10-Q 1 cnsl-20230331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

or

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-51446

Graphic

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

02-0636095

(State or other jurisdiction

(IRS Employer

of incorporation or organization)

Identification No.)

2116 South 17th Street, MattoonIllinois

61938-5973

(Address of principal executive offices)

(Zip Code)

  (217) 235-3311   

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock - $0.01 par value

CNSL

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ____

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes X No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     Accelerated filer

Non-accelerated filer___ Smaller reporting company ____ Emerging growth company ____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

On May 1, 2023, the registrant had 116,649,382 shares of Common Stock outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands except per share amounts)

Three Months Ended

March 31,

    

2023

    

2022

    

 

Net revenues

$

276,126

$

300,278

Operating expense:

Cost of services and products (exclusive of depreciation and amortization)

 

131,938

 

135,895

Selling, general and administrative expenses

 

81,284

 

73,285

Loss on impairment of assets held for sale

 

 

126,490

Loss on disposal of assets

 

3,304

 

Depreciation and amortization

 

77,699

 

72,350

Loss from operations

 

(18,099)

 

(107,742)

Other income (expense):

Interest expense, net of interest income

 

(33,860)

 

(29,515)

Other, net

 

2,758

 

3,342

Loss from continuing operations before income taxes

 

(49,201)

 

(133,915)

Income tax benefit

 

(12,240)

 

(14,819)

Loss from continuing operations

 

(36,961)

 

(119,096)

Discontinued operations:

Income from discontinued operations

 

 

8,063

Income tax expense

4,516

Income from discontinued operations

 

 

3,547

Net loss

 

(36,961)

 

(115,549)

Less: dividends on Series A preferred stock

10,587

9,598

Less: net income attributable to noncontrolling interest

 

143

 

115

Net loss attributable to common shareholders

$

(47,691)

$

(125,262)

Net income (loss) per common share - basic and diluted

Loss from continuing operations

$

(0.42)

$

(1.15)

Income from discontinued operations

 

 

0.03

Loss per basic and diluted common shares attributable to common shareholders

$

(0.42)

$

(1.12)

See accompanying notes

1

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; Amounts in thousands)

Three Months Ended

March 31,

    

2023

    

2022

 

Net loss

$

(36,961)

$

(115,549)

Pension and post-retirement obligations:

Amortization of actuarial loss (gain) and prior service cost (credit) to earnings, net of tax

 

(999)

 

(52)

Derivative instruments designated as cash flow hedges:

Change in fair value of derivatives, net of tax

 

(34)

 

4,638

Reclassification of realized loss (gain) to earnings, net of tax

 

(1,979)

 

1,339

Comprehensive loss

 

(39,973)

 

(109,624)

Less: comprehensive income attributable to noncontrolling interest

 

143

 

115

Total comprehensive loss attributable to common shareholders

$

(40,116)

$

(109,739)

See accompanying notes

2

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands except share and per share amounts)

March 31,

December 31,

    

2023

    

2022

 

ASSETS

Current assets:

Cash and cash equivalents

$

247,877

$

325,852

Short-term investments

 

87,951

 

87,951

Accounts receivable, net of allowance for credit losses

 

108,471

 

119,675

Income tax receivable

 

1,662

 

1,670

Prepaid expenses and other current assets

 

65,622

 

62,996

Total current assets

 

511,583

 

598,144

Property, plant and equipment, net

 

2,330,545

 

2,234,122

Investments

 

9,104

 

10,297

Goodwill

 

929,570

 

929,570

Customer relationships, net

 

37,018

 

43,089

Other intangible assets

 

10,557

 

10,557

Other assets

 

63,542

 

61,315

Total assets

$

3,891,919

$

3,887,094

LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

53,921

$

33,096

Advance billings and customer deposits

 

49,009

 

46,664

Accrued compensation

 

51,602

 

60,903

Accrued interest

35,956

18,201

Accrued expense

 

111,808

 

95,206

Current portion of long-term debt and finance lease obligations

 

16,377

 

12,834

Total current liabilities

 

318,673

 

266,904

Long-term debt and finance lease obligations

 

2,136,837

 

2,129,462

Deferred income taxes

 

261,001

 

274,309

Pension and other post-retirement obligations

 

122,090

 

123,644

Other long-term liabilities

 

48,079

 

47,326

Total liabilities

 

2,886,680

 

2,841,645

Commitments and contingencies (Note 15)

Series A preferred stock, par value $0.01 per share; 10,000,000 shares authorized, 477,047 and 456,343 shares outstanding as of March 31, 2023 and December 31, 2022, respectively; liquidation preference of $487,634 and $477,047 as of March 31, 2023 and December 31, 2022, respectively

339,267

328,680

Shareholders’ equity:

Common stock, par value $0.01 per share; 150,000,000 shares authorized, 116,649,382 and 115,167,193 shares outstanding as of March 31, 2023 and December 31, 2022, respectively

 

1,167

 

1,152

Additional paid-in capital

 

709,603

 

720,442

Retained earnings (accumulated deficit)

 

(48,970)

 

(11,866)

Accumulated other comprehensive loss, net

 

(3,622)

 

(610)

Noncontrolling interest

 

7,794

 

7,651

Total shareholders’ equity

 

665,972

 

716,769

Total liabilities, mezzanine equity and shareholders’ equity

$

3,891,919

    

$

3,887,094

See accompanying notes

3

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY

(Unaudited; Amounts in thousands)

Mezzanine Equity

Shareholders' Equity

Accumulated

 

Additional 

Retained 

Other 

Non-

Preferred Stock

Common Stock

Paid-in 

Earnings

Comprehensive

controlling 

 

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

(Deficit)

  

Loss, net

  

Interest

  

Total

 

Balance at December 31, 2021

 

434

$

288,576

113,647

$

1,137

$

740,746

$

(141,599)

$

(59,571)

$

7,087

$

547,800

Shares issued under employee plan, net of forfeitures

 

1,792

17

 

(17)

 

 

 

Series A preferred stock issued

3

Dividends on Series A preferred stock accrued

 

9,598

(9,598)

 

(9,598)

Non-cash, share-based compensation

 

 

 

 

2,199

 

 

 

2,199

Purchase and retirement of common stock

 

(16)

 

 

(114)

 

 

 

(114)

Other comprehensive income

 

 

 

 

 

 

5,925

 

5,925

Net income (loss)

 

 

 

 

 

(115,664)

 

115

 

(115,549)

Balance at March 31, 2022

 

437

$

298,174

115,424

$

1,154

$

733,216

$

(257,263)

$

(53,646)

$

7,202

$

430,663

Balance at December 31, 2022

 

456

$

328,680

115,167

$

1,152

$

720,442

$

(11,866)

$

(610)

$

7,651

$

716,769

Shares issued under employee plan, net of forfeitures

 

1,738

17

 

(17)

 

 

 

Series A preferred stock issued

21

Dividends on Series A preferred stock accrued

 

10,587

(10,587)

 

(10,587)

Non-cash, share-based compensation

 

 

 

 

799

 

 

 

799

Purchase and retirement of common stock

 

(256)

 

(2)

 

(1,034)

 

 

 

(1,036)

Other comprehensive income

 

 

 

 

 

 

(3,012)

 

(3,012)

Net income (loss)

 

 

 

 

 

(37,104)

 

143

 

(36,961)

Balance at March 31, 2023

 

477

$

339,267

116,649

$

1,167

$

709,603

$

(48,970)

$

(3,622)

$

7,794

$

665,972

See accompanying notes

4

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; Amounts in thousands)

Three Months Ended March 31,

    

2023

    

2022

 

Cash flows from operating activities:

Net loss

$

(36,961)

$

(115,549)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

 

77,699

 

72,350

Deferred income taxes

 

5,604

 

(10,560)

Cash distributions from wireless partnerships in excess of current earnings

 

 

153

Pension and post-retirement contributions in excess of expense

(2,861)

(9,342)

Stock-based compensation expense

 

799

 

2,199

Amortization of deferred financing costs and discounts

 

1,847

 

1,802

Loss on impairment of assets held for sale

126,490

Loss on disposal of assets

3,304

Other, net

 

(418)

 

(189)

Changes in operating assets and liabilities:

Accounts receivable, net

 

10,110

 

12,035

Income tax receivable

 

(17,835)

 

(1,599)

Prepaid expenses and other assets

 

(6,691)

 

(8,398)

Accounts payable

 

11,976

 

(1,893)

Accrued expenses and other liabilities

 

8,513

 

14,061

Net cash provided by operating activities

55,086

81,560

Cash flows from investing activities:

Purchases of property, plant and equipment, net

 

(130,826)

 

(156,480)

Purchase of investments

 

 

(39,959)

Proceeds from sale and maturity of investments

1,623

65,754

Proceeds from sale of assets

 

292

 

74

Proceeds from business dispositions

 

 

26,042

Net cash used in investing activities

 

(128,911)

 

(104,569)

Cash flows from financing activities:

Payment of finance lease obligations

 

(3,114)

 

(2,341)

Share repurchases for minimum tax withholding

 

(1,036)

 

(114)

Net cash used in financing activities

 

(4,150)

 

(2,455)

Change in cash and cash equivalents

 

(77,975)

 

(25,464)

Cash and cash equivalents at beginning of period

 

325,852

 

99,635

Cash and cash equivalents at end of period

$

247,877

$

74,171

See accompanying notes

5

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Accounting

Consolidated Communications Holdings, Inc. (the “Company,” “we,” “our” or “us”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communication solutions to consumer, commercial and carrier customers across a service area in over 20 states.

Leveraging our advanced fiber network spanning approximately 57,500 fiber route miles, we offer residential high-speed Internet, video, phone and home security services as well as a comprehensive business product suite including: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services.  

In the opinion of management, the accompanying unaudited condensed consolidated balance sheets and related condensed consolidated statements of operations, comprehensive income (loss), mezzanine equity and shareholders’ equity and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods.  Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading.  Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2022 Annual Report on Form 10-K filed with the SEC.

Recent Developments

Take Private Proposal

On April 12, 2023, our board of directors (the “Board”) received a non-binding proposal letter from Searchlight Capital Partners, L.P. (“Searchlight”), together with its affiliated investment funds, and British Columbia Investment Management Corporation (“BCI” and together with Searchlight, the “Searchlight Group”) to acquire all of the outstanding common shares of Consolidated not already owned by the Searchlight Group for cash consideration of $4.00 per share (the “Proposal”). The Proposal letter states that any potential transaction must be subject to the approval and recommendation by a special committee of independent and disinterested directors, advised by independent legal and financial advisors. The Proposal letter also indicates that any potential transaction would be subject to a non-waivable condition requiring the approval of the holders of a majority of the shares of Common Stock that are not owned by the Searchlight Group. The Board has formed a special committee of independent directors to evaluate and consider the Proposal.

The Proposal constitutes only an indication of interest by the Searchlight Group and does not constitute a binding commitment with respect to the proposed transaction or any other transaction. No agreement, arrangement or understanding between Consolidated and the Searchlight Group relating to any proposed transaction will be created unless definitive documentation is executed and delivered by the appropriate parties. There can be no assurance that the Proposal will result in a transaction occurring, its timing, or ultimate terms.

6

On December 7, 2021, we closed on the final stage of the investment agreement (the “Investment Agreement”) entered into on September 13, 2020 with an affiliate of Searchlight.  In connection with the Investment Agreement, affiliates of Searchlight have invested an aggregate of $425.0 million in the Company and hold a combination of Series A perpetual preferred stock and approximately 34% of the Company’s outstanding common stock as of March 31, 2023. For a more complete discussion of the transaction, refer to Note 4.

Discontinued Operations – Sale of Investment in Wireless Partnerships

On September 13, 2022, we completed the sale of our five limited wireless partnership interests to Cellco Partnership (“Cellco”) for an aggregate purchase price of $490.0 million, other than a portion of the interest in one of the partnerships which was sold to a limited partner of such partnership pursuant to its right of first refusal. Cellco is the general partner for each of the five wireless partnerships and is an indirect, wholly-owned subsidiary of Verizon Communications, Inc. In accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements – Discontinued Operations, the sale of the limited partnership interests met the criteria for reporting as discontinued operations. As a result, the financial results of the limited partnership interests have been classified as discontinued operations in our consolidated financial statements for all prior periods presented. Refer to Note 6 for additional information on the transaction and the partnership interests.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable (“AR”) consists primarily of amounts due to the Company from normal business activities.  We maintain an allowance for credit losses (“ACL”) based on our historical loss experience, current conditions and forecasted changes including but not limited to changes related to the economy, our industry and business.  Uncollectible accounts are written-off (removed from AR and charged against the ACL) when internal collection efforts have been unsuccessful.  Subsequently, if payment is received from the customer, the recovery is credited to the ACL.

The following table summarizes the activity in ACL for the three months ended March 31, 2023 and 2022:

Three Months Ended

March 31,

(In thousands)

    

2023

    

2022

    

Balance at beginning of year

$

11,470

$

9,961

Provision charged to expense

 

2,040

2,085

Write-offs, less recoveries

 

(1,523)

(1,927)

Balance at end of year

$

11,987

$

10,119

Goodwill

Goodwill is evaluated for impairment annually as of November 30 of each year or more frequently when events or changes in circumstances indicate potential impairment. At March 31, 2023 and December 31, 2012, the carrying value of goodwill was $929.6 million.

During the quarter ended March 31, 2023, as part of our qualitative assessment, we assessed certain events and changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair value of our reporting unit was below its carrying value, specifically relating to the recent decline in the Company’s stock price. Events and circumstances integrated into the qualitative assessment process include a combination of macroeconomic conditions affecting equity and credit markets, significant changes to our cost structure, overall financial performance and other relevant events affecting the reporting unit.  Management concluded that the qualitative assessment indicated that the fair value of our reporting unit exceeded its carrying value; however, we concluded that an interim quantitative impairment analysis as of March 31, 2023 was necessary to determine the fair value of the reporting unit as compared to the carrying value. In performing the quantitative impairment test, we concluded that the fair value of the reporting unit exceeded the carrying value at March 31, 2023 and that there was no impairment of goodwill. The fair value of the reporting unit could

7

be adversely affected by the decline or further declines in the Company’s stock price or a significant deterioration of the operating results of the Company, which could result in a potential goodwill impairment in the future.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04 (“ASU 2020-04”), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU No. 2021-01 (“ASU 2021-01”), Reference Rate Reform (Topic 848): Scope. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2020-04 and ASU 2021-01 are both elective and are effective upon issuance through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the optional relief guidance in Topic 848 from December 31, 2022 to December 31, 2024. As of March 31, 2023, we have interest rate swap agreements and variable rate long-term debt for which existing payments are based on the London Interbank Offered Rate (“LIBOR”) expected to cease as June 30, 2023. On April 17, 2023, we entered into an amendment to our credit agreement to replace LIBOR-based benchmark rates with Secured Overnight Financing Rate (“SOFR”) benchmark rates. We do not expect this adoption to have a material impact on our condensed consolidated financial statements and related disclosures.

Reclassifications

Certain amounts in our 2022 condensed consolidated financial statements have been reclassified to conform to the current year presentation which consists of the presentation of the financial results for our wireless partnership interests as discontinued operations.

2.  REVENUE

Nature of Contracts with Customers

Our revenue contracts with customers may include a promise or promises to deliver goods such as equipment and/or services such as broadband, video or voice services.  Promised goods and services are considered distinct as the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer and the Company’s promise to transfer a good or service to the customer is separately identifiable from other promises in the contract.  The Company accounts for goods and services as separate performance obligations.  Each service is considered a single performance obligation as it is providing a series of distinct services that are substantially the same and have the same pattern of transfer.

The transaction price is determined at contract inception and reflects the amount of consideration to which we expect to be entitled in exchange for transferring a good or service to the customer.  This amount is generally equal to the market price of the goods and/or services promised in the contract and may include promotional discounts.  The transaction price excludes amounts collected on behalf of third parties such as sales taxes and regulatory fees. Conversely, nonrefundable upfront fees, such as service activation and set-up fees, are included in the transaction price.  In determining the transaction price, we consider our enforceable rights and obligations within the contract. We do not consider the possibility of a contract being cancelled, renewed or modified.

The transaction price is allocated to each performance obligation based on the standalone selling price of the good or service, net of the related discount, as applicable.

Revenue is recognized when or as performance obligations are satisfied by transferring control of the good or service to the customer.

8

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the quarters ended March 31, 2023 and 2022:

Three Months Ended

March 31,

(In thousands)

    

2023

    

2022

 

Operating Revenues

Consumer:

 

 

Broadband (Data and VoIP)

$

67,961

$

65,911

Voice services

 

32,263

 

37,452

Video services

9,594

14,366

109,818

117,729

Commercial:

 

 

Data services (includes VoIP)

53,134

57,895

Voice services

 

32,631

 

36,339

Other

9,756

11,560

95,521

105,794

Carrier:

Data and transport services

32,923

33,485

Voice services

4,367

3,852

Other

350

391

37,640

37,728

Subsidies

7,036

6,583

Network access

24,444

26,213

Other products and services

1,667

6,231

Total operating revenues

$

276,126

$

300,278

Contract Assets and Liabilities

The following table provides information about receivables, contract assets and contract liabilities from our revenue contracts with customers:

March 31,

(In thousands)

    

2023

    

2022

Accounts receivable, net

$

108,471

$

118,596

Contract assets

 

26,556

 

24,280

Contract liabilities

 

57,787

 

61,615

Contract assets include costs that are incremental to the acquisition of a contract.  Incremental costs are those that result directly from obtaining a contract or costs that would not have been incurred if the contract had not been obtained, which primarily relate to sales commissions. These costs are deferred and amortized over the expected customer life.  We determined that the expected customer life is the expected period of benefit as the commission on the renewal contract is not commensurate with the commission on the initial contract. During the quarters ended March 31, 2023 and 2022, the Company recognized expense of $3.5 million and $3.1 million, respectively, related to deferred contract acquisition costs.

Contract liabilities include deferred revenues related to advanced payments for services and nonrefundable, upfront service activation and set-up fees, which are generally deferred and amortized over the expected customer life as the option to renew without paying an upfront fee provides the customer with a material right.  During the quarters ended March 31, 2023 and 2022, the Company recognized previously deferred revenues of $110.7 million and $121.6 million, respectively.  

A receivable is recognized in the period the Company provides goods or services when the Company’s right to consideration is unconditional.  Payment terms on invoiced amounts are generally 30 to 60 days.

9

Performance Obligations

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), requires that the Company disclose the aggregate amount of the transaction price that is allocated to remaining performance obligations that are unsatisfied as of March 31, 2023.  The guidance provides certain practical expedients that limit this requirement.  The service revenue contracts of the Company meet the following practical expedients provided by ASC 606:

1.The performance obligation is part of a contract that has an original expected duration of one year or less.
2.Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18.

The Company has elected these practical expedients.  Performance obligations related to our service revenue contracts are generally satisfied over time.  For services transferred over time, revenue is recognized based on amounts invoiced to the customer as the Company has concluded that the invoice amount directly corresponds with the value of services provided to the customer.  Management considers this a faithful depiction of the transfer of control as services are substantially the same and have the same pattern of transfer over the life of the contract.  As such, revenue related to unsatisfied performance obligations that will be billed in future periods has not been disclosed.

3.  EARNINGS (LOSS) PER SHARE

Basic and diluted earnings (loss) per common share (“EPS”) are computed using the two-class method, which is an earnings allocation method that determines EPS for each class of common stock and participating securities considering dividends declared and participation rights in undistributed earnings.  Common stock related to certain of the Company’s restricted stock awards are considered participating securities because holders are entitled to receive non-forfeitable dividends, if declared, during the vesting term.  

The potentially dilutive impact of the Company’s restricted stock awards is determined using the treasury stock method.  Under the treasury stock method, if the average market price during the period exceeds the exercise price, these instruments are treated as if they had been exercised with the proceeds of exercise used to repurchase common stock at the average market price during the period.  Any incremental difference between the assumed number of shares issued and repurchased is included in the diluted share computation.

Diluted EPS includes securities that could potentially dilute basic EPS during a reporting period.  Dilutive securities are not included in the computation of loss per share when a company reports a net loss from continuing operations as the impact would be anti-dilutive.

10

The computation of basic and diluted EPS attributable to common shareholders computed using the two-class method is as follows:

Three Months Ended

March 31,

(In thousands, except per share amounts)

    

2023

    

2022

 

Loss from continuing operations

$

(36,961)

$

(119,096)

Less: dividends on Series A preferred stock

10,587

9,598

Less: net income attributable to noncontrolling interest

 

143

 

115

Loss attributable to common shareholders before allocation of earnings to participating securities

 

(47,691)

 

(128,809)

Less: earnings allocated to participating securities

 

 

Loss from continuing operations attributable to common shareholders, after earnings allocated to participating securities

(47,691)

(128,809)

Income from discontinued operations

3,547

Less: earnings allocated to participating securities

Income from discontinued operations attributable to common shareholders, after earnings allocated to participating securities

3,547

Net loss attributable to common shareholders, after earnings allocated to participating securities

$

(47,691)

$

(125,262)

Weighted-average number of common shares outstanding

 

112,939

 

111,691

Basic and diluted earnings (loss) per common share:

Loss from continuing operations

$

(0.42)

$

(1.15)

Income from discontinued operations

0.03

Net loss per common share attributable to common shareholders - basic and diluted

$

(0.42)

$

(1.12)

Diluted EPS attributable to common shareholders for the quarters ended March 31, 2023 and 2022 excludes 2.5 million and 2.4 million potential common shares related to our share-based compensation plan, respectively, because the inclusion of the potential common shares would have an antidilutive effect.  

4.  SEARCHLIGHT INVESTMENT

In connection with the Investment Agreement entered into on September 13, 2020, affiliates of Searchlight committed to invest up to an aggregate of $425.0 million in the Company. The investment commitment was structured in two stages.  In the first stage of the transaction, which was completed on October 2, 2020, Searchlight invested $350.0 million in the Company in exchange for 6,352,842 shares, or approximately 8%, of the Company’s common stock and was issued a CPR that was convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 17,870,012 shares, or 16.9%, of the Company’s common stock.  In addition, Searchlight received the right to an unsecured subordinated note with an aggregate principal amount of approximately $395.5 million (the “Note”), which was convertible into shares of a new series of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the Note plus accrued interest as of the date of conversion.

On July 15, 2021, the Company received all required state public utility commission regulatory approvals necessary for the conversion of the CPR into 16.9% additional shares of the Company’s common stock. As a result, the CPR was converted into 17,870,012 shares of common stock, which were issued to Searchlight on July 16, 2021.

In the second stage of the transaction, which was completed on December 7, 2021 following the receipt of Federal Communications Commission (“FCC”) and certain regulatory approvals and the satisfaction of certain other customary closing conditions, Searchlight invested an additional $75.0 million and was issued the Note. On December 7, 2021, Searchlight elected to convert the Note into 434,266 shares of Series A Perpetual Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”). In addition, the CPR converted into an additional 15,115,899 shares, or an

11

additional 10.1%, of the Company’s common stock.  As of March 31, 2023 and December 31, 2022, the total shares of common stock issued to Searchlight represent approximately 34% of the Company’s outstanding common stock.

On December 7, 2021, Searchlight exercised its option to convert the Note and the net carrying value of the Note of $285.9 million, net of unamortized discount and issuance costs of $139.7 million and $8.7 million, respectively, was converted into 434,266 shares of Series A Preferred Stock at a liquidation preference of $1,000 per share.  Dividends on the Series A Preferred Stock accrue daily on the liquidation preference at a rate of 9.0% per annum, payable semi-annually in arrears. See Note 11 for more information on the terms of the Series A Preferred Stock.

With the strategic investment from Searchlight, we intend to enhance our fiber infrastructure and accelerate the investment in our network, which will include the upgrade over six years of approximately 1.6 million passings across select service areas to enable multi-Gig capable services to these homes and small businesses. Our fiber build plan includes the upgrade of approximately 225,000 homes and small businesses in 2023.

5.  DIVESTITURES

Kansas City Operations

On March 2, 2022, we entered into a definitive agreement to sell substantially all the assets of our business located in the Kansas City market (the “Kansas City operations”). The Kansas City operations provide data, voice and video services to customers within the Kansas City metropolitan area and surrounding counties and includes approximately 17,100 consumer customers and 1,600 commercial customers. The sale closed on November 30, 2022 for gross cash proceeds of $82.1 million, subject to the finalization of certain working capital and other post-closing purchase price adjustments. We expect to utilize the proceeds from the sale to support our fiber expansion plan in our core regions.

In connection with the classification as assets held for sale during the quarter ended March 31, 2022, the carrying value of the net assets was reduced to their estimated fair value, which was determined based on the estimated selling price less costs to sell and were classified as Level 2 within the fair value hierarchy. As a result, we recognized an impairment loss of $126.5 million during the quarter ended March 31, 2022. During the quarter ended September 30, 2022, we recognized an additional impairment loss of $5.2 million as a result of an increase in net assets held for sale and estimated selling costs during the period. During the quarter ended December 31, 2022, we recognized an additional loss on the sale of $16.8 million as a result of purchase price adjustments and an increase in net assets held for sale and estimated selling costs during the period. During the quarter ended March 31, 2023, we recognized an additional loss on sale of $2.1 million as a result of expected purchase price adjustments and changes in working capital.

Ohio Operations

On September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio, Consolidated Communications of Ohio Company (“CCOC” or the “Ohio Operations”). CCOC provides telecommunications and data services to residential and business customers in 11 rural communities in Ohio and surrounding areas and included approximately 3,800 access lines and 3,900 data connections.  The sale was completed on January 31, 2022 for gross cash proceeds of $26.1 million, including customary working capital adjustments. The asset sale aligns with our strategic asset review and focus on our core broadband regions. In September 2021, in connection with the expected sale, the carrying value of the net assets were reduced to their estimated fair value and we recognized an impairment loss of $5.7 million during the quarter ended September 30, 2021.  During the quarter ended March 31, 2022, we recognized an additional loss on the sale of $0.5 million, which is included in selling, general and administrative expense in the condensed consolidated statement of operations as a result of changes in estimated selling costs.    

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6.  INVESTMENTS

Our investments are as follows:

March 31,

December 31,

(In thousands)

    

2023

    

2022

 

Short-term investments:

Held-to-maturity debt securities

$

87,951

$

87,951

Long-term investments:

Cash surrender value of life insurance policies

$

3,076

$

2,774

CoBank, ACB Stock

 

5,755

 

7,250

Other

 

273

 

273

$

9,104

$

10,297

Held-to-Maturity Debt Securities

Investments in debt securities that we have the positive intent and ability to hold until maturity are classified as held-to-maturity. We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments with original maturities of more than three months and less than one year are classified as short-term investments.  Held-to maturity debt securities are recorded at amortized cost, which approximates fair value, and realized gains or losses are recognized in earnings. Our held-to-maturity debt securities consist of investments in commercial paper and certificate of deposits. At March 31, 2023 and December 31, 2022, we had $88.0 million of investments in commercial paper included in short-term investments. The investments have original maturities of less than one year. As of March 31, 2023 and December 31, 2022, the amortized cost of the investments approximated their fair value and the gross unrecognized gains and losses were not material.    

Long-Term Investments

CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers. On an annual basis, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which has traditionally been a significant lender in the Company’s credit facility.  The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.

Discontinued Operations

Investments at Cost

We owned 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”).  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston and Beaumont, Texas metropolitan areas.  We also owned 3.60% of Pittsburgh SMSA Limited Partnership, which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we accounted for these investments at our initial cost less any impairment because fair value was not readily available for these investments.  For these investments, we adjusted the carrying value for any purchases or sales of our ownership interests, if any. Prior to classification as discontinued operations, we recorded distributions received from these investments as investment income in non-operating income (expense). For the quarter ended March 31, 2022, we received cash distributions from these partnerships of $3.8 million.

Equity Method

We owned 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.67% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory.  Because we had significant influence over the operating and financial policies of these three entities, we accounted for the investments using the equity method. Prior to classification as discontinued

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operations, income was recognized as investment income in non-operating income (expense) on our proportionate share of earnings and cash distributions were recorded as a reduction in our investment.  For the quarter ended March 31, 2022, we received cash distributions from these partnerships of $4.4 million.

On September 13, 2022, we completed the sale of our five limited wireless partnership interests to Cellco for an aggregate purchase price of $490.0 million. Cellco is the general partner for each of the five wireless partnerships and is an indirect, wholly-owned subsidiary of Verizon Communications, Inc. A portion of the interest in one of the partnerships was sold to a limited partner of such partnership, pursuant to its right of first refusal. We intend to use the proceeds from the sale to support our fiber expansion plan. The financial results of the limited partnership interests have been reported as discontinued operations in our condensed consolidated statements of operations for prior periods presented.

The results of discontinued operations included in the condensed consolidated statements of operations consisted of the following:  

Three Months Ended

March 31,

(In thousands)

    

2022

 

Investment income

$

8,063

Gain on sale of discontinued operations

Income from discontinued operations, before income taxes

8,063

Income tax expense

 

4,516

Net income from discontinued operations

$

3,547

In connection with the sale of the partnership interests, we expect to recognize a taxable gain of approximately of $477.7 million on the transaction. For federal income tax purposes, we expect to utilize our available net operating loss carryforwards to offset the taxable gain.  For state income tax purposes, we are estimating approximately $8.0 million in state tax liabilities.

In the statement of cash flows, we have elected to combine cash flows from discontinued operations with cash flows from continuing operations. During the quarter ended March 31, 2022, cash provided by operating activities for discontinued operations was $8.2 million.

 

7.  FAIR VALUE MEASUREMENTS

Our derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using valuation models and are categorized within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and observable market data of similar instruments.  See Note 9 for further discussion regarding our interest rate swap agreements.

Our interest rate swap agreements measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 were as follows:

As of March 31, 2023

 

    

    

Quoted Prices

    

Significant

    

 

In Active

Other

Significant

 

Markets for

Observable

Unobservable

 

Identical Assets

Inputs

Inputs

 

(In thousands)

Total

(Level 1)

(Level 2)

(Level 3)

 

Current interest rate swap assets

$

3,690

$

$

3,690

$