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HCOM > SEC Filings for HCOM > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for HAWAIIAN TELCOM HOLDCO, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HAWAIIAN TELCOM HOLDCO, INC.


8-Nov-2012

Quarterly Report


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 operate as a stand-alone telecommunications provider;

          our ability to close and integrate the pending Wavecom acquisition;

          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;

          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.


Table of Contents

Segments and Sources of Revenue

We operate in two reportable segments (Wireline Services and Wireless) 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 such as voice mail, caller ID and 3-way calling.

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.

Wireless

We receive revenue from wireless services, including the sale of wireless handsets and other wireless accessories.


Table of Contents

Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

Operating Revenues

The following tables summarize our volume information as of September 30, 2012 and 2011, and our operating revenues for the three and nine months ended September 30, 2012 and 2011. For comparability, we also present customer activity as of September 30, 2012 compared to June 30, 2012.

                               Volume Information



September 2012 compared to September 2011



                            September 30,   September 30,          Change
                                2012            2011        Number    Percentage

Voice access lines
Residential                       207,732         227,064   (19,332 )       -8.5 %
Business                          185,849         189,927    (4,078 )       -2.1 %
Public                              4,467           4,657      (190 )       -4.1 %
                                  398,048         421,648   (23,600 )       -5.6 %

High-Speed Internet lines
Residential                        86,570          83,636     2,934          3.5 %
Business                           18,260          17,176     1,084          6.3 %
Wholesale                           1,014           1,164      (150 )      -12.9 %
                                  105,844         101,976     3,868          3.8 %

Long distance lines
Residential                       128,760         139,193   (10,433 )       -7.5 %
Business                           75,529          76,895    (1,366 )       -1.8 %
                                  204,289         216,088   (11,799 )       -5.5 %

Video
Subscribers                         8,444             470     7,974           NA
Homes Enabled                      59,422              NA        NA           NA


Table of Contents

September 2012 compared to June 2012

                            September 30,   June 30,         Change
                                2012          2012     Number   Percentage

Voice access lines
Residential                       207,732    212,668   (4,936 )       -2.3 %
Business                          185,849    185,574      275          0.1 %
Public                              4,467      4,493      (26 )       -0.6 %
                                  398,048    402,735   (4,687 )       -1.2 %

High-Speed Internet lines
Residential                        86,570     86,021      549          0.6 %
Business                           18,260     17,990      270          1.5 %
Wholesale                           1,014      1,122     (108 )       -9.6 %
                                  105,844    105,133      711          0.7 %

Long distance lines
Residential                       128,760    131,082   (2,322 )       -1.8 %
Business                           75,529     75,763     (234 )       -0.3 %
                                  204,289    206,845   (2,556 )       -1.2 %

Video
Subscribers                         8,444      6,354    2,090         32.9 %
Homes Enabled                      59,422     50,149    9,273         18.5 %

                   Operating Revenues (dollars in thousands)



For Three Months



                                   Three Months Ended
                                     September 30,               Change
                                    2012         2011      Amount    Percentage

Wireline Services
Local voice services             $    35,257   $ 36,902   $ (1,645 )       -4.5 %
Network access services
Business data                          4,600      4,700       (100 )       -2.1 %
Wholesale carrier data                15,676     15,586         90          0.6 %
Subscriber line access charge          9,619      9,802       (183 )       -1.9 %
Switched carrier access                2,226      2,423       (197 )       -8.1 %
                                      32,121     32,511       (390 )       -1.2 %
Long distance services                 6,735      7,777     (1,042 )      -13.4 %
High-Speed Internet                    9,013      8,920         93          1.0 %
Video                                  1,528         67      1,461           NA
Equipment and managed services         8,715      7,114      1,601         22.5 %
Other                                  2,472      2,679       (207 )       -7.7 %
                                      95,841     95,970       (129 )       -0.1 %
Wireless                                 806      1,070       (264 )      -24.7 %
                                 $    96,647   $ 97,040   $   (393 )       -0.4 %

Channel
Business                         $    41,618   $ 41,072   $    546          1.3 %
Consumer                              34,486     34,210        276          0.8 %
Wholesale                             17,634     18,009       (375 )       -2.1 %
Other                                  2,909      3,749       (840 )      -22.4 %
                                 $    96,647   $ 97,040   $   (393 )       -0.4 %


Table of Contents

For Nine Months



                                   Nine Months Ended
                                     September 30,              Change
                                   2012        2011       Amount    Percentage

Wireline Services
Local voice services             $ 106,684   $ 110,980   $ (4,296 )       -3.9 %
Network access services
Business data                       14,152      13,626        526          3.9 %
Wholesale carrier data              47,310      48,265       (955 )       -2.0 %
Subscriber line access charge       29,211      30,065       (854 )       -2.8 %
Switched carrier access              6,861       7,464       (603 )       -8.1 %
                                    97,534      99,420     (1,886 )       -1.9 %
Long distance services              21,342      24,428     (3,086 )      -12.6 %
High-Speed Internet                 26,948      26,466        482          1.8 %
Video                                3,060          67      2,993           NA
Equipment and managed services      23,604      23,700        (96 )       -0.4 %
Other                                7,168       7,953       (785 )       -9.9 %
                                   286,340     293,014     (6,674 )       -2.3 %
Wireless                             2,570       3,276       (706 )      -21.6 %
                                 $ 288,910   $ 296,290   $ (7,380 )       -2.5 %

Channel
Business                         $ 123,481   $ 125,413   $ (1,932 )       -1.5 %
Consumer                           102,778     103,919     (1,141 )       -1.1 %
Wholesale                           53,903      55,729     (1,826 )       -3.3 %
Other                                8,748      11,229     (2,481 )      -22.1 %
                                 $ 288,910   $ 296,290   $ (7,380 )       -2.5 %

The operating revenue information above for 2012 includes additional detail not previously provided including components of network access services revenue, television revenue, and equipment and managed services revenue. These changes were made to provide additional insight into our operations and to reflect the strategic emphasis on potential growth products such as business data and video. Certain reclassifications were made to the 2011 information to conform to the 2012 presentation. To provide further insight, we have provided revenue information by channel as well. In the third quarter of 2012, certain reclassifications were made to the channel information to align to the way we manage our business. The channel information for the year-to-date 2012 period and for 2011 has been reclassified to conform to the new presentation.

The decrease in local services revenues was caused primarily by the decline in voice access lines of 5.6% ($2.1 million and $6.2 million of the decline in revenue for the three and nine month periods, respectively). 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 moving local voice service to VoIP technology offered by cable providers, as well as using wireless services in place of traditional wireline phone service. Generally, VoIP technology offered by competitors 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 are also continuing to 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.


Table of Contents

Network access services revenue for the three and nine months ended September 30, 2012 decreased as compared to the same periods in the prior year because certain wireless carriers disconnected lower bandwidth circuits replaced with new more efficient higher bandwidth circuits resulting in a reduction in wholesale carrier data revenue for the three and nine month periods, respectively. We anticipate the data volume and related revenue will increase in future periods as wireless carriers deploy their enhanced wireless networks. In addition, the impact of the decline in voice access lines is reflected in subscriber line access charges and switched carrier access charges. These reductions were partially offset by growth in business data revenue for the nine month period.

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 were comparable to the prior year for both the three and nine month periods. We are continuing to focus on upgrading our network to expand the reach of our higher bandwidth premium services.

On July 1, 2011, we commercially launched our video service on the island of Oahu. We are deploying Hawaiian Telcom TV gradually to selected areas to ensure delivery of superior service and an ongoing excellent customer experience. We have initiated targeted marketing efforts resulting in penetration rates exceeding expectations. Our volume is anticipated to continue to ramp 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 increased for the three months ended September 30, 2012 when compared to the same period in the prior year because of more sales and installations of customer premise equipment for certain large government and institutional customers during the period. For the nine months ended September 30, 2012, equipment and managed services sales was comparable to the same period 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.

Wireless revenues decreased as we attempted to focus our marketing efforts on other segments of our business.

Operating Costs and Expenses

The following tables summarize our costs and expenses for the three and nine months ended September 30, 2012 compared to the costs and expenses for the three and nine months ended September 30, 2011 (dollars in thousands):

For Three Months



                                     Three Months Ended
                                        September 30,                    Change
                                     2012           2011          Amount       Percentage

Cost of revenues (exclusive
of depreciation and
amortization)                    $     41,176    $    39,055    $     2,121           5.4 %
Selling, general and
administrative expenses                26,547         28,066         (1,519 )        -5.4 %
Depreciation and amortization          18,023         17,086            937           5.5 %

                                 $     85,746    $    84,207    $     1,539           1.8 %


Table of Contents

For Nine Months



                                     Nine Months Ended
                                       September 30,                    Change
                                    2012           2011          Amount       Percentage

Cost of revenues (exclusive
of depreciation and
amortization)                    $   121,407    $   121,585    $      (178 )        -0.1 %
Selling, general and
administrative expenses               82,567         88,584         (6,017 )        -6.8 %
Depreciation and amortization         51,965         47,603          4,362           9.2 %

                                 $   255,939    $   257,772    $    (1,833 )        -0.7 %

The Company's total headcount as of September 30, 2012 was 1,343 compared to 1,300 as of September 30, 2011. 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. The increase in such costs for the three months ended September 30, 2012 when compared to the same period of the prior year was because of higher costs of customer premise equipment of $1.7 million related to the increased equipment revenues.

Selling, general and administrative expenses include costs related to sales and marketing, information systems and other administrative functions. The decrease for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was because of lower pension costs of $1.3 million on the freeze of the union pension plan. The decrease for the nine months ended September 30, 2012 compared to the same period in the prior year was because of reduced personnel costs of $6.7 million on lower average headcount and the freeze of the union pension plan. In addition, during the nine months ended September 30, 2011, we had incurred restructuring costs of $1.9 million. The cost decreases were offset by increased external commissions related to television sales of $1.3 million and bad debt of $1.0 million as we had recognized a benefit in 2011 from a large customer settlement on a past due account.

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, 2012 and 2011 (dollars in thousands):

For Three Months



                              Three Months Ended
                                September 30,               Change
                               2012         2011      Amount    Percentage

Interest expense            $    (5,490 ) $ (6,364 ) $    874        -13.7 %
Interest income and other            10         21        (11 )      -52.4 %

                            $    (5,480 ) $ (6,343 ) $    863        -13.6 %


Table of Contents

For Nine Months



                                         Nine Months Ended
                                           September 30,              Change
                                         2012        2011       Amount    Percentage

Interest expense                       $ (16,890 ) $ (18,858 ) $  1,968        -10.4 %
Loss on early extinguishment of debt      (5,112 )         -     (5,112 )         NA
Interest income and other                     28          51        (23 )      -45.1 %

                                       $ (21,974 ) $ (18,807 ) $ (3,167 )       16.8 %

Interest expense decreased for the three and nine months ended September 30, 2012 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 first quarter of 2012, we incurred a $5.1 million charge to income which consisted of the premium on the repayment of the old debt and certain refinancing costs.

Income Tax Benefit

A valuation allowance has been provided at September 30, 2012 and December 31, 2011 for our deferred tax assets because of the uncertainty as to the realization of such assets. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent that we generate taxable income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

Liquidity and Capital Resources

As of September 30, 2012, we had cash of $65.4 million. From an ongoing operating perspective, our cash requirements in 2012 consist of supporting the development and introduction of new products, our purchase of Wavecom, 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 operating activities.

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. Sustained declines in the value of pension trust assets and 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, 2012 and 2011

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.


Table of Contents

Net cash provided by operations amounted to $59.0 million for the nine months ended September 30, 2012. 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 $56.4 million for the nine months ended September 30, 2011. The increase in cash provided by operations was because we are no longer incurring reorganization expenditures.

Cash used in investing activities was comprised of $61.0 million and $55.2 million of capital expenditures for the nine months ended September 30, 2012 and 2011, respectively. The level of capital expenditures for 2012 is expected to be comparable to 2011 as we invest in our network and systems to support new product introductions and enable next-generation technologies.

Cash used in financing activities for the nine months ended September 30, 2012 was related primarily to the refinancing of our debt. Cash provided by financing activities for the nine months ended September 30, 2011 was related to proceeds from the sale of common stock under our warrant agreements.

Outstanding Debt and Financing Arrangements

As of September 30, 2012, we had outstanding $300.0 million in aggregate long-term debt. The term loan has a maturity date of 2017. 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

. . .

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