|
HAWAIIAN TELCOM HOLDCO, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Background
In the following discussion and analysis of financial condition and results
of operations, unless the context otherwise requires, "we," "us" or the
"Company" refers, collectively, to Hawaiian Telcom Holdco, Inc. and its
subsidiaries.
The statements in the discussion and analysis regarding industry outlook,
our expectations regarding the future performance of our business and the other
non-historical statements in the discussion and analysis are forward-looking
statements. These forward-looking statements are subject to numerous risks and
uncertainties, including, but not limited to, the risks and uncertainties
described in Item 1A, "Risk Factors." Our actual results may differ materially
from those contained in any forward-looking statements. You should read the
following discussion together with Item 6, "Selected Financial Data" and our
consolidated financial statements and related notes thereto included elsewhere
in this annual report.
Chapter 11 Reorganization
On December 1, 2008, we and certain of our subsidiaries filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code and on October 28,
2010, the Company emerged from Chapter 11. For further information regarding
these petitions, see Note 22 to the consolidated financial statements.
Under the Plan of Reorganization, all of the existing common stock and stock
options were cancelled upon emergence and the equity holders received no
recovery. Our emergence from Chapter 11 on the emergence date resulted in a new
reporting entity and the new shares of common stock were issued to the former
secured lenders and swap counterparties. We adopted fresh-start reporting as of
October 31, 2010. As required by fresh-start accounting, our assets and
liabilities have been adjusted to fair value. Accordingly, our financial
condition and results of operations after October 31, 2010 are not comparable to
the financial condition and result of operations for periods prior to and on
October 31, 2010.
Wavecom Solutions Corporation Acquisition
On December 31, 2012, we completed our acquisition of Wavecom Solutions
Corporation ("Wavecom") for $8.3 million in cash, net of cash acquired and final
purchase price adjustments. Wavecom provides telecommunication services in the
State of Hawaii which are complementary to our operations. Because the
acquisition occurred on December 31, 2012, the financial results of Wavecom had
no impact on our consolidated statement of income for the year ended
December 31, 2012.
Segments and Sources of Revenue
We operate in two reportable segments (Wireline Services and Wireless) based
on how resources are allocated and performance is assessed by our chief
operating decision maker. Our chief operating decision maker is our Chief
Executive Officer.
Wireline Services
The Wireline Services segment derives revenue from the following sources:
Local Telephone Services-We receive revenue from providing local exchange
telephone services. These revenues include monthly charges for basic service,
local private line services and enhanced calling features such as voice mail,
caller ID and 3-way calling.
Network Access Services-We receive revenue for access to our network for
wholesale carrier data, business customer data including Dedicated Internet
Access, switched carrier access and subscriber line
31--------------------------------------------------------------------------------
Table of Contents
charges imposed on end users. Switched carrier access revenue compensates us for
origination, transport and termination of calls for long distance and other
interexchange carriers.
Long Distance Services-We receive revenue from providing long distance
services to our customers.
High-Speed Internet ("HSI") Services-We provide HSI to our residential and
business customers.
Video Services-Our video services marketed as Hawaiian Telcom TV is an
advanced entertainment service offered to customers in select areas.
Equipment and Managed Services-We provide installation and maintenance of
customer premise equipment as well as managed service for customer telephone and
IT networks.
Wireless
We receive revenue from wireless services, including the sale of wireless
handsets and other wireless accessories.
Results of Operations for the Years Ended December 31, 2012, 2011 and 2010
As discussed above, we emerged from chapter 11 and adopted fresh-start
reporting on October 31, 2010. References to "Predecessor" refer to the Company
prior to and on October 31, 2010. References to "Successor" refer to the Company
after October 31, 2010 after giving effect to the plan of reorganization and
application of fresh-start reporting. As a result of the application of
fresh-start reporting, the Successor's financial statements are not comparable
with the Predecessor's financial statements. However, for purposes of the
discussion of the results of operations, the combined ten months ended
October 31, 2010 and two months ended December 31, 2010 have been compared to
the year ended December 31, 2011. We believe this combined information is useful
to the readers of this Annual Report in understanding changes in our results of
operations. Significant changes in operating results for the Successor, as
compared to Predecessor periods, relate primarily to depreciation and
amortization because of changes in the basis of long-lived assets, and changes
in interest expense with a new borrowing facility in place. In this discussion,
we will disclose the fresh-start and other impacts on our results of operations
that vary from historical Predecessor periods to aid in the understanding of our
financial performance.
Operating Revenues
The following tables summarize our volume information as of December 31,
2012, 2011 and 2010, and our operating revenues for the years ended December 31,
2012, 2011 and 2010. The volume information excludes customers of Wavecom. As we
acquired this subsidiary on December 31, 2012 no revenue was reflected in our
2012 results of operations. Hence, its volume information is not meaningful in
analyzing our 2012 performance.
32--------------------------------------------------------------------------------
Table of Contents
Volume Information
2012 vs. 2011 2011 vs. 2010
December 31, Change Change
2012 2011 2010 Number Percentage Number PercentageVoice
access
lines
Residential 203,330 223,009 241,506 (19,679 ) (8.8 )% (18,497 ) (7.7 )%
Business 185,142 189,035 194,890 (3,893 ) (2.1 )% (5,855 ) (3.0 )%
Public 4,405 4,623 4,791 (218 ) (4.7 )% (168 ) (3.5 )%
392,877 416,667 441,187 (23,790 ) (5.7 )% (24,520 ) (5.6 )%
High-Speed
Internet
lines
Residential 88,016 84,634 81,770 3,382 4.0 % 2,864 3.5 %
Business 18,575 17,442 16,728 1,133 6.5 % 714 4.3 %
Wholesale 1,020 1,156 1,206 (136 ) (11.8 )% (50 ) (4.1 )%
107,611 103,232 99,704 4,379 4.2 % 3,528 3.5 %
Long
distance
lines
Residential 126,551 136,921 147,983 (10,370 ) (7.6 )% (11,062 ) (7.5 )%
Business 74,781 76,160 79,323 (1,379 ) (1.8 )% (3,163 ) (4.0 )%
201,332 213,081 227,306 (11,749 ) (5.5 )% (14,225 ) (6.3 )%
Video
Subscribers 9,829 1,620 - 8,209 506.7 % 1,620 NA
Homes
Enabled 65,000 27,400 - 37,600 137.2 % 27,400 NA
33
--------------------------------------------------------------------------------
Table of Contents
2012 compared to 2011
Operating Revenues (dollars in thousands)
For the Year Ended
December 31, Change
2012 2011 Amount Percentage
Wireline Services
Local voice services $ 141,352 $ 146,921 $ (5,569 ) (3.8 )%
Network access services
Business data 18,946 18,133 813 4.5 %
Wholesale carrier data 63,192 64,589 (1,397 ) (2.2 )%
Subscriber line access charge 38,885 39,857 (972 ) (2.4 )%
Switched carrier access 8,883 9,833 (950 ) (9.7 )%
129,906 132,412 (2,506 ) (1.9 )%
Long distance services 27,959 31,945 (3,986 ) (12.5 )%
High-Speed Internet 36,323 35,426 897 2.5 %
Video 4,883 269 4,614 NA
Equipment and managed services 31,418 33,274 (1,856 ) (5.6 )%
Other 10,321 10,638 (317 ) (3.0 )%
382,162 390,885 (8,723 ) (2.2 )%
Wireless 3,336 4,271 (935 ) (21.9 )%
$ 385,498 $ 395,156 $ (9,658 ) (2.4 )%
Channel
Business $ 163,923 $ 168,262 $ (4,339 ) (2.6 )%
Consumer 137,765 137,563 202 0.1 %
Wholesale 71,673 74,422 (2,749 ) (3.7 )%
Other 12,137 14,909 (2,772 ) (18.6 )%
$ 385,498 $ 395,156 $ (9,658 ) (2.4 )%
The operating revenue information above for 2012 includes additional detail
not previously provided including components of network access revenue, video
revenue, and equipment and managed services revenue. These changes were made to
provide additional insight into our operations and to reflect the strategic
emphasis on potential growth products such as business data and video. Certain
reclassifications were made to the 2011 information to conform to the 2012
presentation. To provide further insight, we have provided revenue information
by channel as well.
The decrease in local services revenues was caused primarily by the decline
in voice access lines of 5.7% ($8.4 million of the decline in revenue).
Continued competition in the telecommunications industry has increasingly
resulted in customers using technologies other than traditional phone lines for
voice and data. Residential customers are increasingly using wireless services
in place of traditional wireline phone service as well as moving local voice
service to VoIP technology offered by competitors. Generally, VoIP technology
offered by cable providers is less expensive than traditional wireline phone
service, requiring us to respond with more competitive pricing. Additionally,
Competitive Local Exchange Carriers (CLECs) and our cable competitor continue to
focus on business customers and selling services to our customer base.
In an effort to slow the rate of line loss, we are continuing retention and
acquisition programs, and are increasingly focusing efforts on bundling of
services. We have instituted various "saves" campaigns designed to focus on
specific circumstances where we believe customer churn is controllable. These
campaigns include targeted offers to "at risk" customers as well as other
promotional tools designed to
34--------------------------------------------------------------------------------
Table of Contents
enhance customer retention. We are also continuing to emphasize win-back and
employee referral programs. Additionally, we are intensifying our efforts
relative to developing tools and training to enhance our customer service
capability to improve customer retention.
Network access services revenue for the year ended December 31, 2012
decreased as compared to the prior year because certain wireless carriers
disconnected lower bandwidth circuits replaced with new more efficient higher
bandwidth circuits resulting in a reduction in wholesale carrier data revenue
for the year. We anticipate the data volume and related revenue will increase in
future periods as wireless carriers deploy their enhanced wireless networks. In
addition, the impact of the decline in voice access lines is reflected in
subscriber line access charges and switched carrier access charges. These
reductions were partially offset by growth in business data revenue.
The decrease in long distance revenue was primarily because of the decline
in long distance lines and customers moving to wireless and VoIP based
technologies for long distance calling.
HSI revenues increased when compared to the prior year primarily because an
approximate 4.2% growth in our HSI subscribers ($1.5 million of the increase in
revenue). We are continuing to focus on upgrading our network to expand the
reach of our higher bandwidth premium services.
On July 1, 2011, we commercially launched our video service on the island of
Oahu. We are deploying Hawaiian Telcom TV gradually to selected areas to ensure
delivery of superior service and an ongoing excellent customer experience. We
have initiated targeted marketing efforts resulting in penetration rates
exceeding expectations. Our volume is anticipated to continue to ramp up as more
homes become enabled for video service. We expect to expand both the
availability and the capabilities of our Hawaiian Telcom TV service over the
next several years through additional capital investment and innovation.
Equipment and managed services sales have decreased because of less sales
and installations of customer premise equipment for certain large government
customers in 2012. Revenue from equipment sales varies from period to period
based on the volume of large installation projects. The volume of such projects
in future periods is uncertain.
Wireless revenues decreased as we attempted to focus our marketing efforts
on other segments of our business.
35--------------------------------------------------------------------------------
Table of Contents
2011 compared to 2010
Operating Revenues (dollars in thousands)
Successor Combined Successor Predecessor
Year-over-Year
For the For the Period from Period from Change
Year Ended Year Ended November 1 January 1
December 31, December 31, to December 31, to October 31,
2011 2010 2010 2010 Amount Percentage
Wireline
Services
Local
voice
services $ 146,921 $ 155,982 $ 25,004 $ 130,978 $ (9,061 ) (5.8 )%
Network
access
services
Business
data 18,133 16,513 2,908 13,605 1,620 9.8 %
Wholesale
carrier
data 64,589 62,081 11,251 50,830 2,508 4.0 %
Subscriber
line
access
charge 39,857 41,734 6,671 35,063 (1,877 ) (4.5 )%
Switched
carrier
access 9,833 11,052 1,710 9,342 (1,219 ) (11.0 )%
132,412 131,380 22,540 108,840 1,032 0.8 %
Long
distance
services 31,945 34,694 5,539 29,155 (2,749 ) (7.9 )%
High-Speed
Internet 35,426 34,302 5,949 28,353 1,124 3.3 %
Video 269 - - - 269 NA
Equipment
and
managed
services 33,274 28,095 4,938 23,157 5,179 18.4 %
Other 10,638 12,257 2,018 10,239 (1,619 ) (13.2 )%
390,885 396,710 65,988 330,722 (5,825 ) (1.5 )%
Wireless 4,271 4,735 771 3,964 (464 ) (9.8 )%
$ 395,156 $ 401,445 $ 66,759 $ 334,686 $ (6,289 ) (1.6 )%
Channel
Business $ 168,262 $ 165,884 $ 27,483 $ 138,401 $ 2,378 1.4 %
Consumer 137,563 145,436 23,526 121,910 (7,873 ) (5.4 )%
Wholesale 74,422 73,133 12,961 60,172 1,289 1.8 %
Other 14,909 16,992 2,789 14,203 (2,083 ) (12.3 )%
$ 395,156 $ 401,445 $ 66,759 $ 334,686 $ (6,289 ) (1.6 )%
The decrease in local services revenues was caused primarily by the decline
in voice access lines of 5.6% ($8.7 million of the decline in revenue). The
decline in voice access lines from 2010 to 2011 was caused by the same factors
discussed previously for the decline from 2011 to 2012.
Network access services revenue for the year ended December 31, 2011 was
comparable to the same period in the prior year as increased revenue related to
the demand for data services of $4.2 million was offset by the revenue impact of
the decline in voice access lines.
The decrease in long distance revenue was primarily because of the decline
in long distance lines.
HSI revenues increased when compared to the prior year primarily because an
approximate 3.5% growth in our HSI subscribers ($1.2 million of the increase in
revenue).
Equipment and managed services sales increased as compared to the prior year
because of more sales and installations of customer premise equipment for
certain large government customers in 2011.
Wireless revenues decreased as we attempted to focus our marketing efforts
on other segments of our business.
36--------------------------------------------------------------------------------
Table of Contents
Operating Costs and Expenses
2012 compared to 2011
The following table summarizes our costs and expenses for 2012 compared to
the costs and expenses for 2011 (dollars in thousands):
For the Year Ended
December 31, Change
2012 2011 Amount PercentageCost of revenues (exclusive of
depreciation and amortization) $ 160,226 $ 159,822 $ 404
0.3 %
Selling, general and
administrative expenses 108,508 120,390 (11,882 ) -9.9 %
Depreciation and amortization 70,908 63,806 7,102 11.1 %
$ 339,642 $ 344,018 $ (4,376 ) -1.3 %
The Company's total headcount as of December 31, 2012 was 1,392 (includes
39 Wavecom employees added on December 31, 2012) compared to 1,309 as of
December 31, 2011. Employee related costs are included in both cost of revenues
and selling, general and administrative expenses.
Cost of revenues consists of costs we incur to provide our products and
services including those for operating and maintaining our networks, installing
and maintaining customer premise equipment, and cost of goods sold directly
associated with various products. The costs for the year ended December 31, 2012
were comparable to the prior year.
Selling, general and administrative expenses include costs related to sales
and marketing, information systems and other administrative functions. The
decrease in such expenses was primarily because of reduced labor costs of
$8.9 million on lower average headcount and reduced pension costs. In addition,
there was a decline in bad debt expense of $2.2 million primarily because of the
settlement of balances due from Wavecom Solutions Corporation as described in
Note 3 to the consolidated financial statements.
Depreciation and amortization increased because of new property additions
placed into service.
2011 compared to 2010
The following table summarizes our costs and expense for the year ended
December 31, 2011 compared to the year ended December 31, 2010 (dollars in
thousands).
Successor Combined Successor Predecessor
Year-over-Year
For the For the Period from Period from Change
Year Ended Year Ended November 1 January 1
December 31, December 31, to December 31, to October 31,
2011 2010 2010 2010 Amount Percentage
Cost of
revenues
(exclusive of
depreciation
and
amortization) $ 159,822 $ 162,231 $ 27,117 $ 135,114 $ (2,409 ) (1.5 )%
Selling,
general and
administrative
expenses 120,390 127,751 21,938 105,813 (7,361 ) (5.8 )%
Depreciation
and
amortization 63,806 146,384 9,723 136,661 (82,578 ) (56.4 )%
$ 344,018 $ 436,366 $ 58,778 $ 377,588 $ (92,348 ) (21.2 )%
37
--------------------------------------------------------------------------------
Table of Contents
The Company's total headcount as of December 31, 2011 was 1,309 compared to
1,431 as of December 31, 2010.
The cost of revenues for the year ended December 31, 2011 decreased
$6.6 million due to a decline in wages and employee benefit costs on lower
headcount and pension costs offset by higher electricity costs of $4.4 million
on higher electricity rates.
Selling, general and administrative expenses for the year ended December 31,
2011 decreased because of more favorable rates on information technology
outsourcing for a benefit of $6.2 million and a decline in bad debt expense of
$2.6 million with improved collection efforts and bad debt recovery. The
decrease was offset by a $2.0 million increase in stock compensation expense and
$1.8 million in restructuring charges.
Depreciation and amortization decreased because of the new lower basis
assigned to our long-lived assets in fresh-start accounting.
Other Income and (Expense)
2012 compared to 2011
The following table summarizes other income (expense) for the years ended
December 31, 2012 and 2011 (dollars in thousands).
For the Year Ended
December 31, Change
2012 2011 Amount Percentage
Interest expense $ (22,183 ) $ (25,339 ) $ 3,156 -12.5 %
Loss on early extinguishment of debt (5,112 ) - (5,112 ) NA
Interest income and other 59 65 (6 ) -9.2 %
$ (27,236 ) $ (25,274 ) $ (1,962 ) 7.8 %
Interest expense decreased primarily because of the lower interest rates on
the refinanced debt.
In connection with the refinancing of debt in the first quarter of 2012, we
incurred a $5.1 million charge to income which consisted of the premium on the
repayment of the old debt and certain refinancing costs.
2011 compared to 2010
The following table summarizes other income (expense) for the years ended
December 31, 2011 and 2010 (dollars in thousands).
Successor Combined Successor Predecessor
For the For the Period from Period from Year-over-Year Change
Year Ended Year Ended November 1 January 1
December 31, December 31, to December 31, to October 31,
2011 2010 2010 2010 Amount Percentage
Interest
expense $ (25,339 ) $ (27,727 ) $ (4,329 ) $ (23,398 ) $ 2,388 (8.6 )%
Interest
income
and
other 65 90 16 74 (25 ) (27.8 )%
$ (25,274 ) $ (27,637 ) $ (4,313 ) $ (23,324 ) $ 2,363 (8.6 )%
Interest expense decreased primarily because the Company was no longer
accruing paid-in-kind interest on debt in conjunction with the Chapter 11
proceeding.
38--------------------------------------------------------------------------------
Table of Contents
Reorganization Items
Reorganization items represent amounts incurred as a direct result of the
Company's Chapter 11 filing and are presented separately in our consolidated
statements of income. Such (income) and expense items consisted of the following
(dollars in thousands):
Successor Predecessor
For the Period from Period from
Year Ended November 1 January 1
December 31, to December 31, to October 31,
2011 2010 2010
Professional fees $ 1,050 $ 539 $ 10,586
Effects of the plan of
reorganization - - (708,590 )
Fresh-start valuation of
assets and liabilities - - 445,796
Other - - 534
$ 1,050 $ 539 $ (251,674 )
The Company emerged from Chapter 11 in October 2010 but continued to incur
reorganization related expenses until December 2011 as the Chapter 11 cases were
not closed until January 2012.
Reorganization professional fees declined as the activity related to the
Chapter 11 reorganization diminished.
The implementation of the plan of reorganization resulted in income of
$708.6 million. This reflects the discharge of prepetition liabilities in
accordance with the plan of reorganization offset by the value of new debt and
equity issued in conjunction with the plan.
In conjunction with the adoption of the plan of reorganization, we adopted
fresh-start reporting resulting in changes to carrying value of assets and
liabilities to reflect fair values. The loss recorded from the adoption of
fresh-start amounted to $445.8 million.
Income Tax Benefit
The income tax benefit differs from amounts determined by applying the
statutory federal income tax rate of 34% to the income or loss before income
taxes primarily because of changes in the valuation allowance previously
established for the recovery of deferred income tax assets.
As of December 31, 2011, we had maintained a full valuation allowance over
our net deferred income tax assets. This situation resulted from our having a
short history as a new entity (post Chapter 11). From emergence in 2010 through
2012, we have generated earnings in all periods. As a result of our continued
positive annual earnings, as well as positive forecasted earnings in the future,
management concluded that it was more likely than not that we will realize our
deferred income tax assets, and therefore, we released our valuation allowance
as of December 31, 2012. If there is a decline in the level of actual future or
forecasted earnings, the conclusion regarding the need for a valuation allowance
may change in future periods resulting in the establishment of a valuation
allowance for some or all of our deferred income tax assets.
Liquidity and Capital Resources
As of December 31, 2012, we had cash of $67.0 million. From an ongoing
operating perspective, our cash requirements going into 2013 consist of
supporting the development and introduction of new products, capital expenditure
projects, pension funding obligations and other changes in working capital. A
combination of cash-on-hand and cash generated from operating activities will be
used to fund our operating activities.
39--------------------------------------------------------------------------------
Table of Contents
We have continued to take actions to conserve cash and improve liquidity.
Efforts have also been taken to generate further operating efficiencies and
focus on expense management. We have focused on improving operating results,
including efforts to simplify product offerings, improve our customer service
experience and increase our revenue enhancement activities. There can be no
assurance that these additional actions will result in improved overall cash
flow. We continue to have sizable retirement obligations for our existing
employee base. Any sustained declines in the value of pension trust assets or
higher levels of pension lump sum benefit payments will increase the magnitude
of future plan contributions.
Agreements with the Hawaii Public Utilities Commission and the debt
agreements of Hawaiian Telcom Communications, Inc. limit the ability of our
subsidiaries to pay dividends to the parent company and restrict the net assets
of all of our subsidiaries. This can limit our ability to pay dividends to our
shareholders. As the parent company has no operations, debt or other
obligations, this restriction has no other immediate impact on our operations.
Cash Flows
Our primary source of funds continues to be cash generated from operations.
We use the net cash generated from operations to fund network expansion and
modernization. We expect that our capital spending requirements will continue to
be financed through internally generated funds. We also expect to use cash
generated in future periods for debt service. Additional debt or equity
financing may be needed to fund additional development activities or to maintain
our capital structure to ensure financial flexibility. Available cash and
borrowing capacity is expected to be sufficient to fund cash requirements for
the next twelve months.
Net cash provided by operations amounted to $86.5 million for 2012. Net cash
provided by operations amounted to $79.2 million for 2011. Our cash flows from
operations are impacted by our results of operations, changes in working capital
and payments on certain long-term liabilities such as pension obligations. Our
results of operations were discussed above. The increase in cash provided by
operations was because of improved management of working capital. Pension plan
contributions amounted to $14.2 million and $17.0 million for the years ended
December 31, 2012 and 2011, respectively. We typically generate positive cash
flow from operations and expect to do so in 2013. We anticipate using the cash
generated by operations for capital expenditures and for required debt payments.
Cash used in investing activities was comprised of $85.3 million and
$78.0 million for the year ended December 31, 2012 and 2011, respectively.
Investing activities for the year ended December 31, 2012 included the
acquisition of Wavecom for $8.3 million net of cash acquired and final purchase
price adjustments. The level of capital expenditures for 2013 is expected to be
comparable to 2012 as we invest in our network and systems to support new
product introductions and enable next-generation technologies.
Cash used in financing activities for the year ended December 31, 2012 was
related primarily to the refinancing of our debt. Cash used in financing
activities for the year ended December 31, 2011 amounted to $0.8 million and was
comprised primarily of payments on a capital lease of $0.6 million and revolving
loan refinancing costs of $0.3 million.
Outstanding Debt and Financing Arrangements
As of December 31, 2012, we had outstanding $299.2 million in aggregate
long-term debt and an undrawn $30.0 million revolving line of credit.
Our bank credit facilities contain various negative and affirmative
covenants that restrict, among other things, incurrence of additional
indebtedness, payment of dividends, redemptions of stock, other
40--------------------------------------------------------------------------------
Table of Contents
distributions to shareholders and sales of assets. In addition, there are
financial covenants which have the following metrics as of December 31, 2012:
interest coverage with maximum allowed ratio of 4.25:1 of earnings before
interest, taxes, depreciation and amortization to interest expense; leverage
with maximum allowed ratio of 3.00:1 of indebtedness to earnings before
interest, taxes, depreciation and amortization, as defined; and a maximum level
of annual capital expenditures of $105.0 million. We were in compliance with
these covenants as of December 31, 2012.
On February 29, 2012, we refinanced the existing term debt with a new five
year term loan. With our new debt structure, we do not expect to generate the
necessary cash flow from operations to repay the facility in its entirety by the
maturity date and repayment is dependent on our ability to refinance the credit
facility at reasonable terms. The ability to refinance the indebtedness at
reasonable terms before maturity cannot be assured.
Contractual Obligations
The following table sets forth our long-term debt and contractual
obligations for the next several years. Pension funding obligations are based on
known funding. Additional obligations are expected in future periods.
Obligations are as follows (dollars in thousands):
2014 to 2016 and 2018 and
2013 2015 2017 Thereafter Total
Term loan facility(1) $ 3,000 $ 6,000 $ 290,250 $ - $ 299,250
Debt interest(2) 20,869 41,108 23,489 - 85,466
Pension funding obligations(3) 12,123 - - - 12,123
Operating leases 1,824 3,109 2,333 9,943 17,209
Supplier contracts 12,850 6,850 - - 19,700
Total $ 50,666 $ 57,067 $ 316,072 $ 9,943 $ 433,748
--------------------------------------------------------------------------------
º (1)
º Existing debt at December 31, 2012.
º (2)
º Computed based on debt outstanding and the interest rate in effect at
December 31, 2012 for the contractual term.
º (3) º Represents pension funding expected for 2013. Additional funding will be
required in future years.
We do not maintain any off balance sheet financing or other arrangements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in consolidated financial statements. Changes in these estimates and
assumptions are considered reasonably possible and may have a material effect on
the consolidated financial statements and thus actual results could differ from
the amounts reported and disclosed herein. The following is a summary of certain
policies considered critical by management.
Indefinite-Lived Intangible Assets
Intangible assets not subject to amortization are tested for impairment
annually in the fourth quarter, or when events or changes in circumstances
indicate that the asset might be impaired. The impairment test consists of a
comparison of the fair value of the intangible asset with its carrying value. If
the carrying value of an indefinite-lived intangible asset exceeds its fair
value, an impairment loss is recognized in an amount equal to that excess. Fair
value is an estimate based on the present value of an expected range of future
cash flows. For the brand name intangible asset, future cash flows were
41--------------------------------------------------------------------------------
Table of Contents
estimated using a relief of royalty method using an assumed royalty rate for the
brand name asset of one percent applied to projected revenues. The expected
range of future cash flows is based on internal forecasts developed utilizing
management's knowledge of the business and the anticipated effects of market
forces. The use of different assumptions or estimates of future cash flows could
produce different impairment amounts (or none at all). Significant assumptions
which are reasonably possible of changing in future periods relate to projection
of future cash flows generated by the indefinite-lived intangible assets which
are dependent on projections of company-wide revenues in future periods and the
discount rate used to calculate the present values of cash flows based on the
estimated weighted average cost of capital. As of December 31, 2012, the fair
value of the trade name intangible assets exceeded the carrying value by
approximately ten percent.
Impairment of Long-Lived Assets and Definite-Lived Intangibles
We assess the recoverability of long-lived assets, including property, plant
and equipment and definite-lived intangible assets, whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In such cases, if the sum of the expected cash flows, undiscounted
and without interest, resulting from use of the asset is less than the carrying
amount, an impairment loss is recognized based on the difference between the
carrying amount and the fair value of the assets. When determining future cash
flow estimates, we consider historical operating results, as adjusted to reflect
current and anticipated operating conditions. Estimating future cash flows
requires significant judgment by us in such areas as future economic conditions,
industry specific conditions and necessary capital expenditures. The use of
different assumptions or estimates for future cash flows could produce different
impairment amounts (or none at all) for long-lived assets, including
identifiable intangible assets subject to amortization. Significant assumptions
which are reasonably possible of changing in future periods relate to projection
of future cash flows generated by the long-lived assets which are dependent on
projections of company-wide profitability and capital expenditures for
maintaining our network in future periods. In addition, estimates of the cash
generating useful lives are also critical to such evaluations.
Revenue Recognition
We recognize revenue when evidence of an arrangement exists, the earnings
process is complete and collectability is reasonably assured. We recognize
service revenues based upon usage of our local exchange network and facilities
and contract fees. In general, fixed fees for local telephone, Internet access,
television and certain other services are billed one month in advance and
recognized the following month when earned. Revenue from other products that are
not fixed fee or that exceed contracted amounts is recognized when such services
are provided.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts reflects reserves for customer
receivables to reduce receivables to amounts expected to be collected. In
estimating uncollectible amounts, management considers factors such as current
overall economic conditions, industry-specific economic conditions, historical
customer performance and anticipated customer performance. While we believe our
process effectively addresses our exposure for doubtful accounts, changes in
economic, industry or specific customer conditions may require adjustment to the
allowance for doubtful accounts recognized by us.
Income Taxes
Management calculates the income tax provision, current and deferred income
taxes along with the valuation allowance based upon various complex estimates
and interpretations of income tax laws and regulations. Deferred tax assets are
reduced by a valuation allowance to the extent that it is more likely
42--------------------------------------------------------------------------------
Table of Contents
than not that they will not be realized. The most significant assumption in this
process are projections of future income which are reasonably possible of
changing in future periods.
Employee-Related Benefits
We incur certain employee-related costs associated with pensions and
post-retirement health care benefits. In order to measure the expense associated
with these employee-related benefits, management must make a variety of
estimates, including discount rates used to measure the present value of certain
liabilities, assumed rates of return on assets set aside to fund these expenses,
compensation increases, employee turnover rates, anticipated mortality rates and
anticipated healthcare costs. The estimates used by management are based on our
historical experience, as well as current facts and circumstances. We use
third-party specialists to assist management in appropriately measuring the
expenses associated with these employee-related benefits. Different estimates
could result in our recognizing different amounts of expense over different time
periods.
The discount rate used for determining the year-end benefit plan obligation
was generally calculated using a weighting of expected benefit payments and
rates associated with high-quality U.S. corporate bonds for each year of
expected payment to derive a single estimated rate at which the benefits could
be effectively settled.
The estimated return on plan assets was based on historical trends combined
with long-term expectations. In selecting the rate of return on plan assets for
purposes of determining net periodic benefit cost, we considered economic
forecasts for the types of investments held by the plans (primarily equity and
fixed income investments), and the plans' asset allocations. While primary
emphasis was on the economic forecasts of long-term returns, consideration was
given to the past performance of the plans' assets. The assumption is based on
consideration of all inputs, with a focus on long-term trends to avoid
short-term market influences. Assumptions are not changed unless structural
trends in the underlying economy are identified, our asset strategy changes, or
there are significant changes in other inputs. The method for selecting the
expected return on plan assets did not change from prior periods.
[ Back To SIP Trunking Home's Homepage ]
|
NEW Bring Your Own Device
(BYOD): HTML5 and Google's WebRTC are
transforming our industry: The disaggregation of the telecom industry has long
been talked about, while available solutions remain
vertically integrated in spite of a growing industry of
standards-based individual components...
NEW SSOA - SIP Service Oriented Architecture™:
Cloud and large enterprise communications
and collaboration infrastructure: This eBook introduces eZuce's SIP Service Oriented
Architecture (SSOA). SSOA is a 'carrier-class'
system that offers the demanding global enterprise
a modern built-for-the-cloud and highly
scalable...
NEW Benefits of Broadvox VAR Partner Program: We built our Partner Program to work for you. We understand that different
types of partners have different needs, and we don't play favorites. When
you partner with Broadvox, every member of our team stands behind you
and your customers 100%... 
What's New?
