FairPoint Communications Reports 2017 First Quarter Results

http://www.nasdaq.com/press-release/fairpoint-communications-reports-2017-first-quarter-results-20170504-00292
By GlobeNewswire,  May 04, 2017, 06:00:00 AM EDT
  • 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

CHARLOTTE, N.C., May 04, 2017 (GLOBE NEWSWIRE) — FairPoint Communications, Inc. (Nasdaq:FRP) (“FairPoint” or the “Company”), a leading communications provider, today announced its financial results for the first quarter ended March 31, 2017.

“Our first quarter results represent a solid start to the year and are broadly in line with our expectations,” said Paul H. Sunu, Chief Executive Officer.  “I am particularly pleased with first quarter revenue trends in what is typically a seasonally slow quarter, the continued expense discipline evidenced in our results and the cash flow generated by the business.”

“I am proud of our team as our steady operational performance shows they remain focused on executing our strategy as we work to close the pending merger with Consolidated,” Sunu continued.  “We are actively engaged in integration planning to deliver a seamless transition for customers, capitalize on the benefits of the combined company and ensure our revenue transformation momentum continues.  We continue to target a mid-2017 closing of the transaction.”

Operating Highlights

A focus on customer service combined with strategic investments in the network continued during the quarter, which strengthened service reliability and helped solidify the Company’s competitive position.

The Company is focused on driving growth revenue2 as a critical component of its continued revenue transformation.  In the first quarter of 2017, the Company generated growth revenue of $66.7 million or 33.0% of total revenue, which increased from 29.7% of total revenue in the first quarter of 2016.

In the first quarter of 2017, Ethernet services revenue was $24.5 million, as Ethernet circuits grew 7.8% year-over-year.  Growth in the Company’s Ethernet products is expected based on demand from customers such as regional banks, healthcare networks and wireless carriers, although the commoditization of Ethernet services will continue to pressure average revenue per unit over time.

For the remainder of 2017, the Company expects to add more than 200 additional fiber-to-the-tower Ethernet connections bringing the total count to more than 2,100 tower Ethernet circuits.  Twenty five additional circuits were completed in the first quarter of 2017.

As of March 31, 2017, FairPoint had 2,471 employees, a decrease of 233 employees versus a year ago.

Proposed Merger with Consolidated Communications Holdings, Inc.

On December 3, 2016, Consolidated Communications Holdings, Inc. (“Consolidated”) and FairPoint entered into an Agreement and Plan of Merger, pursuant to which Consolidated has agreed to acquire FairPoint (the “Merger”).  Since the announcement of the Merger on December 5, 2016, both companies have engaged in work required to consummate the Merger.  Applications with all necessary federal and state regulatory authorities have been filed and the Company has received early termination related to Hart-Scott-Rodino and has completed, where required, pre-close regulatory approval and notification processes in 11 of its 17 operating states.  Both the Company and Consolidated’s stockholders provided required approvals for the Merger on March 28, 2017.

Integration planning is underway with a targeted mid-2017 closing of the transaction. Additional details of the planned merger can be found at www.fairpoint.com/investors.

The Company incurred $1.2 million of transaction expenses related to the Merger during the first quarter of 2017.

Financial Highlights

First Quarter 2017 as compared to Fourth Quarter 2016

Revenue decreased $2.0 million during the first quarter of 2017 to $201.9 million.

The following strategic revenue categorization2 is presented to provide visibility into revenue trends for the Company as a result of product and service evolution within our industry as well as the Company’s efforts to continue to transform revenue to more sustainable growth products.

  • Growth revenue decreased $0.3 million primarily due to the impact of the renewal of certain expiring long-term Ethernet contracts, partially offset by growth in Ethernet circuits.  Broadband revenue and hosted and advanced services revenue were relatively flat compared to the fourth quarter.
  • Convertible revenue2 decreased $1.3 million as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products.
  • Legacy revenue2 was down $2.3 million resulting from the decline in residential voice revenue due to fewer lines in service and slightly lower legacy switched access revenue.
  • Regulatory funding revenue2 increased $2.2 million primarily due to the successful resolution of a dispute regarding the NECA calculation of CAF/intercarrier compensation (“ICC”) for local switching support (“LSS”) revenue.  In the first quarter of 2017, the Company recorded $2.0 million of non-recurring revenue related to previous periods.
  • Miscellaneous revenue2 decreased $0.3 million primarily due to revenue assurance activities that did not recur at the same level in the first quarter partially offset by higher revenue from special purpose construction projects.

The following traditional categorization of revenue is presented to provide reporting continuity.

  • Voice services revenue decreased $2.6 million primarily due to fewer lines in service combined with lower long distance usage.
  • Access revenue decreased $1.9 million due to the continued loss and conversion of legacy transport circuits to fiber-based Ethernet services and lower wholesale Ethernet revenue due to the timing of the renewal of certain expiring long-term Ethernet contracts, partially offset by growth in wholesale Ethernet circuits.
  • Data and Internet services revenue was relatively flat compared to the fourth quarter.
  • Regulatory funding revenue2 increased $2.2 million primarily due to the successful resolution of a dispute regarding the NECA calculation of CAF/ICC for LSS revenue.  In the first quarter of 2017, the Company recorded $2.0 million of non-recurring revenue related to previous periods.
  • Other services revenue increased $0.3 million primarily due to higher revenue from special purpose construction projects compared to the fourth quarter.

Operating expenses, excluding depreciation and amortization, increased $43.6 million to $150.8 million in the first quarter of 2017 compared to $107.2 million in the fourth quarter of 2016.  The increase was primarily due to the $42.7 million increase in other post-employment benefits (“OPEB”) expense as the amortization of the benefit from the elimination of post-employment health benefits for active represented employees was completed in the fourth quarter of 2016.  In addition, higher employee expenses from higher compensated absences expense and higher operating taxes were partially offset by lower Merger related expenses, lower severance and lower bad debt expense compared to the fourth quarter of 2016.  The expense for compensated absences for certain employees is accrued in the first quarter and released as paid time off is incurred.

Adjusted Operating Expenses1 were $138.6 million in the first quarter of 2017 compared to $139.0 million in the fourth quarter of 2016.  The decrease was primarily due to lower employee expenses from a lower bonus accrual, lower benefits and lower overtime, as well as lower access expenses, partially offset by higher operating taxes.  Operating taxes were $1.2 million lower in the fourth quarter of 2016 primarily due to the settlement of certain property tax disputes.

Net loss of $23.9 million in the first quarter of 2017 compared to net income of $16.0 million in the fourth quarter of 2016.  The change was primarily due to higher OPEB expense and lower revenue partially offset by lower income tax expense.   The effective tax rate for the first quarter of 2017 was reduced to zero primarily due to an increase in the valuation allowance which fully offset the tax benefit on the pre-tax net loss.  We do not expect this GAAP treatment to impact our ability to use our gross federal net operating loss carryforwards in the future.

Adjusted EBITDA decreased $1.5 million to $63.4 million in the first quarter of 2017 compared to $64.9 million in the fourth quarter of 2016.  The decrease was driven by lower revenue partially offset by lower Adjusted Operating Expenses.

Capital expenditures were $22.1 million in the first quarter of 2017 compared to $34.1 million in the fourth quarter of 2016.  The decrease was primarily due to the timing of planned capital projects intended to take advantage of more temperate weather in many of our service territories in the second, third and fourth quarters and specifically several broadband-related projects planned in 2017 in northern Maine.

Cash was $38.7 million as of March 31, 2017 compared to $34.9 million as of December 31, 2016. The increase is due to cash generated by the business in addition to favorable changes in our working capital partially offset by the scheduled semi-annual interest payment towards the Company’s senior notes and payment of employee bonuses in the first quarter.  Total gross debt outstanding was $914.4 million as of March 31, 2017, after the regularly scheduled principal payment of $1.6 million on the term loan made during the first quarter of 2017, as compared to $916.0 million as of December 31, 2016.  The Company’s $75.0 million revolving credit facility was undrawn, with $61.1 million available for borrowing after applying $13.9 million of outstanding letters of credit.

Net cash provided by operating activities was $28.2 million in the first quarter of 2016 compared to $37.8 million in the fourth quarter of 2016.  The decrease was primarily due to the semi-annual interest payment on the Company’s senior notes made during the first quarter partially offset by lower operating expenses, including Merger related expenses, as well as lower cash pension contributions and OPEB payments compared to the fourth quarter of 2016.

Unlevered Free Cash Flow was $36.7 million in the first quarter of 2017 compared to $25.0 million in the fourth quarter of 2016.  Unlevered Free Cash Flow was higher in the first quarter of 2017 primarily due to lower capital expenditures and lower pension contributions partially offset by lower Adjusted EBITDA.

First Quarter 2017 as compared to First Quarter 2016

Revenue was $201.9 million in the first quarter of 2017 compared to $206.8 million a year earlier.

Strategic revenue categorization:

  • Growth revenue increased by $5.3 million as we experienced growth in broadband revenue as speed upgrades and rate increases helped offset a decline in broadband subscribers.  In addition, hosted and advanced services revenue increased due to the inclusion of revenue from CTI3 and Ethernet revenue increased as circuit growth more than offset the impact of the renewal of certain expiring long-term Ethernet contracts compared to the prior year.
  • Convertible revenue decreased by $5.5 million as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products.
  • Legacy revenue decreased by $6.9 million resulting from a decline in residential voice revenue due to fewer lines in service and lower legacy switched access revenue versus a year ago.
  • Regulatory funding revenue increased by $1.6 million primarily due to the successful resolution of a dispute regarding the NECA calculation of CAF/ICC for LSS revenue.  In the first quarter of 2017, the Company recorded $2.0 million of non-recurring revenue related to previous periods.  These items were partially offset by the annual August step-down of CAF Phase II transitional revenue.
  • Miscellaneous revenue increased $0.6 million due to higher special purpose construction projects and higher late payment fees compared to the prior year.

The following traditional categorization of revenue is presented to provide reporting continuity.

  • Voice services revenue declined by $7.0 million resulting from the loss of voice access lines versus a year ago combined with lower long distance usage.
  • Access revenue declined by $5.6 million due to the continued loss and conversion of legacy transport circuits to Ethernet services.
  • Data and Internet services revenue increased by $4.6 million as speed upgrades and rate increases on broadband products helped offset a decline in broadband subscribers as well as growth in retail Ethernet revenue compared to the prior year.
  • Regulatory funding revenue increased by $1.6 million primarily due to the successful resolution of a dispute regarding the NECA calculation of CAF/ICC for LSS revenue.  In the first quarter of 2017, the Company recorded $2.0 million of non-recurring revenue related to previous periods.  These items were partially offset by the annual August step-down of CAF Phase II transitional revenue.
  • Other services revenue increased by $1.6 million primarily due to the inclusion of revenue from CTI, higher special purpose construction projects and higher late payment fees.

Operating expenses, excluding depreciation and amortization, increased $48.7 million to $150.8 million in the first quarter of 2017 compared to $102.1 million in the first quarter of 2016.  The increase is primarily due to the $56.1 million increase in OPEB expense as the amortization of the benefit from the elimination of post-employment health benefits for active represented employees was completed in the fourth quarter of 2016.  Other contributing factors included higher Merger related expenses and higher bad debt expense, which were partially offset by lower employee expenses from lower salary, benefits, bonus accrual and severance costs. Bad debt expense in the first quarter of 2016 included nonrecurring write-off recoveries.

Adjusted Operating Expenses were $138.6 million in the first quarter of 2017 compared to $144.9 million in the first quarter of 2016.  The decrease was primarily the result of lower employee costs due to lower headcount as well as lower access expense partially offset by higher bad debt expense.

Net loss of $23.9 million in the first quarter of 2017 compared to net income of $18.6 million in the first quarter of 2016.  The change was primarily due to higher operating expenses and lower revenue partially offset by lower income tax expense.

Adjusted EBITDA was $63.4 million in the first quarter of 2017 compared to $62.0 million a year earlier.  The increase is due to Adjusted Operating Expense savings partially offset by lower revenue.

Capital expenditures were $22.1 million in the first quarter of 2017 compared to $25.9 million a year earlier.

Net cash provided by operating activities was $28.2 million in the first quarter of 2017 compared to $24.4 million in the first quarter of 2016.  The increase was primarily due to lower operating expenses partially offset by higher pension contributions, higher Merger related expenses and lower revenue in 2017 compared to the same period in 2016.

Unlevered Free Cash Flow of $36.7 million in the first quarter of 2017 increased $2.0 million compared to $34.7 million in the first quarter of 2016.  The increase was due to lower capital expenditures and higher Adjusted EBITDA partially offset by higher pension contributions.

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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.

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