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FairPoint Communications Reports 2011 Third Quarter Results
Nov 02, 2011 (05:11 PM EDT)
Strong Consecutive Quarters Operationally and Financially
CHARLOTTE, N.C., Nov. 2, 2011 /PRNewswire/ --
FairPoint Communications, Inc. (NasdaqCM: FRP) (FairPoint or the Company), a leading provider of communications services, today announced its financial results for the third quarter ended Sept. 30, 2011. As previously announced, the Company will host a conference call and simultaneous webcast to discuss its results at 10:00 a.m. (EDT) on Thursday, Nov. 3, 2011.
"We accomplished great things this quarter," said Paul H. Sunu, CEO of FairPoint. "Despite a major storm affecting much of our footprint, we delivered a solid quarter operationally and financially. High-speed Internet subscriber growth remains strong and we continue to improve the rate of voice access line loss. I'm impressed with the Company's resolve and our team's ability to execute."
Operating and Regulatory Highlights
High-speed Internet subscriber growth accelerated to 8.2% year-over-year, compared to a 5.4% increase in the second quarter of 2011 and a 1.7% decline in the third quarter of 2010. FairPoint has added more than 22,000 high-speed Internet subscribers year-to-date, compared to less than 400 for the first nine months of 2010. High-speed Internet penetration reached 29.6% of voice access lines at Sept. 30, 2011, as the Company surpassed 312,000 high-speed Internet subscribers in service—another all-time high.
Voice access line loss slowed for the sixth consecutive quarter, reaching 8.8% year-over-year versus 9.3% in the second quarter of 2011 and 11.0% in the third quarter of 2010.
On Sept. 8, 2011, the Company announced it would reduce its work force by approximately 400 employees by year-end. The initiative is expected to result in operating expense savings of approximately $34 million annually, with the full benefit realized in 2012. As of Sept. 30, 2011, the Company had approximately 3,700 employees, compared to approximately 4,000 at June 30, 2011, with most of the reduction occurring in late September. FairPoint incurred $3.3 million in severance and incentive payments in the third quarter. The Company expects the total severance and incentive payments related to this work force reduction initiative will range from $7 million to $13 million.
FairPoint continued its fiber-to-the-tower expansion during the quarter. As of Sept. 30, 2011, fiber had been placed to more than 700 of the approximately 800 towers that the Company has announced it intends to serve with fiber.
Third Quarter 2011 as compared to Second Quarter 2011
Revenue was $257.9 million in the third quarter of 2011 as compared to $262.6 million in the second quarter of 2011. The unfavorable variance of $4.7 million was primarily the result of two items. First, the Company recognized a one-time revenue benefit of $4.0 million in the second quarter related to the reversal of retail and wholesale service quality penalties. Second, service outages related to Hurricane Irene resulted in approximately $0.8 million of incremental service quality penalties during the third quarter. Excluding these two items, revenue was essentially flat on a sequential basis as declines in voice services revenue were offset by increases in access revenue, data and Internet services revenue and other revenue.
Operating expenses, excluding depreciation, amortization and reorganization, were $213.5 million in the third quarter of 2011 as compared to $202.8 million in the second quarter of 2011. The unfavorable variance of $10.7 million was primarily the result of three items that impacted the third quarter. First, non-cash other post-employment benefit ("OPEB") expense increased by approximately $4.9 million after the Company received its annual actuarial study and booked a true-up to the liability. Second, FairPoint recognized severance charges of $3.3 million related to the work force reduction initiative. Both non-cash OPEB and severance expense are add-backs for Consolidated EBITDAR as defined in the Company's credit facility. Third, storm-related activities following Hurricane Irene resulted in approximately $3.2 million of increased overtime and contracted services expense.
Consolidated EBITDAR was $60.5 million in the third quarter of 2011 as compared to $70.5 million in the second quarter of 2011. The $10.0 million unfavorable variance was primarily the result of two items. First, the Company made a $6.8 million cash contribution to its pension plan during the third quarter, of which approximately $6.2 million was related to operating expenses. Prior to the third quarter, FairPoint had not made a cash contribution to the pension plan. As a result, Consolidated EBITDAR declined $6.2 million sequentially for this item. Second, the impact of Hurricane Irene totaled approximately $4.0 million between revenue and operating expenses in the third quarter.
Net loss was $279.4 million in the third quarter of 2011 as compared to $27.1 million in the second quarter of 2011. Net loss increased due to a non-cash goodwill and trade name impairment charge booked in the third quarter of $262.0 million, which was precipitated by the decline of FairPoint's stock price in recent months.
Capital expenditures were $35.2 million in the third quarter of 2011 as compared to $52.1 million in the second quarter of 2011. FairPoint completed its Vermont broadband buildout during the second quarter of 2011 and has now satisfied its regulatory broadband commitment in the state. In addition, spending on the Company's fiber-to-the-tower initiative was lower in the third quarter as compared to the second quarter.
FairPoint's cash position was $9.9 million as of Sept. 30, 2011, versus $13.1 million at June 30, 2011. The Company has not drawn on its $75 million revolving credit facility and, as of Sept. 30, 2011, it had $62.6 million available for borrowing, net of $12.4 million of outstanding letters of credit.
Third Quarter 2011 as compared to Third Quarter 2010
Revenue was $257.9 million in the third quarter of 2011 as compared to $260.6 million a year earlier. The decrease was primarily the result of an 8.8% decline in voice access lines year-over-year, which led to decreases in voice services and access revenue. Partially offsetting the decline was a $3.4 million reduction in service quality penalties and a 12.6% increase in data and Internet services revenue.
Operating expenses, excluding depreciation, amortization and reorganization, were $213.5 million in the third quarter of 2011 as compared to $218.2 million a year earlier. The favorable variance of $4.7 million would have been greater if not for three items in the third quarter of 2011. First, non-cash OPEB expense increased versus a year earlier by approximately $3.3 million after the Company received its annual actuarial study and booked a true-up to the liability. Second, severance charges increased approximately $3.0 million versus a year earlier as a result of the work force reduction initiative. Both non-cash OPEB and severance expense are add-backs for Consolidated EBITDAR as defined in the Company's credit facility. Third, overtime and contracted services expense were higher by approximately $4.0 million due primarily to storm-related activities following Hurricane Irene. If not for these three items, expenses would have declined by more than $15.0 million versus a year ago. The primary drivers of the decrease were a reduction in bad debt expense, a reduction in employee costs and other operating expense reductions.
Consolidated EBITDAR was $60.5 million in the third quarter of 2011 as compared to $59.2 million a year earlier. The benefit from operating expense reductions made during the last 12 months was offset primarily by two items in the third quarter of 2011. First, the Company made a $6.8 million cash contribution to its pension plan during the third quarter, of which approximately $6.2 million was related to operating expenses. Prior to the third quarter of 2011, FairPoint had not made a cash contribution to the pension plan. As a result, Consolidated EBITDAR declined $6.2 million for this item. Second, the impact of Hurricane Irene totaled approximately $4.0 million between revenue and operating expenses.
Capital expenditures were $35.2 million in the third quarter of 2011 as compared to $53.7 million a year earlier, when the Company was aggressively expanding its broadband network to meet certain regulatory commitments in Maine, New Hampshire and Vermont by year end 2010.
The information in this press release should be read in conjunction with the financial statements and footnotes contained in the Company's quarterly report for the quarter ended Sept. 30, 2011, which will be filed with the SEC on or prior to Nov. 15, 2011. The Company's results for the quarter ended Sept. 30, 2011, are subject to the completion of its quarterly report for such period.
Fresh Start Accounting
On Jan. 24, 2011, the Company emerged from Chapter 11 bankruptcy protection and its Plan of Reorganization became effective. For purposes of generally accepted accounting principles, the Company adopted fresh start accounting as of Jan. 24, 2011, whereby the Company's assets and liabilities were marked to their fair value as of the date of emergence. Accordingly, the Company's condensed consolidated statements of financial position and operations for periods after Jan. 24, 2011, will not be comparable in many respects to periods prior to the adoption of fresh start accounting.
Conference Call Information
As previously announced, FairPoint will host a conference call and simultaneous webcast to discuss its third quarter 2011 results at 10:00 a.m. (EDT) on Thursday, Nov. 3, 2011.
Participants should call (866) 804-6920 (US/Canada) or (857) 350-1666 (international) at 9:50 a.m. (EDT) and enter the passcode 70534871 when prompted. The title of the call is the Q3 2011 FairPoint Communications, Inc. Earnings Conference Call.
A telephonic replay will be available for anyone unable to participate in the live call. To access the replay, call (888) 286-8010 (US/Canada) or (617) 801-6888 (international) and enter the passcode 31962362 when prompted. The recording will be available from Thursday, Nov. 3, 2011, at 1:00 p.m. (EDT) through Friday, Nov. 11, 2011, at 11:59 p.m. (EST).
A live broadcast of the earnings conference call will be available online at www.fairpoint.com/investors. An online replay will be available shortly thereafter.
Use of Non-GAAP Financial Measures
This press release includes certain non-GAAP financial measures, including but not limited to Consolidated EBITDAR and adjustments to GAAP measures to exclude the effect of special items. Management believes that Consolidated EBITDAR may be useful to investors in assessing the Company's operating performance and its ability to meet its debt service requirements, and the maintenance covenants contained in the Company's credit facility are based on Consolidated EBITDAR. In addition, management believes that the adjustments to GAAP measures to exclude the effect of special items may be useful to investors in understanding period-to-period operating performance and in identifying historical and prospective trends. However, the non-GAAP financial measures, as used herein, are not necessarily comparable to similarly titled measures of other companies. Furthermore, Consolidated EBITDAR has limitations as an analytical tool 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, Consolidated EBITDAR 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 Consolidated EBITDAR only supplementally. A reconciliation of Consolidated EBITDAR to net income is contained in the attachments to this press release.
About FairPoint Communications, Inc.
FairPoint Communications, Inc. (NasdaqCM: FRP) (www.FairPoint.com) is a leading communications provider of high-speed Internet access, local and long-distance phone, television and other broadband services to customers in communities across 18 states. Through its fast, reliable network, FairPoint delivers affordable data and voice networking communications solutions to residential, business and wholesale customers. FairPoint delivers VantagePoint(SM) services through its resilient IP-based network in northern New England. This state-of-the-art network provides Ethernet connections that support applications like video conferencing, e-learning and other broadband based applications. Additional information about FairPoint products and services is available at www.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" 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. 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. 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 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 represents 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.
(1) Consolidated EBITDAR means earnings before interest, taxes, depreciation, amortization and restructuring items as defined in the Company's credit facility. Consolidated EBITDAR is a non-GAAP financial measure. A reconciliation of Consolidated EBITDAR to net income is contained in the attachments to this press release.
SOURCE FairPoint Communications, Inc.