solidated munications (CNSL) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019 Condensed Consolidated Statements of Operations (Unaudited, in thousands) | | Quarter Ended June 30, 2019 | Quarter Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $333,532 | $350,221 | $672,181 | $706,260 | | Income from operations | $14,300 | $5,427 | $31,020 | $14,666 | | Net loss | $(7,312) | $(10,560) | $(14,498) | $(21,758) | | Net loss per share (basic and diluted) | $(0.10) | $(0.15) | $(0.21) | $(0.32) | Condensed Consolidated Balance Sheets (Unaudited, in thousands) | | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $200,596 | $198,143 | | Total assets | $3,485,710 | $3,535,261 | | Total current liabilities | $264,111 | $283,614 | | Total liabilities | $3,126,537 | $3,119,607 | | Total shareholders' equity | $359,173 | $415,654 | Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $163,262 | $194,371 | | Net cash used in investing activities | $(105,686) | $(123,164) | | Net cash used in financing activities | $(56,725) | $(76,222) | | Change in cash and cash equivalents | $851 | $(5,015) | Notes to Unaudited Condensed Consolidated Financial Statements This subsection details disclosures for financial statements, covering accounting standards, revenue, debt, equity, and contingencies - Effective January 1, 2019, the company adopted the new lease standard (ASU 2016-02), resulting in the recognition of right-of-use assets and lease liabilities of approximately $30.9 million for historical operating leases[32] Disaggregation of Revenue (in thousands) | Revenue Category | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Commercial and carrier | $149,064 | $153,162 | | Consumer | $129,644 | $136,226 | | Subsidies | $18,134 | $20,979 | | Network access | $34,198 | $37,338 | | Total operating revenues | $333,532 | $350,221 | - As of June 30, 2019, total long-term debt was approximately $2.3 billion The company was in compliance with all covenants under its Credit Agreement and the indenture governing its Senior Notes[76][84][89] - On April 25, 2019, the company announced the elimination of quarterly dividends on its stock, beginning in the second quarter of 2019, to prioritize deleveraging[111] - The company is involved in legal proceedings concerning access charges with Sprint and Verizon and a Gross Receipts Tax dispute in Pennsylvania Management does not expect these matters to have a material adverse impact on financial results[137][145][148] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition and operational results, covering performance, trends, regulatory impacts, liquidity, and capital resources Results of Operations This subsection analyzes operating results, showing a 5% decrease in total operating revenues offset by lower expenses, leading to increased income from operations Operating Revenues Comparison (in millions) | Revenue Category | Q2 2019 | Q2 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Commercial and carrier | $149.1 | $153.2 | $(4.1) | (3)% | | Consumer | $129.6 | $136.2 | $(6.6) | (5)% | | Subsidies | $18.1 | $20.9 | $(2.8) | (13)% | | Network access | $34.2 | $37.4 | $(3.2) | (9)% | | Total operating revenues | $333.5 | $350.2 | $(16.7) | (5)% | - Commercial data and transport revenues grew by $1.0 million (1%) in Q2 2019 YoY, driven by Metro Ethernet and VoIP services, while commercial voice services revenue fell by $4.3 million (8%) due to a 7% decline in access lines[188][190] - Consumer revenues saw a $1.6 million (3%) increase in broadband due to price increases, but this was offset by a $1.8 million (8%) decrease in video and a $6.4 million (12%) decrease in voice services, reflecting connection losses[193][195][196] - Operating expenses declined primarily due to cost-saving initiatives reducing employee-related costs, lower pension costs from frozen benefit plans, and a decrease in video programming costs corresponding to subscriber losses[201][202] Regulatory Matters This subsection details the impact of federal and state regulations on revenues, including CAF Phase II funding, ICC reform, and FairPoint acquisition commitments - The company accepted CAF Phase II funding, replacing previous support with $48.1 million annually through 2020 This funding is tied to a commitment to serve approximately 124,500 locations with broadband speeds of at least 10 Mbps downstream / 1 Mbps upstream by the end of 2020[215][216] - As part of the FairPoint acquisition, the company has regulatory commitments to make specific capital investments in Maine, New Hampshire, and Vermont through 2020, totaling a percentage of state revenues or fixed dollar amounts annually[231] - The FCC's reform of intercarrier compensation (ICC) continues to reduce network access revenue, with an anticipated decline of approximately $1.1 million for the full year 2019[211][278] Liquidity and Capital Resources This subsection outlines the company's liquidity, cash flow, and capital structure, highlighting dividend elimination for deleveraging and sufficient resources for future obligations Summary of Cash Flows (in thousands) | | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Operating activities | $163,262 | $194,371 | | Investing activities | $(105,686) | $(123,164) | | Financing activities | $(56,725) | $(76,222) | - Capital expenditures for the remainder of 2019 are projected to be between $90.0 million and $100.0 million, with a focus on success-based projects for consumer and commercial initiatives[247] - The company eliminated its quarterly dividend payments beginning in Q2 2019 to focus on deleveraging and create long-term shareholder value This action freed up approximately $27.6 million per quarter[263][266] - Management believes that cash flows from operations, existing cash, and available borrowings under the revolving credit facility will be sufficient to fund anticipated uses of cash for at least the next twelve months[268] Quantitative and Qualitative Disclosures About Market Risk This section addresses the company's market risk exposure, primarily from interest rate fluctuations on variable-rate debt, and mitigation strategies - The company's primary market risk exposure is from interest rate fluctuations on its variable-rate debt obligations[284] - Based on outstanding variable-rate debt as of June 30, 2019, a 1.00% change in market interest rates would result in an approximate $6.8 million change in annual interest expense[285] - As of June 30, 2019, the fair value of the company's interest rate swap agreements was a net liability of $29.4 million[286] Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures, with no material changes in internal control over financial reporting - Management, including the CEO and CFO, evaluated and concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[287] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[289] PART II. OTHER INFORMATION Legal Proceedings This section confirms the company's involvement in routine litigation, with management not expecting a material adverse impact on financial results - The company is involved in routine litigation and regulatory issues common to the telecommunications industry[292] - Management does not expect the outcome of any of these legal matters to have a material adverse impact on the company's business, results of operations, financial condition, or cash flows[292] Exhibits This section lists concurrently filed exhibits, including CEO/CFO certifications and financial statements in Inline XBRL format - The report includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[294] - Financial information is provided in Inline eXtensible Business Reporting Language (XBRL) format as an exhibit[294] SIGNATURES The report was duly signed on August 2, 2019, by C. Robert Udell Jr., Chief Executive Officer, and Steven L. Childers, Chief Financial Officer[298]