FairPoint Communications Reports Third Quarter 2008 Results
CHARLOTTE, N.C., Nov. 6 /PRNewswire-FirstCall/ -- FairPoint
Communications, Inc. (NYSE: FRP) ("FairPoint" or the "Company"), a leading
provider of communications services to communities across the country,
today announced its financial results for the three and nine months ended
September 30, 2008. FairPoint completed its acquisition of Verizon
Communication's wireline operations in Maine, New Hampshire and Vermont
(the Northern New England business) on March 31, 2008. As a result of that
transaction, which was treated as a "reverse acquisition" for accounting
purposes, the financial statements for all periods prior to March 31, 2008
reflect the operating results and assets and liabilities of the Northern
New England business only. For purposes of analysis, certain financial
information for periods prior to March 31, 2008 is presented on a pro forma
basis, assuming the acquisition and related transactions had occurred on
January 1, 2007.
Highlights
-- Significant progress continued toward systems cutover currently
scheduled for January 2009.
-- Decline in access line equivalents holds steady in the third quarter
at 3% in the newly acquired Northern New England business despite
seasonality and a weakening economic environment.
-- High-speed data (HSD) penetration increased to 19.9% on a
consolidated basis as of September 30, 2008. The rate of decline in HSD
subscribers was reduced in Northern New England by more than half to 0.8%
in the third quarter from 1.9% in the second quarter of 2008, reflecting an
increase in subscribers in Maine and Vermont during the quarter.
-- Revenue totaled $328.3 million for the third quarter of 2008
compared with $344.7 million in the second quarter. Compared with the
second quarter of 2008, revenue declined by 0.9% on a normalized basis
(adjusting for the Maine AFOR rate reduction and prior period revenue
adjustments).
-- Adjusted EBITDA (a non-GAAP measure as defined herein) totaled
$149.9 million in the third quarter of 2008, or 45.0% of revenue, excluding
prior period revenue adjustments.
-- Cash-on-hand totaling $168.1 million at September 30, 2008
(excluding an additional $80.4 million of restricted cash), together with
ongoing operating cash flow, is expected to provide sufficient liquidity to
complete the systems cutover and to continue to execute network expansion
plans.
Gene Johnson, Chairman and CEO of FairPoint, stated, "We are very
pleased that our operations have stabilized and we are seeing increasing
evidence that our customers are embracing the FairPoint brand. We expect to
begin to see the benefits of this as we move beyond cutover to our new
systems and continue to execute our business plan. Operationally, we remain
focused on reducing customer churn and evaluating our ongoing cost
structure in relation to the current revenue base for our business and the
uncertain economic environment. Finally, the September drawdown of $200
million under our available credit facilities, together with cash flows
generated from operations, is expected to provide sufficient liquidity to
complete cutover and to continue to execute our network expansion plans in
the Northern New England states."
Third Quarter Results
Revenue for the third quarter of 2008 was $328.3 million, compared with
pro forma revenue of $381.0 million for the third quarter of 2007 and
$344.7 million for the second quarter of 2008. The quarter over quarter
revenue decline of 4.8% was driven by a decrease in access line equivalents
of 2.8% during the quarter, a mandated local rate reduction in Maine
(previously disclosed as the Maine AFOR adjustment), which became effective
in August 2008 and reduced third quarter revenue by approximately $3.0
million, and prior period revenue adjustments related to the second quarter
of approximately $5.3 million. As previously disclosed, the Maine AFOR
settlement is expected to reduce revenues by approximately $18.0 million on
an annual basis. Normalizing for the impact of the Maine AFOR rate
reduction and the prior period revenue adjustments, quarter over quarter
revenue would have declined by 0.9%.
Adjusted EBITDA was $149.9 million for the three months ended September
30, 2008, compared with pro forma Adjusted EBITDA of $149.2 million for the
three months ended September 30, 2007 and Adjusted EBITDA of $167.7 million
for the second quarter of 2008. The decline in Adjusted EBITDA from the
second quarter of 2008 reflects the impact of reduced access lines and the
local rate reduction in Maine, which took effect in August 2008. Also
impacting Adjusted EBITDA is a net quarter over quarter increase in
operating and other expenses of $12.0 million, excluding one-time merger
related expenses, largely reflecting the continued buildup of the Company's
work force following the completion of the acquisition of the Northern New
England business at the end of the first quarter.
The Adjusted EBITDA margin was 45.0% in the third quarter of 2008,
compared with 39.2% in the same quarter a year ago and 49.4% in the second
quarter of 2008 (based upon normalized revenue in the second and third
quarters of 2008 reflecting the non-recurring revenue adjustments of $5.3
million). The increase in the Adjusted EBITDA margin compared with the
second quarter a year ago reflects the elimination of the Verizon cost
structure supporting the Northern New England business following the
closing of the acquisition on March 31, 2008. These cost savings have
offset declining revenue, resulting in an overall margin improvement.
Operating Metrics
Total access line equivalents were 1,768,528 at September 30, 2008
compared with 1,947,574 at September 30, 2007, a decline of 9.2%. During
the third quarter, total access line equivalents declined by 2.8% compared
with a decline of 2.4% during the second quarter of this year. The Northern
New England business experienced a 3.1% decline in access line equivalents
during the third quarter of 2008 compared with a 3.0% decline in the second
quarter, while Legacy FairPoint access line equivalents declined by 1.5% in
the current quarter compared with an increase of 0.4% in the second
quarter. Third quarter results were negatively impacted by seasonal
disconnects which affected the Northern New England and Legacy FairPoint
businesses as well as the weakening economic environment.
High-speed data (HSD) subscribers totaled 294,134 as of September 30,
2008, an increase of 2.3% compared with 287,472 at September 30, 2007.
Total HSD subscribers at September 30, 2008 remained essentially flat
compared to 294,412 subscribers at June 30, 2008. HSD penetration was 19.9%
as of September 30, 2008, compared with 17.3% at September 30, 2007 and
19.3% at June 30, 2008.
During the third quarter of 2008, HSD subscribers increased by 2.0% in
Legacy FairPoint, while the trend in the Northern New England business
improved, reflecting a modest decline of 0.8% in the third quarter of 2008,
compared with a decline of 1.9% during the second quarter of this year. The
Northern New England business experienced modest increases in HSD
subscribers in Maine and Vermont during the third quarter of this year,
compared with declines in both of those states during the second quarter.
Long distance subscribers totaled 643,844 at the end of September 2008,
down 1.9% from 656,599 as of June 30, 2008 and 9.4% below the prior year.
Long distance penetration was 43.4% at September 30, 2008, compared with
42.8% a year ago and 43.0% as of June 30, 2008.
Access Line Equivalents
% change % change
9/30/07 to 6/30/08 to
9/30/2008 6/30/2008 9/30/2007 9/30/08 9/30/08
Residential access
lines
Legacy FairPoint 171,598 176,891 186,304 (7.9%) (3.0%)
Northern New England 786,726 819,640 912,179 (13.8%) (4.0%)
958,324 996,531 1,098,483 (12.8%) (3.8%)
Business access lines
Legacy FairPoint 53,780 54,619 56,575 (4.9%) (1.5%)
Northern New England 350,159 358,014 375,841 (6.8%) (2.2%)
403,939 412,633 432,416 (6.6%) (2.1%)
Wholesale access lines 112,131 116,731 129,203 (13.2%) (3.9%)
Total voice access
lines 1,474,394 1,525,895 1,660,102 (11.2%) (3.4%)
HSD subscribers
Legacy FairPoint 74,764 73,326 66,978 11.6% 2.0%
Northern New England 219,370 221,086 220,494 (0.5%) (0.8%)
Total HSD subscribers 294,134 294,412 287,472 2.3% (0.1%)
Total access line
equivalents 1,768,528 1,820,307 1,947,574 (9.2%) (2.8%)
Long distance
subscribers 643,844 656,599 710,780 (9.4%) (1.9%)
Cutover Update
On September 15, 2008, the Company announced a 60 day extension, to the
end of January 2009, for the systems cutover related to the recently
acquired Northern New England properties. This effort encompasses the
development of approximately 60 new state-of-the-art, fully integrated
systems which will replace the more than 600 systems currently being
utilized by Verizon to support the acquired operations.
During the third quarter and throughout October, the Company continued
to make strong progress toward meeting the pre-established cutover
criteria. Systems testing and enhancement continued, including live network
testing, end-to-end business simulations and CLEC testing. Hiring of all
key positions has now been completed. Key methods and procedures have been
documented and are being validated with business simulations which support
finalizing of training materials.
The Company continues to provide Liberty with information necessary for
Liberty's evaluation of the cutover acceptance criteria and anticipates
that Liberty will issue its next report during the week of November 10th.
Cash Flow and Liquidity
Cash flow from operations totaled $36.2 million for the nine months
ended September 30, 2008, while capital expenditures, including $105.4
million associated with the continued development of the Company's new
platform of fully integrated, state-of-the-art systems and the build-out of
its MPLS high speed data network in the Northern New England states,
totaled $189.2 million for the nine months ended September 30, 2008.
During the third quarter, in conjunction with the final working capital
settlement with Verizon, the Company reimbursed Verizon $66.3 million
related to amounts owed for services rendered to the Northern New England
business prior to the closing of the merger. At the same time, Verizon paid
the Company $29.0 million for the final working capital true-up and
one-half of the bank fees incurred in connection with the transaction
financing. The $66.3 million payment to Verizon is reflected as a net
reduction in cash provided by operating activities in the accompanying
statement of cash flows, while the $29.0 million received from Verizon is
reflected as a contribution from Verizon in net cash provided by financing
activities. Normalizing for the one-time reimbursement to Verizon, net cash
provided by operating activities for the three and nine months ended
September 30, 2008 would have been $52.2 million and $102.5 million,
respectively. Operating cash flows for the three and nine months ended
September 30, 2008 are also negatively impacted by the monthly transition
service agreement payments and other one-time merger and cutover related
costs.
During September 2008, due to the extreme uncertainty in the financial
markets and the risk associated with Lehman Brothers (which then accounted
for 30% of the undrawn loan commitments under its credit facilities) the
Company borrowed the remaining $100 million available under its $200
million delayed draw term loan facility as well as $100 million under its
$200 million revolving credit facility. Lehman Brothers subsequently filed
for bankruptcy, effectively reducing the remaining amount available under
the revolving credit facility to $70 million. With these borrowings,
together with ongoing operating cash flow, the Company expects to have
sufficient liquidity to complete its systems cutover and to continue to
execute on network expansion plans for the recently acquired operations in
the Northern New England states.
Cash and cash equivalents at September 30, 2008 totaled $168.1 million
(excluding restricted cash totaling $80.4 million), compared with $11.2
million at the end of the second quarter. As of September 30, 2008, the
Company's total indebtness (as calculated in accordance with its credit
facility) was 3.96 times Adjusted EBITDA.
Conference Call and Webcast
As previously announced, FairPoint will host a conference call and
simultaneous webcast to discuss its third quarter results at 8:00 a.m. EST
on November 7, 2008. Participants should call (888) 253-4456 (US/Canada) or
(973) 935-8178 (international) at 7:50 a.m. (EST) and request the FairPoint
Communications Third Quarter 2008 Earnings Call or Conference ID#
718-763-78. A telephonic replay will be available for anyone unable to
participate in the live call. To access the replay, call (800) 642-1687
(US/Canada) or (706) 645-9291 (international) and enter confirmation code
718-763-78. The recording will be available from Friday, November 7, 2008
at 10:00 a.m. (EST) through Friday, November 14, 2008 at 11:59 p.m. (EST).
A live broadcast of the earnings conference call will be available via
the Internet at http://www.fairpoint.com under the Investor Relations section. An
online replay will be available beginning later that morning on November 7,
2008 and will remain available for one year.
During the conference call, representatives of the Company may discuss
and answer one or more questions concerning the Company's business and
financial matters. The responses to these questions may contain information
that has not been previously disclosed.
The information in this press release should be read in conjunction
with the financial statements and footnotes contained in FairPoint's
Quarterly Report on Form 10-Q to be filed with the Securities and Exchange
Commission. FairPoint's results for the quarter ended September 30, 2008
are subject to the completion and filing with the Securities and Exchange
Commission of its Quarterly Report on Form 10-Q for such quarter.
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure (i.e., it is not a
measure of financial performance under generally accepted accounting
principles) and should not be considered in isolation or as a substitute
for consolidated statements of operations and cash flow data prepared in
accordance with GAAP. In addition, the non-GAAP financial measures used by
FairPoint may not be comparable to similarly titled measures of other
companies. For a definition of and additional information regarding
Adjusted EBITDA, and a reconciliation of such measure to the most
comparable financial measure calculated in accordance with GAAP, please see
the attachments to this press release.
FairPoint believes Adjusted EBITDA is useful to investors because
Adjusted EBITDA is commonly used in the communications industry to analyze
companies on the basis of operating performance, liquidity and leverage.
FairPoint believes Adjusted EBITDA allows a standardized comparison between
companies in the industry, while minimizing the differences from
depreciation policies, financial leverage and tax strategies. In addition,
certain covenants in FairPoint's credit facility and the indenture
governing its senior notes as well as the regulatory orders issued in
connection with the acquisition of the Northern New England business
contain ratios based on Adjusted EBITDA. The restricted payment covenants
in such agreements and orders regulating the payment of dividends on
FairPoint's common stock are also based on Adjusted EBITDA. If FairPoint's
Adjusted EBITDA were to decline below certain levels, covenants in
FairPoint's credit facility that are based on Adjusted EBITDA may be
violated and could cause, among other things, a default under such credit
facility. In addition, such a decline could result in FairPoint's inability
to pay dividends on its common stock.
While FairPoint uses Adjusted EBITDA in managing and analyzing its
business and financial condition and believes it is useful to its
management and investors for the reasons described above, Adjusted EBITDA
has certain shortcomings. In particular, Adjusted EBITDA does not represent
the residual cash flows available for discretionary expenditures, since
items such as debt repayment and interest payments are not deducted from
such measure. FairPoint's management compensates for the shortcomings of
Adjusted EBITDA by utilizing it in conjunction with its comparable GAAP
financial measures.
About FairPoint
FairPoint Communications, Inc. is an industry leading provider of
communications services to communities across the country. Today, FairPoint
owns and operates local exchange companies in 18 states offering advanced
communications with a personal touch, including local and long distance
voice, data, Internet, television and broadband services. FairPoint is
traded on the New York Stock Exchange under the symbol FRP. Learn more at
http://www.fairpoint.com
This press release may contain forward-looking statements by FairPoint
that are not based on historical fact, including, without limitation,
statements containing the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions and
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. Such
factors include those risks described from time to time in FairPoint's
filings with the Securities and Exchange Commission ("SEC"), including,
without limitation, the risks described in FairPoint's most recent
Quarterly Report on Form 10-Q on file with the SEC. These factors should be
considered carefully and readers are cautioned not to place undue reliance
on such forward-looking statements. All information is current as of the
date this press release is issued, and FairPoint undertakes no duty to
update this information.
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, December 31,
2008 2007
(unaudited)
(Dollars in thousands)
Assets
Current assets:
Cash $168,071 $-
Restricted cash 10,341 -
Accounts receivable, net 168,431 160,130
Other receivables 15,468 18,579
Materials and supplies 42,155 4,229
Other 44,196 21,180
Deferred income tax, net 19,836 9,730
Short term investments - 37,090
Total current assets 468,498 250,938
Property, plant, and equipment, net 1,924,132 1,630,085
Intangibles assets, net 222,100 -
Prepaid pension asset 69,874 36,692
Debt issue costs, net 27,016 -
Restricted cash 70,108 -
Other assets 16,492 20,457
Investments 6,959 -
Goodwill 625,010 -
Total assets $3,430,189 $1,938,172
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $22,500 $-
Current portion of capital lease obligations 2,193 2,064
Accounts payable 99,647 175,866
Dividends payable 22,905 -
Accrued interest payable 36,686 -
Interest rate swaps 17,434 -
Other accrued liabilities 65,873 47,115
Total current liabilities 267,238 225,045
Long-term liabilities:
Capital lease obligations 7,869 9,936
Employee benefit obligations 186,775 408,863
Deferred income taxes 248,087 140,911
Unamortized investment tax credits 5,759 5,877
Other long-term liabilities 37,103 28,378
Long-term debt, net of current portion 2,447,608 -
Interest rate swap agreements 19,123 -
Total long-term liabilities 2,952,324 593,965
Minority interest 6 -
Stockholders' equity:
Common stock 890 538
Additional paid-in capital 755,574 484,383
Retained earnings (deficit) (467,118) 634,241
Accumulated other comprehensive loss (78,725) -
Total stockholders' equity 210,621 1,119,162
Total liabilities and stockholders' equity $3,430,189 $1,938,172
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
(Dollars in thousands)
Revenues $328,255 $306,258 $955,359 $903,614
Operating expenses:
Cost of services and sales,
excluding depreciation and
amortization 152,579 141,645 422,316 419,290
Selling, general and
administrative expense,
excluding depreciation and
amortization 104,679 67,340 270,085 196,545
Depreciation and amortization 60,768 58,360 184,434 174,361
Total operating expenses 318,026 267,345 876,835 790,196
Income from operations 10,229 38,913 78,524 113,418
Other income (expense):
Interest expense (49,665) (17,052) (109,310) (52,871)
Gain on derivative instruments (5,014) - 38,109 -
Other 2,165 852 3,415 2,651
Total other expense (52,514) (16,200) (67,786) (50,220)
Income before income taxes (42,285) 22,713 10,738 63,198
Income tax (expense) benefit 17,176 (8,903) (3,190) (24,639)
Net income $(25,109) $13,810 $7,548 $38,559
Weighted average shares
outstanding:
Basic 88,999 53,761 71,358 53,761
Diluted 88,999 53,761 72,773 53,761
Earnings per share:
Basic $(0.28) $0.26 $0.11 $0.72
Diluted (0.28) 0.26 0.10 0.72
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2008 2007
(Dollars in thousands)
Cash flows from operating activities:
Net income $7,548 $38,559
Adjustments to reconcile net income to net
cash provided by operating activities of
continuing operations excluding impact of
acquisitions:
Deferred income taxes 15,354 (21,834)
Provision for uncollectible revenue 13,004 14,603
Depreciation and amortization 184,434 174,361
SFAS 106 post-retirement accruals 33,762 67,514
Gain on derivative instruments (38,109) -
Other non cash items (26,382) (70,344)
Changes in assets and liabilities arising
from operations:
Accounts receivable (37,670) (8,645)
Prepaid and other assets 2,838 3,784
Accounts payable and other accrued
liabilities (106,576) (16,194)
Other assets and liabilities, net 4,244 (3,283)
Other (16,221) -
Total adjustments 28,678 139,962
Net cash provided by operating
activities of continuing operations 36,226 178,521
Cash flows from investing activities of
continuing operations:
Acquired cash balance, net 11,401 -
Net capital additions (189,234) (107,121)
Net proceeds from sales of investments and
other assets 2,154 34,146
Net cash used in investing activities of
continuing operations (175,679) (72,975)
Cash flows from financing activities of
continuing operations:
Loan origination costs (29,238) -
Proceeds from issuance of long-term debt 1,930,000 -
Repayments of long-term debt (687,491) -
Contributions from Verizon 373,590 (104,848)
Restricted cash (80,436) -
Repayment of capital lease obligations (1,938) (698)
Dividends paid to stockholders (1,196,963) -
Net cash provided by (used in) financing
activities of continuing operations 307,524 (105,546)
Net increase in cash 168,071 -
Cash, beginning of period - -
Cash, end of period $168,071 $-
Supplemental disclosure of cash flow
information:
Non-cash equity consideration $316,290 $-
Non-cash issuance of senior notes 551,000 -
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Combined Statement of Operations (Non-GAAP)
For the Three Months Ended September 30, 2007
(in thousands, except per share data)
Northern New Merger
England Legacy Related
business (A) FairPoint(B) Costs (C)
Revenues $306,258 75,707 -
Operating expenses:
Cost of services and sales,
excluding depreciation and
amortization 141,645 26,846 -
Selling, general and administrative
expense 67,341 20,000 8,000
Depreciation and amortization 58,360 12,624 -
Gain on sale of operating assets - (2,164) -
Total operating expenses 267,346 57,306 8,000
Income from operations 38,912 18,401 (8,000)
Other income (expense):
Net gain on sale of investments and
other assets - 2,759
Interest expense (17,053) (9,924) -
Interest and dividend income - 294 -
Loss on derivative instruments - (5,669) -
Equity in earnings of investees - 320
Other nonoperating, net 852 - -
Total other expense (16,201) (12,220) -
Income before income taxes 22,711 6,181 (8,000)
Income tax (expense) benefit (8,903) (5,164) 1,792 (K)
Minority interest - (1) -
Net income $13,808 1,016 (6,208)
Basic weighted average shares
outstanding 53,761.0 34,770.0
Diluted weighted average shares
outstanding 53,761.0 34,770.0
Basic earnings per common share:
Continuing operations $0.26
Diluted earnings per common share:
Continuing operations $0.26
Pro Forma
Results for
Pro Forma Combined
Adjustments Businesses
Revenues (1,000) (D) $380,965
Operating expenses:
Cost of services and sales,
excluding depreciation and
amortization (9,000) (D)(E) 159,491
Selling, general and administrative
expense (13,750) (E)(F) 81,591
Depreciation and amortization