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MBND > SEC Filings for MBND > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for MULTIBAND CORP


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Corporate Information

The Company is a Minnesota corporation formed in September 1975. The Company's principal executive offices are located at 5605 Green Circle Drive, Minnetonka, Minnesota 55343, and its telephone number is (763) 504-3000. The Company's website address is www.multibandusa.com. The information on, or that may be accessed through, the Company's website is not incorporated by reference into this report and should not be considered a part of this report. As used in this report, references to "we," "our," "us," "Multiband" and "the Company" refer to Multiband Corporation unless the context indicates otherwise.

Overview

The Company has three operating segments: (1) Field Services Segment (FS), where the Company provides installation services to pay television (satellite and broadband cable) providers, internet providers and commercial customers, (2) Multi-Dwelling Unit Segment (MDU), where the Company bills voice, internet and video services to subscribers as owner/operator and also acts as a master system operator for DIRECTV, receiving net cash payments for managing video subscribers through its network of system operators; and (3) Engineering, Energy & Construction Segment (EE&C) where the Company provides engineering and construction services for the wired and wireless telecommunications industry, including public safety networks. This segment also provides renewable energy services including wind and solar applications and other design and construction services, usually done on a project basis. All segments encompass a variety of different corporate entities. We operate in 33 states with 33 field offices and employ approximately 3,700 people.

Field Services Segment (FS)

The Company, through its FS segment, generates revenue from the installation and service of DIRECTV video programming for residents of single family homes under a contract with DIRECTV. DIRECTV is the largest provider of satellite television services in the United States with approximately 20 million subscribers. These video subscribers are owned and billed by DIRECTV. The FS segment functions as a fulfillment arm for DIRECTV. As a result, the Company does not directly compete with other providers for DIRECTV's business. Although DIRECTV competes with DISH, the other leading satellite television provider and incumbent providers of phone and telephone services for pay television customers, DIRECTV has its own marketing and competitive programs of which the Company is merely an indirect and passive recipient. The FS segment also provides similar installation services for certain broadband cable and internet providers and commercial customers.

Multi-Dwelling Unit Segment (MDU)

Through our MDU segment, we serve as a master system operator for DIRECTV, which allows us to offer satellite television services to residents of multi-dwelling units directly and through a network of affiliated operators. The MDU segment also offers bundled services for voice, data and video directly to residents in the MDU market. Our primary customers in the MDU segment are property owners/managers who are focused on delivering their residents (our end users) reliability, quality service, short response times, minimized disruptions and alterations on the property, and value added services. Our contracts with the property owner typically run three to ten years pursuant to right-of-entry agreements between property owners and us. Within this segment, we also offer our internal support center and billing platform to service third party clients. As of October 31, 2012, we had approximately 160,000 owned and managed subscribers, with an additional 38,000 subscribers supported by the support center.

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Energy, Engineering & Construction Segment (EE&C)

The Company also provides engineering and construction services for the wired and wireless telecommunications industry, including public safety networks, renewable energy services including wind and solar applications and other design and construction services which are usually done on a project basis.

Backlog (in thousands)

As of September 30, 2012, we had a backlog of unfilled orders of approximately $1,725 compared to approximately $1,817 at December 31, 2011. We define backlog as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both in definition and amount; and (iii) there is an executed written contract, purchase order, agreement or other documentary evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We have experienced variances from time to time in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does not include new firm commitments which may be awarded to us by our customers from time to time in future periods. These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total revenue that could be earned by us in future periods.

Our Strategies

Our strategies are centered on leveraging our existing infrastructure and improving operational efficiencies. The key elements of our business strategies are:

Grow Our MDU Business.

We believe that we are well positioned with proper funding to support growth initiatives in the MDU market because we are currently the largest nationwide MDU master system operator and we have invested significant time, effort, and capital into developing our MDU infrastructure. Our intent is to substantially grow this segment of our business by targeting middle to high-end rental properties and resort area condominiums. We will target properties that range from 50 to 150 units on a contiguous MDU property for television and internet access only. We will survey properties that exceed 150 units for the feasibility of local and long distance telephone services.

Expand Our Installation & Fulfillment Services.

We believe our national footprint and technical expertise uniquely position us to expand into new installation and fulfillment services for corporations, government agencies and residential properties. Expanding our installation services would allow us to better leverage our fixed costs and improve operating margins. We continue to evaluate opportunities to expand into new installation services and will pursue those opportunities that are strategically and financially viable.

Grow the EE&C Business Segment.

We believe growth in public safety networks will continue as security and safety concerns, driven by, among other things, terrorism threats and weather emergencies, require further infrastructure buildouts. We also believe that research, development and investment in alternative and renewable energy sources will provide work for the Company as the United States looks to reduce its dependence on foreign oil imports.

Improve Operational Efficiencies.

We intend to continue improving our profitability and cash flow by reducing technician turnover, maintaining strict inventory control systems, improving our training and safety programs to reduce insurance and other costs, reducing fleet fuel usage, and optimizing vehicle leasing terms.

Pursue Strategic Acquisitions.

We intend to pursue strategic acquisitions that expand the scope of our service offerings, allow us to expand our operations into new geographic areas or strengthen our position in our existing geographic markets.

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SELECTED CONSOLIDATED FINANCIAL DATA (expressed as a percentage of revenue)



                                      DOLLAR AMOUNTS AS A PERCENTAGE OF REVENUES
                                      THREE MONTHS ENDED       NINE MONTHS ENDED

                                    September    September   September   September
                                     30, 2012    30, 2011    30, 2012    30, 2011
                                   (unaudited)  (unaudited) (unaudited) (unaudited)
REVENUES                               100%        100%        100%        100%

COST OF PRODUCTS & SERVICES
(Exclusive of depreciation and
amortization shown below)             73.4%        69.9%       73.7%       72.0%

SELLING, GENERAL & ADMINISTRATIVE     20.5%        19.7%       22.5%       20.3%
DEPRECIATION & AMORTIZATION            2.1%        1.8%        2.3%        2.2%

INCOME FROM OPERATIONS                 4.0%        8.6%        1.5%        5.5%
OTHER EXPENSE                         -0.9%        -1.0%       -1.4%       -1.0%
INCOME BEFORE INCOME TAXES             3.1%        7.6%        0.1%        4.5%
PROVISION FOR INCOME TAXES             1.2%        3.3%        0.1%        2.0%
NET INCOME                             1.9%        4.3%        0.0%        2.5%

RESULTS OF OPERATIONS (in thousands, except for percentages)

Revenues

Total revenues decreased 0.8% to $85,695 for the quarter ended September 30, 2012 as compared to $86,366 for the quarter ended September 30, 2011. Revenues for the nine months ended September 30, 2012 increased 2.3% to $227,727 from $222,623 for the same period in 2011.

FS segment revenues for the three months ended September 30, 2012 were $74,798 in comparison to $78,659 for the same period in 2011, a decrease of 4.9%. Revenue generated under the home services provider agreement with DIRECTV decreased $8,054, or 10.4%, as a result of a 9% decline in the number of closed work orders between periods. This decline was partially offset by a $1,241 (225%) increase in WildBlue fulfillment revenue and revenue from the cable fulfillment business (acquired in late 2011 and early 2012), which totaled $2,954 in the 2012 period. Revenues for the nine months ended September 30, 2012, for the FS segment, were $199,514 as compared to $203,135 for the same period in 2011, a decrease of 1.8%. Revenue generated under the home services provider agreement with DIRECTV decreased $14,819, or 7.4%, as a result of a 9% decline in the number of closed work orders between years. This decline was offset by a 3,404 (257%) increase in WildBlue fulfillment revenue and revenue from the cable fulfillment business, which totaled $8,497 in 2012. During the remainder of 2012, the Company expects FS segment revenues to seasonally decrease in the fourth quarter.

The MDU segment had revenues of $7,534 for the three months ended September 30, 2012, compared to $5,742 for the same period in 2011, an increase of 31.2%. Revenues for the nine month period ended September 30, 2012, increased 25.0% to $19,753 from $15,805 for the same period in 2011. During the three and nine months ended September 30, 2012, the Company increased its MDU revenue primarily via an increase in system operator related revenue. During the remainder of 2012, the Company expects MDU revenue to seasonally decrease in the fourth quarter.

The EE&C segment revenues increased from $1,965 for the three months ended September 30, 2011 to $3,363 for the three months ended September 30, 2012, an increase of 71.1%. The Company's acquisition of SE and MW in September 2011, accounted for $1,659 of this increase which was partially offset by a decrease in MDU construction revenue of $261. Revenues for the nine month period ended September 30, 2012, for the EE&C segment, increased 129.7% to $8,460 from $3,683 for the same period in 2011. Revenues generated by SE and MW accounted for $5,960 of this increase which was partially offset by a decrease in MDU construction revenue of $1,183. During the remainder of 2012, the Company expects EE&C segment revenues to increase as the Company increases its sales and bidding efforts.

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Cost of Products and Services (exclusive of depreciation and amortization)

The Company's cost of products and services increased by 4.2% to $62,893 for the quarter ended September 30, 2012, as compared to $60,332 for the same quarter last year. For the nine months ended September 30, 2012, cost of products and services were $167,750 compared to $160,201 in the prior year, a 4.7% increase.

Cost of products and services for the FS segment decreased by 0.1% for the three months ended September 30, 2012 to $54,871, compared to $54,947 in the prior year quarter. As a percentage of revenue, cost of products and services for the FS segment was 73.4% and 69.9% for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012, cost of products and services were $148,302 for the FS segment compared to $147,051 in the prior year, a 0.9% increase. The increase in both periods is attributable to increased technician retention efforts and additional costs associated with our newly acquired cable fulfillment. As a percentage of revenue, cost of products and services for the FS segment was 74.3% and 72.4% for the nine months ended September 30, 2012 and 2011, respectively. For the remainder of 2012, the Company expects FS segment costs of products and services to remain relatively constant in relation to FS segment revenue.

Cost of products and services for the MDU segment increased by 37.7% for the current quarter to $5,370, compared to $3,901 in the same quarter last year. For the nine months ended September 30, 2012, cost of products and services were $12,684 for the MDU segment, compared to $10,440 in the prior year, a 21.5% increase. As a percentage of revenue, cost of products and services for the MDU segment was 64.2% and 66.1% for the nine months ended September 30, 2012 and 2011, respectively. The increase was due to system operator related costs. For the remainder of 2012, the Company expects MDU costs of products and services to be consistent as a percentage of revenues.

For the EE&C segment, cost of products and services were $2,652 for the quarter ended September 30, 2012, compared to $1,484 in the same quarter last year, a 78.7% increase. The acquisition of SE and MW in September 2011 accounted for $1,384 of this increase offset by a decline in MDU construction costs of $216. As a percentage of revenue, costs of products and services for the EE&C segment were 78.9% and 75.5% for the quarters ended September 30, 2012 and 2011, respectively. The increase in costs as a percentage of revenues between periods is due to economic conditions and the competitive marketplace in which this segment operates. For the nine months ended September 30, 2012, cost of products and services were $6,764 for the EE&C segment, compared to $2,710 in the prior year, a 149.6% increase. Costs associated with SE and MW accounted for $4,916 of this increase while MDU construction costs declined by $862. As a percentage of revenue, cost of products and services for the EE&C segment was 80.0% and 73.6% for the nine months ended September 30, 2012 and 2011, respectively. For the remainder of 2012, the Company expects EE&C segment costs of products and services to remain relatively consistent in relation to EE&C segment revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $17,557 for the quarter ended September 30, 2012, compared to $17,014 in the prior year's quarter, an increase of 3.2%. Costs associated with newly acquired operations accounted for the majority of the increase. Selling, general and administrative expenses were, as a percentage of revenues, 20.5% for the quarter ended September 30, 2012 and 19.7% for the same period a year ago. For the nine months ended September 30, 2012, selling, general and administrative expenses increased 13.5% to $51,218 compared to $45,131 for the nine months ended September 30, 2011. Costs associated with newly acquired operations accounted for $4,262 (70%) of the increase. The remainder of the increase was caused by an increase in benefit costs, which was driven by a variety of factors including an increase in health plan expenses due to an increase in the number of participants and certain significant medical claims incurred under the Company's self-insured plan. The Company believes that offering improved benefits to employees will lead to improved retention, which will drive down recruitment and training costs. Workers compensation expense also increased due to an increase in the number of claims filed in 2012. As a percentage of revenue, selling general and administrative expenses were 22.5% for the nine months ended September 30, 2012, compared to 20.3% for the same period in 2011. The Company anticipates that during the remainder of 2012, selling, general and administrative expenses will decline as a percentage of total revenues.

Depreciation and Amortization

Depreciation and amortization expense of $1,789 for the quarter ended September 30, 2012, compared to $1,566 in the prior year's quarter, an increase of 14.2%. For the nine months ended September 30, 2012, depreciation and amortization increased 5.8% to $5,277 compared to $4,986 for the nine months ended September 30, 2011.

Income from Operations

In the third quarter of 2012, the Company earned income from operations of $3,456, versus operating income of $7,454 during the prior year's comparable period. Income from operations was $3,482 during the first nine months of 2012 compared to $12,305 during the first nine months of 2011.

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For the third quarter of 2012, the FS segment earned income from operations of $3,771 compared to $9,934 in the same period last year, a decrease of 62.0%. The decrease in income from operations was primarily due to an increase in selling, general and administrative expense together with a $1,382 operating loss generated by the cable fulfillment business, which was acquired in late 2011 and early 2012. For the nine months ended September 30, 2012, income from operations was $4,913 for the FS segment, compared to $17,740 in the prior year, a decrease of 72.3%. This decrease in income from operations was primarily due to an increase in selling, general and administrative expense together with a $2,011 operating loss generated by the cable fulfillment business. The FS segment is expected to decrease its profitability through the balance of 2012 as seasonal decreases in work orders occurs.

The MDU segment showed income from operations of $329 for the three months ended September 30, 2012, compared to a loss of $669 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, income from operations was $1,201 for the MDU segment, compared to a loss from operations of $2,000 in the same period last year. The Company plans to continue its improvement in the MDU segment in future periods by increasing levels of activity in the managed subscriber divisions (the Master System Operator and call center divisions) and by reshaping its owned subscriber footprint in concentrated, targeted geographic markets in order to service the customers more efficiently.

The EE&C segment had a loss from operations of $81 for the third quarter of 2012, compared to income from operations of $269 in the third quarter of 2011. For the nine months ended September 30, 2012, loss from operations was $892 for the EE&C segment, compared to income from operations of $761 in the same period last year. For the balance of 2012, the Company expects this segment to improve its results as revenue increases with increased activity.

The MBCorp segment, which has no revenues, had loss from operations of $563 for the three months ended September 30, 2012, compared to a loss of $2,080 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, loss from operations was $1,740 compared to a loss from operations of $4,196 in the same period last year. The reduction in the loss from operations between years is a result of increased cost allocations to other business segments due to the acquisition of the cable fulfillment and energy, engineering and wireless businesses. The MBCorp segment is expected to show losses in future periods as corporate overhead is expected to remain consistent with current levels with no offsetting revenues or anticipated credits to expenses.

Interest Expense

Interest expense was $935 for the quarter ended September 30, 2012, versus $1,038 for the same period a year ago. Interest expense was $2,774 for the nine months ended September 30, 2012 and $2,989 for the same period last year.

Gain on Bargain Purchase

The Company recorded a gain on bargain purchase of $177 for both the three and nine months ended September 30, 2012, related to its acquisition of SE (see Note 3).

Losses Attributable to Available For-Sale Securities

For the three months ended September 30, 2012 and 2011, the Company recorded other-than-temporary impairment losses of $71 and $0, respectively. For the nine months ended September 30, 2012 and 2011, the Company recorded other-than-temporary impairment losses of $652 and $0, respectively. The losses were due to the decline in the fair value of the shares it held in WPCS International, Inc. (see Note 4). As of September 30, 2012, all shares of WPCS have been sold. The gross realized losses on sales of available-for-sale securities, which are included in losses attributable to available for-sale securities, were $71 and $121 for the three and nine months ended September 30, 2012, respectively and $0 for both the three and nine months ended September 30, 2011.

Provision for Income Taxes

The Company recorded an income tax provision of $1,015 (38.4% of net income before income taxes) and $2,869 (43.8% of net income before income taxes) for the three months ended September 30, 2012 and 2011, respectively. The Company recorded an income tax provision of $185 (60.5% of net income before income taxes) for the nine months ended September 30, 2012 and $4,369 (43.7% of net income before income taxes) for the nine months ended September 30, 2011. Due to the size of the taxable income, the provision for the nine months ended September 30, 2012, consists almost entirely of state income taxes that are based on factors other than earnings. The Company has no significant unrecognized tax benefits as of September 30, 2012 that would reasonably be expected to affect our effective tax rate.

Net Income

In the third quarter of fiscal 2012, the Company reported a net income of $1,627 compared to a net income of $3,679 for the third fiscal quarter of 2011. For the nine months ended September 30, 2012, the Company recorded a net income of $121 compared to a net income of $5,621 for the nine months ended September 30, 2011.

Liquidity and Capital Resources

During the nine months ended September 30, 2012 and 2011, the Company earned a net income of $121 and $5,621, respectively. Cash from operations during the nine months ended September 30, 2012 was $410, compared to $15,620 during the nine months ended September 30, 2011. During the first nine months, DIRECTV implemented certain changes in the way it prices, finances and sells equipment to the Company, resulting in a one-time reduction of cash of approximately $3,200. This change had no impact on operating income. A significant reduction in accounts receivable, inventory and accounts payable balances also resulted from the equipment price change. A reduction in DIRECTV workorder volumes plus losses from the cable fullfillment and energy, engineering and wireless businesses contributed to the decrease in cash from operations.

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Net cash from investing activities totaled $4,636 for the nine months ended September 30, 2012, compared to $5,940 for the nine months ended September 30, 2011. During the first nine months of 2012, purchases of property and equipment totaled $3,618. The Company acquired cable fulfillment assets for $700 and increased restricted cash as security for a letter of credit in connection with the acquisition of land and a building for $1,682. In addition, the transaction to acquire land and a building resulted in proceeds of $685. The Company also received proceeds from the sale of available-for-sale securites of $335.

Net cash from financing activities was $3,814 for the nine months ended September 30, 2012, compared to $4,223 for the nine months ended September 30, 2011. Cash used during the nine months ended September 30, 2012 consisted of payments on short-term debt of $3,556 and payments on capital lease obligations of $400. Principle payments on current long-term debt, short-term debt, related party debt and capital lease obligations over the next 12 months are expected to total $37,055. At September 30, 2012, the Company was in compliance with its debt covenants. The Company intends to pay these maturing debt obligations via refinancing the debt and/or via a combination of the actions listed below.

Cash and cash equivalents totaled $10,129 at September 30, 2012, versus $18,169 at December 31, 2011. The Company has a working capital deficit of $22,935 at September 30, 2012, compared to positive working capital of $7,463 at December 31, 2011. The working capital deficit at September 30, 2012 is impacted by the fact that long-term debt totaling $34,369 is classified as a current liability as the maturity dates are within the next twelve months. The Company intends to refinance its current long-term debt prior to January 1, 2013.

In 2012, the Company intends to focus on maintaining profitability in its FS segment. With regards to its MDU segment, the Company believes it can also maintain profitability by growing owned subscriber revenues by acquiring new rights of entry agreements, increasing marketing and customer penetrations of previously built properties and by acquiring existing subscribers from other operators. In addition, the Company believes it can increase managed subscriber revenues by selling its support center services to its network of system operators and by providing ancillary programs for voice and data services to that same network. In the EE&C segment, the Company hopes to see improvements in operating results by: (i) a concentrated focus on the selling process results in increased bid activity which should result in increased revenues; (ii) governmental grants for alternate energy projects are extended to promote growth in wind projects; and (iii) 3G to 4G tower conversions increase based on the demand for higher capacity mobile infrastructure.

Management anticipates that the impact of the actions listed below will generate sufficient cash flows to pay current liabilities, long-term debt and capital and operating lease obligations and fund the Company's operations for the next twelve months:

1. Maintain continued operating profit in the Company's FS segment (see Note 7).
2. Obtain senior debt financing with extended terms to refinance the Company's note payable to DirecTECH Holding Company, Inc., which matures on January 1, 2013. 3 Expand call center support with sales of call center services to both existing and future system operators.
4. Improve results in the MDU segment by reshaping its owned subscriber footprint to gain efficiencies and by expanding its managed subscriber base by adding new system operators.
5. Improve results in the newly diversified business segments by further integrating these segments into the Company's traditional systems and processes.

The Company, as of September 30, 2012, needs to continue to improve its working capital ratio over the next few quarters to adequately manage the size of its expanded operations. Since the Company acquired significant assets in its purchase of 100% of the outstanding stock of the former DTHC operating entities, Multiband believes it has the capacity to leverage certain of those assets. Management believes that through a combination of leveraging and refinancing assets, its cash on hand, greater expense control, and recent positive operating . . .

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