FairPoint Communications, Inc. (Nasdaq:FRP) (“FairPoint” or the
“Company”), a leading communications provider, today announced its
financial results for the first quarter ended March 31, 2017.
"Our first quarter results represent a solid
start to the year and are broadly in line with our expectations,"
said Paul H. Sunu, Chief Executive Officer. "I am
particularly pleased with first quarter revenue trends in what is
typically a seasonally slow quarter, the continued expense
discipline evidenced in our results and the cash flow generated by
the business."
"I am proud of our team as our steady
operational performance shows they remain focused on executing our
strategy as we work to close the pending merger with Consolidated,"
Sunu continued. "We are actively engaged in integration
planning to deliver a seamless transition for customers, capitalize
on the benefits of the combined company and ensure our revenue
transformation momentum continues. We continue to target a
mid-2017 closing of the transaction."
Operating Highlights
A focus on customer service combined with
strategic investments in the network continued during the quarter,
which strengthened service reliability and helped solidify the
Company’s competitive position.
The Company is focused on driving growth
revenue2 as a critical component of its continued revenue
transformation. In the first quarter of 2017, the Company
generated growth revenue of $66.7 million or 33.0% of total
revenue, which increased from 29.7% of total revenue in the first
quarter of 2016.
In the first quarter of 2017, Ethernet services
revenue was $24.5 million, as Ethernet circuits grew 7.8%
year-over-year. Growth in the Company's Ethernet products is
expected based on demand from customers such as regional banks,
healthcare networks and wireless carriers, although the
commoditization of Ethernet services will continue to pressure
average revenue per unit over time.
For the remainder of 2017, the Company expects
to add more than 200 additional fiber-to-the-tower Ethernet
connections bringing the total count to more than 2,100 tower
Ethernet circuits. Twenty five additional circuits were
completed in the first quarter of 2017.
As of March 31, 2017, FairPoint had 2,471
employees, a decrease of 233 employees versus a year ago.
Proposed Merger with Consolidated Communications
Holdings, Inc.
On December 3, 2016, Consolidated Communications
Holdings, Inc. ("Consolidated") and FairPoint entered into an
Agreement and Plan of Merger, pursuant to which Consolidated has
agreed to acquire FairPoint (the "Merger"). Since the
announcement of the Merger on December 5, 2016, both companies have
engaged in work required to consummate the Merger.
Applications with all necessary federal and state regulatory
authorities have been filed and the Company has received early
termination related to Hart-Scott-Rodino and has completed, where
required, pre-close regulatory approval and notification processes
in 11 of its 17 operating states. Both the Company and
Consolidated's stockholders provided required approvals for the
Merger on March 28, 2017.
Integration planning is underway with a targeted
mid-2017 closing of the transaction. Additional details of the
planned merger can be found at
www.fairpoint.com/investors.
The Company incurred $1.2 million of transaction
expenses related to the Merger during the first quarter of
2017.
Financial Highlights
First Quarter 2017 as compared to Fourth
Quarter 2016
Revenue decreased $2.0 million during the first
quarter of 2017 to $201.9 million.
The following strategic revenue categorization2
is presented to provide visibility into revenue trends for the
Company as a result of product and service evolution within our
industry as well as the Company's efforts to continue to transform
revenue to more sustainable growth products.
- Growth revenue decreased $0.3 million primarily due to the
impact of the renewal of certain expiring long-term Ethernet
contracts, partially offset by growth in Ethernet circuits.
Broadband revenue and hosted and advanced services revenue were
relatively flat compared to the fourth quarter.
- Convertible revenue2 decreased $1.3 million as customers
continued to migrate from non-Ethernet circuits and businesses
shifted from traditional voice products to VoIP and hosted
products.
- Legacy revenue2 was down $2.3 million resulting from the
decline in residential voice revenue due to fewer lines in service
and slightly lower legacy switched access revenue.
- Regulatory funding revenue2 increased $2.2 million primarily
due to the successful resolution of a dispute regarding the NECA
calculation of CAF/intercarrier compensation ("ICC") for local
switching support ("LSS") revenue. In the first quarter of
2017, the Company recorded $2.0 million of non-recurring revenue
related to previous periods.
- Miscellaneous revenue2 decreased $0.3 million primarily due to
revenue assurance activities that did not recur at the same level
in the first quarter partially offset by higher revenue from
special purpose construction projects.
The following traditional categorization of
revenue is presented to provide reporting continuity.
- Voice services revenue decreased $2.6 million primarily due to
fewer lines in service combined with lower long distance
usage.
- Access revenue decreased $1.9 million due to the continued loss
and conversion of legacy transport circuits to fiber-based Ethernet
services and lower wholesale Ethernet revenue due to the timing of
the renewal of certain expiring long-term Ethernet contracts,
partially offset by growth in wholesale Ethernet circuits.
- Data and Internet services revenue was relatively flat compared
to the fourth quarter.
- Regulatory funding revenue2 increased $2.2 million primarily
due to the successful resolution of a dispute regarding the NECA
calculation of CAF/ICC for LSS revenue. In the first quarter
of 2017, the Company recorded $2.0 million of non-recurring revenue
related to previous periods.
- Other services revenue increased $0.3 million primarily due to
higher revenue from special purpose construction projects compared
to the fourth quarter.
Operating expenses, excluding depreciation and
amortization, increased $43.6 million to $150.8 million in the
first quarter of 2017 compared to $107.2 million in the fourth
quarter of 2016. The increase was primarily due to the $42.7
million increase in other post-employment benefits ("OPEB") expense
as the amortization of the benefit from the elimination of
post-employment health benefits for active represented employees
was completed in the fourth quarter of 2016. In addition,
higher employee expenses from higher compensated absences expense
and higher operating taxes were partially offset by lower Merger
related expenses, lower severance and lower bad debt expense
compared to the fourth quarter of 2016. The expense for
compensated absences for certain employees is accrued in the first
quarter and released as paid time off is incurred.
Adjusted Operating Expenses1 were $138.6 million
in the first quarter of 2017 compared to $139.0 million in the
fourth quarter of 2016. The decrease was primarily due to
lower employee expenses from a lower bonus accrual, lower benefits
and lower overtime, as well as lower access expenses, partially
offset by higher operating taxes. Operating taxes were $1.2
million lower in the fourth quarter of 2016 primarily due to the
settlement of certain property tax disputes.
Net loss of $23.9 million in the first quarter
of 2017 compared to net income of $16.0 million in the fourth
quarter of 2016. The change was primarily due to higher OPEB
expense and lower revenue partially offset by lower income tax
expense. The effective tax rate for the first quarter
of 2017 was reduced to zero primarily due to an increase in the
valuation allowance which fully offset the tax benefit on the
pre-tax net loss. We do not expect this GAAP treatment to
impact our ability to use our gross federal net operating loss
carryforwards in the future.
Adjusted EBITDA decreased $1.5 million to $63.4
million in the first quarter of 2017 compared to $64.9 million in
the fourth quarter of 2016. The decrease was driven by lower
revenue partially offset by lower Adjusted Operating Expenses.
Capital expenditures were $22.1 million in the
first quarter of 2017 compared to $34.1 million in the fourth
quarter of 2016. The decrease was primarily due to the timing
of planned capital projects intended to take advantage of more
temperate weather in many of our service territories in the second,
third and fourth quarters and specifically several
broadband-related projects planned in 2017 in northern Maine.
Cash was $38.7 million as of March 31, 2017
compared to $34.9 million as of December 31, 2016. The
increase is due to cash generated by the business in addition to
favorable changes in our working capital partially offset by the
scheduled semi-annual interest payment towards the Company's senior
notes and payment of employee bonuses in the first quarter.
Total gross debt outstanding was $914.4 million as of March 31,
2017, after the regularly scheduled principal payment of $1.6
million on the term loan made during the first quarter of 2017, as
compared to $916.0 million as of December 31, 2016. The
Company's $75.0 million revolving credit facility was undrawn, with
$61.1 million available for borrowing after applying $13.9 million
of outstanding letters of credit.
Net cash provided by operating activities was
$28.2 million in the first quarter of 2016 compared to $37.8
million in the fourth quarter of 2016. The decrease was
primarily due to the semi-annual interest payment on the Company's
senior notes made during the first quarter partially offset by
lower operating expenses, including Merger related expenses, as
well as lower cash pension contributions and OPEB payments compared
to the fourth quarter of 2016.
Unlevered Free Cash Flow was $36.7 million in
the first quarter of 2017 compared to $25.0 million in the fourth
quarter of 2016. Unlevered Free Cash Flow was higher in the
first quarter of 2017 primarily due to lower capital expenditures
and lower pension contributions partially offset by lower Adjusted
EBITDA.
First Quarter 2017 as compared to First
Quarter 2016
Revenue was $201.9 million in the first quarter
of 2017 compared to $206.8 million a year earlier.
Strategic revenue categorization:
- Growth revenue increased by $5.3 million as we experienced
growth in broadband revenue as speed upgrades and rate increases
helped offset a decline in broadband subscribers. In
addition, hosted and advanced services revenue increased due to the
inclusion of revenue from CTI3 and Ethernet revenue increased as
circuit growth more than offset the impact of the renewal of
certain expiring long-term Ethernet contracts compared to the prior
year.
- Convertible revenue decreased by $5.5 million as customers
continued to migrate from non-Ethernet circuits and businesses
shifted from traditional voice products to VoIP and hosted
products.
- Legacy revenue decreased by $6.9 million resulting from a
decline in residential voice revenue due to fewer lines in service
and lower legacy switched access revenue versus a year ago.
- Regulatory funding revenue increased by $1.6 million primarily
due to the successful resolution of a dispute regarding the NECA
calculation of CAF/ICC for LSS revenue. In the first quarter
of 2017, the Company recorded $2.0 million of non-recurring revenue
related to previous periods. These items were partially
offset by the annual August step-down of CAF Phase II transitional
revenue.
- Miscellaneous revenue increased $0.6 million due to higher
special purpose construction projects and higher late payment fees
compared to the prior year.
The following traditional categorization of
revenue is presented to provide reporting continuity.
- Voice services revenue declined by $7.0 million resulting from
the loss of voice access lines versus a year ago combined with
lower long distance usage.
- Access revenue declined by $5.6 million due to the continued
loss and conversion of legacy transport circuits to Ethernet
services.
- Data and Internet services revenue increased by $4.6 million as
speed upgrades and rate increases on broadband products helped
offset a decline in broadband subscribers as well as growth in
retail Ethernet revenue compared to the prior year.
- Regulatory funding revenue increased by $1.6 million primarily
due to the successful resolution of a dispute regarding the NECA
calculation of CAF/ICC for LSS revenue. In the first quarter
of 2017, the Company recorded $2.0 million of non-recurring revenue
related to previous periods. These items were partially
offset by the annual August step-down of CAF Phase II transitional
revenue.
- Other services revenue increased by $1.6 million primarily due
to the inclusion of revenue from CTI, higher special purpose
construction projects and higher late payment fees.
Operating expenses, excluding depreciation and
amortization, increased $48.7 million to $150.8 million in the
first quarter of 2017 compared to $102.1 million in the first
quarter of 2016. The increase is primarily due to the $56.1
million increase in OPEB expense as the amortization of the benefit
from the elimination of post-employment health benefits for active
represented employees was completed in the fourth quarter of
2016. Other contributing factors included higher Merger
related expenses and higher bad debt expense, which were partially
offset by lower employee expenses from lower salary, benefits,
bonus accrual and severance costs. Bad debt expense in the first
quarter of 2016 included nonrecurring write-off recoveries.
Adjusted Operating Expenses were $138.6 million
in the first quarter of 2017 compared to $144.9 million in the
first quarter of 2016. The decrease was primarily the result
of lower employee costs due to lower headcount as well as lower
access expense partially offset by higher bad debt
expense.
Net loss of $23.9 million in the first quarter
of 2017 compared to net income of $18.6 million in the first
quarter of 2016. The change was primarily due to higher
operating expenses and lower revenue partially offset by lower
income tax expense.
Adjusted EBITDA was $63.4 million in the first
quarter of 2017 compared to $62.0 million a year earlier. The
increase is due to Adjusted Operating Expense savings partially
offset by lower revenue.
Capital expenditures were $22.1 million in the
first quarter of 2017 compared to $25.9 million a year earlier.
Net cash provided by operating activities was
$28.2 million in the first quarter of 2017 compared to $24.4
million in the first quarter of 2016. The increase was
primarily due to lower operating expenses partially offset by
higher pension contributions, higher Merger related expenses and
lower revenue in 2017 compared to the same period in 2016.
Unlevered Free Cash Flow of $36.7 million in the
first quarter of 2017 increased $2.0 million compared to $34.7
million in the first quarter of 2016. The increase was due to
lower capital expenditures and higher Adjusted EBITDA partially
offset by higher pension contributions. _________________
| 1 Unlevered Free Cash
Flow, Adjusted EBITDA and Adjusted Operating Expenses are non-GAAP
financial measures. Additional information regarding the
calculation of these non-GAAP measures and a reconciliation to net
income/(loss) are contained under "Use of Non-GAAP Financial
Measures" and in the attachments to this press release. |
| 2 Additional
information and definitions for regulatory funding revenue and
strategic revenue categorization and its components are contained
in the attachments to this press release. |
| 3 The Company acquired
Communication Technologies, Inc. ("CTI") in July 2016. |
2017 Guidance on a Full Year, Standalone
Basis
For full year 2017, the Company expects to
generate $105 million to $115 million of Unlevered Free Cash Flow.
In addition, Adjusted EBITDA is expected to be $245 million to $250
million, annual capital expenditures are expected to be $110
million to $115 million and aggregate annual cash pension
contributions and cash OPEB payments are expected to be
approximately $24 million for full year 2017.
The Company is not able to provide a reconciliation of its
forward-looking non-GAAP financial measures to GAAP measures
because the Company does not forecast certain items used to prepare
net income/(loss) in accordance with GAAP.
Adoption of ASU 2016-09
In March 2016, the Financial Accounting
Standards Board issued Accounting Standards Update ("ASU") 2016-09,
Improvements to Employee Share-Based Payment Accounting, which
simplifies several aspects of the accounting for share-based
payment award transactions, including, but not limited to: (a)
income tax consequences; (b) classification of awards as either
equity or liabilities; and (c) classification on the statement of
cash flows. The Company adopted this pronouncement effective
January 1, 2017 and recorded a cumulative-effect adjustment to
retained earnings of $0.1 million as the result of the change in
accounting policy to recognize forfeitures as they occur. In
addition, the Company reclassified "Repurchases of common stock to
satisfy tax withholding obligations" from net cash provided by
operating activities to net cash used in financing activities for
all periods presented herein to be consistent with current period
presentation. The deferred tax asset for NOL carryforwards
from share-based compensation resulting from the adoption of this
pronouncement was fully offset by a corresponding valuation
allowance and resulted in no adjustment for income taxes.
Quarterly Report
The information in this press release should be
read in conjunction with the financial statements and footnotes
contained in the Company's Quarterly Report on Form 10-Q for the
year ended March 31, 2017 (the "Form 10-Q), which will be filed
with the Securities and Exchange Commission ("SEC") no later than
May 10, 2017. The Company's results for the quarter ended March 31,
2017 are subject to the completion of the Form 10-Q.
Conference Call Information
FairPoint will not host an investor call with
respect to the financial results due to the pending Merger with
Consolidated.
Use of Non-GAAP Financial Measures
This press release includes certain non-GAAP
financial measures, including but not limited to Adjusted EBITDA,
Unlevered Free Cash Flow and Adjusted Operating Expenses and the
adjustments to the most directly comparable GAAP measure used to
determine the non-GAAP measures. Management believes Adjusted
EBITDA provides a useful measure of covenant compliance, Unlevered
Free Cash Flow may be useful to investors in assessing the
Company's ability to generate cash and meet its debt service
requirements and Adjusted Operating Expenses may be useful to
investors in understanding period-to-period operating
performance. The maintenance covenants contained in the
Company's credit facility are based on Consolidated EBITDA, which
is consistent with the calculation of Adjusted EBITDA included in
the attachments to this press release.
The Company believes that the non-GAAP measures
may be useful to investors in understanding period-to-period
operating performance and in identifying historical and prospective
trends that may not otherwise be apparent when relying solely on
GAAP financial measures. In addition, the non-GAAP measures
are useful for investors because they enable them to view
performance in a manner similar to the method used by the Company’s
management.
However, the non-GAAP financial measures, as
used herein, are not necessarily comparable to similarly titled
measures of other companies. Furthermore, these non-GAAP measures
have limitations as analytical tools and should not be considered
in isolation from, or as an alternative to, net income or loss,
operating income, cash flow or other combined income or cash flow
data prepared in accordance with GAAP. Because of these
limitations, Adjusted EBITDA, Unlevered Free Cash Flow and Adjusted
Operating Expenses and related ratios should not be considered as
measures of discretionary cash available to invest in business
growth or reduce indebtedness. The Company compensates for these
limitations by relying primarily on its GAAP results and using the
non-GAAP measures only supplementally. A reconciliation of
Adjusted EBITDA and Unlevered Free Cash Flow to net income/(loss)
is contained in the attachments to this press release.
About FairPoint Communications, Inc.
FairPoint Communications, Inc. (Nasdaq:FRP)
provides advanced data, voice and video technologies to single and
multi-site businesses, public and private institutions, consumers,
wireless companies and wholesale re-sellers in 17 states.
Leveraging an owned, fiber-based Ethernet network — with more than
22,000 route miles of fiber, including approximately 18,000 route
miles of fiber in northern New England — FairPoint has the network
coverage, scalable bandwidth and transport capacity to support
enhanced applications, including the next generation of mobile and
cloud-based communications, such as small cell wireless backhaul
technology, voice over IP, data center colocation services, managed
services and disaster recovery. For more information, visit
www.FairPoint.com.
Cautionary Note Regarding
Forward-looking Statements
The SEC encourages companies to disclose
forward-looking information so that investors can better understand
a company’s future prospects and make informed investment
decisions. Certain statements in this communication are
forward-looking statements and are made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995.
These forward-looking statements reflect, among other things,
current expectations, plans, strategies, and anticipated financial
results of Consolidated and FairPoint, both separately and as a
combined entity. There are a number of risks, uncertainties,
and conditions that may cause the actual results of Consolidated
and FairPoint, both separately and as a combined entity, to differ
materially from those expressed or implied by these forward-looking
statements. These risks and uncertainties include the timing
and ability to complete the proposed acquisition of FairPoint by
Consolidated, the expected benefits of the integration of the two
companies and successful integration of FairPoint’s operations with
those of Consolidated and realization of the synergies from the
integration, as well as a number of factors related to the
respective businesses of Consolidated and FairPoint, including
economic and financial market conditions generally and economic
conditions in Consolidated’s and FairPoint’s service areas; various
risks to stockholders of not receiving dividends and risks to
Consolidated’s ability to pursue growth opportunities if
Consolidated continues to pay dividends according to the current
dividend policy; various risks to the price and volatility of
Consolidated’s common stock; changes in the valuation of pension
plan assets; the substantial amount of debt and Consolidated’s
ability to repay or refinance it or incur additional debt in the
future; Consolidated’s need for a significant amount of cash to
service and repay the debt and to pay dividends on its common
stock; restrictions contained in Consolidated’s debt agreements
that limit the discretion of management in operating the business;
legal or regulatory proceedings or other matters that impact the
timing or ability to complete the acquisition as contemplated,
regulatory changes, including changes to subsidies, rapid
development and introduction of new technologies and intense
competition in the telecommunications industry; risks associated
with Consolidated’s possible pursuit of acquisitions; system
failures; losses of large customers or government contracts; risks
associated with the rights-of-way for the network; disruptions in
the relationship with third party vendors; losses of key management
personnel and the inability to attract and retain highly qualified
management and personnel in the future; changes in the extensive
governmental legislation and regulations governing
telecommunications providers and the provision of
telecommunications services; telecommunications carriers disputing
and/or avoiding their obligations to pay network access charges for
use of Consolidated’s and FairPoint’s network; high costs of
regulatory compliance; the competitive impact of legislation and
regulatory changes in the telecommunications industry; liability
and compliance costs regarding environmental regulations; the
possibility of disruption from the integration of the two companies
making it more difficult to maintain business and operational
relationships; the possibility that the acquisition is not
consummated, including, but not limited to, due to the failure to
satisfy the closing conditions; the possibility that the merger or
the acquisition may be more expensive to complete than anticipated,
including as a result of unexpected factors or events; and
diversion of management’s attention from ongoing business
operations and opportunities. A detailed discussion of risks
and uncertainties that could cause actual results and events to
differ materially from such forward-looking statements are
discussed in more detail in the joint proxy statement of
Consolidated and FairPoint, which also constitutes a prospectus of
Consolidated, filed by Consolidated with the SEC pursuant to Rule
424(b)(3) on February 24, 2017 (the "Joint Proxy
Statement/Prospectus") and in Consolidated’s and FairPoint’s
respective filings with the SEC, including the Annual Report on
Form 10-K of Consolidated for the year ended December 31, 2016,
which was filed with the SEC on March 1, 2017, under the heading
“Item 1A-Risk Factors,” and the Annual Report on Form 10-K of
FairPoint for the year ended December 31, 2016, which was filed
with the SEC on March 6, 2017, under the heading “Item 1A-Risk
Factors,” and in subsequent reports on Forms 10-Q and 8-K and other
filings made with the SEC by each of Consolidated and FairPoint.
Many of these circumstances are beyond the ability of Consolidated
and FairPoint to control or predict. Moreover,
forward-looking statements necessarily involve assumptions on the
part of Consolidated and FairPoint. These forward-looking
statements generally are identified by the words “believe,”
“expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,”
“should,” “may,” “will,” “would,” “will be,” “will continue” or
similar expressions. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of Consolidated
and FairPoint, and their respective subsidiaries, both separately
and as a combined entity to be different from those expressed or
implied in the forward-looking statements. All
forward-looking statements attributable to us or persons acting on
the respective behalf of Consolidated or FairPoint are expressly
qualified in their entirety by the cautionary statements that
appear throughout this communication. Furthermore,
forward-looking statements speak only as of the date they are
made. Except as required under the federal securities laws or
the rules and regulations of the SEC, each of Consolidated and
FairPoint disclaim any intention or obligation to update or revise
publicly any forward-looking statements. You should not place
undue reliance on forward-looking statements.
| FAIRPOINT COMMUNICATIONS, INC. AND
SUBSIDIARIESCondensed Consolidated Balance
SheetsMarch 31, 2017 and 2016 (in
thousands, except share data) |
| |
| |
March 31, 2017 |
|
December 31, 2016 |
| |
(unaudited) |
|
(as adjusted) |
|
Assets: |
|
|
|
| Cash |
$ |
38,747 |
|
|
$ |
34,924 |
|
| Accounts
receivable, net |
60,762 |
|
|
62,395 |
|
| Prepaid
expenses |
22,533 |
|
|
24,498 |
|
| Other
current assets |
4,743 |
|
|
4,898 |
|
|
Total current assets |
126,785 |
|
|
126,715 |
|
| Property,
plant and equipment, net |
994,269 |
|
|
1,024,352 |
|
|
Intangible assets, net |
73,140 |
|
|
75,913 |
|
|
Restricted cash |
653 |
|
|
653 |
|
|
Other assets |
3,022 |
|
|
3,202 |
|
|
Total assets |
$ |
1,197,869 |
|
|
$ |
1,230,835 |
|
| |
|
|
|
| Liabilities and
Stockholders' Deficit: |
|
|
|
| Current
portion of long-term debt |
$ |
6,400 |
|
|
$ |
6,400 |
|
| Current
portion of capital lease obligations |
1,165 |
|
|
1,227 |
|
| Accounts
payable |
29,706 |
|
|
27,598 |
|
| Accrued
interest payable |
3,419 |
|
|
10,120 |
|
| Accrued
payroll and related expenses |
20,009 |
|
|
26,187 |
|
|
Other accrued liabilities |
50,512 |
|
|
47,918 |
|
|
Total current liabilities |
111,211 |
|
|
119,450 |
|
| Capital
lease obligations |
1,134 |
|
|
1,311 |
|
| Accrued
pension obligations |
131,726 |
|
|
133,917 |
|
| Accrued
post-employment benefit obligations |
87,411 |
|
|
87,629 |
|
| Deferred
income taxes, net |
26,230 |
|
|
28,016 |
|
| Other
long-term liabilities |
16,209 |
|
|
16,219 |
|
|
Long-term debt, net of current portion |
897,966 |
|
|
898,370 |
|
|
Total long-term liabilities |
1,160,676 |
|
|
1,165,462 |
|
|
Total liabilities |
1,271,887 |
|
|
1,284,912 |
|
| Stockholders'
deficit: |
|
|
|
| Common
stock, $0.01 par value, 37,500,000 shares authorized, 27,266,792
and 27,074,398 shares issued and outstanding at March 31, 2017
and December 31, 2016, respectively |
273 |
|
|
271 |
|
|
Additional paid-in capital |
528,666 |
|
|
527,726 |
|
|
Accumulated deficit |
(627,465 |
) |
|
(603,610 |
) |
|
Accumulated other comprehensive income |
24,508 |
|
|
21,536 |
|
|
Total stockholders' deficit |
(74,018 |
) |
|
(54,077 |
) |
|
Total liabilities and stockholders' deficit |
$ |
1,197,869 |
|
|
$ |
1,230,835 |
|
| FAIRPOINT COMMUNICATIONS, INC. AND
SUBSIDIARIESCondensed Consolidated Statements of
OperationsThree Months Ended March 31, 2017 and
2016(Unaudited)(in thousands,
except per share data) |
| |
| |
Three Months Ended March 31, |
| |
|
2017 |
|
|
|
2016 |
|
|
Revenues |
$ |
201,907 |
|
|
$ |
206,816 |
|
| Operating
expenses: |
|
|
|
| Cost of
services and sales, excluding depreciation and
amortization |
97,806 |
|
|
105,039 |
|
| Other
post-employment benefit and pension expense/(benefit) |
3,097 |
|
|
(53,228 |
) |
| Selling,
general and administrative expense |
49,853 |
|
|
50,336 |
|
|
Depreciation and amortization |
54,794 |
|
|
57,638 |
|
|
Total operating expenses |
205,550 |
|
|
159,785 |
|
|
Income/(loss) from operations |
(3,643 |
) |
|
47,031 |
|
| Other
income/(expense): |
|
|
|
| Interest
expense |
(20,378 |
) |
|
(20,610 |
) |
|
Other, net |
163 |
|
|
158 |
|
|
Total other expense |
(20,215 |
) |
|
(20,452 |
) |
| Income/(loss)
before income taxes |
(23,858 |
) |
|
26,579 |
|
| Income
tax benefit/(expense) |
3 |
|
|
(8,011 |
) |
|
Net income/(loss) |
$ |
(23,855 |
) |
|
$ |
18,568 |
|
| |
|
|
|
| Weighted average shares
outstanding: |
|
|
|
|
Basic |
26,961 |
|
|
26,812 |
|
|
Diluted |
26,961 |
|
|
27,119 |
|
| |
|
|
|
| Income/(loss) per
share, basic |
$ |
(0.88 |
) |
|
$ |
0.69 |
|
| |
|
|
|
| Income/(loss) per
share, diluted |
$ |
(0.88 |
) |
|
$ |
0.68 |
|
| FAIRPOINT COMMUNICATIONS, INC. AND
SUBSIDIARIESCondensed Consolidated Statements of
Cash FlowsThree Months Ended March 31, 2017 and
2016 (Unaudited)(in
thousands) |
| |
| |
Three Months Ended March 31, |
| |
2017 |
|
2016 |
| Cash flows from
operating activities: |
|
|
|
|
Net income/(loss) |
$ |
(23,855 |
) |
|
$ |
18,568 |
|
|
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities: |
|
|
|
| Deferred
income taxes |
(78 |
) |
|
7,908 |
|
| Provision
for uncollectible revenue |
731 |
|
|
(1,406 |
) |
|
Depreciation and amortization |
54,794 |
|
|
57,638 |
|
| Other
post-employment benefits |
(401 |
) |
|
(56,678 |
) |
| Qualified
pension |
(1,082 |
) |
|
2,036 |
|
|
Stock-based compensation |
1,634 |
|
|
2,666 |
|
| Other
non-cash items |
1,285 |
|
|
1,102 |
|
| Changes
in assets and liabilities arising from operations: |
|
|
|
| Accounts
receivable |
902 |
|
|
(1,841 |
) |
| Prepaid
and other assets |
2,005 |
|
|
(79 |
) |
| Accounts
payable and accrued liabilities |
(1,032 |
) |
|
3,349 |
|
| Accrued
interest payable |
(6,701 |
) |
|
(6,563 |
) |
| Other
assets and liabilities, net |
33 |
|
|
(2,281 |
) |
|
Total adjustments |
52,090 |
|
|
5,851 |
|
|
Net cash provided by operating activities |
28,235 |
|
|
24,419 |
|
| Cash flows from
investing activities: |
|
|
|
| Net
capital additions |
(22,066 |
) |
|
(25,880 |
) |
|
Distributions from investments and proceeds from the sale of
property and equipment |
243 |
|
|
175 |
|
|
Net cash used in investing activities |
(21,823 |
) |
|
(25,705 |
) |
| Cash flows from
financing activities: |
|
|
|
|
Repayments of long-term debt |
(1,600 |
) |
|
(1,600 |
) |
| Proceeds
from exercise of stock options |
2 |
|
|
2 |
|
|
Repurchases of common stock to satisfy tax withholding
obligations |
(695 |
) |
|
(388 |
) |
|
Repayment of capital lease obligations |
(296 |
) |
|
(224 |
) |
|
Net cash used in financing activities |
(2,589 |
) |
|
(2,210 |
) |
| Net
change |
3,823 |
|
|
(3,496 |
) |
| Cash,
beginning of period |
34,924 |
|
|
26,560 |
|
|
Cash, end of period |
$ |
38,747 |
|
|
$ |
23,064 |
|
| FAIRPOINT COMMUNICATIONS,
INC.Supplemental Financial
Information(Unaudited) |
| |
|
|
1Q17 |
4Q16 |
3Q16 |
2Q16 |
1Q16 |
|
|
Summary Income Statement (in thousands): |
|
|
|
Revenue: |
|
|
|
|
|
|
| Voice services |
$ |
68,878 |
|
$ |
71,523 |
|
$ |
74,916 |
|
$ |
75,099 |
|
$ |
75,903 |
|
|
| Access |
56,337 |
|
58,219 |
|
59,030 |
|
60,579 |
|
61,933 |
|
|
| Data and Internet services |
49,128 |
|
49,070 |
|
47,479 |
|
46,159 |
|
44,560 |
|
|
| Regulatory funding (1) |
14,651 |
|
12,486 |
|
12,691 |
|
13,117 |
|
13,117 |
|
|
| Other services |
12,913 |
|
12,631 |
|
13,025 |
|
11,603 |
|
11,303 |
|
|
| Total revenue |
201,907 |
|
203,929 |
|
207,141 |
|
206,557 |
|
206,816 |
|
|
| Operating
expenses: |
|
|
|
|
|
|
| Operating expenses, excluding depreciation and amortization
(2) |
150,756 |
|
107,152 |
|
74,240 |
|
89,256 |
|
102,147 |
|
|
| Depreciation and amortization |
54,794 |
|
54,642 |
|
54,918 |
|
55,105 |
|
57,638 |
|
|
| Total operating expenses |
205,550 |
|
161,794 |
|
129,158 |
|
144,361 |
|
159,785 |
|
|
| Income/(loss) from operations |
(3,643 |
) |
42,135 |
|
77,983 |
|
62,196 |
|
47,031 |
|
|
| Other
income/(expense): |
|
|
|
|
|
|
| Interest expense |
(20,378 |
) |
(20,806 |
) |
(20,698 |
) |
(20,583 |
) |
(20,610 |
) |
|
| Other income, net |
163 |
|
(48 |
) |
91 |
|
95 |
|
158 |
|
|
| Total other expense |
(20,215 |
) |
(20,854 |
) |
(20,607 |
) |
(20,488 |
) |
(20,452 |
) |
|
|
Income/(loss) before income taxes |
(23,858 |
) |
21,281 |
|
57,376 |
|
41,708 |
|
26,579 |
|
|
| Income tax
benefit/(expense) |
3 |
|
(5,276 |
) |
(17,169 |
) |
(12,393 |
) |
(8,011 |
) |
|
| Net income/(loss) |
$ |
(23,855 |
) |
$ |
16,005 |
|
$ |
40,207 |
|
$ |
29,315 |
|
$ |
18,568 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted EBITDA and Unlevered Free Cash
Flow to Net Income/(Loss) (in thousands): |
|
|
| Net
income/(loss) |
$ |
(23,855 |
) |
$ |
16,005 |
|
$ |
40,207 |
|
$ |
29,315 |
|
$ |
18,568 |
|
|
| Income tax (benefit)/expense |
(3 |
) |
5,276 |
|
17,169 |
|
12,393 |
|
8,011 |
|
|
| Interest expense |
20,378 |
|
20,806 |
|
20,698 |
|
20,583 |
|
20,610 |
|
|
| Depreciation and amortization |
54,794 |
|
54,642 |
|
54,918 |
|
55,105 |
|
57,638 |
|
|
| Pension expense (3a) |
2,291 |
|
2,294 |
|
2,617 |
|
2,020 |
|
2,036 |
|
|
| OPEB expense/(benefit) (3a) |
806 |
|
(41,912 |
) |
(70,045 |
) |
(55,506 |
) |
(55,264 |
) |
|
| Compensated absences (3b) |
5,886 |
|
(1,573 |
) |
(2,838 |
) |
(2,226 |
) |
6,287 |
|
|
| Severance |
230 |
|
3,293 |
|
73 |
|
38 |
|
1,459 |
|
|
| Other non-cash items, net (3e) |
1,687 |
|
1,652 |
|
1,083 |
|
1,401 |
|
2,694 |
|
|
| All other allowed adjustments, net (3f) |
1,142 |
|
4,433 |
|
7 |
|
(40 |
) |
(88 |
) |
|
| Adjusted EBITDA (3) |
$ |
63,356 |
|
$ |
64,916 |
|
$ |
63,889 |
|
$ |
63,083 |
|
$ |
61,951 |
|
|
| Adjusted EBITDA Margin |
31.4 |
% |
31.8 |
% |
30.8 |
% |
30.5 |
% |
30.0 |
% |
|
|
|
|
|
|
|
|
|
| Adjusted
EBITDA (3) |
$ |
63,356 |
|
$ |
64,916 |
|
$ |
63,889 |
|
$ |
63,083 |
|
$ |
61,951 |
|
|
| Pension contributions |
(3,372 |
) |
(4,285 |
) |
(7,632 |
) |
(3,558 |
) |
— |
|
|
| OPEB payments |
(1,208 |
) |
(1,505 |
) |
(1,614 |
) |
(1,182 |
) |
(1,414 |
) |
|
| Capital expenditures |
(22,066 |
) |
(34,144 |
) |
(30,221 |
) |
(26,805 |
) |
(25,880 |
) |
|
| Unlevered Free Cash Flow (4) |
$ |
36,710 |
|
$ |
24,982 |
|
$ |
24,422 |
|
$ |
31,538 |
|
$ |
34,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted Operating Expenses to Operating
Expenses, excluding depreciation and amortization (in
thousands): |
|
|
| Operating
expenses, excluding depreciation and amortization |
$ |
150,756 |
|
$ |
107,152 |
|
$ |
74,240 |
|
$ |
89,256 |
|
$ |
102,147 |
|
|
| Pension expense |
(2,291 |
) |
(2,294 |
) |
(2,617 |
) |
(2,020 |
) |
(2,036 |
) |
|
| OPEB expense/(benefit) |
(806 |
) |
41,912 |
|
70,045 |
|
55,506 |
|
55,264 |
|
|
| Compensated absences |
(5,886 |
) |
1,573 |
|
2,838 |
|
2,226 |
|
(6,287 |
) |
|
| Severance |
(230 |
) |
(3,293 |
) |
(73 |
) |
(38 |
) |
(1,459 |
) |
|
| Other non-cash items, net |
(1,757 |
) |
(1,492 |
) |
(1,172 |
) |
(1,456 |
) |
(2,764 |
) |
|
| All other allowed adjustments, net (3f) |
(1,235 |
) |
(4,545 |
) |
(9 |
) |
— |
|
— |
|
|
| Adjusted Operating Expenses (5) |
$ |
138,551 |
|
$ |
139,013 |
|
$ |
143,252 |
|
$ |
143,474 |
|
$ |
144,865 |
|
|
|
|
|
|
|
|
|
|
|
Strategic Revenue Categorization and Product Revenue Detail
(in millions): (6) |
|
|
|
Growth (7) |
|
|
|
|
|
|
| Broadband (7a) |
$ |
37.0 |
|
$ |
37.0 |
|
$ |
36.0 |
|
$ |
34.8 |
|
$ |
34.0 |
|
|
| Ethernet (7b) |
24.5 |
|
24.7 |
|
24.9 |
|
24.9 |
|
23.6 |
|
|
| Hosted and Advanced Services (7c) |
5.2 |
|
5.3 |
|
4.7 |
|
4.1 |
|
3.8 |
|
|
|
Subtotal Growth |
66.7 |
|
67.0 |
|
65.6 |
|
63.8 |
|
61.4 |
|
|
| Growth as
a % of Total Revenue |
33.0 |
% |
32.9 |
% |
31.7 |
% |
30.9 |
% |
29.7 |
% |
|
|
|
|
|
|
|
|
|
|
Convertible (8) |
|
|
|
|
|
|
| Non-Ethernet Special Access (8a) |
15.1 |
|
15.7 |
|
16.0 |
|
16.7 |
|
18.2 |
|
|
| Business Voice (8b) |
28.6 |
|
29.1 |
|
29.5 |
|
29.9 |
|
30.5 |
|
|
| Other convertible (8c) |
4.9 |
|
5.1 |
|
5.0 |
|
5.0 |
|
5.4 |
|
|
|
Subtotal Convertible |
48.6 |
|
49.9 |
|
50.5 |
|
51.6 |
|
54.1 |
|
|
|
Convertible as a % of Total Revenue |
24.1 |
% |
24.5 |
% |
24.4 |
% |
25.0 |
% |
26.2 |
% |
|
|
|
|
|
|
|
|
|
|
Legacy (9) |
|
|
|
|
|
|
| Residential Voice (9a) |
48.8 |
|
50.9 |
|
53.9 |
|
53.4 |
|
53.9 |
|
|
| Switched Access and Other (9b) |
15.9 |
|
16.1 |
|
15.3 |
|
16.8 |
|
17.7 |
|
|
|
Subtotal Legacy |
64.7 |
|
67.0 |
|
69.2 |
|
70.2 |
|
71.6 |
|
|
| Legacy as
a % of Total Revenue |
32.0 |
% |
32.9 |
% |
33.4 |
% |
34.0 |
% |
34.6 |
% |
|
|
|
|
|
|
|
|
|
|
Regulatory funding (1) |
14.7 |
|
12.5 |
|
12.7 |
|
13.1 |
|
13.1 |
|
|
| Regulatory
funding as a % of Total Revenue |
7.3 |
% |
6.1 |
% |
6.1 |
% |
6.3 |
% |
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
Miscellaneous (10) |
7.2 |
|
7.5 |
|
9.1 |
|
7.9 |
|
6.6 |
|
|
|
Miscellaneous as a % of Total Revenue |
3.6 |
% |
3.6 |
% |
4.4 |
% |
3.8 |
% |
3.2 |
% |
|
|
|
|
|
|
|
|
|
| Total Revenue |
$ |
201.9 |
|
$ |
203.9 |
|
$ |
207.1 |
|
$ |
206.6 |
|
$ |
206.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Cash Flows (in thousands): |
|
|
|
|
|
|
| Cash Flows
from operating activities: |
|
|
|
|
|
|
| Net
income/(loss) |
$ |
(23,855 |
) |
$ |
16,005 |
|
$ |
40,207 |
|
$ |
29,315 |
|
$ |
18,568 |
|
|
| Deferred income taxes |
(78 |
) |
5,429 |
|
17,057 |
|
12,215 |
|
7,908 |
|
|
| Provision for uncollectible revenue |
731 |
|
1,281 |
|
391 |
|
311 |
|
(1,406 |
) |
|
| Depreciation and amortization |
54,794 |
|
54,642 |
|
54,918 |
|
55,105 |
|
57,638 |
|
|
| OPEB |
(401 |
) |
(43,418 |
) |
(71,659 |
) |
(56,687 |
) |
(56,678 |
) |
|
| Pension |
(1,082 |
) |
(1,991 |
) |
(5,015 |
) |
(1,538 |
) |
2,036 |
|
|
| Other non-cash items |
2,919 |
|
2,781 |
|
2,349 |
|
2,658 |
|
3,768 |
|
|
| Changes in assets and liabilities arising from
operations |
(4,793 |
) |
3,056 |
|
(12,050 |
) |
5,001 |
|
(7,415 |
) |
|
|
Net cash provided by operating activities |
28,235 |
|
37,785 |
|
26,198 |
|
46,380 |
|
24,419 |
|
|
|
Net cash used in investing activities |
(21,823 |
) |
(34,031 |
) |
(32,242 |
) |
(26,482 |
) |
(25,705 |
) |
|
| Net cash used in financing
activities |
(2,589 |
) |
(1,901 |
) |
(2,001 |
) |
(1,846 |
) |
(2,210 |
) |
|
|
Net change |
3,823 |
|
1,853 |
|
(8,045 |
) |
18,052 |
|
(3,496 |
) |
|
| Cash,
beginning of period |
34,924 |
|
33,071 |
|
41,116 |
|
23,064 |
|
26,560 |
|
|
| Cash, end of period |
$ |
38,747 |
|
$ |
34,924 |
|
$ |
33,071 |
|
$ |
41,116 |
|
$ |
23,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Operating Metrics: |
|
|
|
|
|
| Broadband subscribers (11) |
305,353 |
|
306,624 |
|
309,547 |
|
311,440 |
|
311,323 |
|
|
| % change y-o-y |
(1.9 |
)% |
(1.4 |
)% |
(1.4 |
)% |
(1.2 |
)% |
(1.7 |
)% |
|
| % change q-o-q |
(0.4 |
)% |
(0.9 |
)% |
(0.6 |
)% |
— |
% |
0.1 |
% |
|
|
|
|
|
|
|
|
|
| Ethernet Circuits |
15,974 |
|
15,691 |
|
15,444 |
|
15,137 |
|
14,813 |
|
|
| % change y-o-y |
7.8 |
% |
8.2 |
% |
9.5 |
% |
10.7 |
% |
13.2 |
% |
|
| % change q-o-q |
1.8 |
% |
1.6 |
% |
2.0 |
% |
2.2 |
% |
2.1 |
% |
|
| |
|
|
|
|
|
|
| Residential voice lines |
356,144 |
|
366,111 |
|
377,403 |
|
388,983 |
|
398,488 |
|
|
| % change y-o-y |
(10.6 |
)% |
(10.7 |
)% |
(10.9 |
)% |
(11.0 |
)% |
(11.7 |
)% |
|
| % change q-o-q |
(2.7 |
)% |
(3.0 |
)% |
(3.0 |
)% |
(2.4 |
)% |
(2.8 |
)% |
|
|
|
|
|
|
|
|
|
| Employee
Headcount |
2,471 |
|
2,492 |
|
2,649 |
|
2,663 |
|
2,704 |
|
|
| % change y-o-y |
(8.6 |
)% |
(8.3 |
)% |
(2.9 |
)% |
(9.1 |
)% |
(9.7 |
)% |
|
| (1) We receive certain
federal and state government funding that we classify as regulatory
funding including: CAF Phase II support effective January 1,
2015 to build and operate broadband services; CAF Phase II
transition funding (scheduled to phase down over three-years); CAF
Phase I frozen support (for Kansas and Colorado in 2015 and until a
reverse auction is conducted); CAF funding under the CAF/ICC Order;
and universal service fund support from certain states in which we
operate. |
| (2) Excludes
reorganization costs. |
| (3) For purposes of
calculating Adjusted EBITDA (calculated in accordance with the
definition of Consolidated EBITDA in the Company's credit
agreement), the Company adjusts net income/(loss) for interest,
income taxes, depreciation and amortization, in addition to: |
| a) the
add-back of aggregate pension and other post-employment benefits
(OPEB) expense/(benefit), |
| b) the
add-back (or subtraction) of the adjustment to the compensated
absences accrual to eliminate the impact of changes in the
accrual, |
| c) the
add-back of costs related to the reorganization, including
professional fees for advisors and consultants, |
| d) the
add-back of costs and expenses, including those imposed by
regulatory authorities, with respect to casualty events, acts of
God or force majeure to the extent they are not reimbursed from
proceeds of insurance, |
| e) the
add-back of other non-cash items, including stock compensation
expense, except to the extent they will require a cash payment in a
future period, and |
| f) the
add-back (or subtraction) of other items, including facility and
office closures, expenses related to permitted transactions, labor
negotiation expenses (including losses related to disruption of
operations), non-cash gains/losses, non-operating dividend and
interest income and other extraordinary gains/losses. |
| (4) Unlevered Free Cash
Flow refers to Adjusted EBITDA (calculated in accordance with the
definition of Consolidated EBITDA in the Company's credit
agreement) minus capital expenditures, cash pension contributions
and cash payments for OPEB. |
| (5) For purposes of
calculating Adjusted Operating Expenses, the Company adjusts
operating expenses, excluding depreciation and amortization, for
pension and OPEB expense/(benefit) see (3a), compensated absences
see (3b), severance, storm expenses see (3d), other non-cash items,
net see (3e), labor negotiation related expense see (3f) and all
other allowed adjustments, net see (3f). |
| (6) Management believes
the Strategic Revenue Categorization provides key metrics that will
enhance investors' ability to evaluate our business and assist
investors in their understanding of the changing composition of our
revenue as well as period-to-period revenue trends as a result of
product and service evolution within our industry. |
| (7) Growth revenue is
comprised of products and services that are generally viewed as
in-demand by telecommunications consumers over the medium- to
long-term and are expected to increase over time. |
| a)
Broadband revenue is comprised of both residential and business
customers delivered through DSL, ADSL, VDSL or other similar
services. |
| b)
Ethernet revenue includes Ethernet over copper ("EOC") or Ethernet
over fiber ("EOF") services delivered to end-users or to
wholesalers, who then sell to their end-users. |
| c) Hosted
and Advanced Services includes VoIP and other digital voice
services including unified messaging and other IP features as well
as revenue generated from our various advanced services including
our value added reseller of unified communications, data networking
and cabling infrastructure solutions, the next-generation emergency
9-1-1 contracts in several of our service territories as well as
data center and managed services. |
| (8) Convertible
revenues are revenues that could move from TDM-based technologies
to Ethernet or other advanced services. |
| a)
Non-Ethernet Special Access includes high-capacity circuits.
The revenues are primarily comprised of business revenue from T1's,
DS3's and SONET products. |
| b)
Business Voice is traditional voice, long distance, ISDN and
Centrex services for a business customer. |
| c) Other
convertible revenue primarily includes Unbundled Network Element
("UNE"), Asynchronous Transfer Mode ("ATM"), Frame Relay, ISDN,
Analog Private Line and Internet services such as dial-up. |
| (9) Legacy revenues are
TDM-based voice related consumer revenue largely related to
residential customers. |
| a)
Residential Voice is comprised of TDM voice services to residential
customers. |
| b)
Switched Access and Other primarily includes Switched Transport,
Local Switching, NECA pooling elements and colocation of
miscellaneous equipment. |
| (10) Miscellaneous is
comprised of special purpose projects, late payment fees from our
customers and pole rental revenues among other various service
revenues. |
| (11) Broadband
subscribers include DSL, fiber-to-the-premise, cable modem and
fixed wireless broadband, but exclude Ethernet and other
high-capacity circuits. |
Investor Relations Contact:
Paul Taaffe
(704) 227-3623
ptaaffe@fairpoint.com
Media Contact:
Angelynne Beaudry
(207) 535-4129
aamores@fairpoint.com
Fairpoint Communications, Inc. (NASDAQ:FRP)
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Fairpoint Communications, Inc. (NASDAQ:FRP)
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