CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
These forward-looking statements reflect, among other things, our current
expectations, plans, strategies and anticipated financial results. There are a
number of risks, uncertainties and conditions that may cause our actual results
to differ materially from those expressed or implied by these forward-looking
statements including the impact of the ongoing novel coronavirus ("COVID-19")
pandemic and our response to it. Many of these circumstances are beyond our
ability to control or predict. Moreover, forward-looking statements necessarily
involve assumptions on our part. These forward-looking statements generally are
identified by the words "believe," "expect," "anticipate," "estimate,"
"project," "intend," "plan," "should," "may," "will," "would," "will be," "will
continue" or similar expressions. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of
Except as required under federal securities laws or the rules and regulations
of the
Throughout this MD&A, we refer to certain measures that are not measures of
financial performance in accordance with accounting principles generally
accepted in
Overview
Consolidated is a broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers across a 23-state service area. We operate an advanced fiber network spanning approximately 47,400 fiber route miles across many rural areas and metro communities. Our business product suite includes: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services. We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections. We offer residential high-speed Internet, video, phone and home security services as well as multi-service residential and small business bundles.
We generate the majority of our consolidated operating revenues primarily from monthly subscriptions to our broadband, data and transport services (collectively "broadband services") marketed to business and residential customers. Commercial and carrier services represent the largest source of our operating revenues and are expected to be key growth areas in the future. We are focused on expanding our broadband and commercial product suite and are continually enhancing our commercial product offerings to meet the needs of our business customers. We leverage our advanced fiber network and tailor our services for business customers by developing solutions to fit their specific
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needs. Additionally, we are continuously enhancing our suite of managed and cloud services, which increases efficiency and enables greater scalability and reliability for businesses. We anticipate future momentum in commercial and carrier services as these products gain traction as well as from the demand from customers for additional bandwidth and data-based services.
We market our residential services by leading with a competitive broadband
service. As consumer demands for bandwidth continue to increase, our focus is
on significantly enhancing our broadband services and upgrading data speeds. We
offer data speeds of up to 1 Gbps in select markets, and up to 100 Mbps in
markets where 1 Gbps is not yet available, depending on the geographical
region. As of
Our investment in more competitive broadband speeds is critical to our long-term
success. The strategic investment with
Our competitive broadband speeds enable us to meet the need for higher bandwidth
from the growing consumer demand for streaming live programming or in-demand
content on any device. The consumers demand for streaming services, either to
augment their current video subscription plan or to entirely replace their video
subscription may impact our future video subscriber base and, accordingly,
reduce our video revenue as well as our video programing costs. Total video
connections decreased 10% as of
Operating revenues also continue to be impacted by the anticipated industry-wide
trend of declines in voice services, access lines and related network access
revenue. Many customers are choosing to subscribe to alternative communication
services and competition for these subscribers continues to increase. Total
voice connections decreased 6% as of
As discussed in the "Regulatory Matters" section below, our operating revenues are impacted by legislative or regulatory changes at the federal and state levels, which could reduce or eliminate the current subsidies revenue we receive. A number of proceedings and recent orders relate to universal service reform, intercarrier compensation ("ICC") and network access charges. There are various ongoing legal challenges to the orders that have been issued. As a result, it is not yet possible to fully determine the impact of the regulatory changes on our operations.
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Recent Developments
Searchlight Investment On
In the first stage of the transaction, which was completed on
In the second stage of the transaction, Searchlight will invest an additional
Refinancing of Long-term Debt
On
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COVID-19 Pandemic
We are closely monitoring the impact on our business of the outbreak of the COVID-19 pandemic. We are taking precautions to ensure the safety of our employees, customers and business partners, while assuring business continuity and reliable service and support to our customers. Health and safety measures implemented include transitioning to remote work-from-home policies, providing our field technicians with personal protective equipment and additional safety training, practicing social distancing and adding call aheads for work that must be performed inside customer premises. We are proactively monitoring and augmenting our network capacity, to meet the higher demands for data usage during the pandemic as a result of increased usage from work from home and remote learning applications. As a result of the pandemic, the demand for bandwidth upgrades has increased for our consumer, commercial and carrier customers. Our existing network enables us to efficiently respond and adapt to the increase in internet traffic during this time.
While we have not seen a significant adverse impact to our financial results from COVID-19 to date, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Capital markets and the US economy have also been significantly impacted by the pandemic and an economic recession. Adverse economic and market conditions as a result of COVID-19 could also adversely affect the demand for our products and services and may also impact the ability of our customers to satisfy their obligations to us. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted.
On
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Results of Operations
The following tables reflect our financial results on a consolidated basis and
key operating metrics as of and for the quarters ended
Financial Data
Quarter Ended March 31,
$ %
(In millions, except for percentages) 2021 2020 Change Change
Operating Revenues
Commercial and carrier:
Data and transport services (includes VoIP) $ 90.3 $ 89.6 $ 0.7 1 %
Voice services 44.3 45.7 (1.4) (3)
Other 9.7 11.7 (2.0) (17)
144.3 147.0 (2.7) (2)
Consumer:
Broadband (Data and VoIP) 65.8 64.1 1.7 3
Video services 16.8 19.1 (2.3) (12)
Voice services 40.4 43.2 (2.8) (6)
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
Cost of services and products (exclusive of
depreciation and amortization) 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)
Income from operations 38.3 37.4 0.9 2
Interest expense, net (48.4) (32.1) 16.3 51
Gain (loss) on extinguishment of debt (12.0) 0.2 (12.2) (6,100)
Change in fair value of contingent payment
rights (57.6) - (57.6) 100
Other income, net 12.3 15.2 (2.9) (19)
Income tax expense (benefit) (5.3) 5.1 (10.4) (204)
Net income (loss) (62.1) 15.6 (77.7) (498)
Net income attributable to noncontrolling
interest - 0.1 (0.1) (100)
Net income (loss) attributable to common
shareholders $ (62.1) $ 15.5 $ (77.6) (501)
Adjusted EBITDA (1) $ 126.6 $ 131.6 $ (5.0) (4) %
(1) A non-GAAP measure. See the "Non-GAAP Measures" section below for additional
information and reconciliation to the most directly comparable GAAP measure.
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Key Operating Statistics
As of March 31,
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
Commercial and Carrier
Data and Transport Services
We provide a variety of business communication services to business customers of all sizes, including many services over our advanced fiber network. The services we offer include scalable high-speed broadband Internet access and VoIP phone services, which range from basic service plans to virtual hosted systems. In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; private line data services; software defined wide area network and multi-protocol label switching. Our networking services include point-to-point and multi-point deployments from 2.5 Mbps to 10 Gbps to accommodate the growth patterns of our business customers. We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer's on-site phone systems and data networks, managed network security services and data protection services. Data center and disaster recovery solutions provide a reliable and local colocation option for commercial customers. We also offer wholesale services to regional and national interexchange and wireless carriers, including cellular backhaul and other fiber transport solutions.
Data and transport services revenues increased
Voice Services
Voice services include basic local phone and long-distance service packages for
business customers. The plans include options for voicemail, conference calling,
linking multiple office locations and other custom calling features such as
caller ID, call forwarding, speed dialing and call waiting. Services can be
charged at a fixed monthly rate, a measured rate or can be bundled with selected
services at a discounted rate. Voice services revenues decreased
Other
Other services include business equipment sales and related hardware and
maintenance support, video services and other miscellaneous revenues, including
9-1-1 service revenues. We are a full service 9-1-1 provider and have installed
and maintained two turn-key, state of the art statewide next-generation
emergency 9-1-1 systems. These systems, located in
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Other services revenues decreased
Consumer Broadband Services
Broadband services include revenues from residential customers for subscriptions to our VoIP and data products. We offer high-speed Internet access at speeds of up to 1 Gbps, depending on the nature of the network facilities that are available, the level of service selected and the location. Our VoIP digital phone service is also available in certain markets as an alternative to the traditional telephone line. CCiTV, which is a customizable, cloud-enabled video service, supports a wide variety of viewing habits and provides an app-based approach to video services. Content can be delivered in high-definition quality to a big-screen TV, as well as to tablets and mobile devices.
Broadband services revenues increased
Video Services
Depending on geographic market availability, our video services range from
limited basic service to advanced digital television, which includes several
plans, each with hundreds of local, national and music channels including
premium and Pay-Per-View channels as well as video On-Demand service. Certain
customers may also subscribe to our advanced video services, which consist of
high-definition television, digital video recorders ("DVR") and/or a whole home
DVR. Our TV Everywhere service allows our video subscribers to watch their
favorite shows, movies and livestreams on any device. In addition, we offer
other in-demand streaming content including: ATT TV, fuboTV,
Video services revenues decreased
Voice Services
We offer several different basic local phone service packages and long-distance
calling plans, including unlimited flat-rate calling plans. The plans include
options for voicemail and other custom calling features such as caller ID, call
forwarding and call waiting. Voice services revenues decreased
We expect to continue to experience erosion in voice connections due to competition from alternative technologies, including our own competing VoIP product.
Subsidies
Subsidies consist of both federal and state subsidies, which are designed to
promote widely available, quality broadband services at affordable prices with
higher data speeds in rural areas. Subsidies revenues decreased
NetworkAccess Services
Network access services include interstate and intrastate switched access, network special access and end user access. Switched access revenues include access services to other communications carriers to terminate or originate long-distance calls on our network. Special access circuits provide dedicated lines and trunks to business customers and
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interexchange carriers. Network access services revenues increased
Other Products and Services
Other products and services include revenues from telephone directory
publishing, video advertising, billing and support services and other
miscellaneous revenues. We have entered into multiple
Other products and services revenues increased
Operating Expenses
Cost of Services and Products
Cost of services and products increased
Selling, General and Administrative Costs
Selling, general and administrative costs decreased
Depreciation and Amortization
Depreciation and amortization expense decreased
Regulatory Matters
Our revenues are subject to broad federal and/or state regulations, which include such telecommunications services as local telephone service, network access service and toll service. The telecommunications industry is subject to extensive federal, state and local regulation. Under the Telecommunications Act of 1996, federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices.
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At the federal level, the
State regulatory commissions generally exercise jurisdiction over carriers' facilities and services to the extent they are used to provide, originate or terminate intrastate communications. In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks. State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations.
FCC Matters
In general, telecommunications service in rural areas is costlier to provide than service in urban areas. The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain. By supporting the high-cost of operations in rural markets, USF subsidies promote widely available, quality telephone service at affordable prices in rural areas.
Our current annual support through the
We accepted CAF Phase II support in all of our operating states except
The annual
In
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State Matters
Texas
Our Texas Incumbent Local Exchange Carriers ("ILECs") have historically received
support from two state funds, the small and rural incumbent local exchange
company plan
In
CARES Act Funding
States are reviewing opportunities to use federal CARES Act funding to assist in
the deployment of broadband to unserved and underserved areas within their
respective states. In 2020,
COVID-19
On
Other Regulatory Matters
We are also subject to a number of regulatory proceedings occurring at the
federal and state levels that may have a material impact on our operations. The
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Non-Operating Items
Interest Expense, Net
Interest expense, net of interest income, increased
Gain on Extinguishment of Debt
As described in the "Liquidity and Capital Resources" section below, we incurred
a loss on the extinguishment of debt of
During the quarter ended
Change in Fair Value of Contingent Payment Rights
We are required to measure our contingent payment rights at fair value until
they are converted into shares of the Company's common stock. During the
quarter ended
Other Income
Other income decreased
Income Taxes
Income taxes decreased
Non-GAAP Measures
In addition to the results reported in accordance with US GAAP, we also use certain non-GAAP measures such as EBITDA and adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends. These financial measures are not measures of financial performance under US GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance and net cash provided by operating activities as a measure of liquidity. They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies. Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below.
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EBITDA is defined as net earnings before interest expense, income taxes and depreciation and amortization. Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below. These measures are a common measure of operating performance in the telecommunications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash.
The following table is a reconciliation of net income (loss) to adjusted EBITDA
for the quarters ended
Quarter Ended
March 31,
(In thousands, unaudited) 2021 2020
Net income (loss) $ (62,083) $ 15,623
Add (subtract):
Interest expense, net of interest income 48,415 32,095
Income tax expense (benefit) (5,300) 5,041
Depreciation and amortization 75,611 82,738
EBITDA 56,643 135,497
Adjustments to EBITDA:
Other, net (1) (10,409) (14,639)
Investment distributions (2) 9,377 10,064
(Gain) loss on extinguishment of debt 11,980 (234)
Change in fair value of contingent payment rights 57,588 -
Non-cash, stock-based compensation 1,450 890
Adjusted EBITDA $ 126,629 $ 131,578 Includes the equity earnings from our investments, dividend income, income (1) attributable to noncontrolling interests in subsidiaries, acquisition and
transaction related costs including integration and severance, non-cash
pension and post-retirement benefits and certain other miscellaneous items.
(2) Includes all cash dividends and other cash distributions received from our
investments.
Liquidity and Capital Resources
Outlook and Overview
Our operating requirements have historically been funded from cash flows generated from our business and borrowings under our credit facilities. We expect that our future operating requirements will continue to be funded from cash flows from operating activities, existing cash and cash equivalents and, if needed, borrowings under our revolving credit facility and our ability to obtain future external financing. We anticipate that we will continue to use a substantial portion of our cash flow to fund capital expenditures for our accelerated fiber network expansion and growth plan and invest in future business opportunities.
The following table summarizes our cash flows:
Three Months Ended March 31,
(In thousands) 2021 2020
Cash flows provided by (used in):
Operating activities $ 98,490 $ 84,990
Investing activities (74,738) (39,776)
Financing activities 145,829 (43,470)
Change in cash and cash equivalents
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Cash Flows Provided by Operating Activities
Net cash provided by operating activities was
Cash Flows Used In Investing Activities
Net cash used in investing activities was
Cash Flows Used In Financing Activities
Net cash used in financing activities consists primarily of our proceeds from and principal payments on long-term borrowings, and repurchases of debt.
Long-term Debt Credit Agreement
On
The Initial Term Loans were issued in an original aggregate principal amount of
On
On
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The revolving credit facility has a maturity date of
The weighted-average interest rate on outstanding borrowings under our credit
facility was 5.75% as of
Credit Agreement Covenant Compliance
The Credit Agreement contains various provisions and covenants, including, among
other items, restrictions on the ability to pay dividends, incur additional
indebtedness, and issue certain capital stock. We have agreed to maintain
certain financial ratios, including a maximum consolidated first lien leverage
ratio, as defined in the Credit Agreement. Among other things, it will be an
event of default, with respect to the revolving credit facility only, if our
consolidated first lien leverage ratio as of the end of any fiscal quarter is
greater than 5.85:1.00. As of
Refinancing of Credit Agreement
On
Senior Notes
On
On
Deferred debt issuance costs of
The Senior Notes are unsubordinated secured obligations of the Company, secured by a first priority lien on the collateral that secures the Company's obligations under the Credit Agreement. The Senior Notes are fully and unconditionally guaranteed on a first priority secured basis by the Company and the majority of our wholly-owned subsidiaries. The
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offerings of the Senior Notes have not been registered under the Securities Act of 1933, as amended or any state securities laws.
Senior Notes Covenant Compliance
Subject to certain exceptions and qualifications, the indentures governing the
Senior Notes contains customary covenants that, among other things, limits the
Company and its restricted subsidiaries' ability to: incur additional debt or
issue certain preferred stock; pay dividends or make other distributions on
capital stock or prepay subordinated indebtedness; purchase or redeem any equity
interests; make investments; create liens; sell assets; enter into agreements
that restrict dividends or other payments by restricted subsidiaries;
consolidate, merge or transfer all or substantially all of its assets; engage in
transactions with its affiliates; or enter into any sale and leaseback
transactions. The indentures also contain customary events of default. As of
Repurchase of Senior Notes due 2022
During the quarter ended
Finance Leases
We lease certain facilities and equipment under various finance leases which
expire between 2021 and 2040. As of
Searchlight Investment
On
Sufficiency of Cash Resources
The following table sets forth selected information regarding our financial condition.
March 31, December 31,
(In thousands, except for ratio) 2021 2020
Cash and cash equivalents $ 325,142 $ 155,561
Working capital 225,741 70,191
Current ratio 1.82 1.26
Our net working capital improved
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an increase in accrued interest of
Our most significant use of funds for the remainder of 2021 is expected to be
for: (i) interest payments on our indebtedness of between
We believe that cash flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for at least the next twelve months to fund our current anticipated uses of cash. After that, our ability to fund expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance and cash flow. Our ability to fund expected uses from the results of future operations will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control. Due to the uncertainty and unpredictability related to the potential impacts of the COVID-19 pandemic on our business, we will continue to closely manage our cash and monitor liquidity.
To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities.
There can be no assurance that we will be able to generate sufficient cash flows from operations in the future, that anticipated revenue growth will be realized or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash. Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures which could have a material adverse effect on our financial condition and the results of operations. In addition, the COVID-19 pandemic has caused a disruption in the capital markets, which could make obtaining additional financing more difficult and we may not be able to obtain financing on favorable terms or at all.
We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or are subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries' ability to pay dividends or advance cash in any other manner to us.
Surety Bonds
In the ordinary course of business, we enter into surety, performance and similar bonds as required by certain jurisdictions in which we provide services.
As of
Defined Benefit Pension Plans
As required, we contribute to qualified defined pension plans and non-qualified supplemental retirement plans (collectively the "Pension Plans") and other post-retirement benefit plans, which provide retirement benefits to certain eligible employees as described in the Note 11 to the Condensed Consolidated Financial Statements, included in this report in Part I - Item 1 "Financial Statements". Contributions are intended to provide for benefits attributed to service to date. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations.
The cost to maintain our Pension Plans and future funding requirements are affected by several factors including the expected return on investment of the assets held by the Pension Plans, changes in the discount rate used to calculate pension expense and the amortization of unrecognized gains and losses. Returns generated on the Pension Plans assets have historically funded a significant portion of the benefits paid under the Pension Plans. We estimate the long-term rate of
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return on assets will be 6.00%. The Pension Plans invest in marketable equity securities which are exposed to changes in the financial markets. COVID-19 has also negatively impacted the financial markets, which could significantly impact the returns on our plan assets. If the financial markets experience a sustained downturn and returns fall below our estimate, we could be required to make material contributions to the Pension Plans, which could adversely affect our cash flows from operations.
In 2021, we expect to make contributions totaling approximately
Income Taxes
The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. For example, tax laws in effect regarding accelerated or "bonus" depreciation for tax reporting resulted in less cash payments than the GAAP tax expense. Acceleration of tax deductions could eventually result in situations where cash payments will exceed GAAP tax expense.
Critical Accounting Estimates
Our condensed consolidated financial statements and accompanying notes are
prepared in accordance with US GAAP. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates and assumptions are
affected by management's application of accounting policies. Our judgments are
based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making estimates about the carrying values of assets and liabilities
that are not readily apparent from other sources. For a full discussion of our
accounting estimates and assumptions that we have identified as critical in the
preparation of our condensed consolidated financial statements, refer to our
2020 Annual Report on Form 10-K filed with the
Recent Accounting Pronouncements
For information regarding the impact of certain recent accounting pronouncements, see Note 1 "Summary of Significant Accounting Policies" to the Condensed Consolidated Financial Statements, included in this report in Part I - Item 1 "Financial Statements".
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