FairPoint reports Q1 2017 loss, shares fall

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FairPoint reports Q1 2017 loss, shares fall

Thu, 05/04/2017 - 1:11pm -- tim

Vermont Business Magazine Charlotte, NC-based FairPoint Communications, Inc (Nasdaq:FRP), Vermont's largest telecom, today announced that it lost -$23.9 million (-$0.88 per share) for the first quarter of 2017, compared to net income of $18.6 million for first quarter of 2016. The first quarter ended March 31, 2017. The company that plans to buy FairPoint during the second quarter of this year (ending June 30) also reported a quarterly loss. Consolidated Communications Holdings, Inc (Nasdaq:CNSL) of Mattoon, IL, reported a loss of -$37 million (-$0.07 per share) for the first quarter. Shares of both companies, whose movement have been closely linked since their merger was announced last year, were down in today's trading (FRP: $16.02, -0.73 (-4.18%); CNSL: 22.18-1.00 (-4.31%)). The broader markets were also off, but very slightly.

"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."

  • Ethernet revenue was 12.1% of total revenue in the quarter as circuits increased 7.8% year-over-year
  • Revenue of $201.9 million for the quarter
  • Net loss of $23.9 million for the quarter
  • Adjusted EBITDA1 of $63.4 million for the quarter
  • Net cash provided by operating activities of $28.2 million for the quarter
  • Unlevered Free Cash Flow1 of $36.7 million for the quarter
  • State and federal regulatory applications related to the proposed merger with Consolidated have been filed; regulatory approval processes are progressing

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.

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 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 SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three 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 SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three 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.

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

 

CHARLOTTE, N.C., May 04, 2017 (GLOBE NEWSWIRE) -- FairPoint Communications, Inc