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Press Release -- March 7th, 2017
Source: Lumos Networks
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Lumos Networks Corp. Reports Full Year 2016 Results

WAYNESBORO, Va.–(BUSINESS WIRE)–

Lumos Networks Corp. (“Lumos Networks”, “Lumos” or the “Company”) (LMOS), a leading fiber-based service provider in the Mid-Atlantic region, today announced its results for the fourth quarter and full year 2016.

Total revenue for the full year 2016 was $206.9 million, up over 1% from the prior year. The Company generated operating income of $29.6 million in 2016, down nearly 19% compared to 2015. Net loss attributable to Lumos Networks Corp. in 2016 was $0.5 million, or $0.02 per diluted share, compared to net income of $10 million, or $0.43 per diluted share, in 2015. Total Adjusted EBITDA was $95.1 million in 2016, up over 3% from the prior year period.

Total revenue for the fourth quarter of 2016 was $51.9 million, up slightly from the prior year period. The Company generated operating income of $7.5 million for the three months ended December 31 2016, down approximately 25% year-over-year. Net income attributable to Lumos Networks Corp. was $0.1 million, or $0.00 per diluted share, for the fourth quarter of 2016, down from net income of $2.7 million in the prior year period. Total Adjusted EBITDA for the fourth quarter was $23.9 million, down over 2% from the prior year period.

In 2016, Lumos Networks overall revenue grew over 1%, data revenue growth exceeded 8% and Adjusted EBITDA exceeded $95 million, up over 3% compared to 2015. Combined FTTC and Enterprise businesses, which are approximately 95% tied to Ethernet and other advanced fiber products, grew nearly 20% in 2016.

On February 20, 2017, the Company announced that it had entered into a definitive agreement to be acquired by EQT Infrastructure for $18 in an all-cash transaction, resulting in an enterprise value of approximately $950 million. The agreement was approved by all members of the board of directors voting on the transaction. Completion of the transaction is subject to shareholder approval, regulatory approval and other customary closing conditions. The acquisition is expected to be completed during the third quarter of 2017.

About Lumos Networks

Lumos Networks is a leading fiber-based service provider in the Mid-Atlantic region serving Carrier, Enterprise and Data Center customers, offering end-to-end connectivity in 25 markets in Virginia, West Virginia, North Carolina, Pennsylvania, Maryland, Ohio and Kentucky. With a fiber network of 10,112 fiber route miles and 491,276 total fiber strand miles, Lumos Networks connects 1,304 unique Fiber to the Cell sites, 1,659 total FTTC connections, 36 data centers, including 7 company owned co-location facilities, 2,031 on-net buildings and nearly 3,400 total on-net locations. In 2016, Lumos Networks generated over $123 million in Data revenue over our fiber network. Detailed information about Lumos Networks is available at www.lumosnetworks.com.

Non-GAAP Measures

Contribution Margin is net income or loss attributable to Lumos Networks Corp. before interest, income taxes, depreciation and amortization, accretion of asset retirement obligations, net income attributable to noncontrolling interests, other (income) expenses, net, employee separation charges, restructuring charges, gain or loss on interest rate swap derivatives, corporate general and administrative expenses, including equity-based compensation, acquisition and separation related charges and amortization of actuarial gains or losses, and indirect operating expenses. Contribution Margin ratio is calculated as the ratio of Contribution Margin, as defined, to operating revenues.

Adjusted EBITDA is net income or loss attributable to Lumos Networks Corp. before interest, income taxes, depreciation and amortization and accretion of asset retirement obligations, net income attributable to noncontrolling interests, other (income) expenses, net, equity-based compensation, amortization of actuarial losses, employee separation charges, restructuring charges, acquisition and separation related charges and gain (loss) on interest rate swap derivatives. Adjusted EBITDA margin is calculated as the ratio of Adjusted EBITDA, as defined, to operating revenues.

Contribution Margin, Contribution Margin Ratio, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial performance measures. They should not be considered in isolation or as an alternative to measures determined in accordance with GAAP. Please refer to the schedules herein and our SEC filings for a reconciliation of these non-GAAP financial performance measures to the most comparable measures reported in accordance with GAAP and for a discussion of the presentation, comparability and use of such financial performance measures.

SPECIAL NOTE FROM THE COMPANY REGARDING FORWARD-LOOKING STATEMENTS

Any statements contained in this presentation that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates,” “targets,” “projects,” “should,” “may,” “will” and similar words and expressions are intended to identify forward-looking statements. Such forward-looking statements reflect, among other things, our current expectations, plans and strategies, and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Many of these risks are beyond our ability to control or predict. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. 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. Important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, include, but are not limited to: the successful closing of the announced transaction with EQT Infrastructure, including obtaining the requisite regulatory, governmental and shareholder approvals and satisfying other closing conditions; the risk that required governmental and regulatory approvals may delay the transaction or result in the imposition of conditions that could cause the parties to abandon the transaction or materially impact the financial benefits of the transaction; the timing to consummate the proposed transaction; any disruption from the proposed transaction making it more difficult to maintain relationships with customers, employees or suppliers; the diversion of management time on transaction-related issues; the transaction may involve unexpected costs, liabilities or delays; the outcome of any legal proceedings related to the transaction, the failure by EQT Infrastructure to obtain the necessary financing arrangement set forth in commitment letters received in connection with the merger; the impact of our previous acquisitions of Clarity Communications and DC 74 on our operations; rapid development and intense competition with resulting pricing pressure in the telecommunications and high speed data transport industry; our ability to grow our data business on an organic or inorganic basis in order to offset expected revenue declines in legacy voice and access products; our ability to obtain new carrier contracts or expand services under existing carrier contracts at competitive pricing levels to offset churn and achieve revenue growth from our carrier businesses; our ability to separate our legacy business on a timely basis; our ability to effectively allocate capital and timely implement network expansion plans necessary to accommodate organic growth initiatives; our ability to complete customer installations in a timely manner; adverse economic conditions; operating and financial restrictions imposed by our senior credit facility and our unsecured debt obligations; our cash and capital requirements; our ability to maintain and enhance our network; the potential to experience a high rate of customer turnover; federal and state regulatory fees, requirements and developments; our reliance on certain suppliers and vendors; and other unforeseen difficulties that may occur. These risks and uncertainties are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our SEC filings, including our Annual Report filed on Form 10-K.

Exhibits:

  • Condensed Consolidated Balance Sheets
  • Condensed Consolidated Statements of Operations
  • Condensed Consolidated Statements of Cash Flows
  • Summary of Operating Results, Customer and Network Statistics
  • Reconciliation of Non-GAAP Financial Measures to GAAP Results
Lumos Networks Corp.
Condensed Consolidated Balance Sheets
December 31, 2016 December 31, 2015
(In thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 33,575 $ 13,267
Marketable securities 38,081 88,811
Accounts receivable, net 22,609 20,796
Other receivables 753 852
Income tax receivable 459 568
Prepaid expenses and other 5,028 7,215
Total Current Assets 100,505 131,509
Securities and investments 1,479 1,180
Property, plant and equipment, net 536,288 498,944
Other Assets
Goodwill 100,297 100,297
Other intangibles, net 8,503 11,078
Deferred charges and other assets 6,300 2,364
Total Other Assets 115,100 113,739
Total Assets $ 753,372

$ 745,372
LIABILITIES AND EQUITY
Current Liabilities
Current portion of long-term debt $ 13,530 $ 10,400
Accounts payable 8,607 14,182
Advance billings and customer deposits 14,140 13,849
Accrued compensation 1,491 1,191
Accrued operating taxes 4,518 3,907
Other accrued liabilities 5,000 4,974
Total Current Liabilities 47,286 48,503
Long-Term Liabilities

Long-term debt, net of unamortized discount and debt
issuance costs, excluding current portion

 454,885 456,300
Retirement benefits 16,029 17,029
Deferred income taxes, net 96,988 89,193
Other long-term liabilities 2,124 2,016
Total Long-term Liabilities 570,026 564,538
Stockholders’ Equity 135,174 131,392
Noncontrolling Interests 886 939
Total Equity 136,060 132,331
Total Liabilities and Equity $ 753,372 $ 745,372
Lumos Networks Corp.
Condensed Consolidated Statements of Operations Three months ended December 31, Year ended December 31,
(In thousands, except per share amounts) 2016 2015 2016 2015
Operating Revenues $ 51,886 $ 51,852 $ 206,899 $ 204,269
Operating Expenses
Cost of revenue, exclusive of depreciation and amortization 9,025 10,523 38,973 42,205
Selling, general and administrative, exclusive of depreciation and amortization1 20,922 18,761 84,978 77,292
Depreciation and amortization 14,251 12,415 51,279 47,527
Accretion of asset retirement obligations 24 34 115 139
Restructuring charges2 117 1 1,940 638
Total Operating Expenses 44,339 41,734 177,285 167,801
Operating Income 7,547 10,118 29,614 36,468
Other Income (Expenses)
Interest expense (7,220 ) (6,896 ) (28,385 ) (19,918 )
Gain on interest rate swap derivatives – 220 – 665
Other income, net 69 203 389 114
Income Before Income Tax Expense 396 3,645 1,618 17,329
Income Tax Expense 250 925 1,962 7,146
Net Income (Loss) 146 2,720 (344 ) 10,183
Net Income Attributable to Noncontrolling Interests (42 ) (46 ) (179 ) (157 )
Net Income (Loss) Attributable to Lumos Networks Corp. $ 104 $ 2,674 $ (523 ) $ 10,026
Basic and Diluted Earnings (Loss) per Common Share Attributable to Lumos Networks Corp. Stockholders:
Basic earnings (loss) per share $ 0.00 $ 0.12 $ (0.02 ) $ 0.44
Diluted earnings (loss) per share $ 0.00 $ 0.12 $ (0.02 ) $ 0.43
1 Includes equity-based compensation expense related to all of the Company’s share-based awards, annual employee bonuses paid in the form of immediately vested shares and the Company’s 401(k) matching contributions of $1.1 million and $1.6 million for the three months ended December 31, 2016 and 2015, respectively, and $9.6 million and $5.9 million for the twelve months ended December 31, 2016 and 2015, respectively. Also includes $0.6 million and $1.2 million of acquisition and separation related costs for the three and twelve months ended December 31, 2016, respectively.
2 In 2016, the Company completed an employee reduction-in-force. Restructuring costs, consisting of employee severance and termination benefits, of $1.9 million were recognized during the twelve months ended December 31, 2016.
Lumos Networks Corp.
Condensed Consolidated Statements of Cash Flows Year Ended December 31,
(In thousands) 2016 2015
Cash Flows from Operating Activities:
Net (Loss) Income $ (344 ) $ 10,183
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation 48,704 42,721
Amortization 2,575 4,806
Accretion of asset retirement obligations 115 139
Deferred income taxes 1,551 6,767
Gain on interest rate swap derivatives – (665 )
Equity-based compensation expense 9,818 5,881
Amortization of debt issuance costs 4,500 2,688
Retirement benefits, net of cash contributions and distributions 505 (314 )
Excess tax benefits from share-based compensation – (165 )
Other 1,566 789
Changes in operating assets and liabilities, net (3,614 ) (6,085 )
Net Cash Provided by Operating Activities 65,376 66,745
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (84,027 ) (115,675 )
Broadband network expansion funded by stimulus grant – (2,578 )
Purchases of available-for-sale marketable securities (74,393 ) (114,478 )
Proceeds from sale or maturity of available-for-sale marketable securities 125,041 42,200
Change in restricted cash – 4,208
Cash reimbursement received from broadband stimulus grant – 3,838
Net Cash Used in Investing Activities (33,379 ) (182,485 )
Cash Flows from Financing Activities:
Proceeds from issuance of unsecured notes, net of debt discount – 28,000
Payment of financing costs – 148,500
Principal payments on senior secured term loans (8,030 ) (8,192 )
Cash dividends paid on common stock – (47,960 )
Principal payments under capital lease obligations (2,683 ) (3,152 )
Capital distribution to noncontrolling interests (232 ) (2,471 )
Proceeds from stock option exercises and employee stock purchase plan 1,670 356
Excess tax benefits from share-based compensation – 165
Repurchases of common stock to settle tax withholding obligations on employee stock awards (2,414 ) (371 )
Other – (8 )
Net Cash (Used in) Provided by Financing Activities (11,689 ) 114,867
Increase (decrease) in cash and cash equivalents 20,308 (873 )
Cash and cash equivalents:
Beginning of Period 13,267 14,140
End of Period $ 33,575 $ 13,267
Lumos Networks Corp.
Operating Results, Customer and Network Statistics
(Dollars in thousands) Three months ended: Twelve Months Ended:
December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Revenue, Gross Margin, Contribution Margin and Adjusted EBITDA
Revenue
Enterprise Data $ 13,911 $ 13,549 $ 12,878 $ 12,001 $ 11,935 $ 52,339 $ 45,820
Transport 8,106 8,499 8,902 9,099 10,005 34,606 40,021
FTTC 9,629 9,325 9,176 8,529 7,892 36,659 28,470
Total Data 31,646 31,373 30,956 29,629 29,832 123,604 114,311
Residential and Small Business 15,488 15,863 16,149 15,828 16,379 63,328 67,214
RLEC Access 4,752 4,535 5,343 5,337 5,641 19,967 22,744
Total Revenue $ 51,886 $ 51,771 $ 52,448 $ 50,794 $ 51,852 $ 206,899 $ 204,269
Gross Margin1
Data 86.6% 85.5% 85.3% 84.6% 83.8% 85.5% 84.3%
Residential and Small Business 69.1% 67.7% 65.8% 64.3% 65.2% 66.7% 63.9%
Contribution Margin2
Data $ 25,517 $ 24,822 $ 24,477 $ 23,390 $ 24,047 $ 98,206 $ 90,974
Residential and Small Business 9,554 9,516 9,394 9,142 9,701 37,606 38,422
RLEC Access 4,591 4,360 5,171 5,192 5,486 19,314 22,078
Total Contribution Margin $ 39,662 $ 38,698 $ 39,042 $ 37,724 $ 39,234 $ 155,126 $ 151,474
Contribution Margin Ratio2
Data 80.6% 79.1% 79.1% 78.9% 80.6% 79.5% 79.6%
Residential and Small Business 61.7% 60.0% 58.2% 57.8% 59.2% 59.4% 57.2%
RLEC Access 96.6% 96.1% 96.8% 97.3% 97.3% 96.7% 97.1%
Total Contribution Margin Ratio 76.4% 74.7% 74.4% 74.3% 75.7% 75.0% 74.2%
Adjusted EBITDA2
Data $ 14,311 $ 14,567 $ 13,826 $ 13,314 $ 14,186 $ 56,018 $ 50,719
Residential and Small Business 5,506 5,723 5,339 5,149 5,458 21,717 21,426
RLEC Access 4,122 3,970 4,611 4,652 4,907 17,355 19,858
Total Adjusted EBITDA $ 23,939 $ 24,260 $ 23,776 $ 23,115 $ 24,551 $ 95,090 $ 92,003
Adjusted EBITDA Margin2
Data 45.2% 46.4% 44.7% 44.9% 47.6% 45.3% 44.4%
Residential and Small Business 35.6% 36.1% 33.1% 32.5% 33.3% 34.3% 31.9%
RLEC Access 86.7% 87.5% 86.3% 87.2% 87.0% 86.9% 87.3%
Total Adjusted EBITDA Margin 46.1% 46.9% 45.3% 45.5% 47.3% 46.0% 45.0%
Capital Expenditures $ 18,747 $ 20,089 $ 23,185 $ 22,006 $ 35,557 $ 84,027 $ 115,675
Adjusted EBITDA less Capital Expenditures $ 5,192 $ 4,171 $ 591 $ 1,109 $ (11,006) $ 11,063 $ (23,672)
Lumos Networks Corp.
Operating Results, Customer and Network Statistics (continued)
Three months ended:
December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015
Fiber Network Statistics
Fiber Route-Miles 10,112 9,204 8,985 8,734 8,607
Fiber Miles3 491,276 475,507 436,451 401,109 384,094
Fiber Markets 25 24 24 24 24
FTTC Unique Towers 1,304 1,297 1,295 1,252 1,099
FTTC Total Connections 1,659 1,642 1,636 1,592 1,440
On-Network Buildings 2,031 1,984 1,922 1,812 1,732
Data Centers4 36 36 36 36 34
Mobile Switching Centers 15 14 14 14 14
R&SB Statistics
Competitive Voice Connections7 65,285 68,084 69,903 71,675 73,794
Video Subscribers 5,851 5,841 5,817 5,840 5,904
Fiber-to-the-Premise Broadband Connections5 8,972 8,307 7,982 7,849 7,649
Premises Passed by Fiber6 19,783 19,591 19,453 19,495 19,421
RLEC Access Lines7 22,991 23,381 23,695 24,094 24,421
1 The Company had previously reported gross margin percentages that were calculated as the ratio of gross profit (total revenue less network access charges) to total revenue. Beginning in Q1 2016, the Company began reporting cost of revenue, which includes network access charges and certain other facilities rental costs and adjusted its measurement of gross margin to include these costs. Historical periods have been revised to be consistent with the current period presentation.
2 Contribution Margin, Contribution Margin Ratio, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures. See definitions on page 3 of this earnings release.
3 Fiber miles are calculated as the fiber route miles multiplied by the number of fiber strands within each cable (represents an average of 49 fibers per route as of December 31, 2016).
4 Data centers reported include both commercial and private data centers and Company-owned facilities offering commercial data center services.
5 During the first quarter of 2016, the Company revised its fiber-to-the-premise broadband connections as a result of enhanced system reporting capabilities. Historical fiber-to-the-premise broadband connections for prior quarters have been revised to reflect the updated information.
6 Includes residential and small business locations passed by fiber and available for service. Approximately 92% of the premises passed by fiber and available for service as of December 31, 2016 were residential.
7 During the fourth quarter of 2016, the Company revised its competitive and RLEC voice connections as a result of enhanced system reporting capabilities. Historical voice connections for prior quarters have been revised to reflect the updated information.
Note: Certain prior period Adjusted EBITDA amounts have been reclassified to conform with the current year presentation.
Lumos Networks Corp.
Reconciliation of Net Income (Loss) Attributable to Lumos Networks Corp. to Contribution Margin
(Dollars in thousands) 2016 2015
For The Three Months Ended December 31,
Net Income Attributable to Lumos Networks Corp. $ 104 $ 2,674
Net Income Attributable to Noncontrolling Interests 42 46
Net Income 146 2,720
Income tax expense 250 925
Interest expense 7,220 6,896
Gain on interest rate swap derivatives – (220 )
Other income, net (69 ) (203 )
Operating Income 7,547 10,118
Depreciation and amortization and accretion of asset retirement obligations 14,275 12,449
Restructuring charges 117 1
Indirect operating costs 9,764 8,481

Corporate general and administrative costs, including equity-based compensation and
acquisition and separation related charges

 7,959 8,185
Contribution Margin $ 39,662 $ 39,234
Contribution Margin Ratio 76.4 % 75.7 %
For The Twelve Months Ended December 31,
Net (Loss) Income Attributable to Lumos Networks Corp. $ (523 ) $ 10,026
Net Income Attributable to Noncontrolling Interests 179 157
Net (Loss) Income (344 ) 10,183
Income tax expense 1,962 7,146
Interest expense 28,385 19,918
Gain on interest rate swap derivatives – (665 )
Other income, net (389 ) (114 )
Operating Income 29,614 36,468
Depreciation and amortization and accretion of asset retirement obligations 51,394 47,666
Restructuring charges 1,940 638
Indirect operating costs 36,421 35,590

Corporate general and administrative costs, including equity-based compensation and
acquisition and separation related charges

 35,757 31,112
Contribution Margin $ 155,126 $ 151,474
Contribution Margin Ratio 75.0 % 74.2 %
Reconciliation of Net Income (Loss) Attributable to Lumos Networks Corp. to Adjusted EBITDA
(Dollars in thousands) 2016 2015
For The Three Months Ended December 31,
Net Income Attributable to Lumos Networks Corp. $ 104 $ 2,674
Net Income Attributable to Noncontrolling Interests 42 46
Net Income 146 2,720
Income tax expense 250 925
Interest expense 7,220 6,896
Gain on interest rate swap derivatives – (220 )
Other income, net (69 ) (203 )
Operating Income 7,547 10,118
Depreciation and amortization and accretion of asset retirement obligations 14,275 12,449
Amortization of actuarial losses 337 338
Equity-based compensation 1,104 1,645
Restructuring charges 117 1
Acquisition and separation related charges 559 –
Adjusted EBITDA $ 23,939 $ 24,551
Adjusted EBITDA Margin 46.1 % 47.3 %
For The Twelve Months Ended December 31,
Net (Loss) Income Attributable to Lumos Networks Corp. $ (523 ) $ 10,026
Net Income Attributable to Noncontrolling Interests 179 157
Net (Loss) Income (344 ) 10,183
Income tax expense 1,962 7,146
Interest expense 28,385 19,918
Gain on interest rate swap derivatives – (665 )
Other income, net (389 ) (114 )
Operating Income 29,614 36,468
Depreciation and amortization and accretion of asset retirement obligations 51,394 47,666
Amortization of actuarial losses 1,350 1,350
Equity-based compensation 9,581 5,881
Restructuring charges 1,940 638
Acquisition and separation related charges 1,211 –
Adjusted EBITDA $ 95,090 $ 92,003
Adjusted EBITDA Margin 46.0 % 45.0 %

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