CNSL Consolidated Communications Holdings Inc

Consolidated Communications Holdings, Inc. (Nasdaq:CNSL) (the “Company”) reported results for the third quarter 2016.  

Third quarter financial summary:

• Revenue was $191.5 million.
• Net cash from operations was $58.1 million.
• Adjusted EBITDA was $77.1 million.
• Dividend payout ratio was 74.4%.

“I am pleased with the solid financial results for the quarter and the strong growth in our fiber-based commercial and carrier sales,” said Bob Udell, President and Chief Executive Officer.  “We delivered another comfortable dividend payout ratio and our year-to-date payout of 69.2% is right on plan.”

“During the third quarter, we closed on both the acquisition in Illinois of Champaign Telephone Company, a fiber-based business communications provider, and the sale of our rural independent local exchange company in Iowa,” added Udell.  “These transactions strengthen our strategic focus on expanding our fiber footprint and delivering fiber-based products and services.”

“Finally, in early October, we completed a refinancing of our secured bank facility.  This transaction is expected to improve our annual cash interest expenses by approximately $2.0 million.  In addition, it extended our maturities by three years and increased our revolver capacity to $110.0 million from $75.0 million.  We could not have been more pleased with the results of the transaction, and I would like to thank all of our investors and underwriters for their support,” Udell concluded.   

Financial Results for the Third Quarter   

• Total revenues were $191.5 million, compared to $194.0 million for the same period last year.  Growth in strategic revenues were offset by declines in legacy voice revenues, network access and subsidy step-downs from CAF II and Texas USF support.    
• Income from operations was $22.7 million, compared to $13.6 million in the third quarter of 2015.  Included in the third quarter last year was $9.6 million of integration and severance charges tied to the Enventis synergy efforts and an early retirement offer made to, and accepted by, certain employees.   
• Interest expense, net was $19.1 million compared to $19.2 million for the same period last year.     
• Other income, net was $8.4 million, compared to $10.5 million for the same period in 2015.   
• On a GAAP basis, net income and net income per share were $7.0 million and $0.14, respectively.  Adjusted diluted net income per share excludes certain items in the manner described in the table provided in this release.  Adjusted diluted net income per share was $0.16 for the current quarter, compared to $0.18 the same period last year. 
• Cash distributions from our Verizon Wireless partnerships were $8.6 million compared to $20.0 million last year.  The third quarter of 2015 included a non-recurring cash distribution for the partnership owned towers that Verizon sold to American Tower.    
• Adjusted EBITDA was $77.1 million compared to $89.4 million for the same period in 2015.  As mentioned above, the third quarter last year included non-recurring cash distributions from the Company’s partnerships.
• The total net debt to last 12-month adjusted EBITDA ratio was 4.34.

Financial Results for the Nine Months Ended September 30, 2016

• Revenues were $567.3 million, net cash from operating activities was $173.6 million and adjusted EBITDA was $233.7 million.

Cash Available to Pay Dividends For the quarter, cash available to pay dividends, or CAPD, was $26.4 million, and the dividend payout ratio was 74.4%.  At September 30, 2016, cash and cash equivalents were $33.4 million.  Capital expenditures for the quarter were $31.9 million. 

Financial Guidance The Company is updating its full year 2016 guidance as outlined below.

 

		2016 Updated Guidance		2016 Original Guidance
Cash Interest Expense		$72.0 million to $73.0 million		$73.0 million to $75.0 million
Cash Income Taxes		Less than $1.0 million		$1.0 million to $3.0 million
Capital Expenditures		$125.0 million to $130.0 million		$125.0 million to $130.0 million

Dividend PaymentsOn October 31, 2016, the Company’s board of directors declared its next quarterly dividend of $0.38738 per common share, which is payable on February 1, 2017 to stockholders of record at the close of business on January 13, 2017.  This will represent the 46th consecutive quarterly dividend paid by the Company. 

Conference Call Information  The Company will host a conference call today at 11:00 a.m. ET / 10:00 a.m. CT to discuss third quarter earnings and developments with respect to the Company.  The live webcast and replay can be accessed from the “Investor Relations” section of the Company’s website at http://ir.consolidated.com.  The live conference call dial-in number is 1-877-374-3981 with conference ID 94247732.  A telephonic replay of the conference call will be available through November 10, 2016 and can be accessed by calling 1-855-859-2056.  

Use of Non-GAAP Financial Measures This press release, as well as the conference call, includes disclosures regarding “EBITDA”, “adjusted EBITDA”, “cash available to pay dividends” and the related “dividend payout ratio”, “total net debt to last twelve month adjusted EBITDA coverage ratio”, “adjusted diluted net income per share” and “adjusted net income attributable to common stockholders”, all of which are non-GAAP financial measures and described in this section as not being in compliance with Regulation S-X.  Accordingly, they should not be construed as alternatives to net cash from operating or investing activities, cash and cash equivalents, cash flows from operations, net income or net income per share as defined by GAAP and are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. In addition, not all companies use identical calculations, and the non-GAAP financial measures may not be comparable to other similarly titled measures of other companies.  A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable financial measures presented in accordance with GAAP is included in the tables that follow.

Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required by the lenders under our credit agreement in place at the end of each quarter in the periods presented.  The tables that follow include an explanation of how adjusted EBITDA is calculated for each of the periods presented with the reconciliation to net income.  EBITDA is defined as net earnings before interest expense, income taxes, depreciation and amortization on a historical basis.   

Cash available to pay dividends represents adjusted EBITDA plus cash interest income less (1) cash interest expense, (2) capital expenditures and (3) cash income taxes; this calculation differs in certain respects from the similar calculation used in our credit agreement. 

We present adjusted EBITDA, cash available to pay dividends and the related dividend payout ratio for several reasons.  Management believes adjusted EBITDA, cash available to pay dividends and the dividend payout ratio are useful as a means to evaluate our ability to fund our estimated uses of cash (including interest on our debt) and pay dividends. In addition, we have presented adjusted EBITDA, cash available to pay dividends and the dividend payout ratio to investors in the past because they are frequently used by investors, securities analysts and other interested parties in the evaluation of companies in our industry, and management believes presenting them here provides a measure of consistency in our financial reporting. Adjusted EBITDA and cash available to pay dividends, referred to as Available Cash in our credit agreement, are also components of the restrictive covenants and financial ratios contained in our credit agreement that requires us to maintain compliance with these covenants and limit certain activities, such as our ability to incur debt and to pay dividends.  The definitions in these covenants and ratios are based on adjusted EBITDA and cash available to pay dividends after giving effect to specified charges.  In addition, adjusted EBITDA, cash available to pay dividends and the dividend payout ratio provide our board of directors with meaningful information to determine, with other data, assumptions and considerations, our dividend policy and our ability to pay dividends under the restrictive covenants in our credit agreement and to measure our ability to service and repay debt.  We present the related “total net debt to last twelve month adjusted EBITDA coverage ratio” principally to put other non-GAAP measures in context and facilitate comparisons by investors, security analysts and others; this ratio differs in certain respects from the similar ratio used in our credit agreement.  These measures differ in certain respects from the ratios used in our senior notes indenture. 

These non-GAAP financial measures have certain shortcomings.  In particular, adjusted EBITDA does not represent the residual cash flows available for discretionary expenditures, since items such as debt repayment and interest payments are not deducted from such measure.  Similarly, while we may generate cash available to pay dividends, we are not required to use any such cash to pay dividends, and the payment of any dividends is subject to declaration by our board of directors, compliance with applicable law and the terms of our credit agreement.  Because adjusted EBITDA is a component of the dividend payout ratio and the ratio of total net debt to last twelve month adjusted EBITDA, these measures are also subject to the material limitations discussed above.  In addition, the ratio of total net debt to last twelve month adjusted EBITDA is subject to the risk that we may not be able to use the cash on the balance sheet to reduce our debt on a dollar-for-dollar basis. Management believes these ratios are useful as a means to evaluate our ability to incur additional indebtedness in the future. 

We present the non-GAAP measures adjusted diluted net income per share and adjusted diluted net income attributable to common stockholders because our net income and net income per share are regularly affected by items that occur at irregular intervals or are non-cash items.  We believe that disclosing these measures assists investors, securities analysts and other interested parties in evaluating both our company over time and the relative performance of the companies in our industry.

About Consolidated Communications Consolidated Communications provides business and broadband communications services across its 11-state service area to carrier, commercial and consumer customers. For more than a century, the Company has consistently provided innovative, reliable, high-quality products and services. The Company offers a wide range of communications solutions including: High-Speed Internet, Data, Digital TV, Phone, managed and cloud services and wireless backhaul over an extensive fiber optic network.

Safe Harbor  The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions.  Certain statements in this press release are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995.  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.  These risks and uncertainties include a number of factors related to our business, including economic and financial market conditions generally and economic conditions in our service areas; various risks to shareholders of not receiving dividends and risks to our ability to pursue growth opportunities if we continue to pay dividends according to the current dividend policy; various risks to the price and volatility of our common stock; changes in the valuation of pension plan assets; the substantial amount of debt and our ability to repay or refinance it or incur additional debt in the future; our need for a significant amount of cash to service and repay the debt and to pay dividends on the common stock; restrictions contained in our debt agreements that limit the discretion of management in operating the business; regulatory changes, including changes to subsidies, rapid development and introduction of new technologies and intense competition in the telecommunications industry; risks associated with our possible pursuit of acquisitions; system failures; losses of large customers or government contracts; risks associated with the rights-of-way for the network; disruptions in the relationship with third party vendors; losses of key management personnel and the inability to attract and retain highly qualified management and personnel in the future; changes in the extensive governmental legislation and regulations governing telecommunications providers and the provision of telecommunications services; telecommunications carriers disputing and/or avoiding their obligations to pay network access charges for use of our network; high costs of regulatory compliance; the competitive impact of legislation and regulatory changes in the telecommunications industry; and liability and compliance costs regarding environmental regulations. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements are discussed in more detail in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q.  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 Consolidated Communications Holdings, Inc. and its subsidiaries to be different from those expressed or implied in the forward-looking statements.  All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements that appear throughout this press release.  Furthermore, forward-looking statements speak only as of the date they are made.  Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we disclaim any intention or obligation to update or revise publicly any forward-looking statements.  You should not place undue reliance on forward-looking statements.

- Tables Follow –

Consolidated Communications Holdings, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value)
(Unaudited)
	September 30,			December 31,
		2016				2015
ASSETS
Current assets:
Cash and cash equivalents	$	33,403			$	15,878
Accounts receivable, net		68,447				68,848
Income tax receivable		9,132				23,867
Prepaid expenses and other current assets		18,081				17,815
Total current assets		129,063				126,408
Property, plant and equipment, net		1,065,528				1,093,261
Investments		106,916				105,543
Goodwill		760,998				764,630
Other intangible assets		34,758				43,497
Other assets		6,896				5,187
Total assets	$	2,104,159			$	2,138,526
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	15,010			$	12,576
Advance billings and customer deposits		29,255				27,616
Dividends payable		19,623				19,551
Accrued compensation		17,569				21,883
Accrued interest		17,564				9,353
Accrued expense		38,154				42,384
Current portion of long-term debt and capital lease obligations		14,429				10,937
Total current liabilities		151,604				144,300
Long-term debt and capital lease obligations		1,377,549				1,377,892
Deferred income taxes		238,359				236,529
Pension and other post-retirement obligations		109,035				112,966
Other long-term liabilities		16,091				16,140
Total liabilities		1,892,638				1,887,827
Shareholders' equity:
Common stock, par value $0.01 per share; 100,000,000 shares
authorized, 50,654,989 and 50,470,096, shares outstanding
as of September 30, 2016 and December 31, 2015, respectively		507				505
Additional paid-in capital		239,559				281,738
Retained earnings (deficit)		-				(881	)
Accumulated other comprehensive loss, net		(33,792	)			(35,699	)
Noncontrolling interest		5,247				5,036
Total shareholders' equity		211,521				250,699
Total liabilities and shareholders' equity	$	2,104,159			$	2,138,526

 

Consolidated Communications Holdings, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
		2016				2015				2016				2015
Net revenues	$	191,541			$	193,958			$	567,258			$	587,546
Operating expenses:
Cost of services and products		85,646				83,209				246,129				249,477
Selling, general and administrative
expenses		39,935				51,044				119,664				136,737
Loss on impairment		-				-				610				-
Depreciation and amortization		43,224				46,057				130,855				133,264
Income from operations		22,736				13,648				70,000				68,068
Other income (expense):
Interest expense, net of interest income		(19,075	)			(19,174	)			(56,827	)			(60,277	)
Loss on extinguishment of debt		-				-				-				(41,242	)
Other income, net		8,419				10,491				24,262				25,839
Income (loss) before income taxes		12,080				4,965				37,435				(7,612	)
Income tax expense (benefit)		4,991				2,220				22,287				(2,258	)
Net income (loss)		7,089				2,745				15,148				(5,354	)
Less: net income attributable to noncontrolling interest		77				150				211				209
Net income (loss) attributable to common shareholders	$	7,012			$	2,595			$	14,937			$	(5,563	)
Net income (loss) per basic and diluted common shares
attributable to common shareholders	$	0.14			$	0.05			$	0.29			$	(0.11	)

 

Consolidated Communications Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
				Three Months Ended								Nine Months Ended
				September 30,								September 30,
					2016				2015				2016				2015
OPERATING ACTIVITIES
		Net income (loss)		$	7,089			$	2,745			$	15,148			$	(5,354	)
		Adjustments to reconcile net income (loss) to cash provided by operating activities:
		Depreciation and amortization			43,224				46,057				130,855				133,264
		Deferred income taxes			469				4,213				7,993				4,218
		Cash distributions from wireless partnerships in excess of/(less than) earnings			(97	)			9,396				(1,250	)			7,840
		Non- cash stock-based compensation			862				742				2,666				2,265
		Amortization of deferred financing			815				770				2,413				2,592
		Loss on extinguishment of debt			-				-				-				41,242
		Other adjustments, net			382				226				1,017				924
		Changes in operating assets and liabilities, net			5,342				7,672				14,749				(19,354	)
		Net cash provided by operating activities			58,086				71,821				173,591				167,637
INVESTING ACTIVITIES
		Business acquisition, net of cash acquired			(13,422	)			-				(13,422	)			-
		Purchase of property, plant and equipment, net			(31,887	)			(34,581	)			(94,158	)			(100,119	)
		Proceeds from sale of investments			-				-				-				846
		Proceeds from sale of assets			20,913				61				20,963				118
		Net cash used in investing activities			(24,396	)			(34,520	)			(86,617	)			(99,155	)
FINANCING ACTIVITIES
		Proceeds from bond offering			-				-				-				294,780
		Proceeds on issuance of long-term debt			24,000				21,000				31,000				61,000
		Payment of capital lease obligation			(945	)			(214	)			(1,757	)			(658	)
		Payment on long-term debt			(28,275	)			(21,275	)			(39,825	)			(80,825	)
		Redemption of senior notes			-				-				-				(261,874	)
		Payment of financing costs			-				(337	)			-				(4,805	)
		Share repurchases for minimum tax withholding			-				-				(71	)			(282	)
		Dividends on common stock			(19,622	)			(19,567	)			(58,796	)			(58,643	)
		Net cash used by financing activities			(24,842	)			(20,393	)			(69,449	)			(51,307	)
Net change in cash and cash equivalents					8,848				16,908				17,525				17,175
Cash and cash equivalents at beginning of period					24,555				6,946				15,878				6,679
Cash and cash equivalents at end of period				$	33,403			$	23,854			$	33,403			$	23,854

 

Consolidated Communications Holdings, Inc.
Consolidated Revenue by Category
(Dollars in thousands)
(Unaudited)
	Q3'15			Q4'15			Q1'16			Q2'16			Q3'16
Commercial and carrier:
Data and transport services (includes VoIP)	$	47,198		$	47,969		$	49,112		$	48,558		$	49,653
Voice services		25,463			25,288			25,025			25,323			25,098
Other		3,208			3,621			2,624			2,703			3,481
		75,869			76,878			76,761			76,584			78,232
Consumer:
Broadband (VoIP, Data and Video)		52,956			52,863			54,559			53,103			51,363
Voice services		15,143			14,829			14,491			14,028			13,717
		68,099			67,692			69,050			67,131			65,080
Equipment sales and service		14,759			10,080			9,640			10,448			17,695
Subsidies		13,905			13,524			13,074			12,982			11,681
Network access		16,912			16,563			16,813			16,305			15,536
Other products and services		4,414			3,454			3,508			3,421			3,317
Total operating revenue	$	193,958		$	188,191		$	188,846		$	186,871		$	191,541

Consolidated Communications Holdings, Inc.
Schedule of Adjusted EBITDA Calculation
(Dollars in thousands)
(Unaudited)
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
		2016				2015				2016				2015
Net income (loss)	$	7,089			$	2,745			$	15,148			$	(5,354	)
Add (subtract):
Income tax expense (benefit)		4,991				2,220				22,287				(2,258	)
Interest expense, net		19,075				19,174				56,827				60,277
Depreciation and amortization		43,224				46,057				130,855				133,264
EBITDA		74,379				70,196				225,117				185,929
Adjustments to EBITDA (1):
Other, net (2)		1,993				9,103				7,373				53,148
Investment income (accrual basis)		(8,735	)			(10,601	)			(24,636	)			(26,046	)
Investment distributions (cash basis)		8,638				19,996				23,218				34,162
Non-cash compensation (3)		862				742				2,666				2,265
Adjusted EBITDA	$	77,137			$	89,436			$	233,738			$	249,458
Footnotes for Adjusted EBITDA:
(1)  These adjustments reflect those required or permitted by the lenders under our credit agreement.
(2)  Other, net includes income attributable to noncontrolling interests, acquisition and non-recurring related
costs, and certain miscellaneous items.
(3)  Represents compensation expenses in connection with our Restricted Share Plan, which because
of the non-cash nature of the expenses are excluded from adjusted EBITDA.

 

Consolidated Communications Holdings, Inc.
Cash Available to Pay Dividends
(Dollars in thousands)
(Unaudited)
	Three Months Ended					Nine Months Ended
	September 30, 2016					September 30, 2016
Adjusted EBITDA	$	77,137				$	233,738
- Cash interest expense		(18,257	)				(54,759	)
- Capital expenditures		(31,887	)				(94,158	)
- Cash income (taxes)/refund		(616	)				132
Cash available to pay dividends	$	26,377				$	84,953
Dividends Paid	$	19,622				$	58,796
Payout Ratio		74.4	%				69.2	%
Note:  The above calculation excludes the principal payments on our debt

 

Consolidated Communications Holdings, Inc.
Total Net Debt to LTM Adjusted EBITDA Ratio
(Dollars in thousands)
(Unaudited)
Summary of Outstanding Debt
Term loan, net of discount $2,872	$	882,103
Revolving loan		8,000
Senior unsecured notes due 2022, net of discount $4,453		495,547
Capital leases		17,141
Total debt as of September 30, 2016	$	1,402,791
Less deferred debt issuance costs		(10,813	)
Less cash on hand		(33,403	)
Total net debt as of September 30, 2016	$	1,358,575
Adjusted EBITDA for the last
twelve months ended September 30, 2016	$	313,184
Total Net Debt to last twelve months
Adjusted EBITDA	4.34x

 

Consolidated Communications Holdings, Inc.
Adjusted Net Income and Net Income Per Share
(in thousands, except per share amounts)
(Unaudited)
	Three Months Ended								Nine Months Ended
	Sep 30,				Sep 30,				Sep 30,				Sep 30,
		2016				2015				2016				2015
Net income (loss)	$	7,089			$	2,745			$	15,148			$	(5,354	)
Transaction and severance related costs, net of tax		606				5,620				1,985				9,329
Impairment charge for sale of Iowa ILEC, net of tax		-				-				248				-
Impairment charge for sale of CVIN Investment, net of tax		-				-				-				573
Deferred tax related to asset held for sale		-				-				7,524				-
Loss on extinguishment of debt, net of tax		-				-				-				28,251
Non-cash stock compensation, net of tax		506				433				1,082				1,552
Adjusted net income	$	8,201			$	8,798			$	25,988			$	34,351
Weighted average number of shares outstanding		50,294				50,174				50,292				50,166
Adjusted diluted net income per share	$	0.16			$	0.18			$	0.52			$	0.68
* Calculations above assume a 41.3% and 41.7% effective tax rate for the three months ended and 59.4% and 31.5% for the nine
months ended September 30, 2016 and 2015, respectively.

 

Consolidated Communications Holdings, Inc.
Key Operating Statistics
(Unaudited)
		30-Sep-16				30-Jun-16				% Change in Qtr				30-Sep-15				% Change yoy
Voice Connections			462,232				471,458				(2.0	%)			488,037				(5.3	%)
Data and Internet Connections			470,474				462,559				1.7	%			452,265				4.0	%
Video Connections			108,816				111,617				(2.5	%)			119,643				(9.0	%)
Business and Broadband as % of total revenue			82.5	%			80.9	%			2.0	%			80.1	%			3.0	%
Fiber route network miles (long-haul and metro)			14,099				13,830				1.9	%			13,441				4.9	%
On-net buildings			5,497				5,348				2.8	%			4,981				10.4	%
Consumer Customers			257,106				262,177				(1.9	%)			270,466				(4.9	%)
Consumer ARPU		$	84.38			$	85.35				(1.1	%)		$	83.93				0.5	%
Note:
1) BB% includes commercial/carrier, equipment sales and service, directory, consumer broadband and special access.
2) The acquisition of Champaign Telephone Co. and the sale of our Iowa ILEC resulted in a net increase of 4,905 data connections and
a net reduction of 4,290 voice connections in the third quarter 2016.

Company Contacts:                                                             
Jennifer Spaude
Senior Director of Corporate Communications and IR
507-386-3765
Jennifer.spaude@consolidated.com