compared with $31.9 million in the same period in 2005.
Total Access Linesdecreased by 1,600 during the fourth quarter of 2006 from the third quarter in 2006, as ILEC access lines declined by 2,400 lines and CLEC lines increased by 800 lines. Total access lines decreased by 1,600, or 0.6%, for the fourth quarter of 2006 as compared to 2,000, or 0.8%, for the fourth quarter in 2005.



Fourth Quarter 2006 Financial Summary
(Unaudited)
(dollars in thousands, except per share amounts)


	4th Quarter		4th Quarter		Change
	2006		2005		Amount		Percent

Revenue	$	59,843	$	58,226	$	1,617	2.8%
Operating Income	$	15,403	$	18,901	$	(3,498)	-18.5%
Interest Expense	$	8,131	$	7,897	$	234	3.0%
Earnings Before Income Taxes	$	7,432	$	11,595	$	(4,163)	-35.9%
Net Income	$	3,497	$	11,595	$	(8,098)	-69.8%
Basic Earnings Per Share	$	0.11	$	0.37	$	(0.26)	-70.3%
Diluted Earnings Per Share	$	0.11	$	0.36	$	(0.25)	-69.4%

Adjusted EBITDA ⁽¹⁾	$	28,768	$	31,926	$	(3,158)	-9.9%
Capital Expenditures	$	7,723	$	6,609	$	1,114	16.9%
Dividends Paid	$	12,836	$	12,666	$	170	1.3%

(1) See the definition of Adjusted EBITDA under Explanation and Reconciliation to Non-GAAP Concepts at the end of the financial statements.

Key Operating Statistics	4th Quarter		4th Quarter		Change
Key Operating Statistics	2006		2005		Amount		Percent
Telephone Access Lines
ILEC Lines ⁽¹⁾		228,200		237,900		(9,700)	-4.1%
CLEC Lines ⁽²⁾		23,800		20,800		3,000	14.4%
Total Telephone Access Lines		252,000		258,700		(6,700)	-2.6%

Long Distance Subscribers		146,600		142,800		3,800	2.7%
Dial-up Internet Subscribers		31,500		41,700		(10,200)	-24.5%
DSL Subscribers		50,000		31,200		18,800	60.3%


Key Operating Statistics	4th Quarter		3rd Quarter		Change
Key Operating Statistics	2006		2006		Amount		Percent
Telephone Access Lines
ILEC Lines ⁽¹⁾		228,200		230,600		(2,400)	-1.0%
CLEC Lines ⁽²⁾		23,800		23,000		800	3.5%
Total Telephone Access Lines		252,000		253,600		(1,600)	-0.6%

Long Distance Subscribers		146,600		145,900		700	0.5%
Dial-up Internet Subscribers		31,500		33,700		(2,200)	-6.5%
DSL Subscribers		50,000		45,000		5,000	11.1%

(1) Includes lines subscribed by our incumbent local exchange carrier retail customers and lines subscribed by our "wholesale" customers who are competing local exchange carriers. Wholesale access lines include: lines subscribed by our local exchange carrier competitors pursuant to interconnection agreements on an unbundled network element basis, for which the competitive local exchange carrier pays us a monthly fee; lines that we provide to competitive local exchange carriers for resale to their subscribers, for which the competitive local exchange carrier pays us a monthly fee equal to what we would charge our customers for local service less an agreed discount; and shared lines, for which a competitive local exchange carrier pays us a monthly fee to provide DSL service to its customers. We had 3,100 wholesale lines subscribed at December 31, 2006 and 3,200 at September 30, 2006 and December 31, 2005. During the second quarter of 2006, the company completed the sale of three exchanges resulting in the loss of 600 ILEC lines. During the third quarter of 2006, the company completed the sale of four exchanges resulting in the loss of 2,000 ILEC lines and completed the acquisition of two exchanges resulting in the gain of 2,100 ILEC lines.

(2) Access lines subscribed by customers of our competitive local exchange carrier subsidiaries, Iowa Telecom Communications, Inc. and IT Communications, LLC.

FINANCIAL DISCUSSION FOR YEAR ENDED DECEMBER 31, 2006:

Operating Revenues increased $2.4 million, or 1.1%, to $234.1 million for the year ended December 31, 2006, as compared to 2005. The increase was primarily the result of an $8.6 million, or 27.8% increase, in other services and sales revenue. Specifically, the increase was due to a $5.8 million, or 51.6%, increase in DSL Internet access revenue, as well as from the growth of our CPE business as a result of our acquisition of Baker Communications in August 2006.
Operating Costs and Expenses increased $2.0 million, or 1.3%, to $156.4 million in 2006 as compared to 2005. Cost of service and sales increased $2.4 million, or 3.8%, principally due our acquisition of Baker Communications. Selling, general and administrative expenses increased $434,000, or 1.0%, which included a pension settlement charge increase of $1.5 million and a $526,000 increase in non-cash equity-based compensation. Also contributing to the increase in selling, general and administrative expenses was a $2.0 million benefit in 2005 resulting from the settlement of past access disputes. Offsetting these increases was a $4.2 million gain on the sale of eight exchanges during the period. Depreciation and amortization decreased by $864,000, or 1.8%, for 2006 as compared to 2005.
Operating Income increased to $77.7 million in 2006 compared to $77.2 million in 2005.
Interest Expense increased $619,000, or 2.0%, in 2006 as compared to 2005, principally as a result of higher interest rates on our variable rate debt and the increase in the rate on our interest rate swap agreement resulting from the extension of the term in August 2005.
Interest and Dividend Income decreased $125,000, or 11.6%, in 2006, due primarily to higher RTFC dividend income in 2005.
Earnings Before Income Taxes for the year was $46.4 million, and was in line with 2005.
Income Tax Expense for 2006 was $12.3 million compared to zero in 2005. The Company paid actual cash income taxes in 2006 of $964,000.
Net Income decreased to $34.0 million in 2006 from $46.4 million 2005. The decrease was primarily the result of non-cash book income tax expense of $12.3 million in 2006.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA as defined herein) was $124.3 million for 2006 as compared with $127.9 million for 2005. The decrease in Adjusted EBITDA was primarily the result of the previously described pension settlement charges, and the benefit of the one-time settlement of access disputes during 2005.
Total Access Linesdecreased by 6,700, or 2.6%, for 2006 as compared to 2005. Incumbent local exchange carrier access lines declined by 9,700 lines and CLEC lines increased by 3,000 lines from the end of 2005. During the year, 2,100 access lines, 1,350 cable television subscribers, and approximately 500 High Speed Internet subscribers were acquired as the result of the acquisition of Montezuma Mutual Telephone Company and 2,600 access lines and 300 DSL subscribers in eight other exchanges were sold.