UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34686
Hawaiian Telcom Holdco, Inc.
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of |
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16-1710376 (I.R.S. Employer Identification No.) |
1177 Bishop Street
Honolulu, Hawaii 96813
(Address of principal executive offices)
808-546-4511
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer o |
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Accelerated Filer x |
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Non-Accelerated Filer o |
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Smaller reporting company o |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o
As of November 12, 2013, 10,339,517 shares of the registrant’s common stock were outstanding.
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Page | |
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3 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 | |
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34 | ||
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35 | ||
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36 | ||
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37 | ||
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38 | ||
PART I — FINANCIAL INFORMATION
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statements of Income
(Unaudited, dollars in thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2013 |
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2012 |
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2013 |
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2012 |
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Operating revenues |
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$ |
97,682 |
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$ |
96,647 |
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$ |
290,643 |
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$ |
288,910 |
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Operating expenses: |
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Cost of revenues (exclusive of depreciation and amortization) |
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41,829 |
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41,176 |
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122,073 |
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121,407 |
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Selling, general and administrative |
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27,965 |
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26,547 |
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84,860 |
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82,567 |
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Gain on sale of property |
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— |
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— |
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(6,546 |
) |
— |
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Depreciation and amortization |
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19,974 |
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18,023 |
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58,532 |
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51,965 |
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Total operating expenses |
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89,768 |
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85,746 |
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258,919 |
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255,939 |
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Operating income |
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7,914 |
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10,901 |
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31,724 |
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32,971 |
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Other income (expense): |
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Interest expense |
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(4,089 |
) |
(5,490 |
) |
(14,712 |
) |
(16,890 |
) | ||||
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Loss on early extinguishment of debt |
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— |
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— |
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(3,660 |
) |
(5,112 |
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Interest income and other |
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7 |
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10 |
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28 |
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28 |
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Total other expense |
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(4,082 |
) |
(5,480 |
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(18,344 |
) |
(21,974 |
) | ||||
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Income before income tax provision (benefit) |
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3,832 |
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5,421 |
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13,380 |
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10,997 |
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Income tax provision (benefit) |
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1,771 |
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(194 |
) |
5,521 |
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(346 |
) | ||||
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Net income |
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$ |
2,061 |
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$ |
5,615 |
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$ |
7,859 |
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$ |
11,343 |
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Net income per common share - |
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Basic |
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$ |
0.20 |
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$ |
0.55 |
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$ |
0.76 |
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$ |
1.11 |
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Diluted |
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$ |
0.18 |
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$ |
0.52 |
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$ |
0.71 |
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$ |
1.06 |
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Weighted average shares used to compute net income per common share - |
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Basic |
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10,337,488 |
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10,246,335 |
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10,321,905 |
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10,230,719 |
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Diluted |
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11,206,159 |
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10,708,454 |
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11,096,177 |
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10,658,517 |
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See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, dollars in thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2013 |
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2012 |
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2013 |
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2012 |
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Net income |
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$ |
2,061 |
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$ |
5,615 |
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$ |
7,859 |
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$ |
11,343 |
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Other comprehensive income (loss), net of tax - |
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Unrealized holding gains (losses) arising during period |
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6 |
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(1 |
) |
(22 |
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(2 |
) | ||||
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Retirement plan |
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222 |
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260 |
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667 |
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33,648 |
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Income tax charge on comprehensive income |
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(88 |
) |
— |
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(263 |
) |
— |
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Other comprehensive income, net of tax - |
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140 |
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259 |
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382 |
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33,646 |
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Comprehensive income |
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$ |
2,201 |
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$ |
5,874 |
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$ |
8,241 |
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$ |
44,989 |
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See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, dollars in thousands, except per share amounts)
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September 30, |
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December 31, |
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2013 |
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2012 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
45,114 |
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$ |
66,993 |
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Receivables, net |
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36,706 |
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34,082 |
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Material and supplies |
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15,268 |
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11,352 |
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Prepaid expenses |
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5,344 |
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5,161 |
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Deferred income taxes |
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5,892 |
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5,727 |
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Other current assets |
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2,751 |
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2,181 |
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Total current assets |
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111,075 |
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125,496 |
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Property, plant and equipment, net |
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517,874 |
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507,197 |
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Intangible assets, net |
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41,052 |
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39,075 |
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Goodwill |
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11,783 |
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1,569 |
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Deferred income taxes |
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94,908 |
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102,680 |
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Other assets |
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12,315 |
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9,075 |
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Total assets |
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$ |
789,007 |
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$ |
785,092 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Current portion of long-term debt |
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$ |
3,000 |
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$ |
3,000 |
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Accounts payable |
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39,102 |
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36,351 |
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Accrued expenses |
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16,227 |
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20,537 |
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Advance billings and customer deposits |
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16,159 |
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15,185 |
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Other current liabilities |
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5,387 |
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3,961 |
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Total current liabilities |
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79,875 |
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79,034 |
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Long-term debt |
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292,248 |
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292,410 |
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Employee benefit obligations |
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121,014 |
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132,004 |
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Other liabilities |
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9,309 |
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4,784 |
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Total liabilities |
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502,446 |
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508,232 |
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Commitments and contingencies (Note 12) |
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Stockholders’ equity |
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Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 10,338,737 and 10,291,897 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively |
|
103 |
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103 |
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Additional paid-in capital |
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167,401 |
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165,941 |
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Accumulated other comprehensive loss |
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(28,068 |
) |
(28,450 |
) | ||
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Retained earnings |
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147,125 |
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139,266 |
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Total stockholders’ equity |
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286,561 |
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276,860 |
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Total liabilities and stockholders’ equity |
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$ |
789,007 |
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$ |
785,092 |
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See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
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Nine Months Ended |
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September 30, |
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2013 |
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2012 |
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Cash flows from operating activities: |
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|
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Net income |
|
$ |
7,859 |
|
$ |
11,343 |
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|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
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| ||
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Depreciation and amortization |
|
58,532 |
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51,965 |
| ||
|
Loss on early extinguishment of debt |
|
3,660 |
|
5,112 |
| ||
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Gain on sale of property |
|
(6,546 |
) |
— |
| ||
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Employee retirement benefits |
|
(10,324 |
) |
(11,001 |
) | ||
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Provision for uncollectibles |
|
2,003 |
|
2,526 |
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Stock based compensation |
|
1,886 |
|
1,343 |
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Deferred income taxes |
|
6,018 |
|
— |
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Changes in operating assets and liabilities: |
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|
|
|
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Receivables |
|
(4,142 |
) |
(1,552 |
) | ||
|
Material and supplies |
|
(3,916 |
) |
(2,153 |
) | ||
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Prepaid expenses and other current assets |
|
(1,064 |
) |
(2,600 |
) | ||
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Accounts payable and accrued expenses |
|
(2,064 |
) |
1,768 |
| ||
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Advance billings and customer deposits |
|
323 |
|
980 |
| ||
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Other current liabilities |
|
106 |
|
296 |
| ||
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Other |
|
2,446 |
|
1,021 |
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Net cash provided by operating activities |
|
54,777 |
|
59,048 |
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|
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Cash flows from investing activities: |
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|
|
|
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Capital expenditures |
|
(69,809 |
) |
(61,019 |
) | ||
|
Acquisitions |
|
(11,858 |
) |
— |
| ||
|
Proceeds on sale of property |
|
13,118 |
|
— |
| ||
|
Net cash used in investing activities |
|
(68,549 |
) |
(61,019 |
) | ||
|
|
|
|
|
|
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Cash flows from financing activities: |
|
|
|
|
| ||
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Repayment of capital lease |
|
(406 |
) |
— |
| ||
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Repayment of debt including premium |
|
(302,333 |
) |
(306,000 |
) | ||
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Proceeds from borrowing |
|
298,500 |
|
295,500 |
| ||
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Loan refinancing costs |
|
(3,442 |
) |
(4,130 |
) | ||
|
Taxes paid related to net share settlement of equity awards |
|
(426 |
) |
(53 |
) | ||
|
Net cash used in financing activities |
|
(8,107 |
) |
(14,683 |
) | ||
|
|
|
|
|
|
| ||
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Net change in cash and cash equivalents |
|
(21,879 |
) |
(16,654 |
) | ||
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Cash and cash equivalents, beginning of period |
|
66,993 |
|
82,063 |
| ||
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|
|
|
|
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Cash and cash equivalents, end of period |
|
$ |
45,114 |
|
$ |
65,409 |
|
|
|
|
|
|
|
| ||
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Supplemental disclosure of cash flow information: |
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|
|
|
| ||
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Interest paid, net of amounts capitalized |
|
$ |
14,416 |
|
$ |
17,054 |
|
See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited, dollars in thousands)
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Accumulated |
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|
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Additional |
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Other |
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Total |
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|
|
Common Stock |
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Paid-In |
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Comprehensive |
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Retained |
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Stockholders’ |
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Shares |
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Amount |
|
Capital |
|
Income (Loss) |
|
Earnings |
|
Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
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Balance, January 1, 2013 |
|
10,291,897 |
|
$ |
103 |
|
$ |
165,941 |
|
$ |
(28,450 |
) |
$ |
139,266 |
|
$ |
276,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
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Stock based compensation |
|
— |
|
— |
|
1,886 |
|
— |
|
— |
|
1,886 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
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Sale of stock under warrants |
|
297 |
|
— |
|
— |
|
— |
|
— |
|
— |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes |
|
46,543 |
|
— |
|
(426 |
) |
— |
|
— |
|
(426 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
7,859 |
|
7,859 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Other comprehensive income, net of tax |
|
— |
|
— |
|
— |
|
382 |
|
— |
|
382 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Balance, September 30, 2013 |
|
10,338,737 |
|
$ |
103 |
|
$ |
167,401 |
|
$ |
(28,068 |
) |
$ |
147,125 |
|
$ |
286,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Balance, January 1, 2012 |
|
10,190,526 |
|
$ |
102 |
|
$ |
164,328 |
|
$ |
(57,518 |
) |
$ |
29,284 |
|
$ |
136,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Stock based compensation |
|
— |
|
— |
|
1,343 |
|
— |
|
— |
|
1,343 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes |
|
56,109 |
|
— |
|
(53 |
) |
— |
|
— |
|
(53 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
11,343 |
|
11,343 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Other comprehensive income, net of tax |
|
— |
|
— |
|
— |
|
33,646 |
|
— |
|
33,646 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Balance, September 30, 2012 |
|
10,246,635 |
|
$ |
102 |
|
$ |
165,618 |
|
$ |
(23,872 |
) |
$ |
40,627 |
|
$ |
182,475 |
|
See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business
Business Description
Hawaiian Telcom Holdco, Inc. and subsidiaries (the “Company”) is the incumbent local exchange carrier for the State of Hawaii with an integrated telecommunications network. The Company offers a variety of telecommunication services to residential and business customers in Hawaii including local telephone, network access and data transport, long distance, Internet, television and wireless phone service. The Company also provides communications equipment sales and maintenance, and network managed services.
Organization
The Company has one direct wholly-owned subsidiary, Hawaiian Telcom Communications, Inc. which has two direct wholly-owned subsidiaries — Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc. Hawaiian Telcom, Inc. operates the regulated incumbent local exchange carrier and Hawaiian Telcom Services Company, Inc. operates all other businesses.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted and condensed. In the opinion of the Company’s management, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial position, the results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2012.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market accounts with maturities at acquisition of three months or less. The majority of cash balances at September 30, 2013 are held in one bank in demand deposit accounts.
Supplemental Non-Cash Investing and Financing Activities
Accounts payable included $6.2 million and $2.4 million at September 30, 2013 and 2012, respectively, for additions to property, plant and equipment.
Taxes Collected from Customers
The Company presents taxes collected from customers and remitted to governmental authorities on a gross basis, including such amounts in the Company’s reported operating revenues. Such amounts represent primarily Hawaii state general excise taxes and HPUC fees. Such taxes and fees amounted to $1.9 million and $5.6 million for the three and nine months ended September 30, 2013 and $1.6 million and $5.3 million for the three and nine months ended September 30, 2012, respectively.
Earnings per Share
Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing earnings by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing earnings, adjusted for the effect, if any, from assumed conversion of all potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. The denominator used to compute basic and diluted earnings per share was as follows:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
|
September 30, |
|
September 30, |
| ||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share - weighted average shares |
|
10,337,488 |
|
10,246,335 |
|
10,321,905 |
|
10,230,719 |
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
Employee and director restricted stock units |
|
173,405 |
|
124,301 |
|
166,461 |
|
124,871 |
|
|
Warrants |
|
695,266 |
|
337,818 |
|
607,811 |
|
302,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share - weighted average shares |
|
11,206,159 |
|
10,708,454 |
|
11,096,177 |
|
10,658,517 |
|
The computation of weighted average dilutive shares outstanding excluded restrictive stock units to acquire 18,610 shares and 18,612 shares of common stock for the three and nine month period ended September 30, 2012, respectively. The unrecognized compensation on a per unit basis for these restricted stock units was greater than the average market price of the Company’s common stock for the period presented. Therefore, the effect would be anti-dilutive. There was no such exclusion for the three and nine month periods ended September 30, 2013.
3. Acquisitions
SystemMetrics Corporation
On September 30, 2013, the Company completed its acquisition of all of SystemMetrics Corporation (“SystemMetrics”) common stock for $16.3 million. Of the total purchase price, $11.9 million was payable at closing, net of cash acquired and purchase price adjustments. A balance of $3.3 million is subject to an earn-out over a three year period. Payment of the earn-out is contingent on SystemMetrics meeting certain performance metrics and continued employment of the SystemMetrics’ key executive. The purchase transaction has been accounted for as a business combination. For financial reporting purposes, the earn-out will be accounted for as compensation expense as earned.
SystemMetrics provides virtual and physical data center colocation services in the State of Hawaii along with other telecommunication services that are complementary to the Company’s operations. Transaction costs amounted to $0.4 million. These costs were primarily professional fees and recognized as general and administrative expenses as incurred.
The Company followed the acquisition method of accounting and allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their preliminary fair values, and the estimates and assumptions are subject to change within the measurement period, which is one year from the acquisition date. The excess of the purchase price over those fair values was recorded as goodwill. The following table summarizes the assets acquired and the liabilities assumed (dollars in thousands):
|
Assets - |
|
|
| |
|
Property and equipment |
|
$ |
3,781 |
|
|
Intangible assets |
|
4,380 |
| |
|
Goodwill |
|
10,368 |
| |
|
Other assets |
|
643 |
| |
|
|
|
19,172 |
| |
|
|
|
|
| |
|
Liabilities - |
|
|
| |
|
Current liabilities |
|
3,684 |
| |
|
Non-current liabilities |
|
2,304 |
| |
|
Deferred income taxes |
|
1,326 |
| |
|
|
|
7,314 |
| |
|
|
|
|
| |
|
Net acquisition price |
|
$ |
11,858 |
|
Because the acquisition occurred on September 30, 2013, the financial results of SystemMetrics had no impact on the Company’s consolidated statements of income for the three or nine months ended September 30, 2013.
The fair value of property, plant and equipment was based on the highest and best use of the specific properties. To determine fair value the Company considered and applied primarily the cost approach. This approach considers the amount required to construct or purchase a new asset of equal utility at current prices with adjustments to the value for physical deterioration, functional obsolescence and economic obsolescence. The fair value of intangible assets including the brand name and customer relationship intangibles were based on discounted cash flows from projections of results of operations for SystemMetrics.
The goodwill recognized is attributed to the anticipated synergies to be achieved by combining the operations of the Company and SystemMetrics. The goodwill is not deductible for income tax reporting purposes and is anticipated to be attributed to a newly formed data center segment.
The following unaudited pro forma results of operations are provided for the three and nine months ended September 30, 2013 and 2012 as if the acquisition of SystemMetrics occurred on January 1, 2012. The pro forma combined results of operations have been prepared by adjusting the historical results of the Company to include the historical results of SystemMetrics. Adjustments were made to the historical results for the purchase price allocation which primarily impacts depreciation and amortization, to eliminate the interest on certain debt financing which was not assumed in the purchase, to eliminate certain intercompany revenue between the entities and to reallocate the transaction related expenses from the 2013 to the 2012 periods.
These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any costs savings or synergies that resulted, or will result, from the acquisition or any estimated costs that will be incurred to integrate SystemMetrics. Future results may vary significantly from the results reflected in this pro forma financial information because of future events and transactions as well as other factors.
The pro forma results are as follows (dollars in thousands):
|
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Revenues |
|
$ |
99,649 |
|
$ |
98,512 |
|
$ |
296,443 |
|
$ |
294,411 |
|
|
Expenses |
|
91,610 |
|
87,885 |
|
264,808 |
|
262,631 |
| ||||
|
Operating income |
|
8,039 |
|
10,627 |
|
31,635 |
|
31,780 |
| ||||
|
Other income (expense) |
|
(4,082 |
) |
(5,480 |
) |
(18,344 |
) |
(21,974 |
) | ||||
|
Income before income tax benefit |
|
3,957 |
|
5,147 |
|
13,291 |
|
9,806 |
| ||||
|
Income tax expense (benefit) |
|
1,301 |
|
(298 |
) |
4,970 |
|
(799 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net income |
|
$ |
2,656 |
|
$ |
5,445 |
|
$ |
8,321 |
|
$ |
10,605 |
|
Wavecom Solutions Corporation
On December 31, 2012, the Company completed its acquisition of Wavecom Solutions Corporation (“Wavecom”) for $8.7 million in cash, net of cash acquired and final purchase adjustments. Wavecom provides telecommunication services in the State of Hawaii which are complementary to the Company’s operations.
The Company followed the acquisition method of accounting and allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their preliminary fair values, and the estimates and assumptions are subject to change within the measurement period, which is one year from the acquisition date. The measurement period remains open as of September 30, 2013 as the Company continues to evaluate additional information obtained related to the amount recognized for certain estimated liabilities. The excess of the purchase price over those fair values was recorded as goodwill. During the three months ended March 31, 2013, the Company made adjustments to the preliminary purchase price allocation based on additional information as to the existence and value of certain assets. In addition, the net acquisition price changed with the final purchase adjustments agreed to by the seller. The measurement period adjustments did not have a significant impact on the Company’s condensed consolidated statements of income for the nine months ended September 30, 2013. In addition, these adjustments did not have a significant impact on the Company’s consolidated balance sheets as of December 31, 2012. Therefore, the Company has not retrospectively adjusted the comparative 2012 financial information presented herein. The adjustments are as follows (dollars in thousands):
|
|
|
|
|
|
|
Recognized |
| |||
|
|
|
Recognized |
|
Measurement |
|
as of |
| |||
|
|
|
as of |
|
Period |
|
Acquisition |
| |||
|
|
|
Acquisition |
|
Adjustments |
|
As Revised |
| |||
|
|
|
|
|
|
|
|
| |||
|
Assets - |
|
|
|
|
|
|
| |||
|
Property and equipment |
|
$ |
11,898 |
|
$ |
876 |
|
$ |
12,774 |
|
|
Intangible assets |
|
1,060 |
|
(410 |
) |
650 |
| |||
|
Goodwill |
|
1,569 |
|
(154 |
) |
1,415 |
| |||
|
Other assets |
|
1,663 |
|
— |
|
1,663 |
| |||
|
|
|
16,190 |
|
312 |
|
16,502 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Liabilities - |
|
|
|
|
|
|
| |||
|
Current liabilities |
|
2,360 |
|
— |
|
2,360 |
| |||
|
Payable from Wavecom to the Company |
|
4,037 |
|
— |
|
4,037 |
| |||
|
Non-current liabilities |
|
1,450 |
|
— |
|
1,450 |
| |||
|
|
|
7,847 |
|
— |
|
7,847 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Net acquisition price |
|
$ |
8,343 |
|
$ |
312 |
|
$ |
8,655 |
|
4. Receivables
Receivables consisted of the following (dollars in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2013 |
|
2012 |
| ||
|
|
|
|
|
|
| ||
|
Customers and other |
|
$ |
40,328 |
|
$ |
36,713 |
|
|
Allowance for doubtful accounts |
|
(3,622 |
) |
(2,631 |
) | ||
|
|
|
|
|
|
| ||
|
|
|
$ |
36,706 |
|
$ |
34,082 |
|
5. Long-Lived Assets
Property, plant and equipment consisted of the following (dollars in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2013 |
|
2012 |
| ||
|
|
|
|
|
|
| ||
|
Property, plant and equipment |
|
$ |
705,519 |
|
$ |
639,343 |
|
|
Less accumulated depreciation and amortization |
|
(187,645 |
) |
(132,146 |
) | ||
|
|
|
|
|
|
| ||
|
|
|
$ |
517,874 |
|
$ |
507,197 |
|
Depreciation expense amounted to $19.3 million and $56.5 million for the three and nine months ended September 30, 2013, respectively. Depreciation expense amounted to $17.3 million and $49.9 million for the three and nine months ended September 30, 2012, respectively.
In February 2013, the Company entered into an agreement to sell a parcel of land and warehouse not actively used in the Company’s operations for a purchase price of $13.9 million. The sale was subject to due diligence by the buyer and approval of the Hawaii Public Utilities Commission (“HPUC”). The HPUC approval was received in May 2013 and the sale was consummated in June 2013. The net proceeds, net of commissions and other costs paid through escrow of $0.8 million, amounted to $13.1 million. A gain on the sale of $6.5 million was recognized in the second quarter of 2013 as management concluded the land sold was not grouped with the assets subject to the composite depreciation method. The HPUC approval requires the Company to spend $0.3 million on training employees on broadband telecommunication deployment and operation. In addition, the HPUC approval provides for the Company to make improvements to its broadband network in an amount equal to the net proceeds less the training cost commitment. The planned training expenses and network capital spending will be recognized as the costs are incurred.
In January 2013, the Company entered into an agreement to sell most of its radio towers for $3.6 million. The sale was subject to due diligence by the buyer. In November 2013, the buyer, as a result of a change in its ownership, issued a termination notice of the purchase per the provisions of the agreement.
The gross carrying amount and accumulated amortization of identifiable intangible assets are as follows (dollars in thousands):
|
|
|
September 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
| ||||||
|
|
|
Carrying |
|
Accumulated |
|
Net Carrying |
|
Carrying |
|
Accumulated |
|
Net Carrying |
| ||||||
|
|
|
Value |
|
Amortization |
|
Value |
|
Value |
|
Amortization |
|
Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Subject to amortization — |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Customer relationships |
|
$ |
21,709 |
|
$ |
8,194 |
|
$ |
13,515 |
|
$ |
17,850 |
|
$ |
6,285 |
|
$ |
11,565 |
|
|
Trade name and other |
|
320 |
|
83 |
|
237 |
|
210 |
|
— |
|
210 |
| ||||||
|
|
|
22,029 |
|
8,277 |
|
13,752 |
|
18,060 |
|
6,285 |
|
11,775 |
| ||||||
|
Not subject to amortization — |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Brand name |
|
27,300 |
|
— |
|
27,300 |
|
27,300 |
|
— |
|
27,300 |
| ||||||
|
|
|
27,300 |
|
— |
|
27,300 |
|
27,300 |
|
— |
|
27,300 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
$ |
49,329 |
|
$ |
8,277 |
|
$ |
41,052 |
|
$ |
45,360 |
|
$ |
6,285 |
|
$ |
39,075 |
|
Amortization expense amounted to $0.7 million and $2.0 million for the three and nine months ended September 30, 2013, respectively. Amortization expense amounted to $0.7 million and $2.1 million for the three and nine months ended September 30, 2012, respectively. Estimated amortization expense for the next five years and thereafter is as follows (dollars in thousands):
|
2013 (remaining months) |
|
$ |
828 |
|
|
2014 |
|
2,896 |
| |
|
2015 |
|
2,498 |
| |
|
2016 |
|
2,100 |
| |
|
2017 |
|
1,703 |
| |
|
Thereafter |
|
3,727 |
| |
|
|
|
|
| |
|
|
|
$ |
13,752 |
|
With the acquisition of SystemMetrics, the Company recognized customer relationship intangibles of $3.6 million with a useful life of 13 years and a trade name of $0.1 million with a useful life of four years. The determination of useful lives for customer relationships was based on historical and expected customer attrition rates. The Company will use an accelerated amortization method reflecting the rate of expected customer attrition.
In conjunction with the acquisition of Wavecom, the Company adjusted the carrying value of goodwill in the first quarter of 2013 as further discussed in Note 3. The revised goodwill amounted to $1.4 million and is included in the wireline segment. In conjunction with the acquisition of SystemMetrics, the Company recognized goodwill of $10.4 million which is expected to be attributed to the data center colocation services segment.
6. Accrued Expenses
Accrued expenses consisted of the following (dollars in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2013 |
|
2012 |
| ||
|
|
|
|
|
|
| ||
|
Salaries and benefits |
|
$ |
12,666 |
|
$ |
15,642 |
|
|
Interest |
|
2,541 |
|
3,607 |
| ||
|
Other taxes |
|
1,020 |
|
1,288 |
| ||
|
|
|
|
|
|
| ||
|
|
|
$ |
16,227 |
|
$ |
20,537 |
|
7. Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
|
|
|
Interest Rate |
|
|
|
|
|
|
| ||
|
|
|
at September 30, |
|
Final |
|
September 30, |
|
December 31, |
| ||
|
|
|
2013 |
|
Maturity |
|
2013 |
|
2012 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
|
Term loan |
|
5.00 |
% |
June 2019 |
|
$ |
299,888 |
|
$ |
299,250 |
|
|
Original issue discount |
|
|
|
|
|
(4,640 |
) |
(3,840 |
) | ||
|
|
|
|
|
|
|
295,248 |
|
295,410 |
| ||
|
Current |
|
|
|
|
|
3,000 |
|
3,000 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
|
Noncurrent |
|
|
|
|
|
$ |
292,248 |
|
$ |
292,410 |
|
The term loan outstanding at September 30, 2013 provides for interest at the Alternate Base Rate, a rate which is indexed to the prime rate with certain adjustments as defined, plus a margin of 3.00% or a Eurocurrency rate on deposits of one, two, three or six months but no less than 1.00% per annum plus a margin of 4.00%. The Company has selected the Eurocurrency rate as of September 30, 2013 resulting in an interest rate currently at 5.00%.
The term loan provides for interest payments no less than quarterly. In addition, quarterly principal payments of $0.8 million are required. The balance of the loan is due at maturity on June 6, 2019. The Company must prepay, generally within three months after year end, 50% or 25% of excess cash flow, as defined. The percent of excess cash flow required for prepayment is dependent on the Company’s leverage ratio. The excess cash flow prepayment for the year ended December 31, 2012 amounted to $2.1 million and was paid in March 2013. The Company must also make prepayments on loans in the case of certain events such as large asset sales.
The Company also has a revolving credit facility which matures on October 3, 2015. The facility has an available balance of $30.0 million with no amounts drawn as of or for the periods ending September 30, 2013 and 2012. A commitment fee is payable quarterly to the lender under the facility. Interest on amounts outstanding is based on, at the Company’s option, the bank prime rate plus a margin of 3.0% to 6.0% or the Eurocurrency rate for one, two, three or six month periods plus a margin of 4.0% to 5.5%. The margin is dependent on the Company’s leverage, as defined in the agreement, at the time of the borrowing.
Refinancing 2013
In June 2013, the Company refinanced its term loan debt. The Company paid a premium on the repayment of the old term loan of $3.0 million. In addition, the Company paid $3.4 million in underwriting fees and legal costs. The premium on repayment of debt, existing original issue discount, existing deferred financing costs, underwriting fees and legal costs were accounted for in accordance with accounting standards for modification of debt instruments with different terms. The Company compared each syndicated lenders’ loan under the old term loan with the syndicated lenders’ loan under the new term loans. For loans under the new term loan that were substantially different, the Company recognized the exchange of debt instruments as a debt extinguishment. For loans under the new term loan that were not substantially different, the Company accounted for the exchange of debt instruments as a modification. As a result of the refinancing, the Company deferred $2.7 million of financing related costs and recognized a loss on early extinguishment of debt of $3.7 million.
Refinancing 2012
In connection with the February 2012 refinancing of the term loan debt, the Company paid a premium on the repayment of the old term loan of $6.0 million. In addition, the Company paid $4.1 million in underwriting fees and legal costs. The premium on repayment of debt, and underwriting fees and legal costs were accounted for in accordance with accounting standards for modification of debt instruments with different terms. The Company compared each syndicated lenders’ loan under the old term loan with the syndicated lenders’ loan under the new term loans. For loans under the new term loan that were substantially different, the Company recognized the exchange of debt instruments as a debt extinguishment. For loans under the new term loan that were not substantially different, the Company accounted for the exchange of debt instruments as a modification. As a result of the refinancing, the Company capitalized $5.0 million of the premium on the repayment of debt and refinancing fees and expensed the remainder resulting in a loss on early extinguishment of debt of $5.1 million.
Maturities
The annual requirements for principal payments on long-term debt as of September 30, 2013 are as follows (dollars in thousands):
|
Year ended December 31, |
|
|
| |
|
2013 (remainder of year) |
|
$ |
750 |
|
|
2014 |
|
3,000 |
| |
|
2015 |
|
3,000 |
| |
|
2016 |
|
3,000 |
| |
|
2017 |
|
3,000 |
| |
|
Thereafter |
|
287,138 |
| |
|
|
|
|
| |
|
|
|
$ |
299,888 |
|
8. Employee Benefit Plans
The Company sponsors a defined benefit pension plan, with benefits frozen as of March 1, 2012, and postretirement health and life insurance benefits for union employees. The Company also sponsors a cash balance pension plan for nonunion employees, with benefits frozen as of April 1, 2007, and certain management employees receive postretirement health and life insurance under grandfathered provisions of a terminated plan.
The Company amended its union pension plan on January 24, 2012 for the freeze of benefits effective March 1, 2012. This resulted in a reduction of the projected benefit obligation by $30.2 million which is the difference between the accumulated benefit obligation and projected benefit obligation at that date. The liability as of January 24, 2012 was measured using a discount rate of 4.54%. The union pension trust assets were also measured as of this date. The reduction in the net recorded liability of $33.4 million was used to offset actuarial losses previously recognized in accumulated other comprehensive loss.
The Company accrues the costs of pension and postretirement benefits over the period from the date of hire until the date the employee becomes fully eligible for benefits. The following provides the components of benefit costs for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):
Pension
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Service cost (benefit) |
|
$ |
— |
|
$ |
(50 |
) |
$ |
— |
|
$ |
1,488 |
|
|
Interest cost |
|
2,055 |
|
2,557 |
|
6,166 |
|
7,493 |
| ||||
|
Expected asset return |
|
(2,934 |
) |
(2,890 |
) |
(8,804 |
) |
(8,601 |
) | ||||
|
Amortization of loss |
|
148 |
|
131 |
|
444 |
|
373 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net periodic benefit cost |
|
$ |
(731 |
) |
$ |
(252 |
) |
$ |
(2,194 |
) |
$ |
753 |
|
Other Postretirement Benefits
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Service cost |
|
$ |
277 |
|
$ |
221 |
|
$ |
832 |
|
$ |
724 |
|
|
Interest cost |
|
516 |
|
576 |
|
1,548 |
|
1,772 |
| ||||
|
Amortization of loss |
|
74 |
|
7 |
|
223 |
|
88 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net periodic benefit cost |
|
$ |
867 |
|
$ |
804 |
|
$ |
2,603 |
|
$ |
2,584 |
|
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2012 that it expected to contribute $12.1 million to its pension plan in 2013. As of September 30, 2013, the Company has contributed $9.4 million. The Company presently anticipates contributing the full amount during the remainder of 2013.
9. Income Taxes
The income tax provision differs from the amounts determined by applying the statutory federal income tax rate of 34% to the income before income tax provision for the following reasons (dollars in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Income tax provision at statutory rate |
|
$ |
1,303 |
|
$ |
1,843 |
|
$ |
4,549 |
|
$ |
3,739 |
|
|
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
| ||||
|
State income taxes, net of federal income tax |
|
(86 |
) |
137 |
|
122 |
|
208 |
| ||||
|
Other |
|
554 |
|
— |
|
850 |
|
— |
| ||||
|
Valuation allowance |
|
— |
|
(2,174 |
) |
— |
|
(4,293 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Income tax provision (benefit) |
|
$ |
1,771 |
|
$ |
(194 |
) |
$ |
5,521 |
|
$ |
(346 |
) |
Through December 31, 2012, the Company maintained a full valuation allowance over its net deferred income tax assets. Based on consistent earnings after its 2010 emergence from Chapter 11 through December 31, 2012, the Company released its valuation allowance as of that date. For the three months and nine months ended September 30, 2012, the existence of the full valuation allowance resulted in an income tax benefit reflecting certain tax credits.
The Company evaluates its tax positions for liability recognition. As of September 30, 2013, the Company had no unrecognized tax benefits. No interest or penalties related to tax assessments were recognized in the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2013 or 2012. All tax years from 2009 remain open for both federal and Hawaii state purposes.
On September 13, 2013, the Treasury Department and the Internal Revenue Service issued regulations that provide guidance with respect to the treatment of materials and supplies, capitalization of amounts paid to acquire or produce tangible property, and the determination of whether an expenditure with respect to tangible property is a deductible repair or must be capitalized. The Company evaluated the impact of the new regulations and concluded that the new regulations will not have a significant impact on its consolidated financial statements.
10. Stock Compensation
The Company has an equity incentive plan. The Compensation Committee of the Company’s Board of Directors may grant awards under the plan in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. The maximum number of shares issuable under the new equity incentive plan is 1,400,000 shares. All grants under the equity incentive plan will be issued to acquire shares at the fair value on date of grant.
As of September 30, 2013, all awards were restricted stock units. Activity with respect to outstanding restricted stock units for the nine months ended September 30, 2013 and 2012 was as follows:
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
| |
|
|
|
Shares |
|
Fair Value |
| |
|
2013 |
|
|
|
|
| |
|
Nonvested at January 1, 2013 |
|
223,224 |
|
$ |
15 |
|
|
Granted |
|
181,330 |
|
20 |
| |
|
Vested |
|
(67,233 |
) |
17 |
| |
|
Forfeited |
|
(22,918 |
) |
17 |
| |
|
Nonvested at September 30, 2013 |
|
314,403 |
|
$ |
17 |
|
|
|
|
|
|
|
| |
|
2012 |
|
|
|
|
| |
|
Nonvested at January 1, 2012 |
|
248,951 |
|
$ |
17 |
|
|
Granted |
|
118,647 |
|
16 |
| |
|
Vested |
|
(59,264 |
) |
26 |
| |
|
Forfeited |
|
(19,205 |
) |
26 |
| |
|
Nonvested at September 30, 2012 |
|
289,129 |
|
$ |
15 |
|
The Company recognized compensation expense of $0.7 million and $1.9 million for the three and nine months ended September 30, 2013, respectively. The Company recognized compensation expense of $0.5 million and $1.3 million for the three and nine months ended September 30, 2012, respectively. The fair value as of the vesting date for the restricted stock units that vested during the nine months ended September 30, 2013 and 2012 was $1.3 million and $1.0 million, respectively. Upon vesting, unit holders have the option to net share-settle to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. The total shares withheld were 20,692 and 3,160 for the nine months ended September 30, 2013 and 2012, respectively, and were based on the value of the restricted stock units as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to the tax authorities were $0.4 million and less than $0.1 million for the nine months ended September 30, 2013 and 2012, respectively. Other than reimbursements for tax withholdings, there was no cash received under all share-based arrangements.
11. Other Comprehensive Income
Reclassifications out of accumulated other comprehensive income (loss) for the three months and nine months ended September 30, 2013 and 2012 were as follows (dollars in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Retirement plans |
|
|
|
|
|
|
|
|
| ||||
|
Amortization of loss |
|
222 |
|
138 |
|
667 |
|
461 |
| ||||
|
Income tax charge on comprehensive income |
|
(88 |
) |
— |
|
(263 |
) |
— |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net of tax |
|
$ |
134 |
|
$ |
138 |
|
$ |
404 |
|
$ |
461 |
|
The amortization of loss was recognized primarily in selling, general and administrative expense for both the nine months ended September 30, 2013 and 2012.
12. Commitments and Contingencies
Collective Bargaining Agreement
The Company maintains a collective bargaining agreement with the International Brotherhood of Electrical Workers Local 1357 (“IBEW”). The agreement covers approximately half of the Company’s work force. In December 2012, the IBEW announced their members had ratified a new collective bargaining agreement with the Company with an effective date of January 1, 2013 for a term of five years.
Third Party Claims
In the normal course of conducting its business, the Company is involved in various disputes with third parties, including vendors and customers. The outcome of such disputes is generally uncertain and subject to commercial negotiations. The Company periodically assesses its liabilities in connection with these matters and records reserves for those matters where it is probable that a loss has been incurred and the loss can be reasonably estimated. Based on management’s most recent assessment, the Company believes that the risk of loss in excess of liabilities recorded is not material for all outstanding claims and disputes and the ultimate outcome of such matters will not have a material adverse effect on the Company’s results of operations, cash flows or financial position.
Litigation
The Company is involved in litigation arising in the normal course of business. The outcome of this litigation is not expected to have a material adverse impact on the Company’s condensed consolidated financial statements.
13. Fair Value of Financial Instruments
The following method and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the fair value.
Cash and cash equivalents, accounts receivable and accounts payable — The carrying amount approximates the fair value. The valuation is based on settlements of similar financial instruments all of which are short-term in nature and generally settled at or near cost. Cash is measured as Level 1.
Investment securities — The fair value of investment securities is based on quoted market prices. Investment securities are included in other assets on the condensed consolidated balance sheets.
Debt — The fair value of debt is based on the value at which the debt is trading among holders.
The estimated fair value of financial instruments is as follows (dollars in thousands):
|
|
|
Carrying |
|
Fair |
| ||
|
|
|
Value |
|
Value |
| ||
|
|
|
|
|
|
| ||
|
September 30, 2013 |
|
|
|
|
| ||
|
Assets - investment in U.S. Treasury obligations (Level 1) |
|
$ |
891 |
|
$ |
891 |
|
|
Liabilities - long-term debt (carried at amortized cost, Level 2) |
|
295,248 |
|
300,638 |
| ||
|
|
|
|
|
|
| ||
|
December 31, 2012 |
|
|
|
|
| ||
|
Assets - investment in U.S. Treasury obligations (Level 1) |
|
$ |
905 |
|
$ |
905 |
|
|
Liabilities - long-term debt (carried at amortized cost, Level 2) |
|
295,410 |
|
302,000 |
| ||
Fair Value Measurements
Fair value for accounting purposes is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Accounting standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Assets measured at fair value on a recurring basis represent investment securities included in other assets. Liabilities carried at cost with fair value disclosure on a recurring basis represent long-term debt. A summary is as follows (dollars in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2013 |
|
2012 |
| ||
|
|
|
|
|
|
| ||
|
Asset value measurements using: |
|
|
|
|
| ||
|
Quoted prices in active markets for identical assets (Level 1) |
|
$ |
891 |
|
$ |
905 |
|
|
Significant other observable inputs (Level 2) |
|
— |
|
— |
| ||
|
Significant unobservable inputs (Level 3) |
|
— |
|
— |
| ||
|
|
|
|
|
|
| ||
|
|
|
$ |
891 |
|
$ |
905 |
|
|
|
|
|
|
|
| ||
|
Liability value measurements using: |
|
|
|
|
| ||
|
Quoted prices in active markets for identical liabilities (Level 1) |
|
$ |
— |
|
$ |
— |
|
|
Significant other observable inputs (Level 2) |
|
300,638 |
|
302,000 |
| ||
|
Significant unobservable inputs (Level 3) |
|
— |
|
— |
| ||
|
|
|
|
|
|
| ||
|
|
|
$ |
300,638 |
|
$ |
302,000 |
|
Assets and liabilities measured at fair value on a non-recurring basis for the nine months ended September 30, 2013 represent those recognized in conjunction with the acquisition of SystemMetrics as of September 30, 2013. A summary of the valued assets and liabilities is included in Note 3 including a discussion of the valuation methodology. The majority of assets and liabilities were valued using level 3 unobservable inputs.
14. Segment Information
The Company operates in two reportable segments (Wireline Services and Other) based on how resources are allocated and performance is assessed by the Company’s Chief Executive Officer, the Company’s chief operating decision maker. The Wireline Services segment provides local telephone service including voice and data transport, enhanced custom calling features, network access, directory assistance and private lines. In addition, the Wireline Services segment provides Internet, long distance services, television, managed services, customer premise equipment, data solutions, billing and collection, and pay telephone services.
The following table provides operating financial information for the Company’s two existing reportable segments (dollars in thousands):
|
|
|
Wireline |
|
|
|
Intersegment |
|
|
| ||||
|
|
|
Services |
|
Other |
|
Elimination |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
For the three months ended September 30, 2013 |
|
|
|
|
|
|
|
|
| ||||
|
Operating revenues |
|
|
|
|
|
|
|
|
| ||||
|
Local voice and other retail services |
|
$ |
64,809 |
|
$ |
1,061 |
|
$ |
(385 |
) |
$ |
65,485 |
|
|
Network access services |
|
32,197 |
|
— |
|
— |
|
32,197 |
| ||||
|
|
|
$ |
97,006 |
|
$ |
1,061 |
|
$ |
(385 |
) |
$ |
97,682 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Depreciation and amortization |
|
$ |
19,974 |
|
$ |
— |
|
$ |
— |
|
$ |
19,974 |
|
|
Net income |
|
1,922 |
|
139 |
|
— |
|
2,061 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
For the nine months ended September 30, 2013 |
|
|
|
|
|
|
|
|
| ||||
|
Operating revenues |
|
|
|
|
|
|
|
|
| ||||
|
Local voice and other retail services |
|
$ |
190,919 |
|
$ |
3,236 |
|
$ |
(1,152 |
) |
$ |
193,003 |
|
|
Network access services |
|
97,640 |
|
— |
|
— |
|
97,640 |
| ||||
|
|
|
$ |
288,559 |
|
$ |
3,236 |
|
$ |
(1,152 |
) |
$ |
290,643 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Depreciation and amortization |
|
$ |
58,532 |
|
$ |
— |
|
$ |
— |
|
$ |
58,532 |
|
|
Net income |
|
7,297 |
|
562 |
|
— |
|
7,859 |
| ||||
|
Capital expenditures |
|
68,599 |
|
— |
|
— |
|
68,599 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Assets as of December 31, 2012 |
|
$ |
784,585 |
|
$ |
507 |
|
$ |
— |
|
$ |
785,092 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
For the three months ended September 30, 2012 |
|
|
|
|
|
|
|
|
| ||||
|
Operating revenues |
|
|
|
|
|
|
|
|
| ||||
|
Local voice and other retail services |
|
$ |
63,721 |
|
$ |
1,114 |
|
$ |
(309 |
) |
$ |
64,526 |
|
|
Network access services |
|
32,121 |
|
— |
|
— |
|
32,121 |
| ||||
|
|
|
$ |
95,842 |
|
$ |
1,114 |
|
$ |
(309 |
) |
$ |
96,647 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Depreciation and amortization |
|
$ |
18,023 |
|
$ |
— |
|
$ |
— |
|
$ |
18,023 |
|
|
Net income |
|
5,557 |
|
58 |
|
— |
|
5,615 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
For the nine months ended September 30, 2012 |
|
|
|
|
|
|
|
|
| ||||
|
Operating revenues |
|
|
|
|
|
|
|
|
| ||||
|
Local voice and other retail services |
|
$ |
188,806 |
|
$ |
3,598 |
|
$ |
(1,028 |
) |
$ |
191,376 |
|
|
Network access services |
|
97,534 |
|
— |
|
— |
|
97,534 |
| ||||
|
|
|
$ |
286,340 |
|
$ |
3,598 |
|
$ |
(1,028 |
) |
$ |
288,910 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Depreciation and amortization |
|
$ |
51,965 |
|
$ |
— |
|
$ |
— |
|
$ |
51,965 |
|
|
Net income |
|
10,920 |
|
423 |
|
— |
|
11,343 |
| ||||
|
Capital expenditures |
|
59,409 |
|
— |
|
— |
|
59,409 |
| ||||
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance (including our anticipated cost structure) and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues,” “assumption” or the negative of these terms or other comparable terminology. These statements (including statements related to our anticipated cost structure) are only predictions. Actual events or results may differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to:
· our ability to execute our strategic plan;
· failures in critical back-office systems and IT infrastructure;
· our ability to maintain arrangements with third-party service providers;
· changes in regulations and legislation applicable to providers of telecommunications services;
· changes in demand for our products and services;
· our ability to integrate recent business acquisitions;
· technological changes affecting the telecommunications industry; and
· our indebtedness could adversely affect our financial condition.
These and other factors may cause our actual results to differ materially from any forward-looking statement. Refer to our Annual Report on Form 10-K for a detailed discussion of risks that could materially adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements are made as of the date of issuance of these quarterly condensed consolidated financial statements, we assume no obligation to update or revise them or to provide reasons why actual results may differ.
We do not undertake any responsibility to release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of issuance of these quarterly condensed consolidated financial statements. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this quarterly report.
Background
In the following discussion and analysis of financial condition and results of operations, unless the context otherwise requires, “we,” “us” or the “Company” refers, collectively, to Hawaiian Telcom Holdco, Inc. and its subsidiaries.
Segments and Sources of Revenue
We operate in two reportable segments (Wireline Services and Other) based on how resources are allocated and performance is assessed by our chief operating decision maker. Our chief operating decision maker is our Chief Executive Officer.
Wireline Services
The Wireline Services segment derives revenue from the following sources:
Local Voice Services — We receive revenue from providing local exchange telephone services. These revenues include monthly charges for basic service, local private line services and enhanced calling features.
Network Access Services — We receive revenue for access to our network for wholesale carrier data, business customer data including Dedicated Internet Access, switched carrier access and subscriber line charges imposed on end users. Switched carrier access revenue compensates us for origination, transport and termination of calls for long distance and other interexchange carriers.
Long Distance Services — We receive revenue from providing long distance services to our customers.
High-Speed Internet (“HSI”) Services — We provide HSI to our residential and business customers.
Video Services — Our video services marketed as Hawaiian Telcom TV is an advanced entertainment service offered to customers in select areas.
Equipment and managed services — We provide installation and maintenance of customer premise equipment as well as managed service for customer telephone and IT networks.
Other
We receive revenue from wireless services, including the sale of wireless handsets and other wireless accessories.
Results of Operations for the Three and Nine Months Ended September 30, 2013 and 2012
Operating Revenues
The following tables summarize our volume information as of September 30, 2013 and 2012, and our operating revenues for the three and nine months ended September 30, 2013 and 2012. For comparability, we also present volume information as of September 30, 2013 compared to June 30, 2013.
Volume Information
September 2013 compared to September 2012
|
|
|
September 30, |
|
September 30, |
|
Change |
| ||
|
|
|
2013 |
|
2012 |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice access lines |
|
|
|
|
|
|
|
|
|
|
Residential |
|
190,013 |
|
207,732 |
|
(17,719 |
) |
-8.5 |
% |
|
Business (1) |
|
194,623 |
|
185,849 |
|
8,774 |
|
4.7 |
% |
|
Public |
|
4,246 |
|
4,467 |
|
(221 |
) |
-4.9 |
% |
|
|
|
388,882 |
|
398,048 |
|
(9,166 |
) |
-2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
High-Speed Internet lines |
|
|
|
|
|
|
|
|
|
|
Residential |
|
90,253 |
|
86,570 |
|
3,683 |
|
4.3 |
% |
|
Business |
|
19,163 |
|
18,260 |
|
903 |
|
4.9 |
% |
|
Wholesale |
|
986 |
|
1,014 |
|
(28 |
) |
-2.8 |
% |
|
|
|
110,402 |
|
105,844 |
|
4,558 |
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Long distance lines |
|
|
|
|
|
|
|
|
|
|
Residential |
|
119,096 |
|
128,760 |
|
(9,664 |
) |
-7.5 |
% |
|
Business (1) |
|
79,320 |
|
75,529 |
|
3,791 |
|
5.0 |
% |
|
|
|
198,416 |
|
204,289 |
|
(5,873 |
) |
-2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Video |
|
|
|
|
|
|
|
|
|
|
Subscribers |
|
15,796 |
|
8,444 |
|
7,352 |
|
87.1 |
% |
|
Homes Enabled |
|
111,000 |
|
59,422 |
|
51,578 |
|
86.8 |
% |
(1) Business voice access lines and business long distance lines included approximately 11,000 and 6,100, respectively, as of September 30, 2013 related to the acquisition of Wavecom.
September 2013 compared to June 2013
|
|
|
September 30, |
|
June 30, |
|
Change |
| ||
|
|
|
2013 |
|
2013 |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice access lines |
|
|
|
|
|
|
|
|
|
|
Residential |
|
190,013 |
|
194,365 |
|
(4,352 |
) |
-2.2 |
% |
|
Business |
|
194,623 |
|
195,756 |
|
(1,133 |
) |
-0.6 |
% |
|
Public |
|
4,246 |
|
4,291 |
|
(45 |
) |
-1.0 |
% |
|
|
|
388,882 |
|
394,412 |
|
(5,530 |
) |
-1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
High-Speed Internet lines |
|
|
|
|
|
|
|
|
|
|
Residential |
|
90,253 |
|
89,737 |
|
516 |
|
0.6 |
% |
|
Business |
|
19,163 |
|
18,986 |
|
177 |
|
0.9 |
% |
|
Wholesale |
|
986 |
|
998 |
|
(12 |
) |
-1.2 |
% |
|
|
|
110,402 |
|
109,721 |
|
681 |
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Long distance lines |
|
|
|
|
|
|
|
|
|
|
Residential |
|
119,096 |
|
121,591 |
|
(2,495 |
) |
-2.1 |
% |
|
Business |
|
79,320 |
|
79,956 |
|
(636 |
) |
-0.8 |
% |
|
|
|
198,416 |
|
201,547 |
|
(3,131 |
) |
-1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Video |
|
|
|
|
|
|
|
|
|
|
Subscribers |
|
15,796 |
|
13,618 |
|
2,178 |
|
16.0 |
% |
|
Homes Enabled |
|
111,000 |
|
100,000 |
|
11,000 |
|
11.0 |
% |
Operating Revenues (dollars in thousands)
For Three Months
|
|
|
Three Months Ended |
|
|
| |||||||
|
|
|
September 30, |
|
Change |
| |||||||
|
|
|
2013 |
|
2012 |
|
Amount |
|
Percentage |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Wireline Services |
|
|
|
|
|
|
|
|
| |||
|
Local voice services |
|
$ |
34,195 |
|
$ |
35,257 |
|
$ |
(1,062 |
) |
-3.0 |
% |
|
Network access services |
|
|
|
|
|
|
|
|
| |||
|
Business data |
|
6,282 |
|
4,600 |
|
1,682 |
|
36.6 |
% | |||
|
Wholesale carrier data |
|
14,850 |
|
15,676 |
|
(826 |
) |
-5.3 |
% | |||
|
Subscriber line access charge |
|
9,442 |
|
9,619 |
|
(177 |
) |
-1.8 |
% | |||
|
Switched carrier access |
|
1,623 |
|
2,226 |
|
(603 |
) |
-27.1 |
% | |||
|
|
|
32,197 |
|
32,121 |
|
76 |
|
0.2 |
% | |||
|
Long distance services |
|
6,091 |
|
6,735 |
|
(644 |
) |
-9.6 |
% | |||
|
High-Speed Internet |
|
9,999 |
|
9,013 |
|
986 |
|
10.9 |
% | |||
|
Video |
|
3,717 |
|
1,528 |
|
2,189 |
|
143.3 |
% | |||
|
Equipment and managed services |
|
7,228 |
|
8,715 |
|
(1,487 |
) |
-17.1 |
% | |||
|
Other |
|
3,579 |
|
2,472 |
|
1,107 |
|
44.8 |
% | |||
|
|
|
97,006 |
|
95,841 |
|
1,165 |
|
1.2 |
% | |||
|
Wireless |
|
676 |
|
806 |
|
(130 |
) |
-16.1 |
% | |||
|
|
|
$ |
97,682 |
|
$ |
96,647 |
|
$ |
1,035 |
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
| |||
|
Channel |
|
|
|
|
|
|
|
|
| |||
|
Business |
|
$ |
42,739 |
|
$ |
41,618 |
|
$ |
1,121 |
|
2.7 |
% |
|
Consumer |
|
35,298 |
|
34,486 |
|
812 |
|
2.4 |
% | |||
|
Wholesale |
|
16,473 |
|
17,634 |
|
(1,161 |
) |
-6.6 |
% | |||
|
Other |
|
3,172 |
|
2,909 |
|
263 |
|
9.0 |
% | |||
|
|
|
$ |
97,682 |
|
$ |
96,647 |
|
$ |
1,035 |
|
1.1 |
% |
For Nine Months
|
|
|
Nine Months Ended |
|
|
| |||||||
|
|
|
September 30, |
|
Change |
| |||||||
|
|
|
2013 |
|
2012 |
|
Amount |
|
Percentage |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Wireline Services |
|
|
|
|
|
|
|
|
| |||
|
Local voice services |
|
$ |
103,859 |
|
$ |
106,684 |
|
$ |
(2,825 |
) |
-2.6 |
% |
|
Network access services |
|
|
|
|
|
|
|
|
| |||
|
Business data |
|
18,885 |
|
14,152 |
|
4,733 |
|
33.4 |
% | |||
|
Wholesale carrier data |
|
45,123 |
|
47,310 |
|
(2,187 |
) |
-4.6 |
% | |||
|
Subscriber line access charge |
|
28,507 |
|
29,211 |
|
(704 |
) |
-2.4 |
% | |||
|
Switched carrier access |
|
5,125 |
|
6,861 |
|
(1,736 |
) |
-25.3 |
% | |||
|
|
|
97,640 |
|
97,534 |
|
106 |
|
0.1 |
% | |||
|
Long distance services |
|
18,804 |
|
21,342 |
|
(2,538 |
) |
-11.9 |
% | |||
|
High-Speed Internet |
|
29,495 |
|
26,948 |
|
2,547 |
|
9.5 |
% | |||
|
Video |
|
8,784 |
|
3,060 |
|
5,724 |
|
187.1 |
% | |||
|
Equipment and managed services |
|
19,724 |
|
23,604 |
|
(3,880 |
) |
-16.4 |
% | |||
|
Other |
|
10,253 |
|
7,168 |
|
3,085 |
|
43.0 |
% | |||
|
|
|
288,559 |
|
286,340 |
|
2,219 |
|
0.8 |
% | |||
|
Wireless |
|
2,084 |
|
2,570 |
|
(486 |
) |
-18.9 |
% | |||
|
|
|
$ |
290,643 |
|
$ |
288,910 |
|
$ |
1,733 |
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
| |||
|
Channel |
|
|
|
|
|
|
|
|
| |||
|
Business |
|
$ |
125,820 |
|
$ |
123,481 |
|
$ |
2,339 |
|
1.9 |
% |
|
Consumer |
|
104,794 |
|
102,778 |
|
2,016 |
|
2.0 |
% | |||
|
Wholesale |
|
50,248 |
|
53,903 |
|
(3,655 |
) |
-6.8 |
% | |||
|
Other |
|
9,781 |
|
8,748 |
|
1,033 |
|
11.8 |
% | |||
|
|
|
$ |
290,643 |
|
$ |
288,910 |
|
$ |
1,733 |
|
0.6 |
% |
The decrease in local services revenues was caused primarily by the decline of $2.0 million and $5.7 million of voice access lines for the three and nine month periods, respectively. This was offset by $0.9 million and $2.9 million of revenue for the three and nine month periods, respectively, from Wavecom customers acquired in December 2012. Continued competition in the telecommunications industry has increasingly resulted in customers using technologies other than traditional phone lines for voice and data. Residential customers are increasingly using wireless services in place of traditional wireline phone services as well as moving local voice service to VoIP technology offered by competitors. Generally, VoIP technology offered by cable providers is less expensive than traditional wireline phone service, requiring us to respond with more competitive pricing. Additionally, Competitive Local Exchange Carriers (CLECs) and our cable competitor continue to focus on business customers and selling services to our customer base.
In an effort to slow the rate of line loss, we are continuing retention and acquisition programs, and are increasingly focusing efforts on bundling of services. We have instituted various “saves” campaigns designed to focus on specific circumstances where we believe customer churn is controllable. These campaigns include targeted offers to “at risk” customers as well as other promotional tools designed to enhance customer retention. We also emphasize win-back and employee referral programs. Additionally, we are intensifying our efforts relative to developing tools and training to enhance our customer service capability to improve customer retention and growth.
Business data revenue for the three and nine months ended September 30, 2013 increased when compared to the prior year period because of $1.2 million and $3.8 million, respectively, of revenue from Wavecom customers acquired in December 2012. Wholesale carrier revenue decreased because of revenues received from Wavecom in 2012 which we no longer recognize as Wavecom is a wholly-owned subsidiary. In addition, the impact of the decline in voice access lines is reflected in subscriber line access charges and switched carrier access charges.
The decrease in long distance revenue was primarily because of the decline in long distance lines and customers moving to wireless and VoIP based technologies for long distance calling.
HSI revenues increased when compared to the prior year primarily because of an approximate 4.3% growth in our HSI subscribers as well as improved revenue per subscriber with increased bandwidth offerings.
On July 1, 2011, we commercially launched our video service on the island of Oahu. We are rolling out Hawaiian Telcom TV to selected areas to ensure delivery of superior service and an ongoing excellent customer experience. Our volume is ramping up as more homes become enabled for video service. We expect to expand both the availability and the capabilities of our Hawaiian Telcom TV service over the next several years through additional capital investment and innovation.
Equipment and managed services sales have decreased for the three and nine month periods because of changes in the volume of sales and installations of customer premise equipment for certain large government customers during the three and nine months ended September 30, 2013 compared to the same periods in the prior year. Revenue from equipment sales varies from period to period based on the volume of large installation projects. The volume of such projects in future periods is uncertain.
The increase in other wireline services revenue for the three and nine months ended September 30, 2013 compared to the same periods in the prior year is because of revenue from Wavecom of $0.4 million and $1.2 million, respectively. In addition, business VoIP equipment usage fees amounted to $0.6 million and $1.4 million for the three and nine months ended September 30, 2013 and were negligible in the prior year periods.
Wireless revenues declined when compared to the same periods in the prior year as there has been a reduction in marketing effort as we focus on other products.
SystemMetrics
The acquisition of SystemMetrics increases the scale and scope of our data center operations by adding a state-of-the-art facility in Honolulu with up to 6,500 square feet of data center capacity and room for expansion. SystemMetrics currently generates annual revenues of approximately $8.0 million. With the acquisition, we anticipate marketing an expanded bundle of communication and data products to our business customers that includes enhanced physical and virtual colocation services.
Operating Costs and Expenses
The following tables summarize our costs and expenses for the three and nine months ended September 30, 2013 compared to the costs and expenses for the three and nine months ended September 30, 2012 (dollars in thousands):
For Three Months
|
|
|
Three Months Ended |
|
|
| |||||||
|
|
|
September 30, |
|
Change |
| |||||||
|
|
|
2013 |
|
2012 |
|
Amount |
|
Percentage |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Cost of revenues |
|
|
|
|
|
|
|
|
| |||
|
(exclusive of depreciation and amortization) |
|
$ |
41,829 |
|
$ |
41,176 |
|
$ |
653 |
|
1.6 |
% |
|
Selling, general and administrative expenses |
|
27,965 |
|
26,547 |
|
1,418 |
|
5.3 |
% | |||
|
Depreciation and amortization |
|
19,974 |
|
18,023 |
|
1,951 |
|
10.8 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
$ |
89,768 |
|
$ |
85,746 |
|
$ |
4,022 |
|
4.7 |
% |
For Nine Months
|
|
|
Nine Months Ended |
|
|
| |||||||
|
|
|
September 30, |
|
Change |
| |||||||
|
|
|
2013 |
|
2012 |
|
Amount |
|
Percentage |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Cost of revenues |
|
|
|
|
|
|
|
|
| |||
|
(exclusive of depreciation and amortization) |
|
$ |
122,073 |
|
$ |
121,407 |
|
$ |
666 |
|
0.5 |
% |
|
Selling, general and administrative expenses |
|
84,860 |
|
82,567 |
|
2,293 |
|
2.8 |
% | |||
|
Gain on sale of property |
|
(6,546 |
) |
— |
|
(6,546 |
) |
NA |
| |||
|
Depreciation and amortization |
|
58,532 |
|
51,965 |
|
6,567 |
|
12.6 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
$ |
258,919 |
|
$ |
255,939 |
|
$ |
2,980 |
|
1.2 |
% |
The Company’s total headcount as of September 30, 2013 was 1,382 compared to 1,343 as of September 30, 2012. Employee related costs are included in both cost of revenues and selling, general and administrative expenses.
Cost of revenues consists of costs we incur to provide our products and services including those for operating and maintaining our networks, installing and maintaining customer premise equipment, and cost of goods sold directly associated with various products. Costs of revenues were comparable for the three and nine months ended September 30, 2013 relative to the same periods in the prior year.
Selling, general and administrative expenses include costs related to sales and marketing, information systems and other administrative functions. The increase for the three months ended September 30, 2013 compared to the same period in the prior year was because of an increase in contracted services of $1.1 million for expenses related to the operation of Wavecom and the acquisition of SystemMetrics. The increase for the nine months ended September 30, 2013 compared to the same period in the prior year was because of increased gross receipts taxes of $1.2 million as there were beneficial settlements related to such taxes in the prior year. In addition, rent expense increased $0.7 million related to Wavecom operations.
We sold a parcel of land and warehouse not actively used in the Company’s operations for a purchase price, as amended, of $13.9 million. A gain on the sale of $6.5 million was recognized in the second quarter of 2013. The HPUC approval of the sale requires we spend $0.3 million on training employees on broadband telecommunication deployment and operation. In addition, the HPUC approval requires the remaining proceeds be used for improvement to our broadband network.
Depreciation and amortization increased because of new property additions placed into service.
Other Income and (Expense)
The following tables summarize other income (expense) for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):
For Three Months
|
|
|
Three Months Ended |
|
|
| |||||||
|
|
|
September 30, |
|
Change |
| |||||||
|
|
|
2013 |
|
2012 |
|
Amount |
|
Percentage |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Interest expense |
|
$ |
(4,089 |
) |
$ |
(5,490 |
) |
$ |
1,401 |
|
-25.5 |
% |
|
Interest income and other |
|
7 |
|
10 |
|
(3 |
) |
-30.0 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
$ |
(4,082 |
) |
$ |
(5,480 |
) |
$ |
1,398 |
|
-25.5 |
% |
For Nine Months
|
|
|
Nine Months Ended |
|
|
| |||||||
|
|
|
September 30, |
|
Change |
| |||||||
|
|
|
2013 |
|
2012 |
|
Amount |
|
Percentage |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Interest expense |
|
$ |
(14,712 |
) |
$ |
(16,890 |
) |
$ |
2,178 |
|
-12.9 |
% |
|
Loss on early extinguishment of debt |
|
(3,660 |
) |
(5,112 |
) |
1,452 |
|
-28.4 |
% | |||
|
Interest income and other |
|
28 |
|
28 |
|
— |
|
0.0 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
$ |
(18,344 |
) |
$ |
(21,974 |
) |
$ |
3,630 |
|
-16.5 |
% |
Interest expense decreased for the three and nine months ended September 30, 2013 compared to the same periods in the prior year primarily because of the lower interest rates on the refinanced debt.
In connection with the refinancing of debt in the second quarter of 2013 and the first quarter of 2012, we incurred charges of $3.7 million and $5.1 million, respectively, which consisted of the loss on the repayment of the old debt and certain refinancing costs.
Income Tax
As of December 31, 2011, we had maintained a full valuation allowance over our net deferred income tax assets. This situation resulted from our having a short history as a new entity (post Chapter 11). From emergence in 2010 through 2012, we have generated earnings in all periods. As a result of our continued positive annual earnings, as well as positive forecasted earnings in the future, management concluded that it was more than likely than not that we will realize our deferred income tax assets, and therefore, we released our valuation allowance as of December 31, 2012. If there is a decline in the level of actual future or forecasted earnings, the conclusion regarding the need for a valuation allowance may change in future periods resulting in the establishment of a valuation allowance for some or all of our deferred income tax assets.
Liquidity and Capital Resources
As of September 30, 2013, we had cash of $45.1 million. From an ongoing operating perspective, our cash requirements in 2013 consist of supporting the development and introduction of new products, capital expenditure projects, pension funding obligations and other changes in working capital. A combination of cash-on-hand and cash generated from operating activities will be used to fund our cash requirements.
We have continued to take actions to conserve cash and improve liquidity. Efforts have also been taken to generate further operating efficiencies and focus on expense management. We have focused on improving operating results, including efforts to simplify product offerings, improve our customer service experience and increase our revenue enhancement activities. There can be no assurance that these additional actions will result in improved overall cash flow. We continue to have sizable retirement obligations for our existing employee base. Any sustained declines in the value of pension trust assets or relatively high levels of pension lump sum benefit payments will increase the magnitude of future plan contributions.
Agreements with the Hawaii Public Utilities Commission and the debt agreements of Hawaiian Telcom Communications, Inc. limit the ability of our subsidiaries to pay dividends to the parent company and restrict the net assets of all of our subsidiaries. This can limit our ability to pay dividends to our shareholders. As the parent company has no operations, debt or other obligations, this restriction has no other immediate impact on our operations.
Cash Flows for Nine Months Ended September 30, 2013 and 2012
Our primary source of funds continues to be cash generated from operations. We use the net cash generated from operations to fund network expansion and modernization. We expect that our capital spending requirements will continue to be financed through internally generated funds. We also expect to use cash generated in future periods for debt service. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure financial flexibility.
Net cash provided by operations amounted to $54.8 million for the nine months ended September 30, 2013. Our cash flows from operations are impacted by our results of operations, changes in working capital and payments on certain long-term liabilities. Net cash provided by operations amounted to $59.0 million for the nine months ended September 30, 2012. The decrease in cash provided by operations was primarily because of working capital needs during the nine month period ended September 30, 2013.
Cash used in investing activities included capital expenditures of $69.8 million and $61.0 million for the nine months ended September 30, 2013 and 2012, respectively. The level of capital expenditures for 2013 is expected to be slightly higher than 2012 as we invest in systems to support new product introductions and transform our network to enable next-generation technologies.
Cash used in financing activities for the nine months ended September 30, 2013 and 2012 includes the impact of the 2013 and 2012 refinancing of our debt.
Outstanding Debt and Financing Arrangements
As of September 30, 2013, we had outstanding $299.9 million in aggregate principal long-term debt. The term loan has a maturity date of June 2019. We do not expect to generate the necessary cash flow from operations to repay the facility in its entirety by the maturity date and repayment is dependent on our ability to refinance the credit facility at reasonable terms. The ability to refinance the indebtedness at reasonable terms before maturity cannot be assured.
Contractual Obligations
During the nine months ended September 30, 2013, the Company’s future contractual obligations have not changed materially from the amounts disclosed as of December 31, 2012 in our Form 10-K other than related to our new debt and those attributed to SystemMetrics. The changes in obligations are as follows (dollars in thousands):
|
|
|
2013 (remainder) |
|
2016 and |
|
2018 and |
|
|
| ||||
|
|
|
to 2015 |
|
2017 |
|
Thereafter |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Term loan facility |
|
$ |
6,750 |
|
$ |
6,000 |
|
$ |
287,138 |
|
$ |
299,888 |
|
|
Debt interest |
|
33,400 |
|
29,051 |
|
21,395 |
|
83,846 |
| ||||
|
SystemMetrics lease and other |
|
3,695 |
|
2,377 |
|
5,007 |
|
11,079 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
$ |
43,845 |
|
$ |
37,428 |
|
$ |
313,540 |
|
$ |
394,813 |
|
We do not maintain any off balance sheet financing or other arrangements.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the condensed consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. The Company’s critical accounting policies that require the use of estimates and assumptions were discussed in detail in our Annual Report on Form 10-K for the year ended December 31, 2012, and have not changed materially from that discussion.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2013, our floating rate obligations consisted of $299.9 million of debt outstanding under our term loan facility. Accordingly, our earnings and cash flow are affected by changes in interest rates. Based on our borrowings at September 30, 2013 and assuming a 1.0 percentage point increase in the average interest rate under these borrowings, we estimate that our annual interest expense would increase by approximately $3.0 million.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Eric K. Yeaman, Chief Executive Officer, and Robert F. Reich, Chief Financial Officer, have evaluated the disclosure controls and procedures of Hawaiian Telcom Holdco, Inc. (the “Company’) as of September 30, 2013. Based on their evaluations, as of September 30, 2013, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective in ensuring that information required to be disclosed by the Company in reports the Company files or submits under the Securities Exchange Act of 1934:
(1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and
(2) is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Certifications
The certifications attached hereto as Exhibits 31.1, 31.2, 32.1 and 32.2 should be read in conjunction with the disclosures set forth herein.
Other than ordinary routine litigation incidental to the business, we are not involved in any material pending legal proceedings that are likely to have a material adverse effect on us.
Hawaiian Telcom Holdco, Inc. issued a press release on November 12, 2013 announcing its 2013 third quarter earnings. This information, attached as Exhibit 99.1, is being furnished to the SEC pursuant to Item 2.02 of Form 8-K.
See Exhibit Index following the signature page of this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
HAWAIIAN TELCOM HOLDCO, INC. |
|
|
|
|
November 12, 2013 |
/s/ Eric K. Yeaman |
|
|
Eric K. Yeaman |
|
|
|
|
November 12, 2013 |
/s/ Robert F. Reich |
|
|
Robert F. Reich |
EXHIBIT INDEX
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
99.1 |
|
Press Release dated November 12, 2013 announcing third quarter earnings. |
|
101.INS |
|
XBRL Instance Document |
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |