x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 13-3725229 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
521 East Morehead Street, Suite 500 Charlotte, North Carolina | 28202 | |
(Address of principal executive offices) | (Zip Code) |
Large accelerated filer | o | Accelerated filer | x | |||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Page | ||
Item 1. | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
• | future performance generally and our share price as a result thereof; |
• | any change in strategic direction, including as a result of mergers, acquisitions or dispositions; |
• | restrictions imposed by the agreements governing our indebtedness; |
• | our ability to satisfy certain financial covenants included in the agreements governing our indebtedness; |
• | financing sources and availability, and future interest expense; |
• | our ability to repay or refinance our indebtedness; |
• | our ability to fund substantial capital expenditures; |
• | anticipated business development activities and future capital expenditures; |
• | the effects of regulation and enforcement, including changes in federal and state regulatory policies, procedures and their enforcement mechanisms including but not limited to the availability and levels of regulatory support payments and penalties associated with performance; |
• | our ability to satisfy our Connect America Fund ("CAF") Phase II obligations; |
• | adverse changes in economic and industry conditions, and any resulting financial or operational impact, in the markets we serve; |
• | labor matters, including workforce levels, our workforce reduction initiatives, labor negotiations and any resulting financial or operational impact; |
• | material technological developments and changes in the communications industry, including declines in access lines; |
• | disruption of our third party suppliers' provisioning of critical products or services; |
• | change in preference and use by customers of alternative technologies; |
• | the effects of competition on our business and market share; |
• | our ability to overcome changes to or pressure on pricing and their impact on our profitability; |
• | intellectual property infringement claims by third parties; |
• | failure of, or attack on, our information technology infrastructure; |
• | risks related to our reported financial information and operating results; |
• | availability of net operating loss ("NOL") carryforwards to offset anticipated tax liabilities; |
• | the impact of changes in assumptions on our ability to meet obligations to our company-sponsored qualified pension plans and other post-employment benefit plans; |
• | the impact of lump sum payments under certain of our company-sponsored qualified pension plans on future pension contributions; |
• | the effects of severe weather events, such as hurricanes, storms, tornadoes and floods, terrorist attacks, cyber-attacks or other natural or man-made disasters; and |
• | changes in accounting assumptions that regulatory agencies, including the Securities and Exchange Commission (the "SEC"), may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings. |
• | "FairPoint Communications" refers to FairPoint Communications, Inc., excluding its subsidiaries. |
• | "FairPoint," the "Company," "we," "us" or "our" refer to the combined business of FairPoint Communications, Inc. and all of its subsidiaries after giving effect to the merger on March 31, 2008 with Northern New England Spinco Inc., a subsidiary of Verizon Communications Inc. ("Verizon"), which transaction is referred to herein as the "Merger". |
• | "Northern New England operations" refers to the local exchange business acquired from Verizon and certain of its subsidiaries after giving effect to the Merger. |
• | "Telecom Group" refers to FairPoint, exclusive of the acquired Northern New England operations. |
June 30, 2016 | December 31, 2015 | ||||||
(unaudited) | |||||||
Assets: | |||||||
Cash | $ | 41,116 | $ | 26,560 | |||
Accounts receivable (net of $4.6 million and $8.3 million allowance for doubtful accounts, respectively) | 61,281 | 60,136 | |||||
Prepaid expenses | 26,536 | 24,410 | |||||
Other current assets | 3,650 | 5,030 | |||||
Total current assets | 132,583 | 116,136 | |||||
Property, plant and equipment (net of $1,377.6 million and $1,281.2 million accumulated depreciation, respectively) | 1,064,630 | 1,118,781 | |||||
Intangible assets (net of $59.8 million and $54.3 million accumulated amortization, respectively) | 78,379 | 83,879 | |||||
Restricted cash | 652 | 651 | |||||
Other assets | 3,012 | 3,079 | |||||
Total assets | $ | 1,279,256 | $ | 1,322,526 | |||
Liabilities and Stockholders’ Deficit: | |||||||
Current portion of long-term debt | $ | 6,400 | $ | 6,400 | |||
Current portion of capital lease obligations | 1,110 | 918 | |||||
Accounts payable | 28,861 | 28,157 | |||||
Claims payable and estimated claims accrual | — | 216 | |||||
Accrued interest payable | 9,983 | 9,983 | |||||
Accrued payroll and related expenses | 24,361 | 24,753 | |||||
Other accrued liabilities | 52,139 | 49,802 | |||||
Total current liabilities | 122,854 | 120,229 | |||||
Capital lease obligations | 1,269 | 1,223 | |||||
Accrued pension obligations | 149,911 | 150,562 | |||||
Accrued post-employment benefit obligations | 93,545 | 94,042 | |||||
Deferred income taxes, net | 17,335 | 35,075 | |||||
Other long-term liabilities | 18,822 | 22,739 | |||||
Long-term debt, net of current portion | 899,206 | 900,145 | |||||
Total long-term liabilities | 1,180,088 | 1,203,786 | |||||
Total liabilities | 1,302,942 | 1,324,015 | |||||
Commitments and contingencies (See Note 13) | |||||||
Stockholders’ deficit: | |||||||
Common stock, $0.01 par value, 37,500,000 shares authorized, 27,050,600 and 26,921,066 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively | 271 | 269 | |||||
Additional paid-in capital | 525,377 | 521,842 | |||||
Retained deficit | (659,709 | ) | (707,592 | ) | |||
Accumulated other comprehensive income | 110,375 | 183,992 | |||||
Total stockholders’ deficit | (23,686 | ) | (1,489 | ) | |||
Total liabilities and stockholders’ deficit | $ | 1,279,256 | $ | 1,322,526 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues | $ | 206,557 | $ | 214,098 | $ | 413,373 | $ | 428,072 | |||||||
Operating expenses: | |||||||||||||||
Cost of services and sales, excluding depreciation and amortization | 93,302 | 97,968 | 198,341 | 232,349 | |||||||||||
Other post-employment benefit and pension expense | (53,486 | ) | (52,460 | ) | (106,714 | ) | (59,358 | ) | |||||||
Selling, general and administrative expense, excluding depreciation and amortization | 49,440 | 53,434 | 99,776 | 109,280 | |||||||||||
Depreciation and amortization | 55,105 | 55,818 | 112,743 | 111,124 | |||||||||||
Reorganization related expense | — | 20 | — | 27 | |||||||||||
Total operating expenses | 144,361 | 154,780 | 304,146 | 393,422 | |||||||||||
Income from operations | 62,196 | 59,318 | 109,227 | 34,650 | |||||||||||
Other income/(expense): | |||||||||||||||
Interest expense | (20,583 | ) | (19,974 | ) | (41,193 | ) | (39,793 | ) | |||||||
Other, net | 95 | 97 | 253 | 272 | |||||||||||
Total other expense | (20,488 | ) | (19,877 | ) | (40,940 | ) | (39,521 | ) | |||||||
Income/(loss) before income taxes | 41,708 | 39,441 | 68,287 | (4,871 | ) | ||||||||||
Income tax (expense)/benefit | (12,393 | ) | 824 | (20,404 | ) | (77 | ) | ||||||||
Net income/(loss) | $ | 29,315 | $ | 40,265 | $ | 47,883 | $ | (4,948 | ) | ||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 26,858 | 26,655 | 26,835 | 26,622 | |||||||||||
Diluted | 27,084 | 27,025 | 27,071 | 26,622 | |||||||||||
Income/(loss) per share, basic | $ | 1.09 | $ | 1.51 | $ | 1.78 | $ | (0.19 | ) | ||||||
Income/(loss) per share, diluted | $ | 1.08 | $ | 1.49 | $ | 1.77 | $ | (0.19 | ) |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income/(loss) | $ | 29,315 | $ | 40,265 | $ | 47,883 | $ | (4,948 | ) | ||||||
Other comprehensive income/(loss), net of taxes: | |||||||||||||||
Interest rate swaps (net of $(0.2) million, $0.1 million, $(0.3) million and $0.4 million tax (expense)/benefit, respectively) | 274 | (135 | ) | 398 | (623 | ) | |||||||||
Qualified pension and post-employment benefit plans (net of $18.5 million, $0 million, $37.7 million and $0 million tax benefit, respectively) | (37,515 | ) | (55,691 | ) | (74,015 | ) | 615,334 | ||||||||
Total other comprehensive income/(loss) | (37,241 | ) | (55,826 | ) | (73,617 | ) | 614,711 | ||||||||
Comprehensive income/(loss) | $ | (7,926 | ) | $ | (15,561 | ) | $ | (25,734 | ) | $ | 609,763 |
Common Stock | Additional paid-in capital | Retained deficit | Accumulated other comprehensive income | Total stockholders' deficit | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance at December 31, 2015 | 26,921 | $ | 269 | $ | 521,842 | $ | (707,592 | ) | $ | 183,992 | $ | (1,489 | ) | |||||||||
Net income | — | — | — | 47,883 | — | 47,883 | ||||||||||||||||
Stock-based compensation issued, net | 130 | 2 | (382 | ) | — | — | (380 | ) | ||||||||||||||
Stock-based compensation expense | — | — | 3,917 | — | — | 3,917 | ||||||||||||||||
Interest rate swaps other comprehensive income before reclassifications | — | — | — | — | (329 | ) | (329 | ) | ||||||||||||||
Interest rate swaps reclassified from accumulated other comprehensive income | — | — | — | — | 727 | 727 | ||||||||||||||||
Employee benefits reclassified from accumulated other comprehensive income | — | — | — | — | (74,015 | ) | (74,015 | ) | ||||||||||||||
Balance at June 30, 2016 | 27,051 | $ | 271 | $ | 525,377 | $ | (659,709 | ) | $ | 110,375 | $ | (23,686 | ) |
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Cash flows from operating activities: | |||||||
Net income/(loss) | $ | 47,883 | $ | (4,948 | ) | ||
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | |||||||
Deferred income taxes | 20,123 | (678 | ) | ||||
Provision for uncollectible revenue | (1,095 | ) | 4,065 | ||||
Depreciation and amortization | 112,743 | 111,124 | |||||
Other post-employment benefits | (113,365 | ) | (70,191 | ) | |||
Qualified pension | 498 | 3,816 | |||||
Stock-based compensation | 3,917 | 4,109 | |||||
Other non-cash items | 2,509 | 2,066 | |||||
Changes in assets and liabilities arising from operations: | |||||||
Accounts receivable | (48 | ) | 1,605 | ||||
Prepaid and other assets | (1,031 | ) | 4,089 | ||||
Accounts payable and accrued liabilities | 1,784 | (24,480 | ) | ||||
Accrued interest payable | — | (1 | ) | ||||
Other assets and liabilities, net | (3,510 | ) | (939 | ) | |||
Total adjustments | 22,525 | 34,585 | |||||
Net cash provided by operating activities | 70,408 | 29,637 | |||||
Cash flows from investing activities: | |||||||
Net capital additions | (52,685 | ) | (54,728 | ) | |||
Distributions from investments and proceeds from the sale of property and equipment | 498 | 217 | |||||
Net cash used in investing activities | (52,187 | ) | (54,511 | ) | |||
Cash flows from financing activities: | |||||||
Repayments of long-term debt | (3,200 | ) | (3,200 | ) | |||
Restricted cash | (1 | ) | — | ||||
Proceeds from exercise of stock options | 9 | 13 | |||||
Repayment of capital lease obligations | (473 | ) | (378 | ) | |||
Net cash used in financing activities | (3,665 | ) | (3,565 | ) | |||
Net change | 14,556 | (28,439 | ) | ||||
Cash, beginning of period | 26,560 | 37,587 | |||||
Cash, end of period | $ | 41,116 | $ | 9,148 | |||
Supplemental disclosure of cash flow information: | |||||||
Capital additions included in accounts payable | $ | 9,904 | $ | 10,683 | |||
Acquisition of property and equipment by capital lease | 713 | 748 |
June 30, 2016 | December 31, 2015 | ||||||
Term Loan, due 2019 (weighted average rate of 7.50%) | $ | 619,200 | $ | 622,400 | |||
Discount on Term Loan (a) | (9,524 | ) | (11,138 | ) | |||
Debt issuance costs | (4,070 | ) | (4,717 | ) | |||
Notes, 8.75%, due 2019 | 300,000 | 300,000 | |||||
Total long-term debt | 905,606 | 906,545 | |||||
Less: current portion | (6,400 | ) | (6,400 | ) | |||
Total long-term debt, net of current portion | $ | 899,206 | $ | 900,145 |
(a) | The $9.5 million and $11.1 million discount on the Term Loan (as defined below) as of June 30, 2016 and December 31, 2015, respectively, is being amortized using the effective interest method over the life of the Term Loan. |
Trailing twelve months ending June 30, | Balance Due | ||
2017 | $ | 6,400 | |
2018 | 6,400 | ||
2019 | 606,400 | ||
Thereafter | 300,000 | ||
Total long-term debt, including current portion | $ | 919,200 |
As of June 30, 2016 | |||||
Derivatives designated as hedging instruments: | Balance Sheet Location | Fair Value | |||
Interest rate swaps, Current | Other accrued liabilities | $ | 2,391 | ||
Interest rate swaps, Long-term | Other long-term liabilities | $ | 550 | ||
As of December 31, 2015 | |||||
Derivatives designated as hedging instruments: | Balance Sheet Location | Fair Value | |||
Interest rate swaps, Current | Other accrued liabilities | $ | 2,375 | ||
Interest rate swaps, Long-term | Other long-term liabilities | $ | 1,232 |
Amount Recognized in Interest Expense (Pre-Tax) | Amount of Loss/(Gain) Recognized in Other Comprehensive Income on Derivative (Effective Portion) (Pre-Tax) | ||||||||||||||||||||||||
Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 | ||||||||||||||||||
Interest rate swaps | $ | 608 | $ | — | $ | 1,216 | $ | — | $ | (459 | ) | $ | 226 | $ | (666 | ) | $ | 1,043 |
Level 1 - | Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
Level 2 - | Valuations based on quoted prices for similar instruments in active markets or quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
Level 3 - | Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
Fair Value Measurements Using | |||||||||||
Level 1 | Level 2 | Level 3 | |||||||||
Interest rate swaps, Current (a) | $ | — | $ | 2,391 | $ | — | |||||
Interest rate swaps, Long-term (a) | $ | — | $ | 550 | $ | — |
Fair Value Measurements Using | |||||||||||
Level 1 | Level 2 | Level 3 | |||||||||
Interest rate swaps, Current (a) | $ | — | $ | 2,375 | $ | — | |||||
Interest rate swaps, Long-term (a) | $ | — | $ | 1,232 | $ | — |
(a) | The fair value is determined using valuation models which rely on the expected LIBOR based yield curve and estimates of counterparty and the Company’s non-performance risk. Because each of these inputs are directly observable or can be corroborated by observable market data, the Company has categorized these interest rate swaps as Level 2 within the fair value hierarchy. |
June 30, 2016 | December 31, 2015 | ||||||||||||||
Carrying Amount | Fair Value (a) | Carrying Amount | Fair Value (a) | ||||||||||||
Term Loan, due 2019 (b) | $ | 609,676 | $ | 617,652 | $ | 611,262 | $ | 616,954 | |||||||
Notes, 8.75%, due 2019 | 300,000 | 294,750 | 300,000 | 295,500 | |||||||||||
Total | $ | 909,676 | $ | 912,402 | $ | 911,262 | $ | 912,454 |
(a) | The Company estimated fair value based on market prices of the Company's debt securities at the balance sheet dates, which falls within Level 2 of the fair value hierarchy. |
(b) | The carrying amount of the Term Loan is net of the unamortized discount of $9.5 million and $11.1 million as of June 30, 2016 and December 31, 2015, respectively. |
Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | ||||||||||||||
Qualified Pension Plans | Post- employment Benefit Plans | Qualified Pension Plans | Post- employment Benefit Plans | ||||||||||||
Service cost | $ | 1,593 | $ | 41 | $ | 1,823 | $ | 62 | |||||||
Interest cost | 3,821 | 1,008 | 3,633 | 1,013 | |||||||||||
Expected return on plan assets | (3,834 | ) | — | (3,658 | ) | — | |||||||||
Amortization of actuarial loss | 1,349 | 31,704 | 1,886 | 32,838 | |||||||||||
Amortization of prior service cost | (761 | ) | (88,259 | ) | (863 | ) | (89,550 | ) | |||||||
Plan settlement | — | — | 607 | — | |||||||||||
Net periodic benefit cost | 2,168 | (55,506 | ) | 3,428 | (55,637 | ) | |||||||||
Less capitalized portion | (148 | ) | — | (251 | ) | — | |||||||||
Other post-employment benefit and pension expense | $ | 2,020 | $ | (55,506 | ) | $ | 3,177 | $ | (55,637 | ) |
Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 | ||||||||||||||
Qualified Pension Plans | Post- employment Benefit Plans | Qualified Pension Plans | Post- employment Benefit Plans | ||||||||||||
Service cost | $ | 3,185 | $ | 82 | $ | 5,169 | $ | 4,417 | |||||||
Interest cost | 7,641 | 2,016 | 7,444 | 5,678 | |||||||||||
Expected return on plan assets | (7,668 | ) | — | (7,223 | ) | — | |||||||||
Amortization of actuarial loss | 2,698 | 63,407 | 3,741 | 47,874 | |||||||||||
Amortization of prior service cost | (1,521 | ) | (176,275 | ) | (1,207 | ) | (125,526 | ) | |||||||
Plan settlement | — | — | 607 | — | |||||||||||
Net periodic benefit cost | 4,335 | (110,770 | ) | 8,531 | (67,557 | ) | |||||||||
Less capitalized portion | (279 | ) | — | (332 | ) | — | |||||||||
Other post-employment benefit and pension expense | $ | 4,056 | $ | (110,770 | ) | $ | 8,199 | $ | (67,557 | ) |
Three Months Ended June 30, 2016 | Six Months Ended June 30, 2016 | ||||||
Employee benefits: | |||||||
Amortization of actuarial loss (.65 years to 11.47 years) (a) | $ | 33,053 | $ | 66,105 | |||
Amortization of net prior service credit (.87 years to 23.91 years) (a) | (89,020 | ) | (177,796 | ) | |||
Total employee benefits reclassified from accumulated other comprehensive income | (55,967 | ) | (111,691 | ) | |||
Tax benefit | 18,452 | 37,676 | |||||
Total employee benefits reclassified from accumulated other comprehensive income, net | $ | (37,515 | ) | $ | (74,015 | ) | |
Interest rate swaps: | |||||||
Interest rate swaps reclassified from accumulated other comprehensive income (b) | $ | 608 | $ | 1,216 | |||
Tax expense | (245 | ) | (489 | ) | |||
Total interest rate swaps reclassified from accumulated other comprehensive income, net | $ | 363 | $ | 727 | |||
Total amounts reclassified from accumulated other comprehensive income, net | $ | (37,152 | ) | $ | (73,288 | ) |
(a) | These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See note (9) "Employee Benefit Plans" for details. |
(b) | These accumulated other comprehensive income components are included in interest expense. See note (7) "Interest Rate Swap Agreements" for details. |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
Weighted average number of common shares used for basic earnings per share | 26,858,029 | 26,654,518 | 26,834,863 | 26,621,662 | |||||||
Effect of potential dilutive shares | 225,483 | 370,843 | 235,815 | — | |||||||
Weighted average number of common shares and potential dilutive shares used for diluted earnings per share | 27,083,512 | 27,025,361 | 27,070,678 | 26,621,662 | |||||||
Weighted average number of anti-dilutive shares outstanding at period-end that are excluded from the above reconciliation | 5,764,994 | 4,246,924 | 5,837,675 | 4,487,876 |
• | January 1, 2015 - July 31, 2015: $824,000 per month in transitional funding (recognized in the third quarter of 2015) |
• | August 1, 2015 - July 31, 2016: $618,000 per month in transitional funding |
• | August 1, 2016 - July 31, 2017: $412,000 per month in transitional funding |
• | August 1, 2017 - July 31, 2018: $206,000 per month in transitional funding |
• | August 1, 2018 and after: no transitional funding |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues: | |||||||||||||||
Voice services | $ | 75,099 | $ | 81,470 | $ | 151,002 | $ | 164,764 | |||||||
Access | 60,579 | 65,713 | 122,512 | 130,248 | |||||||||||
Data and Internet services | 46,159 | 44,455 | 90,719 | 87,726 | |||||||||||
Regulatory funding | 13,117 | 11,338 | 26,234 | 22,748 | |||||||||||
Other | 11,603 | 11,122 | 22,906 | 22,586 | |||||||||||
Total revenues | 206,557 | 214,098 | 413,373 | 428,072 | |||||||||||
Operating expenses: | |||||||||||||||
Cost of services and sales, excluding depreciation and amortization | 93,302 | 97,968 | 198,341 | 232,349 | |||||||||||
Other post-employment benefit and pension expense | (53,486 | ) | (52,460 | ) | (106,714 | ) | (59,358 | ) | |||||||
Selling, general and administrative expense, excluding depreciation and amortization | 49,440 | 53,434 | 99,776 | 109,280 | |||||||||||
Depreciation and amortization | 55,105 | 55,818 | 112,743 | 111,124 | |||||||||||
Reorganization related expense | — | 20 | — | 27 | |||||||||||
Total operating expenses | 144,361 | 154,780 | 304,146 | 393,422 | |||||||||||
Income/(loss) from operations | 62,196 | 59,318 | 109,227 | 34,650 | |||||||||||
Other income/(expense): | |||||||||||||||
Interest expense | (20,583 | ) | (19,974 | ) | (41,193 | ) | (39,793 | ) | |||||||
Other, net | 95 | 97 | 253 | 272 | |||||||||||
Total other expense | (20,488 | ) | (19,877 | ) | (40,940 | ) | (39,521 | ) | |||||||
Income/(loss) before income taxes | 41,708 | 39,441 | 68,287 | (4,871 | ) | ||||||||||
Income tax (expense)/benefit | (12,393 | ) | 824 | (20,404 | ) | (77 | ) | ||||||||
Net income/(loss) | $ | 29,315 | $ | 40,265 | $ | 47,883 | $ | (4,948 | ) | ||||||
As of June 30, | |||||||||||||||
Select Operating Metrics: | 2016 | 2015 | |||||||||||||
Broadband subscribers | 311,440 | 315,320 | |||||||||||||
Ethernet circuits | 15,137 | 13,680 | |||||||||||||
Residential voice lines | 388,983 | 437,303 |
Three Months Ended June 30, 2016 vs. June 30, 2015 | Six Months Ended June 30, 2016 vs June 30, 2015 | |||||||||||
Increase (Decrease) | % | Increase (Decrease) | % | |||||||||
Local voice services revenues, excluding: | $ | (5.1 | ) | $ | (11.2 | ) | ||||||
Long distance services revenues | (1.3 | ) | (2.8 | ) | ||||||||
Decrease in accrual of PAP/WPP service credits (1) | — | 0.2 | ||||||||||
Total change in voice services revenues | $ | (6.4 | ) | (8 | )% | $ | (13.8 | ) | (8 | )% |
(1) | There was an insignificant amount of PAP/WPP service credits during the three months ended June 30, 2016 and 2015 and the six months ended June 30, 2016. During the six months ended June 30, 2015, PAP/WPP service credits resulted in an increase of $0.2 million to local voice services revenues. |
Three Months Ended June 30, 2016 vs. June 30, 2015 | Six Months Ended June 30, 2016 vs June 30, 2015 | |||||||||||
Increase (Decrease) | % | Increase (Decrease) | % | |||||||||
Carrier Ethernet services (1) | $ | 0.4 | $ | 0.7 | ||||||||
Legacy access services (2) | (5.3 | ) | (9.3 | ) | ||||||||
(Increase)/decrease in accrual of PAP/WPP service credits (3) | (0.2 | ) | 0.9 | |||||||||
Total change in access revenues | $ | (5.1 | ) | (8 | )% | $ | (7.7 | ) | (6 | )% |
(1) | We offer carrier Ethernet services throughout our market to our business and wholesale customers, which include Ethernet virtual circuit technology for cellular backhaul. As of June 30, 2016, we provide cellular transport on our fiber-based Ethernet network through over 1,900 fiber-to-the-tower connections compared to over 1,800 as of June 30, 2015. |
(2) | Legacy access services include products such as DS1, DS3, frame relay, ATM and private line. |
(3) | During the three months ended June 30, 2016 and 2015, PAP/WPP service credits resulted in a decrease of $0.1 million and an increase of $0.1 million to access revenues, respectively. During the six months ended June 30, 2016 and 2015, PAP/WPP service credits resulted in a decrease of $0.1 million and $1.0 million to access revenues, respectively. |
Three Months Ended June 30, 2016 vs. June 30, 2015 | Six Months Ended June 30, 2016 vs June 30, 2015 | |||||||||||
Increase (Decrease) | % | Increase (Decrease) | % | |||||||||
Retail Ethernet services (1) | $ | 0.6 | $ | 0.5 | ||||||||
Other data and Internet technology based services (2) | 1.1 | 2.5 | ||||||||||
Total change in data and Internet services revenues | $ | 1.7 | 4 | % | $ | 3.0 | 3 | % |
(1) | Retail Ethernet services revenue is comprised of data services provided through E-LAN, E-LINE and E-DIA technology on our fiber-based Ethernet network. We recognized $11.0 million and $10.4 million for the three months ended June 30, 2016 and 2015, respectively, and $21.2 million and $20.7 million for the six months ended June 30, 2016 and 2015, respectively, of retail Ethernet services revenues. |
(2) | Includes all other services such as DSL, dial-up, high speed cable modem and wireless broadband. |
Three Months Ended June 30, 2016 vs. June 30, 2015 | Six Months Ended June 30, 2016 vs June 30, 2015 | |||||||||||
Increase (Decrease) | % | Increase (Decrease) | % | |||||||||
Special purpose projects (1) | $ | 0.2 | $ | 0.3 | ||||||||
Late payment fees (2) | 0.5 | 0.5 | ||||||||||
Other (3) | (0.2 | ) | (0.5 | ) | ||||||||
Total change in other services revenues | $ | 0.5 | 4 | % | $ | 0.3 | 1 | % |
(1) | Special purpose projects are completed on behalf of third party requests. |
(2) | Late payment fees are related to customers who have not paid their bills in a timely manner. |
(3) | Other revenues were primarily attributable to fluctuations in directory services, billing and collections and in various other miscellaneous services revenues. |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Growth (1) | |||||||||||||||
Broadband (1a) | $ | 34.8 | $ | 33.7 | $ | 68.8 | $ | 66.8 | |||||||
Ethernet (1b) | 24.9 | 23.4 | 48.5 | 46.3 | |||||||||||
Hosted and Advanced Services (1c) | 4.1 | 3.1 | 7.9 | 6.1 | |||||||||||
Subtotal Growth | 63.8 | 60.2 | 125.2 | 119.2 | |||||||||||
Growth as a % of Total Revenue | 30.9 | % | 28.1 | % | 30.3 | % | 27.8 | % | |||||||
Convertible (2) | |||||||||||||||
Non-Ethernet Special Access (2a) | 16.7 | 21.3 | 34.9 | 42.4 | |||||||||||
Business Voice (2b) | 29.9 | 32.2 | 60.4 | 65.5 | |||||||||||
Other Convertible (2c) | 5.0 | 6.0 | 10.4 | 12.4 | |||||||||||
Subtotal Convertible | 51.6 | 59.5 | 105.7 | 120.3 | |||||||||||
Convertible as a % of Total Revenue | 25.0 | % | 27.8 | % | 25.6 | % | 28.1 | % | |||||||
Legacy (3) | |||||||||||||||
Residential Voice (3a) | 53.4 | 57.3 | 107.3 | 114.5 | |||||||||||
Switched Access and Other (3b) | 16.8 | 19.0 | 34.5 | 39.0 | |||||||||||
Subtotal Legacy | 70.2 | 76.3 | 141.8 | 153.5 | |||||||||||
Legacy as a % of Total Revenue | 34.0 | % | 35.6 | % | 34.3 | % | 35.9 | % | |||||||
Regulatory funding (4) | 13.1 | 11.3 | 26.2 | 22.7 | |||||||||||
Regulatory funding as a % of Total Revenue | 6.3 | % | 5.3 | % | 6.3 | % | 5.3 | % | |||||||
Miscellaneous (5) | 7.9 | 6.8 | 14.5 | 12.4 | |||||||||||
Miscellaneous as a % of Total Revenue | 3.8 | % | 3.2 | % | 3.5 | % | 2.9 | % | |||||||
Total Revenue | $ | 206.6 | $ | 214.1 | $ | 413.4 | $ | 428.1 |
• | Growth revenue increased by $3.6 million as we experienced growth in broadband revenue and Ethernet revenue, which are described further above, as well as increased hosted and advanced services revenue due to customer growth, compared to the prior year. |
• | Convertible revenue decreased by $7.9 million as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products. |
• | Legacy revenue decreased by $6.1 million resulting from a decline in voice access lines and legacy switched access revenue versus a year ago. |
• | Regulatory funding revenue grew by $1.8 million primarily due to CAF Phase II transitional revenue in 2016. |
• | Miscellaneous revenue increased $1.1 million due to higher late payment fees. |
• | Growth revenue increased by $5.8 million due to growth in broadband revenue and Ethernet revenue, which are described further above, as well as increased hosted and advanced services revenue due to customer growth. |
• | Convertible revenue decreased by $14.5 million as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products. |
• | Legacy revenue decreased by $11.8 million resulting from a decline in voice access lines and legacy switched access revenue versus the same period in 2015. |
• | Regulatory funding revenue increased by $3.5 million primarily due to CAF Phase II transitional revenue in 2016. |
• | Miscellaneous revenue increased $2.3 million due to lower PAP/WPP service credits of $1.1 million, higher late payment fees of $0.5 million and higher special purpose projects of $0.3 million in the first half of 2016 compared to the comparable period in 2015. |
Three Months Ended June 30, 2016 vs. June 30, 2015 | Six Months Ended June 30, 2016 vs June 30, 2015 | |||||||||||
Increase (Decrease) | % | Increase (Decrease) | % | |||||||||
Employee expense (1) | $ | (2.9 | ) | $ | 6.4 | |||||||
Labor negotiation related expense (2) | 1.3 | (40.2 | ) | |||||||||
Severance expense (3) | (3.0 | ) | (2.2 | ) | ||||||||
Network and access expense (4) | 0.7 | 3.3 | ||||||||||
Other (5) | (0.8 | ) | (1.3 | ) | ||||||||
Total change in cost of services and sales | $ | (4.7 | ) | (5 | )% | $ | (34.0 | ) | (15 | )% |
(1) | We recognized $37.5 million and $40.4 million for the three months ended June 30, 2016 and 2015, respectively, and $85.4 million and $79.0 million for the six months ended June 30, 2016 and 2015, respectively, of employee expense as cost of services and sales. The decrease for the three months ended June 30, 2016 compared to the comparable period of 2015 is primarily due to a reduction in headcount. The increase for the six months ended June 30, 2016 compared to the comparable period of 2015 is primarily due to the work stoppage described in "Labor Matters" herein partially offset by a reduction in headcount. |
(2) | Labor negotiation related expense is related primarily to contracted services incurred during the three and six months ended June 30, 2015 as a result of the work stoppage described in "Labor Matters" herein. There was a credit recorded during the three months ended June 30, 2015 for previously expensed contracted services. |
(3) | We recognized $3.0 million for the three months ended June 30, 2015 and $0.8 million and $3.0 million for the six months ended June 30, 2016 and 2015, respectively, of severance expense attributed to the reduction in our workforce. There was no severance expense during the three months ended June 30, 2016. |
(4) | Network and access expense was lower in the second quarter of 2015 and the first half of 2015 primarily due to fewer material purchases due to the work stoppage described in "Labor Matters" herein. |
(5) | Other cost of services and sales has decreased primarily due to lower back-office expenses. |
Three Months Ended June 30, 2016 vs. June 30, 2015 | Six Months Ended June 30, 2016 vs June 30, 2015 | |||||||||||
Increase (Decrease) | % | Increase (Decrease) | % | |||||||||
Other post-employment benefits expense (1) | $ | 0.1 | $ | (43.2 | ) | |||||||
Pension expense (2) | (1.1 | ) | (4.2 | ) | ||||||||
Total change in other post-employment benefit and pension expense | $ | (1.0 | ) | 2 | % | $ | (47.4 | ) | 80 | % |
(1) | The increase in the net periodic benefit cost for the three months ended June 30, 2016 compared to the comparable period of 2015 for our other post-employment benefit plans is primarily attributable to the additional amortization of net prior service credits of $1.3 million partially offset by additional amortization expense of the net actuarial loss of $1.1 million in the second quarter of 2016. The decrease in the net periodic benefit cost for the six months ended June 30, 2016 compared to the comparable period of 2015 for our other post-employment benefit plans is primarily attributable to the additional amortization of net prior service credits of $50.7 million partially offset by additional amortization expense of the net actuarial loss of $15.5 million in the first six months of 2016 and decreases in service and interest costs resulting from the lower projected benefit obligation. |
(2) | The decrease in the net periodic benefit cost for the three months ended June 30, 2016 compared to the comparable period of 2015 for our qualified pension plans is primarily attributable to a settlement charge in the second quarter of 2015 as well as lower amortization of actuarial losses. The decrease in the net periodic benefit cost for the six months ended June 30, 2016 compared to the comparable period of 2015 for our qualified pension plans is primarily attributable to a decrease in service cost from the reduction in the projected benefit obligation, lower amortization of actuarial losses, a settlement charge in the second quarter of 2015 and additional amortization of the prior service credit. |
Three Months Ended June 30, 2016 vs. June 30, 2015 | Six Months Ended June 30, 2016 vs June 30, 2015 | |||||||||||
Increase (Decrease) | % | Increase (Decrease) | % | |||||||||
Employee expense (1) | $ | (0.1 | ) | 4.3 | ||||||||
Labor negotiation related expense (2) | (0.5 | ) | (7.7 | ) | ||||||||
Operating taxes | (0.3 | ) | (1.2 | ) | ||||||||
Bad debt expense (3) | (1.4 | ) | (5.2 | ) | ||||||||
Severance expense (4) | (0.7 | ) | (0.3 | ) | ||||||||
Other (5) | (1.0 | ) | 0.6 | |||||||||
Total change in SG&A expense | $ | (4.0 | ) | (7 | )% | $ | (9.5 | ) | (9 | )% |
(1) | We recognized $26.4 million and $26.5 million for the three months ended June 30, 2016 and 2015, respectively, and $54.1 million and $49.8 million for the six months ended June 30, 2016 and 2015, respectively, of employee expense in SG&A expense. The increase for the six months ended June 30, 2016 compared to the comparable period of 2015 is primarily due to the work stoppage described in "Labor Matters" herein. |
(2) | Labor negotiation related expense is primarily related to contingent workforce expenses as well as communications and public relations, legal and training expenses incurred during the second quarter of 2015 and the first half of 2015. |
(3) | We recognized $0.3 million and $1.7 million for the three months ended June 30, 2016 and 2015, respectively, and $(1.1) million and $4.1 million for the six months ended June 30, 2016 and 2015, respectively, of bad debt expense. Bad debt expense was lower for the three and six months ended June 30, 2016 compared to the comparable periods of 2015 due to increased recoveries and overall decreased aging of receivables. The first half of 2016 also includes nonrecurring write-off recoveries. |
(4) | We recognized $0.7 million for the three months ended June 30, 2015 and $0.7 million and $1.0 million for the six months ended June 30, 2016 and 2015, respectively, of severance expense attributed to the reduction in our workforce. There was no severance expense during the three months ended June 30, 2016. |
(5) | The change in other expenses for the three and six months ended June 30, 2016 compared to the comparable periods of 2015 was primarily due to the timing of spending for contracted services and advertising costs. |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Credit Agreement Loans (as defined hereinafter) | $ | 12.1 | $ | 12.3 | $ | 24.3 | $ | 24.4 | ||||||||
Notes (as defined hereinafter) | 6.6 | 6.6 | 13.1 | 13.1 | ||||||||||||
Amortization of debt issue costs | 0.3 | 0.3 | 0.6 | 0.6 | ||||||||||||
Amortization of debt discount | 0.8 | 0.8 | 1.6 | 1.5 | ||||||||||||
Interest rate swap agreements | 0.6 | — | 1.2 | — | ||||||||||||
Other interest expense | 0.2 | 0.1 | 0.4 | 0.2 | ||||||||||||
Total interest expense | $ | 20.6 | $ | 20.1 | $ | 41.2 | $ | 39.8 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income/(loss) | $ | 29,315 | $ | 40,265 | $ | 47,883 | $ | (4,948 | ) | ||||||
Income tax (benefit)/expense | 12,393 | (824 | ) | 20,404 | 77 | ||||||||||
Interest expense | 20,583 | 19,974 | 41,193 | 39,793 | |||||||||||
Depreciation and amortization | 55,105 | 55,818 | 112,743 | 111,124 | |||||||||||
Pension expense (1a) | 2,020 | 3,088 | 4,056 | 8,199 | |||||||||||
Other post-employment benefits expense (1a) | (55,506 | ) | (55,548 | ) | (110,770 | ) | (67,556 | ) | |||||||
Compensated absences (1b) | (2,226 | ) | (3,803 | ) | 4,061 | 8,434 | |||||||||
Severance | 38 | 3,760 | 1,497 | 4,118 | |||||||||||
Reorganization costs (1c) | — | 20 | — | 27 | |||||||||||
Other non-cash items, net (1d) | 1,401 | 1,780 | 4,095 | 4,513 | |||||||||||
Labor negotiation related expense (1e) | — | (850 | ) | — | 48,678 | ||||||||||
All other allowed adjustments, net (1e) | (40 | ) | (16 | ) | (128 | ) | (115 | ) | |||||||
Adjusted EBITDA (1) | 63,083 | 63,664 | 125,034 | 152,344 | |||||||||||
Estimated Avoided Costs (2) | — | — | — | (27,000 | ) | ||||||||||
Adjusted EBITDA minus Estimated Avoided Costs | $ | 63,083 | $ | 63,664 | $ | 125,034 | $ | 125,344 | |||||||
Adjusted EBITDA (1) | $ | 63,083 | $ | 63,664 | $ | 125,034 | $ | 152,344 | |||||||
Pension contributions | (3,558 | ) | (3,182 | ) | (3,558 | ) | (4,382 | ) | |||||||
Other post-employment benefits payments | (1,182 | ) | (1,486 | ) | (2,596 | ) | (2,635 | ) | |||||||
Capital expenditures | (26,805 | ) | (28,298 | ) | (52,685 | ) | (54,728 | ) | |||||||
Unlevered Free Cash Flow (3) | 31,538 | 30,698 | 66,195 | 90,599 | |||||||||||
Estimated Avoided Costs (2) | — | — | — | (27,000 | ) | ||||||||||
Unlevered Free Cash Flow minus Estimated Avoided Costs | $ | 31,538 | $ | 30,698 | $ | 66,195 | $ | 63,599 |
(i) | interest and principal payments on our indebtedness; |
(ii) | capital expenditures; |
(iii) | working capital requirements as may be needed to support and grow our business; and |
(iv) | contributions to our qualified pension plans and payments under our other post-employment benefit plans. |
Six Months Ended June 30, | |||||||
Net cash flows provided by (used in): | 2016 | 2015 | |||||
Operating activities | $ | 70.4 | $ | 29.6 | |||
Investing activities | (52.2 | ) | (54.5 | ) | |||
Financing activities | (3.7 | ) | (3.5 | ) | |||
Net increase/(decrease) in cash | $ | 14.5 | $ | (28.4 | ) |
FAIRPOINT COMMUNICATIONS, INC. | |||
Date: | August 3, 2016 | By: | /s/ Ajay Sabherwal |
Name: | Ajay Sabherwal | ||
Title: | Executive Vice President and Chief Financial Officer | ||
(duly authorized officer and principal financial officer) |
Exhibit No. | Description | |
2.1 | Third Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code.(1) | |
3.1 | Ninth Amended and Restated Certificate of Incorporation of FairPoint.(2) | |
3.2 | Second Amended and Restated By-Laws of FairPoint.(2) | |
4.1 | Warrant Agreement, dated as of January 24, 2011, by and between FairPoint and The Bank of New York Mellon.(3) | |
4.2 | Specimen Stock Certificate.(2) | |
4.3 | Specimen Warrant Certificate.(3) | |
4.4 | Indenture, dated as February 14, 2013, among FairPoint Communications, Inc., the Subsidiary Guarantors and U.S. Bank National Association, as trustee.(4) | |
4.5 | First Supplemental Indenture, dated as of September 16, 2013, among FairPoint Communications, Inc., the Subsidiary Guarantors and U.S. Bank National Association, as trustee.(5) | |
10.1 | Second Amendment to January 22, 2013 Employment Agreement, effective as of May 16, 2016, by and between FairPoint and Ajay Sabherwal. † * | |
10.2 | Second Amendment to January 22, 2013 Employment Agreement, effective as of May 16, 2016, by and between FairPoint and Peter G. Nixon. † * | |
10.3 | First Amendment to August 10, 2015 Employment Agreement, effective as of June 1, 2016, by and between FairPoint and Steven G. Rush. † * | |
11 | Statement Regarding Computation of Per Share Earnings (included in the financial statements contained in this Quarterly Report). | |
31.1 | Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
31.2 | Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
32.1 | Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡ | |
32.2 | Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡ | |
101.INS | XBRL Instance Document.* | |
101.SCH | XBRL Taxonomy Extension Schema Document.* | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.* | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.* | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document.* | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.* |
* | Filed herewith. |
‡ | Submitted herewith. Pursuant to SEC Release No. 33-8238, this certification will be treated as "accompanying" this Quarterly Report on Form 10-Q and not "filed" as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
(1) | Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 14, 2011. |
(2) | Incorporated by reference to the Registration Statement on Form 8-A of FairPoint filed on January 24, 2011. |
(3) | Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 25, 2011, Film Number 11544980. |
(4) | Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on February 14, 2013. |
(5) | Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended September 30, 2013. |
1. | The Term of Employment as defined in Section 2 of the Agreement, and as amended in Paragraph 1 of the First Amendment, shall continue through December 31, 2019, unless terminated sooner or renewed as provided in the Agreement. |
2. | Except as specifically provided above, all terms and conditions of the Agreement shall remain in full force and effect. |
1. | The Term of Employment as defined in Section 2 of the Agreement, and as amended in Paragraph 1 of the First Amendment, shall continue through December 31, 2019, unless terminated sooner or renewed as provided in the Agreement. |
2. | Except as specifically provided above, all terms and conditions of the Agreement shall remain in full force and effect. |
1. | The last sentence of subsection 3(a) of the Agreement shall be deleted in its entirety and replace with the following: |
2. | Section 23 of the Agreement shall be deleted in its entirety. |
3. | Except as specifically provided above, all terms and conditions of the Agreement shall remain in full force and effect. |
1. | I have reviewed this Quarterly Report on Form 10-Q of FairPoint Communications, Inc. (the “Company”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report; |
4. | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
(i) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
(ii) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(iii) | evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
(iv) | disclosed in this Quarterly Report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; |
5. | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): |
(i) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and |
(ii) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. |
/s/ Paul H. Sunu | ||
Paul H. Sunu | ||
Chief Executive Officer |
1. | I have reviewed this Quarterly Report on Form 10-Q of FairPoint Communications, Inc. (the “Company”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report; |
4. | The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
(i) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
(ii) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(iii) | evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
(iv) | disclosed in this Quarterly Report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; |
5. | The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): |
(i) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and |
(ii) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. |
/s/ Ajay Sabherwal | ||
Ajay Sabherwal | ||
Chief Financial Officer |
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of |
2. The information contained in the Report fairly presents, in all material respects, the financial condition and |
/s/ Paul H. Sunu | ||
Paul H. Sunu | ||
Chief Executive Officer | ||
August 3, 2016 |
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of |
2. The information contained in the Report fairly presents, in all material respects, the financial condition and |
/s/ Ajay Sabherwal | ||
Ajay Sabherwal | ||
Chief Financial Officer | ||
August 3, 2016 |
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Jun. 30, 2016 |
Jul. 29, 2016 |
|
Document and Entity Information [Abstract] | ||
Entity Registrant Name | FAIRPOINT COMMUNICATIONS INC | |
Entity Central Index Key | 0001062613 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Accelerated Filer | |
Document Type | 10-Q | |
Document Period End Date | Jun. 30, 2016 | |
Document Fiscal Year Focus | 2016 | |
Document Fiscal Period Focus | Q2 | |
Amendment Flag | false | |
Entity Common Stock, Shares Outstanding | 27,050,972 |
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Millions |
Jun. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Accounts receivable, allowance for doubtful accounts | $ 4.6 | $ 8.3 |
Property, plant and equipment, accumulated depreciation | 1,377.6 | 1,281.2 |
Intangible assets, accumulated amortization | $ 59.8 | $ 54.3 |
Common stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 37,500,000 | 37,500,000 |
Common stock, shares issued | 27,050,600 | 26,921,066 |
Common stock, shares outstanding | 27,050,600 | 26,921,066 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
|
Income Statement [Abstract] | ||||
Revenues | $ 206,557 | $ 214,098 | $ 413,373 | $ 428,072 |
Operating expenses: | ||||
Cost of services and sales, excluding depreciation and amortization | 93,302 | 97,968 | 198,341 | 232,349 |
Other post-employment benefit and pension expense | (53,486) | (52,460) | (106,714) | (59,358) |
Selling, general and administrative expense, excluding depreciation and amortization | 49,440 | 53,434 | 99,776 | 109,280 |
Depreciation and amortization | 55,105 | 55,818 | 112,743 | 111,124 |
Reorganization related expense | 0 | 20 | 0 | 27 |
Total operating expenses | 144,361 | 154,780 | 304,146 | 393,422 |
Income from operations | 62,196 | 59,318 | 109,227 | 34,650 |
Interest expense | (20,583) | (19,974) | (41,193) | (39,793) |
Other, net | 95 | 97 | 253 | 272 |
Total other expense | (20,488) | (19,877) | (40,940) | (39,521) |
Income/(loss) before income taxes | 41,708 | 39,441 | 68,287 | (4,871) |
Income tax (expense)/benefit | (12,393) | 824 | (20,404) | (77) |
Net income/(loss) | $ 29,315 | $ 40,265 | $ 47,883 | $ (4,948) |
Weighted average shares outstanding: | ||||
Basic, in shares | 26,858,029 | 26,654,518 | 26,834,863 | 26,621,662 |
Diluted, in shares | 27,083,512 | 27,025,361 | 27,070,678 | 26,621,662 |
Income/(loss) per share, basic (in dollars per share) | $ 1.09 | $ 1.51 | $ 1.78 | $ (0.19) |
Income/(loss) per share, diluted (in dollars per share) | $ 1.08 | $ 1.49 | $ 1.77 | $ (0.19) |
Condensed Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
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Statement of Comprehensive Income [Abstract] | ||||
Net income/(loss) | $ 29,315 | $ 40,265 | $ 47,883 | $ (4,948) |
Other comprehensive income/(loss), net of taxes: | ||||
Interest rate swaps (net of $(0.2) million, $0.1 million, $(0.3) million and $0.4 million tax (expense)/benefit, respectively) | 274 | (135) | 398 | (623) |
Qualified pension and post-employment benefit plans (net of $18.5 million, $0 million, $37.7 million and $0 million tax benefit, respectively) | (37,515) | (55,691) | (74,015) | 615,334 |
Total other comprehensive income/(loss) | (37,241) | (55,826) | (73,617) | 614,711 |
Comprehensive income/(loss) | $ (7,926) | $ (15,561) | $ (25,734) | $ 609,763 |
Condensed Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) (Parenthetical) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
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Statement of Comprehensive Income [Abstract] | ||||
Tax expense on interest rate swaps | $ 0.2 | $ (0.1) | $ 0.3 | $ (0.4) |
Tax expense on pension and OPEB | $ (18.5) | $ 0.0 | $ (37.7) | $ 0.0 |
Organization and Principles of Consolidation |
6 Months Ended |
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Jun. 30, 2016 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Organization and Principles of Consolidation | Organization and Principles of Consolidation Organization FairPoint is a leading provider of advanced communications services to business, wholesale and residential customers within its service territories. FairPoint offers its customers a suite of advanced data services such as Ethernet, high capacity data transport and other IP-based services over an extensive fiber network with more than 21,000 miles of fiber optic cable, including approximately 17,000 miles of fiber optic cable in Maine, New Hampshire and Vermont, in addition to Internet access, high-speed data ("HSD") and local and long distance voice services. As of June 30, 2016, FairPoint's service territory spanned 17 states where it is the incumbent communications provider, primarily serving rural communities and small urban markets. Many of its local exchange carriers ("LECs") have served their respective communities for more than 80 years. As of June 30, 2016, the Company operated with approximately 311,000 broadband subscribers, approximately 15,100 Ethernet circuits and approximately 389,000 residential voice lines. Principles of Consolidation The condensed consolidated financial statements include all majority-owned subsidiaries of the Company. Partially owned equity affiliates are accounted for under the cost method or equity method when the Company demonstrates significant influence, but does not have a controlling financial interest. Intercompany accounts and transactions have been eliminated upon consolidation. |
Significant Accounting Policies |
6 Months Ended |
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Jun. 30, 2016 | |
Accounting Policies [Abstract] | |
Significant Accounting Policies | Significant Accounting Policies (a) Presentation and Use of Estimates The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, certain information and footnote disclosures have been condensed or omitted for this quarterly report and should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company's annual report on Form 10-K for the year ended December 31, 2015. The condensed consolidated balance sheet as of December 31, 2015 is derived from audited financial statements. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. Interim results are not necessarily indicative of results for a full year and actual results could differ from those estimates. (b) Revenue Recognition Revenues are recognized as services are rendered and are primarily derived from the usage of the Company's networks and facilities or under revenue-sharing arrangements with other communications carriers. Revenues are primarily derived from: voice services, access (including pooling), certain Connect America Fund ("CAF") receipts, Internet and broadband services and other miscellaneous services. Local access charges are billed to local end users under tariffs approved by each state's Public Utilities Commission ("PUC") or by rates, terms and conditions determined by the Company. Access revenues are derived for the intrastate jurisdiction by billing access charges to interexchange carriers and to other LECs. These charges are billed based on toll or access tariffs approved by the local state's PUC. Access charges for the interstate jurisdiction are billed in accordance with tariffs filed by the National Exchange Carrier Association ("NECA") or by the individual company and approved by the Federal Communications Commission (the "FCC"). On July 14, 2016, the FCC adopted a Declaratory Order that classifies switched access services provided by Incumbent LECs as non-dominant services. This change in classification will not impact rates or revenues as the rates continue to be subject to rules established for all access providers pursuant to the Intercarrier Compensation transition rules adopted in 2011. Revenues are determined on a bill-and-keep basis or a pooling basis. If on a bill-and-keep basis, the Company bills the charges to the customer and keeps the revenue. If the Company participates in a pooling environment (interstate or intrastate), the revenue from the covered services is contributed to a revenue pool. The revenue is then distributed to individual companies based on their company-specific revenue requirement or similar distribution methods. This distribution is based on individual state PUCs' (intrastate) or the FCC's (interstate) approved settlement mechanisms, separation rules and rates of return. Distribution from these pools can change relative to changes made to expenses, plant investment or rate-of-return. Some companies participate in federal and certain state universal service programs that are pooling in nature but are regulated by rules separate from those described above. These rules vary by state. Revenues earned through the various pooling arrangements are initially recorded based on the Company's estimates. On November 18, 2011, the FCC released its comprehensive landmark order to modify the nationwide system of universal support and the CAF/intercarrier compensation ("ICC") system (the "CAF/ICC Order"). Rule changes associated with the FCC's CAF/ICC Order impact the NECA interstate pooling, in that a portion of the Company's interstate Universal Service Fund ("USF") revenues, which are administered through the NECA pools and which prior to January 1, 2012 were based on costs, are now based on rules from the FCC's CAF/ICC Order, including CAF Phase II support where FairPoint accepted CAF Phase II support, continued CAF Phase I frozen support where FairPoint did not accept CAF Phase II support and CAF/ICC rules in states where FairPoint is eligible for such support under the ICC Transition Rules for price cap and rate-of-return carriers. FairPoint accepted CAF Phase II support in all states except Kansas and Colorado. The CAF Phase II revenue is being recognized on a straight-line basis, ratably over the six-year period in which the funding will be received. The accepted transition funding is being recognized monthly as received over the three-year transition period ending in July 2018. The Company is required to meet certain interim milestones over the six-year period of CAF Phase II and the Company performs a quarterly assessment of its progress. Revenue from long distance switched retail and wholesale services can be recurring due to coverage under an unlimited calling plan or can be usage sensitive. In either case, they are billed in arrears and recognized when earned. Internet and data services revenues are substantially all recurring revenues and are billed one month in advance and deferred until earned. As of June 30, 2016 and December 31, 2015, unearned revenue of $19.5 million and $19.9 million, respectively, was included in other accrued liabilities and unearned revenue of $5.9 million and $7.6 million, respectively, was included in other long-term liabilities on the condensed consolidated balance sheets. The majority of the Company's other miscellaneous services revenue is generated from ancillary special projects at the request of third parties, video services, directory services and late payment charges to end users and wholesale carriers. The Company generally requires customers to pay for ancillary special projects in advance. As of June 30, 2016 and December 31, 2015, customer deposits of $2.8 million and $2.1 million, respectively, were included in other accrued liabilities on the condensed consolidated balance sheets. Once the ancillary special project is completed or substantially complete and all project costs have been accumulated for proper accounting recognition, the advance payment is recognized as revenue with any overpayments refunded to the customer, as appropriate. The Company recognizes revenue upon the provision of video services in certain markets by reselling DirecTV and providing cable and IP television video-over-digital subscriber line services. The Company also publishes telephone directories in some of its Telecom Group markets and recognizes revenues associated with these publications evenly over the time period covered by the directory, which is typically twelve months. The Company bills late payment fees to customers who have not paid their bills in a timely manner. In general, late payment fee revenue is recognized based on collection of these charges. Non-recurring customer activation fees, along with the related costs up to, but not exceeding, the activation fees, are deferred and amortized over the customer relationship period. Under the Maine Public Utilities Commission ("MPUC") rules (Chapter 201), which went into effect August 1, 2014, the MPUC may open an investigation regarding the failure to meet any of the established SQI benchmarks and has the authority to impose penalties of up to $500,000 per standard. The MPUC opened an investigation into our failure to meet some third quarter 2014 SQI benchmarks and subsequently opened an investigation into the fourth quarter of 2014 and then with respect to each of the quarterly periods in 2015. On March 29, 2016, the MPUC consolidated the investigations of the six quarters into one investigation. As of June 30, 2016, there has been no further action. Penalties, if any, would be recorded as a reduction to revenue. The Company also adopted a separate performance assurance plan ("PAP") for certain services provided on a wholesale basis to competitive local exchange carriers ("CLECs") in each of the states of Maine, New Hampshire and Vermont. Pursuant to the PAPs, FairPoint was required to provide service credits in the event the Company was unable to meet the provisions of the respective PAP. Effective June 1, 2015, the PAP was retired and the Company began measuring and reporting certain wholesale local service performance results pursuant to the terms of a simplified measurement plan. The new plan, called the Wholesale Performance Plan ("WPP"), was developed collaboratively with CLECs over several years and was approved by the Maine, New Hampshire and Vermont regulatory commissions. Under the WPP, the Company is subject to significantly fewer performance criteria and its annual service credit exposure was reduced. In evaluating the presentation of taxes and surcharges, such as USF charges, sales, use, value added and some excise taxes, we determine whether we are the primary obligor or principal taxpayer. In jurisdictions where we deem that we are the principal taxpayer, we record these taxes and surcharges on a gross basis and include them in our revenues and costs of services and sales. In jurisdictions where we determine that we are a pass through agent for the government authority, we record the taxes on a net basis through the condensed consolidated balance sheets. Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the elements are deemed separable and separate earnings processes exist, the revenue associated with each element is allocated to each element based on the relative estimated selling price of the separate elements. The Company has estimated the selling prices of each element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized as earned. Management makes estimated adjustments, as necessary, to revenue and accounts receivable for billing errors, including certain disputed amounts. (c) Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is recorded as a contra-asset of accounts receivable and represents the Company's best estimate of probable credit losses in the Company's existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Accounts receivable balances are reviewed on an aged basis and account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. (d) Accounting for Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management determines its estimates of future taxable income based upon the scheduled reversal of deferred tax liabilities and tax planning strategies. The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized. In determining the income tax provision, a reserve for uncertain tax positions is established unless management determines that such positions are more likely than not to be sustained upon examination by the taxing authorities, based on their merits. There is considerable judgment involved in determining whether positions taken on the Company’s tax return are more likely than not to be sustained. (e) Operating Segments Management views its business of providing data, video and voice communications services to residential, wholesale and business customers as one operating segment. The Company's services consist of retail and wholesale communications and data services, including voice and HSD in 17 states. The Company's chief operating decision maker assesses operating performance and allocates resources based on the consolidated results. (f) Interest Rate Swap Agreements In the third quarter of 2013, the Company entered into interest rate swap agreements. For further information regarding these interest rate swap agreements, see note (7) "Interest Rate Swap Agreements." The interest rate swap agreements, at their inception, qualified for and were designated as cash flow hedging instruments. The Company records its interest rate swaps on the condensed consolidated balance sheets at fair value. The effective portion of changes in fair value are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion is recognized in earnings. Both at inception and on a quarterly basis, the Company performs an effectiveness test. |
Recent Accounting Pronouncements |
6 Months Ended |
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Jun. 30, 2016 | |
Accounting Changes and Error Corrections [Abstract] | |
Recent Accounting Pronouncements | Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which is designed to clarify the principles used to recognize revenue for entities. The accounting guidance defines how companies report revenues from contracts with customers and also requires enhanced disclosures. In July 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09. Subsequently, the FASB has issued several additional ASUs to clarify the implementation guidance on principal versus agent considerations, identifying performance obligations, assessing collectability, presentation of sales taxes and other similar taxes collected from customers, non-cash considerations, contract modifications and completed contracts at transition. The new pronouncements will be effective for annual and interim periods beginning on or after December 15, 2017 and allows for two methods of adoption: (1) "full retrospective" adoption, meaning the standard is applied to all periods presented, or (2) "modified retrospective" adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the fiscal year 2018 opening retained earnings balance. The Company is evaluating the potential impact of these pronouncements and the Company's method of adoption. In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016 with early adoption permitted. The Company does not believe the adoption of this pronouncement will have a material impact on its condensed consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases, whereby, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the potential impact of this pronouncement. In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment award transactions, including, but not limited to: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. The Company is evaluating the potential impact of this pronouncement. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. The Company is evaluating the potential impact of this pronouncement. |
Dividends |
6 Months Ended |
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Jun. 30, 2016 | |
Dividends [Abstract] | |
Dividends | Dividends The Company currently does not pay a dividend on its common stock and has no plans to pay dividends. |
Income Taxes |
6 Months Ended |
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Jun. 30, 2016 | |
Income Tax Disclosure [Abstract] | |
Income Taxes | Income Taxes The Company recorded tax expense on the pre-tax net income for the three months ended June 30, 2016 of $12.4 million and tax benefit on the pre-tax net income for the three months ended June 30, 2015 of $0.8 million, which equates to an effective tax rate of 29.7% and (2.1)%, respectively, by applying the projected full year effective rate. Tax expense of $20.4 million on the pre-tax net income for the six months ended June 30, 2016 and tax expense of $0.1 million on the pre-tax net loss for the six months ended June 30, 2015 equates to an effective tax rate of 29.9% and (1.6)%, respectively, by applying the projected full year effective rate. For 2016, the projected annual effective tax rate differs from the 35% federal statutory rate primarily due to a decrease in the valuation allowance offset by tax expense related to state taxes. For 2015, the projected annual effective tax rate differs from the 35% federal statutory rate primarily due to a decrease in the valuation allowance offset by tax expense related to state taxes. Deferred Income Taxes At June 30, 2016, the Company had gross federal NOL carryforwards of $283.2 million. The Company's remaining federal NOL carryforwards will expire from 2019 to 2036. At June 30, 2016, the Company had a net, after attribute reduction, state NOL deferred tax asset of $12.0 million. The Company's remaining state NOL carryforwards will expire from 2016 to 2036; the amount that will expire in 2016 is negligible. At June 30, 2016, the Company had no alternative minimum tax credit carryover and had $5.1 million in state credit carryovers. Telecom Group completed an initial public offering on February 8, 2005, which resulted in an "ownership change" within the meaning of the United States of America federal income tax laws addressing NOL carryforwards, alternative minimum tax credits and other similar tax attributes. The Merger and the Company's emergence from Chapter 11 protection also resulted in ownership changes. As a result of these ownership changes, there are specific limitations on the Company's ability to use its NOL carryforwards and other tax attributes. The Company believes that it can use the NOLs even with these restrictions in place. Valuation Allowance. At June 30, 2016 and December 31, 2015, the Company established a valuation allowance against its deferred tax assets of $23.8 million and $25.1 million, respectively, which consist of a $17.1 million and $14.7 million federal allowance, respectively, and a $6.7 million and $10.4 million state allowance, respectively. Income Tax Returns The Company and its eligible subsidiaries file consolidated income tax returns in the United States of America federal jurisdiction and certain consolidated, combined and separate entity tax returns, as required, with various state and local governments. Based solely on statutes of limitations, the Company would not be subject to United States of America federal, state and local, or non-United States of America income tax examinations by tax authorities for years prior to 2011. However, tax years prior to 2011 may be subject to examination by federal or state taxing authorities if the Company's NOL carryovers from those years are utilized in the future. As of June 30, 2016 and December 31, 2015, the Company does not have any significant jurisdictional income tax audits. |
Long-Term Debt |
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-Term Debt | Long-term Debt Long-term debt for the Company at June 30, 2016 and December 31, 2015 is shown below (in thousands):
As of June 30, 2016, the Company had $60.2 million, net of $14.8 million outstanding letters of credit, available for additional borrowing under the Revolving Facility (as defined below). The approximate aggregate maturities of long-term debt, excluding the debt discount on the Term Loan (as defined below), for each of the four years subsequent to June 30, 2016 are as follows (in thousands):
Refinancing. On February 14, 2013 (the "Refinancing Closing Date"), FairPoint Communications refinanced its old credit agreement (the "Refinancing"). In connection with the Refinancing, FairPoint Communications (i) issued $300.0 million aggregate principal amount of its 8.75% senior secured notes due 2019 (the "Notes") in a private offering exempt from registration under the Securities Act pursuant to an indenture (the "Indenture") that FairPoint Communications entered into on the Refinancing Closing Date with certain of its subsidiaries that guarantee the indebtedness under the Credit Agreement (as defined herein) (the "Subsidiary Guarantors") and U.S. Bank National Association, as trustee and collateral agent, and (ii) entered into a credit agreement (the "Credit Agreement"), dated as of the Refinancing Closing Date, with the lenders party thereto from time to time and Morgan Stanley Senior Funding, Inc., as administrative agent and letter of credit issuer. The Credit Agreement provides for a $75.0 million revolving credit facility (the ''Revolving Facility''), which has a sub-facility providing for the issuance of up to $40.0 million in letters of credit, and a $640.0 million term loan facility (the ''Term Loan'' and, together with the Revolving Facility, the ''Credit Agreement Loans"). On the Refinancing Closing Date, FairPoint Communications used the proceeds of the Notes offering, together with $640.0 million of borrowings under the Term Loan and cash on hand to (i) repay principal of $946.5 million outstanding on the old term loan, plus approximately $7.7 million of accrued interest and (ii) pay approximately $32.6 million of fees, expenses and other costs related to the Refinancing. The Credit Agreement. The principal amount of the Term Loan and commitments under the Revolving Facility may be increased by an aggregate amount of up to $200.0 million, subject to certain terms and conditions specified in the Credit Agreement. The Term Loan will mature on February 14, 2019 and the Revolving Facility will mature on February 14, 2018, subject in each case to extensions pursuant to the terms of the Credit Agreement. Interest Rates and Fees. Interest on borrowings under the Credit Agreement Loans accrue at an annual rate equal to either a British Bankers Association London Inter-Bank Offered Rate ("LIBOR") or the base rate, in each case plus an applicable margin. LIBOR is a per annum rate for dollar deposits with an interest period of one, two, three or six months (at FairPoint Communication's election), subject to a minimum LIBOR floor of 1.25% for the Term Loan. The base rate is the per annum rate equal to the greatest of (x) the federal funds effective rate plus 0.50%, (y) the rate of interest publicly quoted from time to time by The Wall Street Journal as the United States ''Prime Rate'' and (z) LIBOR with an interest period of one month plus 1.00%. The applicable margin for the Term Loan is (a) 6.25% per annum with respect to term loans bearing interest based on LIBOR or (b) 5.25% per annum with respect to term loans bearing interest based on the base rate. The applicable interest rate for the Revolving Facility is, initially, (a) 5.50% with respect to revolving loans bearing interest based on LIBOR or (b) 4.50% per annum with respect to revolving loans bearing interest based on the base rate, in each case subject to adjustment based on FairPoint Communication's consolidated total leverage ratio, as defined in the Credit Agreement. FairPoint Communications is required to pay a quarterly letter of credit fee on the average daily amount available to be drawn under letters of credit issued under the Revolving Facility equal to the applicable interest rate for revolving loans bearing interest based on LIBOR, plus a fronting fee of 0.125% per annum on the average daily amount available to be drawn under such letters of credit. In addition, FairPoint Communications is required to pay a quarterly commitment fee on the average daily unused portion of the New Revolving Facility, which is 0.50% initially, subject to reduction to 0.375% based on FairPoint Communication's consolidated total leverage ratio. Security/Guarantors. All obligations under the Credit Agreement, together with certain designated hedging obligations and cash management obligations, are unconditionally guaranteed on a senior secured basis by certain subsidiaries of FairPoint Communications (the "Subsidiary Guarantors") and secured by a first-priority lien on substantially all personal property of FairPoint Communications and the Subsidiary Guarantors, subject to certain exclusions set forth in the related security documents, pari passu with the lien securing the obligations under the Notes. Mandatory Repayments. FairPoint Communications is required to make quarterly repayments of the Term Loan in a principal amount of $1.6 million during the term of the Credit Agreement. In addition, mandatory repayments are required under the Credit Agreement with (i) a percentage, initially equal to 50% and subject to reduction to 25% based on FairPoint Communication's consolidated total leverage ratio, of FairPoint Communication's excess cash flow, as defined in the Credit Agreement, (ii) the net cash proceeds of certain asset dispositions, insurance proceeds and condemnation awards and (iii) issuances of debt not permitted to be incurred under the Credit Agreement. No premium is required for prepayments made after February 14, 2016. Covenants. The Credit Agreement contains customary representations and warranties and affirmative and negative covenants for a transaction of this type, including two financial maintenance covenants: (i) a consolidated interest coverage ratio and (ii) a consolidated total leverage ratio. The Credit Agreement also contains a covenant limiting the amount of capital expenditures that FairPoint Communications and its subsidiaries may make in any fiscal year. As of June 30, 2016, FairPoint Communications was in compliance with all covenants under the Credit Agreement. Events of Default. The Credit Agreement also contains customary events of default for a transaction of this type. The Notes. On the Refinancing Closing Date, FairPoint Communications issued $300.0 million of the Notes pursuant to the Indenture in a private offering exempt from registration under the Securities Act. The terms of the Notes are governed by the Indenture. The Notes are senior secured obligations of FairPoint Communications and are guaranteed by the Subsidiary Guarantors. The Notes and the guarantees thereof are secured by a first-priority lien on substantially all personal property of FairPoint Communications and the Subsidiary Guarantors, subject to certain exclusions set forth in the related security documents, pari passu with the lien securing the obligations under the Credit Agreement. The Notes will mature on August 15, 2019 and accrue interest at a rate of 8.75% per annum, which is payable semi-annually in arrears on February 15 and August 15 of each year. Notes redeemed after February 15, 2016 and prior to February 15, 2017 may be redeemed at 104.375% of the aggregate principal amount; Notes redeemed on or after February 15, 2017 and prior to February 15, 2018 may be redeemed at 102.188% of the aggregate principal amount; and Notes redeemed on or after February 15, 2018 may be redeemed at their par value. The holders of the Notes have the ability to require FairPoint Communications to repurchase all or any part of the Notes if FairPoint Communications experiences certain kinds of changes in control or engages in certain asset sales, in each case at the repurchase prices and subject to the terms and conditions set forth in the Indenture. The Indenture contains certain covenants which are customary with respect to non-investment grade debt securities, including limitations on FairPoint Communication's ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase FairPoint Communication's capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies. These covenants are subject to a number of important limitations and exceptions. As of June 30, 2016, FairPoint Communications was in compliance with all covenants under the Indenture. The Indenture also provides for customary events of default, including cross defaults to other specified debt of FairPoint Communications and certain of its subsidiaries. |
Interest Rate Swap Agreements |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Rate Swap Agreements | Interest Rate Swap Agreements The Company uses interest rate swap agreements to protect the Company against future adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company's interest rate swaps, which are designated as cash flow hedges, involve the receipt of variable amounts from counterparties in exchange for the Company making fixed-rate payments over the effective term of the agreements without exchange of the underlying notional amount. The Company does not hold or issue any derivative financial instruments for speculative trading purposes. In the third quarter of 2013, the Company entered into interest rate swap agreements with a combined notional amount of $170.0 million with three counterparties that are effective for a two year period. Such swaps became effective on September 30, 2015 and mature on September 30, 2017. Each respective swap agreement requires the Company to pay a fixed rate of 2.665% and provides that the Company will receive a variable rate based on the three month LIBOR rate subject to a minimum LIBOR floor of 1.25%. Amounts payable by or due to the Company are net settled with the respective counterparties on the last business day of each fiscal quarter. The effect of the Company’s interest rate swap agreements on the condensed consolidated balance sheets at June 30, 2016 and December 31, 2015 is shown below (in thousands):
The gross effect of the Company’s interest rate swap agreements on the condensed consolidated statements of comprehensive income/(loss) for the three and six months ended June 30, 2016 and 2015 is shown below (in thousands):
Amounts reported in accumulated other comprehensive income related to interest rate swaps will be reclassified to interest expense as interest payments are made on the Term Loan. The Company estimates that approximately $2.4 million will be reclassified as an increase to interest expense in the next 12 months. Each interest rate swap agreement contains a provision whereby if the Company defaults on any of its indebtedness, the Company may also be declared in default under the interest rate swap agreements. |
Fair Value |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value | Fair Value In determining fair value, the Company uses a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
The Company's non-financial assets and liabilities, including its long-lived assets and indefinite-lived intangible assets, are measured and subsequently adjusted, if necessary, to fair value on a non-recurring basis. The Company periodically performs routine reviews of triggering events and/or an impairment test, as applicable. Based on these procedures, the Company did not require an adjustment to fair value to be recorded to these assets in the three months ended June 30, 2016 or 2015. The Company's financial instruments, other than interest rate swap agreements and long-term debt, consist primarily of cash, restricted cash, accounts receivable and accounts payable. The carrying amounts of these financial instruments are estimated to approximate fair value due to the relatively short period of time to maturity for these instruments. As of June 30, 2016, interest rate swap agreements are carried at their fair value and measured on a recurring basis as follows (in thousands):
As of December 31, 2015, interest rate swap agreements are carried at their fair value and measured on a recurring basis as follows (in thousands):
The estimated fair values of the Company's long-term debt as of June 30, 2016 and December 31, 2015 are as follows (in thousands):
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Employee Benefit Plans |
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Compensation and Retirement Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee Benefit Plans | Employee Benefit Plans The Company sponsors noncontributory qualified defined benefit pension plans ("qualified pension plans") and post-employment benefit plans which provide certain cash payments and medical, dental and life insurance benefits to eligible retired employees and their beneficiaries and covered dependents. The qualified pension plans and certain post-employment benefit plans were created as part of the acquisition of the Northern New England operations from Verizon and mirrored the prior Verizon plans. Two of the Company's collective bargaining agreements in northern New England were ratified on February 22, 2015. The respective collective bargaining agreements expire in August 2018. Active represented employees as of February 22, 2015 are eligible for benefits in accordance with the respective plan documents and contractual obligations in the ratified collective bargaining agreements. The remaining unrecognized prior service credit for the represented employees pension plan recorded in accumulated other comprehensive income of $37.1 million as of December 31, 2015 is being amortized over 10.82 years. As of December 31, 2015, $306.8 million of the remaining unrecognized net prior service credit and $81.9 million of the remaining unrecognized net actuarial loss for post-employment benefits recorded in accumulated other comprehensive income are being amortized in 2016. The Company makes contributions to the qualified pension plans to meet minimum funding requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and has the ability to elect to make additional discretionary contributions. The other post-employment benefit plans are unfunded and the Company funds the benefits that are paid. Annually, and as necessary, the Company remeasures the net liabilities of its qualified pension and other post-employment benefit plans. Net Periodic Benefit Cost. The Company capitalizes a portion of net periodic benefit cost in conjunction with its use of internal labor resources utilized on capital projects. Components of the net periodic benefit cost related to the Company's qualified pension plans and other post-employment benefit plans for the three and six months ended June 30, 2016 and 2015 are as follows (in thousands):
Return on Plan Assets. For the three months ended June 30, 2016 and 2015, the actual return on the pension plan assets were annualized gains/(losses) of approximately 7.6% and (0.7)%, respectively and 7.4% and 1.9% for the six months ended June 30, 2016 and 2015, respectively. Contributions and Benefit Payments. During the six months ended June 30, 2016, contributions of $3.8 million were made to the Company-sponsored qualified defined benefit pension plans and the Company funded benefit payments of $2.6 million under its post-employment benefit plans. |
Accumulated Other Comprehensive Income |
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Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income | Accumulated Other Comprehensive Income The following table provides a reconciliation of adjustments reclassified from accumulated other comprehensive income to the condensed consolidated statement of operations (in thousands):
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Earnings Per Share |
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share | Earnings Per Share Basic earnings per share of the Company is computed by dividing net income/(loss) by the weighted average number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, the diluted earnings per share calculation calculated using the treasury stock method includes the impact of stock units, shares of non-vested restricted stock and shares that could be issued under outstanding stock options. Weighted average number of common shares used for basic earnings per share excludes weighted average shares of non-vested restricted stock of 198,459 and 235,981 for the three months ended June 30, 2016 and 2015, respectively and 206,276 and 238,168 for the six months ended June 30, 2016 and 2015, respectively. Non-vested restricted stock is included in common shares issued and outstanding in the condensed consolidated balance sheets. Potentially dilutive shares exclude warrants and stock options in accordance with the treasury stock method primarily due to exercise prices exceeding the average market value. Since the Company incurred a loss for the six months ended June 30, 2015, all potentially dilutive securities are anti-dilutive and, therefore, are excluded from the determination of diluted earnings per share. The following table provides a reconciliation of the common shares used for basic earnings per share and diluted earnings per share:
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Stockholders' Deficit |
6 Months Ended |
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Jun. 30, 2016 | |
Stockholders' Equity Note [Abstract] | |
Stockholders' Deficit | Stockholders' Deficit At June 30, 2016, 37,500,000 shares of common stock were authorized and 27,050,600 shares of common stock (including shares of non-vested restricted stock) and 3,582,402 warrants, each eligible to purchase one share of common stock, were outstanding. The initial exercise price applicable to the warrants is $48.81 per share of common stock. The exercise price applicable to the warrants is subject to adjustment upon the occurrence of certain events described in the warrant agreement. The warrants may be exercised at any time on or before January 24, 2018. |
Commitments and Contingencies |
6 Months Ended |
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Jun. 30, 2016 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Commitments and Contingencies (a) Legal Proceedings From time to time, the Company is involved in litigation and regulatory proceedings arising out of its operations. The Company's management believes that it is not currently a party to any legal or regulatory proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company's financial position or results of operations. Notwithstanding the foregoing, the Company is a defendant in approximately 16 lawsuits filed by two long distance communications companies, who as plaintiffs have collectively filed over 60 lawsuits arising from switched access charges for calls originating and terminating within the same wireless major trading area. These cases have all been consolidated and transferred to federal district court (the "Court") in Dallas, Texas. The defendants filed joint motions to dismiss these actions. On November 17, 2015, the Court granted the defendants' motions dismissing the plaintiffs' federal law based claims with prejudice. The state law based claims were allowed to be amended and refiled. The Court has denied the plaintiffs' request for an immediate appeal of the dismissal of the federal law based claims. Counterclaims against the plaintiffs for the failure to pay these access charges have been filed. The Company and some of the co-defendants have filed lawsuits against a third long distance communications company for the failure to pay this same type of access charge. These additional lawsuits have also been consolidated and transferred to the Court. At this time, an estimate of the impact, if any, of these claims cannot be made. (b) Restricted Cash As of June 30, 2016 and December 31, 2015, the Company had $0.7 million and $0.7 million, respectively, of restricted cash, which is restricted for regulatory purposes and is included in long-term restricted cash on the condensed consolidated balance sheets. |
Significant Accounting Policies (Policies) |
6 Months Ended |
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Jun. 30, 2016 | |
Accounting Policies [Abstract] | |
Principles of Consolidation | Principles of Consolidation The condensed consolidated financial statements include all majority-owned subsidiaries of the Company. Partially owned equity affiliates are accounted for under the cost method or equity method when the Company demonstrates significant influence, but does not have a controlling financial interest. Intercompany accounts and transactions have been eliminated upon consolidation. |
Presentation and Use of Estimates | Presentation and Use of Estimates The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, certain information and footnote disclosures have been condensed or omitted for this quarterly report and should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company's annual report on Form 10-K for the year ended December 31, 2015. The condensed consolidated balance sheet as of December 31, 2015 is derived from audited financial statements. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. Interim results are not necessarily indicative of results for a full year and actual results could differ from those estimates. |
Revenue Recognition | Revenue Recognition Revenues are recognized as services are rendered and are primarily derived from the usage of the Company's networks and facilities or under revenue-sharing arrangements with other communications carriers. Revenues are primarily derived from: voice services, access (including pooling), certain Connect America Fund ("CAF") receipts, Internet and broadband services and other miscellaneous services. Local access charges are billed to local end users under tariffs approved by each state's Public Utilities Commission ("PUC") or by rates, terms and conditions determined by the Company. Access revenues are derived for the intrastate jurisdiction by billing access charges to interexchange carriers and to other LECs. These charges are billed based on toll or access tariffs approved by the local state's PUC. Access charges for the interstate jurisdiction are billed in accordance with tariffs filed by the National Exchange Carrier Association ("NECA") or by the individual company and approved by the Federal Communications Commission (the "FCC"). On July 14, 2016, the FCC adopted a Declaratory Order that classifies switched access services provided by Incumbent LECs as non-dominant services. This change in classification will not impact rates or revenues as the rates continue to be subject to rules established for all access providers pursuant to the Intercarrier Compensation transition rules adopted in 2011. Revenues are determined on a bill-and-keep basis or a pooling basis. If on a bill-and-keep basis, the Company bills the charges to the customer and keeps the revenue. If the Company participates in a pooling environment (interstate or intrastate), the revenue from the covered services is contributed to a revenue pool. The revenue is then distributed to individual companies based on their company-specific revenue requirement or similar distribution methods. This distribution is based on individual state PUCs' (intrastate) or the FCC's (interstate) approved settlement mechanisms, separation rules and rates of return. Distribution from these pools can change relative to changes made to expenses, plant investment or rate-of-return. Some companies participate in federal and certain state universal service programs that are pooling in nature but are regulated by rules separate from those described above. These rules vary by state. Revenues earned through the various pooling arrangements are initially recorded based on the Company's estimates. On November 18, 2011, the FCC released its comprehensive landmark order to modify the nationwide system of universal support and the CAF/intercarrier compensation ("ICC") system (the "CAF/ICC Order"). Rule changes associated with the FCC's CAF/ICC Order impact the NECA interstate pooling, in that a portion of the Company's interstate Universal Service Fund ("USF") revenues, which are administered through the NECA pools and which prior to January 1, 2012 were based on costs, are now based on rules from the FCC's CAF/ICC Order, including CAF Phase II support where FairPoint accepted CAF Phase II support, continued CAF Phase I frozen support where FairPoint did not accept CAF Phase II support and CAF/ICC rules in states where FairPoint is eligible for such support under the ICC Transition Rules for price cap and rate-of-return carriers. FairPoint accepted CAF Phase II support in all states except Kansas and Colorado. The CAF Phase II revenue is being recognized on a straight-line basis, ratably over the six-year period in which the funding will be received. The accepted transition funding is being recognized monthly as received over the three-year transition period ending in July 2018. The Company is required to meet certain interim milestones over the six-year period of CAF Phase II and the Company performs a quarterly assessment of its progress. Revenue from long distance switched retail and wholesale services can be recurring due to coverage under an unlimited calling plan or can be usage sensitive. In either case, they are billed in arrears and recognized when earned. Internet and data services revenues are substantially all recurring revenues and are billed one month in advance and deferred until earned. As of June 30, 2016 and December 31, 2015, unearned revenue of $19.5 million and $19.9 million, respectively, was included in other accrued liabilities and unearned revenue of $5.9 million and $7.6 million, respectively, was included in other long-term liabilities on the condensed consolidated balance sheets. The majority of the Company's other miscellaneous services revenue is generated from ancillary special projects at the request of third parties, video services, directory services and late payment charges to end users and wholesale carriers. The Company generally requires customers to pay for ancillary special projects in advance. As of June 30, 2016 and December 31, 2015, customer deposits of $2.8 million and $2.1 million, respectively, were included in other accrued liabilities on the condensed consolidated balance sheets. Once the ancillary special project is completed or substantially complete and all project costs have been accumulated for proper accounting recognition, the advance payment is recognized as revenue with any overpayments refunded to the customer, as appropriate. The Company recognizes revenue upon the provision of video services in certain markets by reselling DirecTV and providing cable and IP television video-over-digital subscriber line services. The Company also publishes telephone directories in some of its Telecom Group markets and recognizes revenues associated with these publications evenly over the time period covered by the directory, which is typically twelve months. The Company bills late payment fees to customers who have not paid their bills in a timely manner. In general, late payment fee revenue is recognized based on collection of these charges. Non-recurring customer activation fees, along with the related costs up to, but not exceeding, the activation fees, are deferred and amortized over the customer relationship period. Under the Maine Public Utilities Commission ("MPUC") rules (Chapter 201), which went into effect August 1, 2014, the MPUC may open an investigation regarding the failure to meet any of the established SQI benchmarks and has the authority to impose penalties of up to $500,000 per standard. The MPUC opened an investigation into our failure to meet some third quarter 2014 SQI benchmarks and subsequently opened an investigation into the fourth quarter of 2014 and then with respect to each of the quarterly periods in 2015. On March 29, 2016, the MPUC consolidated the investigations of the six quarters into one investigation. As of June 30, 2016, there has been no further action. Penalties, if any, would be recorded as a reduction to revenue. The Company also adopted a separate performance assurance plan ("PAP") for certain services provided on a wholesale basis to competitive local exchange carriers ("CLECs") in each of the states of Maine, New Hampshire and Vermont. Pursuant to the PAPs, FairPoint was required to provide service credits in the event the Company was unable to meet the provisions of the respective PAP. Effective June 1, 2015, the PAP was retired and the Company began measuring and reporting certain wholesale local service performance results pursuant to the terms of a simplified measurement plan. The new plan, called the Wholesale Performance Plan ("WPP"), was developed collaboratively with CLECs over several years and was approved by the Maine, New Hampshire and Vermont regulatory commissions. Under the WPP, the Company is subject to significantly fewer performance criteria and its annual service credit exposure was reduced. In evaluating the presentation of taxes and surcharges, such as USF charges, sales, use, value added and some excise taxes, we determine whether we are the primary obligor or principal taxpayer. In jurisdictions where we deem that we are the principal taxpayer, we record these taxes and surcharges on a gross basis and include them in our revenues and costs of services and sales. In jurisdictions where we determine that we are a pass through agent for the government authority, we record the taxes on a net basis through the condensed consolidated balance sheets. Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the elements are deemed separable and separate earnings processes exist, the revenue associated with each element is allocated to each element based on the relative estimated selling price of the separate elements. The Company has estimated the selling prices of each element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized as earned. Management makes estimated adjustments, as necessary, to revenue and accounts receivable for billing errors, including certain disputed amounts. |
Accounts Receivable | Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is recorded as a contra-asset of accounts receivable and represents the Company's best estimate of probable credit losses in the Company's existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Accounts receivable balances are reviewed on an aged basis and account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. |
Accounting for Income Taxes | Accounting for Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management determines its estimates of future taxable income based upon the scheduled reversal of deferred tax liabilities and tax planning strategies. The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized. In determining the income tax provision, a reserve for uncertain tax positions is established unless management determines that such positions are more likely than not to be sustained upon examination by the taxing authorities, based on their merits. There is considerable judgment involved in determining whether positions taken on the Company’s tax return are more likely than not to be sustained. |
Operating Segments | Operating Segments Management views its business of providing data, video and voice communications services to residential, wholesale and business customers as one operating segment. The Company's services consist of retail and wholesale communications and data services, including voice and HSD in 17 states. The Company's chief operating decision maker assesses operating performance and allocates resources based on the consolidated results. |
Interest Rate Swap Agreements | Interest Rate Swap Agreements In the third quarter of 2013, the Company entered into interest rate swap agreements. For further information regarding these interest rate swap agreements, see note (7) "Interest Rate Swap Agreements." The interest rate swap agreements, at their inception, qualified for and were designated as cash flow hedging instruments. The Company records its interest rate swaps on the condensed consolidated balance sheets at fair value. The effective portion of changes in fair value are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion is recognized in earnings. Both at inception and on a quarterly basis, the Company performs an effectiveness test. |
Long-Term Debt (Tables) |
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Long-term Debt Balances | Long-term debt for the Company at June 30, 2016 and December 31, 2015 is shown below (in thousands):
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Schedule of Maturities of Long-term Debt | The approximate aggregate maturities of long-term debt, excluding the debt discount on the Term Loan (as defined below), for each of the four years subsequent to June 30, 2016 are as follows (in thousands):
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Interest Rate Swap Agreements (Tables) |
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Derivative Instruments in Statement of Financial Position, Fair Value | The effect of the Company’s interest rate swap agreements on the condensed consolidated balance sheets at June 30, 2016 and December 31, 2015 is shown below (in thousands):
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Schedule of Derivative Instruments, Effect on Other Comprehensive Income (Loss) | The gross effect of the Company’s interest rate swap agreements on the condensed consolidated statements of comprehensive income/(loss) for the three and six months ended June 30, 2016 and 2015 is shown below (in thousands):
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Fair Value (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements, Recurring and Nonrecurring | As of June 30, 2016, interest rate swap agreements are carried at their fair value and measured on a recurring basis as follows (in thousands):
As of December 31, 2015, interest rate swap agreements are carried at their fair value and measured on a recurring basis as follows (in thousands):
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Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis | The estimated fair values of the Company's long-term debt as of June 30, 2016 and December 31, 2015 are as follows (in thousands):
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Employee Benefit Plans (Tables) |
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Compensation and Retirement Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Net Periodic Benefit Costs of Pension and Post-Retirement Healthcare | Components of the net periodic benefit cost related to the Company's qualified pension plans and other post-employment benefit plans for the three and six months ended June 30, 2016 and 2015 are as follows (in thousands):
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Accumulated Other Comprehensive Income (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification out of Accumulated Other Comprehensive Income | The following table provides a reconciliation of adjustments reclassified from accumulated other comprehensive income to the condensed consolidated statement of operations (in thousands):
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Earnings Per Share (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Weighted Average Number of Shares | The following table provides a reconciliation of the common shares used for basic earnings per share and diluted earnings per share:
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Organization and Principles of Consolidation (Details) mi in Thousands |
Jun. 30, 2016
state
subscriptions
mi
|
---|---|
Product Information [Line Items] | |
Number of operating states | state | 17 |
Communication Services | |
Product Information [Line Items] | |
Number of route miles in fiber network, more than | mi | 21 |
Number of data subscribers | 311,000 |
Communication Services | Maine, New Hampshire and Vermont | |
Product Information [Line Items] | |
Number of route miles in fiber network, more than | mi | 17 |
Ethernet Circuits | |
Product Information [Line Items] | |
Number of data subscribers | 15,100 |
Residential Voice Lines | |
Product Information [Line Items] | |
Number of data subscribers | 389,000,000 |
Significant Accounting Policies (Details) $ in Millions |
6 Months Ended | |
---|---|---|
Jun. 30, 2016
USD ($)
state
segment
|
Dec. 31, 2015
USD ($)
|
|
Revenues from External Customers and Long-Lived Assets [Line Items] | ||
Current customer deposits | $ 2.8 | $ 2.1 |
Number of operating segments | segment | 1 | |
Number of operating states | state | 17 | |
Other Accrued Liabilities | ||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||
Deferred revenue | $ 19.5 | 19.9 |
Other Long Term Liabilities | ||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||
Non-current deferred revenue | $ 5.9 | $ 7.6 |
Income Taxes (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | 12 Months Ended | |||
---|---|---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
Income Tax Contingency [Line Items] | ||||||
Income tax expense (benefit) | $ 12,393 | $ (824) | $ 20,404 | $ 77 | ||
Effective tax rate | 29.70% | (2.10%) | 29.90% | (1.60%) | ||
NOL carryforwards | $ 283,200 | $ 283,200 | ||||
State NOL deferred tax asset | 12,000 | 12,000 | ||||
State tax credit carryover | 5,100 | 5,100 | ||||
Valuation allowance | 23,800 | $ 23,800 | $ 25,100 | |||
Scenario, Forecast | ||||||
Income Tax Contingency [Line Items] | ||||||
Federal statutory rate | 35.00% | |||||
Minimum | ||||||
Income Tax Contingency [Line Items] | ||||||
Expiration period of NOL carryforwards | Dec. 31, 2019 | |||||
Maximum | ||||||
Income Tax Contingency [Line Items] | ||||||
Expiration period of NOL carryforwards | Dec. 31, 2036 | |||||
Federal Allowance | ||||||
Income Tax Contingency [Line Items] | ||||||
Valuation allowance | 17,100 | $ 17,100 | 14,700 | |||
State allowance | ||||||
Income Tax Contingency [Line Items] | ||||||
Valuation allowance | $ 6,700 | $ 6,700 | $ 10,400 |
Long-Term Debt (Schedule of Long-term Debt) (Details) - USD ($) $ in Thousands |
Jun. 30, 2016 |
Dec. 31, 2015 |
Feb. 14, 2013 |
---|---|---|---|
Long term debt for the Company | |||
Debt issuance costs | $ (4,070) | $ (4,717) | |
Total long-term debt | 905,606 | 906,545 | |
Less: current portion | (6,400) | (6,400) | |
Total long-term debt, net of current portion | 899,206 | 900,145 | |
Term Loan, due 2019 | |||
Long term debt for the Company | |||
Term Loan, due 2019 (weighted average rate of 7.50%) | 619,200 | 622,400 | |
Discount on Term Loan | $ (9,524) | (11,138) | |
Weighted average interest rate | 7.50% | ||
Senior Secured Notes due 2019 | |||
Long term debt for the Company | |||
Notes, 8.75%, due 2019 | $ 300,000 | $ 300,000 | |
Stated interest rate | 8.75% | 8.75% |
Long-Term Debt (Maturities of Long-term Debt) (Details) $ in Thousands |
Jun. 30, 2016
USD ($)
|
---|---|
Approximate Aggregate Maturities of Long-term Debt | |
2017 | $ 6,400 |
2018 | 6,400 |
2019 | 606,400 |
Thereafter | 300,000 |
Total long-term debt, including current portion | $ 919,200 |
Interest Rate Swap Agreements (Narrative) (Details) $ in Millions |
Jun. 30, 2016
USD ($)
|
Sep. 30, 2013
USD ($)
counterparties
|
---|---|---|
Interest Rate Swap | ||
Derivative [Line Items] | ||
Notional amount | $ 170.0 | |
Number of counterparties | counterparties | 3 | |
Fixed rate | 2.665% | |
LIBOR | Interest Rate Swap | ||
Derivative [Line Items] | ||
Floor interest rate | 1.25% | |
Reclassification out of Accumulated Other Comprehensive Income | ||
Derivative [Line Items] | ||
Interest reclassified | $ 2.4 |
Interest Rate Swap Agreements (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
Dec. 31, 2015 |
|
Derivative [Line Items] | |||||
Amount of Loss/(Gain) Recognized in Other Comprehensive Income on Derivative (Effective Portion) (Pre-Tax) | $ (459) | $ 226 | $ (666) | $ 1,043 | |
Reclassification out of Accumulated Other Comprehensive Income | |||||
Derivative [Line Items] | |||||
Amount Recognized in Interest Expense (Pre-Tax) | $ 0 | $ 0 | |||
Interest Rate Swap | Fair Value, Measurements, Recurring | Level 2 | Other Accrued Liabilities | |||||
Derivative [Line Items] | |||||
Interest rate swaps, Current | 2,391 | 2,391 | $ 2,375 | ||
Interest Rate Swap | Fair Value, Measurements, Recurring | Level 2 | Other long-term liabilities | |||||
Derivative [Line Items] | |||||
Interest rate swaps, Long-term | $ 550 | $ 550 | $ 1,232 |
Earnings Per Share (Details) - shares |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
|
Earnings Per Share [Abstract] | ||||
Weighted average shares of non-vested restricted stock excluded from basic earnings per share | 198,459 | 235,981 | 206,276 | 238,168 |
Calculation of basic and diluted earnings per common share | ||||
Weighted average number of common shares used for basic earnings per share | 26,858,029 | 26,654,518 | 26,834,863 | 26,621,662 |
Effect of potential dilutive shares | 225,483 | 370,843 | 235,815 | 0 |
Weighted average number of common shares and potential dilutive shares used for diluted earnings per share | 27,083,512 | 27,025,361 | 27,070,678 | 26,621,662 |
Weighted average number of anti-dilutive shares outstanding at period-end that are excluded from the above reconciliation | 5,764,994 | 4,246,924 | 5,837,675 | 4,487,876 |
Stockholders' Deficit (Details) - $ / shares |
Jun. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Class of Warrant or Right [Line Items] | ||
Common stock, shares authorized | 37,500,000 | 37,500,000 |
Common stock, shares outstanding | 27,050,600 | 26,921,066 |
Warrants, outstanding | 3,582,402 | |
Common Stock | ||
Class of Warrant or Right [Line Items] | ||
Exercise price of warrants (in dollars per share) | $ 48.81 |
Commitments and Contingencies (Details) $ in Millions |
6 Months Ended | |
---|---|---|
Jun. 30, 2016
USD ($)
Plaintiff
Lawsuit
|
Dec. 31, 2015
USD ($)
|
|
Long-term Purchase Commitment [Line Items] | ||
Restricted cash | $ | $ 0.7 | $ 0.7 |
Pending Litigation | ||
Long-term Purchase Commitment [Line Items] | ||
Number of pending claims | 16 | |
Pending Litigation | IntraMTA | ||
Long-term Purchase Commitment [Line Items] | ||
Number of pending claims | 60 | |
Number of plaintiffs | Plaintiff | 2 |
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