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HCOM > SEC Filings for HCOM > Form 10-Q on 6-May-2013All 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.


6-May-2013

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:

failures in critical back-office systems and IT infrastructure or a breach of our cyber security systems;

our ability to fund capital expenditures to improve our network and other facilities;

          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.


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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.


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Results of Operations for the Three Months Ended March 31, 2013 and 2012

Operating Revenues

The following tables summarize our volume information as of March 31, 2013 and 2012, and our operating revenues for the three months ended March 31, 2013 and 2012. For comparability, we also present volume information as of March 31, 2013 compared to December 31, 2012. In the third quarter of 2012, certain reclassifications were made to the channel information for operating revenues to align to the way we manage our business. The information for the three months ended March 31, 2012, presented for comparative purposes, has been reclassified to conform to the new presentation.

                               Volume Information



March 2013 compared to March 2012



                            March 31,   March 31,          Change
                              2013        2012      Number    Percentage

Voice access lines
Residential                   199,044     217,470   (18,426 )       -8.5 %
Business (1)                  196,970     186,854    10,116          5.4 %
Public                          4,350       4,559      (209 )       -4.6 %
                              400,364     408,883    (8,519 )       -2.1 %

High-Speed Internet lines
Residential                    89,464      85,518     3,946          4.6 %
Business                       18,810      17,714     1,096          6.2 %
Wholesale                       1,013       1,126      (113 )      -10.0 %
                              109,287     104,358     4,929          4.7 %

Long distance lines
Residential                   124,072     133,648    (9,576 )       -7.2 %
Business (1)                   80,659      76,197     4,462          5.9 %
                              204,731     209,845    (5,114 )       -2.4 %

Video services
Subscribers                    11,671       3,866     7,805        201.9 %
Homes Enabled                  83,000      41,200    41,800        101.5 %



(1) Business voice access lines and business long distance lines included approximately 11,800 and 6,200 lines, respectively, as of March 31, 2013 related to the acquisition of Wavecom.


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March 2013 compared to December 2012

                            March 31,   December 31,         Change
                              2013          2012       Number   Percentage

Voice access lines
Residential                   199,044        203,330   (4,286 )       -2.1 %
Business (1)                  196,970        185,142   11,828          6.4 %
Public                          4,350          4,405      (55 )       -1.2 %
                              400,364        392,877    7,487          1.9 %

High-Speed Internet lines
Residential                    89,464         88,016    1,448          1.6 %
Business                       18,810         18,575      235          1.3 %
Wholesale                       1,013          1,020       (7 )       -0.7 %
                              109,287        107,611    1,676          1.6 %

Long distance lines
Residential                   124,072        126,551   (2,479 )       -2.0 %
Business (1)                   80,659         74,781    5,878          7.9 %
                              204,731        201,332    3,399          1.7 %

Video services
Subscribers                    11,671          9,829    1,842         18.7 %
Homes Enabled                  83,000         65,000   18,000         27.7 %



(1) Business voice access lines and business long distance lines included approximately 11,800 and 6,200 lines, respectively, as of March 31, 2013 related to the acquisition of Wavecom.


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                   Operating Revenues (dollars in thousands)



                                   Three Months Ended
                                       March 31,                 Change
                                    2013         2012      Amount    Percentage

Wireline Services
Local voice services             $    35,028   $ 35,697   $   (669 )       -1.9 %
Network access services
Business data                          6,186      4,761      1,425         29.9 %
Wholesale carrier data                15,464     16,177       (713 )       -4.4 %
Subscriber line access charge          9,657      9,836       (179 )       -1.8 %
Switched carrier access                1,768      2,384       (616 )      -25.8 %
                                      33,075     33,158        (83 )       -0.3 %
Long distance services                 6,574      7,448       (874 )      -11.7 %
High-Speed Internet                    9,616      8,976        640          7.1 %
Video                                  2,204        497      1,707        343.5 %
Equipment and managed services         5,379      8,509     (3,130 )      -36.8 %
Other                                  3,377      2,380        997         41.9 %
                                      95,253     96,665     (1,412 )       -1.5 %
Wireless                                 712        909       (197 )      -21.7 %
                                 $    95,965   $ 97,574   $ (1,609 )       -1.6 %

Channel
Business                         $    40,516   $ 42,097   $ (1,581 )       -3.8 %
Consumer                              34,647     33,942        705          2.1 %
Wholesale                             17,232     18,561     (1,329 )       -7.2 %
Other                                  3,570      2,974        596         20.0 %
                                 $    95,965   $ 97,574   $ (1,609 )       -1.6 %

The decrease in local services revenues was caused primarily by the decline of $1.8 million of legacy voice offset by $1.1 million of revenue 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.

Business data revenues for the three months ended March 31, 2013 increased when compared to the prior year period because of $1.4 million of revenue from Wavecom customers acquired in December 2012. Wholesale carrier data 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 an approximate 4.7% growth in our HSI subscribers ($0.4 million of the increase in revenue).


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On July 1, 2011, we commercially launched our video service on the island of Oahu. We are rolling out 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 ramp up significantly 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 fewer sales and installations of customer premise equipment for certain large government customers during the three months ended March 31, 2013 compared 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 were comparable to the same period in the prior year.

Operating Costs and Expenses

The following tables summarize our costs and expenses for the three months ended
March 31, 2013 compared to the costs and expenses for the three months ended
March 31, 2012 (dollars in thousands):



                                     Three Months Ended
                                          March 31,                       Change
                                     2013           2012           Amount       Percentage

Cost of revenues (exclusive
of depreciation and
amortization)                    $     40,284    $    40,799    $       (515 )        -1.3 %
Selling, general and
administrative expenses                28,379         29,026            (647 )        -2.2 %
Depreciation and amortization          18,717         16,588           2,129          12.8 %

                                 $     87,380    $    86,413    $        967           1.1 %

The Company's total headcount as of March 31, 2013 was 1,382 compared to 1,323 as of March 31, 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. The decrease for the three month period ended March 31, 2013 compared to the same period in the prior year was because of lower customer premise equipment costs of $2.9 million as a result of decreased customer premise equipment revenues partially offset by an increase in video content costs on a ramp up in Hawaiian Telcom TV subscribers.

Selling, general and administrative expenses include costs related to sales and marketing, information systems and other administrative functions. The expenses for the three months ended March 31, 2013 compared to the same period in the prior year decreased on reduced pension costs.

Depreciation and amortization for the three month period ended March 31, 2013 increased compared to the same period in the prior year because of new property additions placed into service.


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Other Income and (Expense)

The following table summarizes other income (expense) for the three months ended
March 31, 2013 and 2012 (dollars in thousands).



                                          Three Months Ended
                                              March 31,                   Change
                                          2013         2012        Amount     Percentage

Interest expense                       $    (5,540 ) $  (5,986 ) $      446         -7.5 %
Loss on early extinguishment of debt             -      (5,112 )      5,112       -100.0 %
Interest income and other                       15          12            3         25.0 %

                                       $    (5,525 ) $ (11,086 ) $    5,561        -50.2 %

Interest expense decreased for the three month period ended March 31, 2013 compared to the same period in the prior year primarily because of the benefit of the refinancing which occurred in the first quarter of 2012.

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 Provision

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 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 March 31, 2013, we had cash of $55.9 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 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. Any sustained declines in the value of pension trust assets or higher 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.


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Cash Flows for Three Months Ended March 31, 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 $14.9 million for the three months ended March 31, 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 $12.5 million for the three months ended March 31, 2012. The increase in cash provided by operations was because of improved management of working capital.

Cash used in investing activities was $23.3 million for the three months ended March 31, 2013 and was comprised of capital expenditures. Cash used in investing activities was $19.8 million of capital expenditures for the three months ended March 31, 2012. The level of capital expenditures for 2013 is expected to be comparable to 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 three months ended March 31, 2013 was related primarily to the repayment of our debt. Cash used in financing activities for the three months ended March 31, 2012 was related primarily to the refinancing of our debt.

Outstanding Debt and Financing Arrangements

As of March 31, 2013, we had outstanding $297.1 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

During the three months ended March 31, 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.

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.


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