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| PAETEC Holding Corp. Announces 2007 First Quarter Results |
FAIRPORT, N.Y.--(BUSINESS WIRE)--May 9, 2007--PAETEC Holding Corp. (NASDAQ GS: PAET) today announced 2007 first quarter financial and operating results. As previously announced, PAETEC Corp. completed its merger with US LEC Corp. on February 28, 2007, creating one of the largest competitive telecommunications providers in the United States. Highlights of the combined company's 2007 first quarter, which includes the results of US LEC's operations only for March 2007, included:
-- Revenue of $194.0 million, which represented a 37.8% increase
over first quarter 2006 revenue of $140.8 million;
-- Adjusted EBITDA* of $34.2 million, which represented a 52.5%
increase over 2006 first quarter adjusted EBITDA of $22.4
million;
-- Net loss of ($5.8) million versus $12.5 million in net income
in 2006 first quarter;
-- Free cash flow* of $19.0 million, which represented the 17th
consecutive quarter in which PAETEC Holding or its predecessor
generated positive free cash flow; and
-- 145.4% increase in the number of access line equivalents, from
1,038,024 as of March 31, 2006 to 2,547,456 as of March 31,
2007.
* Neither adjusted EBITDA nor free cash flow is a measurement of financial performance under accounting principles generally accepted in the United States. For a quantitative reconciliation of the differences between adjusted EBITDA and net loss (income), as net loss (income) is calculated in accordance with generally accepted accounting principles, see the accompanying tables. PAETEC Holding defines free cash flow as adjusted EBITDA minus capital expenditures. Quarterly Performance Total revenue for the 2007 first quarter increased 37.8% to $194.0 million from $140.8 million for the 2006 first quarter. Adjusted EBITDA for the 2007 first quarter increased 52.5% to $34.2 million over adjusted EBITDA for the 2006 first quarter of $22.4 million. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of total revenue, was 17.6% for the 2007 first quarter versus an adjusted EBITDA margin of 15.9% for the 2006 first quarter. Net loss for the 2007 first quarter was ($5.8) million compared to net income of $12.5 million for the first quarter of 2006, resulting primarily from the write-off of $9.8 million in debt issuance costs related to prior credit facilities that were terminated on February 28, 2007 as part of the merger closing transactions. Increased depreciation and amortization expense of $5.6 million and increased interest expense of $11.8 million also contributed to the change and resulted primarily from the depreciation of US LEC's assets in the combined company's results of operations from March 1, 2007 and increased debt levels incurred in connection with PAETEC's June 2006 leveraged recapitalization and in connection with the merger. The increase in revenue--and subsequently adjusted EBITDA--was driven by an increase in network services revenue of 42.3%. Network services revenue outpaced overall revenue growth as our rapidly growing MPLS VPN product sales continue to complement historically strong integrated voice and data T1 sales. The rapid growth in network services revenue offset the integrated services revenue growth of 1.1% as that business line has an annual revenue cycle and tends to provide uneven results on a quarterly basis. Carrier Services had a 28.5% growth rate period to period due primarily to the addition of the US LEC carrier services segment. For the 2007 first quarter operating results, US LEC results accounted for $37.4 million in revenue. Sequential Performance 2007 first quarter revenue of $194.0 million represented an increase of 28.1% over 2006 fourth quarter revenues and reflected the addition of US LEC results for March 2007 and continued access line additions. As previously mentioned, access line growth has been generated through robust MPLS VPN and integrated voice and data T1 sales. Adjusted EBITDA of $34.2 million for 2007 first quarter represented a 33.8% increase over adjusted EBITDA for the 2006 fourth quarter, also reflecting the addition of US LEC results for March 2007, as well as solid expense management coupled with the strong revenue growth. Capital Expenditures PAETEC Holding continues to invest in the enhancement of its network and product offerings. Capital expenditures for the 2007 first quarter increased to $15.2 million from $12.3 million in the 2006 first quarter. Approximately $2.1 million in capital expenditures resulted from the inclusion of US LEC's capital expenditures for March 2007. The remaining capital expenditures for the 2007 first quarter were associated with investments in the PAETEC Holding network, including expansion in the switching and information technology infrastructure. The 2006 quarter included the implementation of the new 5ESS switch in Newark N.J. during that period. Financing and Liquidity Update Concurrently with the closing of the merger, PAETEC Holding closed on its new $850 million credit facility consisting of a $50 million five-year revolving credit facility and an $800 million six-year term loan facility. As of March 31, 2007, the revolver remained undrawn, there was $800 million outstanding under the term loan and PAETEC Holding had $53.4 million of cash on hand. Pro Forma Financial Snapshot If the historical results of operations of PAETEC Corp. were combined with the historical results of operations of US LEC Corp. as if the merger had occurred on January 1, 2006, and without giving effect to any pro forma adjustments or unrealized synergies, PAETEC Holding's revenue would have increased to $267.6 million for the 2007 first quarter from $243.6 million for the 2006 first quarter, yielding a growth rate of 9.9%. Adjusted EBTIDA would have demonstrated an increase of $11.4 million, or 30.6%, from $37.2 million in the 2006 first quarter to $48.6 million in the 2007 first quarter, reflecting solid expense management coupled with the revenue growth as well as some initial synergies achieved as a result of the US LEC merger. The increase in pro forma adjusted EBITDA also would have resulted in an increase in pro forma adjusted EBITDA margins, from 15.3% in the 2006 first quarter to 18.1% in the 2007 first quarter. Full Year 2007 Outlook If the merger had occurred on January 1, 2007 and, accordingly, US LEC's operations were included for all of 2007, PAETEC Holding anticipates that for the full year 2007 the combined company would generate the full year 2007 results below. ($ in millions) Full Year 2007 Revenue $1,110 to $1,125 Adjusted EBTIDA $195 to $205 Capital Expenditures $80 to $90 PAETEC Holding anticipates that actual results for full year 2007 (which as noted above will include only ten months of US LEC operations) will include revenue in the range of $1,037 million to $1,052 million, adjusted EBITDA in the range of $181 million to $191 million and capital expenditures in the range of $75 million to $85 million. Forward-Looking Statements Except for statements that present historical facts, 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. In some cases, you can identify these statements by such forward-looking words as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would," or similar expressions. These statements, which include PAETEC's forecasts of total revenue, adjusted EBTIDA and capital expenditures involve known and unknown risks, uncertainties and other factors that may cause PAETEC's actual operating results, financial position, levels of activity or performance to be materially different from those expressed or implied by such forward-looking statements. Some of these risks, uncertainties and factors are discussed under the caption "Risk Factors" in PAETEC's 2006 Annual Report on Form 10-K and in PAETEC's subsequently filed SEC reports. They include, but are not limited to, the following risks, uncertainties and other factors: changes in regulation and the regulatory environment; competition in the markets in which PAETEC operates; the continued availability of necessary network elements from competitors; PAETEC's ability to manage and expand its business and execute its acquisition strategy, to adapt its product and service offerings to changes in customer preferences, and to convert its existing network to a network with more advanced technology; effects of network failures, systems breaches, natural catastrophes and other service interruptions; and PAETEC's ability to service its indebtedness and to raise capital in the future. PAETEC disclaims any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. About PAETEC PAETEC (NASDAQ GS: PAET) is personalizing business communications for medium-sized and large businesses, enterprise organizations and institutions across the United States. We offer a comprehensive suite of voice, data, and IP services, as well as enterprise communications management software, network security solutions, CPE, and managed services. For more information, visit www.paetec.com.
PAETEC Holding Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands)
Three Months
Ended
Three Months Ended March 31, December 31,
----------------------------- --------------
2007 2006 2006
----------------- ----------- --------------
REVENUE:
Network services
revenue $ 158,438 $ 111,335 $ 118,941
Carrier services
revenue 27,312 21,260 22,876
Integrated solutions
revenue 8,267 8,180 9,671
----------------- ----------- --------------
TOTAL REVENUE 194,017 140,775 151,488
COST OF SALES (exclusive
of depreciation and
amortization shown
separately below) 91,361 67,398 72,780
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES (exclusive of
depreciation and
amortization shown
separately below and
inclusive of stock-
based compensation) 75,033 52,299 56,224
INTEGRATION/RESTRUCTURING
COSTS 105
LEVERAGED
RECAPITALIZATION COSTS - - 67
DEPRECIATION AND
AMORTIZATION 13,153 7,593 9,322
----------------- ----------- --------------
INCOME FROM OPERATIONS 14,365 13,485 13,095
CHANGE IN FAIR VALUE OF
SERIES A CONVERTIBLE
REDEEMABLE PREFERRED
STOCK CONVERSION RIGHT - (5,496) -
LOSS ON EXTINGUISHMENT OF
DEBT 9,834 - -
OTHER INCOME, net (1,220) (939) (1,167)
INTEREST EXPENSE 14,498 2,722 10,175
----------------- ----------- --------------
(LOSS) INCOME BEFORE
INCOME TAXES (8,747) 17,198 4,087
(BENEFIT FROM) PROVISION
FOR INCOME TAXES (2,898) 4,672 1,462
----------------- ----------- --------------
NET (LOSS) INCOME $ (5,849) $ 12,526 $ 2,625
================= =========== ==============
Adjusted EBITDA, as defined by PAETEC, represents net income before
interest, provision for taxes, depreciation and amortization, change
in fair value of Series A convertible redeemable preferred stock
conversion rights, stock-based compensation, loss on extinguishment
of debt, leveraged recapitalization costs, and
integration/restructuring costs, and, with respect to pro forma
adjusted EBITDA, loss related to investment in ETV. PAETEC's adjusted
EBITDA is a non-GAAP financial measure used by PAETEC's management,
together with GAAP measures such as revenue and cash flows from
operations, to assess PAETEC's historical and prospective operating
performance. Management uses adjusted EBITDA to enhance its
understanding of PAETEC's core operating performance, which
represents management's views concerning PAETEC's performance in the
ordinary ongoing and customary course of its operations.
Management also uses this measure to evaluate PAETEC's performance
relative to that of its competitors. This financial measure permits a
comparative assessment of PAETEC's operating performance, relative to
the company's performance based on its GAAP results, while isolating
the effects of certain items that may vary from period to period
without any correlation to core operating performance or that vary
widely among similar companies. The table below sets forth, for the
periods indicated, a reconciliation of the differences between
adjusted EBITDA and net (loss) income, as net (loss) income is
calculated in accordance with generally accepted accounting
principles.
Three Months
Ended
Three Months Ended March 31, December 31,
----------------------------- --------------
2007 2006 2006
----------------- ----------- --------------
Net (loss) income $ (5,849) $ 12,526 $ 2,625
Add back non-EBITDA items
included in net (loss)
income:
Depreciation and
amortization 13,153 7,593 9,322
Interest expense, net
of interest income 13,264 2,199 9,608
Provision for (benefit
from) income taxes (2,898) 4,672 1,462
----------------- ----------- --------------
EBITDA 17,670 26,990 23,017
----------------- ----------- --------------
Change in fair value of
Series A convertible
redeemable preferred
stock conversion right - (5,496) -
Stock-based compensation 6,584 932 2,476
Loss on extinguishment of
debt 9,834 - -
Leveraged
recapitalization costs - - 67
Integration/restructuring
costs 105 - -
----------------- ----------- --------------
Adjusted EBITDA $ 34,193 $ 22,426 $ 25,560
================= =========== ==============
PAETEC Holding Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
(Based on combination of historical results, without adjustment)
(in thousands)
Three Months
Three Months Ended Ended
March 31, December 31,
----------------------------------------
2007 2006 2006
----------- ---------- --------------
TOTAL REVENUE 267,576 243,572 260,789
COST OF SALES (exclusive of
depreciation and amortization
shown separately below) 125,958 117,648 127,703
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES (exclusive of
depreciation and
amortization shown
separately below and
inclusive of stock-based
compensation) 100,109 90,818 96,017
INTEGRATION/RESTRUCTURING
COSTS 1,919 - -
LEVERAGED RECAPITALIZATION
COSTS - - 67
DEPRECIATION AND AMORTIZATION 22,335 19,787 21,309
----------- ---------- --------------
INCOME FROM OPERATIONS 17,255 15,319 15,693
CHANGE IN FAIR VALUE OF SERIES
A CONVERTIBLE REDEEMABLE
PREFERRED STOCK CONVERSION
RIGHT - (5,496) -
LOSS ON EXTINGUISHMENT OF DEBT 9,834 - -
OTHER INCOME, net (1,594) (939) (1,167)
INTEREST EXPENSE 17,999 7,267 14,928
----------- ---------- --------------
(LOSS) INCOME BEFORE INCOME
TAXES (8,984) 14,487 1,932
(BENEFIT FROM) PROVISION FOR
INCOME TAXES (2,897) 4,672 1,462
----------- ---------- --------------
NET (LOSS) INCOME $ (6,087) $ 9,815 $ 470
=========== ========== ==============
Pro Forma results for the 2007 three-month period do not include
approximately $11.8 million of costs related to the early
extinguishment of US LEC debt.
The table below sets forth, for the periods indicated, a
reconciliation of the differences between pro forma adjusted EBITDA
and pro forma net (loss) income, as pro forma net (loss) income is
calculated based on the combination of historical results of PAETEC
Holding and its predecessor and of US LEC for such periods.
Three Months
Three Months Ended Ended
March 31, December 31,
----------------------------------------
2007 2006 2006
----------- ---------- --------------
Net (loss) income $ (6,087) 9,815 $ 470
Add back non-EBITDA items
included in net (loss)
income:
Depreciation and
amortization 22,335 19,787 21,309
Interest expense, net of
interest income 16,427 6,744 14,361
Provision for (benefit from)
income taxes (2,897) 4,672 1,462
----------- ---------- --------------
EBITDA 29,778 41,018 37,602
----------- ---------- --------------
Change in fair value of Series
A convertible redeemable
preferred stock conversion
right - (5,496) -
Stock-based compensation 7,029 1,649 3,301
Loss on extinguishment of debt 9,834 - -
Leveraged recapitalization
costs - - 67
Integration/restructuring
costs 1,919 - 2,322
Loss related to investment in
ETV - - 713
----------- ---------- --------------
Adjusted EBITDA $ 48,560 $ 37,171 $ 44,005
=========== ========== ==============
PAETEC Holding has omitted a quantitative reconciliation of forecasted
2007 adjusted EBITDA amounts included in this release to forecasted
2007 net (loss) income, because forecasted 2007 net (loss) income
cannot be calculated with reasonable accuracy until, among other
matters, PAETEC Holding finalizes adjustments under the purchase
method of accounting for the US LEC merger and until it completes its
analysis of limitations that may be placed on its ability to use net
operating loss carryforwards under Section 382 of the Internal
Revenue Code. The manner in which each of these items is finalized
may have a material affect on PAETEC Holding's net (loss) income for
2007.
PAETEC Holding Corp. and Subsidiaries
Selected Financial and Operating Data
(in thousands)
March 31, 2007 December 31, 2006
-------------- -------------------
Consolidated Balance Sheet Data:
(in thousands)
Cash and cash equivalents $ 53,437 $ 46,885
Accounts receivable, net 130,771 79,740
Property and equipment, net (1) 293,398 167,566
Accounts payable $ 36,899 $ 27,321
Other accrued expenses 80,934 43,824
Current portion of long-term debt 8,091 2,856
Long-term debt 792,039 370,930
Operating Data
(as of period end):
Geographic markets served 52 29
Number of switches deployed 40 13
Total digital T1 transmission lines
installed 106,144 52,371
Network services digital T1
transmission lines installed 95,827 42,017
Percentage of network services
digital T1 transmission lines
disconnected 1.9% 9.2%
Total access line equivalents
installed 2,547,456 1,256,904
Total employees 2,235 1,312
(1) Property and equipment, net, as of March 31, 2007 does not reflect
the impact, if any, of a fair value assessment of such assets
acquired related to the merger with US LEC Corp.
CONTACT: PAETEC |