solidated munications (CNSL) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2021 Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Consolidated Communications Holdings, Inc. and its subsidiaries for the quarter ended March 31, 2021, including statements of operations, comprehensive income (loss), balance sheets, changes in shareholders' equity, and cash flows, along with accompanying notes detailing significant accounting policies, revenue recognition, earnings per share, investments, debt, and other financial disclosures Condensed Consolidated Statements of Operations This statement presents the company's net revenues, operating income, interest expense, and net income or loss for the reported quarters Condensed Consolidated Statements of Operations (in millions) | Metric | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :-------------------- | :--------------------------- | :--------------------------- | | Net revenues | $324.8 | $325.7 | | Income from operations | $38.3 | $37.4 | | Interest expense, net | $(48.4) | $(32.1) | | Loss on extinguishment of debt | $(12.0) | $0.2 | | Change in fair value of contingent payment rights | $(57.6) | — | | Net income (loss) | $(62.1) | $15.6 | | Net income (loss) attributable to common shareholders | $(62.1) | $15.5 | | Net income (loss) per basic and diluted common shares | $(0.80) | $0.22 | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents the company's net income or loss and other comprehensive income or loss components for the reported quarters Condensed Consolidated Statements of Comprehensive Income (Loss) (in millions) | Metric | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :-------------------- | :--------------------------- | :--------------------------- | | Net income (loss) | $(62.1) | $15.6 | | Pension and post-retirement obligations (net of tax) | $0.2 | $0.3 | | Derivative instruments (net of tax) | $3.7 | $(10.3) | | Comprehensive income (loss) | $(58.2) | $5.6 | | Total comprehensive income (loss) attributable to common shareholders | $(58.2) | $5.5 | Condensed Consolidated Balance Sheets This statement presents the company's assets, liabilities, and shareholders' equity at the end of the reported periods Condensed Consolidated Balance Sheets (in millions) | Metric | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $325.1 | $155.6 | | Total current assets | $500.5 | $340.7 | | Total assets | $3,673.8 | $3,507.3 | | Total current liabilities | $274.7 | $270.5 | | Long-term debt and finance lease obligations | $2,105.8 | $1,932.7 | | Total liabilities | $3,341.3 | $3,118.1 | | Total shareholders' equity | $332.5 | $389.2 | Condensed Consolidated Statements of Changes in Shareholders' Equity This statement details the changes in common stock, additional paid-in capital, accumulated deficit, and other comprehensive loss for the reported period Condensed Consolidated Statements of Changes in Shareholders' Equity (in millions) | Metric | Balance at Dec 31, 2020 | Net Income (Loss) | Other Comprehensive Income (Loss) | Balance at Mar 31, 2021 | | :-------------------- | :---------------------- | :---------------- | :-------------------------------- | :---------------------- | | Common Stock | $0.8 | — | — | $0.8 | | Additional Paid-in Capital | $525.7 | — | — | $527.1 | | Accumulated Deficit | $(34.5) | $(62.1) | — | $(96.6) | | Accumulated Other Comprehensive Loss, net | $(109.4) | — | $3.9 | $(105.5) | | Noncontrolling Interest | $6.7 | $0.0 | — | $6.7 | | Total Shareholders' Equity | $389.2 | $(62.1) | $3.9 | $332.5 | Condensed Consolidated Statements of Cash Flows This statement presents the company's cash flows from operating, investing, and financing activities for the reported quarters Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $98.5 | $85.0 | | Net cash used in investing activities | $(74.7) | $(39.8) | | Net cash provided by (used in) financing activities | $145.8 | $(43.5) | | Change in cash and cash equivalents | $169.6 | $1.7 | | Cash and cash equivalents at end of period | $325.1 | $14.1 | Notes to Unaudited Condensed Consolidated Financial Statements This section details significant accounting policies, revenue recognition, earnings per share, investments, debt, and other financial disclosures 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the company's business operations, basis of accounting, recent developments including the Searchlight Investment and COVID-19 impact, policies for accounts receivable and credit losses, and recent accounting pronouncements adopted or under evaluation - Consolidated Communications Holdings, Inc. provides communication solutions to consumer, commercial, and carrier customers across a 23-state service area, leveraging an advanced fiber network spanning approximately 47,400 fiber route miles[24][25] - Searchlight Capital Partners, L.P. committed to invest up to $425.0 million, with $350.0 million already invested, in exchange for common stock and contingent payment rights (CPRs), aiming for approximately 35% ownership on an as-converted basis upon completion of both stages[27][53][54] - The company is monitoring the impact of COVID-19, which has not significantly adversely affected financial results to date, but could if economic conditions worsen. The CARES Act and American Rescue Plan Act are not expected to have a material impact on financial statements[28][29][31] Allowance for Credit Losses (ACL) Activity (in millions) | Metric | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :----- | :--------------------------- | :--------------------------- | | Balance at beginning of year | $9.1 | $4.5 | | Provision charged to expense | $2.2 | $2.1 | | Write-offs, less recoveries | $(1.8) | $(1.8) | | Balance at end of year | $9.6 | $5.0 | - The company adopted ASU No. 2020-06 (Convertible Instruments) and ASU No. 2019-12 (Income Taxes) effective January 1, 2021, with no material impact on financial statements. ASU No. 2020-04 and ASU No. 2021-01 (Reference Rate Reform) are being evaluated[33][34][35] 2. REVENUE This section details the company's revenue recognition policies, including how transaction prices are determined and allocated to performance obligations. It also provides a disaggregation of revenue by customer type (commercial and carrier, consumer) and service category, along with information on contract assets and liabilities - Revenue is recognized when performance obligations are satisfied by transferring control of goods or services to the customer, with transaction prices generally reflecting market rates and including nonrefundable upfront fees[39][40] Operating Revenues (in millions) | Category | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :------- | :--------------------------- | :--------------------------- | | Commercial and carrier | $144.3 | $147.0 | | Consumer | $123.0 | $126.4 | | Subsidies | $17.3 | $18.5 | | Network access | $31.6 | $31.5 | | Other products and services | $8.5 | $2.4 | | Total operating revenues | $324.8 | $325.7 | Contract Assets and Liabilities (in millions) | Metric | March 31, 2021 | March 31, 2020 | | :----- | :------------- | :------------- | | Accounts receivable, net | $125.7 | $122.3 | | Contract assets | $21.0 | $19.7 | | Contract liabilities | $55.6 | $52.9 | - Deferred contract acquisition costs (primarily sales commissions) of $2.6 million and $2.1 million were recognized as expense for the quarters ended March 31, 2021 and 2020, respectively[44] - Previously deferred revenues of $116.2 million and $111.2 million were recognized during the quarters ended March 31, 2021 and 2020, respectively, related to advanced payments and upfront fees[45] 3. EARNINGS (LOSS) PER SHARE This section details the computation of basic and diluted earnings (loss) per common share using the two-class method, considering participating securities like restricted stock awards and contingent payment rights. It also explains the exclusion of anti-dilutive securities from diluted EPS calculations EPS Computation | Metric | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :----- | :--------------------------- | :--------------------------- | | Net income (loss) attributable to common shareholders, after earnings allocated to participating securities (in millions) | $(62.1) | $15.3 | | Weighted-average number of common shares outstanding (in thousands) | 78,029 | 71,153 | | Net income (loss) per common share - basic and diluted | $(0.80) | $0.22 | - Diluted EPS for Q1 2021 excludes 19.4 million potential common shares (share-based compensation and CPR) due to their anti-dilutive effect, compared to 1.1 million potential shares excluded in Q1 2020[52] 4. SEARCHLIGHT INVESTMENT This section provides details on the strategic investment by Searchlight Capital Partners, L.P., outlining the two-stage investment structure, the allocation of proceeds, and the accounting treatment of the contingent payment rights (CPRs) and the unsecured subordinated note - Searchlight committed to invest up to $425.0 million in two stages. The first stage (October 2, 2020) involved a $350.0 million investment for common stock and CPRs, plus the right to an unsecured subordinated note[53] - The second stage involves an additional $75.0 million investment and the issuance of the Note, convertible into perpetual preferred stock. Upon completion, Searchlight's common stock and CPRs will represent approximately 35% of the company's common stock on an as-converted basis[54] - Shareholders approved the issuance of additional common stock to Searchlight on April 26, 2021, with the second stage expected to close in Q3 2021[56] Estimated Fair Value of Investment Components at October 2, 2020 (in millions) | Component | Amount | | :-------- | :----- | | Cash proceeds | $350.0 | | Receivable from Searchlight, net | $74.4 | | Less: Issuance costs | $(14.5) | | Total consideration | $409.9 | | Common stock, net of issuance costs | $26.8 | | CPR for 16.9% additional shares | $79.5 | | CPR for 10.1% additional shares | $67.2 | | Convertible security interest (Note right), net | $236.4 | | Total Assets Exchanged | $409.9 | - The estimated fair value of the CPRs increased from $123.2 million at December 31, 2020, to $180.8 million at March 31, 2021, resulting in a $57.6 million loss recognized in Q1 2021[58] - The unsecured subordinated Note bears 9.0% interest per annum, payable semi-annually, with a paid-in-kind (PIK) option for five years. The company intends to exercise the PIK option through at least 2022[59] 5. INVESTMENTS This section details the company's investments, categorized by accounting method (cost and equity method), primarily in cellular service limited partnerships and CoBank. It outlines the nature of these investments and the income/distributions received Investments (in millions) | Investment Type | March 31, 2021 | December 31, 2020 | | :-------------- | :------------- | :---------------- | | Cash surrender value of life insurance policies | $2.7 | $2.5 | | Investments at cost (Mobilnet South, Pittsburgh SMSA, CoBank, Other) | $54.6 | $53.6 | | Equity method investments (RSA 17, RSA 6(I), RSA 6(II)) | $55.6 | $55.6 | | Totals | $110.8 | $111.7 | - Cash distributions from cost-method partnerships (Mobilnet South, Pittsburgh SMSA) totaled $4.3 million in Q1 2021, down from $5.3 million in Q1 2020[62] - Cash distributions from equity-method partnerships (RSA 17, RSA 6(I), RSA 6(II)) totaled $5.1 million in Q1 2021, up from $4.8 million in Q1 2020[64] 6. FAIR VALUE MEASUREMENTS This section describes the fair value measurements for the company's financial instruments, particularly interest rate swap agreements and contingent payment obligations, categorizing them within the fair value hierarchy (Level 2). It also provides carrying and fair values for long-term debt - Interest rate swap agreements are measured at fair value on a recurring basis using valuation models based on observable market data (Level 2)[66][67] Interest Rate Swap Liabilities (in millions) | Metric | March 31, 2021 | December 31, 2020 | | :----- | :------------- | :---------------- | | Current interest rate swap liabilities | $(3.6) | $(6.3) | | Long-term interest rate swap liabilities | $(20.3) | $(23.0) | | Total | $(23.9) | $(29.3) | - Contingent payment obligations (CPRs) are measured at estimated fair value on a recurring basis using a market approach with observable market values and a marketability discount (Level 2). The fair value increased from $123.2 million (Dec 31, 2020) to $180.8 million (Mar 31, 2021)[68] Long-term Debt Fair Value (in millions) | Metric | March 31, 2021 Carrying Value | March 31, 2021 Fair Value | December 31, 2020 Carrying Value | December 31, 2020 Fair Value | | :----- | :---------------------------- | :------------------------ | :------------------------------- | :--------------------------- | | Long-term debt, excluding finance leases | $2,137.3 | $2,205.3 | $1,978.7 | $2,039.8 | 7. LONG-TERM DEBT This section details the company's long-term debt structure, including its senior secured credit facility and senior notes. It covers the terms, recent amendments, refinancing activities, and compliance with debt covenants Long-term Debt (in millions) | Debt Type | March 31, 2021 | December 31, 2020 | | :-------- | :------------- | :---------------- | | Term loans, net of discounts | $987.3 | $1,228.7 | | 6.50% Senior notes due 2028 | $750.0 | $750.0 | | 5.00% Senior notes due 2028 | $400.0 | — | | Finance leases | $16.7 | $17.5 | | Less: current portion | $(5.0) | $(17.6) | | Less: deferred debt issuance costs | $(43.2) | $(45.9) | | Total long-term debt | $2,105.8 | $1,932.7 | - On January 15, 2021, the company borrowed an additional $150.0 million in incremental term loans. On March 18, 2021, $397.0 million of outstanding term loans were repaid using proceeds from new 5.00% Senior Notes, resulting in a $12.0 million loss on extinguishment of debt[77][78] - As of March 31, 2021, the company was in compliance with its Credit Agreement covenants, with a consolidated first lien leverage ratio of 3.90:1.00 (below the 5.85:1.00 maximum)[83] - On April 5, 2021, a second amendment to the Credit Agreement refinanced $999.9 million of Term Loans, reducing the interest rate to 3.50% plus LIBOR (0.75% floor). A loss on extinguishment of debt of $3.0 million to $6.0 million is expected in Q2 2021[84] - The company issued $400.0 million aggregate principal amount of 5.00% Senior Notes due 2028 on March 18, 2021, with proceeds used to repay Term Loans[86] 8. DERIVATIVE FINANCIAL INSTRUMENTS This section describes the company's use of interest rate swap agreements to manage exposure to interest rate fluctuations, converting floating-rate debt to fixed-rate. It details the accounting treatment for these derivatives, their fair values, and the impact on accumulated other comprehensive income (loss) - The company uses interest rate swaps to convert floating-rate debt to fixed-rate, reducing the impact of interest rate changes on future cash interest payments[92] Outstanding Interest Rate Swaps (in millions) | Notional Amount | March 31, 2021 Fair Value | December 31, 2020 Fair Value | | :-------------- | :------------------------ | :--------------------------- | | $705.0 | $(3.6) | $(6.3) | | $500.0 | $(20.3) | $(23.0) | | Total Fair Values | $(23.9) | $(29.3) | - As of March 31, 2021, the total pre-tax unrealized loss related to interest rate swaps in AOCI was $(20.2) million, with an expected $11.0 million loss to be recognized in earnings within the next twelve months[99] Cash Flow Hedge Transactions (in millions) | Metric | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :----- | :--------------------------- | :--------------------------- | | Unrealized gain (loss) recognized in AOCI, pretax | $0.4 | $(16.2) | | Deferred loss reclassified from AOCI to interest expense | $(4.6) | $(2.2) | 9. LEASES This section briefly discusses the company's lease arrangements, distinguishing between operating leases (where the company is a lessor for network assets) and sales-type leases (such as indefeasible right of use arrangements for dark fiber) - The company acts as a lessor for network assets (tower space, colocation, conduit, dark fiber) under operating lease classifications, with lease income not being material[100] - No sales-type lease arrangements (e.g., IRU for dark fiber) were entered into during the quarters ended March 31, 2021 and 2020[100] 10. EQUITY This section covers the company's equity-related activities, including share-based compensation plans and changes in accumulated other comprehensive loss. It details the types of awards granted, compensation costs recognized, and the impact of pension and derivative reclassifications - Shareholders approved an amendment to the Long-Term Incentive Plan on April 26, 2021, increasing authorized shares by 5,400,000 to approximately 10,050,000[101] Share-Based Compensation Costs (in millions) | Award Type | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :--------- | :--------------------------- | :--------------------------- | | Restricted stock | $0.8 | $0.8 | | Performance shares | $0.7 | $0.0 | | Total | $1.5 | $0.9 | - Total unrecognized compensation cost for non-vested RSAs and PSAs was $9.8 million as of March 31, 2021, to be recognized over a weighted-average period of approximately 1.6 years[105] Changes in Accumulated Other Comprehensive Loss (in millions) | Component | Balance at Dec 31, 2020 | Net Current Period Other Comprehensive Income (Loss) | Balance at Mar 31, 2021 | | :-------- | :---------------------- | :--------------------------------------------------- | :---------------------- | | Pension and Post-Retirement Obligations | $(90.9) | $0.2 | $(90.7) | | Derivative Instruments | $(18.5) | $3.7 | $(14.8) | | Total | $(109.4) | $3.9 | $(105.5) | 11. PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS This section details the company's defined benefit pension plans and other post-retirement benefit obligations, including their frozen status, components of net periodic costs, and expected contributions for 2021 - The company sponsors qualified defined benefit pension plans and non-qualified supplemental retirement plans, all of which are frozen to new entrants and no longer accrue additional monthly benefits[110][111] Net Periodic Pension Cost (in millions) | Component | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :-------- | :--------------------------- | :--------------------------- | | Interest cost | $5.7 | $6.5 | | Expected return on plan assets | $(9.3) | $(8.6) | | Net amortization loss | $0.6 | $0.3 | | Net prior service cost amortization | $0.0 | $0.0 | | Net periodic pension benefit | $(3.0) | $(1.8) | - The company sponsors Post-retirement Plans for healthcare and life insurance benefits, with certain plans frozen to new participants. Most healthcare plans are unfunded[114] Net Periodic Post-retirement Cost (in millions) | Component | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :-------- | :--------------------------- | :--------------------------- | | Service cost | $0.2 | $0.3 | | Interest cost | $0.7 | $0.9 | | Expected return on plan assets | $(0.1) | $(0.0) | | Net amortization gain | $(0.1) | $(0.3) | | Net prior service cost (credit) amortization | $(0.2) | $0.4 | | Net periodic post-retirement cost | $0.5 | $1.2 | - Expected contributions for 2021 are $20.7 million for Pension Plans and $8.8 million for Post-retirement Plans. As of March 31, 2021, $4.2 million and $2.0 million, respectively, have been contributed[116] 12. INCOME TAXES This section provides information on the company's income tax positions, including unrecognized tax benefits, interest and penalties, periods subject to examination, and the effective tax rate for the reported quarters - Unrecognized tax benefits were $4.9 million as of March 31, 2021, with a net impact of $4.7 million to the effective tax rate if recognized[117] - The effective tax rate was 7.9% for Q1 2021, significantly lower than 24.4% for Q1 2020, primarily due to permanent income tax differences related to the Searchlight transaction and other factors[120] - Excluding these adjustments, the effective tax rate would have been approximately 26.0% for Q1 2021 and 24.4% for Q1 2020[123] 13. COMMITMENTS AND CONTINGENCIES This section addresses the company's commitments and contingencies, primarily focusing on ongoing litigation and regulatory proceedings, specifically regarding Pennsylvania Gross Receipts Tax assessments - The company is involved in appeals regarding Pennsylvania Gross Receipts Tax assessments totaling approximately $6.1 million and $7.4 million for its CCES and CCPA subsidiaries, respectively, for tax years 2008-2016[124] - A settlement for 2008-2013 tax years (excluding 2010 CCPA appeals) resulted in a $2.1 million payment to the DOR. The company has reserved $1.5 million and $0.7 million for potential additional tax liabilities for remaining disputed claims[125] - The company does not believe the outcome of these legal matters will have a material adverse impact on its business, results of operations, financial condition, or cash flows[126] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the quarter ended March 31, 2021. It covers an overview of the business, recent developments, detailed analysis of operating revenues and expenses, regulatory matters, non-operating items, non-GAAP measures, and a comprehensive discussion of liquidity and capital resources Overview Consolidated Communications is a broadband and business communications provider operating across 23 states with an advanced fiber network. The company focuses on expanding its broadband and commercial product suite, enhancing data speeds, and accelerating fiber expansion plans, supported by a strategic investment from Searchlight Capital Partners - The company generates most operating revenues from monthly subscriptions to broadband, data, and transport services for business and residential customers, with commercial and carrier services being key growth areas[131] - A strategic investment with Searchlight Capital Partners and capital structure refinancing provides additional capital to accelerate fiber expansion, aiming to upgrade approximately 1.6 million passings over five years, including 300,000 in 2021[135] - As of March 31, 2021, 59% of homes on the legacy network had broadband speeds of up to 100 Mbps or greater. The company upgraded 45,800 passings in Q1 2021[134][135] - Total video connections decreased 10% and total voice connections decreased 6% as of March 31, 2021, compared to 2020, due to changing consumer habits and competition from alternative technologies[136][137] Recent Developments This section highlights key recent developments, including the strategic investment from Searchlight Capital Partners, the refinancing of long-term debt, and the ongoing impact and management of the COVID-19 pandemic - Searchlight Capital Partners invested $350.0 million in the first stage of a $425.0 million commitment, receiving common stock and contingent payment rights. The second stage, involving an additional $75.0 million, is expected to close in Q3 2021 after shareholder approval[140][141] - The company completed a refinancing of its long-term debt in October 2020, issuing $2,250.0 million in new secured debt. In Q1 2021, an additional $150.0 million in term loans were issued, and $400.0 million in 5.00% Senior Notes were issued to repay $397.0 million of Term Loans[142] - The COVID-19 pandemic has increased demand for bandwidth upgrades. While no significant adverse financial impact has been seen to date, future economic conditions could materially affect operations. The CARES Act and American Rescue Plan Act are not expected to have a material impact[144][145][146] Results of Operations This section provides a detailed analysis of the company's financial performance for the quarter, covering operating revenues by segment (commercial and carrier, consumer), operating expenses, non-operating items, and the impact of regulatory matters Operating Revenues (in millions) | Category | Q1 2021 | Q1 2020 | $ Change | % Change | | :------- | :------ | :------ | :------- | :------- | | Commercial and carrier | $144.3 | $147.0 | $(2.7) | (2)% | | Consumer | $123.0 | $126.4 | $(3.4) | (3)% | | Subsidies | $17.4 | $18.4 | $(1.0) | (5)% | | Network access | $31.6 | $31.5 | $0.1 | 0% | | Other products and services | $8.5 | $2.4 | $6.1 | 254% | | Total operating revenues | $324.8 | $325.7 | $(0.9) | (0)% | Operating Expenses (in millions) | Category | Q1 2021 | Q1 2020 | $ Change | % Change | | :------- | :------ | :------ | :------- | :------- | | Cost of services and products | $144.0 | $137.8 | $6.2 | 4% | | Selling, general and administrative costs | $66.9 | $67.8 | $(0.9) | (1)% | | Depreciation and amortization | $75.6 | $82.7 | $(7.1) | (9)% | | Total operating expenses | $286.5 | $288.3 | $(1.8) | (1)% | Key Operating Statistics (as of March 31) | Metric | 2021 | 2020 | Change | % Change | | :----- | :-------- | :-------- | :-------- | :------- | | Consumer customers | 545,061 | 574,597 | (29,536) | (5)% | | Voice connections | 768,083 | 820,620 | (52,537) | (6)% | | Data connections | 794,224 | 786,125 | 8,099 | 1% | | Video connections | 73,986 | 82,633 | (8,647) | (10)% | | Total connections | 1,636,293 | 1,689,378 | (53,085) | (3)% | Operating Revenues Operating revenues saw a slight decrease overall, driven by declines in commercial and consumer voice and video services, and subsidies, partially offset by growth in commercial data and transport services, consumer broadband, and other products and services, particularly from Public Private Partnership construction projects - Commercial and carrier data and transport services revenues increased by $0.7 million (1%) due to growth in Metro Ethernet and VoIP services[149][156] - Commercial voice services revenues decreased by $1.4 million (3%) due to a 7% decline in access lines as customers shift to alternative technologies[149][157] - Consumer broadband services revenues increased by $1.7 million (3%) despite decreases in data and VoIP connections, driven by price increases and expansion of CCiTV[149][163] - Consumer video services revenues decreased by $2.3 million (12%) due to an 11% decrease in connections as consumers opt for over-the-top streaming services[149][165] - Other products and services revenues increased significantly by $6.1 million (254%) primarily due to revenue recognition from Public Private Partnership construction projects[149][172] Operating Expenses Operating expenses decreased slightly overall, with a rise in cost of services and products due to fiber costs and USF contributions, offset by declines in selling, general and administrative costs from headcount reductions, and lower depreciation and amortization due to fully depreciated assets and asset sales - Cost of services and products increased by $6.2 million (4%) due to higher access expense for Public Private Partnership agreements, increased Federal Universal Service Fund contributions, and video programming costs, partially offset by lower employee labor costs[149][173] - Selling, general and administrative costs decreased by $0.9 million (1%) primarily due to a reduction in employee salaries and benefits from headcount reductions, despite increased advertising and customer acquisition costs[149][174] - Depreciation and amortization expense decreased by $7.1 million (9%) as certain acquired assets became fully depreciated/amortized and due to the sale of utility poles, partially offset by ongoing capital expenditures for network expansion[149][175] Regulatory Matters This section discusses the impact of federal and state telecommunications regulations on the company's operations, including universal service reform, intercarrier compensation, and responses to the COVID-19 pandemic. It highlights changes in FCC funding, RDOF participation, and state-level subsidy adjustments - The company's annual support through the FCC's Connect America Fund (CAF) Phase II funding is $48.1 million through 2021, with milestones met for 2017-2020[181] - Consolidated won 246 census block groups in seven states under the Rural Digital Opportunity Fund (RDOF) auction, securing $5.9 million annually over 10 years to provide 1 Gbps downstream and 500 Mbps upstream speeds to approximately 27,000 locations[184] - The Texas Universal Service Fund (TUSF) announced a 64% funding shortfall reduction starting January 15, 2021, potentially reducing support by $4.0 million annually, which the company is challenging legally[187] - The company received up to $3.5 million in New Hampshire CARES Act funding to build high-speed Internet networks in three towns[188] - The company supported the FCC's 'Keep America Connected' pledge during COVID-19, and most state moratoriums on disconnections have expired, though some extend into Q3 2021[189] Non-Operating Items This section details changes in non-operating financial items, including a significant increase in interest expense due to new debt and the Searchlight Note, a loss on debt extinguishment, a loss from the change in fair value of contingent payment rights, and a decrease in other income - Interest expense, net, increased by $16.3 million (51%) in Q1 2021, primarily due to $10.2 million in interest expense on the Searchlight Note and increased interest on senior notes from debt refinancing[149][192] - A $12.0 million loss on extinguishment of debt was recognized in Q1 2021 due to the repayment of $397.0 million of term loans, compared to a $0.2 million gain in Q1 2020 from repurchasing senior notes[149][193][194] - A $57.6 million loss was recognized in Q1 2021 due to the increase in the fair value of contingent payment rights issued to Searchlight[149][195] - Other income decreased by $2.9 million (19%), driven by a $1.0 million decrease in investment income and a $3.7 million gain on spectrum license sale in Q1 2020 not recurring, partially offset by a $1.9 million decrease in pension and post-retirement expense[149][196] - Income tax expense decreased by $10.4 million, with the effective tax rate falling to 7.9% in Q1 2021 from 24.4% in Q1 2020, mainly due to permanent income tax differences from the Searchlight transaction[149][197] Non-GAAP Measures This section defines and reconciles non-GAAP financial measures, specifically EBITDA and Adjusted EBITDA, to their most directly comparable GAAP measures. These metrics are used to evaluate operating performance and liquidity within the telecommunications industry - EBITDA is defined as net earnings before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA further adjusts EBITDA for certain items as permitted or required under the credit facility[200] Reconciliation of Net Income (Loss) to Adjusted EBITDA (in millions) | Metric | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | | :----- | :--------------------------- | :--------------------------- | | Net income (loss) | $(62.1) | $15.6 | | Interest expense, net | $48.4 | $32.1 | | Income tax expense (benefit) | $(5.3) | $5.0 | | Depreciation and amortization | $75.6 | $82.7 | | EBITDA | $56.6 | $135.5 | | Adjustments to EBITDA (Other, Investment distributions, Gain (loss) on extinguishment of debt, Change in fair value of contingent payment rights, Non-cash, stock-based compensation) | $70.0 | $(3.9) | | Adjusted EBITDA | $126.6 | $131.6 | Liquidity and Capital Resources This section discusses the company's financial liquidity and capital resources, including historical funding sources, expected future funding, cash flow analysis, details of long-term debt and refinancing, and an assessment of cash resource sufficiency for future operations and fiber network expansion - Operating requirements are funded by cash flows from operations, existing cash, and revolving credit facility borrowings. A substantial portion of cash flow will fund capital expenditures for fiber network expansion and growth[203] Summary of Cash Flows (in millions) | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------- | :-------------------------------- | :-------------------------------- | | Operating activities | $98.5 | $85.0 | | Investing activities | $(74.7) | $(39.8) | | Financing activities | $145.8 | $(43.5) | | Change in cash and cash equivalents | $169.6 | $1.7 | - Net cash provided by operating activities increased by $13.5 million to $98.5 million in Q1 2021, primarily due to changes in working capital and timing of expenditures[206] - Net cash used in investing activities was $74.7 million in Q1 2021, mainly for capital expenditures of $76.0 million (up from $42.4 million in Q1 2020). Expected capital expenditures for 2021 are $400.0 million to $420.0 million for fiber network expansion[207] - Net cash provided by financing activities was $145.8 million in Q1 2021, compared to $43.5 million used in Q1 2020, reflecting proceeds from bond offerings and long-term debt issuance, partially offset by debt payments[22][204][208] - The company's net working capital improved by $155.6 million as of March 31, 2021, to $225.7 million, primarily due to a $169.6 million increase in cash and cash equivalents and a decline in current portion of long-term debt[228] - Significant uses of funds for the remainder of 2021 include $101.0-$106.0 million for interest payments and $324.0-$344.0 million for capital expenditures[231] - The company believes current cash flows, existing cash, and available revolving credit will be sufficient for at least the next twelve months, but future funding depends on economic conditions and operational results[232] - Expected contributions for 2021 are $20.7 million for Pension Plans and $8.8 million for Post-retirement Plans[240] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risk, primarily from interest rate fluctuations on its debt obligations. It outlines the use of derivative financial instruments (interest rate swaps) to manage this risk and quantifies the potential impact of interest rate changes - The company's primary market risk is from interest rate fluctuations on variable rate debt, managed using interest rate swaps to convert a portion of floating-rate debt to fixed-rate[244] - As of March 31, 2021, most variable rate debt had a 1.00% LIBOR floor, which was reduced to 0.75% on April 5, 2021. A 1.00% increase in market interest rates would increase annual interest expense by approximately $1.2 million[245] - A 1.00% decrease in current interest rates would not impact annual interest expense due to the 0.75% LIBOR floor[245] - The fair value of interest rate swap agreements was a net liability of $23.9 million as of March 31, 2021, with total pre-tax deferred losses of $20.2 million in accumulated other comprehensive loss[247] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2021, and states that there have been no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2021, providing reasonable assurance of achieving control objectives[248] - No material changes in internal controls over financial reporting occurred during the quarter ended March 31, 2021[249] PART II. OTHER INFORMATION This part provides disclosures on legal proceedings and a list of exhibits filed with the Form 10-Q Item 1. Legal Proceedings This section states that the company is involved in various legal proceedings common to its industry, including regulatory issues. While outcomes are uncertain, the company does not anticipate any material adverse impact on its business, results of operations, financial condition, or cash flows - The company is involved in litigation and regulatory issues typical for its industry[252] - Management does not believe the outcome of these legal matters will have a material adverse impact on the company's business, financial condition, or cash flows[252] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various agreements related to debt, security, and pledges, as well as certifications from the Chief Executive Officer and Chief Financial Officer, and financial information in Inline XBRL format - Exhibits include joinder agreements, supplemental indentures, purchase agreements, and certifications (302 and 906) from the CEO and CFO[254][255][256][257][258][259][260][261][262] - Financial information from the 10-Q is provided in Inline XBRL format (Exhibit 101 and 104)[263][264] SIGNATURES This section contains the official signatures of the company's Chief Executive Officer and Chief Financial Officer, certifying the report's submission - The report was signed on April 30, 2021, by C. Robert Udell Jr., Chief Executive Officer, and Steven L. Childers, Chief Financial Officer and Chief Accounting Officer[268]