ITC^DeltaCom Announces Third Quarter 2010 Results

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Nov 15, 2010, 06:40 ET

HUNTSVILLE, Ala., Nov. 15, 2010 /PRNewswire-FirstCall/ -- ITC^DeltaCom, Inc. (OTC Bulletin Board: ITCD), a leading provider of integrated communications services to customers in the southeastern United States, today announced its operating and financial results for the quarter ended September 30, 2010. These results are following the October 1, 2010 announcement of the definitive agreement for purchase of ITC^DeltaCom by EarthLink, Inc.

For the quarter ended September 30, 2010, ITC^DeltaCom reported total operating revenues of $110.9 million, net loss of $4.7 million, and adjusted EBITDA* of $21.8 million.

"Our third quarter results reflect the strengthening operational momentum we are seeing in the business in response to the investments we have been making to build a company with sustainable revenue growth," said Randall E. Curran, ITC^DeltaCom's Chief Executive Officer. "Our current operational trajectory backed by the scale and resources of EarthLink will drive increased value for all our stakeholders."

Among its operating highlights for the third quarter, ITC^DeltaCom:

recorded operating income of $7.0 million compared to $5.3 million for the third quarter of 2009, and a net loss of $4.7 million compared to a net loss of $2.1 million for the third quarter of 2009;

recorded adjusted EBITDA* of $21.8 million, a 5.6% decrease from $23.1 million for the third quarter of 2009;

recorded an increase of 0.02% in total operating revenues over the second quarter of 2010, which was a decrease in total operating revenues of $5.5 million, or 4.7%, compared to the third quarter of 2009;

continued to derive benefit from investments in process redesign and other efficiency gains, resulting in selling, operations and administration expense of $38.7 million compared to $41.4 million for the third quarter of 2009;

generated $20.2 million in net cash provided by operating activities, compared to $14.6 million generated for the third quarter of 2009; and

generated adjusted unlevered free cash flow** of $7.0 million, which decreased from $12.8 million in the third quarter of 2009 as the result of an increase in capital expenditures of $4.5 million and a decrease of $1.3 million in adjusted EBITDA in third quarter 2010.

"Total revenue for the third quarter of $110.9 million represents the best sequential quarterly result since second quarter of 2008," said Richard E. Fish, ITC^DeltaCom's Chief Financial Officer. "The combination of Deltacom with EarthLink creates a company with the financial strength and national presence necessary to compete and win in today's marketplace."

A supplemental presentation of information complementary to the information presented in this release is available on our Investors page at www.deltacom.com.

*Adjusted EBITDA is defined by ITC^DeltaCom as net income (loss) before interest income and expense, net, provision for income taxes, depreciation and amortization, stock-based compensation, non-cash loss on extinguishment of debt, write-off of debt discount and issuance cost, prepayment penalties on debt, equity commitment fees, restructuring expenses, merger-related expenses, asset impairment loss and other income or loss, all as disclosed in the consolidated statements of operations and comprehensive loss. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles. For information about management's reasons for providing data with respect to adjusted EBITDA, the limitations associated with the use of adjusted EBITDA and a quantitative reconciliation of adjusted EBITDA to net income (loss), as net income (loss) is calculated in accordance with generally accepted accounting principles, see the accompanying tables captioned "Adjusted EBITDA Reconciliation."

**Adjusted unlevered free cash flow is defined by ITC^DeltaCom as adjusted EBITDA (as defined above) less capital expenditures (including equipment purchased through capital leases) and changes in accounts payable – construction, all as disclosed in the consolidated statements of cash flows. Adjusted unlevered free cash flow is not a measurement of financial performance under generally accepted accounting principles. For information about management's reasons for providing data with respect to adjusted unlevered free cash flow, the limitations associated with the use of adjusted unlevered free cash flow, and a quantitative reconciliation of adjusted unlevered free cash flow to net cash provided by operating activities, as net cash provided by operating activities is calculated in accordance with generally accepted accounting principles, see the accompanying tables captioned "Adjusted Unlevered Free Cash Flow Reconciliation."

ABOUT ITC^DELTACOM, INC.

ITC^DeltaCom, Inc., headquartered in Huntsville, Alabama, provides, through its operating subsidiaries, integrated telecommunications and technology services to businesses and other communications providers in the southeastern United States. ITC^DeltaCom has a fiber optic network spanning approximately 12,483 route miles, and offers a comprehensive suite of data and voice communications services, including high-speed or broadband data communications (which consist of Ethernet and Internet access connectivity), local exchange, long-distance and conference calling, and mobile data and voice services. ITC^DeltaCom is one of the largest competitive telecommunications providers in its primary eight-state region. For more information about ITC^DeltaCom, visit ITC^DeltaCom's web site at http://www.deltacom.com.

FORWARD-LOOKING STATEMENTS

Except for the historical and present factual information contained herein, this release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this release, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions as they relate to ITC^DeltaCom, Inc. or its management are intended to identify these forward-looking statements. All statements by the Company regarding its expected financial position, revenues, liquidity, cash flow and other operating results, balance sheet improvement, business strategy, financing plans, forecasted trends related to the markets in which it operates, legal proceedings and similar matters are forward-looking statements. The Company's actual results could be materially different from its expectations because of various risks. These risks, some of which are discussed under the caption "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, and in the Company's subsequent SEC filings, include the Company's dependence on new product development, rapid technological and market changes, the Company's dependence upon rights of way and other third-party agreements, debt service and other cash requirements, liquidity constraints and risks related to future growth and rapid expansion. Other important risk factors that could cause actual events or results to differ from those contained or implied in the forward-looking statements include, without limitation, customer attrition, delays or difficulties in deployment and implementation of colocation arrangements and facilities, appeals of or failures by third parties to comply with rulings of governmental entities, inability to meet installation schedules, general economic and business conditions, failure to maintain underlying service/vendor arrangements, competition, adverse changes in the regulatory or legislative environment, and various other factors beyond the Company's control. The aforementioned risks also include those related to the pending acquisition of our company by EarthLink, Inc., including but not limited to our ability to obtain required regulatory approvals and to consummate the transaction. ITC^DeltaCom disclaims any responsibility to update these forward-looking statements.

ITC^DeltaCom, Inc. Financial Highlights (In thousands, except share and per share data)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2010	2009	2010	2009
OPERATING REVENUES:
Integrated communications services	$ 90,118	$ 97,668	$ 274,523	$ 299,797
Wholesale services	16,330	14,564	45,900	44,807
Equipment sales and related services	4,472	4,167	12,537	12,373

TOTAL OPERATING REVENUES	110,920	116,399	332,960	356,977

COSTS AND EXPENSES:
Cost of services and equipment, excluding depreciation and amortization	51,391	52,627	148,170	163,731
Selling, operations and administration	38,670	41,378	118,744	126,865
Depreciation and amortization	13,810	17,110	42,280	51,245

Total operating expenses	103,871	111,115	309,194	341,841

OPERATING INCOME	7,049	5,284	23,766	15,136

OTHER (EXPENSE) INCOME:
Interest expense	(9,644)	(7,453)	(22,869)	(22,544)
Interest income	11	9	22	38
Write-off of debt discount and issuance cost	—	—	(7,948)	—
Other income (expense)	(50)	43	268	(89)
Merger cost	(2,064)	—	(2,064)	—

Total other expense, net	(11,747)	(7,401)	(32,591)	(22,595)

LOSS BEFORE INCOME TAXES	(4,698)	(2,117)	(8,825)	(7,459)

INCOME TAX EXPENSE	—	—	—	—

NET LOSS	$ (4,698)	$ (2,117)	$ (8,825)	$ (7,459)

BASIC AND DILUTED NET LOSS PER COMMON SHARE	$ (0.06)	$ (0.03)	$ (0.11)	$ (0.09)

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING	83,660,985	81,136,456	83,031,819	80,987,101

COMPREHENSIVE INCOME (LOSS)
NET LOSS	$ (4,698)	$ (2,117)	$ (8,825)	$ (7,459)
OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized gains on derivative instrument designated as cash flow hedging instrument, net of tax	—	2,275	—	5,610

COMPREHENSIVE INCOME (LOSS)	$ (4,698)	$ 158	$ (8,825)	$ (1,849)

ITC^DeltaCom, Inc. Quarterly Highlights (Unaudited) (In thousands)

	Three Months Ended

	Sept 30, 2010	June 30, 2010	March 31, 2010	Dec 31, 2009	Sept 30, 2009
Integrated communications services revenues:
Long distance and access	$ 14,263	$ 14,015	$ 14,153	$ 14,007	$ 15,375
Business local, data and internet	75,855	77,272	78,965	80,352	82,293

Total integrated communications services revenues	90,118	91,287	93,118	94,359	97,668

Wholesale services revenues:
Broadband transport	14,265	13,046	11,917	12,327	12,284
Local interconnection	70	93	120	127	181
Directory assistance and operator services	1,000	964	919	925	986
Other	995	1,178	1,333	1,215	1,113

Total wholesale services revenues	16,330	15,281	14,289	14,594	14,564

Equipment sales and related services revenues	4,472	4,332	3,733	3,394	4,167

Total operating revenues	110,920	110,900	111,140	112,347	116,399

COSTS AND EXPENSES:
Cost of services and equipment, excluding depreciation and amortization	51,391	47,634	49,144	48,899	52,627
Selling, operations and administration expense	38,670	39,974	40,100	44,714	41,378
Depreciation and amortization	13,810	13,648	14,822	17,819	17,110

Total operating expenses	103,871	101,256	104,066	111,432	111,115

OPERATING INCOME	$ 7,049	$ 9,644	$ 7,074	$ 915	$ 5,284

ITC^DeltaCom, Inc. Balance Sheet and Other Financial Highlights (In thousands)

Balance Sheet Data (at period end):	September 30, 2010	December 31, 2009

	(Unaudited)
Cash and cash equivalents (unrestricted)	$ 81,798	$ 67,786
Working capital	43,106	40,371
Total assets	385,932	368,494
Long-term liabilities	320,271	303,747
Stockholders' deficit	(26,173)	(16,724)
Total liabilities and stockholders' deficit	385,932	368,494


	Three Months Ended

	Sept 30, 2010	June 30, 2010	March 31, 2010	Dec. 31, 2009	Sept 30, 2009
Other Financial Data:	Sept 30, 2010	June 30, 2010	March 31, 2010	Dec. 31, 2009	Sept 30, 2009
	(Unaudited)
Capital expenditures(1)	$ 14,768	$ 18,589	$ 11,217	$ 24,570	$ 10,315
Cash flows (used in) provided by:
Operating activities	20,173	19,959	19,039	15,579	14,622
Investing activities	(14,605)	(18,321)	(10,266)	(24,693)	(10,385)
Financing activities	(315)	1,033	(2,685)	(573)	(576)
Adjusted EBITDA(2)	21,755	23,475	22,830	19,936	23,094
Adjusted unlevered free cash flow(3)	6,987	4,886	11,613	(4,634)	12,779

ITC^DeltaCom, Inc. Balance Sheet and Other Financial Highlights (continued) (In thousands)

Notes:
(1.) Includes equipment purchased through capital leases and changes in accrued capital related costs.
(2.) Adjusted EBITDA is defined by ITC^DeltaCom as net income (loss) before interest income and expense, net, provision for income taxes, depreciation and amortization, stock-based compensation, non-cash loss on extinguishment of debt, write-off of debt discount and issuance cost, prepayment penalties on debt, equity commitment fees, restructuring expenses, merger-related expenses, asset impairment loss and other income or loss, all as disclosed in the consolidated statements of operations and comprehensive loss. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles. For information about management's reasons for providing data with respect to adjusted EBITDA and a quantitative reconciliation of adjusted EBITDA to net income (loss), as net income (loss) is calculated in accordance with generally accepted accounting principles, see the accompanying tables captioned "Adjusted EBITDA Reconciliation."

(3.) Adjusted unlevered free cash flow is defined by ITC^DeltaCom as adjusted EBITDA, as defined above in Note (2), less capital expenditures (including equipment purchased through capital leases) and changes in accounts payable–construction, all as disclosed in the consolidated statements of cash flows. Adjusted unlevered free cash flow is not a measurement of financial performance under generally accepted accounting principles. For information about management's reasons for providing data with respect to adjusted unlevered free cash flow and for a quantitative reconciliation of adjusted unlevered free cash flow to net cash provided by operating activities, as net cash provided by operating activities is calculated in accordance with generally accepted accounting principles, see the accompanying tables captioned "Adjusted Unlevered Free Cash Flow Reconciliation."

ITC^DeltaCom, Inc.

Adjusted EBITDA Reconciliation

(In thousands)

(Unaudited)

Adjusted EBITDA is defined by ITC^DeltaCom as net income (loss) before interest income and expense, net, provision for income taxes, depreciation and amortization, stock-based compensation, non-cash loss on extinguishment of debt, write-off of debt discount and issuance cost, prepayment penalties on debt, equity commitment fees, restructuring expenses, merger-related expenses, asset impairment loss and other income or loss, all as disclosed in the consolidated statements of operations and comprehensive loss. Not all of these adjustments are applicable in every period. Adjusted EBITDA is not a financial measurement under generally accepted accounting principles ("GAAP").See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview—Adjusted EBITDA" in our Annual Report on Form 10-K for our 2009 fiscal year for additional information regarding management's reasons for including adjusted EBITDA data and for material limitations with respect to the usefulness of this measure. The following tables present adjusted EBITDA amounts for the fiscal quarters indicated and also sets forth a quantitative reconciliation of adjusted EBITDA to net income (loss), as net income (loss) is calculated in accordance with GAAP (in thousands):


		Three Months Ended

		Sept 30, 2010	June 30, 2010	March 31, 2010	Dec. 31, 2009	Sept 30, 2009
		(Unaudited)
Net income (loss)		$ (4,698)	$ (6,516)	$ 2,389	$ (3,516)	$ (2,117)
Add: non-EBITDA items included in net income (loss):
	Interest (income) and expense, net	9,633	8,379	4,837	4,889	7,444
	Depreciation and amortization	13,810	13,648	14,822	17,819	17,110
	Stock-based compensation	896	183	934	1,202	700
	Write-off of debt discount and issuance cost	—	7,948	—	—	—
	Other (income) loss	50	(167)	(152)	(458)	(43)
	Merger cost	2,064	—	—	—	—

Adjusted EBITDA		$ 21,755	$ 23,475	$ 22,830	$19,936	$ 23,094

ITC^DeltaCom, Inc.

Adjusted Unlevered Free Cash Flow Reconciliation

(In thousands)

(Unaudited)

Adjusted unlevered free cash flow is defined by ITC^DeltaCom as adjusted EBITDA (as defined above) less capital expenditures (including equipment purchased through capital leases) and changes in accounts payable–construction, all as disclosed in the consolidated statements of cash flows. Adjusted unlevered free cash flow is not a measurement of financial performance under GAAP. ITC^DeltaCom has included data with respect to adjusted unlevered free cash flow because its management considers adjusted unlevered free cash flow to be a useful, supplemental indicator of its operating performance. When measured over time, adjusted unlevered free cash flow provides supplemental information to investors concerning the growth rate in ITC^DeltaCom's operating results and its ability to generate cash flows to satisfy mandatory debt service requirements and make other mandatory, non-discretionary expenditures. ITC^DeltaCom's management believes that consideration of adjusted unlevered free cash flow should be supplemental, however, because adjusted unlevered free cash flow has limitations as an analytical financial measure, including the following:

adjusted unlevered free cash flow does not reflect ITC^DeltaCom's cash expenditures for changes in current operating assets and liabilities;
adjusted unlevered free cash flow does not reflect ITC^DeltaCom's cash expenditures for interest expense or accrued restructuring and merger costs, prepayment penalties on debt paid in cash, equity commitment fees, changes in restricted cash balances, or proceeds from sales of fixed assets;
ITC^DeltaCom does not pay income taxes due to net operating losses and, therefore, generates greater adjusted unlevered free cash flow than a comparable business that does pay income taxes; and
adjusted unlevered free cash flow may be calculated in a different manner by other companies in ITC^DeltaCom's industry, which limits its usefulness as a comparative measure.

ITC^DeltaCom's management compensates for these limitations by relying primarily on ITC^DeltaCom's results under GAAP to evaluate its operating performance and by considering independently the economic effects of the foregoing items that are not reflected in adjusted unlevered free cash flow. As a result of these limitations, adjusted unlevered free cash flow should not be considered as a measure of liquidity nor as an alternative to net cash provided by operating activities, cash used in investing activities, cash provided by (used in) financing activities or change in cash and cash equivalents, as calculated in accordance with GAAP. The following tables present adjusted unlevered free cash flow amounts for the fiscal quarters indicated and also set forth a quantitative reconciliation of adjusted unlevered free cash flow to net cash provided by operating activities, as net cash provided by operating activities is calculated in accordance with GAAP (in thousands):


	Three Months Ended

	Sept 30, 2010	June 30, 2010	March 31, 2010	Dec. 31, 2009	Sept 30, 2009
	(Unaudited)
Net cash provided by operating activities	$ 20,173	$ 19,959	$ 19,039	$ 15,579	$ 14,622

Adjustments to reconcile adjusted unlevered free cash flow to net cash provided by operating activities
Elements included in net cash provided by (used in) operating activities not included in adjusted unlevered free cash flow:
Total changes in current operating assets and liabilities	(8,508)	(3,207)	459	1,369	2,858
Provision for bad debts	(795)	(950)	(925)	(1,300)	(1,225)
Interest expense excluding interest paid in kind and in common stock, and amortization of debt issuance costs and debt discount, net of interest income	8,923	7,673	4,236	4,288	6,839
Other (income) loss	(102)	—	21	—	—
Merger cost	2,064	—	—	—	—

Adjusted EBITDA	21,755	23,475	22,830	19,936	23,094
Less:
Capital expenditures	(15,472)	(13,798)	(15,381)	(24,716)	(10,437)
Change in accounts payable –construction	704	(4,791)	4,164	146	122

Adjusted unlevered free cash flow	$ 6,987	$ 4,886	$ 11,613	$ (4,634)	$ 12,779