solidated munications (CNSL) - 2021 Q4 - Annual Report

Part I Business Consolidated Communications is a broadband and business communications provider focused on fiber network expansion and diversified revenue streams Business Overview and Strategy The company is executing a five-year plan to upgrade 1.6 million premises to FTTP, supported by a $425 million strategic investment - The company is executing a five-year plan to upgrade approximately 1.6 million residential and small business premises to fiber-to-the-home/premise (FTTP), enabling multi-Gig symmetrical speeds. In 2021, approximately 330,000 locations were upgraded, with plans for an additional 400,000 in 2022[10][29] - A strategic investment from Searchlight Capital Partners, totaling $425.0 million, is providing the capital to accelerate this fiber expansion and growth plan[8][12] - In November 2021, the company launched Fidium Fiber, its new consumer product brand for Gigabit fiber services, as part of its broadband-first strategy[10][28] Sources of Revenue and Key Statistics Revenue is diversified across commercial, consumer, subsidies, and network access, with declining voice/video offset by broadband growth Operating Revenues by Source (2019-2021) | (In millions) | 2021 $ | % of Revenues | 2020 $ | % of Revenues | 2019 $ | % of Revenues | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commercial and carrier: | | | | | | | | Data and transport services | 362.3 | 28.3% | 362.1 | 27.8% | 355.3 | 26.6% | | Voice services | 171.8 | 13.4% | 181.7 | 13.9% | 188.3 | 14.1% | | Other | 41.6 | 3.2% | 45.1 | 3.5% | 52.9 | 4.0% | | Total Commercial and carrier | 575.7 | 44.9% | 588.9 | 45.2% | 596.5 | 44.6% | | Consumer: | | | | | | | | Broadband (Data and VoIP) | 269.3 | 21.0% | 263.1 | 20.1% | 257.1 | 19.2% | | Video services | 65.1 | 5.1% | 74.3 | 5.7% | 81.4 | 6.1% | | Voice services | 160.7 | 12.5% | 170.5 | 13.1% | 180.8 | 13.5% | | Total Consumer | 495.1 | 38.6% | 507.9 | 38.9% | 519.3 | 38.9% | | Subsidies | 69.8 | 5.4% | 72.0 | 5.5% | 72.4 | 5.4% | | Network access | 120.5 | 9.4% | 125.3 | 9.6% | 138.1 | 10.3% | | Other products and services | 21.1 | 1.6% | 9.9 | 0.8% | 10.2 | 0.8% | | Total operating revenues | 1,282.2 | 100.0% | 1,304.0 | 100.0% | 1,336.5 | 100.0% | Key Operating Statistics (as of December 31) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Consumer customers | 516,949 | 554,763 | 582,818 | | Consumer data connections | 384,564 | 401,357 | 417,410 | | Consumer voice connections | 328,849 | 370,660 | 404,943 | | Video connections | 63,447 | 76,041 | 84,171 | - The company recognized income of $41.8 million, $40.7 million, and $37.7 million in 2021, 2020, and 2019, respectively, from its five wireless partnership investments[25] Network Architecture and Technology The company operates a 52,400-mile 100% fiber backbone network, connecting over 2.7 million homes and 14,981 commercial buildings - As of December 31, 2021, the fiber-optic network consisted of over 52,400 route-miles, passing more than 2.7 million homes[26] - The network has direct fiber connections to 14,981 on-net commercial building locations and supports 3,628 cell sites for wireless carriers[26] Regulatory Environment The company operates in a highly regulated environment, facing a $42.2 million reduction in federal subsidies from the RDOF transition - The company's participation in the FCC's Rural Digital Opportunity Fund (RDOF) auction will result in a reduction of approximately $42.2 million in annual support beginning January 1, 2022[52][96][119] - The company received annual support of $48.1 million through the FCC's CAF Phase II funding through 2021, which required building out broadband to approximately 124,500 locations by December 31, 2020[52][127] - The company is participating in the Affordable Connectivity Program (ACP), which replaces the Emergency Broadband Benefit (EBB) and provides discounts on internet service for eligible households[61][134] Risk Factors The company faces significant risks including intense competition, reduced federal subsidies, substantial debt, and labor contract expirations - The company faces intense competition from other local telephone companies, cable operators, wireless carriers, and OTT providers, which could lead to loss of customers, revenue, and market share[65][67] - A significant portion of revenues comes from federal and state support funds (USF/CAF), and the transition to the Rural Digital Opportunity Fund (RDOF) will result in a reduction of approximately $42.2 million in annual support beginning in 2022[71] - As of December 31, 2021, the company had $2.1 billion of debt outstanding. This substantial indebtedness could require a large portion of cash flow for debt service, limiting funds for operations and capital expenditures[76] - Approximately 48% of employees are covered by collective bargaining agreements, with contracts covering 41% of employees set to expire in 2022, posing a risk of work stoppages or increased labor costs[73] Properties The company owns its corporate headquarters and various operational facilities, including extensive fiber and cable network infrastructure - The company owns its corporate headquarters in Mattoon, Illinois, and owns and leases numerous other facilities necessary for its operations[85] - Property consists of central office equipment, customer premises equipment, outside plant facilities (poles, cable, fiber), vehicles, and other equipment[85] Legal Proceedings The company is involved in routine industry litigation, with management not expecting a material adverse financial impact - The company is subject to routine litigation and regulatory issues common in its industry[86] - Management does not expect any ongoing legal matters to have a material adverse impact on the company's financial results[86] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Consolidated's common stock trades on NASDAQ, with recent share repurchases and historical underperformance against market indices - The company's common stock is traded on the NASDAQ under the symbol 'CNSL'[89] Share Repurchases (Q4 2021) | Purchase period | Total number of shares purchased | Average price paid per share | | :--- | :--- | :--- | | October 1-October 31, 2021 | — | — | | November 1-November 30, 2021 | — | — | | December 1-December 31, 2021 | 219,067 | $ 7.85 | - The company's 5-year cumulative total return of $36.37 on a $100 investment significantly underperformed the S&P 500 ($233.41) and the NASDAQ Telecommunications Index ($174.78)[93] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Total operating revenues decreased 2% in 2021, resulting in a net loss primarily due to non-cash charges and increased capital expenditures Results of Operations Total operating revenues decreased 2% in 2021, leading to a net loss of $106.7 million primarily due to non-cash charges Financial Highlights (2021 vs. 2020) | Metric (In millions) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $1,282.2 | $1,304.0 | (2)% | | Income from operations | $135.2 | $135.5 | (0)% | | Net income (loss) | $(106.7) | $37.3 | (386)% | | Adjusted EBITDA (Non-GAAP) | $506.9 | $529.2 | (4)% | - The significant net loss in 2021 was primarily driven by a non-cash loss of $86.5 million from the change in fair value of contingent payment rights and a $17.1 million loss on debt extinguishment[105][140] - Consumer broadband revenue increased by $6.2 million (2%) in 2021, while consumer voice and video revenues decreased by $9.8 million (6%) and $9.2 million (12%), respectively, reflecting a shift in product mix[105][115][116][117] Liquidity and Capital Resources Net cash from operations decreased, while capital expenditures surged to $480.3 million for fiber expansion, with total debt at $2.16 billion Cash Flow Summary (In thousands) | Cash flows provided by (used in): | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Operating activities | $ 318,867 | $ 364,980 | $ 339,096 | | Investing activities | $ (586,443) | $ (210,066) | $ (217,819) | | Financing activities | $ 211,650 | $ (11,748) | $ (118,481) | - Capital expenditures increased significantly to $480.3 million in 2021 from $217.6 million in 2020, primarily to fund the fiber expansion plan. 2022 capex is projected to be between $475.0 million and $495.0 million[153] Indebtedness as of Dec 31, 2021 (In thousands) | Debt Instrument | Balance | Maturity Date | | :--- | :--- | :--- | | 6.50% Senior Notes | $ 750,000 | Oct 1, 2028 | | 5.00% Senior Notes | $ 400,000 | Oct 1, 2028 | | Term loans, net of discount | $ 989,567 | Oct 2, 2027 | | Finance leases | $ 24,990 | Various | | Total | $ 2,164,557 | | Critical Accounting Estimates Key estimates include goodwill impairment testing, deferred income taxes, and significant assumptions for pension and post-retirement benefit obligations - Goodwill, with a carrying value of $1,013.2 million at year-end 2021, is tested for impairment annually. The 2021 qualitative assessment concluded that fair value was more likely than not greater than the carrying value[184][263] - Pension and post-retirement benefit calculations rely on critical assumptions. For 2021, the weighted-average discount rate for pension obligations was 3.05% and the expected long-term rate of return on plan assets was 6.00%[190][177] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on variable-rate debt, managed through interest rate swaps - The company's main market risk is interest rate changes on its variable-rate debt. A hypothetical 1.00% increase in market interest rates would raise annual interest expense by about $1.8 million[194] - The company uses interest rate swap agreements to hedge against interest rate volatility. At December 31, 2021, the fair value of these swaps was a liability of $12.8 million[194] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and the independent auditor's unqualified opinion on financial statements and internal controls - The Report of Independent Registered Public Accounting Firm, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[204][227] - The auditor identified the valuation of Defined Benefit Pension and Other Post-Retirement Benefit Obligations as a Critical Audit Matter due to the highly judgmental nature of the discount rate assumptions used in the measurement process[229][232] Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[195] - Management's report on internal control over financial reporting concluded that controls were effective as of December 31, 2021, an assessment audited and affirmed by Ernst & Young LLP[197][199][204] Part III Directors, Executive Compensation, and Corporate Governance Information on directors, executive compensation, and corporate governance is incorporated by reference from the forthcoming proxy statement - Information regarding directors, executive compensation, security ownership, and other governance matters is incorporated by reference from the company's forthcoming proxy statement[211][212] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including corporate governance and debt agreements - This section contains a list of all exhibits filed with the 10-K, including the company's certificate of incorporation, bylaws, debt indentures, and executive compensation plans[215][216]