solidated munications (CNSL) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited condensed consolidated financial statements and related notes ITEM 1. FINANCIAL STATEMENTS This section presents unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and detailed notes on accounting policies, revenue, debt, and equity Condensed Consolidated Statements of Operations The company reported a net loss for Q2 and 6M 2021, a decline from prior year net income, driven by increased interest expense, debt extinguishment losses, and contingent payment rights fair value changes Condensed Consolidated Statements of Operations (Amounts in thousands except per share amounts) | Metric (in thousands) | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :-------------------- | :------ | :------ | :------ | :------ | | Net revenues | $320,403 | $325,176 | $645,169 | $650,838 | | Income from operations | $30,015 | $39,780 | $68,341 | $77,132 | | Interest expense, net | $(45,431) | $(31,459) | $(93,846) | $(63,554) | | Loss on extinguishment of debt | $(5,121) | — | $(17,101) | $234 | | Change in fair value of contingent payment rights | $(39,826) | — | $(97,414) | — | | Net income (loss) | $(55,089) | $13,935 | $(117,172) | $29,558 | | Net income (loss) per basic and diluted common shares | $(0.71) | $0.19 | $(1.51) | $0.40 | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a total comprehensive loss attributable to common shareholders of $(51.8) million for Q2 2021 and $(109.9) million for the six months ended June 30, 2021, a significant decrease from comprehensive income in the prior year, primarily due to the net loss and changes in derivative fair values Condensed Consolidated Statements of Comprehensive Income (Loss) (Amounts in thousands) | Metric (in thousands) | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :-------------------- | :------ | :------ | :------ | :------ | | Net income (loss) | $(55,089) | $13,935 | $(117,172) | $29,558 | | Total comprehensive income (loss) attributable to common shareholders | $(51,772) | $16,289 | $(109,960) | $21,836 | Condensed Consolidated Balance Sheets As of June 30, 2021, total assets increased to $3.69 billion from $3.51 billion at December 31, 2020, driven by increases in cash, short-term investments, and property, plant and equipment. Total liabilities also increased significantly to $3.40 billion from $3.12 billion, mainly due to higher long-term debt and contingent payment rights Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | Change | | :-------------------- | :------------ | :---------------- | :----- | | Total assets | $3,686,800 | $3,507,300 | +$179,500 | | Total liabilities | $3,403,306 | $3,118,072 | +$285,234 | | Total shareholders' equity | $283,494 | $389,228 | $(105,734) | | Cash and cash equivalents | $199,314 | $155,561 | +$43,753 | | Short-term investments | $89,967 | — | +$89,967 | | Long-term debt and finance lease obligations | $2,113,269 | $1,932,666 | +$180,603 | | Contingent payment rights | $220,655 | $123,241 | +$97,414 | Condensed Consolidated Statements of Changes in Shareholders' Equity Total shareholders' equity decreased from $389.2 million at December 31, 2020, to $283.5 million at June 30, 2021, primarily due to a net loss of $(151.9) million for the period, partially offset by increases in additional paid-in capital from share-based compensation and other comprehensive income Changes in Shareholders' Equity (Amounts in thousands) | Metric (in thousands) | Balance at Dec 31, 2020 | Shares issued under employee plan, net of forfeitures | Non-cash, share-based compensation | Other comprehensive income (loss) | Net income (loss) | Balance at June 30, 2021 | | :-------------------- | :---------------------- | :---------------------------------------------------- | :--------------------------------- | :-------------------------------- | :---------------- | :----------------------- | | Common Stock Amount | $792 | $8 | — | — | — | $809 | | Additional Paid-in Capital | $525,673 | $(8) | $2,493 | — | — | $529,599 | | Accumulated Deficit | $(34,514) | — | — | — | $(151,969) | $(151,969)$ | | Accumulated Other Comprehensive Loss, net | $(109,418)$ | — | — | $7,495 | — | $(101,923)$ | | Noncontrolling Interest | $6,695 | — | — | — | $283 | $6,978 | | Total | $389,228 | — | $2,493 | $7,495 | $(151,969)$ | $283,494 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased slightly to $185.8 million for the six months ended June 30, 2021. However, net cash used in investing activities significantly increased to $283.9 million, primarily due to higher capital expenditures and short-term investment purchases. Net cash provided by financing activities was $141.8 million, a reversal from a net use in the prior year, driven by bond offerings and long-term debt issuance Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity (in thousands) | 6M 2021 | 6M 2020 | Change | | :-------------------------------- | :------ | :------ | :------ | | Net cash provided by operating activities | $185,831 | $181,721 | +$4,110 | | Net cash used in investing activities | $(283,876) | $(89,738) | $(194,138) | | Net cash provided by (used in) financing activities | $141,798 | $(58,502) | +$200,300 | | Change in cash and cash equivalents | $43,753 | $33,481 | +$10,272 | | Cash and cash equivalents at end of period | $199,314 | $45,876 | +$153,438 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, revenue, EPS, Searchlight investment, fair value, debt, derivatives, leases, equity, pension benefits, income taxes, and commitments 1. Summary of Significant Accounting Policies The company provides communication solutions across 23 states, leveraging a 50,000-mile fiber network. Recent developments include a $425 million investment commitment from Searchlight Capital Partners and ongoing monitoring of COVID-19 impacts, which have not materially affected financial results to date. The company adopted new accounting standards (ASU 2020-06 and ASU 2019-12) in January 2021, neither of which had a material impact - Consolidated Communications Holdings, Inc. provides communication solutions to consumer, commercial, and carrier customers across a 23-state service area, utilizing an advanced fiber network spanning approximately 50,000 fiber route miles[24][25] - Searchlight Capital Partners committed to invest up to $425.0 million in the Company, structured in two stages, with the first stage completed on October 2, 2020[27] - The COVID-19 pandemic has not had a significant adverse impact on financial results to date, but the company continues to monitor potential future impacts. The CARES Act and American Rescue Plan Act of 2021 did not materially impact consolidated financial statements[28][30] Allowance for Credit Losses (ACL) Activity (In thousands) | Metric (in thousands) | 2021 | 2020 | | :-------------------- | :--- | :--- | | Balance at beginning of year | $9,136 | $4,549 | | Provision charged to expense | $4,282 | $4,565 | | Write-offs, less recoveries | $(2,884) | $(3,290) | | Balance at end of year | $10,534 | $5,968 | 2. Revenue Revenue is disaggregated across commercial and carrier, consumer, subsidies, network access, and other products/services. Total operating revenues decreased slightly to $320.4 million for Q2 2021 and $645.2 million for 6M 2021 compared to prior year periods. Commercial and carrier data and transport services showed growth, while voice and video services declined across both segments Operating Revenues (In thousands) | Operating Revenues (in thousands) | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :-------------------------------- | :------ | :------ | :------ | :------ | | Commercial and carrier: Data and transport services | $90,813 | $89,572 | $181,161 | $179,144 | | Commercial and carrier: Voice services | $43,461 | $45,775 | $87,740 | $91,495 | | Consumer: Broadband (VoIP and Data) | $67,981 | $65,567 | $133,736 | $129,643 | | Consumer: Video services | $16,799 | $19,213 | $33,580 | $38,344 | | Consumer: Voice services | $40,173 | $43,121 | $80,593 | $86,297 | | Subsidies | $17,465 | $18,069 | $34,804 | $36,523 | | Network access | $31,115 | $30,473 | $62,718 | $61,938 | | Other products and services | $3,110 | $2,980 | $11,632 | $5,336 | | Total operating revenues | $320,403 | $325,176 | $645,169 | $650,838 | Contract Assets and Liabilities (In thousands) | Metric (in thousands) | June 30, 2021 | June 30, 2020 | | :-------------------- | :------------ | :------------ | | Accounts receivable, net | $128,601 | $116,493 | | Contract assets | $21,874 | $20,130 | | Contract liabilities | $55,023 | $50,296 | 3. Earnings (Loss) Per Share The company reported a basic and diluted EPS loss of $(0.71) for Q2 2021 and $(1.51) for 6M 2021, compared to positive EPS in the prior year periods. Dilutive securities were excluded from loss per share calculations as their inclusion would be anti-dilutive Earnings (Loss) Per Share (Amounts in thousands, except per share amounts) | Metric | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :-------------------------------------------------------------------------------- | :------ | :------ | :------ | :------ | | Net income (loss) attributable to common shareholders, after earnings allocated to participating securities | $(55,356) | $13,480 | $(117,455) | $28,780 | | Weighted-average number of common shares outstanding | 78,029 | 71,153 | 78,029 | 71,153 | | Net income (loss) per common share attributable to common shareholders - basic and diluted | $(0.71) | $0.19 | $(1.51) | $0.40 | - Diluted EPS for Q2 and 6M 2021 excludes 20.4 million and 19.9 million potential common shares, respectively, due to their anti-dilutive effect[50] 4. Searchlight Investment Searchlight Capital Partners committed $425.0 million in two stages; the first stage is complete, the CPR converted to shares, and the second stage is pending FCC approval - Searchlight Capital Partners committed to invest up to $425.0 million in the Company, structured in two stages. The first stage involved $350.0 million for common stock and a Contingent Payment Right (CPR)[53] - On July 16, 2021, the CPR was converted into 17,870,012 shares of common stock, representing approximately 16.9% of the Company's common stock, following regulatory and shareholder approvals[55] Fair Value of Contingent Payment Rights (In thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Estimated fair value of CPR | $220,700 | $123,200 | | Loss on increase in fair value of CPR (Q2 2021) | $39,800 | — | | Loss on increase in fair value of CPR (6M 2021) | $97,400 | — | - The unsecured subordinated note bears interest at 9.0% per annum, payable semi-annually, with a paid-in-kind (PIK) option for five years, which the Company intends to exercise through at least 2022[60] 5. Investments The company holds held-to-maturity debt securities, investments at cost (minority positions in cellular partnerships and CoBank stock), and equity method investments (significant influence in cellular partnerships). Cash distributions from cost and equity method investments totaled $10.4 million and $11.6 million, respectively, for the six months ended June 30, 2021 Investments (In thousands) | Investment Type (in thousands) | June 30, 2021 | December 31, 2020 | | :----------------------------- | :------------ | :---------------- | | Short-term investments: Held-to-maturity debt securities | $89,967 | — | | Long-term investments: Cash surrender value of life insurance policies | $2,666 | $2,536 | | Investments at cost (GTE Mobilnet, Pittsburgh SMSA, CoBank, Other) | $52,590 | $53,555 | | Equity method investments (GTE Mobilnet, Pennsylvania RSA 6(I), Pennsylvania RSA 6(II)) | $54,336 | $55,574 | | Totals | $109,542 | $111,665 | - Cash distributions from investments accounted for at cost (Mobilnet South Partnership, Pittsburgh SMSA Limited Partnership) totaled $10.4 million for the six months ended June 30, 2021, up from $9.2 million in 2020[65] - Cash distributions from equity method investments (RSA 17, RSA 6(I), RSA 6(II)) totaled $11.6 million for the six months ended June 30, 2021, up from $10.5 million in 2020[67] 6. Fair Value Measurements Derivative instruments (interest rate swaps) are measured at fair value on a recurring basis and categorized as Level 2. The contingent payment obligation (CPR) is also measured at fair value on a recurring basis, classified as Level 2, with its estimated fair value increasing to $220.7 million at June 30, 2021. Long-term debt fair value is based on market prices and rates, also categorized as Level 2 Interest Rate Swap Liabilities (In thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Current interest rate swap liabilities | $(896) | $(6,297) | | Long-term interest rate swap liabilities | $(18,089) | $(22,958) | | Total | $(18,985) | $(29,255) | - The estimated fair value of the Contingent Payment Right (CPR) was $220.7 million as of June 30, 2021, up from $123.2 million at December 31, 2020, and is classified as Level 2 within the fair value hierarchy[71] Long-term Debt Fair Value (In thousands) | Metric (in thousands) | June 30, 2021 Carrying Value | June 30, 2021 Fair Value | Dec 31, 2020 Carrying Value | Dec 31, 2020 Fair Value | | :-------------------- | :--------------------------- | :----------------------- | :-------------------------- | :---------------------- | | Long-term debt, excluding finance leases | $2,138,789 | $2,206,004 | $1,978,694 | $2,039,790 | 7. Long-Term Debt Total long-term debt increased to $2.11 billion at June 30, 2021, from $1.93 billion at December 31, 2020. This was primarily due to the issuance of $150.0 million in incremental term loans and $400.0 million in 5.00% Senior Notes, partially offset by a $397.0 million repayment of term loans and a refinancing that reduced the interest rate on term loans. The company was in compliance with all Credit Agreement and Senior Notes covenants as of June 30, 2021 Long-Term Debt (In thousands) | Debt Type (in thousands) | June 30, 2021 | December 31, 2020 | | :----------------------- | :------------ | :---------------- | | Term loans, net | $988,789 | $1,228,694 | | 6.50% Senior notes due 2028 | $750,000 | $750,000 | | 5.00% Senior notes due 2028 | $400,000 | — | | Finance leases | $21,456 | $17,467 | | Total long-term debt | $2,113,269 | $1,932,666 | - The company borrowed an additional $150.0 million in incremental term loans on January 15, 2021[79] - A second amendment to the Credit Agreement on April 5, 2021, refinanced $999.9 million of Term Loans, reducing the interest rate to 3.50% plus LIBOR subject to a 0.75% LIBOR floor and resulting in a $5.1 million loss on extinguishment of debt[81] - The consolidated first lien leverage ratio was 3.96:1.00 as of June 30, 2021, in compliance with the Credit Agreement covenant (maximum 5.85:1.00)[85] 8. Derivative Financial Instruments The company uses interest rate swaps to manage exposure to interest rate fluctuations, converting floating-rate debt to fixed-rate. As of June 30, 2021, total fair value of these swaps was a net liability of $(19.0) million. The refinancing of the Credit Agreement in April 2021 led to certain critical terms of the swaps no longer matching the variable rate debt, but they were still deemed highly effective Interest Rate Swaps Outstanding (In thousands) | Swap Type | Notional Amount | Fair Value (June 30, 2021) | Fair Value (Dec 31, 2020) | | :-------------------------------- | :-------------- | :------------------------- | :------------------------ | | Fixed to 1-month floating LIBOR (with floor) | $705,000 | $(896) | $(6,297) | | Fixed to 1-month floating LIBOR (with floor) | $500,000 | $(18,089) | $(22,958) | | Total Fair Values | | $(18,985) | $(29,255) | - The total pre-tax unrealized loss related to interest rate swap agreements included in Accumulated Other Comprehensive Income (AOCI) was $(15.5) million as of June 30, 2021, with an expected $8.2 million loss to be recognized in earnings in the next twelve months[98] 9. Leases The company acts as a lessor for network assets (tower space, colocation, conduit, dark fiber), primarily under operating leases. Sales-type leases, such as indefeasible right of use (IRU) arrangements for dark fiber, are also entered into, with one such arrangement in Q2/6M 2021 not having a material financial impact - The company has various arrangements as a lessor for network assets, including tower space, colocation, conduit, and dark fiber, primarily classified as operating leases[100] - Sales-type leases, such as indefeasible right of use (IRU) arrangements for dark fiber, are also utilized, with one such arrangement in Q2/6M 2021 not materially impacting financial statements[100] 10. Equity Shareholders approved an amendment to the Long-Term Incentive Plan, increasing authorized shares for issuance by 5.4 million to approximately 10.05 million. Share-based compensation expense for Q2 2021 was $2.49 million, and total unrecognized compensation cost for non-vested awards was $21.6 million as of June 30, 2021, to be recognized over approximately 1.7 years. Accumulated other comprehensive loss, net, improved to $(101.9) million from $(109.4) million at December 31, 2020 - Shareholders approved an amendment to the Long-Term Incentive Plan, increasing authorized shares for issuance by 5,400,000 to approximately 10,050,000 shares[101] Share-Based Compensation Costs (In thousands) | Compensation Type (in thousands) | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :------------------------------- | :------ | :------ | :------ | :------ | | Restricted stock | $1,391 | $1,282 | $2,155 | $2,130 | | Performance shares | $1,102 | $1,052 | $1,788 | $1,094 | | Total | $2,493 | $2,334 | $3,943 | $3,224 | - Total unrecognized compensation cost related to non-vested Restricted Stock Awards (RSAs) and Performance Share Awards (PSAs) was $21.6 million as of June 30, 2021, to be recognized over a weighted-average period of approximately 1.7 years[104] Changes in Accumulated Other Comprehensive Loss, net of tax (In thousands) | Component (in thousands) | Balance at Dec 31, 2020 | Net current period other comprehensive income | Balance at June 30, 2021 | | :----------------------- | :---------------------- | :-------------------------------------------- | :----------------------- | | Pension and Post-Retirement Obligations | $(90,887) | $324 | $(90,563) | | Derivative Instruments | $(18,531) | $7,171 | $(11,360) | | Total | $(109,418) | $7,495 | $(101,923) | 11. Pension Plan and Other Post-Retirement Benefits The company sponsors frozen defined benefit pension and post-retirement plans; net periodic pension benefit was a credit of $(2.99) million for Q2 2021, with $20.7 million expected contributions to Pension Plans in 2021 Net Periodic Pension Cost (In thousands) | Metric (in thousands) | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :-------------------- | :------ | :------ | :------ | :------ | | Interest cost | $5,680 | $6,519 | $11,361 | $13,039 | | Expected return on plan assets | $(9,263) | $(8,646) | $(18,526) | $(17,291) | | Net periodic pension benefit | $(2,995) | $(1,785) | $(5,990) | $(3,569) | Net Periodic Post-retirement Cost (In thousands) | Metric (in thousands) | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :-------------------- | :------ | :------ | :------ | :------ | | Service cost | $223 | $258 | $445 | $516 | | Interest cost | $657 | $885 | $1,314 | $1,769 | | Net periodic post-retirement cost | $462 | $1,209 | $924 | $2,418 | - Expected contributions for 2021 are approximately $20.7 million to Pension Plans and $8.8 million to Post-retirement Plans. As of June 30, 2021, $8.9 million and $4.3 million, respectively, have been contributed[115][239] 12. Income Taxes Unrecognized tax benefits were $4.9 million as of June 30, 2021. The company used the discrete effective tax rate method due to uncertainty in estimating annual pretax earnings, resulting in an effective tax rate of (10.9)% for Q2 2021 and (0.1)% for 6M 2021. The Searchlight transaction's non-cash PIK interest expense and fair value adjustments are not recognized for federal income tax purposes, causing permanent adjustments to the effective tax rate - Unrecognized tax benefits were $4.9 million as of June 30, 2021, with a net impact of $4.7 million to the effective tax rate if recognized[116] Effective Tax Rate | Period | Effective Tax Rate | Effective Tax Rate (Exclusive of discrete method & Searchlight impact) | | :----- | :----------------- | :------------------------------------------------------------------- | | Q2 2021 | (10.9)% | 24.6% | | Q2 2020 | 23.5% | 23.5% | | 6M 2021 | (0.1)% | 24.5% | | 6M 2020 | 24.0% | 24.0% | - The company uses the discrete effective tax rate method due to high uncertainty in estimating annual pretax earnings, particularly related to the Searchlight transaction's regulatory approval and second closing date[122][196] 13. Commitments and Contingencies The company is involved in litigation, including appeals related to Pennsylvania Gross Receipts Tax assessments for tax years 2010 and 2014-2018, for which $0.8 million for CCPA and $1.6 million for CCES (including interest) have been reserved. Management believes the outcome of these and other legal matters will not have a material adverse impact on financial results or cash flows - The company is appealing Pennsylvania Gross Receipts Tax assessments for tax years 2010 (CCPA) and 2014-2018 (CCPA and CCES)[127] - Reserves of $0.8 million for CCPA and $1.6 million for CCES (including interest) have been made for potential additional tax liabilities[127] - Management does not believe the outcome of current litigation and regulatory proceedings will have a material adverse impact on the company's business, results of operations, financial condition, or cash flows[128] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial condition, operational results, fiber network expansion, financing, revenue and expense trends, regulatory matters, non-GAAP measures, and liquidity Overview Consolidated operates a 50,000-mile fiber network across 23 states, focusing on broadband expansion, with 1.6 million passings targeted over five years, while video and voice connections decline - Consolidated operates an advanced fiber network spanning approximately 50,000 fiber route miles across 23 states, offering communication solutions to consumer, commercial, and carrier customers[132] - The company plans to upgrade approximately 1.6 million passings over the next five years to enable multi-Gig capable services, including over 1 million in northern New England, with 300,000 upgrades planned for 2021[137] - Video connections decreased 12% and total voice connections decreased 7% as of June 30, 2021, compared to June 30, 2020, due to changing consumer viewing habits and competition from alternative communication services[138][139][155] Recent Developments Recent developments include the ongoing two-stage Searchlight investment, significant long-term debt refinancing, and continued monitoring of COVID-19 impacts, which have not materially affected financial results Searchlight Investment Searchlight Capital Partners committed $425.0 million in two stages; the first stage is complete, the CPR converted to shares, and the second stage is pending FCC approval - Searchlight Capital Partners committed to invest up to $425.0 million in the Company, with $350.0 million invested in the first stage (October 2, 2020) for common stock and a Contingent Payment Right (CPR)[142] - On July 15, 2021, the company received all required state public utility commission regulatory approvals for the conversion of the CPR into 16.9% additional shares of common stock, which were issued on July 16, 2021[144] - The second stage of the investment, an additional $75.0 million, is expected to close later in 2021, pending FCC approval and other customary closing conditions[144] Refinancing of Long-term Debt The company refinanced $2.25 billion in secured debt, extending maturities and reducing interest rates, including new term loans and senior notes, and an amendment to the credit agreement - On October 2, 2020, the company refinanced $2.25 billion in secured debt, including a new credit agreement and $750.0 million of 6.50% senior secured notes due 2028[145][86] - In 2021, the company issued an additional $150.0 million in incremental term loans and $400.0 million in 5.00% Senior Notes, using the proceeds to repay $397.0 million of existing term loans[145][87] - An amendment to the credit agreement on April 5, 2021, refinanced outstanding term loans and reduced the interest rate to 3.50% plus LIBOR (0.75% floor)[145][81] COVID-19 Pandemic The company implemented safety measures and remote work policies in response to COVID-19, proactively monitoring and augmenting network capacity due to increased demand for data usage. While no significant adverse financial impact has been observed to date, future economic conditions could materially affect results. The CARES Act and American Rescue Plan Act of 2021 did not have a material impact on financial statements - The company implemented safety measures and remote work policies, and augmented network capacity to meet increased data usage demand during the COVID-19 pandemic[147] - No significant adverse financial impact from COVID-19 has been observed to date, but future economic conditions could materially affect results[148] - The CARES Act and American Rescue Plan Act of 2021 did not have a material impact on the company's consolidated financial statements[149] Results of Operations Total operating revenues decreased by 1% for both Q2 and 6M 2021 compared to the prior year. Commercial and carrier data and transport services saw modest growth, while voice and video services continued to decline. Operating expenses increased by 2% for Q2 and 1% for 6M 2021, primarily due to higher cost of services and products, partially offset by lower depreciation and amortization. Income from operations decreased significantly by 24% for Q2 and 11% for 6M 2021 Key Financial Data (In millions, except for percentages) | Metric (in millions) | Q2 2021 | Q2 2020 | Q2 Change ($) | Q2 Change (%) | 6M 2021 | 6M 2020 | 6M Change ($) | 6M Change (%) | | :------------------- | :------ | :------ | :------------ | :------------ | :------ | :------ | :------------ | :------------ | | Total operating revenues | $320.4 | $325.1 | $(4.7) | (1)% | $645.2 | $650.8 | $(5.6) | (1)% | | Total operating expenses | $290.4 | $285.4 | $5.0 | 2% | $576.9 | $573.7 | $3.2 | 1% | | Income from operations | $30.0 | $39.7 | $(9.7) | (24)% | $68.3 | $77.1 | $(8.8) | (11)% | Key Operating Statistics (As of June 30) | Metric | 2021 | 2020 | Change | % Change | | :------------------ | :----- | :----- | :----- | :------- | | Consumer customers | 535,070 | 569,148 | (34,078) | (6)% | | Voice connections | 752,240 | 809,457 | (57,217) | (7)% | | Data connections | 796,669 | 791,203 | 5,466 | 1% | | Video connections | 70,795 | 80,053 | (9,258) | (12)% | | Total connections | 1,619,704 | 1,680,713 | (61,009) | (4)% | Operating Revenues Operating revenues saw varied performance across segments. Commercial and carrier data and transport services experienced growth, while voice and video services for both commercial and consumer segments continued their decline. Subsidies decreased due to state support reductions, but network access revenues slightly increased. Other products and services revenues grew significantly, driven by Public Private Partnership construction projects Commercial and Carrier Commercial and carrier data and transport services revenues increased by $1.3 million (Q2) and $2.0 million (6M) due to growth in Metro Ethernet, VoIP, and SD-WAN. Voice services revenues decreased by $2.3 million (Q2) and $3.7 million (6M) due to a 7% decline in access lines. Other services revenues decreased by $0.9 million (Q2) and $2.9 million (6M) primarily due to the expiration of a 9-1-1 service contract in Vermont - Commercial and carrier data and transport services revenues increased by $1.3 million (Q2 2021) and $2.0 million (6M 2021) primarily due to continued growth in Metro Ethernet, VoIP, and SD-WAN services[157] - Commercial and carrier voice services revenues decreased by $2.3 million (Q2 2021) and $3.7 million (6M 2021) due to a 7% decline in access lines as commercial customers increasingly choose alternative technologies[158] - Other commercial and carrier services revenues decreased by $0.9 million (Q2 2021) and $2.9 million (6M 2021) primarily due to the expiration of the 9-1-1 service contract in Vermont and declines in custom construction projects[161] Consumer Consumer broadband services revenues increased by $2.4 million (Q2) and $4.1 million (6M) despite a decrease in data and VoIP connections, driven by price increases and growth in CCiTV. Video services revenues decreased by $2.4 million (Q2) and $4.7 million (6M) due to a 13% decline in connections as consumers shift to streaming. Consumer voice services revenues decreased by $2.9 million (Q2) and $5.7 million (6M) due to a 9% decline in access lines - Consumer broadband services revenues increased by $2.4 million (Q2 2021) and $4.1 million (6M 2021) due to price increases and growth in CCiTV, despite a decrease in data and VoIP connections[163] - Consumer video services revenues decreased by $2.4 million (Q2 2021) and $4.7 million (6M 2021) due to a 13% decrease in connections as consumers adopt alternative streaming services[165] - Consumer voice services revenues decreased by $2.9 million (Q2 2021) and $5.7 million (6M 2021) due to a 9% decline in access lines, impacted by competition from alternative technologies[166] Subsidies Subsidies revenues decreased by $0.7 million (Q2) and $1.7 million (6M) primarily due to a reduction in state subsidies support - Subsidies revenues decreased by $0.7 million (Q2 2021) and $1.7 million (6M 2021) primarily due to a reduction in state subsidies support[167] Network Access Services Network access services revenues increased by $0.6 million (Q2) and $0.7 million (6M) due to increases in the Federal Universal Service Fund Contribution Factor, partially offset by declines in interstate rates, minutes of use, and voice connections - Network access services revenues increased by $0.6 million (Q2 2021) and $0.7 million (6M 2021) primarily due to increases in the Federal Universal Service Fund Contribution Factor, offset by the continuing decline in interstate rates, minutes of use, and voice connections[169] Other Products and Services Other products and services revenues increased by $0.2 million (Q2) and $6.3 million (6M) primarily due to revenue recognition from Public Private Partnership construction projects in 2021 - Other products and services revenues increased by $0.2 million (Q2 2021) and $6.3 million (6M 2021) primarily due to revenue recognition of Public Private Partnership construction projects during 2021[171] Operating Expenses Operating expenses increased due to higher cost of services and products, driven by fiber costs for Public Private Partnership agreements and early contract termination charges, as well as increased selling, general and administrative costs from advertising. These increases were partially offset by a decline in depreciation and amortization as certain assets became fully depreciated Cost of Services and Products Cost of services and products increased by $5.8 million (Q2) and $12.0 million (6M) due to higher access expense for fiber costs related to Public Private Partnership agreements, a $3.4 million charge for early termination of a fixed wireless services contract, and increased Federal USF contributions, partially offset by lower employee labor costs - Cost of services and products increased by $5.8 million (Q2 2021) and $12.0 million (6M 2021) primarily due to an increase in access expense related to fiber costs for the Public Private Partnership agreements[172] - The increase also includes $3.4 million in access charges related to the early termination of a contract obligation for fixed wireless services during Q2 2021 and increased required contributions to the Federal Universal Service Fund (USF)[172] Selling, General and Administrative Costs Selling, general and administrative costs increased by $4.2 million (Q2) and $3.3 million (6M) due to higher advertising expense for promoting new fiber broadband speeds, partially offset by reduced employee salaries and benefits from headcount reductions and lower property and real estate taxes - Selling, general and administrative costs increased by $4.2 million (Q2 2021) and $3.3 million (6M 2021) primarily due to an increase in advertising expense for additional radio and television advertising to promote new fiber broadband speeds[173] - These increases were reduced in part by a decline in employee salaries and benefits due to a reduction in headcount and decreased property and real estate taxes from refunds and settlements received in 2021[173] Depreciation and Amortization Depreciation and amortization expense decreased by $5.0 million (Q2) and $12.1 million (6M) primarily because certain acquired assets became fully depreciated or amortized, and amortization expense for customer relationships declined. This was partially offset by ongoing capital expenditures for fiber network expansion and customer service improvements - Depreciation and amortization expense decreased by $5.0 million (Q2 2021) and $12.1 million (6M 2021) primarily due to certain acquired assets becoming fully depreciated or amortized and declining amortization expense for customer relationships[174] - These declines were offset in part by ongoing capital expenditures related to success-based capital projects for consumer and commercial services as well as the fiber network expansion and customer service improvements[174] Regulatory Matters The company navigates extensive federal and state regulations, receiving $48.1 million annually from FCC CAF Phase II and winning $5.9 million annually in RDOF, while facing state subsidy reductions and expiring COVID-19 service pledges - The company receives $48.1 million annually through the FCC's Connect America Fund (CAF) Phase II funding through 2021 and has met all associated milestones[180] - Consolidated won bids in the Rural Digital Opportunity Fund (RDOF) auction for $5.9 million annually over 10 years to serve approximately 27,000 locations with 1 Gbps downstream and 500 Mbps upstream speeds[183] - A Texas Universal Service Fund (TUSF) funding shortfall led to a 64% reduction in support starting January 15, 2021, with a potential annual impact of approximately $4.0 million, currently under appeal[186] - New Hampshire allocated $50.0 million of CARES Act funding for broadband expansion, with Consolidated granted up to $3.5 million for projects in Danbury, Springfield, and Mason[187] Non-Operating Items Non-operating items significantly impacted financial results, with increased interest expense, substantial losses on debt extinguishment and contingent payment rights, and income tax fluctuations due to the Searchlight transaction Interest Expense, Net Interest expense, net, increased by $14.0 million (Q2) and $30.3 million (6M) primarily due to $10.9 million (Q2) and $21.1 million (6M) in interest expense on the Searchlight Note and increased interest on outstanding senior notes following debt refinancing - Interest expense, net, increased by $14.0 million (Q2 2021) and $30.3 million (6M 2021) compared to the same periods in 2020[191] - This increase was primarily due to $10.9 million (Q2 2021) and $21.1 million (6M 2021) in interest expense on the Note issued to Searchlight and higher interest on outstanding senior notes after debt refinancing[191] Gain on Extinguishment of Debt The company recognized a $12.0 million loss on extinguishment of debt for the six months ended June 30, 2021, related to the repayment of $397.0 million in term loans, and an additional $5.1 million loss for Q2/6M 2021 from refinancing the credit agreement. In contrast, a $0.2 million gain was recognized in 6M 2020 from repurchasing senior notes - A $12.0 million loss on extinguishment of debt was recognized for 6M 2021 due to the repayment of $397.0 million in term loans[192] - An additional $5.1 million loss on extinguishment of debt was recognized for Q2/6M 2021 related to the refinancing of the credit agreement[192] - In 6M 2020, a $0.2 million gain on extinguishment of debt was recognized from repurchasing $4.5 million of 6.50% Senior Notes due 2022[193] Change in Fair Value of Contingent Payment Rights The company recognized a loss of $39.8 million for Q2 2021 and $97.4 million for 6M 2021 due to the increase in the fair value of the contingent payment right issued to Searchlight - A loss of $39.8 million (Q2 2021) and $97.4 million (6M 2021) was recognized due to the increase in the fair value of the contingent payment right issued to Searchlight[194] Other Income Other income increased by $0.7 million for Q2 2021 but decreased by $2.2 million for 6M 2021. Investment income from wireless partnerships increased, and pension/post-retirement expense decreased. However, a $3.6 million loss on wireless spectrum license disposition in Q2/6M 2021 contrasted with a $3.7 million gain from a similar sale in 6M 2020 - Investment income from wireless partnership interests increased by $2.3 million (Q2 2021) and $1.2 million (6M 2021)[195] - A loss of $3.6 million was recognized on the disposition of wireless spectrum licenses during Q2/6M 2021, compared to a $3.7 million gain from a similar sale in 6M 2020[195] Income Taxes Income taxes increased by $1.2 million for Q2 2021 but decreased by $9.2 million for 6M 2021. The effective tax rate was (10.9)% for Q2 2021 and (0.1)% for 6M 2021, significantly impacted by the discrete effective tax rate method and permanent differences related to the Searchlight transaction - Income taxes increased by $1.2 million (Q2 2021) and decreased by $9.2 million (6M 2021) compared to the same periods in 2020[197] - The effective tax rate was (10.9)% for Q2 2021 and (0.1)% for 6M 2021, influenced by the discrete effective tax rate method and permanent income tax differences from the Searchlight transaction[199] Non-GAAP Measures The company uses non-GAAP measures like EBITDA and Adjusted EBITDA to evaluate operating performance and facilitate comparisons; Adjusted EBITDA for Q2 2021 was $126.7 million, a 5% decrease - The company uses non-GAAP measures such as EBITDA and Adjusted EBITDA to evaluate operating performance and trends, noting they should not be considered substitutes for GAAP measures[200][201] Reconciliation of Net Income (Loss) to Adjusted EBITDA (In thousands, unaudited) | Metric (in thousands) | Q2 2021 | Q2 2020 | 6M 2021 | 6M 2020 | | :-------------------- | :------ | :------ | :------ | :------ | | Net income (loss) | $(55,089) | $13,935 | $(117,172) | $29,558 | | Interest expense, net of interest income | $45,431 | $31,459 | $93,846 | $63,554 | | Income tax expense | $5,413 | $4,275 | $113 | $9,316 | | Depreciation and amortization | $76,079 | $81,066 | $151,690 | $163,804 | | EBITDA | $71,834 | $130,735 | $128,477 | $266,232 | | Adjusted EBITDA | $126,697 | $133,096 | $253,326 | $264,674 | Liquidity and Capital Resources Liquidity is supported by operating cash flows, cash, and credit, with significant capital expenditures planned for fiber expansion; net working capital improved, and financing activities provided substantial cash, ensuring sufficient resources for the next twelve months Outlook and Overview Future operating requirements are expected to be funded by cash flows from operations, existing cash, and revolving credit facility borrowings. A substantial portion of cash flow will fund capital expenditures for accelerated fiber network expansion and growth plans - Future operating requirements are expected to be funded from cash flows from operating activities, existing cash and cash equivalents and, if needed, borrowings under the revolving credit facility[206] - A substantial portion of cash flow will be used to fund capital expenditures for the accelerated fiber network expansion and growth plan and invest in future business opportunities[206] Summary of Cash Flows (In thousands) | Cash Flow Activity (in thousands) | 6M 2021 | 6M 2020 | | :-------------------------------- | :------ | :------ | | Operating activities | $185,831 | $181,721 | | Investing activities | $(283,876) | $(89,738) | | Financing activities | $141,798 | $(58,502) | | Change in cash and cash equivalents | $43,753 | $33,481 | Cash Flows Provided by Operating Activities Net cash provided by operating activities increased by $4.1 million to $185.8 million for the six months ended June 30, 2021, primarily due to changes in working capital, timing of expenditures and receipts, increased cash distributions from wireless partnerships, and decreased pension plan contributions - Net cash provided by operating activities was $185.8 million during the six-month period ended June 30, 2021, an increase of $4.1 million compared to the same period in 2020[207] - The increase is primarily as a result of changes in working capital and the timing of expenditures and cash receipts, a $2.3 million increase in cash distributions from wireless partnerships, and a $1.7 million decrease in defined benefit pension plan contributions[207] Cash Flows Used In Investing Activities Net cash used in investing activities significantly increased to $283.9 million for the six months ended June 30, 2021, from $89.7 million in the prior year. This was driven by higher capital expenditures of $195.2 million (up from $96.2 million) and the purchase of $90.0 million in short-term investments. Capital expenditures for 2021 are projected to be $400.0 million to $420.0 million, supporting fiber network expansion - Net cash used in investing activities was $283.9 million during the six-month period ended June 30, 2021, a significant increase from $89.7 million in the same period in 2020[208] - Capital expenditures were $195.2 million for 6M 2021 (up from $96.2 million in 6M 2020) and are projected to be $400.0 million to $420.0 million for the full year 2021, primarily for fiber network expansion[208] - The company purchased $90.0 million in short-term investments during the six months ended June 30, 2021[209] Cash Flows Used In Financing Activities Net cash provided by financing activities was $141.8 million for the six months ended June 30, 2021, a significant shift from a net use in the prior year. This was primarily due to proceeds from bond offerings ($400.0 million) and issuance of long-term debt ($150.0 million), partially offset by payments on long-term debt ($397.0 million) and financing costs - Net cash provided by financing activities was $141.798 million for the six months ended June 30, 2021, compared to a net use of $(58.502) million in the prior year[20][210] - Key financing activities included proceeds from a bond offering of $400.0 million and issuance of long-term debt of $150.0 million[20] - Payments on long-term debt totaled $397.0 million, and financing costs were $8.266 million[20] Long-term Debt The company's long-term debt structure was significantly altered by a new Credit Agreement in October 2020, including $1.25 billion in Initial Term Loans and a $250.0 million revolving facility, with subsequent refinancing reducing interest rates and maintaining covenant compliance - A new Credit Agreement in October 2020 established $1.25 billion in Initial Term Loans and a $250.0 million revolving loan facility, secured by substantially all company assets[212] - In January 2021, $150.0 million in Incremental Term Loans were borrowed. In March 2021, $397.0 million of Term Loans were repaid using proceeds from $400.0 million in 5.00% Senior Notes, eliminating quarterly principal payments[214][215] - An April 2021 amendment refinanced $999.9 million of Term Loans, reducing the interest rate to 3.50% plus LIBOR (0.75% floor). The weighted-average interest rate on credit facility borrowings decreased from 5.75% (Dec 31, 2020) to 4.25% (June 30, 2021)[216][218] - The company was in compliance with all Credit Agreement and Senior Notes covenants as of June 30, 2021, with a consolidated first lien leverage ratio of 3.96:1.00[220][224] Finance Leases The company leases facilities and equipment under finance leases expiring between 2021 and 2040. As of June 30, 2021, the present value of minimum remaining lease commitments was $21.5 million, with $6.5 million due within the next twelve months - As of June 30, 2021, the present value of minimum remaining finance lease commitments was approximately $21.5 million[227] - Of the total, $6.5 million was due and payable within the next twelve months[227] Searchlight Investment The first stage of Searchlight's $425.0 million strategic investment closed on October 2, 2020, providing $350.0 million. The second stage, an additional $75.0 million, is expected to close later in 2021, providing capital and financial flexibility for network expansion - The first stage of Searchlight's $425.0 million strategic investment closed on October 2, 2020, providing $350.0 million[228] - The second stage, an additional $75.0 million, is expected to close later in 2021, providing capital and financial flexibility for network expansion[228] Sufficiency of Cash Resources Net working capital improved by $125.1 million to $195.3 million as of June 30, 2021, driven by increased cash and reduced current debt, with sufficient resources expected for the next twelve months, allocating funds for interest and capital expenditures Selected Financial Condition Information (In thousands, except for ratio) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Cash, cash equivalents and short-term investments | $289,281 | $155,561 | | Working capital | $195,318 | $70,191 | | Current ratio | 1.71 | 1.26 | - Net working capital improved by $125.1 million as of June 30, 2021, primarily due to a $133.7 million increase in cash, cash equivalents, and short-term investments, and an $11.1 million decline in the current portion of long-term debt[230] - Expected uses of funds for the remainder of 2021 include $60.0 million to $65.0 million for interest payments and $205.0 million to $225.0 million for capital expenditures[231] - The company believes cash flows from operating activities, existing cash, and available revolving credit will be sufficient for at least the next twelve months[232] Surety Bonds As of June 30, 2021, the company had approximately $6.3 million in surety, performance, and similar bonds outstanding, entered into as required by certain jurisdictions - As of June 30, 2021, the company had approximately $6.3 million of surety, performance, and similar bonds outstanding[236] Defined Benefit Pension Plans The company's Pension Plans are affected by investment returns and discount rates, with $20.7 million expected contributions for 2021, and a sustained market downturn could require material contributions - The cost and future funding requirements of Pension Plans are affected by expected return on investment (estimated at 6.00%) and changes in the discount rate[238] - Expected contributions for 2021 are approximately $20.7 million to Pension Plans and $8.8 million to other post-retirement benefit plans. As of June 30, 2021, $8.9 million and $4.3 million, respectively, have been contributed[239] Income Taxes The timing of cash payments for income taxes may differ from GAAP tax expense due to factors like accelerated depreciation, potentially leading to cash payments exceeding GAAP tax expense in the future - The timing of cash payments for income taxes may differ from GAAP tax expense due to factors like accelerated depreciation, potentially causing cash payments to exceed GAAP tax expense in the future[240] Critical Accounting Estimates The preparation of financial statements requires management to make estimates and assumptions, which are detailed in the 2020 Annual Report on Form 10-K - Financial statements are prepared using management's estimates and assumptions, as detailed in the 2020 Annual Report on Form 10-K[242] Recent Accounting Pronouncements Information regarding the impact of recent accounting pronouncements is provided in Note 1 to the Condensed Consolidated Financial Statements - Information on recent accounting pronouncements is available in Note 1 "Summary of Significant Accounting Policies" of the Condensed Consolidated Financial Statements[243] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk is interest rate fluctuations on variable-rate debt, managed with swaps, with a 1.00% rate increase impacting annual interest by $1.6 million - The company's primary market risk is from interest rate fluctuations on variable-rate debt, managed using interest rate swaps[244] - A 1.00% increase in market interest rates would increase annual interest expense by approximately $1.6 million, while a decrease would have no impact due to the 0.75% LIBOR floor on most variable-rate debt[245] - As of June 30, 2021, the fair value of interest rate swap agreements amounted to a net liability of $19.0 million[246] ITEM 4. CONTROLS AND PROCEDURES Management confirmed effective disclosure controls and procedures as of June 30, 2021, with no material changes in internal control over financial reporting - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[247] - There have been no material changes in internal control over financial reporting during the quarter ended June 30, 2021[249] - Internal control systems are designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting[250] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, and exhibits filed with the Form 10-Q ITEM 1. LEGAL PROCEEDINGS The company is involved in various legal and regulatory proceedings, including tax appeals, with no anticipated material adverse impact on financial results - The company is involved in litigation and regulatory proceedings, including appeals related to Pennsylvania Gross Receipts Tax assessments[252] - Management does not believe the outcome of these legal matters will have a material adverse impact on the company's business, results of operations, financial condition, or cash flows[252] ITEM 6. EXHIBITS This section lists Form 10-Q exhibits, including corporate amendments, debt agreements, and CEO/CFO certifications - The exhibits include amendments to the Certificate of Incorporation and Bylaws, joinder agreements, security agreements, pledge agreements, and supplements to indentures related to the company's debt[254][255][256] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are also included[257] SIGNATURES The report was officially signed by the Chief Executive Officer and Chief Financial Officer SIGNATURES The report was officially signed by the Chief Executive Officer and Chief Financial Officer - The report was signed by C. Robert Udell Jr., Chief Executive Officer, and Steven L. Childers, Chief Financial Officer, on August 4, 2021[261]