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HCOM > SEC Filings for HCOM > Form 10-K on 14-Mar-2013All Recent SEC Filings

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

Form 10-K for HAWAIIAN TELCOM HOLDCO, INC.


14-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

The statements in the discussion and analysis regarding industry outlook, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, "Risk Factors." Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with Item 6, "Selected Financial Data" and our consolidated financial statements and related notes thereto included elsewhere in this annual report.

Chapter 11 Reorganization

On December 1, 2008, we and certain of our subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code and on October 28, 2010, the Company emerged from Chapter 11. For further information regarding these petitions, see Note 22 to the consolidated financial statements.

Under the Plan of Reorganization, all of the existing common stock and stock options were cancelled upon emergence and the equity holders received no recovery. Our emergence from Chapter 11 on the emergence date resulted in a new reporting entity and the new shares of common stock were issued to the former secured lenders and swap counterparties. We adopted fresh-start reporting as of October 31, 2010. As required by fresh-start accounting, our assets and liabilities have been adjusted to fair value. Accordingly, our financial condition and results of operations after October 31, 2010 are not comparable to the financial condition and result of operations for periods prior to and on October 31, 2010.

Wavecom Solutions Corporation Acquisition

On December 31, 2012, we completed our acquisition of Wavecom Solutions Corporation ("Wavecom") for $8.3 million in cash, net of cash acquired and final purchase price adjustments. Wavecom provides telecommunication services in the State of Hawaii which are complementary to our operations. Because the acquisition occurred on December 31, 2012, the financial results of Wavecom had no impact on our consolidated statement of income for the year ended December 31, 2012.

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 Telephone 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


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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.

Results of Operations for the Years Ended December 31, 2012, 2011 and 2010

As discussed above, we emerged from chapter 11 and adopted fresh-start reporting on October 31, 2010. References to "Predecessor" refer to the Company prior to and on October 31, 2010. References to "Successor" refer to the Company after October 31, 2010 after giving effect to the plan of reorganization and application of fresh-start reporting. As a result of the application of fresh-start reporting, the Successor's financial statements are not comparable with the Predecessor's financial statements. However, for purposes of the discussion of the results of operations, the combined ten months ended October 31, 2010 and two months ended December 31, 2010 have been compared to the year ended December 31, 2011. We believe this combined information is useful to the readers of this Annual Report in understanding changes in our results of operations. Significant changes in operating results for the Successor, as compared to Predecessor periods, relate primarily to depreciation and amortization because of changes in the basis of long-lived assets, and changes in interest expense with a new borrowing facility in place. In this discussion, we will disclose the fresh-start and other impacts on our results of operations that vary from historical Predecessor periods to aid in the understanding of our financial performance.

Operating Revenues

The following tables summarize our volume information as of December 31, 2012, 2011 and 2010, and our operating revenues for the years ended December 31, 2012, 2011 and 2010. The volume information excludes customers of Wavecom. As we acquired this subsidiary on December 31, 2012 no revenue was reflected in our 2012 results of operations. Hence, its volume information is not meaningful in analyzing our 2012 performance.


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                               Volume Information

                                                       2012 vs. 2011               2011 vs. 2010
                        December 31,                       Change                     Change
                2012        2011        2010       Number      Percentage      Number     Percentage
Voice
access
lines
Residential     203,330     223,009     241,506     (19,679 )         (8.8 )%   (18,497 )        (7.7 )%
Business        185,142     189,035     194,890      (3,893 )         (2.1 )%    (5,855 )        (3.0 )%
Public            4,405       4,623       4,791        (218 )         (4.7 )%      (168 )        (3.5 )%

                392,877     416,667     441,187     (23,790 )         (5.7 )%   (24,520 )        (5.6 )%

High-Speed
Internet
lines
Residential      88,016      84,634      81,770       3,382            4.0 %      2,864           3.5 %
Business         18,575      17,442      16,728       1,133            6.5 %        714           4.3 %
Wholesale         1,020       1,156       1,206        (136 )        (11.8 )%       (50 )        (4.1 )%

                107,611     103,232      99,704       4,379            4.2 %      3,528           3.5 %

Long
distance
lines
Residential     126,551     136,921     147,983     (10,370 )         (7.6 )%   (11,062 )        (7.5 )%
Business         74,781      76,160      79,323      (1,379 )         (1.8 )%    (3,163 )        (4.0 )%

                201,332     213,081     227,306     (11,749 )         (5.5 )%   (14,225 )        (6.3 )%

Video
Subscribers       9,829       1,620           -       8,209          506.7 %      1,620            NA

Homes
Enabled          65,000      27,400           -      37,600          137.2 %     27,400            NA


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2012 compared to 2011

Operating Revenues (dollars in thousands)

                                       For the Year Ended
                                          December 31,                Change
                                        2012        2011       Amount     Percentage
    Wireline Services
    Local voice services              $ 141,352   $ 146,921   $ (5,569 )         (3.8 )%
    Network access services
    Business data                        18,946      18,133        813            4.5 %
    Wholesale carrier data               63,192      64,589     (1,397 )         (2.2 )%
    Subscriber line access charge        38,885      39,857       (972 )         (2.4 )%
    Switched carrier access               8,883       9,833       (950 )         (9.7 )%

                                        129,906     132,412     (2,506 )         (1.9 )%

    Long distance services               27,959      31,945     (3,986 )        (12.5 )%
    High-Speed Internet                  36,323      35,426        897            2.5 %
    Video                                 4,883         269      4,614             NA
    Equipment and managed services       31,418      33,274     (1,856 )         (5.6 )%
    Other                                10,321      10,638       (317 )         (3.0 )%

                                        382,162     390,885     (8,723 )         (2.2 )%
    Wireless                              3,336       4,271       (935 )        (21.9 )%

                                      $ 385,498   $ 395,156   $ (9,658 )         (2.4 )%

    Channel
    Business                          $ 163,923   $ 168,262   $ (4,339 )         (2.6 )%
    Consumer                            137,765     137,563        202            0.1 %
    Wholesale                            71,673      74,422     (2,749 )         (3.7 )%
    Other                                12,137      14,909     (2,772 )        (18.6 )%

                                      $ 385,498   $ 395,156   $ (9,658 )         (2.4 )%

The operating revenue information above for 2012 includes additional detail not previously provided including components of network access revenue, video 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.

The decrease in local services revenues was caused primarily by the decline in voice access lines of 5.7% ($8.4 million of the decline in revenue). 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 service 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


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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.

Network access services revenue for the year ended December 31, 2012 decreased as compared to 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 year. 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.

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 an approximate 4.2% growth in our HSI subscribers ($1.5 million of the increase in revenue). 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 decreased because of less sales and installations of customer premise equipment for certain large government customers in 2012. 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.


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2011 compared to 2010

Operating Revenues (dollars in thousands)

               Successor         Combined         Successor             Predecessor
                                                                                             Year-over-Year
                For the          For the         Period from            Period from              Change
               Year Ended       Year Ended        November 1             January 1
              December 31,     December 31,    to December 31,         to October 31,
                  2011             2010              2010                   2010          Amount     Percentage
Wireline
Services
Local
voice
services       $    146,921    $     155,982     $       25,004         $      130,978   $ (9,061 )         (5.8 )%
Network
access
services
Business
data                 18,133           16,513              2,908                 13,605      1,620            9.8 %
Wholesale
carrier
data                 64,589           62,081             11,251                 50,830      2,508            4.0 %
Subscriber
line
access
charge               39,857           41,734              6,671                 35,063     (1,877 )         (4.5 )%
Switched
carrier
access                9,833           11,052              1,710                  9,342     (1,219 )        (11.0 )%

                    132,412          131,380             22,540                108,840      1,032            0.8 %

Long
distance
services             31,945           34,694              5,539                 29,155     (2,749 )         (7.9 )%
High-Speed
Internet             35,426           34,302              5,949                 28,353      1,124            3.3 %
Video                   269                -                  -                      -        269             NA
Equipment
and
managed
services             33,274           28,095              4,938                 23,157      5,179           18.4 %
Other                10,638           12,257              2,018                 10,239     (1,619 )        (13.2 )%

                    390,885          396,710             65,988                330,722     (5,825 )         (1.5 )%
Wireless              4,271            4,735                771                  3,964       (464 )         (9.8 )%

               $    395,156    $     401,445     $       66,759         $      334,686   $ (6,289 )         (1.6 )%

Channel
Business       $    168,262    $     165,884     $       27,483         $      138,401   $  2,378            1.4 %
Consumer            137,563          145,436             23,526                121,910     (7,873 )         (5.4 )%
Wholesale            74,422           73,133             12,961                 60,172      1,289            1.8 %
Other                14,909           16,992              2,789                 14,203     (2,083 )        (12.3 )%

               $    395,156    $     401,445     $       66,759         $      334,686   $ (6,289 )         (1.6 )%

The decrease in local services revenues was caused primarily by the decline in voice access lines of 5.6% ($8.7 million of the decline in revenue). The decline in voice access lines from 2010 to 2011 was caused by the same factors discussed previously for the decline from 2011 to 2012.

Network access services revenue for the year ended December 31, 2011 was comparable to the same period in the prior year as increased revenue related to the demand for data services of $4.2 million was offset by the revenue impact of the decline in voice access lines.

The decrease in long distance revenue was primarily because of the decline in long distance lines.

HSI revenues increased when compared to the prior year primarily because an approximate 3.5% growth in our HSI subscribers ($1.2 million of the increase in revenue).

Equipment and managed services sales increased as compared to the prior year because of more sales and installations of customer premise equipment for certain large government customers in 2011.

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


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Operating Costs and Expenses

2012 compared to 2011

    The following table summarizes our costs and expenses for 2012 compared to
the costs and expenses for 2011 (dollars in thousands):

                                        For the Year Ended
                                           December 31,                    Change
                                      2012             2011         Amount     Percentage
Cost of revenues (exclusive of
depreciation and amortization)     $    160,226     $    159,822   $     404           0.3 %
Selling, general and
administrative expenses                 108,508          120,390     (11,882 )        -9.9 %
Depreciation and amortization            70,908           63,806       7,102          11.1 %

                                   $    339,642     $    344,018   $  (4,376 )        -1.3 %

The Company's total headcount as of December 31, 2012 was 1,392 (includes 39 Wavecom employees added on December 31, 2012) compared to 1,309 as of December 31, 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 costs for the year ended December 31, 2012 were comparable to the prior year.

Selling, general and administrative expenses include costs related to sales and marketing, information systems and other administrative functions. The decrease in such expenses was primarily because of reduced labor costs of $8.9 million on lower average headcount and reduced pension costs. In addition, there was a decline in bad debt expense of $2.2 million primarily because of the settlement of balances due from Wavecom Solutions Corporation as described in Note 3 to the consolidated financial statements.

Depreciation and amortization increased because of new property additions placed into service.

2011 compared to 2010

The following table summarizes our costs and expense for the year ended December 31, 2011 compared to the year ended December 31, 2010 (dollars in thousands).

                   Successor         Combined         Successor             Predecessor
                                                                                                  Year-over-Year
                    For the          For the         Period from            Period from               Change
                   Year Ended       Year Ended        November 1             January 1
                  December 31,     December 31,    to December 31,         to October 31,
                      2011             2010              2010                   2010          Amount      Percentage
Cost of
revenues
(exclusive of
depreciation
and
amortization)      $    159,822    $     162,231     $       27,117         $      135,114   $  (2,409 )         (1.5 )%
Selling,
general and
administrative
expenses                120,390          127,751             21,938                105,813      (7,361 )         (5.8 )%
Depreciation
and
amortization             63,806          146,384              9,723                136,661     (82,578 )        (56.4 )%

                   $    344,018    $     436,366     $       58,778         $      377,588   $ (92,348 )        (21.2 )%


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The Company's total headcount as of December 31, 2011 was 1,309 compared to 1,431 as of December 31, 2010.

The cost of revenues for the year ended December 31, 2011 decreased $6.6 million due to a decline in wages and employee benefit costs on lower headcount and pension costs offset by higher electricity costs of $4.4 million on higher electricity rates.

Selling, general and administrative expenses for the year ended December 31, 2011 decreased because of more favorable rates on information technology outsourcing for a benefit of $6.2 million and a decline in bad debt expense of $2.6 million with improved collection efforts and bad debt recovery. The decrease was offset by a $2.0 million increase in stock compensation expense and $1.8 million in restructuring charges.

Depreciation and amortization decreased because of the new lower basis assigned to our long-lived assets in fresh-start accounting.

Other Income and (Expense)

2012 compared to 2011

    The following table summarizes other income (expense) for the years ended
December 31, 2012 and 2011 (dollars in thousands).

                                           For the Year Ended
                                              December 31,                Change
                                            2012        2011       Amount     Percentage
  Interest expense                        $ (22,183 ) $ (25,339 ) $  3,156          -12.5 %
  Loss on early extinguishment of debt       (5,112 )         -     (5,112 )           NA
  Interest income and other                      59          65         (6 )         -9.2 %

                                          $ (27,236 ) $ (25,274 ) $ (1,962 )          7.8 %

Interest expense decreased 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.

2011 compared to 2010

The following table summarizes other income (expense) for the years ended December 31, 2011 and 2010 (dollars in thousands).

             Successor         Combined         Successor             Predecessor

              For the          For the         Period from            Period from         Year-over-Year Change
             Year Ended       Year Ended        November 1             January 1
            December 31,     December 31,    to December 31,         to October 31,
                2011             2010              2010                   2010            Amount        Percentage
Interest
expense      $    (25,339 )  $     (27,727 )   $       (4,329 )       $      (23,398 )  $     2,388            (8.6 )%
Interest
income
and
other                  65               90                 16                     74            (25 )         (27.8 )%

             $    (25,274 )  $     (27,637 )   $       (4,313 )       $      (23,324 )  $     2,363            (8.6 )%

Interest expense decreased primarily because the Company was no longer accruing paid-in-kind interest on debt in conjunction with the Chapter 11 proceeding.


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Reorganization Items

    Reorganization items represent amounts incurred as a direct result of the
Company's Chapter 11 filing and are presented separately in our consolidated
statements of income. Such (income) and expense items consisted of the following
(dollars in thousands):

                                             Successor                     Predecessor
                                    For the         Period from            Period from
                                  Year Ended        November 1              January 1
                                 December 31,     to December 31,         to October 31,
                                     2011              2010                    2010
Professional fees                 $      1,050      $          539         $       10,586
Effects of the plan of
reorganization                               -                   -               (708,590 )
Fresh-start valuation of
assets and liabilities                       -                   -                445,796
Other                                        -                   -                    534

                                  $      1,050      $          539         $     (251,674 )

The Company emerged from Chapter 11 in October 2010 but continued to incur reorganization related expenses until December 2011 as the Chapter 11 cases were not closed until January 2012.

Reorganization professional fees declined as the activity related to the Chapter 11 reorganization diminished. . . .

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