FairPoint Communications reports 2012 second quarter results

FairPoint Communications, Inc. (NasdaqCM: FRP), Vermont's largest telecom provider, announced after the markets closed Thursday its financial results for the quarter ended June 30, 2012. Shares closed at $6.07 Thursday and shares fell in after-market trading, opening Friday at $5.75. In early trading Friday, shares had rebounded somewhat to $5.90. FRP in recent weeks has been trading in the upper half of its 52-week high/low range ($3.13 - $7.41). 

"We're pleased to report a very strong quarter," said Paul H. Sunu, CEO of FairPoint.  "We continue to make great strides on our 'four pillar' strategy to improve operations, level the regulatory playing field, transform our revenue composition and align our human resources.  Our operational and regulatory achievements pave the way for our revenue strategy." 

-- Unlevered Free Cash Flow[1] of $38.1 million in the quarter and $67.2 million year-to-date

-- Cash balance grew to $43.8 million at June 30, 2012 from $35.8 million at March 31, 2012

-- Consolidated EBITDAR[2] of $70.2 million in the quarter

-- Net loss narrows to $37.1 million in the quarter

-- Landmark deregulation in New Hampshire, joining Maine and Vermont 

Revenue Highlights 

FairPoint continues to see positive momentum in its growth-oriented business and broadband products.  Data and Internet services revenue grew 8.4% sequentially and new products, such as FairPoint's Ethernet service offerings, continued to attract new customers.  Growth in business and broadband products is a key element of FairPoint's strategy to transform its revenue composition and offset continued erosion in the Company's residential voice base.  Ethernet services contributed approximately $10.2 million of revenue in the second quarter of 2012 as compared to $9.0 million in the first quarter of 2012 and $2.6 millionin the second quarter of 2011.  Growth in the Company's Ethernet products is expected to continue as regional banks, healthcare networks and wireless carriers transition away from legacy technologies like frame relay.

FairPoint continues to see a steady improvement in its ability to attract and retain business customers, which contributed to an improvement in the rate of business voice access line loss in the quarter.  The rate of loss in business voice access lines, which stood at 3.4% for the twelve months ended June 30, 2012, is less than half the 6.9% loss FairPoint experienced for the twelve months ended June 30, 2011.  Business voice access lines declined only 0.8% sequentially versus March 31, 2012.

Regulatory Highlights

"We were thrilled with the legislation passed in New Hampshire in the quarter, which provides for the substantial deregulation of retail products and services in the state," said Sunu.  "When combined with the retail legislation passed in Maine and the new Incentive Regulation Plan in Vermont, FairPoint can now compete on a more level playing field in all three northern New England states as we expand our sales efforts and transform our revenue composition," Sunu said.

On June 11, 2012, Governor Lynch of New Hampshire signed into law historic legislation that substantially deregulates FairPoint's retail operations in the state.  Among other benefits, FairPoint now has greater regulatory flexibility for all products and services except unbundled basic local voice calling.  The regulatory framework has been dramatically simplified and retail service quality penalties have been eliminated entirely in New Hampshire—reducing FairPoint's exposure to such penalties by $12.5 million per year and further de-risking the business. 

Operating and Human Resource Highlights 

Broadband subscribers grew 5.1% year-over-year and 0.7% sequentially.  FairPoint has added more than 15,000 broadband subscribers in the last twelve months, as penetration reached 32.2% of voice access lines at June 30, 2012.

Voice access line loss slowed for the ninth consecutive quarter, reaching 7.8% year-over-year and 1.8% sequentially.

As of June 30, 2012, FairPoint had approximately 3,410 employees, a decrease of 3.7% and 15.4% from Dec. 31, 2011 and Dec. 31, 2010, respectively.

Financial Highlights 

Second Quarter 2012 as compared to First Quarter 2012 

Revenue was $243.5 million in the second quarter of 2012 as compared to $248.5 million in the first quarter of 2012.  The change was due primarily to a loss of voice access lines in the quarter and the impact of service quality penalty reversals which had a $1.2 million beneficial impact in the first quarter of 2012.  Access revenue was down slightly, as growth in special access largely offset continued declines in switched access.  Other revenue declined versus the first quarter of 2012 due primarily to a decline in late payment fees.  Increases in broadband subscribers and Ethernet product revenues led to a $2.8 million increase in data and Internet services revenue.

Operating expenses, excluding depreciation, amortization and reorganization, were $190.7 million in the second quarter of 2012 as compared to $210.9 million in the first quarter of 2012.  The Company recorded its annual vacation expense accrual of $13.8 million in the first quarter of 2012, which will be amortized over the balance of the year as vacation is used.  Adjusting for the impact of the annual vacation accrual, operating expenses declined $6.4 million sequentially due primarily to decreases in employee expenses, contracted services and cost of goods sold.

Consolidated EBITDAR was $70.2 million in the second quarter of 2012 as compared to $55.3 million in the first quarter of 2012.  Adjusting for the impact of the annual vacation expense, Consolidated EBITDAR was up slightly versus the first quarter of 2012, as operating expense reductions offset declines in revenue.

Net loss was $37.1 million in the second quarter of 2012 as compared to a net loss of $46.7 million in the first quarter of 2012.  Adjusting for the impact of the annual vacation accrual, net loss was flat versus the first quarter of 2012.

Capital expenditures were $32.1 million in the second quarter of 2012 as compared to $26.3 million in the first quarter of 2012.  While FairPoint will continue to be diligent in its approach to capital spending, the Company expects capital expenditures will increase for the remainder of 2012 as the Company expands its broadband footprint in New Hampshire in accordance with a regulatory commitment to reach 95% of its customers in the state by March 31, 2013.

FairPoint's cash position grew to $43.8 million as of June 30, 2012, as compared to $35.8 million as of March 31, 2012 and $17.4 million as of Dec. 31, 2011.  Cash grew to $43.8 million in the quarter even after a cash interest payment of approximately $16.5 million, principal repayment of $2.5 million and cash pension contributions of $5.7 million.  The Company's $75 million revolving credit facility is undrawn, with $62.6 million available for additional borrowing after applying$12.4 million for outstanding letters of credit.

Second Quarter 2012 as compared to Second Quarter 2011 

Revenue was $243.5 million in the second quarter of 2012 as compared to $262.6 million a year earlier.  The change was due primarily to a loss of voice access lines and the impact of service quality penalty reversals which had a $4.0 million beneficial impact in the second quarter of 2011.  Access revenue declined versus a year earlier, which was primarily caused by the decline in voice access lines leading to fewer switched access minutes of use.  Data and Internet services revenue grew as broadband subscribers and Ethernet product revenues increased year-over-year.

Operating expenses, excluding depreciation, amortization and reorganization, were $190.7 million in the second quarter of 2012 as compared to $202.8 million a year earlier.  Decreases in employee expenses, bad debt and other expenses were partially offset by an increase in pension and OPEB expense.

Consolidated EBITDAR was $70.2 million in the second quarter of 2012 as compared to $70.5 million a year earlier.  Operating expense reductions more than offset the impact of the revenue decline and a cash pension contribution of $5.7 million made during the second quarter of 2012. FairPoint did not make a cash pension contribution in the second quarter of 2011.

Capital expenditures were $32.1 million in the second quarter of 2012 as compared to $52.1 million a year earlier, when the Company was aggressively building fiber to towers and completing its regulatory commitment for broadband expansion in Vermont.  As discussed above, FairPoint expects capital expenditures will increase for the remainder of 2012.

Net loss was $37.1 million in the second quarter of 2012 as compared to net loss of $27.1 million in the second quarter of 2011.

2012 Guidance 

The Company plans to make cash contributions to its pension plan on a quarterly basis in 2012 and expects to contribute approximately $19.8 million for the full year, including the $11.5 million contributed in the first and second quarters combined.  As the Company stated in its previous earnings release, FairPoint expects to generate Unlevered Free Cash Flow (after cash pension contributions) of $90 million to $100 million in 2012 through a continued focus on improving Consolidated EBITDAR margins and disciplined capital spending.  FairPoint expects to pay approximately $68 million in interest and $10 million in loan amortization in 2012.

Quarterly Report 

The information in this press release should be read in conjunction with the financial statements and footnotes contained in the Company's quarterly report for the quarter ended June 30, 2012, which will be filed with the SEC on or prior to August 9, 2012. The Company's results for the quarter ended June 30, 2012 are subject to the completion of its quarterly report for such period.

Fresh Start Accounting 

On Jan. 24, 2011, the Company emerged from Chapter 11 bankruptcy protection and its Plan of Reorganization became effective.  For purposes of generally accepted accounting principles, the Company adopted fresh start accounting as of Jan. 24, 2011, whereby the Company's assets and liabilities were marked to their fair value as of the date of emergence.  Accordingly, the Company's consolidated statements of financial position and operations for periods after Jan. 24, 2011 will not be comparable in many respects to periods prior to the adoption of fresh start accounting.

Conference Call Information 

As previously announced, FairPoint will host a conference call and simultaneous webcast to discuss its second quarter 2012 results at 8:30 a.m. (EDT) onFriday, August 3, 2012.

Participants should call (866) 578-5747 (US/Canada) or (617) 213-8054 (international) at 8:20 a.m. (EDT) and enter the passcode 88153752 when prompted.   The title of the call is the Q2 2012 FairPoint Communications, Inc. Earnings Conference Call.

A telephonic replay will be available for anyone unable to participate in the live call. To access the replay, call (888) 286-8010 (US/Canada) or (617) 801-6888 (international) and enter the passcode 88754734 when prompted.  The recording will be available from Friday, August 3, 2012, at 10:30 a.m. (EDT) through Friday, August 10, 2012, at 11:59 p.m. (EDT).

A live broadcast of the earnings conference call will be available online at www.fairpoint.com/investors. An online replay will be available shortly thereafter.

Use of Non-GAAP Financial Measures 

This press release includes certain non-GAAP financial measures, including but not limited to Consolidated EBITDAR, Unlevered Free Cash Flow and adjustments to GAAP and non-GAAP measures to exclude the effect of special items. Management believes that Consolidated EBITDAR and Unlevered Free Cash Flow may be useful to investors in assessing the Company's operating performance and its ability to meet its debt service requirements.  The maintenance covenants contained in the Company's credit facility are based on Consolidated EBITDAR.  In addition, management believes that the adjustments to GAAP and non-GAAP measures to exclude the effect of special items may be useful to investors in understanding period-to-period operating performance and in identifying historical and prospective trends.

However, the non-GAAP financial measures, as used herein, are not necessarily comparable to similarly titled measures of other companies. Furthermore, Consolidated EBITDAR and Unlevered Free Cash Flow have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income or loss, operating income, cash flow or other combined income or cash flow data prepared in accordance with GAAP. Because of these limitations, Consolidated EBITDAR, Unlevered Free Cash Flow and related ratios should not be considered as measures of discretionary cash available to invest in business growth or reduce indebtedness. The Company compensates for these limitations by relying primarily on its GAAP results and using Consolidated EBITDAR and Unlevered Free Cash Flow only supplementally.  A reconciliation of Consolidated EBITDAR and Unlevered Free Cash Flow to net income is contained in the attachments to this press release.

About FairPoint Communications, Inc. 

FairPoint Communications, Inc. (NasdaqCM: FRP) is a leading communications provider of broadband Internet access, local and long-distance phone, television and other high-capacity data services to customers in communities across 18 states. Through its fast, reliable fiber network, FairPoint delivers high-quality data and voice networking communications solutions to residential, business and wholesale customers. FairPoint delivers VantagePointSM services through its resilient IP-based network in northern New England. This state-of-the-art fiber network provides carrier Ethernet connections to support the surging bandwidth and performance requirements for cloud-based applications like network storage, disaster recovery, distance learning, medical imaging, video conferencing and CAD/CAM along with traditional voice, VoIP, video and Internet access solutions. Additional information about FairPoint products and services is available atwww.FairPoint.com.

Cautionary Note Regarding Forward-looking Statements 

Some statements herein or discussed on our earnings conference call are known as "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements include, but are not limited to, statements about the Company's plans, objectives, expectations and intentions and other statements contained herein that are not historical facts. When used herein, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including the Company's plans, objectives, expectations and intentions and other factors. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of the date hereof. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  However, your attention is directed to any further disclosures made on related subjects in the Company's subsequent reports filed with the SEC.

Certain information contained herein or discussed on our earnings conference call may constitute guidance as to projected financial results and the Company's future performance that represent management's estimates as of the date hereof. This guidance, which consists of forward-looking statements, is prepared by the Company's management and is qualified by, and subject to, certain assumptions. Guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither the Company's independent registered public accounting firm nor any other independent expert or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto. Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and are based upon specific assumptions with respect to future business decisions, some of which will change. Management generally states possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent actual results, which could fall outside of the suggested ranges. The principal reason that the Company releases this data is to provide a basis for management to discuss the Company's business outlook with analysts and investors. The Company does not accept any responsibility for any projections or reports published by any such outside analysts or investors. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, the Company's guidance is only an estimate of what management believes is realizable as of the date hereof. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.

[1] Unlevered Free Cash Flow means Consolidated EBITDAR minus capital expenditures.  Unlevered Free Cash Flow is a non-GAAP financial measure.  A reconciliation of Unlevered Free Cash Flow to net income is contained in the attachments to this press release.

[2] Consolidated EBITDAR means earnings before interest, taxes, depreciation, amortization and restructuring items as defined in the Company's credit facility.  Consolidated EBITDAR is a non-GAAP financial measure.  A reconciliation of Consolidated EBITDAR to net income is contained in the attachments to this press release. 

SOURCE FairPoint Communications, Inc. CHARLOTTE, N.C., Aug. 2, 2012 /PRNewswire/