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Press Release -- August 3rd, 2016
Source: Lumos Networks
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Lumos Networks Corp. Reports Second Quarter 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 second quarter of 2016 results. Total revenue in the second quarter of 2016 was $52.4 million, an increase of nearly 3% from the prior year period. The Company generated operating income of $9.7 million for the three months ended June 30, 2016, up nearly 5% year-over-year. Net Income attributable to Lumos Networks Corp. was $1.2 million, or $0.05 per diluted share, for the second quarter of 2016, down from $3.3 million in the prior year period. Total Adjusted EBITDA was approximately $23.8 million, up nearly 5% from the prior year period.

“Lumos Networks executed well in the quarter and we delivered one of our strongest operational quarters in my tenure as CEO,” said Timothy G. Biltz, President and CEO of Lumos Networks. “We accelerated our year-over-year data revenue growth to over 10%, led by approximately 36% growth in our FTTC business and a significant acceleration in our Enterprise growth to 14%. Our combined FTTC and Enterprise businesses, which are approximately 95% tied to Ethernet and other advanced fiber products, grew over 22% year-over-year in the second quarter.”

Mr. Biltz continued, “Given our strong operational performance in the first half of 2016 and continued expected strong demand from our Carrier and Enterprise customers, we reiterate our 2016 annual guidance for revenue of $206-$210 million and Adjusted EBITDA of $93-$96 million.”

“During the second quarter of 2016, we saw increased Enterprise demand in our recently completed Network Expansion project into the markets of Richmond and Hampton Roads/Norfolk,” Mr. Biltz said. “Based upon our recently completed extensive market analysis, we believe that these markets increase our total Enterprise addressable market by $221 million or approximately 67%. Our prior analysis indicated an increase of $135 million, or 60%. This increase is largely related to the efficient and strategic placement of our fiber routes combined with continued solid economic growth in many of our enterprise markets.”

“I am also pleased to announce that we made significant progress in our project focused on separation of our regulated, legacy assets during the second quarter,” Mr. Biltz concluded. “We continue to expect to have our full network separation analysis completed in conjunction with our third quarter of 2016 earnings call.”

Business Outlook

For the full year 2016, the Company reiterates its financial guidance for revenue of $206 to $210 million, Adjusted EBITDA of $93 to $96 million and capital expenditures of $85 to $95 million.

Please see the schedules accompanying this release for additional financial guidance, including reconciliations of non-GAAP measures to GAAP results.

Statements made are based on management’s current expectations. These statements are forward-looking and actual results may differ materially. Please see “Special Note from the Company Regarding Forward-Looking Statements.”

Conference Call

A conference call and simultaneous webcast, hosted by Timothy G. Biltz, Chief Executive Officer, Johan Broekhuysen, Chief Financial Officer, and Will Davis, SVP of Marketing and Investor Relations, Chief of Staff to discuss today’s announcement and to review these financial and operational results and financial guidance will be held at 8:30 A.M. (ET) on August 3, 2016.

The webcast may be accessed via the Internet at http://ir.lumosnetworks.com/ and the live call (“Lumos Networks Second Quarter Earnings Conference Call”) may be accessed with the following numbers:

Domestic: 1-877-510-3772
International: 1-412-902-4135
Canada: 1-855-669-9657
The conference call will be archived and available for replay through August 18, 2016 and may be accessed with
the following numbers:
Domestic: 1-877-344-7529
International: 1-412-317-0088
Canada: 1-855-669-9658
Replay pass codes: Conference ID: 10089808

The webcast will also bearchived and the replay may be accessed at http://ir.lumosnetworks.com/.

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 24 markets in Virginia, Pennsylvania, West Virginia, Maryland, Ohio and Kentucky. With a fiber network of 8,985 fiber route miles and more than 436,000 total fiber strand miles, Lumos Networks connects 1,295 unique Fiber to the Cell sites, 1,636 total FTTC connections, 36 data centers, including 7 company owned co-location facilities, 1,922 on-net buildings and over 3,200 total on-net locations. In 2015, Lumos Networks generated over $114 million in Data revenue and over $51 million in Adjusted EBITDA 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 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 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 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: 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 divest 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
  • Business Outlook

Lumos Networks Corp.

Condensed Consolidated Balance Sheets
June 30, 2016 December 31, 2015

ASSETS
Current Assets
Cash and cash equivalents $ 48,984 $ 13,267
Marketable securities 32,318 88,811
Accounts receivable, net 21,574 20,796
Other receivables 408 852
Income tax receivable 376 568
Prepaid expenses and other 6,061 7,215
Total Current Assets 109,721 131,509
Securities and investments 1,308 1,180
Property, plant and equipment, net 527,001 498,944
Other Assets
Goodwill 100,297 100,297
Other intangibles, net 9,790 11,078
Deferred charges and other assets 6,899 2,364
Total Other Assets 116,986 113,739

Total Assets $ 755,016 $ 745,372

LIABILITIES AND EQUITY
Current Liabilities
Current portion of long-term debt $ 11,071 $ 10,400
Accounts payable 12,625 14,182
Advance billings and customer deposits 14,146 13,849
Accrued compensation 2,444 1,191
Accrued operating taxes 5,183 3,907
Other accrued liabilities 5,416 4,974
Total Current Liabilities 50,885 48,503
Long-Term Liabilities

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

 459,357 456,300
Retirement benefits 16,572 17,029
Deferred income taxes, net 89,918 89,193
Other long-term liabilities 2,097 2,016
Total Long-term Liabilities 567,944 564,538
Stockholders’ Equity 135,157 131,392
Noncontrolling Interests 1,030 939
Total Equity 136,187 132,331
Total Liabilities and Equity $ 755,016 $ 745,372
Lumos Networks Corp.
Condensed Consolidated Statements of Operations Three months ended June 30, Six months ended June 30,
(In thousands, except per share amounts) 2016 2015 2016 2015
Operating Revenues $ 52,448 $ 50,953 $ 103,242 $ 101,448
Operating Expenses
Cost of revenue, exclusive of depreciation and amortization 10,079 10,683 20,291 21,136

Selling, general and administrative, exclusive of
depreciation and amortization1

 20,216 19,498 43,551 38,591
Depreciation and amortization 12,398 11,441 24,289 23,309
Accretion of asset retirement obligations 34 38 68 72
Restructuring charges2 – 4 2,207 637
Total Operating Expenses 42,727 41,664 90,406 83,745
Operating Income 9,721 9,289 12,836 17,703
Other Income (Expenses)
Interest expense (7,012) (3,719) (14,001) (7,205)
Gain on interest rate swap derivatives – 165 – 247
Other income (expenses), net 98 96 272 (147)
Income (Loss) Before Income Tax Expense 2,807 5,831 (893) 10,598
Income Tax Expense 1,527 2,438 666 4,447
Net Income (Loss) 1,280 3,393 (1,559) 6,151
Net Income Attributable to Noncontrolling Interests (36) (44) (91) (78)
Net Income (Loss) Attributable to Lumos Networks Corp. $ 1,244 $ 3,349 $ (1,650) $ 6,073

Basic and Diluted Earnings (Loss) per Common Share Attributable
to Lumos Networks Corp. Stockholders:
Basic earnings (loss) per share $ 0.05 $ 0.15 $ (0.07) $ 0.27
Diluted earnings (loss) per share $ 0.05 $ 0.14 $ (0.07) $ 0.26
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 $1.3 million and $1.6 million for the three months ended June 30, 2016 and 2015, respectively, and $6.8 million and $2.8 million for the six months ended June 30, 2016 and 2015, respectively.
2 In the first quarter of 2016, the Company commenced a cost reduction plan involving an employee reduction-in-force. Restructuring charges of $2.2 million were recognized in the six months ended June 30, 2016 in connection with this plan, all of which related to employee severance and termination benefits.
Lumos Networks Corp.
Condensed Consolidated Statements of Cash Flows Six Months Ended June 30,
(In thousands) 2016 2015
Cash Flows from Operating Activities:
Net (Loss) Income $ (1,559) $ 6,151
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 23,001 19,961
Amortization 1,288 3,348
Accretion of asset retirement obligations 68 72
Deferred income taxes 447 4,166
Gain on interest rate swap derivatives – (247)
Equity-based compensation expense 6,816 2,782
Amortization of debt issuance costs 2,212 822
Retirement benefits, net of cash contributions and distributions 218 (142)
Other 877 332
Changes in operating assets and liabilities, net (687) (2,251)
Net Cash Provided by Operating Activities 32,681 34,994
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (45,191) (55,349)
Broadband network expansion funded by stimulus grant – (2,082)
Purchases of available-for-sale marketable securities (18,344) (23,356)
Proceeds from sale or maturity of available-for-sale marketable securities 74,764 18,045
Change in restricted cash – 1,574
Cash reimbursement received from broadband stimulus grant – 1,574
Net Cash Provided by (Used in) Investing Activities 11,229 (59,594)
Cash Flows from Financing Activities:
Proceeds from issuance of senior secured term loan – 28,000
Payment of financing costs – (861)
Principal payments on senior secured term loans (4,015) (3,945)
Cash dividends paid on common stock – (3,152)
Principal payments under capital lease obligations (2,397) (2,317)
Proceeds from stock option exercises and employee stock purchase plan 530 543

Repurchases of common stock to settle tax withholding
obligations on employee stock awards

 (2,311) (361)
Other – (247)
Net Cash (Used in) Provided by Financing Activities (8,193) 17,660
Increase (decrease) in cash and cash equivalents 35,717 (6,940)
Cash and cash equivalents:
Beginning of Period 13,267 14,140
End of Period $ 48,984 $ 7,200
Lumos Networks Corp.
Operating Results, Customer and Network Statistics
(Dollars in thousands) Three months ended: Six months ended:
June 30, 2016 March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 June 30, 2016 June 30, 2015

Revenue, Gross Margin, Contribution
Margin and Adjusted EBITDA
Revenue
Enterprise Data $ 12,878 $ 12,001 $ 11,935 $ 11,560 $ 11,298 $ 24,879 $ 22,325
Transport 8,902 9,099 10,005 9,507 10,036 18,001 20,509
FTTC 9,176 8,529 7,892 7,556 6,755 17,705 13,022
Total Data 30,956 29,629 29,832 28,623 28,089 60,585 55,856
Residential and Small Business 16,149 15,828 16,379 16,560 17,010 31,977 34,275
RLEC Access 5,343 5,337 5,641 5,786 5,854 10,680 11,317
Total Revenue $ 52,448 $ 50,794 $ 51,852 $ 50,969 $ 50,953 $ 103,242 $ 101,448
Gross Margin1
Data 85.3% 84.6% 84.2% 83.7% 84.5% 84.9% 86.2%
Residential and Small Business 65.8% 64.3% 64.5% 64.4% 62.8% 65.1% 65.2%
Contribution Margin2
Data $ 24,477 $ 23,390 $ 24,164 $ 22,500 $ 22,127 $ 47,867 $ 44,573
Residential and Small Business 9,394 9,142 9,584 9,343 9,510 18,536 19,232
RLEC Access 5,171 5,192 5,486 5,609 5,684 10,363 10,983
Total Contribution Margin $ 39,042 $ 37,724 $ 39,234 $ 37,452 $ 37,321 $ 76,766 $ 74,788
Contribution Margin Ratio2
Data 79.1% 78.9% 81.0% 78.6% 78.8% 79.0% 79.8%
Residential and Small Business 58.2% 57.8% 58.5% 56.4% 55.9% 58.0% 56.1%
RLEC Access 96.8% 97.3% 97.3% 96.9% 97.1% 97.0% 97.0%
Total Contribution Margin Ratio 74.4% 74.3% 75.7% 73.5% 73.2% 74.4% 73.7%
Adjusted EBITDA2
Data $ 13,826 $ 13,314 $ 14,303 $ 12,215 $ 12,158 $ 27,140 $ 24,464
Residential and Small Business 5,339 5,149 5,341 5,020 5,400 10,488 10,802
RLEC Access 4,611 4,652 4,907 5,039 5,109 9,263 9,912
Total Adjusted EBITDA $ 23,776 $ 23,115 $ 24,551 $ 22,274 $ 22,667 $ 46,891 $ 45,178
Adjusted EBITDA Margin2
Data 44.7% 44.9% 47.9% 42.7% 43.3% 44.8% 44.5%
Residential and Small Business 33.1% 32.5% 32.6% 30.3% 31.7% 32.8% 32.0%
RLEC Access 86.3% 87.2% 87.0% 87.1% 87.3% 86.7% 82.8%
Total Adjusted EBITDA Margin 45.3% 45.5% 47.3% 43.7% 44.5% 45.4% 44.5%
Capital Expenditures $ 23,185 $ 22,006 $ 35,557 $ 24,769 $ 26,125 $ 45,191 $ 55,349
Adjusted EBITDA less Capital Expenditures $ 591 $ 1,109 $ (11,006) $ (2,495) $ (3,458) $ 1,700 $ (10,171)

Lumos Networks Corp.

Operating Results, Customer and Network Statistics (continued)
Three months ended:
June 30, 2016 March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015

Fiber Network Statistics
Fiber Route-Miles 8,985 8,734 8,607 8,408 8,100
Fiber Miles3 436,451 401,109 384,094 378,581 369,238
Fiber Markets 24 24 24 24 24
FTTC Unique Towers 1,295 1,252 1,099 1,030 976
FTTC Total Connections 1,636 1,592 1,440 1,363 1,307
On-Network Buildings 1,922 1,812 1,732 1,642 1,574
Data Centers4 36 36 34 33 32
Mobile Switching Centers 14 14 14 14 14

R&SB Statistics
Competitive Voice Connections 69,728 71,547 73,705 76,380 79,022
Video Subscribers 5,817 5,840 5,904 5,760 5,516
Fiber-to-the-Premise Broadband Connections5 7,982 7,849 7,649 7,300 6,845
Premises Passed by Fiber6 19,453 19,495 19,421 19,186 18,983

RLEC Access Lines

 24,814 25,079 25,516 25,902 26,276
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 June 30, 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 93% of the premises passed by fiber and available for service as of June 30, 2016 were residential.
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 June 30,
Net Income Attributable to Lumos Networks Corp. $ 1,244 $ 3,349
Net Income Attributable to Noncontrolling Interests 36 44
Net Income 1,280 3,393
Income tax expense 1,527 2,438
Interest expense 7,012 3,719
Gain on interest rate swap derivatives – (165)
Other income, net (98) (96)
Operating Income 9,721 9,289
Depreciation and amortization and accretion of asset retirement obligations 12,432 11,479
Restructuring charges – 4
Indirect operating costs 8,939 8,706
Corporate general and administrative costs, including equity-based compensation 7,950 7,843
Contribution Margin $ 39,042 $ 37,321
Contribution Margin Ratio 74.4% 73.2%

For The Six Months Ended June 30,
Net (Loss) Income Attributable to Lumos Networks Corp. $ (1,650) $ 6,073
Net Income Attributable to Noncontrolling Interests 91 78
Net (Loss) Income (1,559) 6,151
Income tax expense 666 4,447
Interest expense 14,001 7,205
Gain on interest rate swap derivatives – (247)
Other income, net (272) 147
Operating Income 12,836 17,703
Depreciation and amortization and accretion of asset retirement obligations 24,357 23,381
Restructuring charges 2,207 637
Indirect operating costs 17,536 17,859
Corporate general and administrative costs, including equity-based compensation 19,830 15,208
Contribution Margin $ 76,766 $ 74,788

Contribution Margin Ratio

 74.4% 73.7%

Reconciliation of Net Income (Loss) Attributable to Lumos Networks Corp. to Adjusted EBITDA

(Dollars in thousands)

 2016 2015

For The Three Months Ended June 30,
Net Income Attributable to Lumos Networks Corp. $ 1,244 $ 3,349
Net Income Attributable to Noncontrolling Interests 36 44
Net Income 1,280 3,393
Income tax expense 1,527 2,438
Interest expense 7,012 3,719
Gain on interest rate swap derivatives – (165)
Other income, net (98) (96)
Operating Income 9,721 9,289
Depreciation and amortization and accretion of asset retirement obligations 12,432 11,479
Amortization of actuarial losses 337 338
Equity-based compensation 1,286 1,557
Restructuring charges – 4
Adjusted EBITDA $ 23,776 $ 22,667
Adjusted EBITDA Margin 45.3% 44.5%

For The Six Months Ended June 30,
Net (Loss) Income Attributable to Lumos Networks Corp. $ (1,650) $ 6,073
Net Income Attributable to Noncontrolling Interests 91 78
Net (Loss) Income (1,559) 6,151
Income tax expense 666 4,447
Interest expense 14,001 7,205
Gain on interest rate swap derivatives – (247)
Other income, net (272) 147
Operating Income 12,836 17,703
Depreciation and amortization and accretion of asset retirement obligations 24,357 23,381
Amortization of actuarial losses 675 675
Equity-based compensation 6,816 2,782
Restructuring charges 2,207 637
Adjusted EBITDA $ 46,891 $ 45,178
Adjusted EBITDA Margin 45.4% 44.5%

Lumos Networks

Business Outlook1 (as of August 3, 2016)

(In millions)

 2016 Annual Guidance 1
Operating Revenues $206 to $210
Adjusted EBITDA $93 to $96
Capital Expenditures $85 to $95
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
Net (Loss) Income $(2) to $1
Income tax expense approximately $2
Interest expense approximately $30
Operating Income $30 to $33
Depreciation and amortization approximately $50
Equity-based compensation approximately $12
Amortization of actuarial losses approximately $1
Adjusted EBITDA $93 to $96
1 These estimates are based on management’s current expectations. These estimates are forward-looking and actual results may differ materially. Please see “Special Note from the Company Regarding Forward-Looking Statements” in the Lumos Networks Corp. second quarter earnings release dated August 3, 2016.

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