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HCOM > SEC Filings for HCOM > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for HAWAIIAN TELCOM HOLDCO, INC.

Form 10-Q for HAWAIIAN TELCOM HOLDCO, INC.


7-May-2014

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 for network enhancements;

          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 retain experienced personnel;

          economic conditions in Hawaii;

          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 (telecommunication and data center colocation) 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.

In the fourth quarter of 2013, we reevaluated our reportable segments. This was prompted by the acquisition of SystemMetrics and our current strategic focus. Previously, we presented a wireline and other segment (which was primarily wireless services). With the diminishing significance of the wireless segment, we no longer provide separate wireless information to our chief operating decision maker. Both these segments are now combined into the telecommunications segment. Prior to the acquisition of SystemMetrics on September 30, 2013, we did not have data center colocation operations. Hence, we were in a single segment prior to September 30, 2013 under the revised reportable segment structure.

Telecommunications

The telecommunications 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 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.

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

Data Center Colocation

The data center colocation segment provides physical colocation, virtual colocation and various related telephony services.


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Results of Operations for the Three Months Ended March 31, 2014 and 2013

Operating Revenues

The following tables summarize our volume information (lines or subscribers) as of March 31, 2014 and 2013, and our operating revenues for the three months ended March 31, 2014 and 2013. For comparability, we also present volume information as of March 31, 2014 compared to December 31, 2013.

                               Volume Information



As of March 31, 2014 compared to March 31, 2013



                            March 31,   March 31,          Change
                              2014        2013      Number    Percentage

Voice access lines
Residential                   182,375     199,044   (16,669 )       -8.4 %
Business                      192,202     196,970    (4,768 )       -2.4 %
Public                          4,073       4,350      (277 )       -6.4 %
                              378,650     400,364   (21,714 )       -5.4 %

High-Speed Internet lines
Residential                    91,429      89,464     1,965          2.2 %
Business                       19,404      18,810       594          3.2 %
Wholesale                         936       1,013       (77 )       -7.6 %
                              111,769     109,287     2,482          2.3 %

Long distance lines
Residential                   115,019     124,072    (9,053 )       -7.3 %
Business                       79,108      80,659    (1,551 )       -1.9 %
                              194,127     204,731   (10,604 )       -5.2 %

Video services
Subscribers                    20,279      11,671     8,608         73.8 %
Homes Enabled                 130,000      83,000    47,000         56.6 %


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As of March 31, 2014 compared to December 31, 2013

                            March 31,   December 31,         Change
                              2014          2013       Number   Percentage

Voice access lines
Residential                   182,375        186,415   (4,040 )       -2.2 %
Business                      192,202        193,027     (825 )       -0.4 %
Public                          4,073          4,155      (82 )       -2.0 %
                              378,650        383,597   (4,947 )       -1.3 %

High-Speed Internet lines
Residential                    91,429         91,437       (8 )        0.0 %
Business                       19,404         19,320       84          0.4 %
Wholesale                         936            963      (27 )       -2.8 %
                              111,769        111,720       49          0.0 %

Long distance lines
Residential                   115,019        117,282   (2,263 )       -1.9 %
Business                       79,108         79,496     (388 )       -0.5 %
                              194,127        196,778   (2,651 )       -1.3 %

Video services
Subscribers                    20,279         18,393    1,886         10.3 %
Homes Enabled                 130,000        120,000   10,000          8.3 %


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                   Operating Revenues (dollars in thousands)



                                   Three Months Ended
                                       March 31,                 Change
                                    2014         2013      Amount    Percentage

Wireline Services
Local voice services             $    33,059   $ 35,028   $ (1,969 )       -5.6 %
Network access services
Business data                          6,624      6,186        438          7.1 %
Wholesale carrier data                14,386     15,464     (1,078 )       -7.0 %
Subscriber line access charge          9,169      9,657       (488 )       -5.1 %
Switched carrier access                1,552      1,768       (216 )      -12.2 %
                                      31,731     33,075     (1,344 )       -4.1 %
Long distance services                 5,906      6,574       (668 )      -10.2 %
High-Speed Internet                   10,544      9,616        928          9.7 %
Video                                  4,754      2,204      2,550        115.7 %
Equipment and managed services         4,489      5,379       (890 )      -16.5 %
Wireless                                 593        712       (119 )      -16.7 %
Other                                  3,591      3,377        214          6.3 %
                                      94,667     95,965     (1,298 )       -1.4 %
Data center colocation                 2,405          -      2,405           NA
                                 $    97,072   $ 95,965   $  1,107          1.2 %

Channel
Business                         $    42,512   $ 40,516   $  1,996          4.9 %
Consumer                              35,823     34,647      1,176          3.4 %
Wholesale                             15,937     17,232     (1,295 )       -7.5 %
Other                                  2,800      3,570       (770 )      -21.6 %
                                 $    97,072   $ 95,965   $  1,107          1.2 %

The decrease in local voice services revenues was caused primarily by the decline of voice access lines. 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 revenues for the three months ended March 31, 2014 increased when compared to the prior year period because of business win-backs and increasing bandwidth needs from our customers. Wholesale carrier data revenue declined for the three months ended March 31, 2014 compared to the prior year period because of one-time service termination and other fees amounting to $0.8 million in 2013. 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.


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HSI revenues increased when compared to the prior year with premium pricing on higher bandwidth offerings.

We are continuing the roll out of Hawaiian Telcom TV on the island of Oahu focusing on the 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 because of fewer sales and installations of customer premise equipment for certain large institutional customers during the three months ended March 31, 2014 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 and other service revenues were comparable to the same period in the prior year.

Data center colocation revenues are the result of the acquisition of SystemMetrics on September 30, 2013.

Operating Costs and Expenses



The following tables summarize our costs and expenses for the three months ended
March 31, 2014 compared to the costs and expenses for the three months ended
March 31, 2013 (dollars in thousands):



                                  Three Months Ended
                                       March 31,                      Change
                                  2014           2013          Amount       Percentage

Cost of revenues
(exclusive of depreciation
and amortization)             $     40,948    $    40,284    $       664           1.6 %
Selling, general and
administrative expenses             29,266         28,379            887           3.1 %
Depreciation and
amortization                        18,720         18,717              3           0.0 %

                              $     88,934    $    87,380    $     1,554           1.8 %

There were no first quarter 2013 operations for the data center colocation segment as it was newly acquired on September 30, 2013. Hence, a separate discussion for the telecommunications and data center colocation segment is not provided for the current period.

The Company's total headcount as of March 31, 2014 was 1,380 compared to 1,382 as of March 31, 2013. 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. Cost of revenues for the three month period ended March 31, 2014 increased because of costs related to the operations of SystemMetrics which was acquired on September 30, 2013.


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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, 2014 compared to the same period in the prior year increased because of expenses related to SystemMetrics which was acquired on September 30, 2013 and certain expenses not expected to be recurring including incremental stock compensation of $0.6 million, partially offset by a damage claim recovery of $0.9 million.

Depreciation and amortization for the three month period ended March 31, 2014 was comparable to the same period in the prior year.

Other Income and (Expense)



The following table summarizes other income (expense) for the three months ended
March 31, 2014 and 2013 (dollars in thousands).



                              Three Months Ended
                                  March 31,                 Change
                               2014         2013     Amount    Percentage

Interest expense            $    (4,188 ) $ (5,540 ) $ 1,352        -24.4 %
Interest income and other            10         15        (5 )      -33.3 %

                            $    (4,178 ) $ (5,525 ) $ 1,347        -24.4 %

Interest expense decreased primarily because of the lower interest rates on the debt which was refinanced in the second quarter of 2013.

Income Tax Provision

We had effective tax rates of 40.2% and 39.6% for the three months ended March 31, 2014 and 2013, respectively. We consider a variety of factors in determining the effective tax rate, including our forecasted full-year pretax results, the U.S. federal statutory rate, expected nondeductible expenses and estimated state taxes.

As of December 31, 2013, net operating losses available for carry forward through 2033 amounted to $60.0 million for federal purposes and $66.3 million for state purposes. Availability of net operating losses in future periods may be subject to additional limitations if there is a deemed change in control for income tax reporting purposes. Such change in control will be determined for income tax reporting purposes based on future changes in stock ownership.

Liquidity and Capital Resources

As of March 31, 2014, we had cash of $36.7 million. From an ongoing operating perspective, our cash requirements in 2014 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 higher levels of pension lump sum benefit payments will increase the magnitude of future plan contributions.


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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 Three Months Ended March 31, 2014 and 2013

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 $13.4 million for the three months ended March 31, 2014. Our cash flows from operations are impacted by our results of operations, changes in working capital and payments on certain long-term pension liabilities. Net cash provided by operations amounted to $14.9 million for the three months ended March 31, 2013. The decrease in cash provided by operations was because of working capital needs.

Cash used in investing activities was $23.9 million for the three months ended March 31, 2014 and was comprised of capital expenditures. Cash used in investing activities was $23.3 million of capital expenditures for the three months ended March 31, 2013. The level of capital expenditures for 2014 is expected to be approximately $90 million which is slightly higher than 2013 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, 2014 and 2013 was related primarily to the repayment of our debt and satisfaction of other obligations.

Outstanding Debt and Financing Arrangements

As of March 31, 2014, we had outstanding $298.4 million in aggregate 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 three months ended March 31, 2014, the Company's future contractual obligations have not changed materially from the amounts disclosed as of December 31, 2013 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, 2013, and have not changed materially from that discussion.


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