Hickory Tech 10-Q 2006
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
For the transition period from to .
Commission file number 0-13721
HICKORY TECH CORPORATION
(Exact name of registrant as specified in its charter)
221 East Hickory Street
Mankato, Minnesota 56002-3248
(Address of principal executive offices and zip code)
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The total number of shares of the registrant's common stock outstanding as of November 1, 2006: 13,192,745.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair statement of results of operations, financial position, and cash flows in conformity with accounting principles generally accepted in the United States. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of Hickory Tech Corporations (HickoryTech or the Company) results for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim condensed consolidated financial statements should be read in conjunction with HickoryTechs Annual Report on Form 10-K for the year ended December 31, 2005.
The condensed consolidated financial statements of HickoryTech include Hickory Tech Corporation and its subsidiaries in the following four business segments: (i) Telecom Sector, (ii) Information Solutions Sector, (iii) Enterprise Solutions Sector and (iv) Enventis Sector. All inter-company transactions have been eliminated from the consolidated financial statements.
Cost of Sales
Cost of sales for the Enventis and Enterprise Solutions Sectors includes the material and labor costs associated with the installation of products for customers.
Cost of Services:
Cost of services includes all costs related to the delivery of communication services for all HickoryTech sectors. Those operating costs include engineering, customer service, billing and collections, network monitoring and transport costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include direct and indirect selling expenses, advertising, and all other general and administrative costs associated with the operations of the business.
On December 30, 2005, HickoryTech purchased Enventis Telecom, Inc. (Enventis) from ALLETE, Inc. Enventis is a transport and enterprise Internet Protocol telephony equipment sales business which specializes in providing telecommunications and network solutions. In addition to its statewide SONET-based network, Enventis provides innovative Internet Protocol services that combine voice and data onto a single platform. Since 1997, Enventis has provided network solutions for a broad spectrum of large corporate, non-profit, government, and small business clients and has provided network capacity for other interexchange carriers on a wholesale basis. In 2001, Enventis added the distribution of Cisco Internet Protocol equipment to end-users as another service. Enventis has offices located in Duluth, Plymouth and Rochester, Minnesota and Sioux Falls, South Dakota.
Certain reclassifications of prior period data have been made to conform to the current periods presentation.
The most significant of these reclassifications is to reclassify approximately $1.6 million of transport costs for each of the prior two quarters from cost of sales to cost of services. This reclassification results in reporting these costs for the Enventis Sector in a manner consistent with the rest of the organization.
A similar reclassification was made to reclassify selling commissions within the Enterprise Solutions Sector, previously included in cost of sales, to selling, general and administrative expenses (excluding depreciation and amortization). The amounts reclassified in Enterprise Solutions were approximately $503,000 and $420,000 for the years ended December 31, 2005 and 2004 respectively, and $76,000 and $118,000 for the first and second quarters, respectively, of 2006. Reclassified amounts for the three months and nine months ending September 30, 2005 were approximately $80,000 and $415,000, respectively. This reclassification results in reporting these costs for the Enterprise Solutions Sector in a manner consistent with the rest of the organization.
These reclassifications did not affect cash flows, financial position, or net income.
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. Fin No. 48 provides guidance for recognizing and measuring uncertain tax positions, as defined in Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that Fin No. 48 will have a material impact on its financial position, results of operations, or cash flows.
On September 29, 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize in their balance sheet the over-funded or under-funded status of defined benefit post-retirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement plans). Employers must also recognize the change in the funded status of the plan in the year in which the change occurs through comprehensive income. SFAS No. 158 also requires plan assets and obligations to be measured as of the employers balance sheet date. The recognition provisions of SFAS No. 158 are effective for fiscal years ending after December 15, 2006. The measurement date provision of SFAS No. 158 will be effective for fiscal years beginning after December 15, 2008. The company currently complies with the measurement date provision. The Company estimates the impact of SFAS No. 158 on the Companys December 31, 2006 consolidated financial statements to be as follows based on the most recent actuarial measurements of plan assets and obligations dated December 31, 2005. (Dollars in thousands)
The financial statement effects of complying with SFAS No. 158 do not cause the company to fail the financial covenants in its loan agreements nor do they expose the company to future such violation.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108), Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretative guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered is, material. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006, with early application encouraged. The Company does not believe that SAB No. 108 will have a material impact on the Companys Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for the calendar year 2008. The Company is currently assessing the impact of SFAS No. 157 on its results of operations, cash flows, and financial condition.
NOTE 2. EARNINGS AND CASH DIVIDENDS PER COMMON SHARE
Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the applicable period. Shares used in the earnings per share assuming dilution calculation are based on the weighted average number of shares of common stock outstanding during the period increased by potentially dilutive common shares. Potentially dilutive common shares include stock options and stock subscribed under the HickoryTech Corporation Amended and Restated Employee Stock Purchase Plan (ESPP).
Options to purchase 565,251 shares and 564,850 shares for the three months ended September 30, 2006 and 2005, respectively, and 502,161 shares and 517,950 shares for the nine months ended September 30, 2006 and 2005, respectively, were not included in the computation of earnings per share assuming dilution because their effect on earnings per share would have been anti-dilutive.
Cash dividends are based on the number of common shares outstanding at the respective record dates. Listed below is the number of shares outstanding as of the record date for the first, second, and third quarters of 2006 and 2005, respectively.
Dividends per share are based on the quarterly dividend per share as declared by the HickoryTech Board of Directors. HickoryTech paid dividends of $0.12 per share for the third quarter of 2006 and 2005.
During the nine months ended September 30, 2006 and 2005, shareholders have elected to reinvest $186,000 and $196,000, respectively, of dividends into HickoryTech common stock pursuant to the HickoryTech Dividend Reinvestment Plan.
NOTE 3. COMPREHENSIVE INCOME (LOSS)
HickoryTech follows the provisions of SFAS No. 130, Reporting Comprehensive Income. This statement established rules for the reporting of comprehensive income (loss) and its components. In addition to net income, HickoryTechs comprehensive income (loss) includes changes in unrealized gains and losses on derivative instruments qualifying and designated as cash flow hedges. Comprehensive income (loss) for the three months ended September 30, 2006 and 2005 was ($594,000) and $2,597,000, respectively. Comprehensive income for the nine months ended September 30, 2006 and 2005 was $2,379,000 and $7,173,000, respectively.
NOTE 4. ACQUISITION OF ENVENTIS
On December 30, 2005, HickoryTech purchased Enventis from ALLETE, Inc. Enventis was formerly a wholly owned subsidiary of ALLETE, Inc. Enventis is a network transport and an enterprise Internet Protocol telephony equipment sales business. The acquisition of Enventis was made to expand the geographical region which HickoryTech could serve with its business broadband service capabilities. Both Enventis and HickoryTech have similar business plans and use the concept of combined network service with equipment provisioning for end user customers.
The purchase price was cash of $35,500,000 in exchange for the common stock of Enventis, with further purchase price adjustments and transaction costs making the estimated total purchase consideration $38,602,000 as of December 31, 2005. Enventis had no debt at the time of acquisition. The purchase agreement outlined certain purchase price adjustments which were estimated as of December 31, 2005 and resulted in cash payments between ALLETE and HickoryTech in the first quarter of 2006. These adjustments were for working capital, capital expenditures and employee benefits. These adjustments decreased the estimated purchase price by $125,000, which reduced the amounts originally estimated for total purchase consideration and goodwill. In the second quarter of 2006 an adjustment was made to goodwill to accommodate a change in the fair value of acquired deferred revenue of $41,000. Goodwill was also adjusted in the amount of $633,000 as of September 30, 2006 due to an adjustment in the fair value assigned to property, plant, and equipment.
The financing for the adjusted $38,602,000 total purchase consideration for Enventis, plus an additional $8,500,000 for Enventis working capital as of December 31, 2005, was entirely from HickoryTechs credit agreement, as established on December 30, 2005. The credit facility is composed of a $30,000,000 revolving credit component, which expires on December 30, 2011, and a $130,000,000 term loan component, which has partial maturities during its term, with final maturity on June 30, 2013. In the first quarter of 2006, an additional $10,000,000 credit facility with a vendor finance organization was established for short-term inventory floor-plan financing of accounts payable for Enventis.
The Enventis acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The preliminary purchase price allocation resulted in goodwill of $2,023,000, which has been adjusted to $2,490,000 as of September 30, 2006, as noted in the table below. For income tax purposes, ALLETE and HickoryTech have agreed to treat the transaction as a purchase of assets. Accordingly, the tax basis of the acquired assets and assumed liabilities will be the same for financial reporting.
A summary of the changes in the Enventis goodwill is as follows:
The purchase price allocation is still considered preliminary. Specific reasons causing the purchase price allocation to still be preliminary are: 1) the liquidation of acquired accounts receivable, and 2) resolution of one litigation matter. With respect to the litigation matter, HickoryTech has received an indemnification from ALLETE which management believes to be adequate to cover any loss. Both items are expected to be resolved by December 2006.
NOTE 5. INVENTORIES
Inventories, which consist of equipment for resale, materials and supplies, are stated at the lower of average cost or market. Cost is determined on a first-in, first-out (FIFO) basis. Reserves offset the cost of inventory to arrive at the net realizable value of the inventory. Telecommunications equipment supply markets have changed in recent years and have caused the Company to apply additional valuation methods, which estimate the lower of cost or market principle in the Enterprise Solutions Sector. The Company has a regular process of evaluating its inventory and modifying its value to its estimate of market prices and making the adjustments to lower of cost or market on a consistent basis. The Company cannot predict the impact or timing, if any, of future inventory valuation changes.
NOTE 6. INTANGIBLE ASSETS
Goodwill assets are subject to an impairment test annually as well as upon certain events that indicate that impairment may be present. The goodwill impairment test includes two steps, the first of which requires management to determine the fair value of certain of the Companys reporting units (as defined by SFAS No. 142, Goodwill and Other Intangible Assets). The Company determines the fair value of its reporting units by application of a discounted cash flow analysis. Management makes estimates that are included in its discounted cash flow analysis based upon the best available information at the time that the determinations of fair value are made. If circumstances change, HickoryTechs estimates of fair value will also change and could result in a determination of additional impairment charges to reduce the carrying value of goodwill.
The carrying value of HickoryTechs goodwill increased from $27,109,000 as of December 31, 2005 to $27,576,000 as of September 30, 2006 due to the working capital adjustment described above and the Enventis purchase price allocation adjustment associated with the acquisition of Enventis (see Note 4).
The components of HickoryTechs other intangible assets are as follows:
As required by SFAS No. 142, we periodically reassess the carrying value, useful lives and classification of identifiable intangible assets. Amortization expense related to the definite-lived intangible assets for the three months ended September 30, 2006 and 2005 was $293,000 and $26,000, respectively. Amortization expense related to the definite-lived intangible assets for the nine months ended September 30, 2006 and 2005 was $879,000 and $467,000, respectively. Total estimated amortization expense for the remaining three months of 2006 and the five years subsequent to 2006 is as follows: 2006 (October 1 through December 31) - $293,000; 2007 - $1,157,000; 2008 - $1,127,000; 2009 - $853,000; 2010 - $2,000 and 2011 - $0.
NOTE 7. QUARTERLY SECTOR FINANCIAL SUMMARY
(1) No information provided because the Enventis acquisition was not completed until December 30, 2005.
NOTE 8. CONTINGENCIES
HickoryTech is involved in certain contractual disputes in the ordinary course of business. HickoryTech does not believe the ultimate resolution of any existing matters will have a material adverse effect on its financial position, results of operations or cash flows.
NOTE 9. STOCK COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123(R) (revised 2004), Share-Based Payment (SFAS No. 123(R)), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to the ESPP, based on estimated fair values. SFAS No. 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued SAB No. 107 relating to SFAS No. 123(R). The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R).
The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. The Companys Consolidated Financial Statements as of and for the nine months ended September 30, 2006 reflect the impact of SFAS No. 123(R). In accordance with the modified prospective transition method, the Companys Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R) or any modifications to outstanding stock options prior to the adoption of SFAS No. 123(R). Share-based compensation expense recognized under SFAS No. 123(R) for the three months ended September 30, 2006 was $42,000 pre-tax and $26,000 after tax. In addition, share-based compensation expense recognized under SFAS No. 123(R) for the nine months ended September 30, 2006 was $128,000 pre-tax and $78,000 after tax. The majority of this expense relates to the expensing of stock options, and a small amount relates to the ESPP. The adoption of SFAS No. 123(R) had minimal impact on earnings per share and diluted earnings per share and for the three months ended September 30, 2006 and nine months ended September 30, 2006. Also, adopting SFAS No. 123(R) had minimal impact on cash flow from financing and operations.
Share-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that are ultimately expected to vest during the period. Share-based compensation expense recognized in the Companys Consolidated Statements of Operations for the nine months ended September 30, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the fair value provisions of SFAS No. 123(R). Because share-based compensation expense recognized in the Consolidated Statements of Operations for the nine months ended September 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company accounted for forfeitures as they occurred for the periods prior to 2006. The cumulative adjustment for the change in accounting principle was immaterial.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The Company uses a seven-year period to calculate the historical volatility of its stock price for use in the valuation model. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from historical experience and represents the period of time that options granted are expected to be outstanding. The forfeiture rate is based upon a statistical computation of remaining lives and exercise price in relationship to current stock price. The risk-free rate for options is based on a U.S. Treasury rate commensurate with the expected terms.
Mr. John W. Finke, current CEO, received a one-time grant of 15,000 options associated with his acceptance of the CEO position. Other than the one-time stock award issued to John Finke, options were last granted under the Companys Stock Award Plan in February 2005. The Stock Award Plan provides for the issuance of stock options, but no current compensation programs have options as a component. The weighted average grant date fair value of options issued during the three months ending September 30, 2006 was $1.43.
Refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 for a complete description of its stock-based compensation plans.
As of September 30, 2006, there was $135,000 of total unrecognized compensation costs related to non-vested stock options granted under the Companys Stock Award Plan. This expense is expected to be recognized over a weighted average period of two years.
A summary of stock option activity is as follows:
The following table provides certain information with respect to stock options outstanding at September 30, 2006:
The following table provides certain information with respect to stock options exercisable at September 30, 2006:
The following table provides the range of assumptions used for valuing stock options:
If HickoryTech had elected to recognize compensation cost based on the fair value of the options as prescribed by SFAS No. 123(R) for the three and nine month periods ended September 30, 2005, the following operating results would have resulted using the Black-Scholes option-pricing model to determine the fair value of the options:
(1) 2005 net income and net income per share do not include share-based compensation expense in accordance with SFAS No. 123(R).
As of September 30, 2006, the number of shares that are available for future and/or existing grants under each of our stock-based compensation plans are as follows:
Shares issued under other stock-based compensation plans are as follows:
NOTE 10. FINANCIAL DERIVATIVE INSTRUMENTS
HickoryTech accounts for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 149, Amendment of Statement 133 Accounting for Derivative Instruments and Hedging Activities, which requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case the gains and losses are included in other comprehensive income rather than in earnings. The change in the fair value related to HickoryTechs derivative instruments for the nine months ended September 30, 2006 is as follows:
HickoryTech has variable rate debt instruments, which subject the Company to interest rate risk. Beginning in the second quarter of 2003, HickoryTech entered into interest rate swap agreements, with remaining maturities of twenty-one months, to manage its exposure to interest rate movements on a portion of its variable rate debt obligations. The market value of the cumulative gain or loss on these derivative instruments is reported as a component of accumulated other comprehensive income/loss in shareholders equity and will be recognized in earnings when the term of the swap agreement is concluded.
The fair value of HickoryTechs derivatives at September 30, 2006 and December 31, 2005 is a net asset of $2,785,000 and $3,429,000, respectively, which is included in other assets in the accompanying consolidated balance sheet.
NOTE 11. EMPLOYEE POST-RETIREMENT BENEFITS
HickoryTech provides post-retirement health care and life insurance benefits for certain employees. HickoryTech is not currently funding these post-retirement benefits, but has accrued these liabilities as of September 30, 2006 and 2005.
NOTE 12. SHORT-TERM FINANCING ARRANGEMENT
Enventis has a $10 million credit facility with a financing company to purchase inventories from certain approved vendors. Advances under the financing arrangement are collateralized by the accounts receivable and inventory of Enventis and a guaranty of the principal indebtedness by HickoryTech. The credit facility provides sixty-day payment terms for working capital and can be terminated at any time by either party. Borrowings outstanding under the credit facility at September 30, 2006 totaled $5,734,000.
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections. Statements in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements that are based on managements current expectations, estimates and projections about the industry in which Hickory Tech Corporation (HickoryTech or the Company) operates and managements beliefs and assumptions. Forward-looking statements may be identified by the use of terminology such as may, will, believes, does not believe, no reason to believe, expects, plans, intends, estimates, anticipated or anticipates, and similar expressions, as they relate to HickoryTech or its management. Such forward-looking statements are subject to important risks and uncertainties that could cause HickoryTechs future actual results to differ materially from such statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and probabilities, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that might cause such a difference include, but are not limited to, those contained in this Managements Discussion and Analysis of Results of Operations and Financial Condition (Item 2) and Item 1A, Risk Factors, of HickoryTechs Annual Report on Form 10-K for the year ended December 31, 2005, as updated in this and previous quarterly reports on Form 10-Q which are incorporated herein by reference. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. Except as otherwise required by federal securities law, HickoryTech undertakes no obligation to update any of its forward-looking statements for any reason.
HickoryTech operates in four business segments: the Telecom, Information Solutions, Enterprise Solutions and Enventis Sectors. Its largest and oldest business (since 1898) has been the operation of incumbent local exchange carriers (ILECs) or traditional wireline telephone service. The ILEC business is included in HickoryTechs Telecom Sector. In 1998, HickoryTech began its competitive local exchange carrier (CLEC) line of business, competing for the telephone dial tone, dial-up and broadband Internet access, data, digital TV and long distance calling business in ILEC territories owned by others. The CLEC business is in HickoryTechs Telecom Sector. Since 1964, HickoryTechs Information Solutions Sector has provided computer data processing and software, predominantly for HickoryTechs Telecom Sector operations and also for other telecommunications companies. HickoryTech acquired its Enterprise Solutions Sector in 1990, and it operates as a telecommunications, data and Internet Protocol equipment distributor from a base in Minneapolis/St. Paul, Minnesota. On December 30, 2005, HickoryTech purchased Enventis Telecom, Inc. (Enventis). Enventis is a Minnesota-based regional provider of integrated fiber network, Internet Protocol telephony, and data services, with 1,500 route miles of fiber network serving more than 300 business customers in over 40 communities in the Upper Midwest.
The eight current subsidiaries of HickoryTech and the business segments in which they operate are:
HickoryTech and its subsidiaries are engaged in businesses that provide services to their customers for a fee. Many of these services are recurring, and, as a result, backlog orders and seasonality are not significant factors. Working capital requirements for the Telecom Sector involve financing the construction of networks involving switches and cable, maintaining a high amount of fixed assets, paying payroll costs of highly skilled labor, maintaining inventory to service its capital projects and its network and telephone equipment customers, and providing for the carrying value of trade accounts receivable, which may take several months to collect in the normal course of business. Working capital requirements for the Information Solutions Sector involve capital for software development, operating losses, payroll costs of highly skilled labor and the carrying value of trade accounts receivable. Working capital requirements for the Enterprise Solutions Sector involve capital for payroll costs, inventory to service its customers, the carrying value of trade accounts receivable, work-in-process and operating losses. Working capital requirements for the Enventis Sector involve capital for payroll costs, the carrying value of accounts receivable and work-in-process.
The materials and supplies that are necessary for the operation of the businesses of HickoryTech and its subsidiaries are available from a variety of sources. All of HickoryTechs central office switches, as well as a majority of HickoryTechs equipment sold in its Enterprise Solutions and Enventis Sectors, are supplied by Nortel and Cisco. Nortel and Cisco are leading suppliers of communications and data equipment, and HickoryTechs dependence on these brands is not viewed as a significant risk.