FairPoint reports 2015 Q2 2015 results, net income $40.3 million

"Our financial results in the quarter were in line with our expectations as we continue to transform revenue while actively managing costs," saidPaul H. Sunu, Chief Executive Officer. "We are also encouraged by the improving trends we are seeing in operational metrics as subscriber losses moderated from peaks experienced during the strike and our sales bookings returned close to pre-strike levels. We continue to make significant operational improvements and have established new expectations for service that we believe will improve the customer experience and reduce churn over time."

See Tables below.

Operating Highlights

- Unlevered Free Cash Flow minus Estimated Avoided Costs(1) of $30.7 million for the quarter and $63.6 million year-to-date
- Management raises the lower end of prior guidance range for Unlevered Free Cash Flow minus Estimated Avoided Costs(1) and now expects $115 million to $125 million for fiscal 2015
- Revenue of $214.1 million for the quarter and $428.1 million year-to-date
- Capital expenditures of $28.3 million for the quarter and $54.7 million year-to-date
- Adjusted EBITDA minus Estimated Avoided Costs(1) of $63.7 million for the quarter and $125.3 million year-to-date
- Net income of $40.3 million for the quarter and net loss of $4.9 million year-to-date

Ethernet services revenue momentum continued in the second quarter of 2015 and contributed approximately$23.5 millionof revenue or 11.0% of total revenue in the second quarter of 2015 as compared to$20.9 millionor 9.3% of total revenue a year ago, as retail and wholesale Ethernet circuits grew 28.0% 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.

Broadband and other data revenues grew$1.0 millionfrom the first quarter of 2015 driven by customer speed upgrades and price increases which more than offset a net decline in total subscribers. Encouragingly broadband subscriber counts increased in June compared to May.

The Company continues to develop and deploy advanced products and services for customers and experienced continued business adoption of its Hosted PBX product in the second quarter. For example, the Company made good progress in the first half of 2015 toward the installation of a 1,250 seat Hosted PBX solution inNew Hampshireand the next-generation emergency 9-1-1 system for the state ofVermont.

As ofJune 30, 2015, FairPoint had 2,931 employees, a decrease of 229 employees versus a year ago. OnJuly 29, 2015, we completed a previously announced workforce reduction. As a result, we estimate a reduction in adjusted employee expenses of$7 million to $9 millionover the remainder of 2015 compared to the first half of 2015.

Financial Highlights

Second Quarter 2015 as compared to First Quarter 2015

Revenue increased$0.1 millionduring the second quarter of 2015 to$214.1 million.

• Voice services revenue decreased$1.8 millionprimarily due to fewer lines in service partially offset by seasonal reconnects.
• Access revenue increased$1.1 millionprimarily due to lower wholesale service credits in the second quarter.
• Data and Internet services revenue increased$1.2 milliondue to seasonal reconnects, rate increases and speed upgrades partially offset by broadband subscriber losses.
• Other services revenue decreased$0.3 millionprimarily due to lower late payment fees as a result of fewer accounts past due.

Operating expenses, excluding depreciation and amortization, decreased$84.4 millionto$98.9 millionin the second quarter of 2015 compared to$183.3 millionin the first quarter of 2015 primarily due to$49.5 millionlower labor negotiation related expenses and$43.7 millionlower OPEB expense partially offset by$6.6 millionhigher employee expenses, including severance related to the previously announced workforce reduction. However, labor negotiation related expenses, OPEB expense and severance are excluded from the Company's definition of adjusted operating expenses and Adjusted EBITDA.

Adjusted operating expenses were$150.4 millionin the second quarter of 2015 compared to$152.3 millionin the first quarter of 2015. The decrease was primarily due to lower employee expenses (after consideration of Estimated Avoided Costs).

Adjusted EBITDA increased$2.0 millionto$63.7 millionin the second quarter of 2015 compared to Adjusted EBITDA minus Estimated Avoided Costs of$61.7 millionin the first quarter of 2015. The increase was primarily driven by lower adjusted operating expenses.

Capital expenditures were$28.3 millionin the second quarter of 2015 compared to$26.4 millionin the first quarter of 2015.

Unlevered Free Cash Flow, which measures Adjusted EBITDA less capital expenditures, cash contributions towards our pension plans and cash payments for OPEB, was$30.7 millionin the second quarter of 2015 compared to Unlevered Free Cash Flow minus Estimated Avoided Costs of$32.9 millionin the first quarter of 2015. Unlevered Free Cash Flow was lower in the second quarter of 2015 primarily due to higher capital expenditures, cash pension contributions and cash OPEB payments partially offset by higher Adjusted EBITDA.

Net income was$40.3 millionin the second quarter of 2015 compared to a net loss of$45.2 millionin the first quarter of 2015. The change was primarily due to a decrease in operating expenses, excluding depreciation and amortization as described above, and, to a lesser degree, an income tax benefit in the second quarter compared to income tax expense in the first quarter. Net income is positive in the second quarter of 2015 largely due to the non-cash GAAP treatment for the change in the liability of the OPEB plan due to the elimination of post-employment health benefits for active employees. The impact of this treatment will continue for the remainder of 2015 and all of 2016, but we do not expect that it will impact our cash income taxes or change our accumulated federal net operating loss carryforwards.

Cash was$9.1 millionas ofJune 30, 2015compared to$10.3 millionas ofMarch 31, 2015. Total gross debt outstanding was$925.6 millionas ofJune 30, 2015, after the regularly scheduled principal payments of$1.6 millionon the term loan made during the second quarter of 2015, as compared to$927.2 millionas ofMarch 31, 2015. The Company's$75.0 millionrevolving credit facility was undrawn, with$58.8 millionavailable for borrowing after applying$16.2 millionof outstanding letters of credit.

Second Quarter 2015 as compared to Second Quarter 2014

Revenue was$214.1 millionin the second quarter of 2015 compared to$225.6 milliona year earlier.

• Voice services revenue declined$10.1 millionresulting from the loss of voice access lines versus a year ago combined with lower long distance usage.
• Access revenue declined$1.3 milliondue to the continued loss and conversion of legacy transport circuits to next generation fiber-based services, partially offset by an increase in wholesale Ethernet revenue primarily driven by conversion of legacy cellular tower circuits.
• Data and Internet services revenue increased$0.4 millionreflecting strength in retail Ethernet services and the mitigating impact of speed upgrades and price increases on residential broadband products offsetting subscriber declines.
• Other services revenue decreased$0.4 million.

Operating expenses, excluding depreciation and amortization, decreased$81.1 millionto$98.9 millionin the second quarter of 2015 compared to$180.0 millionin the second quarter of 2014 primarily due to$68.9 millionlower OPEB expense,$4.9 millionlower direct operating expenses and$4.5 millionlower labor negotiation related expenses partially offset by$3.6 millionhigher severance. However, OPEB expense, labor negotiation related expenses and severance are excluded from the Company's definition of adjusted operating expenses and Adjusted EBITDA.

Adjusted operating expenses were$150.4 millionin the second quarter of 2015 compared to$161.4 milliona year earlier. The decrease was primarily the result of lower employee costs, direct operating expenses, contracted services and marketing. Lower employee costs primarily resulted from decreased benefits, bonus and salaries due to lower headcount.

Adjusted EBITDA was$63.7 millionin the second quarter of 2015 compared to$64.2 milliona year earlier. The decrease is due to lower revenue almost fully offset by operating expense savings.

Capital expenditures were$28.3 millionin the second quarter of 2015 compared to$34.9 milliona year earlier. The decrease is primarily driven by timing and a lower overall 2015 capital plan.

Unlevered Free Cash Flow of$30.7 millionin the second quarter of 2015 increased$9.3 millioncompared to$21.4 milliona year earlier. The increase was due to lower capital expenditures and lower cash contributions towards our pension plans.

Net income was$40.3 millionin the second quarter of 2015 compared to a net loss of$22.7 millionin the second quarter of 2014. The change was primarily due to a decrease in operating expenses, excluding depreciation and amortization, partially offset by lower revenue, as described above, as well as a lower income tax benefit.

2015 Guidance

For full year 2015, the Company now expects to generate$115 million to $125 millionof Unlevered Free Cash Flow adjusted for Estimated Avoided Costs in the first quarter. The lower end of this guidance range has increased from$105 millionin prior guidance. Unlevered Free Cash Flow refers to Adjusted EBITDA minus capital expenditures, pension contributions and cash payments for OPEB. In addition, annual capital expenditures are expected to be less than$120 millionand aggregate annual pension contributions and OPEB payments are expected to be approximately$20 million.

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 quarter endedJune 30, 2015, which will be filed with the SEC no later thanAugust 10, 2015. The Company's results for the quarter endedJune 30, 2015are subject to the completion of such quarterly report.

Use of Non-GAAP Financial Measures

This press release includes certain non-GAAP financial measures, including but not limited to Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Unlevered Free Cash Flow minus Estimated Avoided Costs, 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 and Unlevered Free Cash Flow may be useful to investors in assessing the Company's ability to generate cash and meet its debt service requirements. 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.

For purposes of calculating Adjusted EBITDA (in accordance with the definition of Consolidated EBITDA in our credit agreement), costs, expenses and charges related to the renegotiation of labor contracts including, but not limited to, expenses for third-party vendors and losses related to disruption of operations (including any associated penalties under service level agreements and regulatory performance plans) are permitted to be excluded from the calculation. We believe this includes, among others, the costs paid to third-parties for the contingent workforce and service quality penalties due to the disruption of operations. OnOctober 17, 2014, two of our labor unions in northern New England initiated a work stoppage and returned to work onFebruary 25, 2015. As a result, significant union employee and vehicle and other related expenses related to northern New England were not incurred betweenOctober 17, 2014andFebruary 24, 2015(the "work stoppage period"). Therefore, to assist in the evaluation of the Company's operating performance without the impact of the work stoppage, we estimated the union employee and vehicle and other related expenses using historical data for the work stoppage period by quarter that we believe would have been incurred absent the work stoppage ("Estimated Avoided Costs"). Estimated Avoided Costs is a pro forma estimate only. Actual costs absent the strike may have been different. In the fourth quarter of 2014 and first quarter of 2015, had our incumbent workforce been in place, actual labor costs during the work stoppage period may have been higher than the$33 millionand$27 million, respectively, recorded as Estimated Avoided Costs due to significant winter storm activity that increased our service demands; however, those incremental storm-related costs would have been an allowed add back to Adjusted EBITDA under the credit agreement. Estimated employee expenses avoided during the work stoppage period include salaries and wages, bonus, overtime, capitalized labor, benefits, payroll taxes, travel expenses and other employee related costs based on a trailing 12-month average calculated per striking employee per day during the work stoppage period less any actual expense incurred. Estimated vehicle fuel and maintenance expense savings, which resulted from the contingent workforce utilizing their own vehicles, for the work stoppage period were estimated based on a trailing 12-month average of historical costs less actual expense incurred. "Adjusted EBITDA minus Estimated Avoided Costs" and "Unlevered Free Cash Flow minus Estimated Avoided Costs" may be useful to investors in understanding our operating performance without the impact of the two unions' work stoppage.

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, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow, Unlevered Free Cash Flow minus Estimated Avoided Costs 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, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Unlevered Free Cash Flow minus Estimated Avoided Costs to net loss or income 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-core Ethernet network— with more than 20,000 route miles of fiber, including approximately 17,000 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, visitwww.FairPoint.com.

Cautionary Note Regarding Forward-looking Statements

Some statements herein or discussed on our earnings conference call are known as "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements about the Company's plans, objectives, expectations and intentions and other statements contained herein that are not historical facts. When used herein, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates", "should", "could", "will" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including the Company's plans, objectives, expectations and intentions and other factors, including the risk factors discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2014and the factors discussed in our Quarterly Report on Form 10-Q for the period endedJune 30, 2015. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of the date hereof. Except as required by law, the Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in expectations or otherwise. However, your attention is directed to any further disclosures made on related subjects in the Company's subsequent reports filed with the SEC.

Certain information contained herein or discussed on our earnings conference call may constitute guidance as to projected financial results and the Company's future performance that represent management's estimates as of the date hereof. This guidance, which consists of forward-looking statements, is prepared by the Company's management and is qualified by, and subject to, certain assumptions. Guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither the Company's independent registered public accounting firm nor any other independent expert or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto. Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and are based upon specific assumptions with respect to future business decisions, some of which will change. Management generally states possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent actual results, which could fall outside of the suggested ranges. The principal reason that the Company releases this data is to provide a basis for management to discuss the Company's business outlook with analysts and investors. The Company does not accept any responsibility for any projections or reports published by any such outside analysts or investors. Guidance is necessarily speculative in nature and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, the Company's guidance is only an estimate of what management believes is realizable as of the date hereof. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.

Source:CHARLOTTE, N.C.,Aug. 5, 2015/PRNewswire/ --FairPoint Communications, Inc