UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34686
Hawaiian Telcom Holdco, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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16-1710376 |
(State or other jurisdiction of |
|
(I.R.S. Employer Identification No.) |
1177 Bishop Street
Honolulu, Hawaii 96813
(Address of principal executive offices)
808-546-4511
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o |
Accelerated Filer x |
Non-Accelerated Filer o |
Smaller reporting company o |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o
As of November 10, 2014, 10,673,103 shares of the registrants common stock were outstanding.
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Page |
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3 | ||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | |
32 | ||
33 | ||
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34 | ||
34 | ||
35 | ||
36 |
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statements of Income
(Unaudited, dollars in thousands, except per share amounts)
|
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Three Months Ended |
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Nine Months Ended |
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|
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September 30, |
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September 30, |
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|
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2014 |
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2013 |
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2014 |
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2013 |
| ||||
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|
|
|
|
|
|
|
|
| ||||
Operating revenues |
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$ |
97,252 |
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$ |
97,682 |
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$ |
291,109 |
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$ |
290,643 |
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| ||||
Operating expenses: |
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|
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|
|
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| ||||
Cost of revenues (exclusive of depreciation and amortization) |
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42,621 |
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41,829 |
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124,858 |
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122,073 |
| ||||
Selling, general and administrative |
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28,294 |
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27,965 |
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86,280 |
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84,860 |
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Gain on sale of property |
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(6,546 |
) | ||||
Depreciation and amortization |
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19,717 |
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19,974 |
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57,321 |
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58,532 |
| ||||
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|
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| ||||
Total operating expenses |
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90,632 |
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89,768 |
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268,459 |
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258,919 |
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Operating income |
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6,620 |
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7,914 |
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22,650 |
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31,724 |
| ||||
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|
|
|
|
|
|
|
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| ||||
Other income (expense): |
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|
|
|
|
|
|
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| ||||
Interest expense |
|
(4,103 |
) |
(4,089 |
) |
(12,401 |
) |
(14,712 |
) | ||||
Loss on early extinguishment of debt |
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|
|
|
|
|
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(3,660 |
) | ||||
Interest income and other |
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13 |
|
7 |
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27 |
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28 |
| ||||
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|
|
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|
|
|
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| ||||
Total other expense |
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(4,090 |
) |
(4,082 |
) |
(12,374 |
) |
(18,344 |
) | ||||
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Income before income tax provision |
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2,530 |
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3,832 |
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10,276 |
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13,380 |
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|
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Income tax provision |
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1,014 |
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1,771 |
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4,155 |
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5,521 |
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Net income |
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$ |
1,516 |
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$ |
2,061 |
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$ |
6,121 |
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$ |
7,859 |
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Net income per common share - |
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Basic |
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$ |
0.14 |
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$ |
0.20 |
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$ |
0.58 |
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$ |
0.76 |
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Diluted |
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$ |
0.13 |
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$ |
0.18 |
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$ |
0.54 |
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$ |
0.71 |
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Weighted average shares used to compute net income per common share - |
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Basic |
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10,586,690 |
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10,337,488 |
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10,567,036 |
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10,321,905 |
| ||||
Diluted |
|
11,311,691 |
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11,206,159 |
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11,329,328 |
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11,096,177 |
|
See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, dollars in thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2014 |
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2013 |
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2014 |
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2013 |
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Net income |
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$ |
1,516 |
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$ |
2,061 |
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$ |
6,121 |
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$ |
7,859 |
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Other comprehensive income (loss) - |
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Unrealized holding gains (losses) arising during period |
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(3 |
) |
6 |
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(4 |
) |
(22 |
) | ||||
Retirement plan (gain) loss |
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43 |
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222 |
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(202 |
) |
667 |
| ||||
Income tax credit (charge) on comprehensive income |
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(17 |
) |
(88 |
) |
83 |
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(263 |
) | ||||
Other comprehensive income (loss), net of tax |
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23 |
|
140 |
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(123 |
) |
382 |
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Comprehensive income |
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$ |
1,539 |
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$ |
2,201 |
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$ |
5,998 |
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$ |
8,241 |
|
See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, dollars in thousands, except per share amounts)
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September 30, |
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December 31, |
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2014 |
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2013 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
31,693 |
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$ |
49,551 |
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Receivables, net |
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33,378 |
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34,521 |
| ||
Material and supplies |
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10,146 |
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15,939 |
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Prepaid expenses |
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4,779 |
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3,724 |
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Deferred income taxes |
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7,968 |
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8,146 |
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Other current assets |
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3,218 |
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2,851 |
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Total current assets |
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91,182 |
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114,732 |
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Property, plant and equipment, net |
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553,467 |
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524,375 |
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Intangible assets, net |
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38,051 |
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40,225 |
| ||
Goodwill |
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12,104 |
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12,104 |
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Deferred income taxes |
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70,765 |
|
75,274 |
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Other assets |
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9,935 |
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11,305 |
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Total assets |
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$ |
775,504 |
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$ |
778,015 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Current portion of long-term debt |
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$ |
3,000 |
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$ |
3,000 |
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Accounts payable |
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45,378 |
|
40,228 |
| ||
Accrued expenses |
|
15,877 |
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18,787 |
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Advance billings and customer deposits |
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16,072 |
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16,122 |
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Other current liabilities |
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7,222 |
|
6,412 |
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Total current liabilities |
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87,549 |
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84,549 |
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Long-term debt |
|
289,985 |
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291,679 |
| ||
Employee benefit obligations |
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69,966 |
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80,321 |
| ||
Other liabilities |
|
6,949 |
|
8,454 |
| ||
Total liabilities |
|
454,449 |
|
465,003 |
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Commitments and contingencies (Note 12) |
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Stockholders equity |
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|
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Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 10,587,105 and 10,495,856 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively |
|
106 |
|
105 |
| ||
Additional paid-in capital |
|
169,913 |
|
167,869 |
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Accumulated other comprehensive loss |
|
(4,839 |
) |
(4,716 |
) | ||
Retained earnings |
|
155,875 |
|
149,754 |
| ||
Total stockholders equity |
|
321,055 |
|
313,012 |
| ||
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|
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Total liabilities and stockholders equity |
|
$ |
775,504 |
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$ |
778,015 |
|
See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
|
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Nine Months Ended |
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September 30, |
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2014 |
|
2013 |
| ||
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Cash flows from operating activities: |
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Net income |
|
$ |
6,121 |
|
$ |
7,859 |
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Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
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Depreciation and amortization |
|
57,321 |
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58,532 |
| ||
Loss on early extinguishment of debt |
|
|
|
3,660 |
| ||
Gain on sale of property |
|
|
|
(6,546 |
) | ||
Employee retirement benefits |
|
(10,557 |
) |
(10,324 |
) | ||
Provision for uncollectibles |
|
2,493 |
|
2,003 |
| ||
Stock based compensation |
|
3,066 |
|
1,886 |
| ||
Deferred income taxes |
|
4,770 |
|
6,018 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Receivables |
|
(1,350 |
) |
(4,142 |
) | ||
Material and supplies |
|
(685 |
) |
(3,916 |
) | ||
Prepaid expenses and other current assets |
|
(1,421 |
) |
(1,064 |
) | ||
Accounts payable and accrued expenses |
|
1,296 |
|
(2,064 |
) | ||
Advance billings and customer deposits |
|
(50 |
) |
323 |
| ||
Other current liabilities |
|
(568 |
) |
106 |
| ||
Other |
|
1,380 |
|
2,446 |
| ||
Net cash provided by operating activities |
|
61,816 |
|
54,777 |
| ||
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Cash flows from investing activities: |
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|
|
|
| ||
Capital expenditures |
|
(76,474 |
) |
(69,809 |
) | ||
Acquisitions |
|
|
|
(11,858 |
) | ||
Proceeds on sale of property |
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|
|
13,118 |
| ||
Net cash used in investing activities |
|
(76,474 |
) |
(68,549 |
) | ||
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Cash flows from financing activities: |
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|
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Repayment of capital lease and installment financing |
|
(2,014 |
) |
(406 |
) | ||
Repayment of debt including premium |
|
(2,250 |
) |
(302,333 |
) | ||
Proceeds from installment financing |
|
2,085 |
|
|
| ||
Proceeds from borrowing |
|
|
|
298,500 |
| ||
Loan refinancing costs |
|
|
|
(3,442 |
) | ||
Taxes paid related to net share settlement of equity awards |
|
(1,021 |
) |
(426 |
) | ||
Net cash used in financing activities |
|
(3,200 |
) |
(8,107 |
) | ||
|
|
|
|
|
| ||
Net change in cash and cash equivalents |
|
(17,858 |
) |
(21,879 |
) | ||
Cash and cash equivalents, beginning of period |
|
49,551 |
|
66,993 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents, end of period |
|
$ |
31,693 |
|
$ |
45,114 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Interest paid, net of amounts capitalized |
|
$ |
11,033 |
|
$ |
14,416 |
|
See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Condensed Consolidated Statement of Changes in Stockholders Equity
(Unaudited, dollars in thousands)
|
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Accumulated |
|
|
|
|
| |||||
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Additional |
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Other |
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Total |
| |||||
|
|
Common Stock |
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Paid-In |
|
Comprehensive |
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Retained |
|
Stockholders |
| |||||||
|
|
Shares |
|
Amount |
|
Capital |
|
Income (Loss) |
|
Earnings |
|
Equity |
| |||||
|
|
|
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| |||||
Balance, January 1, 2014 |
|
10,495,856 |
|
$ |
105 |
|
$ |
167,869 |
|
$ |
(4,716 |
) |
$ |
149,754 |
|
$ |
313,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Stock based compensation |
|
|
|
|
|
3,066 |
|
|
|
|
|
3,066 |
| |||||
|
|
|
|
|
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|
|
|
|
|
|
|
| |||||
Exercise of warrant |
|
15,361 |
|
|
|
|
|
|
|
|
|
|
| |||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes |
|
75,888 |
|
1 |
|
(1,022 |
) |
|
|
|
|
(1,021 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
|
|
|
|
|
6,121 |
|
6,121 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
(123 |
) |
|
|
(123 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, September 30, 2014 |
|
10,587,105 |
|
$ |
106 |
|
$ |
169,913 |
|
$ |
(4,839 |
) |
$ |
155,875 |
|
$ |
321,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, January 1, 2013 |
|
10,291,897 |
|
$ |
103 |
|
$ |
165,941 |
|
$ |
(28,450 |
) |
$ |
139,266 |
|
$ |
276,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Stock based compensation |
|
|
|
|
|
1,886 |
|
|
|
|
|
1,886 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Exercise of warrant |
|
297 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes |
|
46,543 |
|
|
|
(426 |
) |
|
|
|
|
(426 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
|
|
|
|
|
7,859 |
|
7,859 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
382 |
|
|
|
382 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, September 30, 2013 |
|
10,338,737 |
|
$ |
103 |
|
$ |
167,401 |
|
$ |
(28,068 |
) |
$ |
147,125 |
|
$ |
286,561 |
|
See accompanying notes to condensed consolidated financial statements.
Hawaiian Telcom Holdco, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business
Business Description
Hawaiian Telcom Holdco, Inc. and subsidiaries (the Company) is the incumbent local exchange carrier for the State of Hawaii with an integrated telecommunications network. The Company offers a variety of telecommunication services to residential and business customers in Hawaii including local telephone, network access and data transport, long distance, Internet, television and wireless phone service. The Company also provides communications equipment sales and maintenance, data center colocation and network managed services.
Organization
The Company has one direct wholly-owned subsidiary, Hawaiian Telcom Communications, Inc. which has two direct wholly-owned subsidiaries Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc. Hawaiian Telcom, Inc. operates the regulated local exchange carrier and Hawaiian Telcom Services Company, Inc. operates all other businesses.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and pursuant to rules and regulations of the U.S. Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted and condensed. In the opinion of the Companys management, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the results of operations, comprehensive income, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the Companys audited consolidated financial statements as of and for the year ended December 31, 2013.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market accounts with maturities at acquisition of three months or less. The majority of cash balances at September 30, 2014 are held in one bank in demand deposit accounts.
Supplemental Non-Cash Investing and Financing Activities
Accounts payable included $15.1 million and $6.2 million at September 30, 2014 and 2013, respectively, for additions to property, plant and equipment.
Taxes Collected from Customers
The Company presents taxes collected from customers and remitted to governmental authorities on a gross basis, including such amounts in the Companys reported operating revenues. Such amounts represent primarily Hawaii state general excise taxes and Hawaii Public Utility Commission fees. Such taxes and fees amounted to $1.9 million and $5.5 million for the three and nine months ended September 30, 2014 and $1.9 million and $5.6 million for the three and nine months ended September 30, 2013, respectively.
Earnings per Share
Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing earnings by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing earnings, adjusted for the effect, if any, from assumed conversion of all potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. The denominator used to compute basic and diluted earnings per share was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
September 30, |
|
September 30, |
| ||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share - weighted average shares |
|
10,586,690 |
|
10,337,488 |
|
10,567,036 |
|
10,321,905 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
Employee and director restricted stock units |
|
122,530 |
|
173,405 |
|
153,752 |
|
166,461 |
|
Warrants |
|
602,471 |
|
695,266 |
|
608,540 |
|
607,811 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share - weighted average shares |
|
11,311,691 |
|
11,206,159 |
|
11,329,328 |
|
11,096,177 |
|
No restricted stock units were deemed anti-dilutive and excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2014 and 2013.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard which provides guidance for revenue recognition. The new accounting standard will supersede the current revenue recognition requirements and most industry-specific guidance. The standards core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard will be effective for the Company in the first quarter of 2017 and either full retrospective or modified retrospective adoption is permitted. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this accounting standard on the consolidated financial statements.
In August 2014, the FASB issued an accounting standard with new guidance on managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related disclosures. Management must evaluate whether it is probable that known conditions or events, considered in the aggregate, would raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that the financial statements are issued. If such conditions or events are identified, the standard requires managements mitigation plans to alleviate the doubt or a statement of the substantial doubt about the entitys ability to continue as a going concern to be disclosed in the financial statements. The standard is effective for fiscal years and interim periods beginning after December 15, 2016 with early adoption permitted. The adoption of this standard is not expected to impact the consolidated financial statements.
3. SystemMetrics Corporation Acquisition
On September 30, 2013, the Company completed its acquisition of all of the voting stock of SystemMetrics Corporation (SystemMetrics) for $16.3 million in cash, net of cash acquired and purchase price adjustments. Of the total purchase price, $11.9 million was paid at closing with the balance subject to an earn-out over a three year period. Payment of the earn-out is contingent on SystemMetrics meeting certain performance metrics and continued employment of the SystemMetrics key executive. For financial reporting purposes, the earn-out is accounted for as compensation expense as earned.
SystemMetrics provides virtual and physical data center colocation services in the State of Hawaii along with other telecommunication services that are complementary to the Companys operations.
The Company followed the acquisition method of accounting and allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their provisional fair values, and the estimates and assumptions were subject to change within the measurement period. There were no changes made to the allocation of the purchase price in 2014. The measurement period was considered closed as of June 30, 2014.
For the three months ended September 30, 2014, SystemMetrics revenue amounted to $2.5 million and the net loss amounted to $0.2 million. For the nine months ended September 30, 2014, SystemMetrics revenue amounted to $7.2 million and the net loss was $0.4 million.
The following unaudited pro forma results of operations are provided for the three and nine months ended September 30, 2013 as if the acquisition of SystemMetrics occurred on January 1, 2012. The pro forma combined results of operations have been prepared by adjusting the historical results of the Company to include the historical results of SystemMetrics. Adjustments were made to the historical results for the purchase price allocation to adjust depreciation and amortization, to eliminate the interest on certain debt financing which was not assumed in the purchase, to eliminate certain intercompany revenue between the entities and to reallocate the transaction related expenses from the 2013 to the 2012 periods.
These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any costs savings or synergies that resulted, or will result, from the acquisition or any estimated costs that will be incurred to integrate SystemMetrics. Future results may vary significantly from the results reflected in this pro forma financial information because of future events and transactions as well as other factors.
The pro forma results are as follows (dollars in thousands):
|
|
For the Three |
|
For the Nine |
| ||
|
|
Months Ended |
|
Months Ended |
| ||
|
|
September 30, |
|
September 30, |
| ||
|
|
2013 |
|
2013 |
| ||
|
|
|
|
|
| ||
Revenues |
|
$ |
99,649 |
|
$ |
296,443 |
|
Expenses |
|
91,610 |
|
264,808 |
| ||
Operating income |
|
8,039 |
|
31,635 |
| ||
Other income (expense) |
|
(4,082 |
) |
(18,344 |
) | ||
Income before income tax benefit |
|
3,957 |
|
13,291 |
| ||
Income tax expense |
|
1,301 |
|
4,970 |
| ||
|
|
|
|
|
| ||
Net income |
|
$ |
2,656 |
|
$ |
8,321 |
|
4. Receivables
Receivables consisted of the following (dollars in thousands):
|
|
September 30, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Customers and other |
|
$ |
37,252 |
|
$ |
38,463 |
|
Allowance for doubtful accounts |
|
(3,874 |
) |
(3,942 |
) | ||
|
|
|
|
|
| ||
|
|
$ |
33,378 |
|
$ |
34,521 |
|
5. Long-Lived Assets
Property, plant and equipment consisted of the following (dollars in thousands):
|
|
September 30, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment |
|
$ |
812,423 |
|
$ |
729,364 |
|
Less accumulated depreciation |
|
(258,956 |
) |
(204,989 |
) | ||
|
|
|
|
|
| ||
|
|
$ |
553,467 |
|
$ |
524,375 |
|
Depreciation expense amounted to $19.0 million and $55.1 million for the three and nine months ended September 30, 2014, respectively. Depreciation expense amounted to $19.3 million and $56.5 million for the three and nine months ended September 30, 2013, respectively.
In February 2013, the Company entered into an agreement to sell a parcel of land and warehouse not actively used in the Companys operations for a purchase price, as amended, of $13.9 million. The sale was subject to due diligence by the buyer and approval of the Hawaii Public Utilities Commission (HPUC). The HPUC approval was received in May 2013 and the sale was consummated in June 2013. The net proceeds, net of commissions and other costs paid through escrow of $0.8 million, amounted to $13.1 million. A gain on the sale of $6.5 million was recognized in the second quarter of 2013 as management concluded the land sold was not grouped with the assets subject to the composite depreciation method. The HPUC approval requires the Company to spend $0.3 million on training employees on broadband telecommunication deployment and operation. In addition, the HPUC approval provides for the Company to make improvements to its broadband network in an amount equal to the net proceeds less the training cost commitment. The planned training expenses and network capital spending are being recognized as the costs are incurred.
The gross carrying amount and accumulated amortization of identifiable intangible assets are as follows (dollars in thousands):
|
|
September 30, 2014 |
|
December 31, 2013 |
| ||||||||||||||
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
| ||||||
|
|
Carrying |
|
Accumulated |
|
Net Carrying |
|
Carrying |
|
Accumulated |
|
Net Carrying |
| ||||||
|
|
Value |
|
Amortization |
|
Value |
|
Value |
|
Amortization |
|
Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Customer relationships |
|
$ |
21,709 |
|
$ |
11,096 |
|
$ |
10,613 |
|
$ |
21,709 |
|
$ |
8,983 |
|
$ |
12,726 |
|
Trade name and other |
|
320 |
|
182 |
|
138 |
|
320 |
|
121 |
|
199 |
| ||||||
|
|
22,029 |
|
11,278 |
|
10,751 |
|
22,029 |
|
9,104 |
|
12,925 |
| ||||||
Not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Brand name |
|
27,300 |
|
|
|
27,300 |
|
27,300 |
|
|
|
27,300 |
| ||||||
|
|
27,300 |
|
|
|
27,300 |
|
27,300 |
|
|
|
27,300 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
$ |
49,329 |
|
$ |
11,278 |
|
$ |
38,051 |
|
$ |
49,329 |
|
$ |
9,104 |
|
$ |
40,225 |
|
Amortization expense amounted to $0.7 million and $2.2 million for the three and nine months ended September 30, 2014, respectively. Amortization expense amounted to $0.7 million and $2.0 million for the three and nine months ended September 30, 2013, respectively. Estimated amortization expense for the next five years and thereafter is as follows (dollars in thousands):
2014 (remaining months) |
|
$ |
722 |
|
2015 |
|
2,498 |
| |
2016 |
|
2,101 |
| |
2017 |
|
1,703 |
| |
2018 |
|
1,308 |
| |
Thereafter |
|
2,419 |
| |
|
|
|
| |
|
|
$ |
10,751 |
|
6. Accrued Expenses
Accrued expenses consisted of the following (dollars in thousands):
|
|
September 30, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Salaries and benefits |
|
$ |
12,317 |
|
$ |
15,160 |
|
Interest |
|
2,557 |
|
2,576 |
| ||
Other taxes |
|
1,003 |
|
1,051 |
| ||
|
|
|
|
|
| ||
|
|
$ |
15,877 |
|
$ |
18,787 |
|
7. Long-Term Debt
Long-term debt consisted of the following (dollars in thousands):
|
|
Interest Rate |
|
|
|
|
|
|
| ||
|
|
at September 30, |
|
Final |
|
September 30, |
|
December 31, |
| ||
|
|
2014 |
|
Maturity |
|
2014 |
|
2013 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Term loan |
|
5.00 |
% |
June 6, 2019 |
|
$ |
296,888 |
|
$ |
299,138 |
|
Original issue discount |
|
|
|
|
|
(3,903 |
) |
(4,459 |
) | ||
|
|
|
|
|
|
292,985 |
|
294,679 |
| ||
Current |
|
|
|
|
|
3,000 |
|
3,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Noncurrent |
|
|
|
|
|
$ |
289,985 |
|
$ |
291,679 |
|
The term loan outstanding at September 30, 2014 provides for interest at the Alternate Base Rate, a rate which is indexed to the prime rate with certain adjustments as defined, plus a margin of 3.00% or a Eurocurrency rate on deposits of one, two, three or six months but no less than 1.00% per annum plus a margin of 4.00%. The Company has selected the Eurocurrency rate as of September 30, 2014 resulting in an interest rate currently at 5.00%.
The term loan provides for interest payments no less than quarterly. In addition, quarterly principal payments of $0.8 million are required. The balance of the loan is due at maturity on June 6, 2019. The Company must prepay, generally within three months after year end, 50% or 25% of excess cash flow, as defined. The percent of excess cash flow required is dependent on the Companys leverage ratio. No excess cash flow payment was due for the year ended December 31, 2013. The Company must also make prepayments on loans in the case of certain events such as large asset sales.
The Company also has a revolving credit facility which matures on October 3, 2015. The facility has an available balance of $30.0 million with no amounts drawn as of or for the periods ended September 30, 2014 and 2013. A commitment fee is payable quarterly to the lender under the facility. Interest on amounts outstanding is based on, at the Companys option, the bank prime rate plus a margin of 3.0% to 6.0% or the Eurocurrency rate for one, two, three or six month periods plus a margin of 4.0% to 5.5%. The margin is dependent on the Companys leverage, as defined in the agreement, at the time of the borrowing.
Refinancing
In June 2013, the Company refinanced its term loan debt. The Company paid a premium on the repayment of the old term loan of $3.0 million. In addition, the Company paid $3.4 million in underwriting fees and legal costs. The premium on repayment of debt, existing original issue discount, existing deferred financing costs, underwriting fees and legal costs were accounted for in accordance with accounting standards for modification of debt instruments with different terms. The Company compared each syndicated lenders loan under the old term loan with the syndicated lenders loan under the new term loans. For loans under the new term loan that were substantially different, the Company recognized the exchange of debt instruments as a debt extinguishment. For loans under the new term loan that were not substantially different, the Company accounted for the exchange of debt instruments as a modification. As a result of the refinancing, the Company deferred $2.7 million of financing related costs and recognized a loss on early extinguishment of debt of $3.7 million.
Maturities
The annual requirements for principal payments on long-term debt as of September 30, 2014 are as follows (dollars in thousands):
Years ended December 31, |
|
|
| |
2014 (remainder of year) |
|
$ |
750 |
|
2015 |
|
3,000 |
| |
2016 |
|
3,000 |
| |
2017 |
|
3,000 |
| |
2018 |
|
3,000 |
| |
Thereafter |
|
284,138 |
| |
|
|
|
| |
|
|
$ |
296,888 |
|
Capitalized Interest
Interest capitalized by the Company amounted to $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively. Interest capitalized by the Company amounted to $0.3 million and $0.9 million for the three and nine months ended September 30, 2013, respectively.
8. Employee Benefit Plans
The Company sponsors a defined benefit pension plan, with benefits frozen as of March 1, 2012, and postretirement health and life insurance benefits for union employees. The Company also sponsors a cash balance pension plan for nonunion employees, with benefits frozen as of April 1, 2007, and certain management employees receive postretirement health and life insurance under grandfathered provisions of a terminated plan.
The following provides the components of benefit costs (income) for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):
Pension
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest cost |
|
$ |
2,208 |
|
$ |
2,055 |
|
$ |
6,624 |
|
$ |
6,166 |
|
Expected asset return |
|
(3,178 |
) |
(2,934 |
) |
(9,534 |
) |
(8,804 |
) | ||||
Amortization of loss |
|
29 |
|
148 |
|
87 |
|
444 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net periodic benefit income |
|
$ |
(941 |
) |
$ |
(731 |
) |
$ |
(2,823 |
) |
$ |
(2,194 |
) |
Other Postretirement Benefits
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
$ |
230 |
|
$ |
277 |
|
$ |
691 |
|
$ |
832 |
|
Interest cost |
|
602 |
|
516 |
|
1,805 |
|
1,548 |
| ||||
Amortization of loss |
|
15 |
|
74 |
|
45 |
|
223 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net periodic benefit cost |
|
$ |
847 |
|
$ |
867 |
|
$ |
2,541 |
|
$ |
2,603 |
|
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2013 that it expected to contribute $13.1 million to its pension plan in 2014. As of September 30, 2014, the Company has contributed $8.7 million. The Company contributed an additional $1.0 million in October 2014 for a total of $9.7 million for the year. No additional contributions are expected for 2014. The amount contributed for the year is less than originally anticipated because of recent changes in the plan funding rules.
9. Income Taxes
Income tax expense differs from the amounts determined by applying the statutory federal income tax rate of 34% to the income before income tax provision for the following reasons (dollars in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, 2014 |
|
September 30, 2014 |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax at federal rate |
|
$ |
860 |
|
$ |
1,303 |
|
$ |
3,494 |
|
$ |
4,549 |
|
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
| ||||
State income taxes, net of federal income tax |
|
101 |
|
33 |
|
411 |
|
461 |
| ||||
Permanent differences |
|
178 |
|
539 |
|
780 |
|
850 |
| ||||
Capital goods excise tax credit |
|
(125 |
) |
(104 |
) |
(530 |
) |
(339 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Total income tax expense |
|
$ |
1,014 |
|
$ |
1,771 |
|
$ |
4,155 |
|
$ |
5,521 |
|
The Company evaluates its tax positions for liability recognition. As of September 30, 2014, the Company had no unrecognized tax benefits. No interest or penalties related to tax assessments were recognized in the Companys condensed consolidated statements of operations for the three and nine months ended September 30, 2014 or 2013. All tax years from 2010 remain open for both federal and Hawaii state purposes.
10. Stock Compensation
The Company has an equity incentive plan. The Compensation Committee of the Companys Board of Directors may grant awards under the plan in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. The maximum number of shares issuable under the equity incentive plan is 1,400,000 shares. All grants under the equity incentive plan will be issued to acquire shares at the fair value on date of grant.
As of September 30, 2014, all awards were restricted stock units. Activity with respect to outstanding restricted stock units for the nine months ended September 30, 2014 and 2013 was as follows:
|
|
|
|
Weighted- |
| |
|
|
|
|
Average |
| |
|
|
|
|
Grant-Date |
| |
|
|
Shares |
|
Fair Value |
| |
2014 |
|
|
|
|
| |
Nonvested at January 1, 2014 |
|
260,734 |
|
$ |
18 |
|
Granted |
|
155,146 |
|
31 |
| |
Vested |
|
(111,037 |
) |
25 |
| |
Forfeited |
|
(7,221 |
) |
23 |
| |
|
|
|
|
|
| |
Nonvested at September 30, 2014 |
|
297,622 |
|
$ |
24 |
|
|
|
|
|
|
| |
2013 |
|
|
|
|
| |
Nonvested at January 1, 2013 |
|
223,224 |
|
$ |
15 |
|
Granted |
|
181,330 |
|
20 |
| |
Vested |
|
(67,233 |
) |
17 |
| |
Forfeited |
|
(22,918 |
) |
17 |
| |
|
|
|
|
|
| |
Nonvested at September 30, 2013 |
|
314,403 |
|
$ |
17 |
|
The Company recognized compensation expense of $1.0 million and $3.1 million for the three and nine months ended September 30, 2014, respectively. The Company recognized compensation expense of $0.7 million and $1.9 million for the three and nine months ended September 30, 2013, respectively. The fair value as of the vesting date for the restricted stock units that vested during the nine months ended September 30, 2014 and 2013 was $2.7 million and $1.3 million, respectively. Upon vesting, unit holders have the option to net share-settle to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. The total shares withheld were 35,147 and 20,692 for the nine months ended September 30, 2014 and 2013, respectively, and were based on the value of the restricted stock units as determined by the Companys closing stock price on the date of vesting. Total payments for the employees tax obligations to the tax authorities amounted to $1.0 million and $0.4 million for the nine months ended September 30, 2014 and 2013, respectively. Other than reimbursements for tax withholdings, there was no cash received under all share-based arrangements. In March 2014, the terms of certain restricted stock units were modified which resulted in the restricted stock units vesting as of the date of the modification. The Company recognized the incremental value of $0.6 million as additional expense in the first quarter of 2014.
11. Stockholders Equity
Warrants
In 2010, the Company issued warrants to purchase 1,481,055 shares of common stock for $14.00 per share. The warrants to purchase shares may be exercised anytime from January 26, 2011 to the maturity on October 28, 2015. The warrants may be exercised on a cashless basis whereby additional warrants are tendered in lieu of payment for the exercise price. During the nine months ended September 30, 2014 and 2013, warrants were exercised on a cashless basis resulting in the issuance of 15,361 shares and 297 shares of common stock, respectively.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows (dollars in thousands):
|
|
Unrealized |
|
|
|
|
| |||
|
|
Gain (Loss) on |
|
Retirement |
|
|
| |||
|
|
Investments |
|
Plans |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
2014 |
|
|
|
|
|
|
| |||
January 1, 2014 |
|
$ |
(60 |
) |
$ |
(4,656 |
) |
$ |
(4,716 |
) |
Other comprehensive income (loss) for 2014 |
|
(4 |
) |
(119 |
) |
(123 |
) | |||
|
|
|
|
|
|
|
| |||
September 30, 2014 |
|
$ |
(64 |
) |
$ |
(4,775 |
) |
$ |
(4,839 |
) |
|
|
|
|
|
|
|
| |||
2013 |
|
|
|
|
|
|
| |||
January 1, 2013 |
|
$ |
(36 |
) |
$ |
(28,414 |
) |
$ |
(28,450 |
) |
Other comprehensive income (loss) for 2013 |
|
(22 |
) |
404 |
|
382 |
| |||
|
|
|
|
|
|
|
| |||
September 30, 2013 |
|
$ |
(58 |
) |
$ |
(28,010 |
) |
$ |
(28,068 |
) |
Reclassifications out of other comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 were as follows (dollars in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Retirement plans |
|
|
|
|
|
|
|
|
| ||||
Amortization of (gain) loss |
|
43 |
|
222 |
|
(202 |
) |
667 |
| ||||
Income tax credit (charge) on comprehensive income |
|
(17 |
) |
(88 |
) |
83 |
|
(263 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net of tax |
|
$ |
26 |
|
$ |
134 |
|
$ |
(119 |
) |
$ |
404 |
|
The amortization of (gain) loss was recognized primarily in selling, general and administrative expense for the periods ended September 30, 2014 and 2013.
12. Commitments and Contingencies
Trans-Pacific Submarine Cable
In August 2014, the Company joined several other telecommunication companies to form a consortium to build and operate a trans-Pacific submarine cable system. The total system cost is expected to be $245 million and is primarily composed of a supply contract with the lead contractor. The Company will invest $25 million over the multi-year construction period for a fractional ownership in the system. The investment is expected to be $2.5 million in 2014, $10.2 million in 2015, $10.5 million in 2016 and $1.8 million in 2017. In addition, the Company will construct a cable landing station in Hawaii and provide cable landing services in exchange for additional system capacity. The value of this capacity is estimated at $5.0 million. The system is expected to be operational in December 2016.
Power Purchase Agreement
In July 2014, the Company entered into a power purchase agreement to acquire all of the power generated from solar photovoltaic systems that are to be installed by a third party on selected company properties. The agreement provides for all power generated to be purchased at a fixed price over a 25 year term. Based on planned solar installations and expected power generated, the Company estimates it will purchase power amounting to $0.7 million in 2015. Power purchased in future years will be dependent on the level of photovoltaic units installed by the third party and the power generated.
Tropical Storm Iselle
On August 8, 2014, Tropical Storm Iselle made landfall in the State of Hawaii with the most significant damage occurring on the east side of the island of Hawaii. The cost of replacement of the Companys damaged outside plant is estimated to amount to $2.5 million as of September 30, 2014. The Company is insured but there are limitations based on proximity of poles and lines to other Company property and based on deductibles determined by insured location as well as by event. As of September 30, 2014, the Company has not recognized a recovery in the condensed consolidated financial statements. The expense attributed to the storm recognized in the condensed consolidated statements of income after cost capitalization amounted to $0.9 million for the three and nine months ended September 30, 2014.
Puna Lava Flow
A lava flow from Kilauea volcano is impacting the Puna district on the island of Hawaii. The Company has been monitoring the progress of the lava flow and has contingency plans to reduce disruption to its services in the area. These plans are subject to change depending on the direction and advancement of the lava flow which has been unpredictable. It is not possible at this time to estimate what loss, if any, to Company facilities will be incurred as a result of the lava flow.
Collective Bargaining Agreement
The Company has a collective bargaining agreement with the International Brotherhood of Electrical Workers Local 1357 (IBEW) with an effective date of January 1, 2013 for a term of five years. The agreement covers approximately half of the Companys work force.
Third Party Claims
In the normal course of conducting its business, the Company is involved in various disputes with third parties, including vendors and customers. The outcome of such disputes is generally uncertain and subject to commercial negotiations. The Company periodically assesses its liabilities in connection with these matters and records reserves for those matters where it is probable that a loss has been incurred and the loss can be reasonably estimated. Based on managements most recent assessment, the Company believes that the risk of loss in excess of liabilities recorded is not material for all outstanding claims and disputes and the ultimate outcome of such matters will not have a material adverse effect on the Companys results of operations, cash flows or financial position.
Litigation
The Company is involved in litigation arising in the normal course of business. The outcome of litigation is not expected to have a material adverse impact on the Companys condensed consolidated financial statements.
13. Fair Value of Financial Instruments
The following method and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the fair value.
Cash and cash equivalents, accounts receivable and accounts payable The carrying amount approximates fair value. The valuation is based on settlements of similar financial instruments all of which are short-term in nature and generally settled at or near cost. Cash is measured at Level 1.
Investment securities The fair value of investment securities is based on quoted market prices. Investment securities are included in other assets on the condensed consolidated balance sheets.
Debt The fair value of debt is based on the value at which the debt is trading among holders.
The estimated fair value of financial instruments is as follows (dollars in thousands):
|
|
Carrying |
|
Fair |
| ||
|
|
Value |
|
Value |
| ||
|
|
|
|
|
| ||
September 30, 2014 |
|
|
|
|
| ||
Assets - investment in U.S. Treasury obligations |
|
$ |
807 |
|
$ |
807 |
|
Liabilities - long-term debt (carried at amortized cost) |
|
292,985 |
|
298,372 |
| ||
|
|
|
|
|
| ||
December 31, 2013 |
|
|
|
|
| ||
Assets - investment in U.S. Treasury obligations |
|
$ |
807 |
|
$ |
807 |
|
Liabilities - long-term debt (carried at amortized cost) |
|
294,679 |
|
299,886 |
|
Fair Value Measurements
Fair value for accounting purposes is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Accounting standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Assets measured at fair value on a recurring basis represent investment securities included in other assets. Liabilities carried at amortized cost with fair value disclosure on a recurring basis represent long-term debt. A summary is as follows (dollars in thousands):
|
|
September 30, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Asset value measurements using: |
|
|
|
|
| ||
Quoted prices in active markets for identical assets (Level 1) |
|
$ |
807 |
|
$ |
807 |
|
Signficant other observable inputs (Level 2) |
|
|
|
|
| ||
Significant unobservable inputs (Level 3) |
|
|
|
|
| ||
|
|
|
|
|
| ||
|
|
$ |
807 |
|
$ |
807 |
|
|
|
|
|
|
| ||
Liability value measurements using: |
|
|
|
|
| ||
Quoted prices in active markets for identical liabilities (Level 1) |
|
$ |
|
|
$ |
|
|
Signficant other observable inputs (Level 2) |
|
298,372 |
|
299,886 |
| ||
Significant unobservable inputs (Level 3) |
|
|
|
|
| ||
|
|
|
|
|
| ||
|
|
$ |
298,372 |
|
$ |
299,886 |
|
14. Segment Information
The Company operates in two reportable segments of telecommunications and data center colocation. This conclusion is based on how resources are allocated and performance is assessed by the Chief Executive Officer, the Companys chief operating decision maker. The telecommunications segment provides local voice services, long distance voice services, high-speed internet and video. In addition, the segment provides network access which includes data transport. Various related telephony services are provided including equipment and managed services. The data center colocation segment provides physical colocation, virtual colocation and various related telephony services.
In the fourth quarter of 2013, the Company reevaluated its reportable segments. This was prompted by the acquisition of SystemMetrics and the Companys current strategic focus. Previously, the Company presented a wireline and other segment (which was primarily wireless services). With the diminishing significance of the wireless segment, the Company no longer provides separate wireless information to the Companys chief operating decision maker. Both these segments are now combined into the telecommunications segment. Prior to the acquisition of SystemMetrics on September 30, 2013, the Company did not have data center colocation operations. Hence, the Company had a single reportable segment prior to September 30, 2013 under the revised reportable segment structure.
The following table provides operating financial information for the Companys reportable segments for the three and nine months ended September 30, 2014 (dollars in thousands):
|
|
Tele- |
|
Data Center |
|
Intersegment |
|
|
| ||||
|
|
communications |
|
Colocation |
|
Elimination |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Three months ended September 30, 2014 |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
|
$ |
95,040 |
|
$ |
2,485 |
|
$ |
(273 |
) |
$ |
97,252 |
|
Depreciation and amortization |
|
19,298 |
|
419 |
|
|
|
19,717 |
| ||||
Operating income (loss) |
|
6,723 |
|
(103 |
) |
|
|
6,620 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Nine months ended September 30, 2014 |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
|
$ |
284,617 |
|
$ |
7,213 |
|
$ |
(721 |
) |
$ |
291,109 |
|
Depreciation and amortization |
|
56,078 |
|
1,243 |
|
|
|
57,321 |
| ||||
Operating income (loss) |
|
22,888 |
|
(238 |
) |
|
|
22,650 |
| ||||
Capital expeditures |
|
76,949 |
|
468 |
|
|
|
77,417 |
|
Intersegment revenue represents primarily network access services provided by the telecommunications segment for data center colocation. For the three and nine months ended September 30, 2014 total operating income above reconciles to the condensed consolidated statement of income as follows:
|
|
Three Months |
|
Nine Months |
| ||
|
|
Ended |
|
Ended |
| ||
|
|
September 30, |
|
September 30, |
| ||
|
|
2014 |
|
2014 |
| ||
|
|
|
|
|
| ||
Operating income |
|
$ |
6,620 |
|
$ |
22,650 |
|
Corporate other expense |
|
(4,090 |
) |
(12,374 |
) | ||
|
|
|
|
|
| ||
Income before income tax provision |
|
$ |
2,530 |
|
$ |
10,276 |
|
The following table provides information on the Companys revenue, net of intersegment eliminations, by product group (dollars in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Local voice and other retail services |
|
$ |
63,694 |
|
$ |
65,485 |
|
$ |
189,583 |
|
$ |
193,003 |
|
Network access services |
|
31,073 |
|
32,197 |
|
94,313 |
|
97,640 |
| ||||
Data center colocation |
|
2,485 |
|
|
|
7,213 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
$ |
97,252 |
|
$ |
97,682 |
|
$ |
291,109 |
|
$ |
290,643 |
|
Item 2. Managements 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.
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.
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.
Data Center Colocation
The data center colocation segment provides physical colocation, virtual colocation and various related telephony services.
Results of Operations for the Three and Nine Months Ended September 30, 2014 and 2013
Operating Revenues
The following tables summarize our volume information (lines or subscribers) as of September 30, 2014 and 2013, and our operating revenues for the three and nine months ended September 30, 2014 and 2013. For comparability, we also present volume information as of September 30, 2014 compared to June 30, 2014.
Previously, revenues from business VoIP customers for equipment usage and other ancillary services were classified as other revenue. Because all of these revenues relate to providing local telephone service to the customer, they are now presented as local voice services. Comparative information for prior periods, including the first quarter of 2014, has been modified to conform to the current period presentation.
Volume Information
As of September 30, 2014 compared to September 30, 2013
|
|
September 30, |
|
September 30, |
|
Change |
| ||
|
|
2014 |
|
2013 |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
Voice access lines |
|
|
|
|
|
|
|
|
|
Residential |
|
173,656 |
|
190,013 |
|
(16,357 |
) |
-8.6 |
% |
Business |
|
189,207 |
|
194,623 |
|
(5,416 |
) |
-2.8 |
% |
Public |
|
3,954 |
|
4,246 |
|
(292 |
) |
-6.9 |
% |
|
|
366,817 |
|
388,882 |
|
(22,065 |
) |
-5.7 |
% |
|
|
|
|
|
|
|
|
|
|
High-Speed Internet lines |
|
|
|
|
|
|
|
|
|
Residential |
|
92,265 |
|
90,253 |
|
2,012 |
|
2.2 |
% |
Business |
|
19,552 |
|
19,163 |
|
389 |
|
2.0 |
% |
Wholesale |
|
853 |
|
986 |
|
(133 |
) |
-13.5 |
% |
|
|
112,670 |
|
110,402 |
|
2,268 |
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
Long distance lines |
|
|
|
|
|
|
|
|
|
Residential |
|
109,702 |
|
119,096 |
|
(9,394 |
) |
-7.9 |
% |
Business |
|
78,207 |
|
79,320 |
|
(1,113 |
) |
-1.4 |
% |
|
|
187,909 |
|
198,416 |
|
(10,507 |
) |
-5.3 |
% |
|
|
|
|
|
|
|
|
|
|
Video services |
|
|
|
|
|
|
|
|
|
Subscribers |
|
25,766 |
|
15,796 |
|
9,970 |
|
63.1 |
% |
Homes Enabled |
|
152,000 |
|
111,000 |
|
41,000 |
|
36.9 |
% |
As of September 30, 2014 compared to June 30, 2014
|
|
September 30, |
|
June 30, |
|
Change |
| ||
|
|
2014 |
|
2014 |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
Voice access lines |
|
|
|
|
|
|
|
|
|
Residential |
|
173,656 |
|
177,953 |
|
(4,297 |
) |
-2.4 |
% |
Business |
|
189,207 |
|
190,754 |
|
(1,547 |
) |
-0.8 |
% |
Public |
|
3,954 |
|
4,028 |
|
(74 |
) |
-1.8 |
% |
|
|
366,817 |
|
372,735 |
|
(5,918 |
) |
-1.6 |
% |
|
|
|
|
|
|
|
|
|
|
High-Speed Internet lines |
|
|
|
|
|
|
|
|
|
Residential |
|
92,265 |
|
91,405 |
|
860 |
|
0.9 |
% |
Business |
|