Edgar Filing: Hawaiian Telcom Holdco, Inc.

hwtl_Current folio_10Q

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, 2015

[ ]	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		16-1710376
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1177 Bishop Street

Honolulu, Hawaii 96813

(Address of principal executive offices)

808-546-4511

(Registrant's 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 [ ]

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 [ ]

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 [ ]		Accelerated Filer [X]		Non-Accelerated Filer [ ]		Smaller reporting company [ ]
				(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] 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 [ ]

As of November 9, 2015, 11,466,398 shares of the registrant’s common stock were outstanding.

Table of Contents


		Page
Part I	Financial Information
Item 1	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4	Controls and Procedures	32

Part II	Other Information
Item 1	Legal Proceedings	33
Item 1A	Risk Factors	33
Item 5	Other Information	34
Item 6	Exhibits	35

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statements of Income

(Unaudited, dollars in thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Operating revenues	$	100,905	$	97,252	$	294,208	$	291,109
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)		41,013		42,621		120,415		124,858
Selling, general and administrative		33,146		28,294		92,645		86,280
Depreciation and amortization		22,551		19,717		65,772		57,321
Total operating expenses		96,710		90,632		278,832		268,459
Operating income		4,195		6,620		15,376		22,650
Other income (expense):
Interest expense		(4,148)		(4,103)		(12,651)		(12,401)
Interest income and other		4		13		15		27
Total other expense		(4,144)		(4,090)		(12,636)		(12,374)
Income before income tax provision		51		2,530		2,740		10,276
Income tax provision (credit)		(54)		1,014		1,204		4,155
Net income	$	105	$	1,516	$	1,536	$	6,121
Net income per common share -
Basic	$	0.01	$	0.14	$	0.14	$	0.58
Diluted	$	0.01	$	0.13	$	0.14	$	0.54
Weighted average shares used to compute net income per common share -
Basic		11,040,299		10,586,690		10,844,478		10,567,036
Diluted		11,318,641		11,311,691		11,275,655		11,329,328

See accompanying notes to condensed consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income	$	105	$	1,516	$	1,536	$	6,121
Other comprehensive income (loss) -
Unrealized holding gains (losses) arising during period		(1)		(3)		(1)		(4)
Retirement plan gain (loss)		(8,786)		43		(6,711)		(202)
Income tax credit (provision) on comprehensive income		3,357		(17)		2,565		83
Other comprehensive income (loss), net of tax		(5,430)		23		(4,147)		(123)
Comprehensive income (loss)	$	(5,325)	$	1,539	$	(2,611)	$	5,998

See accompanying notes to condensed consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, dollars in thousands, except per share amounts)


	September 30,		December 31,
	2015		2014
Assets
Current assets
Cash and cash equivalents	$	28,845	$	39,885
Receivables, net		33,580		32,662
Material and supplies		9,126		9,337
Prepaid expenses		5,085		3,598
Deferred income taxes		6,481		6,840
Other current assets		3,633		3,481
Total current assets		86,750		95,803
Property, plant and equipment, net		572,242		565,956
Intangible assets, net		35,454		37,328
Goodwill		12,104		12,104
Deferred income taxes		82,917		81,626
Other assets		10,133		9,151
Total assets	$	799,600	$	801,968
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt	$	3,000	$	3,000
Accounts payable		44,707		50,499
Accrued expenses		15,331		19,399
Advance billings and customer deposits		16,540		14,686
Other current liabilities		6,630		6,790
Total current liabilities		86,208		94,374
Long-term debt		287,752		289,423
Employee benefit obligations		102,762		99,366
Other liabilities		17,467		14,271
Total liabilities		494,189		497,434
Commitments and contingencies (Note 11)
Stockholders’ equity
Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 11,122,880 and 10,673,292 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		111		107
Additional paid-in capital		174,005		170,521
Accumulated other comprehensive loss		(28,094)		(23,947)
Retained earnings		159,389		157,853
Total stockholders’ equity		305,411		304,534
Total liabilities and stockholders’ equity	$	799,600	$	801,968

See accompanying notes to condensed consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)


	Nine Months Ended
	September 30,
	2015		2014
Cash flows from operating activities:
Net income	$	1,536	$	6,121
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		65,772		57,321
Employee retirement benefits		(3,315)		(10,557)
Provision for uncollectibles		2,640		2,493
Stock based compensation		1,087		3,066
Deferred income taxes		1,633		4,770
Changes in operating assets and liabilities:
Receivables		(3,558)		(1,350)
Material and supplies		211		(685)
Prepaid expenses and other current assets		(2,538)		(1,421)
Accounts payable and accrued expenses		(3,222)		1,296
Advance billings and customer deposits		4,054		(50)
Other current liabilities		(693)		(568)
Other		1,988		1,380
Net cash provided by operating activities		65,595		61,816
Cash flows from investing activities:
Capital expenditures		(76,732)		(76,474)
Funds released from restricted cash account		400		—
Net cash used in investing activities		(76,332)		(76,474)
Cash flows from financing activities:
Proceeds from stock issuance		3,342		—
Loan refinancing costs		(150)		—
Proceeds from installment financing		2,779		2,085
Repayment of capital lease and installment financing		(3,083)		(2,014)
Repayment of debt		(2,250)		(2,250)
Taxes paid related to net share settlement of equity awards		(941)		(1,021)
Net cash used in financing activities		(303)		(3,200)
Net change in cash and cash equivalents		(11,040)		(17,858)
Cash and cash equivalents, beginning of period		39,885		49,551
Cash and cash equivalents, end of period	$	28,845	$	31,693
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized	$	11,234	$	11,033

See accompanying notes to condensed consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited, dollars in thousands)


						Accumulated
				Additional		Other				Total
	Common Stock			Paid-In		Comprehensive		Retained		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Earnings		Equity

Balance, January 1, 2015	10,673,292	$	107	$	170,521	$	(23,947)	$	157,853	$	304,534

Stock based compensation	—		—		1,087		—		—		1,087

Exercise of warrant agreement	376,333		4		3,338		—		—		3,342

Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes	73,255		—		(941)		—		—		(941)

Net income	—		—		—		—		1,536		1,536

Other comprehensive loss, net of tax	—		—		—		(4,147)		—		(4,147)

Balance, September 30, 2015	11,122,880	$	111	$	174,005	$	(28,094)	$	159,389	$	305,411

Balance, January 1, 2014	10,495,856	$	105	$	167,869	$	(4,716)	$	149,754	$	313,012

Stock based compensation	—		—		3,066		—		—		3,066

Exercise of warrant agreement	15,361		—		—		—		—		—

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

See accompanying notes to condensed consolidated financial statements.

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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, television, Internet, long distance 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 Company’s 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 Company’s audited consolidated financial statements as of and for the year ended December 31, 2014.

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, 2015 are held in one bank in demand deposit accounts. During the nine months ended September 30, 2015, funds amounting to $0.4 million in a restricted cash account held in conjunction with a lease agreement provision were released and deposited into unrestricted cash.

Supplemental Non-Cash Investing and Financing Activities

Accounts payable included $14.5 million and $15.1 million at September 30, 2015 and 2014, 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 Company’s reported operating revenues. Such amounts represent primarily Hawaii state general excise taxes and Hawaii Public Utility Commission fees. Such taxes and fees amounted to $2.1 million and $6.1 million for the three and nine months ended September 30, 2015, and $1.9 million and $5.5 million for the three and nine months ended September 30, 2014, respectively.

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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,
	2015	2014	2015	2014
Basic earnings per share - weighted average shares	11,040,299	10,586,690	10,844,478	10,567,036
Effect of dilutive securities:
Employee and director restricted stock units	19,045	122,530	76,058	153,752
Warrants	259,297	602,471	355,119	608,540
Diluted earnings per share - weighted average shares	11,318,641	11,311,691	11,275,655	11,329,328

The computation of weighted average dilutive shares outstanding excluded grants of restricted stock units convertible into 84,259 of common stock for the three months ended September 30, 2015. The unrecognized compensation on a per unit basis for these restricted stock units was greater than the average market price of the Company’s common stock for the period presented. Therefore, the effect would be anti-dilutive. For the nine months ended September 30, 2015 and for the three and nine months ended September 30, 2014, there were no restricted stock units that were anti-dilutive to earnings per share.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued a new accounting standard which provides guidance for revenue recognition which was amended in July 2015. The amendment deferred the effective date for the Company to the first quarter of 2018 with either full retrospective or modified retrospective adoption permitted. Early adoption is allowed from the first quarter of 2017. The Company is currently evaluating the impact of the adoption of this accounting standard on the Company’s financial position, results of operations and cash flows.

In April 2015, the FASB issued an accounting standard simplifying the presentation of debt issuance costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability which is consistent with debt discounts. The standard requires retrospective adoption and will be effective beginning in the first quarter of 2016 for the Company. Early adoption is permitted. The Company is currently evaluating the impact and timing of adopting this new accounting standard and the impact it will have on the Company’s financial position, results of operations and cash flows.

3. Receivables

Receivables consisted of the following (dollars in thousands):


	September 30,		December 31,
	2015		2014
Customers and other	$	37,453	$	36,417
Allowance for doubtful accounts		(3,873)		(3,755)
	$	33,580	$	32,662

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4. Long-Lived Assets

Property, plant and equipment consisted of the following (dollars in thousands):


	September 30,		December 31,
	2015		2014
Property, plant and equipment	$	910,799	$	843,589
Less accumulated depreciation		(338,557)		(277,633)
	$	572,242	$	565,956

Depreciation expense amounted to $22.0 million and $63.9 million for the three and nine months ended September 30, 2015, respectively. Depreciation expense amounted to $19.0 million and $55.1 million for the three and nine months ended September 30, 2014, respectively.

The gross carrying amount and accumulated amortization of identifiable intangible assets are as follows (dollars in thousands):


	September 30, 2015						December 31, 2014
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Value		Amortization		Value		Value		Amortization		Value
Subject to amortization:
Customer relationships	$	21,709	$	13,628	$	8,081	$	21,709	$	11,799	$	9,910
Trade name and other		320		247		73		320		202		118
		22,029		13,875		8,154		22,029		12,001		10,028
Not subject to amortization:
Brand name		27,300		—		27,300		27,300		—		27,300
		27,300		—		27,300		27,300		—		27,300
	$	49,329	$	13,875	$	35,454	$	49,329	$	12,001	$	37,328

Amortization expense amounted to $0.6 million and $1.9 million for the three and nine months ended September 30, 2015, respectively. Amortization expense amounted to $0.7 million and $2.2 million for the three and nine months ended September 30, 2014, respectively. Estimated amortization expense for the next five years and thereafter is as follows (dollars in thousands):


2015 (remaining months)	$	624
2016		2,101
2017		1,703
2018		1,308
2019		930
Thereafter		1,488
	$	8,154

5. Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following (dollars in thousands):


	September 30,		December 31,
	2015		2014
Salaries and benefits	$	11,750	$	15,910
Interest		2,531		2,550
Other taxes		1,050		939
	$	15,331	$	19,399

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Other current liabilities consisted of the following (dollars in thousands):


	September 30,		December 31,
	2015		2014
Other postretirement benefits, current	$	2,660	$	2,660
Installment financing contracts, current		2,733		2,787
Other		1,237		1,343
	$	6,630	$	6,790

6. Long-Term Debt

Long-term debt consisted of the following (dollars in thousands):


	Interest Rate
	at September 30,		Final	September 30,		December 31,
	2015		Maturity	2015		2014
Term loan	5.00	%	June 6, 2019	$	293,888	$	296,138
Original issue discount					(3,136)		(3,715)
					290,752		292,423
Current					3,000		3,000
Noncurrent				$	287,752	$	289,423

The term loan outstanding at September 30, 2015 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, 2015 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 Company’s leverage ratio. The excess cash flow payment due for the year ended December 31, 2014 was not significant. 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 was extended on April 9, 2015 to mature on December 6, 2018. The facility has an available balance of $30.0 million with no amounts drawn as of or for the periods ended September 30, 2015 and 2014. A commitment fee is payable quarterly to the lender under the facility. Interest on amounts outstanding is based on, at the Company’s 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 Company’s leverage, as defined in the agreement, at the time of the borrowing.

Maturities

The annual requirements for principal payments on long-term debt as of September 30, 2015 are as follows (dollars in thousands):


Years ended December 31,
2015 (remainder of year)	$	750
2016		3,000
2017		3,000
2018		3,000
2019		284,138
	$	293,888

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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, 2015, respectively. 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.

7. 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, 2015 and 2014 (dollars in thousands):

Pension


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Interest cost	$	2,107	$	2,208	$	6,164	$	6,624
Expected asset return		(3,146)		(3,178)		(9,906)		(9,534)
Amortization of loss		24		29		5		87
Net periodic benefit income		(1,015)		(941)		(3,737)		(2,823)
Settlement loss		4,118		—		6,366		—
Net benefit expense (income)	$	3,103	$	(941)	$	2,629	$	(2,823)


		Weighted-
		Average
		Grant-Date
	Shares	Fair Value
2015
Nonvested at January 1, 2015	245,752	$	27
Granted	140,909		26
Vested	(109,426)		28
Forfeited	(101,520)		26
Nonvested at September 30, 2015	175,715	$	26

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