FairPoint Communications, Inc (Nasdaq: FRP), the largest telecommunications provider in Vermont, announced Tuesday its financial results for the fourth quarter and full year endedDecember 31, 2013. Revenue was down from the third quarter and for the year-to-date. The annual loss decreased in 2013 and fourth quarter 2013 showed a positive $6.1 million, compared to losses in both the third quarter and in the fourth quarter of 2012. Trading was modestly heavy during the day before the report was released with a small gain. Shares opened at $13.74 and were up $0.30 or 2.19 percent for the day. The 52-week range is $6.77 - $14.16. Trading was light after-hours.
"I am very pleased with our 2013 financial results," saidPaul H. Sunu, Chief Executive Officer. "Our fourth quarter revenue helps confirm our view that we are in a period of stabilization, and through disciplined operations and capital expenditures, Adjusted EBITDA and Unlevered Free Cash Flow are at the high end or above our annual guidance range for 2013. As we look to 2014, we expect to continue our revenue transformation as we add growth oriented fiber and Ethernet based revenues, enhance our retention initiatives and build a strong pipeline of meaningfully relevant products and services for our customer base."
- Unlevered Free Cash Flow1of$21.1 millionfor the quarter and$113.3 millionfor the full year
- Adjusted EBITDA1of$67.2 millionfor the quarter and$265.0 millionfor the full year
- Capital expenditures of$37.2 millionfor the quarter and$128.3 millionfor the full year
- Net income of$6.1 millionfor the quarter and net loss of$93.5 millionfor the full year2
- Management provides financial guidance for fiscal year 2014
Operating Highlights
FairPoint gained traction with its revenue transformation strategy and achieved positive momentum in its growth-oriented services. The Company experienced revenue growth in business, advanced data services such as Ethernet, high-capacity data transport and other IP-based services along with broadband services.
In 2013, data and Internet services revenue grew 13.0% versus a year ago as products like FairPoint's retail Ethernet service offerings continued to attract new customers. Data and Internet services revenue increased sequentially in the fourth quarter, which is an increase for the fourth consecutive quarter.
Ethernet services contributed approximately$18.2 millionof revenue in the fourth quarter of 2013 as compared to$13.3 milliona year ago, as retail and wholesale Ethernet circuits grew 60.1% year-over-year. Growth in the Company's Ethernet products is expected to continue based on demand from customers like regional banks, healthcare networks and wireless carriers.
FairPoint has continued to invest in its broadband network to increase capacity, broaden its reach and offer more competitive services. Broadband subscribers, pro forma for divestitures, grew 1.5% year-over-year. FairPoint added more than 4,700 broadband subscribers during the last 12 months, as penetration reached 37.5% of the Company's voice access lines atDecember 31, 2013. Broadband subscribers decreased slightly quarter-over-quarter primarily due to the normal seasonality of the business and proactive efforts to improve the credit profile of subscribers. This ongoing effort to improve subscriber credit quality is in line with the Company's initiative to improve the quality of revenue and is expected to increase productivity and reduce collection costs.
Voice access lines, pro forma for divestitures, declined 7.1% year-over-year as compared to 7.7% a year ago. The slower decline was driven by a reduction in the rate of loss in business voice and wholesale access lines.
As ofDecember 31, 2013, FairPoint had 3,171 employees, a decrease of 5.9% versus a year ago, largely due to the completion of a previously announced workforce reduction.
Financial Highlights
Fourth Quarter 2013 as compared to Third Quarter 2013
Revenue decreased$2.6 millionduring the fourth quarter of 2013 to$233.4 million. The decrease in revenue is due to the continued decline in voice services resulting from fewer lines in service, lower long distance usage and seasonality in local access revenue in addition to an unfavorable variance in service quality penalties. This was partially offset by revenue assurance activities.
Adjusting for items that are added back in the computation of Adjusted EBITDA, operating expenses were$166.2 millionin the fourth quarter of 2013 compared to$168.8 millionin the third quarter of 2013.
Adjusted EBITDA was$67.2 millionin the fourth quarter of 2013 as compared to$67.5 millionin the third quarter of 2013. The decrease is primarily due to decreased revenue partially offset by cost savings.
Capital expenditures were$37.2 millionin the fourth quarter of 2013 as compared to$33.8 millionin the third quarter of 2013.
Unlevered Free Cash Flow, which measures Adjusted EBITDA minus capital expenditures, pension contributions and cash payments for other post-employment benefits ("OPEB"), was$21.1 millionin the fourth quarter of 2013 as compared to$24.4 millionin the third quarter of 2013. Unlevered Free Cash Flow was lower in the fourth quarter of 2013 due to higher capital expenditures.
Net income was$6.1 millionin the fourth quarter of 2013 as compared to a net loss of$9.0 millionin the third quarter of 2013. The change was due primarily to an increase in income tax benefit of$14.9 million, primarily due to a change in the valuation allowance.
Cash was$42.7 millionas ofDecember 31, 2013, as compared to$24.7 millionas ofSeptember 30, 2013. The increase is primarily due to positive operating cash flow partially offset by increased capital expenditures in the quarter. There were no scheduled interest payments towards the Company's senior notes in the fourth quarter as the semi-annual bond interest payments of$13.2 millionare made in February and August. Total gross debt outstanding was$935.2 millionas ofDecember 31, 2013, after taking into consideration the regularly scheduled principal payment of$1.6 millionon the term loan made during the fourth quarter of 2013, as compared to$936.8 millionas ofSeptember 30, 2013. The Company's$75.0 millionrevolving credit facility is undrawn, with$59.1 millionavailable for borrowing after applying$15.9 millionof outstanding letters of credit.
Fourth Quarter 2013 as compared to Fourth Quarter 2012
Revenue was$233.4 millionin the fourth quarter of 2013 as compared to$239.7 milliona year earlier. Adjusting for the impact of the sale of theIdaho-based operations onJanuary 31, 2013, revenue declined$4.3 millionversus a year earlier. The change was due primarily to a decline in voice services and access revenues, which was partially offset by growth in data and Internet services revenue. The loss of voice access lines versus a year ago combined with lower long distance usage led to a decrease in voice services revenue in the fourth quarter of 2013 compared to the fourth quarter of 2012. The decline in access revenues was due to decreased special access revenue driven by the exit from one National Exchange Carrier Association ("NECA") pool discussed in the second and third quarters of 2013, partially offset by an increase in wholesale Ethernet revenue.
Adjusting for items that are added back in the computation of Adjusted EBITDA, operating expenses were$166.2 millionin the fourth quarter of 2013 as compared to$177.8 milliona year earlier. The decrease was primarily the result of lower direct cost of services, employee costs and bad debt expenses.
Adjusted EBITDA was$67.2 millionin the fourth quarter of 2013 as compared to$62.6 milliona year earlier. The increase is due to operating cost savings offset by lower revenue.
Capital expenditures were$37.2 millionin the fourth quarter of 2013 as compared to$49.1 milliona year earlier. The decrease year-over-year was due primarily to regulatory build-out requirements in fiscal year 2012.
Unlevered Free Cash Flow of$21.1 millionin the fourth quarter of 2013 increased compared to the$12.4 milliona year earlier. The increase was due primarily to lower capital expenditures and higher Adjusted EBITDA offset by pension contributions in the fourth quarter of 2013.
Net income was$6.1 millionin the fourth quarter of 2013 as compared to a net loss of$32.2 millionin the fourth quarter of 2012. The change was due primarily to a higher income tax benefit, primarily due to a change in the valuation allowance, offset by a combination of lower revenue and increased interest expense.
2014 Guidance
During this period of revenue stabilization, the Company expects to generate$930 million to $940 millionin revenue, yielding$100 million to $110 millionof Unlevered Free Cash Flow. Unlevered Free Cash Flow refers to Adjusted EBITDA minus capital expenditures, pension contributions and cash payments for OPEB. In addition, for fiscal 2014, Adjusted EBITDA is expected to be$260 million to $270 millionand capital expenditures are expected to be approximately$125 million. Aggregate cash pension contributions and cash OPEB payments are expected to be approximately$35 million.
Annual Report
The information in this press release should be read in conjunction with the financial statements and footnotes contained in the Company's annual report on Form 10-K for the year endedDecember 31, 2013, which will be filed with the SEC no later thanMarch 17, 2014. The Company's results for the quarter and year endedDecember 31, 2013are subject to the completion of such annual report.
FAIRPOINT COMMUNICATIONS, INC.
Supplemental Financial Information
(Unaudited)
(in thousands, except operating and financial metrics)
4Q13
3Q13
2Q13
1Q13
4Q12
2013
2012
Summary Income Statement:
Revenue:
Voice services
$
98,510
$
101,272
$
101,660
$
103,717
$
108,487
$
405,159
$
446,126
Access
80,763
80,182
79,235
81,632
82,476
321,812
336,000
Data and Internet services
41,645
41,550
40,054
38,174
36,668
161,423
142,911
Other services
12,478
12,985
13,551
11,946
12,039
50,960
48,612
Total revenue
233,396
235,989
234,500
235,469
239,670
939,354
973,649
Operating expenses:
Operating expenses, excluding depreciation, amortization and reorganization
185,964
187,166
192,246
205,497
194,692
770,873
782,684
Depreciation and amortization
53,605
52,877
84,523
91,433
99,845
282,438
376,614
Reorganization (income) expense (post-emergence)
19
(229)
(398)
(163)
377
(771)
(3,666)
Total operating expenses
239,588
239,814
276,371
296,767
294,914
1,052,540
1,155,632
Loss from operations
(6,192)
(3,825)
(41,871)
(61,298)
(55,244)
(113,186)
(181,983)
Other income (expense):
Interest expense
(20,272)
(20,304)
(20,097)
(18,002)
(16,608)
(78,675)
(67,610)
Loss on debt refinancing
—
—
—
(6,787)
—
(6,787)
—
Other income (expense), net
3,477
951
10
425
14
4,863
739
Total other expense
(16,795)
(19,353)
(20,087)
(24,364)
(16,594)
(80,599)
(66,871)
Loss from continuing operations before income taxes
(22,987)
(23,178)
(61,958)
(85,662)
(71,838)
(193,785)
(248,854)
Income tax benefit
29,090
14,218
18,850
28,133
39,658
90,291
95,560
Net income (loss) from continuing operations
6,103
(8,960)
(43,108)
(57,529)
(32,180)
(103,494)
(153,294)
Gain on sale of discontinued operations
—
—
—
10,044
—
10,044
—
Net income (loss)
$
6,103
$
(8,960)
$
(43,108)
$
(47,485)
$
(32,180)
$
(93,450)
$
(153,294)
Reconciliation of Adjusted EBITDA and Unlevered Free Cash Flow to Net Income (Loss):
Net income (loss)
$
6,103
$
(8,960)
$
(43,108)
$
(47,485)
$
(32,180)
$
(93,450)
$
(153,294)
Income tax benefit
(29,090)
(14,218)
(18,850)
(28,133)
(39,658)
(90,291)
(95,560)
Interest expense
20,272
20,304
20,097
18,002
16,608
78,675
67,610
Depreciation and amortization
53,605
52,877
84,523
91,433
99,845
282,438
376,614
Pension expense (1a)
7,000
6,357
6,980
5,884
4,005
26,221
17,809
OPEB expense (1a)
12,173
11,973
15,247
15,076
11,899
54,469
50,875
Compensated absences (1b)
(3,276)
(4,367)
(3,048)
11,122
(3,925)
431
329
Severance
485
3,537
3,430
698
938
8,150
6,380
Restructuring costs (1c)
19
70
101
17
258
207
1,335
Storm expenses (1d)
2,598
—
—
—
3,000
2,598
3,000
Other non-cash items, net (1e)
299
426
351
826
2,068
1,902
3,518
Gain on sale of assets
36
(956)
207
(10,044)
—
(10,757)
—
Early debt payment expenses
—
—
—
6,787
—
6,787
—
All other allowed adjustments, net (1f)
(3,009)
466
507
(314)
(288)
(2,350)
(675)
Adjusted EBITDA
$
67,215
$
67,509
$
66,437
$
63,869
$
62,570
$
265,030
$
277,941
Adjusted EBITDA margin
28.8
%
28.6
%
28.3
%
27.1
%
26.1
%
28.2
%
28.5
%
Pension contributions
$
(7,925)
$
(8,519)
$
(3,527)
$
—
$
—
$
(19,971)
$
(17,850)
OPEB payments
(938)
(786)
(726)
(1,020)
(1,125)
(3,470)
(3,183)
Capital expenditures
(37,207)
(33,768)
(27,413)
(29,910)
(49,070)
(128,298)
(145,066)
Unlevered Free Cash Flow
$
21,145
$
24,436
$
34,771
$
32,939
$
12,375
$
113,291
$
111,842
Reconciliation of Adjusted EBITDA to Revenue:
Total revenue
$
233,396
$
235,989
$
234,500
$
235,469
$
239,670
$
939,354
$
973,649
Storm expenses (1d)
—
—
—
—
812
—
812
Adjusted total revenue
$
233,396
$
235,989
$
234,500
$
235,469
$
240,482
$
939,354
$
974,461
Operating expenses, excluding depreciation, amortization and reorganization
$
185,964
$
187,166
$
192,246
$
205,497
$
194,692
$
770,873
$
782,684
Pension expense (1a)
(7,000)
(6,357)
(6,980)
(5,884)
(4,005)
(26,221)
(17,809)
OPEB expense (1a)
(12,173)
(11,973)
(15,247)
(15,076)
(11,899)
(54,469)
(50,875)
Compensated Absences (1b)
3,276
4,367
3,048
(11,122)
3,925
(431)
(329)
Severance
(485)
(3,537)
(3,430)
(698)
(938)
(8,150)
(6,380)
Storm expenses (1d)
(2,598)
—
—
—
(2,188)
(2,598)
(2,188)
Other non-cash items, net (1e)
(445)
(394)
(493)
(937)
(1,793)
(2,269)
(3,636)
All other allowed adjustments, net (1f)
(358)
(493)
(581)
—
—
(1,432)
—
Adjusted operating expenses, excluding depreciation, amortization and reorganization
$
166,181
$
168,779
$
168,563
$
171,780
$
177,794
$
675,303
$
701,467
Adjusted operating expenses margin
71.2
%
71.5
%
71.9
%
73.0
%
74.2
%
71.9
%
72.0
%
Adjusted income from continuing operations, excluding depreciation, amortization and reorganization
$
67,215
$
67,210
$
65,937
$
63,689
$
62,688
$
264,051
$
272,994
Adjusted income from continuing operations margin
28.8
%
28.5
%
28.1
%
27.0
%
26.2
%
28.1
%
28.0
%
Reversal of certain bankruptcy claims
—
299
500
180
(118)
979
4,947
Adjusted EBITDA
$
67,215
$
67,509
$
66,437
$
63,869
$
62,570
$
265,030
$
277,941
Adjusted EBITDA margin
28.8
%
28.6
%
28.3
%
27.1
%
26.1
%
28.2
%
28.5
%
Select Operating and Financial Metrics:
Residential access lines (2)
527,890
542,238
556,584
568,594
584,211
527,890
584,211
Business access lines (2)
290,536
292,937
294,183
294,353
295,134
290,536
295,134
Wholesale access lines (3)
59,859
60,315
61,911
63,068
65,641
59,859
65,641
Total switched access lines (2)
878,285
895,490
912,678
926,015
944,986
878,285
944,986
% change y-o-y
(7.1)%
(7.3)%
(7.5)%
(7.8)%
(7.7)%
(7.1)%
(7.7)%
% change q-o-q
(1.9)%
(1.9)%
(1.4)%
(2.0)%
(2.2)%
N/A
N/A
Broadband subscribers (2) (4)
329,766
330,698
332,620
330,082
324,977
329,766
324,977
% change y-o-y
1.5
%
3.0
%
4.2
%
4.1
%
3.9
%
1.5
%
3.9
%
% change q-o-q
(0.3)%
(0.6)%
0.8
%
1.6
%
1.2
%
N/A
N/A
penetration of access lines
37.5
%
36.9
%
36.4
%
35.6
%
34.4
%
37.5
%
34.4
%
Access line equivalents (2)
1,208,051
1,226,188
1,245,298
1,256,097
1,269,963
1,208,051
1,269,963
% change y-o-y
(4.9)%
(4.7)%
(4.6)%
(4.9)%
(5.0)%
(4.9)%
(5.0)%
% change q-o-q
(1.5)%
(1.5)%
(0.9)%
(1.1)%
(1.3)%
N/A
N/A
Retail Ethernet
4,651
4,241
3,857
3,532
3,192
4,651
3,192
Wholesale Ethernet
4,866
4,257
3,374
2,933
2,753
4,866
2,753
Ethernet Circuits
9,517
8,498
7,231
6,465
5,945
9,517
5,945
% change y-o-y
60.1
%
57.8
%
49.2
%
44.9
%
N/A
60.1
%
N/A
% change q-o-q
12.0
%
17.5
%
11.8
%
8.7
%
10.4
%
N/A
N/A
Employee Headcount
3,171
3,182
3,255
3,321
3,369
3,171
3,369
% change y-o-y
(5.9)%
(6.4)%
(4.5)%
(3.9)%
(4.9)%
(5.9)%
(4.9)%
(1) For purposes of calculating Adjusted EBITDA (in accordance with the definition of Consolidated EBITDA in the Company's credit agreement), the Company adjusts net (loss) income for interest, income taxes, depreciation and amortization, in addition to:
a) the add-back of aggregate pension and other post-employment benefits (OPEB) expense,
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, 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, labor negotiation expenses, non-cash gains/losses, non-operating dividend and interest income and other extraordinary gains/losses.
(2) Access and subscriber lines are presented pro forma for the divestiture of our Idaho-based operations and pay phone operations in our northern New England footprint.
(3) Wholesale access lines include Resale and UNE-P, but exclude UNE-L and special access circuits.
(4) Broadband subscribers include DSL, fiber-to-the-premise, cable modem and fixed wireless broadband, but exclude Ethernet and other high-capacity circuits.
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2013 and 2012
(in thousands, except share data)
December31, 2013
December31, 2012
Assets:
Cash
$
42,700
$
23,203
Restricted cash
543
6,818
Accounts receivable, net
89,248
86,999
Prepaid expenses
26,552
20,128
Other current assets
3,876
4,219
Deferred income tax, net
18,250
16,376
Assets held for sale
—
12,549
Total current assets
181,169
170,292
Property, plant and equipment, net
1,301,292
1,438,309
Intangible assets, net
105,886
116,992
Debt issue costs, net
7,101
1,111
Restricted cash
651
651
Other assets
3,799
5,006
Total assets
$
1,599,898
$
1,732,361
Liabilities and Stockholders' Deficit:
Current portion of long-term debt
$
6,400
$
10,000
Current portion of capital lease obligations
1,445
1,220
Accounts payable
37,876
40,654
Claims payable and estimated claims accrual
256
1,282
Accrued interest payable
9,977
176
Accrued payroll and related expenses
34,897
30,952
Other accrued liabilities
55,994
58,262
Liabilities held for sale
—
407
Total current liabilities
146,845
142,953
Capital lease obligations
447
1,470
Accrued pension obligations
153,534
203,537
Accrued post-retirement healthcare obligations
584,734
616,379
Deferred income taxes
85,948
127,361
Other long-term liabilities
25,864
11,474
Long-term debt, net of current portion
911,722
947,000
Total long-term liabilities
1,762,249
1,907,221
Total liabilities
1,909,094
2,050,174
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.01 par value, 37,500,000 sharesauthorized, 26,480,837 and 26,288,998 shares issued and outstanding atDecember 31, 2013 and 2012, respectively
264
262
Additional paid-in capital
512,008
506,153
Retained deficit
(661,689)
(568,239)
Accumulated other comprehensive loss
(159,779)
(255,989)
Total stockholders' deficit
(309,196)
(317,813)
Total liabilities and stockholders' deficit
$
1,599,898
$
1,732,361
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2013 and 2012
(in thousands, except per share data)
Year Ended
December 31,
2013
2012
Revenues
$
939,354
$
973,649
Operating expenses:
Cost of services and sales, excluding depreciationand amortization
439,217
450,441
Selling, general and administrative expense, excludingdepreciation and amortization
331,656
332,243
Depreciation and amortization
282,438
376,614
Reorganization related income
(771)
(3,666)
Total operating expenses
1,052,540
1,155,632
Loss from operations
(113,186)
(181,983)
Interest expense
(78,675)
(67,610)
Loss on debt refinancing
(6,787)
—
Other
4,863
739
Loss from continuing operations before income taxes
(193,785)
(248,854)
Income tax benefit
90,291
95,560
Net loss from continuing operations
(103,494)
(153,294)
Gain on sale of discontinued operations, net of taxes
10,044
—
Net loss
$
(93,450)
$
(153,294)
(Loss) earnings per share, basic:
Continuing operations
$
(3.95)
$
(5.90)
Discontinued operations
0.38
—
Loss per share, basic
$
(3.57)
$
(5.90)
(Loss) earnings per share, diluted:
Continuing operations
$
(3.95)
$
(5.90)
Discontinued operations
0.38
—
Loss per share, diluted
$
(3.57)
$
(5.90)
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Years Ended December 31, 2013 and 2012
(in thousands)
Year Ended December 31,
2013
2012
Cash flows from operating activities:
Net (loss) income
$
(93,450)
$
(153,294)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Deferred income taxes
(94,369)
(96,778)
Provision for uncollectible revenue
9,806
7,506
Depreciation and amortization
282,438
376,614
Post-retirement healthcare
51,035
47,692
Qualified pension
6,250
(42)
Gain on sale of business, net
(10,044)
—
Loss on debt refinancing
6,787
—
Stock-based compensation
5,807
4,055
Loss on abandoned projects
201
2,862
Other non-cash items
(906)
(3,189)
Changes in assets and liabilities arising from operations:
Accounts receivable
(12,127)
9,587
Prepaid and other assets
(7,044)
(3,301)
Restricted cash
5,698
(6,164)
Accounts payable and accrued liabilities
(2,070)
3,364
Accrued interest payable
9,801
(332)
Other assets and liabilities, net
13,721
(4,198)
Reorganization adjustments:
Non-cash reorganization income
(980)
(5,002)
Claims payable and estimated claims accrual
(46)
(8,824)
Restricted cash—Cash Claims Reserve
577
22,219
Total adjustments
264,535
346,069
Net cash provided by (used in) operating activities
171,085
192,775
Cash flows from investing activities:
Net capital additions
(128,298)
(145,066)
Proceeds from sale of business
30,452
—
Distributions from investments and proceeds from the sale of property
1,895
759
Net cash used in investing activities
(95,951)
(144,307)
Cash flows from financing activities:
Financing costs
(13,217)
—
Proceeds from issuance of long-term debt
920,590
—
Repayments of long-term debt
(961,800)
(43,000)
Restricted cash
—
1,573
Proceeds from exercise of stock options
55
64
Repayment of capital lease obligations
(1,265)
(1,252)
Net cash used in financing activities
(55,637)
(42,615)
Net change
19,497
5,853
Cash, beginning of period
23,203
17,350
Cash, end of period
$
42,700
$
23,203
SOURCE CHARLOTTE, N.C.,March 4, 2014/PRNewswire/ -- FairPoint Communications, Inc.