UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20182019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-36863
Cable One, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 13-3060083 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
| ||
210 E. Earll Drive, Phoenix, Arizona |
| 85012 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(602) 364-6000
(Registrant’s telephone number, including area code)Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
Common Stock, par value $0.01 | CABO | New York Stock Exchange |
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑ 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”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 ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
| Description of Class | Shares Outstanding as of August |
| Common stock, par value $0.01 |
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION | |
Item 1. Condensed Consolidated Financial Statements | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. Controls and Procedures | |
PART II: OTHER INFORMATION | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. Defaults Upon Senior Securities | |
Item 4. Mine Safety Disclosures | |
Item 5. Other Information | |
Item 6. Exhibits | |
SIGNATURES |
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CABLE ONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except par value and share data) | June 30, 2018 | December 31, 2017 | ||||||||||||||
(dollars in thousands, except par values) | June 30, 2019 | December 31, 2018 | ||||||||||||||
Assets | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 203,522 | $ | 161,752 | $ | 102,283 | $ | 264,113 | ||||||||
Accounts receivable, net | 34,281 | 29,930 | 30,340 | 29,947 | ||||||||||||
Income taxes receivable | 9,013 | 21,331 | 2,693 | 10,713 | ||||||||||||
Prepaid and other current assets | 18,104 | 10,898 | 20,400 | 13,090 | ||||||||||||
Total Current Assets | 264,920 | 223,911 | 155,716 | 317,863 | ||||||||||||
Property, plant and equipment, net | 819,734 | 831,892 | 977,398 | 847,979 | ||||||||||||
Intangible assets, net | 959,817 | 965,745 | 1,035,210 | 953,851 | ||||||||||||
Goodwill | 172,129 | 172,129 | 355,347 | 172,129 | ||||||||||||
Other noncurrent assets | 11,458 | 10,955 | 25,781 | 11,412 | ||||||||||||
Total Assets | $ | 2,228,058 | $ | 2,204,632 | $ | 2,549,452 | $ | 2,303,234 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 94,444 | $ | 117,855 | $ | 102,817 | $ | 94,134 | ||||||||
Deferred revenue | 18,791 | 15,008 | 23,078 | 18,954 | ||||||||||||
Current portion of long-term debt | 17,500 | 14,375 | 17,153 | 20,625 | ||||||||||||
Total Current Liabilities | 130,735 | 147,238 | 143,048 | 133,713 | ||||||||||||
Long-term debt | 1,151,915 | 1,160,682 | 1,280,637 | 1,142,056 | ||||||||||||
Deferred income taxes | 216,713 | 207,154 | 263,245 | 242,127 | ||||||||||||
Other noncurrent liabilities | 12,762 | 13,111 | 99,614 | 9,980 | ||||||||||||
Total Liabilities | 1,512,125 | 1,528,185 | 1,786,544 | 1,527,876 | ||||||||||||
Commitments and contingencies (refer to note 14) | ||||||||||||||||
Stockholders' Equity | ||||||||||||||||
Preferred stock ($0.01 par value; 4,000,000 shares authorized; none issued or outstanding) | - | - | - | - | ||||||||||||
Common stock ($0.01 par value; 40,000,000 shares authorized; 5,887,899 shares issued; and 5,703,337 and 5,731,442 shares outstanding as of June 30, 2018 and December 31, 2017, respectively) | 59 | 59 | ||||||||||||||
Common stock ($0.01 par value; 40,000,000 shares authorized; 5,887,899 shares issued; and 5,706,812 and 5,703,402 shares outstanding as of June 30, 2019 and December 31, 2018, respectively) | 59 | 59 | ||||||||||||||
Additional paid-in capital | 33,256 | 28,412 | 45,001 | 38,898 | ||||||||||||
Retained earnings | 792,784 | 728,386 | 902,615 | 850,292 | ||||||||||||
Accumulated other comprehensive loss | (351 | ) | (352 | ) | (63,135 | ) | (96 | ) | ||||||||
Treasury stock, at cost (184,562 and 156,457 shares held as of June 30, 2018 and December 31, 2017, respectively) | (109,815 | ) | (80,058 | ) | ||||||||||||
Treasury stock, at cost (181,087 and 184,497 shares held as of June 30, 2019 and December 31, 2018, respectively) | (121,632 | ) | (113,795 | ) | ||||||||||||
Total Stockholders' Equity | 715,933 | 676,447 | 762,908 | 775,358 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,228,058 | $ | 2,204,632 | $ | 2,549,452 | $ | 2,303,234 | ||||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
(in thousands, except per share and share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
(dollars in thousands, except per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||
Revenues | $ | 268,414 | $ | 240,991 | $ | 534,175 | $ | 448,425 | $ | 285,650 | $ | 268,414 | $ | 564,255 | $ | 534,175 | ||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||||||||||
Costs and Expenses: | Costs and Expenses: | |||||||||||||||||||||||||||||||
Operating (excluding depreciation and amortization) | 91,783 | 84,048 | 186,522 | 153,131 | 95,688 | 91,783 | 190,206 | 186,522 | ||||||||||||||||||||||||
Selling, general and administrative | 54,196 | 50,965 | 105,145 | 97,349 | 60,103 | 54,196 | 121,546 | 105,145 | ||||||||||||||||||||||||
Depreciation and amortization | 49,033 | 48,022 | 97,811 | 87,558 | 54,835 | 49,033 | 108,679 | 97,811 | ||||||||||||||||||||||||
(Gain) loss on disposal of assets, net | 2,734 | 462 | 9,368 | (5,686 | ) | |||||||||||||||||||||||||||
Total costs and expenses | 197,746 | 183,497 | 398,846 | 332,352 | ||||||||||||||||||||||||||||
Loss on asset disposals, net | 910 | 2,734 | 2,013 | 9,368 | ||||||||||||||||||||||||||||
Total Costs and Expenses | 211,536 | 197,746 | 422,444 | 398,846 | ||||||||||||||||||||||||||||
Income from operations | 70,668 | 57,494 | 135,329 | 116,073 | 74,114 | 70,668 | 141,811 | 135,329 | ||||||||||||||||||||||||
Interest expense | (14,953 | ) | (11,782 | ) | (29,676 | ) | (19,389 | ) | (18,516 | ) | (14,953 | ) | (36,612 | ) | (29,676 | ) | ||||||||||||||||
Other income (expense), net | 882 | (322 | ) | 1,499 | (35 | ) | (9,632 | ) | 882 | (7,830 | ) | 1,499 | ||||||||||||||||||||
Income before income taxes | 56,597 | 45,390 | 107,152 | 96,649 | 45,966 | 56,597 | 97,369 | 107,152 | ||||||||||||||||||||||||
Income tax provision | 12,812 | 17,530 | 22,714 | 36,674 | 9,571 | 12,812 | 22,235 | 22,714 | ||||||||||||||||||||||||
Net income | $ | 43,785 | $ | 27,860 | $ | 84,438 | $ | 59,975 | $ | 36,395 | $ | 43,785 | $ | 75,134 | $ | 84,438 | ||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||||||||||
Net Income per Common Share: | Net Income per Common Share: | |||||||||||||||||||||||||||||||
Basic | $ | 7.70 | $ | 4.91 | $ | 14.83 | $ | 10.56 | $ | 6.41 | $ | 7.70 | $ | 13.24 | $ | 14.83 | ||||||||||||||||
Diluted | $ | 7.65 | $ | 4.85 | $ | 14.73 | $ | 10.45 | $ | 6.35 | $ | 7.65 | $ | 13.13 | $ | 14.73 | ||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
Weighted Average Common Shares Outstanding: | Weighted Average Common Shares Outstanding: | |||||||||||||||||||||||||||||||
Basic | 5,687,095 | 5,678,394 | 5,694,774 | 5,677,411 | 5,673,669 | 5,687,095 | 5,673,893 | 5,694,774 | ||||||||||||||||||||||||
Diluted | 5,722,869 | 5,745,617 | 5,732,634 | 5,740,837 | 5,730,238 | 5,722,869 | 5,723,296 | 5,732,634 | ||||||||||||||||||||||||
Other comprehensive gain (loss), net of tax | - | 2 | 1 | 4 | ||||||||||||||||||||||||||||
Deferred loss on cash flow hedges and other, net of tax | $ | (33,970 | ) | $ | - | $ | (63,039 | ) | $ | 1 | ||||||||||||||||||||||
Comprehensive income | $ | 43,785 | $ | 27,862 | $ | 84,439 | $ | 59,979 | $ | 2,425 | $ | 43,785 | $ | 12,095 | $ | 84,439 | ||||||||||||||||
Dividends declared per common share | $ | 1.75 | $ | 1.50 | $ | 3.50 | $ | 3.00 | ||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Additional | Treasury | Accumulated Other | Total | |||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Stock, | Comprehensive | Stockholders’ | |||||||||||||||||||||||
(in thousands, except share data) | Shares | Amount | Capital | Earnings | at cost | Loss | Equity | |||||||||||||||||||||
Balance at December 31, 2017 | 5,731,442 | $ | 59 | $ | 28,412 | $ | 728,386 | $ | (80,058 | ) | $ | (352 | ) | $ | 676,447 | |||||||||||||
Net income | - | - | - | 84,438 | - | - | 84,438 | |||||||||||||||||||||
Changes in pension, net of tax | - | - | - | - | - | 1 | 1 | |||||||||||||||||||||
Equity-based compensation | - | - | 4,844 | - | - | - | 4,844 | |||||||||||||||||||||
Issuance of equity awards, net of forfeitures | 15,693 | - | - | - | - | - | - | |||||||||||||||||||||
Repurchases of common stock | (34,028 | ) | - | - | - | (22,556 | ) | - | (22,556 | ) | ||||||||||||||||||
Withholding tax for equity awards | (9,770 | ) | - | - | - | (7,201 | ) | - | (7,201 | ) | ||||||||||||||||||
Dividends paid to stockholders | - | - | - | (20,040 | ) | - | - | (20,040 | ) | |||||||||||||||||||
Balance at June 30, 2018 | 5,703,337 | $ | 59 | $ | 33,256 | $ | 792,784 | $ | (109,815 | ) | $ | (351 | ) | $ | 715,933 | |||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Treasury | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | ||||||||||||||||||||||
(dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
Balance at March 31, 2019 | 5,699,330 | $ | 59 | $ | 41,919 | $ | 877,644 | $ | (29,165 | ) | $ | (121,422 | ) | $ | 769,035 | |||||||||||||
Net income | - | - | - | 36,395 | - | - | 36,395 | |||||||||||||||||||||
Deferred loss on cash flow hedges and other, net of tax | - | - | - | - | (33,970 | ) | - | (33,970 | ) | |||||||||||||||||||
Equity-based compensation | - | - | 3,082 | - | - | - | 3,082 | |||||||||||||||||||||
Issuance of equity awards, net of forfeitures | 7,495 | - | - | - | - | - | - | |||||||||||||||||||||
Withholding tax for equity awards | (13 | ) | - | - | - | - | (210 | ) | (210 | ) | ||||||||||||||||||
Dividends paid to stockholders ($2.00 per common share) | - | - | - | (11,424 | ) | - | - | (11,424 | ) | |||||||||||||||||||
Balance at June 30, 2019 | 5,706,812 | $ | 59 | $ | 45,001 | $ | 902,615 | $ | (63,135 | ) | $ | (121,632 | ) | $ | 762,908 | |||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Treasury | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | ||||||||||||||||||||||
(dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
Balance at March 31, 2018 | 5,732,441 | $ | 59 | $ | 30,750 | $ | 759,004 | $ | (351 | ) | $ | (89,552 | ) | $ | 699,910 | |||||||||||||
Net income | - | - | - | 43,785 | - | - | 43,785 | |||||||||||||||||||||
Equity-based compensation | - | - | 2,506 | - | - | - | 2,506 | |||||||||||||||||||||
Issuance of equity awards, net of forfeitures | 1,616 | - | - | - | - | - | - | |||||||||||||||||||||
Repurchases of common stock | (30,717 | ) | - | - | - | - | (20,261 | ) | (20,261 | ) | ||||||||||||||||||
Withholding tax for equity awards | (3 | ) | - | - | - | - | (2 | ) | (2 | ) | ||||||||||||||||||
Dividends paid to stockholders ($1.75 per common share) | - | - | - | (10,005 | ) | - | - | (10,005 | ) | |||||||||||||||||||
Balance at June 30, 2018 | 5,703,337 | $ | 59 | $ | 33,256 | $ | 792,784 | $ | (351 | ) | $ | (109,815 | ) | $ | 715,933 | |||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Treasury | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | ||||||||||||||||||||||
(dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
Balance at December 31, 2018 | 5,703,402 | $ | 59 | $ | 38,898 | $ | 850,292 | $ | (96 | ) | $ | (113,795 | ) | $ | 775,358 | |||||||||||||
Lease accounting standard adoption cumulative adjustment | - | - | - | 8 | - | - | 8 | |||||||||||||||||||||
Net income | - | - | - | 75,134 | - | - | 75,134 | |||||||||||||||||||||
Deferred loss on cash flow hedges and other, net of tax | - | - | - | - | (63,039 | ) | - | (63,039 | ) | |||||||||||||||||||
Equity-based compensation | - | - | 6,103 | - | - | - | 6,103 | |||||||||||||||||||||
Issuance of equity awards, net of forfeitures | 12,717 | - | - | - | - | - | - | |||||||||||||||||||||
Repurchases of common stock | (5,984 | ) | - | - | - | - | (5,073 | ) | (5,073 | ) | ||||||||||||||||||
Withholding tax for equity awards | (3,323 | ) | - | - | - | - | (2,764 | ) | (2,764 | ) | ||||||||||||||||||
Dividends paid to stockholders ($4.00 per common share) | - | - | - | (22,819 | ) | - | - | (22,819 | ) | |||||||||||||||||||
Balance at June 30, 2019 | 5,706,812 | $ | 59 | $ | 45,001 | $ | 902,615 | $ | (63,135 | ) | $ | (121,632 | ) | $ | 762,908 | |||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Treasury | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | ||||||||||||||||||||||
(dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
Balance at December 31, 2017 | 5,731,442 | $ | 59 | $ | 28,412 | $ | 728,386 | $ | (352 | ) | $ | (80,058 | ) | $ | 676,447 | |||||||||||||
Net income | - | - | - | 84,438 | - | - | 84,438 | |||||||||||||||||||||
Changes in pension, net of tax | - | - | - | - | 1 | - | 1 | |||||||||||||||||||||
Equity-based compensation | - | - | 4,844 | - | - | - | 4,844 | |||||||||||||||||||||
Issuance of equity awards, net of forfeitures | 15,693 | - | - | - | - | - | - | |||||||||||||||||||||
Repurchases of common stock | (34,028 | ) | - | - | - | - | (22,556 | ) | (22,556 | ) | ||||||||||||||||||
Withholding tax for equity awards | (9,770 | ) | - | - | - | - | (7,201 | ) | (7,201 | ) | ||||||||||||||||||
Dividends paid to stockholders ($3.50 per common share) | - | - | - | (20,040 | ) | - | - | (20,040 | ) | |||||||||||||||||||
Balance at June 30, 2018 | 5,703,337 | $ | 59 | $ | 33,256 | $ | 792,784 | $ | (351 | ) | $ | (109,815 | ) | $ | 715,933 | |||||||||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | ||||||||||||||
(in thousands) | 2019 | 2018 | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 84,438 | $ | 59,975 | $ | 75,134 | $ | 84,438 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Depreciation and amortization | 97,811 | 87,558 | 108,679 | 97,811 | ||||||||||||
Amortization of debt issuance cost | 2,012 | 1,191 | 2,409 | 2,012 | ||||||||||||
Equity-based compensation | 4,844 | 4,845 | 6,103 | 4,844 | ||||||||||||
Write-off of debt issuance costs | 110 | 613 | 4,207 | 110 | ||||||||||||
Change in deferred income taxes | 9,559 | 6,719 | ||||||||||||||
(Gain) loss on disposal of assets, net | 9,368 | (5,686 | ) | |||||||||||||
Increase in deferred income taxes | 11,647 | 9,559 | ||||||||||||||
Loss on asset disposals, net | 2,013 | 9,368 | ||||||||||||||
Changes in operating assets and liabilities, net of effects from acquisitions: | ||||||||||||||||
Accounts receivable, net | (4,351 | ) | 2,263 | |||||||||||||
Income taxes receivable | 12,318 | (11,992 | ) | |||||||||||||
Prepaid and other current assets | (7,206 | ) | (1,247 | ) | ||||||||||||
Accounts payable and accrued liabilities | (15,439 | ) | (14,073 | ) | ||||||||||||
Deferred revenue | 3,783 | 181 | ||||||||||||||
Other noncurrent assets and liabilities, net | (645 | ) | 512 | |||||||||||||
(Increase) decrease in accounts receivable, net | 901 | (4,351 | ) | |||||||||||||
Decrease in income taxes receivable | 8,020 | 12,318 | ||||||||||||||
Increase in prepaid and other current assets | (6,999 | ) | (7,206 | ) | ||||||||||||
Increase (decrease) in accounts payable and accrued liabilities | 5,004 | (15,439 | ) | |||||||||||||
Increase (decrease) in deferred revenue | (198 | ) | 3,783 | |||||||||||||
Other, net | (4,426 | ) | (645 | ) | ||||||||||||
Net cash provided by operating activities | 196,602 | 130,859 | 212,494 | 196,602 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchase of business, net of cash acquired | - | (728,783 | ) | (356,917 | ) | - | ||||||||||
Capital expenditures | (90,868 | ) | (76,430 | ) | (110,488 | ) | (90,868 | ) | ||||||||
Change in accrued expenses related to capital expenditures | (2,517 | ) | (1,505 | ) | ||||||||||||
Decrease in accrued expenses related to capital expenditures | (5,410 | ) | (2,517 | ) | ||||||||||||
Proceeds from sales of property, plant and equipment | 1,569 | 10,912 | 6,998 | 1,569 | ||||||||||||
Net cash used in investing activities | (91,816 | ) | (795,806 | ) | (465,817 | ) | (91,816 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of long-term debt | - | 750,000 | 825,000 | - | ||||||||||||
Payment of debt issuance costs | (2,131 | ) | (15,224 | ) | (11,671 | ) | (2,131 | ) | ||||||||
Payments on long-term debt | (5,633 | ) | (95,008 | ) | (691,180 | ) | (5,633 | ) | ||||||||
Repurchases of common stock | (22,556 | ) | (399 | ) | (5,073 | ) | (22,556 | ) | ||||||||
Payment of withholding tax for equity awards | (7,201 | ) | (438 | ) | (2,764 | ) | (7,201 | ) | ||||||||
Dividends paid to stockholders | (20,040 | ) | (17,165 | ) | (22,819 | ) | (20,040 | ) | ||||||||
Change in cash overdraft | (5,455 | ) | (5,066 | ) | - | (5,455 | ) | |||||||||
Net cash provided by (used in) financing activities | (63,016 | ) | 616,700 | 91,493 | (63,016 | ) | ||||||||||
Change in cash and cash equivalents | 41,770 | (48,247 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents | (161,830 | ) | 41,770 | |||||||||||||
Cash and cash equivalents, beginning of period | 161,752 | 138,040 | 264,113 | 161,752 | ||||||||||||
Cash and cash equivalents, end of period | $ | 203,522 | $ | 89,793 | $ | 102,283 | $ | 203,522 | ||||||||
Supplemental cash flow disclosures: | ||||||||||||||||
Cash paid for interest, net of capitalized interest | $ | 27,924 | $ | 14,031 | $ | 34,687 | $ | 27,924 | ||||||||
Cash paid for income taxes, net of refunds received | $ | 1,293 | $ | 41,947 | $ | 3,001 | $ | 1,293 | ||||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
|
Description of Business. Cable One, Inc. (“Cable One”, together with its wholly owned subsidiaries (collectively, “Cable One,” “us,” “our,” “we” or the “Company”) owns and operates cable systems that provideis a fully integrated provider of data, video and voice services to residential and commercialbusiness subscribers in 21 Western, Midwestern and Southern states of the United States.U.S. states. As of June 30, 2018,2019, Cable One provided service to 653,876818,579 residential and business customers, of which 681,762 subscribed to data customers, 340,112services, 308,493 subscribed to video customersservices and 129,683123,672 subscribed to voice customers.services.
On May 1, 2017,January 8, 2019, Cable One completed the acquisitionCompany acquired Delta Communications, L.L.C. (“Clearwave”) for a purchase price of all of the outstanding equity interests of RBI Holding LLC (“NewWave”), which became$358.8 million in cash on a wholly owned subsidiary of Cable One.debt-free basis. Refer to note 42 for details on thethis transaction and note 87 for details on the related financing.
Unless otherwise stated or On March 31, 2019, the context otherwise indicates, all referencesCompany entered into a definitive agreement with Fidelity Communications Co. to acquire its data, video and voice business and certain related assets (collectively, “Fidelity”) for $525.9 million in this Quarterly Report on Form 10-Qcash, subject to “Cable One,” “us,” “our,” “we” or the “Company” refercustomary post-closing adjustments. Fidelity is a cable operator that provides residential and business services to customers throughout greater Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. Cable One Inc. and its wholly owned subsidiaries.Fidelity share similar strategies, customer demographics and products. Accordingly, the Company believes the acquisition of Fidelity offers it opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies. The all-cash transaction is expected to be funded through a combination of cash on hand, revolving credit facility capacity and proceeds from new indebtedness. The transaction is subject to customary closing conditions and is expected to be completed early in the fourth quarter of 2019.
Basis of Presentation.The condensed consolidated financial statements and accompanying notes thereto have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“GAAP”) for interim financial information; and (ii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such guidance, certain notes and other financial information normally required by GAAP have been omitted. Management believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations and cash flows as of and for the periods presented herein. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 1, 2018 (the “20172018 Form 10-K”).
The December 31, 20172018 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 20172018 Form 10-K, but does not include all disclosures required by GAAP. The Company’s interim results of operations may not be indicative of its future results.
Principles of Consolidation.The accompanying condensed consolidated financial statements include the accounts of the Company, including its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting.Accounting Standard Codification (“ASC”) 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. The Company’s operations are organized and managed on the basis of cableoperating systems within its geographic regions.divisions. Each cableoperating system derives revenues from the delivery of similar products and services to a customer base that is also similar. Each cableoperating system deploys similar technology to deliver the Company’s products and services, operates within a similar regulatory environment, has similar economic characteristics and is managed by the Company’s chief operating decision maker as part of an aggregate of all cable systems.operating systems within the Company's material geographic divisions. Management evaluated the criteria for aggregation under ASC 280 and has concluded that the Company meets each of the respective criteria set forth therein. Accordingly, management has identified oneone reportable segment.
Use of Estimates.The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates and underlying assumptions.
Revenue Recognition. The Company recognizes revenue in accordance with ASC 606 - Revenue from Contracts with Customers. Residential revenues are generated through individual and bundled subscriptions for data, video and voice services on month to month terms, without penalty for cancellation. As bundled subscriptions are typically offered at discounted rates, the sales price is allocated amongst the respective product lines based on the relative selling price at which each service is sold under standalone service agreements. Business revenues are generated through individual and bundled subscriptions for data, video and voice services under contracts with terms ranging from one month to several years.
The Company also generally receives an allocation of scheduled advertising time as part of its distribution agreements with cable and broadcast networks, which the Company sells to local, regional and national advertisers under contracts with terms that are typically less than one year. In most instances, the available advertising time is sold directly by the Company’s internal sales force. As the Company is acting as principal in these arrangements, the advertising that is sold is reported as revenue on a gross basis. In instances where advertising time is sold by contracted third-party agencies, the Company is not acting as principal and the advertising sold is therefore reported net of agency fees. Advertising revenues are recognized when the related advertisements are aired.
The unit of account for revenue recognition is a performance obligation, which is a requirement to transfer a distinct good or service to a customer. Customers are billed for the services to which they subscribe based upon published or contracted rates, with the sales price being allocated to each performance obligation. For arrangements with multiple performance obligations, the sales price is allocated based on the relative standalone selling price for each subscribed service. Generally performance obligations are satisfied, and revenue is recognized, over the period of time in which customers simultaneously receive and consume the Company’s defined performance obligations, which are delivered in a similar pattern of transfer. Advertising revenue is recognized at the point in time when the underlying performance obligation is complete.
The Company also incurs certain incremental costs to acquire residential and business customers, such as commission costs and third-party costs to service specific customers. These costs are capitalized as contract assets and amortized over the applicable period. For commissions, the amortization period is the average customer tenure, which is approximately five years for both residential and business customers. All other costs are amortized over the requisite contract period.
Recently Adopted Accounting Pronouncements.In May 2017,June 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No.20172018-09,07,Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with ASC 718. The ASU was effective January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact in the future.
In January 2017, the FASB issued ASU No.2017-04,Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step two of the previous goodwill impairment test under ASC 350 and replaces it with a simplified model. Under the simplified model, goodwill impairment will be calculated as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. The amount of any impairment under the simplified model may differ from what would have been recognized under the previous two-step test. The ASU is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019, with early adoption permitted. The Company elected to early adopt the standard on January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact in the future.
In January 2017, the FASB issued ASU No.2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of the amendment is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU was effective January 1, 2018. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements as no asset acquisitions or business combinations have occurred since the effective date, but may have an impact in the future.
In August 2016, the FASB issued ASU No.2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies the way in which certain cash receipts and cash payments should be classified within the consolidated statements of cash flows and also how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 was effective January 1, 2018. The adoption of this guidance did not have a material impact on the classification of any cash flows within the Company’s consolidated statements of cash flows, but may have an impact in the future.
In May 2014, the FASB issued ASU No.2014-09,Revenue from Contracts with Customers(Topic 606). ASU 2014-09 provides new guidance related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard provides a single principles-based, five step model to be applied to all contracts with customers: (i) identify the contract(s) with the customer, (ii) identify the performance obligation(s) in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligation(s) in the contract and (v) recognize revenue when each performance obligation is satisfied. The updated guidance also requires additional disclosures regarding the nature and timing of revenue recognition as well as any uncertainty surrounding potential revenue recognition. The Company adopted the updated guidance on January 1, 2018 on a full retrospective basis, which required all periods presented to reflect the impact of the updated guidance. Upon adoption, the Company also implemented changes in the presentation of certain revenues and expenses, which resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time instead of immediately. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements for any period presented. Refer to note 3 for further details of the impact on the Company’s 2017 consolidated financial statements and the requisite disclosures pertaining to the transition to the new standard.
Recently Issued But Not Yet Adopted Accounting Pronouncements. In June 2018, the FASB issued ASU No.2018-07,Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The update isASU was effective for the firstJanuary 1, 2019. quarterThe adoption of 2019,this guidance did with early adoption permitted. The Company does not expect ASU 2018-07 to have a material impact on the Company’s consolidated financial statements upon adoption, but it may statements.have an impact in the future.
In February 2016,August 2017, the FASB issued ASU No.2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and also simplifies the application of hedge accounting under GAAP. The ASU was effective January 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No.2016-02,Leases (Topic 842). ASU 2016-02 requires lessees to record mostsubstantially all of their leases on the balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.liability with the exception of short-term leases. The Company will beis required to classify each separate lease component as an operating or a finance lease at the lease commencement date. Initial measurement of the right-of-useROU asset and lease liability is the same for both operating and finance leases, however, expense recognition and amortization of the right-of-useROU asset differs. Operating leases will reflect lease expense on a straight-line basis similar to currentprevious operating leases while finance leases will reflect a front-loaded expense pattern similar to currentprevious capital leases. The Company adopted the updated guidance on January 1, 2019.
With respect to the adoption of ASU 2016-02, the Company elected the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption is effective for as originally reported under ASC 840 - Leases. Upon adoption on January 1, 2019, the first quarterCompany recorded ROU assets of $14.92019, million and lease liabilities of with early adoption permitted.$13.3 million. The adoption of this update will resultguidance did not have a material impact on Company’s consolidated financial statements.
ASU 2016-02 provides several optional practical expedients in transition. The Company elected the lessee and lessor transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs.
The Company also made certain lessee accounting policy elections, including a short-term lease exception policy, permitting the exclusion of short-term leases (leases with terms of 12 months or less) from the recognition requirements of ASU 2016-02, and an increaseaccounting policy to account for lease and non-lease components as a single component for all classes of assets, permitting common area maintenance, real estate taxes, fiber network power charges and routine maintenance fees to be combined with the Company’sassociated lease component. The portfolio approach, which allows a lessee to account for its leases at a portfolio level, was elected for certain equipment and fiber leases in which the difference in accounting for each asset separately would not have been materially different from accounting for the assets as a combined unit. As a lessee, the Company also elected the practical expedient not to reevaluate whether any expired or existing land easements are, or contain, leases.
The Company provides residential and liability balances duebusiness customers with certain hardware to deliver data, video and voice services. As a lessor, the Company elected the practical expedient not to separate lease components from the associated non-lease component for all classes of assets. The Company concluded the non-lease components would otherwise be accounted for under the new revenue recognition standard and existing operating leases being recordedboth the timing and pattern of transfer are the same for the non-lease components and associated lease component based on the balance sheet.interrelated nature of the services provided and the underlying leased hardware and, if accounted for separately, the lease component would be classified as an operating lease.
Refer to note 6 for the requisite disclosures regarding the amount, timing and any uncertainty regarding lease-related cash flows.
Recently Issued But Not Yet Adopted Accounting Pronouncements. In August 2018, the FASB issued ASU No.2018-15,Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation, setup and other upfront costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing such costs incurred to develop or obtain internal-use software. The ASU specifies which costs are to be expensed and which are to be capitalized, the period over which capitalized costs are to be amortized, the process for identifying and recognizing impairment and the proper presentation of such costs within the consolidated financial statements. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019 and may be adopted either retrospectively or prospectively. The Company continues to evaluateis currently evaluating its method of adoption as well as the quantitativeexpected impact of adopting this guidanceon its consolidated financial statements.
In June 2016, the FASB issued ASU No.2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to recognize an allowance for expected lifetime credit losses through earnings concurrent with the recognition of a financial asset measured at amortized cost. The estimate of expected credit losses is required to be adjusted each reporting period over the life of the financial asset. The ASU is effective for annual and interim periods beginning after December 15, 2019 and requires a modified retrospective adoption approach. The Company does not expect ASU 2016-13 to have a material impact on its consolidated financial statements upon adoption, but it may have an impact in the future.
2. CLEARWAVE ACQUISITION
|
|
As previously disclosedOn January 8, 2019, the Company acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. The Company funded the purchase price of $358.8 million with cash on hand and the additional 7-year incremental term “B” loan borrowings described in note 27. to the Company’s consolidated financial statements included in the 2017 Form 10-K,The acquisition provides the Company changedwith a premier fiber network within its accounting for the capitalization of certain internal labor and related costs associated with construction and customer installation activities commencing in the first quarter of 2017. The Company initially classified the entire change as a change in accounting estimate. During the fourth quarter of 2017,existing footprint, further enables the Company determined thatto supply its customers with enhanced business services solutions and provides a portionplatform to allow the Company to replicate Clearwave’s strategy in several of what had previously been reflected as a change in estimate should have been categorized as a change in accounting principle, a portion was determined to be a correction of an error and a portion remained a change in estimate. The changes determined to be a change in estimate or change in accounting principle were applied prospectively for all of 2017.its other markets.
The Company estimates that the change in principle resulted in a decrease in operating expenses (excluding depreciation and amortization) of approximately $3.6 million and $3.8 million, a decrease in selling, general and administrative expenses of approximately $0.1 million and $0.1 million and an increase in depreciation and amortization expense of $0.7 million and $0.2 millionaccounted for the Clearwave acquisition as a business combination pursuant to ASC three805 months ended- Business Combinations. Accordingly, acquisition costs are June 30, 2018 not included as components of consideration transferred and 2017, respectively, compared to the results under the prior principle. The Company estimates that the change in principle resulted in a decrease in operatinginstead are accounted for as expenses (excluding depreciation and amortization) of approximately $7.5 million and $7.7 million, a decrease in selling, general and administrative expenses of approximately $0.1 million and $0.1 million and an increase in depreciation and amortization expense of $1.4 million and $0.5 million for the six months ended June 30, 2018 and 2017, respectively, compared to the results under the prior principle.
Although the Company determined the error to be immaterial to its previously issued financial statements, the cumulative effect of the error would have been material if corrected in 2017. Therefore, as disclosed in the 2017 Form 10-K,period in which the Company revised its historical consolidated financial statements to properly reflect the impact of the labor capitalization, including the related impact to depreciation expense and income taxes. In connection with this revision, the Company also corrected for other previously identified immaterial errors. The condensed consolidated financial statements forcosts are incurred. During the three and six months ended June 30, 20172019, the Company incurred acquisition-related costs of $0.9 million and $6.1 million, respectively, including $0.1 million and $3.4 million associated with the Clearwave acquisition, respectively. These costs are included in this Quarterly Report on Form 10-Q have been similarly revised to reflectselling, general and administrative expenses within the correctionCompany’s condensed consolidated statement of these errorsoperations and should be read in conjunction with note 2 and note 17 in the 2017 Form 10-K.comprehensive income.
The following tables presentIn accordance with ASC 805, the effectCompany uses its best estimates and assumptions to assign fair value to the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date based on the information that was available as of the revision onacquisition date. The Company believes that the condensed consolidated financial statementsinformation available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The preliminary measurements of fair value set forth herein are subject to change and such changes could be material. The Company expects to finalize the valuation as soon as practicable but no later than one year from the acquisition date. No measurement period adjustments occurred during the three and six months ended June 30, 2017 (2019. in thousands, except per share data):
Three Months Ended June 30, 2017 | ||||||||||||
As Reported | Adjustment | As Revised | ||||||||||
Condensed Consolidated Statement of Operations and Comprehensive Income Information | ||||||||||||
Costs and expenses | ||||||||||||
Depreciation and amortization | $ | 46,890 | $ | 1,132 | $ | 48,022 | ||||||
Total costs and expenses | 182,395 | 1,132 | 183,527 | |||||||||
Income from operations | 58,647 | (1,132 | ) | 57,515 | ||||||||
Income before income taxes | 46,543 | (1,132 | ) | 45,411 | ||||||||
Income tax provision | 17,967 | (430 | ) | 17,537 | ||||||||
Net income | $ | 28,576 | $ | (702 | ) | $ | 27,874 | |||||
Net income per common share: | ||||||||||||
Basic | $ | 5.03 | $ | (0.12 | ) | $ | 4.91 | |||||
Diluted | $ | 4.97 | $ | (0.12 | ) | $ | 4.85 | |||||
Comprehensive income | $ | 28,578 | $ | (702 | ) | $ | 27,876 | |||||
Six Months Ended June 30, 2017 | ||||||||||||
As Reported | Adjustment | As Revised | ||||||||||
Condensed Consolidated Statement of Operations and Comprehensive Income Information | ||||||||||||
Costs and expenses | ||||||||||||
Selling, general and administrative | $ | 96,927 | $ | 523 | $ | 97,450 | ||||||
Depreciation and amortization | 85,295 | 2,263 | 87,558 | |||||||||
Total costs and expenses | 329,468 | 2,787 | 332,255 | |||||||||
Income from operations | 119,001 | (2,787 | ) | 116,214 | ||||||||
Income before income taxes | 99,577 | (2,787 | ) | 96,790 | ||||||||
Income tax provision | 37,787 | (1,059 | ) | 36,728 | ||||||||
Net income | $ | 61,790 | $ | (1,728 | ) | $ | 60,062 | |||||
Net income per common share: | ||||||||||||
Basic | $ | 10.88 | $ | (0.30 | ) | $ | 10.58 | |||||
Diluted | $ | 10.76 | $ | (0.30 | ) | $ | 10.46 | |||||
Comprehensive income | $ | 61,794 | $ | (1,728 | ) | $ | 60,066 | |||||
Condensed Consolidated Statement of Cash Flows Information | ||||||||||||
Net income | $ | 61,790 | $ | (1,728 | ) | $ | 60,062 | |||||
Depreciation and amortization | 85,295 | 2,263 | 87,558 | |||||||||
Change in accounts receivable, net | 1,741 | 522 | 2,263 | |||||||||
Change in deferred income taxes | 7,832 | (1,059 | ) | 6,773 | ||||||||
Net cash provided by operating activities | $ | 130,859 | $ | - | $ | 130,859 | ||||||
|
|
The Company adopted ASC 606 on January 1, 2018 using the full retrospective method, resulting in a recasting of prior period consolidated financial statements. The adoption resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time, instead of immediately. The impact of the ASC 606 adoption on the comparative 2017 condensed consolidated financial statements was as follows (in thousands, except per share data):
December 31, 2017 | ||||||||||||
As Reported | ASC 606 Adjustment | As Recasted | ||||||||||
Condensed Consolidated Balance Sheet Information | ||||||||||||
Assets | ||||||||||||
Current Assets: | ||||||||||||
Accounts receivable, net | $ | 51,141 | $ | (21,211 | ) | $ | 29,930 | |||||
Prepaid and other current assets | 8,160 | 2,738 | 10,898 | |||||||||
Total Current Assets | 242,384 | (18,473 | ) | 223,911 | ||||||||
Other noncurrent assets | 6,179 | 4,776 | 10,955 | |||||||||
Total Assets | $ | 2,218,329 | $ | (13,697 | ) | $ | 2,204,632 | |||||
Liabilities and Stockholders' Equity | ||||||||||||
Current Liabilities: | ||||||||||||
Accounts payable and accrued liabilities | $ | 117,963 | $ | (108 | ) | $ | 117,855 | |||||
Deferred revenue | 38,266 | (23,258 | ) | 15,008 | ||||||||
Total Current Liabilities | 170,604 | (23,366 | ) | 147,238 | ||||||||
Deferred income taxes | 205,636 | 1,518 | 207,154 | |||||||||
Other noncurrent liabilities | 9,991 | 3,120 | 13,111 | |||||||||
Total Liabilities | 1,546,913 | (18,728 | ) | 1,528,185 | ||||||||
Stockholders' Equity | ||||||||||||
Retained earnings | 723,354 | 5,032 | 728,386 | |||||||||
Total Stockholders' Equity | 671,416 | 5,031 | 676,447 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 2,218,329 | $ | (13,697 | ) | $ | 2,204,632 | |||||
Three Months Ended June 30, 2017 | ||||||||||||
As Reported / Revised (1) | ASC 606 Adjustment | As Recasted | ||||||||||
Condensed Consolidated Statement of Operations and Comprehensive Income Information | ||||||||||||
Revenues | $ | 241,042 | $ | (51 | ) | $ | 240,991 | |||||
Costs and expenses | ||||||||||||
Operating (excluding depreciation and amortization) | 83,849 | 199 | 84,048 | |||||||||
Selling, general and administrative | 51,194 | (229 | ) | 50,965 | ||||||||
Total costs and expenses | 183,527 | (30 | ) | 183,497 | ||||||||
Income from operations | 57,515 | (21 | ) | 57,494 | ||||||||
Income before income taxes | 45,411 | (21 | ) | 45,390 | ||||||||
Income tax provision | 17,537 | (7 | ) | 17,530 | ||||||||
Net income | $ | 27,874 | $ | (14 | ) | $ | 27,860 | |||||
Net income per common share: | ||||||||||||
Basic | $ | 4.91 | $ | - | $ | 4.91 | ||||||
Diluted | $ | 4.85 | $ | - | $ | 4.85 | ||||||
Comprehensive income | $ | 27,876 | $ | (14 | ) | $ | 27,862 | |||||
_________
|
|
Six Months Ended June 30, 2017 | ||||||||||||
As Reported/ Revised (1) | ASC 606 Adjustment | As Recasted | ||||||||||
Condensed Consolidated Statement of Operations and Comprehensive Income Information | ||||||||||||
Revenues | $ | 448,469 | $ | (44 | ) | $ | 448,425 | |||||
Costs and expenses | ||||||||||||
Operating (excluding depreciation and amortization) | 152,932 | 199 | 153,131 | |||||||||
Selling, general and administrative | 97,450 | (101 | ) | 97,349 | ||||||||
Total costs and expenses | 332,255 | 97 | 332,352 | |||||||||
Income from operations | 116,214 | (141 | ) | 116,073 | ||||||||
Income before income taxes | 96,790 | (141 | ) | 96,649 | ||||||||
Income tax provision | 36,728 | (54 | ) | 36,674 | ||||||||
Net income | $ | 60,062 | $ | (87 | ) | $ | 59,975 | |||||
Net income per common share: | ||||||||||||
Basic | $ | 10.58 | $ | (0.02 | ) | $ | 10.56 | |||||
Diluted | $ | 10.46 | $ | (0.01 | ) | $ | 10.45 | |||||
Comprehensive income | $ | 60,066 | $ | (87 | ) | $ | 59,979 | |||||
Condensed Consolidated Statement of Cash Flows Information | ||||||||||||
Net income | $ | 60,062 | $ | (87 | ) | $ | 59,975 | |||||
Change in deferred income taxes | 6,773 | (54 | ) | 6,719 | ||||||||
Change in deferred revenue | 89 | 92 | 181 | |||||||||
Change in other noncurrent assets and liabilities, net | 462 | 50 | 512 | |||||||||
Net cash provided by operating activities | $ | 130,859 | $ | - | $ | 130,859 | ||||||
_________
|
|
The adoption of ASC 606 did not result in any changes to previously reported total net cash flows from operating, financing or investing activities.
A summary of changes in timing and presentation to the Company’s historical consolidated financial statements is presented below:
|
|
|
|
|
|
|
|
On May 1, 2017, the Company acquired all of the outstanding equity interests in NewWave for $740.2 million in cash on a debt-free basis. Refer to note 8 for details regarding the financing of the transaction. NewWave was a cable operator providing data, video and voice services to residential and business customers throughout non-urban areas of Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas. Cable One and NewWave shared similar strategies, customer demographics, and products. Accordingly, the acquisition of NewWave offers the Company opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies.
The following table summarizes the current allocation of the purchase price consideration as of the acquisition date reflecting all measurement period adjustments recorded in 2017(in thousands):
Preliminary Purchase Price Allocation | ||||
Assets Acquired | ||||
Cash and cash equivalents | $ | 1,913 | ||
Accounts receivable | 1,294 | |||
Prepaid and other current assets | 311 | |||
Property, plant and equipment | 120,472 | |||
Intangible assets | 89,700 | |||
Other noncurrent assets | 3,533 | |||
Total Assets Acquired | $ | 217,223 | ||
Liabilities Assumed | ||||
Accounts payable and accrued liabilities | $ | 2,128 | ||
Deferred revenue | 4,322 | |||
Deferred income taxes | 30,104 | |||
Other noncurrent liabilities | 5,057 | |||
Total Liabilities Assumed | $ | 41,611 | ||
Net assets acquired | $ | 175,612 | ||
Purchase price consideration | 358,830 | |||
Goodwill recognized | $ | 183,218 | ||
Purchase Price Allocation | ||||
Assets Acquired | ||||
Cash and cash equivalents | $ | 12,220 | ||
Accounts receivable | 15,027 | |||
Prepaid and other current assets | 2,286 | |||
Property, plant and equipment | 192,234 | |||
Intangible assets | 476,300 | |||
Other noncurrent assets | 1,184 | |||
Total Assets Acquired | 699,251 | |||
Liabilities Assumed | ||||
Accounts payable and accrued liabilities | 25,125 | |||
Deferred revenue | 14,516 | |||
Deferred income taxes | 6,644 | |||
Total Liabilities Assumed | 46,285 | |||
Net Assets Acquired | 652,966 | |||
Purchase price consideration | 740,166 | |||
Goodwill Recognized | $ | 87,200 | ||
Acquired identifiable intangible assets consist of the following (dollars in thousands):
Preliminary Fair Value | Preliminary Useful Life (in years) | |||||||
Customer relationships | $ | 83,000 | 17 | |||||
Trademark and trade name | $ | 6,700 | Indefinite | |||||
No residual value was assigned to the acquired customer relationships.
The measurement period endedacquisition produced $183.2 million of goodwill, increasing the Company’s goodwill balance from $172.1 million at December 31, 2018 to $355.3 million at June 30, 2019. Goodwill represents the excess of the purchase price consideration over the fair value of the underlying net assets acquired and largely results from expected future synergies from combining operations as well as an assembled workforce, which does not qualify for separate recognition. As an indefinite-lived asset, goodwill is not amortized but rather is subject to impairment testing on at least an annual basis. Goodwill arising from the Clearwave acquisition is April 30, 2018 and nonot measurement period adjustments were recorded during 2018.deductible for tax purposes.
For the three months ended June 30, 2019, the Company recognized revenues of $6.8 million and net income of $1.2 million from Clearwave operations, which reflected acquired intangible assets amortization expense of $1.2 million. For the period from January 8, 2019 to June 30, 2019, the Company recognized revenues of $12.9 million and net income of $2.2 million from Clearwave operations, which reflected acquired intangible assets amortization expense of $2.3 million.
3. REVENUES |
|
The Company’s revenues by product line were as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||||||
Data | $ | 122,471 | $ | 103,497 | $ | 242,330 | $ | 194,018 | $ | 132,824 | $ | 122,471 | $ | 262,635 | $ | 242,330 | ||||||||||||||||
Video | 87,462 | 84,873 | 176,219 | 157,328 | 84,033 | 87,462 | 167,836 | 176,219 | ||||||||||||||||||||||||
Voice | 10,504 | 11,417 | 21,176 | 21,284 | 10,705 | 10,504 | 20,329 | 21,176 | ||||||||||||||||||||||||
Business services | 38,485 | 32,493 | 76,177 | 59,461 | 49,759 | 38,485 | 96,903 | 76,177 | ||||||||||||||||||||||||
Advertising sales | 5,916 | 5,970 | 11,158 | 11,592 | 4,750 | 5,916 | 9,479 | 11,158 | ||||||||||||||||||||||||
Other | 3,576 | 2,741 | 7,115 | 4,742 | 3,579 | 3,576 | 7,073 | 7,115 | ||||||||||||||||||||||||
Total revenues | $ | 268,414 | $ | 240,991 | $ | 534,175 | $ | 448,425 | $ | 285,650 | $ | 268,414 | $ | 564,255 | $ | 534,175 | ||||||||||||||||
Fees imposed on the Company by various governmental authorities are passed through monthly to the Company’s customers and are periodically remitted to authorities. These fees were $4.1$5.9 million and $4.0$4.1 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $8.2$10.0 million and $7.5$8.2 million for the six months ended June 30, 20182019 and 2017,2018, respectively. Further, asAs the Company acts as principal, these fees are reported in video and voice revenues on a gross basis with corresponding expenses included within operating expenses in the condensed consolidated statements of operations and comprehensive income.
Other revenues are comprised primarily of customer late charges and reconnect fees.
A significant portion of the Company’s revenues is derivedNet accounts receivable from contracts with customers who may cancel their subscriptions at any time without penalty. As such, the amount of deferred revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from the Company’s existing customers. Revenues from customers with contractually specified terms and non-cancelable service periods are recognized over the terms of the underlying contracts, which generally range from one to five years.
Contract Costs. The Company capitalizes the incremental costs incurred in obtaining customers, such as commission costs and certain third-party costs. Commission expense is recognized using a portfolio approach over the calculated average residential and business customer tenure. Deferred commissions totaled $7.7$29.9 million and $7.5$29.8 million as ofat June 30, 20182019 and December 31, 2017,2018, respectively.
Deferred commissions totaled $8.0 million and $7.8 million at June 30, 2019 and December 31, 2018, respectively, and were included within prepaid and other current assets and other noncurrent assets in the condensed consolidated balance sheets. Commission amortization expense was $0.9 million for both the three months ended June 30, 20182019 and 20172018 and $1.7$1.9 million and $1.7 million for both the six months ended June 30, 20182019 and 20172018, respectively, and was included inwithin selling, general and administrative expenses withinin the condensed consolidated statements of operations and comprehensive income. Deferred commissions of $2.8$3.1 million included within prepaid and other current assets in the condensed consolidated balance sheet as of June 30, 20182019 are expected to be amortized over the next 12 months.
Contract Liabilities. As residential and business customers are billed for subscription services in advance of the service period, the timing of revenue recognition differs from the timing of billing. Deferred revenue liabilities are recorded when the Company collects payments in advance of providing the associated services.
Current deferred revenue liabilities, consisting of refundable customer prepayments, up-front charges and installation fees, were $18.8$23.1 million and $15.0$19.0 million asat June 30, 2019 and December 31, 2018, respectively. As of June 30, 20182019, the Company’s remaining performance obligations pertain to the refundable customer prepayments and consist of providing future data, video and voice services to customers. Of the $19.0 million of current deferred revenue at December 31, 2017,2018, respectively. nearly all was recognized during the six months ended June 30, 2019. Noncurrent deferred revenue liabilities, consisting of up-front charges and installation fees from business customers, were $2.5$4.8 million and $3.1$2.8 million as of June 30, 20182019 and December 31, 2017,2018, respectively, and were included within other noncurrent liabilities in the condensed consolidated balance sheets.
Significant Judgments. The Company often provides multiple services to a single customer. The provision of customer premise equipment, installation services and service upgrades may be highly integrated and interdependent with the data, video or voice services provided. Judgment is required to determine whether the provision of such customer premise equipment, installation services and service upgrades is considered distinct and accounted for separately, or not distinct and accounted for together with the related subscription service.
The transaction price for a bundle of services is frequently less than the sum of the standalone selling prices of each individual service. The Company allocates the sales price for such bundles to each individual service provided based on the relative standalone selling price for each subscribed service. Standalone selling prices of the Company’s residential data and video services are directly observable, while standalone selling prices for the Company’s residential voice services are estimated using the adjusted market assessment approach, which relies upon information from peer companies who sell residential voice services individually.
The Company also uses significant judgment to determine the appropriate period over which to amortize deferred residential and business commission costs, which was determined to be the average customer tenure. Based on historical data and current expectations, the Company determined the average customer tenure for both residential and business customers to be approximately five years.
4. PROPERTY, PLANT AND EQUIPMENT |
|
Property, plant and equipment consisted of the following (in thousands):
June 30, 2018 | December 31, 2017 | June 30, 2019 | December 31, 2018 | |||||||||||||
Cable distribution systems | $ | 1,370,420 | $ | 1,329,451 | $ | 1,593,313 | $ | 1,421,820 | ||||||||
Customer premise equipment | 201,578 | 200,175 | 227,278 | 220,571 | ||||||||||||
Other equipment and fixtures | 385,033 | 378,968 | 413,364 | 406,011 | ||||||||||||
Buildings and leasehold improvements | 96,898 | 95,314 | 103,520 | 100,625 | ||||||||||||
Capitalized software | 94,399 | 89,773 | 97,790 | 94,801 | ||||||||||||
Construction in progress | 66,089 | 67,564 | 75,536 | 69,163 | ||||||||||||
Land | 11,615 | 11,585 | 12,252 | 11,946 | ||||||||||||
Right-of-use assets | 5,358 | - | ||||||||||||||
Property, plant and equipment, gross | 2,226,032 | 2,172,830 | 2,528,411 | 2,324,937 | ||||||||||||
Less: Accumulated depreciation | (1,406,298 | ) | (1,340,938 | ) | ||||||||||||
Less accumulated depreciation | (1,551,013 | ) | (1,476,958 | ) | ||||||||||||
Property, plant and equipment, net | $ | 819,734 | $ | 831,892 | $ | 977,398 | $ | 847,979 | ||||||||
Depreciation expense was $46.0$50.6 million and $45.9$46.0 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $92.1$100.3 million and $85.4$92.1 million for the six months ended June 30, 20182019 and 2017,2018, respectively.
In January 2017,2019, athe remaining portion of the Company's previous headquarters building and adjoining property was sold for $10.1$6.3 million in gross proceeds and the Company recognized a related gain of $6.6$1.6 million. The remaining property’s carrying value of $4.6$4.6 million iswas included inwithin other noncurrent assets in the condensed consolidated balance sheetssheet as assets held for sale at both June 30, 2018 and December 31, 2017.2018.
|
|
The carrying amount of goodwill was $355.3 million and $172.1 million at both June 30, 20182019 and December 31, 20172018, wasrespectively. The increase related to goodwill recognized upon the acquisition of Clearwave in $172.1January 2019. million and reflected $87.2 million of goodwill associated with the NewWave acquisition. The Company has notnot historically recorded any impairment of goodwill.
Intangible assets (excluding goodwill) consisted of the following (dollars in thousands):
June 30, 2018 | ||||||||||||||||||||||||
Useful | Gross | Net | ||||||||||||||||||||||
Life | Carrying | Accumulated | Carrying | |||||||||||||||||||||
Range (years) | Amount | Amortization | Amount | |||||||||||||||||||||
Finite-Lived Intangible Assets | ||||||||||||||||||||||||
Cable franchise renewals and access rights | 1 | - | 25 | $ | 2,931 | $ | 2,883 | $ | 48 | |||||||||||||||
Customer relationships | 14 | 160,000 | 13,333 | 146,667 | ||||||||||||||||||||
Trademarks and trade names | 2.7 | 1,300 | 569 | 731 | ||||||||||||||||||||
Total Finite-Lived Intangible Assets | $ | 164,231 | $ | 16,785 | $ | 147,446 | ||||||||||||||||||
Indefinite-Lived Intangible Assets | ||||||||||||||||||||||||
Franchise agreements | $ | 812,371 | ||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Useful | Gross | Net | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Life | Carrying | Accumulated | Carrying | June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
Range (years) | Amount | Amortization | Amount | Useful Life Range (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||||||||||
Finite-Lived Intangible Assets | Finite-Lived Intangible Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cable franchise renewals and access rights | 1 | - | 25 | $ | 4,138 | $ | 3,886 | $ | 252 | |||||||||||||||||||||||||||||||||||||||||||||
Franchise renewals | 1 | – | 25 | $ | 2,927 | $ | 2,891 | $ | 36 | $ | 2,927 | $ | 2,887 | $ | 40 | |||||||||||||||||||||||||||||||||||||||
Customer relationships | 14 | 160,000 | 7,619 | 152,381 | 14 | – | 17 | 243,000 | 27,141 | 215,859 | 160,000 | 19,047 | 140,953 | |||||||||||||||||||||||||||||||||||||||||
Trademarks and trade names | 2.7 | 1,300 | 325 | 975 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Trademark and trade name | 2.7 | 1,300 | 1,056 | 244 | 1,300 | 813 | 487 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Finite-Lived Intangible Assets | $ | 165,438 | $ | 11,830 | $ | 153,608 | Total Finite-Lived Intangible Assets | $ | 247,227 | $ | 31,088 | $ | 216,139 | $ | 164,227 | $ | 22,747 | $ | 141,480 | |||||||||||||||||||||||||||||||||||
Indefinite-Lived Intangible Assets | Indefinite-Lived Intangible Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Franchise agreements | $ | 812,137 | $ | 812,371 | $ | 812,371 | ||||||||||||||||||||||||||||||||||||||||||||||||
Trademark and trade name | 6,700 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Indefinite-Lived Intangible Assets | Total Indefinite-Lived Intangible Assets | $ | 819,071 | $ | 812,371 | |||||||||||||||||||||||||||||||||||||||||||||||||
Intangible asset amortization expense was $3.0$4.2 million and $2.1$3.0 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $5.7$8.3 million and $2.2$5.7 million for the six months ended June 30, 20182019 and 2017,2018, respectively.
As of June 30, 2018,2019, the future amortization of intangible assets was as follows (in thousands):
Year Ending December 31, | Amount | Amount | |||||||
2018 (remaining six months) | $ | 5,963 | |||||||
2019 | 11,925 | ||||||||
2019 (remaining six months) | 2019 (remaining six months) | $ | 8,357 | ||||||
2020 | 11,437 | 2020 | 16,319 | ||||||
2021 | 11,436 | 16,318 | |||||||
2022 | 11,433 | 2022 | 16,315 | ||||||
2023 | 2023 | 16,313 | |||||||
Thereafter | 95,252 | Thereafter | 142,517 | ||||||
Total | $ | 147,446 | Total | $ | 216,139 | ||||
Actual amortization expense in future periods may differ from the amounts above as a result of new intangible asset acquisitions or divestitures, changes in useful life estimates, impairments or other relevant factors.
6. LEASES
As a lessee, the Company has operating leases for buildings, equipment, data centers, fiber optic networks and towers and finance leases for certain buildings and fiber optic networks. These leases have remaining lease terms ranging from under 1 year to 24 years, with some including an option to extend the lease for up to 15 additional years and some including an option to terminate the lease within 1 year.
As a lessor, the Company has operating leases for the use of its fiber optic networks, towers and customer premise equipment. These leases have remaining lease terms ranging from under 1 year to 8 years, with some including a lessee option to extend the leases for up to 5 additional years and some including an option to terminate the lease within 1 year.
Significant judgment is required when determining whether a fiber optic contract contains a lease, defining the duration of the lease term and selecting the discount rate.
● | The Company concluded it was the lessee or lessor for fiber arrangements only when the asset is specifically identifiable and both substantially all the economic benefit is obtained and the right to direct the use of the asset exists. |
● | The Company’s lease terms are only for periods in which there are enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. The Company’s lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. |
● | Most of the Company’s leases do not contain an implicit interest rate. Therefore, the Company held discussions with lenders, evaluated its published credit score and incorporated interest rates on currently held debt in determining discount rates that reflect what the Company would pay to borrow on a collateralized basis over similar terms for its lease obligations. |
As of June 30, 2019, additional operating leases that have not yet commenced were not material.
Lessee Financial Information. The Company’s ROU assets and lease liabilities consisted of the following (in thousands):
June 30, 2019 | ||||
ROU Assets | ||||
Property, plant and equipment, net: | ||||
Finance leases | $ | 5,163 | ||
Other noncurrent assets: | ||||
Operating leases | $ | 15,618 | ||
Lease Liabilities | ||||
Accounts payable and accrued liabilities: | ||||
Operating leases | $ | 4,214 | ||
Current portion of long-term debt: | ||||
Finance leases | $ | 153 | ||
Long-term debt: | ||||
Finance leases | $ | 3,187 | ||
Other noncurrent liabilities: | ||||
Operating leases | $ | 11,231 | ||
Total: | ||||
Finance leases | $ | 3,340 | ||
Operating leases | $ | 15,445 | ||
The components of the Company’s lease expense were as follows (in thousands):
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
Finance lease expense: | ||||||||
Amortization of ROU assets | $ | 101 | $ | 210 | ||||
Interest on lease liabilities | 64 | 132 | ||||||
Operating lease expense | 1,284 | 2,462 | ||||||
Short-term lease expense | 228 | 472 | ||||||
Variable lease expense | 31 | 98 | ||||||
Total lease expense | $ | 1,708 | $ | 3,374 | ||||
Finance lease expense is included within depreciation and amortization expense and interest expense, and operating lease expense is included within operating expenses and selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income.
Supplemental lessee financial information is as follows (dollars in thousands):
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Finance leases - financing cash flows | $ | 399 | $ | 555 | ||||
Finance leases - operating cash flows | $ | 64 | $ | 132 | ||||
Operating leases - operating cash flows | $ | 1,331 | $ | 2,560 | ||||
ROU assets obtained in exchange for new lease liabilities: | ||||||||
Finance leases | $ | 524 | $ | 1,101 | ||||
Operating leases (1) | $ | 2,100 | $ | 7,082 | ||||
(1) | Includes $3.3 million of ROU assets acquired in the Clearwave transaction. |
| ||||
| ||||
Finance leases (years) | 13.5 | |||
Operating leases (years) | 4.7 | |||
Weighted average discount rate: | ||||
Finance leases | 8.12 | % | ||
Operating leases | 5.07 | % | ||
As of June 30, 2019, the future maturities of existing lease liabilities were as follows (in thousands):
Year Ending December 31, | Finance Leases | Operating Leases | |||||||
2019 (remaining six months) | $ | 135 | $ | 2,553 | |||||
2020 | 401 | 4,500 | |||||||
2021 | 412 | 3,384 | |||||||
2022 | 423 | 2,508 | |||||||
2023 | 429 | 2,191 | |||||||
Thereafter | 3,705 | 2,272 | |||||||
Total | 5,505 | 17,408 | |||||||
Less present value discount | (2,165 | ) | (1,963 | ) | |||||
Lease liability | $ | 3,340 | $ | 15,445 | |||||
As of December 31, 2018, the Company’s outstanding operating lease obligations under the previous accounting guidance were as follows (in thousands):
Year Ending December 31, | Operating Leases | ||||
2019 | $ | 1,767 | |||
2020 | 1,219 | ||||
2021 | 911 | ||||
2022 | 398 | ||||
2023 | 204 | ||||
Thereafter | 299 | ||||
Total | $ | 4,798 | |||
Lessor Financial Information.The Company’s lease income, which is included within revenues in the condensed consolidated statements of operations and comprehensive income, was as follows (in thousands):
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
Lease income relating to lease payments | $ | 139 | $ | 258 | ||||
As of June 30, 2019, the future maturities of existing lease receivables were as follows (in thousands):
Year Ending December 31, | Operating Leases | ||||
2019 (remaining six months) | $ | 312 | |||
2020 | 411 | ||||
2021 | 248 | ||||
2022 | 45 | ||||
2023 | 33 | ||||
Thereafter | 78 | ||||
Total | $ | 1,127 | |||
As of June 30, 2019, the current and noncurrent portions of operating lease receivables were $0.5 million and $0.6 million, respectively, and were included within accounts receivable, net and other noncurrent assets in the condensed consolidated balance sheet, respectively.
7. DEBT
The carrying amount of long-term debt consisted of the following (in thousands):
June 30, 2018 | December 31, 2017 | |||||||
Notes | $ | 450,000 | $ | 450,000 | ||||
Senior Credit Facilities | 738,750 | 744,375 | ||||||
Capital lease obligation | 259 | 267 | ||||||
Total debt | 1,189,009 | 1,194,642 | ||||||
Less unamortized debt issuance costs | (19,594 | ) | (19,585 | ) | ||||
Less current portion | (17,500 | ) | (14,375 | ) | ||||
Total long-term debt | $ | 1,151,915 | $ | 1,160,682 | ||||
June 30, 2019 | December 31, 2018 | |||||||
Notes (as defined below) | $ | - | $ | 450,000 | ||||
Senior Credit Facilities (as defined below) | 1,314,375 | 730,000 | ||||||
Lease liabilities | 3,340 | 251 | ||||||
Total debt | 1,317,715 | 1,180,251 | ||||||
Less unamortized debt issuance costs | (19,925 | ) | (17,570 | ) | ||||
Less current portion | (17,153 | ) | (20,625 | ) | ||||
Total long-term debt | $ | 1,280,637 | $ | 1,142,056 | ||||
Notes.Notes. On June 17, 2015, the Company issued $450$450 million aggregate principal amount of 5.75% senior unsecured notes due 2022 (the “Notes”). The Notes were jointly and severally guaranteed on a senior unsecured basis by each of the subsidiaries that guarantee the Senior Credit Facilities (as defined below). The Notes were scheduled to mature on June 15, 2022 and interest iswas payable on June 15th and December 15th of each year. The indenture governing the Notes were issued pursuant to an indenture dated as of June 17, 2015 (the “Indenture”). The Indenture providesprovided for early redemption of the Notes, at the option of the Company, at the prices and subject to the terms specified in the Indenture. The Indenture includes certain covenants relating toindenture.
On June 15, 2019, the Company redeemed all $450 million aggregate principal amount of outstanding Notes. In conjunction with the redemption, the Company incurred a $6.5 million call premium and wrote off the remaining $3.8 million debt incurrence, liens, restricted payments, asset salesissuance cost associated with the Notes. These amounts are recorded within other income (expense), net in the condensed consolidated statement of operations and transactions with affiliates, changes in control and mergers or sales of all or substantially all of the Company’s assets. The Indenture also provides for customary events of default (subject, in certain cases, to customary grace periods).comprehensive income.
Senior Credit Facilities. On June 30, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the other agents party thereto. The Credit Agreementthereto, which provided for a five-year5-year revolving credit facility in an aggregate principal amount of $200$200 million (the “Revolving“Original Revolving Credit Facility”) and a five-year term loan facility in an aggregate principal amount of $100 million (the “Term Loan Facility”). Concurrently with its entry into the Credit Agreement, the Company borrowed the full amount of the Term Loan Facility. The Revolving Credit Facility also gives the Company the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility.
On May 1, 2017, the Company and the lenders amended and restated the Credit Agreement (the “Amended and Restated Credit Agreement”) and the Company incurred $750$750 million of senior secured term loans (the “New“2017 New Loans”), the proceeds of which were used, together with cash on hand, to finance the acquisition of NewWave acquisition,Communications (“NewWave”), repay in full the Term Loan Facilitythen-existing term loans and pay related fees and expenses. The 2017New Loans consist of a five-year5-year term “A” loan in an original aggregate principal amount of $250 million (the “Term Loan A-1”) and a 7-year term “B” loan in an original aggregate principal amount of $500 million (the “Term Loan B-1”).
On January 7, 2019, the Company entered into Amendment No.2 to the Amended and Restated Credit Agreement (“Amendment No.2”) with CoBank, ACB (“CoBank”), as lender, and JPMorgan, as administrative agent, and incurred a new 7-year incremental term “B” loan in an aggregate principal amount of $250 million (the “Term Loan A”B-2”), the proceeds of which were used to finance, in part, the Clearwave acquisition.
On April 12, 2019, the Company entered into Amendment No.3 to the Amended and Restated Credit Agreement (“Amendment No.3”) with CoBank, as lender, and JPMorgan, as administrative agent, to provide for a seven-yearnew delayed draw incremental term “B” loan in an aggregate principal amount of $500$325 million (the “Term Loan B”B-3”). The Term Loan B-3 was drawn in full on June 14, 2019.
The Term Loan B-3 will mature on January 7, 2026 and may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). The interest rate applicable to the Term Loan B-3 is equal to, at the Company’s option, LIBOR or a base rate, plus an applicable margin equal to 2.0% for LIBOR loans and 1.0% for base rate loans. The principal amount of the Term Loan B-3 amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum (subject to customary adjustments in the event of any prepayment), with the balance due upon maturity.
On May 8, 2019, the Company entered into a Second Restatement Agreement with JPMorgan, as administrative agent, and the lenders party thereto, to amend and restate the Amended and Restated Credit Agreement (the “Second Restatement Agreement”). The Second Restatement Agreement provides for a new senior secured term “A” loan in an aggregate principal amount of $250 million (the “Term Loan A-2”), a new senior secured delayed draw term “A” loan in an aggregate principal amount of $450 million (the “Delayed Draw Term Loan A-2”) and a new $350 million senior secured revolving credit facility (the “New Revolving Credit Facility” and, together with the Term Loan AA-2, the Delayed Draw Term Loan A-2, the Term Loan B-1, the Term Loan B-2 and the Revolving Credit Facility,Term Loan B-3, the “Senior Credit Facilities”). The obligationsSecond Restatement Agreement did not alter the principal terms of the Company’s previously established Term Loan B-1, Term Loan B-2 or Term Loan B-3.
A portion of the proceeds from the Term Loan A-2, the Term Loan B-3 and the New Revolving Credit Facility, together with cash on hand, were used to refinance the Original Revolving Credit Facility and Term Loan A-1, to redeem the Notes and for other general corporate purposes. The Company intends to use the remaining proceeds, together with proceeds from the Delayed Draw Term Loan A-2 and cash on hand, to finance the acquisition of Fidelity and for other general corporate purposes.
The Term Loan A-2 and New Revolving Credit Facility will mature on May 8, 2024 (unless certain of the Company’s existing indebtedness remains outstanding after certain specified dates, in which case the final maturity date of both facilities will be an earlier date as specified in the Second Restatement Agreement).
The principal amount of the Term Loan A-2 amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year following the closing date, 2.5% per annum for the second year following the closing date, 5.0% per annum for the third year following the closing date, 7.5% per annum for the fourth year following the closing date and 12.5% per annum for the fifth year following the closing date (in each case subject to customary adjustments in the event of any prepayment or in the event the Delayed Draw Term Loan A-2 is drawn), with the balance due upon maturity.
The Delayed Draw Term Loan A-2 will be available in a single drawing until February 8, 2020. Any loans under the AmendedDelayed Draw Term Loan A-2 will have the same terms as, and Restatedwill constitute one class of term loans with, the loans under the Term Loan A-2 described above. The Company is required to pay a ticking fee, which accrues at a per annum rate of 0.30% on the average daily undrawn portion of the Delayed Draw Term Loan A-2 accruing during the period commencing on June 15, 2019 up to, but excluding, the date on which the lender’s commitments under the Delayed Draw Term Loan A-2 terminate.
The Senior Credit AgreementFacilities are guaranteed by the Company’s wholly owned domestic subsidiaries (the “Guarantors”) and are secured, subject to certain exceptions, by substantially all of the assets of the Company and the guarantors.Guarantors.
On April 23, 2018, the Company entered into Amendment No.1 (the “Repricing Amendment”) to the Amended and RestatedThe Senior Credit Agreement. The Repricing Amendment amended the Amended and Restated Credit Agreement to, among other things, (i) decrease the applicable margin for the Term Loan B to 1.75% for London Interbank Offered Rate (“LIBOR”) borrowings and 0.75% for base rate borrowings, (ii) reset the period during which a prepayment premium in respect of the Term Loan BFacilities may be required for a Repricing Transaction until six months after the effective date of the Repricing Amendment and (iii) reset the period during which the Term Loan B benefits from certain “most favored nation” pricing protections until 12 months after the effective date of the Repricing Amendment. Other than as set forth above, all other material terms and provisions of the Senior Credit Facilities described below remain substantially the same.prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions).
The interest margins applicable to the Senior Credit Facilities are, at the Company’s option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (i) with respect to the Term Loan AA-2, Delayed Draw Term Loan A-2 and theNew Revolving Credit Facility, 1.50%1.25% to 2.25%1.75% for LIBOR loans and 0.50%0.25% to 1.25%0.75% for base rate loans, determined on a quarterly basis by reference to a pricing grid based on the Company’s total net leverage ratio, and (ii) with respect to the Term Loan B,B-1, (x) for any day on or prior to April 22, 2018, 2.25% for LIBOR loans and 1.25% for base rate loans through April 22, 2018 and (y) for any day thereafter, 1.75% for LIBOR loans and 0.75% for base rate loans, after April 22, 2018.
Theand (iii) with respect to the Term Loan A B-may be prepaid at any time without premium and amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% per annum for the third year after funding and 10.0% per annum for the fourth2 and fifth years after funding, with the outstanding balance due upon maturity. The Term Loan B amortizes quarterly at aB-3, 2.0% for LIBOR loans and 1.0% for base rate (expressed as a percentage of the original principal amount) of 1.0% per annum, with the outstanding balance due upon maturity. The Term Loan B is subject to a 1.0% prepayment premium if prepaid in connection with a “Repricing Transaction” (as defined in the Amended and Restated Credit Agreement) within six months of the effective date of the Repricing Amendment (as defined below), benefits from certain “most favored nation” pricing protections and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement. Other than as set forth above, the New Loans are subject to terms substantially similar to those under the Credit Agreement.loans.
The Company may, subject to certain specified terms and provisions, obtain additional credit facilities of up to $425$600 million under the Amended and Restated CreditSecond Restatement Agreement plus an unlimited amount so long as, on a pro forma basis, the Company’s First Lien Net Leverage Ratio (as defined in the Amended and Restated CreditSecond Restatement Agreement) is no greater than 1.803.0 to 1.00.1.0. The Amended and Restated Credit Agreement contains customary representations, warranties and affirmative and negative covenants as well as customary events of default. The Amended and Restated Credit Agreement also requires the Company to maintain specified ratios of total net indebtedness and first lien net indebtedness to consolidated operating cash flow.
The Company was in compliance with all debt covenants as of June 30, 2018.2019.
As of June 30, 2018,2019, outstanding borrowings under the Term Loan AA-2, Term Loan B-1, Term Loan B-2 and Term Loan BB-3 were $243.8$250.0 million, $490.0 million, $249.4 million and $495.0$325.0 million, respectively, and each bore interest at a rate of 4.09%rates ranging from 3.91% to 4.41% per annum. Letter of credit issuances under the New Revolving Credit Facility totaled $3.1$5.5 million and the Company had $196.9$344.5 million available for borrowing under the New Revolving Credit Facility at June 30, 2018.2019.
In connection with the Repricing Amendment,financing transactions during 2019, the Company incurred $12.4 million of debt issuance costs, of which $11.7 million was capitalized. The Company also wrote-off $4.2 million of existing unamortized debt issuance costs, including the $2.13.8 million of which $0.1 million was expensed immediately.associated with the Notes. The Company recorded $1.0$1.3 million and $0.8$1.0 million of debt issuance cost amortization for the three months ended June 30, 20182019 and 2017,2018, respectively, and $2.0$2.4 million and $1.2$2.0 million for the six months ended June 30, 20182019 and 2017,2018, respectively. These amounts are includedreflected within interest expense in the condensed consolidated statements of operations and comprehensive income. Unamortized debt issuance costs totaled $22.6 million and $17.6 million at June 30, 2019 and December 31, 2018, respectively, of which $2.7 million and $0 are reflected within other noncurrent assets, respectively, and $19.9 million and $17.6 million are reflected as reductions to long-term debt in the condensed consolidated balance sheets, respectively.
As of June 30, 2018,2019, the future maturities of long-termoutstanding debt, excluding lease liability payment obligations, were as follows (in thousands):
Year Ending December 31, | Amount | ||||
2019 (remaining six months) | $ | 8,500 | |||
2020 | 17,000 | ||||
2021 | 20,125 | ||||
2022 | 26,375 | ||||
2023 | 35,750 | ||||
Thereafter | 1,206,625 | ||||
Total | $ | 1,314,375 | |||
Year Ending December 31, | Amount | |||
2018 (remaining six months) | $ | 8,758 | ||
2019 | 20,642 | |||
2020 | 26,892 | |||
2021 | 30,017 | |||
2022 | 180,017 | |||
Thereafter | 922,683 | |||
Total | $ | 1,189,009 | ||
8. INTEREST RATE SWAPS |
|
AThe Company is party to two interest rate swap agreements, designated as cash flow hedges, to manage the risk of fluctuations in interest expense on its variable rate LIBOR debt. Under the first swap agreement, with respect to a notional amount of $850 million, the Company’s monthly payment obligation is determined at a fixed base rate of 2.653% beginning in March 2019. Under the second swap agreement, which is a forward-starting interest rate swap with respect to a notional amount of $350 million, the Company’s monthly payment obligation beginning in June 2020 is determined at a fixed base rate of 2.739%. Both interest rate swap agreements are scheduled to mature in the first quarter of 2029 but may be terminated prior to their scheduled maturity at the election of the Company or the financial institution counterparty as provided in each swap agreement. The Company does not hold any derivative instruments for speculative trading purposes. As of June 30, 2019, the Company’s interest rate swap liabilities were recorded at their combined fair value of $83.7 million, with the current and noncurrent portions reflected in accounts payable and accrued expenses and other noncurrent liabilities, respectively, within the condensed consolidated balance sheet.
Changes in the fair values of the interest rate swaps are reported through other comprehensive income (loss) until the underlying hedged debt’s interest expense impacts net income, at which point the corresponding change in fair value is reclassified from accumulated other comprehensive income (loss) to interest expense. Losses of $45.1 million ($34.0 million net of tax) and $83.7 million ($63.0 million net of tax) were recorded through other comprehensive loss within the condensed consolidated statements of operations and comprehensive income for the three-level hierarchy is established by GAAP for disclosure of fair value measurements, based on the reliability of inputs used in the valuation of an instrument as and six months ended June 30, 2019, respectively. The Company expects that $7.0 million of the measurement date, as follows:accumulated other comprehensive loss within the condensed consolidated balance sheet will be reclassified to interest expense within the condensed consolidated statement of operations and comprehensive income within the next 12 months. The Company recognized losses of $0.4 million and $0.5 million on interest rate swaps during the three and six months ended June 30, 2019, respectively, which were reflected in interest expense within the condensed consolidated statements of operations and comprehensive income.
9. FAIR VALUE MEASUREMENTS |
|
|
|
|
|
Financial Assets and Liabilities. The Company has estimated the fair valuevalues of its financial instruments as of June 30, 20182019 using available market information or other appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the following fair value estimates presented in the condensed consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a currentan actual market exchange.
The carrying amounts, fair values and related fair value hierarchieshierarchy levels of the Company’s financial assets and liabilities as of June 30, 2019 were as follows (in(dollars in thousands):
June 30, 2018 | ||||||||||||
Carrying | Fair | Fair Value | ||||||||||
Amount | Value | Hierarchy | ||||||||||
Assets: | ||||||||||||
Cash and cash equivalents: | ||||||||||||
Money market investments | $ | 16,456 | $ | 16,456 |
| Level 1 | ||||||
Commercial paper | $ | 179,554 | $ | 179,511 |
| Level 2 | ||||||
Liabilities: | ||||||||||||
Long-term debt, including current portion: | ||||||||||||
Notes | $ | 450,000 | $ | 457,875 |
| Level 2 | ||||||
Senior Credit Facilities | $ | 738,750 | $ | 738,750 | - | |||||||
June 30, 2019 | |||||||||
Carrying | Fair | Fair Value | |||||||
Amount | Value | Hierarchy | |||||||
Assets: | |||||||||
Cash and cash equivalents: | |||||||||
Money market investments | $ | 53,574 | $ | 53,574 | Level 1 | ||||
Commercial paper | $ | 30,007 | $ | 29,820 | Level 2 | ||||
Liabilities: | |||||||||
Long-term debt, including current portion, excluding debt issuance costs: | |||||||||
Senior Credit Facilities | $ | 1,314,375 | $ | 1,306,131 | Level 2 | ||||
Other noncurrent liabilities, including current portion: | |||||||||
Interest rate swaps | $ | 83,672 | $ | 83,672 | Level 2 | ||||
Money market investments are primarily held in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (Level 1). Commercial paper is primarily held with high-quality companies and is valued using quoted market prices for investments similar to the commercial paper (Level 2). Money market investments and commercial paper with original maturities of 90three daysmonths or less are included within cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the NotesSenior Credit Facilities is estimated based on market prices for similar instruments in active markets (Level 2). TheInterest rate swaps are measured at fair value ofwithin the Senior Credit Facilities is equal to the carrying value.condensed consolidated balance sheets on a recurring basis, with fair value determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (Level 2).
The Company’s deferred compensation liability was $18.2$2.5 million and $20.2$3.0 million at June 30, 20182019 and December 31, 2017,2018, respectively. The current portion of this liability is included within accounts payable and accrued liabilities and the noncurrent portion is included within other noncurrent liabilities in the condensed consolidated balance sheets. This liability represents the market value of participant balances in a notional investment account that is comprised primarily of mutual funds, whose value is based on observable market prices. However, since the deferred compensation liability is not exchanged in an active market, it is classified as Level 2 in the fair value hierarchy.
The carrying amounts of accounts receivable, accounts payable and other financial assets and liabilities approximate fair value because of the short-term nature of these instruments.
Nonfinancial Assets and Liabilities. The Company’s nonfinancial assets, such as property, plant and equipment, intangible assets and goodwill, are not measured at fair value on a recurring basis. However, suchThe assets acquired, including identifiable intangible assets and goodwill, and liabilities assumed in the Clearwave acquisition were recorded at fair value on the acquisition date of January 8, 2019, subject to potential future measurement period adjustments discussed in note 2. Nonfinancial assets are subject to fair value adjustments when there is evidence that impairment may exist. No material impairments were recorded during the six months ended June 30, 20182019 or 2017.2018.
10. TREASURY STOCK |
|
Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements.
Share Repurchase Program. On July 1, 2015, the Company’s board of directors (the “Board”) authorized up to $250$250 million of share repurchases (subject to a total cap of 600,000 shares of common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through June 30, 2018,2019, the Company had repurchased 199,861210,631 shares of its common stock at an aggregate cost of $95.8$104.9 million. During the six months ended June 30, 2018,2019, the Company repurchased 34,0285,984 shares at an aggregate cost of $22.6 million, of which 30,717$5.1 million. No shares were repurchased during the three months ended June 30, 2018 2019.at an aggregate cost of $20.3 million.
Tax Withholding for Equity Awards. At the employee’s option, shares of common stock with a fair market value equal to the applicable statutory minimum amount of employee withholding taxes due are withheld by the Company upon vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to pay the applicable statutory minimum amount of employee withholding taxes. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The amounts remitted during the three and six months ended June 30, 20182019 were less than $0.1$0.2 million and $7.2$2.8 million, for which the Company withheld 313 and 9,7703,323 shares of common stock, respectively. Treasury shares of 184,562181,087 held at June 30, 20182019 include such shares withheld for withholding tax.
11. EQUITY-BASED COMPENSATION |
|
The Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “2015 Plan”) provides for grants of incentive stock options, non-qualified stock options, restricted stock awards, SARs, restricted stock units (“RSUs”), cash-based awards, performance-based awards, dividend equivalent units (“DEUs”) and other stock-based awards, including performance stock units and deferred stock units. Directors, officers and employees of the Company and its affiliates are eligible for grants under the 2015 Plan as part of the Company’s approach to long-term incentive compensation.
Restricted stock awards granted to employees are subject to service-based vesting and certain awards are also subject to performance-based vesting and generally cliff-vest on the three-year anniversary of the grant date or, for certain service-based awards, in four equal ratable installments beginning on the first anniversary of the grant date. SARs granted to employees vest in four equal ratable installments beginning on the first anniversary of the grant date. RSUs are generally granted to non-employee directors on the date of the Company’s annual stockholders’ meeting and vest on the earlier of the first anniversary of the grant date or the annual stockholders’ meeting date immediately following the grant date. Non-employee directors who elect to defer all or a portion of their annual cash fees are granted RSUs in lieu of such cash fees, with such RSUs generally vesting on the first anniversary of the grant date or, for such RSUs granted in January 2018, the date immediately preceding the 2018 annual stockholders’ meeting. The settlement of the RSUs follows vesting, unless the director previously elected to defer such settlement until the earliest of his or her separation from service from the Board, a date specified by the director or a change in control of the Company.
The 2015 Plan provides, that, subject to certain adjustments for specified corporate events, the maximum number of shares of common stock that may be issued under the 2015 Plan is 334,870. At June 30, 2018,2019, 256,735185,696 shares were available for issuance under the 2015 Plan.
Compensation expense associated with equity basedequity-based awards is recognized on a straight-line basis over the vesting period, with forfeitures recognized as incurred. Equity-based compensation expense was $2.5$3.1 million and $2.4$2.5 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $4.8$6.1 million and $4.8 million for both the six months ended June 30, 20182019 and 20172018, respectively, and was included inwithin selling, general and administrative expenses withinin the condensed consolidated statements of operations and comprehensive income. The Company recognized an income tax benefit of $2.5$2.7 million related to equity-based awards during the six months ended June 30, 2018.2019. The deferred tax asset related to all outstanding equity-based awards was $3.3$3.6 million as of June 30, 2018.2019.
Restricted Stock Awards. Restricted shares, RSUs and DEUs are collectively referred to as “restricted stock.” A summary of restricted stock activity during the six months ended June 30, 20182019 is as follows:
Restricted Stock | Weighted Average Grant Date Fair Value Per Share | Restricted Stock | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
Outstanding as of December 31, 2017 | 51,290 | $ | 472.89 | |||||||||||||
Outstanding as of December 31, 2018 | 40,876 | $ | 610.88 | |||||||||||||
Granted | 14,455 | $ | 692.25 | 12,001 | $ | 843.68 | ||||||||||
Forfeited | (1,011 | ) | $ | 610.54 | (3,334 | ) | $ | 691.57 | ||||||||
Vested and issued | (24,454 | ) | $ | 394.51 | (10,989 | ) | $ | 487.83 | ||||||||
Outstanding as of June 30, 2018 | 40,280 | $ | 595.79 | |||||||||||||
Outstanding as of June 30, 2019 | 38,554 | $ | 711.44 | |||||||||||||
Vested and unissued as of June 30, 2018 | 4,138 | $ | 493.43 | |||||||||||||
Vested and unissued as of June 30, 2019 | 5,678 | $ | 527.85 | |||||||||||||
Equity-based compensation expense for restricted stock was $1.6$1.9 million and $1.6 million for both the three months ended June 30, 20182019 and 20172018, respectively, and $3.0$3.7 million and $3.3$3.0 million for the six months ended June 30, 20182019 and 2017,2018, respectively. At June 30, 2018,2019, there was $10.5$12.9 million of unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.5 years.
Stock Appreciation Rights. A summary of SAR activity during the six months ended June 30, 20182019 is as follows:
Stock Appreciation Rights | Weighted Average Exercise Price | Weighted Average Grant Date Fair | Aggregate Intrinsic Value (in thousands) | Weighted Average Remaining Contractual Term (in years) | ||||||||||||||||
Outstanding as of December 31, 2017 | 102,458 | $ | 477.62 | $ | 100.91 | $ | 23,173 | 8.1 | ||||||||||||
Granted | 14,500 | $ | 702.40 | $ | 168.84 | $ | - | 9.5 | ||||||||||||
Exercised | (12,707 | ) | $ | 431.96 | $ | 89.64 | ||||||||||||||
Forfeited | (2,249 | ) | $ | 422.31 | $ | 87.22 | ||||||||||||||
Outstanding as of June 30, 2018 | 102,002 | $ | 516.48 | $ | 112.27 | $ | 22,115 | 7.9 | ||||||||||||
Vested and exercisable as of June 30, 2018 | 15,263 | $ | 490.48 | $ | 104.35 | $ | 3,706 | 7.6 | ||||||||||||
Stock Appreciation Rights | Weighted Average Exercise Price | Weighted Average Grant Date Fair | Aggregate Intrinsic Value (in thousands) | Weighted Average Remaining Contractual Term (in years) | ||||||||||||||||
Outstanding as of December 31, 2018 | 90,605 | $ | 550.60 | $ | 122.29 | $ | 24,673 | 7.2 | ||||||||||||
Granted | 24,500 | $ | 832.36 | $ | 196.52 | $ | - | 9.5 | ||||||||||||
Exercised | (13,420 | ) | $ | 512.94 | $ | 111.54 | ||||||||||||||
Forfeited | (979 | ) | $ | 422.31 | $ | 87.22 | ||||||||||||||
Outstanding as of June 30, 2019 | 100,706 | $ | 625.41 | $ | 142.12 | $ | 54,943 | 7.8 | ||||||||||||
Vested and exercisable as of June 30, 2019 | 23,099 | $ | 505.19 | $ | 109.01 | $ | 15,379 | 6.8 | ||||||||||||
The grant date fair value of the Company’s SARs is measured using the Black-Scholes valuation model. The weighted average inputs used in the model for grants awarded during the six months ended June 30, 20182019 were as follows:
| ||||
Expected volatility | % | |||
Risk-free interest rate | % | |||
Expected term (in years) | ||||
Expected dividend yield | % | |||
Equity-based compensation expense for SARs was $0.9$1.2 million and $0.8$0.9 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $1.8$2.4 million and $1.5$1.8 million for the six months ended June 30, 20182019 and 2017,2018, respectively. At June 30, 2018,2019, there was $7.1$8.6 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.11.2 years.
12. INCOME TAXES |
|
The Company’s effective tax rate was 22.6%20.8% and 38.6%22.6% for the three months ended June 30, 20182019 and 2017,2018, respectively, and 21.2%22.8% and 37.9%21.2% for the six months ended June 30, 20182019 and 2017,2018, respectively. The decrease in the effective tax rate for the three months ended June 30, 20182019 compared to the same quarter in the prior year primarily relatesrelated to a reduction$1.7 million increase in the Federal corporate income tax rate from 35%benefits attributable to 21% asequity-based compensation awards, partially offset by a result of the 2017 Federal tax reform legislation and $1.2$1.2 million ofdecrease in income tax benefits attributable to state effective tax rate changes recorded during the three months ended June 30, 2018. changes. The decreaseincrease in the effective tax rate for the six months ended June 30, 20182019 compared to the prior year period was further impacted by $2.5primarily related to a $2.1 million ofdecrease in income tax benefits attributable to equity-based compensation awards recorded during the six months ended June 30, 2018.state effective tax rate changes.
The Company recognized the income tax effects
13. NET INCOME PER COMMON SHARE |
|
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share further includes any common shares available to be issued upon vesting or exercise of outstanding equity awards if such inclusion would be dilutive, calculated using the treasury stock method.
The following table sets forth the computation of basic and diluted net income per common share (in thousands, except share and per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||||||||||
Net income | $ | 43,785 | $ | 27,860 | $ | 84,438 | $ | 59,975 | $ | 36,395 | $ | 43,785 | $ | 75,134 | $ | 84,438 | ||||||||||||||||
Denominator: | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - basic | 5,687,095 | 5,678,394 | 5,694,774 | 5,677,411 | 5,673,669 | 5,687,095 | 5,673,893 | 5,694,774 | ||||||||||||||||||||||||
Effect of dilutive equity awards (1) | 35,774 | 67,223 | 37,860 | 63,426 | ||||||||||||||||||||||||||||
Effect of dilutive equity-based awards (1) | 56,569 | 35,774 | 49,403 | 37,860 | ||||||||||||||||||||||||||||
Weighted average common shares outstanding - diluted | 5,722,869 | 5,745,617 | 5,732,634 | 5,740,837 | 5,730,238 | 5,722,869 | 5,723,296 | 5,732,634 | ||||||||||||||||||||||||
Net Income per Common Share: | ||||||||||||||||||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 7.70 | $ | 4.91 | $ | 14.83 | $ | 10.56 | $ | 6.41 | $ | 7.70 | $ | 13.24 | $ | 14.83 | ||||||||||||||||
Diluted | $ | 7.65 | $ | 4.85 | $ | 14.73 | $ | 10.45 | $ | 6.35 | $ | 7.65 | $ | 13.13 | $ | 14.73 | ||||||||||||||||
_________
(1) | Equity-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per common share calculation. The excluded number of anti-dilutive equity-based awards totaled |
14. COMMITMENTS AND CONTINGENCIES |
|
Litigation and Legal Matters. The Company is subject to complaints and administrative proceedings and ishas been a defendant in various civil lawsuits that have arisen in the ordinary course of its business. Such matters include contract disputes; actions alleging negligence; invasion of privacy; trademark, copyright and patent infringement; violations of applicable wage and hour laws; statutory or common law claims involving current and former employees; and other matters. Although the outcomes of theany legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, managementthe Company believes that there are no existing claims or proceedings that are likely to have a material adverse effect on the Company’sits business, financial condition, results of operations or cash flows. Also, based on currently available information, management is of the opinion that either future material losses from existing legal proceedings are not reasonably possible or that future material losses in excess of the amounts accrued are not reasonably possible.
Regulation in the CableCompany’s Industry. The operation of a cable system is extensively regulated by the Federal Communications Commission (the “FCC”), some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. The Telecommunications Act of 1996 altered the regulatory structure governing the nation’s communications providers. It removed barriers to competition in both the cable television market and the voice services market. Among other things, it reduced the scope of cable rate regulation and encouraged additional competition in the video programming industry by allowing telephone companies to provide video programming in their own telephone service areas. Future legislative and regulatory changes could adversely affect the Company’s operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This document contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the cableour industry, and our business, financial results and financial results.condition. Forward-looking statements often include words such as “will,” “should,” “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:
● | uncertainties as to the timing of the anticipated acquisition of Fidelity and the risk that the transaction may not be completed in a timely manner or at all; |
● | the possibility that any or all of the various conditions to the consummation of the anticipated acquisition of Fidelity may not be satisfied or waived; |
● | the effect of the announcement or pendency of the Fidelity transaction on our and Fidelity’s ability to retain and hire key personnel and to maintain relationships with customers, suppliers and other business partners; |
● | risks related to management’s attention being diverted from our ongoing business operations; |
● | uncertainties as to our ability and the amount of time necessary to realize the expected synergies and other benefits of the |
● | our ability to integrate |
● | rising levels of competition from historical and new entrants in |
● |
|
|
|
● | our ability to continue to grow our business services |
● | increases in programming costs and retransmission fees; |
● |
|
● | the effects of any new significant acquisitions by us; |
● | risks that our rebranding may not produce the benefits expected; |
● | adverse economic conditions; |
● | the integrity and security of our network and information systems; |
● | the impact of possible security breaches and other disruptions, including cyber-attacks; |
● | our failure to obtain necessary intellectual and proprietary rights to operate our business and the risk of intellectual property claims and litigation against us; |
● | our ability to |
● |
|
● |
|
|
|
|
|
|
|
● | our ability to |
● |
|
● |
|
|
|
|
|
● | the potential adverse effect of our level of indebtedness on our business, financial condition or results of operations and cash flows; |
● | the possibility that interest rates will rise, causing our obligations to service our variable rate indebtedness |
● |
|
● | fluctuations in our |
● | our ability to |
● |
|
|
|
|
|
● | provisions in our charter, by-laws and Delaware law that could discourage takeovers; and |
|
|
|
|
|
|
● | the other risks and uncertainties detailed |
Any forward-looking statements made by us in this document speak only as of the date on which they are made. We are under no obligation, and expressly disclaim any obligation, except as required by law, to update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 20172018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 20172018 Form 10-K. Our results of operations for the three and six months ended June 30, 20182019 may not be indicative of our future results.
Overview
We are a fully integrated provider of data, video and voice services in 21 Western, Midwestern and Southern states. We provide these broadband services to residential and business customers in more than 750850 communities. The markets we serve are primarily non-metropolitan, secondary markets, with 77%78% of our customers located in seven states: Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma and Texas. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We are among the 10 largest cable system operators in the United States based on customers and revenues in 2017, providingprovided service to 799,616818,579 residential and business customers out of approximately 2.1 million homes passed as of June 30, 2018.2019. Of these customers, 653,876681,762 subscribed to data services, 340,112308,493 subscribed to video services and 129,683123,672 subscribed to voice services.
We generate substantially all of our revenues through five primary products. Ranked by share of our total revenues through the first six months of 2018,2019, they are residential data (45.4%(46.5%), residential video (33.0%(29.7%), business services (data, voice and video – 14.3%17.2%), residential voice (4.0%(3.6%) and advertising sales (2.1%(1.7%). The profit margins, growth rates and capital intensity of our five primary products vary significantly due to differences in competition, product maturity and relative costs.
On May 1, 2017,January 8, 2019, we completed the acquisition of all of the outstanding equity interests of NewWave.acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. We paid a purchase price of $740.2$358.8 million in cash on a debt-free basis,basis. The acquisition provides us with a premier fiber network within our existing footprint, further enables us to supply our customers with enhanced business services solutions and provides a platform to allow us to replicate Clearwave’s strategy in several of our other markets.
On March 31, 2019, we entered into a definitive agreement with Fidelity Communications Co. to acquire its data, video and voice business and certain related assets for $525.9 million in cash, subject to customary post-closing adjustments. Our resultsFidelity is a cable operator that provides residential and business services to customers throughout greater Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. Cable One and Fidelity share similar strategies, customer demographics and products. Accordingly, we believe the acquisition of operationsFidelity offers us opportunities for the threerevenue growth and six months ended June 30, 2018 include the full impact of NewWave operations, while our comparable results for 2017 include only two months of NewWave operations,Adjusted EBITDA margin expansion as well as the acquisition was notpotential to realize cost synergies. The all-cash transaction is expected to be funded through a combination of cash on hand, revolving credit facility capacity and proceeds from new indebtedness. The transaction is subject to customary closing conditions and is expected to be completed until May 1, 2017.early in the fourth quarter of 2019.
Prior to 2012, we were focused on growing revenues through subscriber retention and growth in overall primary service units (“PSUs”). Accordingly, our strategies consisted of, among others, offering promotional discounts to new and existing subscribers adding new services and to subscribers purchasing more than one service offering. Since 2012, we have adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. We believe the declining profitability of residential video services is primarily due to increasing programming costs and retransmission fees and competition from other content providers, and the declining revenues from residential voice services isare primarily due to the increasing use of wireless voice services in addition to, or instead of residential voice service.services. Beginning in 2013, we shifted our focus away from maximizing customer PSUs and towards growing and maintaining our higher margin businesses, namely residential data and business services. Separately, we have also focused on retaining customers with a high expected lifetime value (“LTV”), who are less attracted by discounting, require less support and churn less. This strategy focuses on increasing Adjusted EBITDA, Adjusted EBITDA less capital expenditures and margins (refer to the section entitled “Use of Adjusted EBITDA” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure).
The trends described above have impacted our four largest product lines in the following ways:
● | Residential data. We experienced growth in the number of, and revenues from, our residential data customers every year since 2013. We expect this growth to continue due to projected increases in the number of |
● | Residential video. Residential video service is a |
● | Residential voice. We have experienced declines in residential voice customers as a result of homes in the United States deciding to terminate their residential voice |
● | Business services. We have experienced significant growth in business data and voice customers and revenues, and we expect this growth to continue. We attribute this growth to our strategic focus |
We continue to experience increased competition, particularly from telephone companies, cable and municipal overbuilders, over-the-top (“OTT”) video providers and direct broadcast satellite (“DBS”) television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. We made elevated levels ofour capital investments between 2012 and 20172018 to increase our cable plant capacities and reliability, launch all-digital video services which(which has freed upmade available approximately half of average plant bandwidth for data services,services) and increase data capacity by moving from four-channel bonding to 32-channel bonding.bonding (to enable our 1 Gigabit per second download speed data service, GigaONE®). We expect to continue devoting financial resources to infrastructure improvements, including in the new markets we acquired in the NewWave transaction,and Clearwave transactions, because we believe these investments are necessary to remain competitive. We expect to spend up to $50 million during 2018 and 2019, in addition to the $10 million spent in 2017, to enhance theThe capital enhancements associated with acquired NewWave systems byoperations include rebuilding low capacity markets, launching all-digital video services, implementing 32-channel bonding, to enable a 1 gigabit-per-second (“Gbps”) download speed product launch, converting back office functions such as billing, accounting and service provisioning, and migrating products to legacy Cable One platforms.platforms and expanding our high-capacity fiber network.
Our primary goals are to continue to growgrowing residential data and business services, and to maintainincrease profit margins and to deliver strong Adjusted EBITDA.EBITDA and Adjusted EBITDA less capital expenditures. To achieve these goals, we intend to continue our industrial engineering-driven cost management, remain focused on customers with high LTV and follow through with further planned investments in broadband plant upgrades and new data servicesservice offerings for residential and business customers.
Our business is subject to extensive governmental regulation. Such regulation has led to increases in our operational and administrative expenses. In addition, we could be significantly impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative or judicial rulings. In 2015, the FCC used its Title II authority to regulate broadband internet access services through the Open Internet Order (the “Order”), which imposed on all providers of broadband internet access service, including us, obligations that limit the ways certain types of traffic can be managed and prescribes certain additional disclosure requirements. The Order was upheld in the courts, but in September 2017, several parties, including the American Cable Association and NCTA – The Internet & Television Association (the “NCTA”), filed petitions for certiorari with the U.S. Supreme Court. Responses to the petitions are due by August 15, 2018, and the FCC filed its response on August 2, 2018. However, in December 2017, the FCC rescinded the majority of the open internet rules previously adopted in the Order, with the exception of the disclosure requirements. Several parties have challenged the FCC’s new rules in Federal courts, and those appeals are pending. Congress and numerous states also have proposed legislation regarding net neutrality. Several states have adopted legislation that requires entities providing broadband internet access service in the state to comply with net neutrality requirements or that prohibits state and local government agencies from contracting with internet service providers that engage in certain network management activities based on paid prioritization, content blocking or other discrimination. We cannot predict whether or when future changes to the regulatory framework will occur at the FCC, in Congress, at the state level or in the courts. We also cannot predict whether or to what extent the rules as revised by the FCC, Congress, the states or the courts may affect our operations or impose costs on our business.
Results of Operations
RevisionAdoption of Previously Issued Financial Statements and Adoption of Revenue RecognitionNew Lease Accounting Standard
In conjunction withWe adopted the error correctionnew lease accounting standard, ASC 842 - Leases, effective January 1, 2019, using the “Comparatives Under 840 Option” approach to transition. The adoption resulted in the fourth quarterrecognition of 2017 associated with our historical accountingROU assets and lease liabilities for certain categories of internal labor and related costs, we revised our historicalsubstantially all leases within the condensed consolidated financial statements to properly reflect the impactbalance sheet. No prior period amounts were retroactively adjusted as a result of the labor capitalization, including the related impact to depreciation expense and income taxes. As a result, the financial statements for the three and six months ended June 30, 2017 have been revised to reflect the error correction.adoption. Refer to note 2notes 1 and 6 to the condensed consolidated financial statements for additional details.
Further, we adopted the revenue recognition standard, ASC 606 - Revenue from Contracts with Customers, effective January 1, 2018, using the full retrospective method. The adoption resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time, instead of immediately. The financial statements for the three and six months ended June 30, 2017 have been recasted to reflect the impact of the revenue recognition standard adoption. Refer to note 3 to the condensed consolidated financial statements for additional details.
PSU and Customer Counts
During the 12 months ended June 30, 2018,2019, our total PSUs decreased 38,956,9,744, or 3.4%0.9%, compared to our total PSUs as of June 30, 2017. Business2018. Residential data PSUs and residential databusiness services PSUs increased 7,84620,392, or 3.4%, and 7,185,10,057, or 9.7%, respectively, while residential video PSUs and residential voice PSUs decreased 43,30230,277, or 9.4%, and 10,685,9,916, or 9.5%, respectively. Our total customer relationships decreased 5,867,increased 18,963, or 0.7%2.4%, year-over-year, with a 5,351an increase of 12,130, or 1.7%, in residential customer relationships and an increase of 6,833, or 9.8%, in business customer relationships being offset by an 11,218 decrease in residential customer relationships.
The following table provides an overview of selected customer data for the time periods specified:
As of June 30, | Annual Net Gain/(Loss) | As of June 30, | Annual Net Gain/(Loss) | |||||||||||||||||||||||||||||
2018 | 2017 | Change | % Change | 2019 | 2018 | Change | % Change | |||||||||||||||||||||||||
Residential data PSUs | 592,234 | 585,049 | 7,185 | 1.2 | 612,626 | 592,234 | 20,392 | 3.4 | ||||||||||||||||||||||||
Residential video PSUs (1) | 323,514 | 366,816 | (43,302 | ) | (11.8 | ) | 293,237 | 323,514 | (30,277 | ) | (9.4 | ) | ||||||||||||||||||||
Residential voice PSUs | 103,834 | 114,519 | (10,685 | ) | (9.3 | ) | 93,918 | 103,834 | (9,916 | ) | (9.5 | ) | ||||||||||||||||||||
Total residential PSUs | 1,019,582 | 1,066,384 | (46,802 | ) | (4.4 | ) | 999,781 | 1,019,582 | (19,801 | ) | (1.9 | ) | ||||||||||||||||||||
Business data PSUs (2) | 61,642 | 55,288 | 6,354 | 11.5 | ||||||||||||||||||||||||||||
Business data PSUs (2) | 69,136 | 61,642 | 7,494 | 12.2 | ||||||||||||||||||||||||||||
Business video PSUs | 16,598 | 17,188 | (590 | ) | (3.4 | ) | 15,256 | 16,598 | (1,342 | ) | (8.1 | ) | ||||||||||||||||||||
Business voice PSUs (3) | 25,849 | 23,767 | 2,082 | 8.8 | ||||||||||||||||||||||||||||
Total business PSUs | 104,089 | 96,243 | 7,846 | 8.2 | ||||||||||||||||||||||||||||
Business voice PSUs (3) | 29,754 | 25,849 | 3,905 | 15.1 | ||||||||||||||||||||||||||||
Total business services PSUs | 114,146 | 104,089 | 10,057 | 9.7 | ||||||||||||||||||||||||||||
Total data PSUs | 681,762 | 653,876 | 27,886 | 4.3 | ||||||||||||||||||||||||||||
Total video PSUs | 308,493 | 340,112 | (31,619 | ) | (9.3 | ) | ||||||||||||||||||||||||||
Total voice PSUs | 123,672 | 129,683 | (6,011 | ) | (4.6 | ) | ||||||||||||||||||||||||||
Total PSUs | 1,123,671 | 1,162,627 | (38,956 | ) | (3.4 | ) | 1,113,927 | 1,123,671 | (9,744 | ) | (0.9 | ) | ||||||||||||||||||||
Total residential customer relationships | 730,007 | 741,225 | (11,218 | ) | (1.5 | ) | ||||||||||||||||||||||||||
Total business customer relationships | 69,609 | 64,258 | 5,351 | 8.3 | ||||||||||||||||||||||||||||
Residential customer relationships | 742,137 | 730,007 | 12,130 | 1.7 | ||||||||||||||||||||||||||||
Business customer relationships | 76,442 | 69,609 | 6,833 | 9.8 | ||||||||||||||||||||||||||||
Total customer relationships | 799,616 | 805,483 | (5,867 | ) | (0.7 | ) | 818,579 | 799,616 | 18,963 | 2.4 | ||||||||||||||||||||||
_________
(1) | Residential video PSUs include all basic residential customers who receive video services and may have one or more digital set-top boxes or cable cards deployed. Residential bulk multi-dwelling accounts are included in our video PSUs at the individual unit level. |
| Business data PSUs include commercial accounts that receive data |
|
|
The following table provides an overview of selected customer data for our legacy Cable One cable systems excluding the impact of PSUs and customers from legacy NewWave cable systems for the time periods specified:
As of June 30, | Annual Net Gain/(Loss) | |||||||||||||||
2018 | 2017 | Change | % Change | |||||||||||||
Residential data PSUs | 483,589 | 474,815 | 8,774 | 1.8 | ||||||||||||
Residential video PSUs (1) | 253,236 | 284,695 | (31,459 | ) | (11.1 | ) | ||||||||||
Residential voice PSUs | 83,385 | 92,100 | (8,715 | ) | (9.5 | ) | ||||||||||
Total residential PSUs | 820,210 | 851,610 | (31,400 | ) | (3.7 | ) | ||||||||||
Business data PSUs (2) | 51,044 | 46,909 | 4,135 | 8.8 | ||||||||||||
Business video PSUs | 12,560 | 13,295 | (735 | ) | (5.5 | ) | ||||||||||
Business voice PSUs (3) | 20,695 | 19,156 | 1,539 | 8.0 | ||||||||||||
Total business PSUs | 84,299 | 79,360 | 4,939 | 6.2 | ||||||||||||
Total PSUs | 904,509 | 930,970 | (26,461 | ) | (2.8 | ) | ||||||||||
Total residential customer relationships | 597,162 | 601,883 | (4,721 | ) | (0.8 | ) | ||||||||||
Total business customer relationships | 57,312 | 53,426 | 3,886 | 7.3 | ||||||||||||
Total customer relationships | 654,474 | 655,309 | (835 | ) | (0.1 | ) | ||||||||||
_________
|
|
| Business |
|
|
In recent years, our customer mix has shifted, causing subscribers to move from triple-play packages combining data, video and voice services to single and double-play packages. This is largely because some residential video customers have defected to DBS services and OTT offerings and more households have discontinued residential voice service. In addition, we have focused on selling data-only packages to new customers rather than cross-selling video to these customers.
Comparison of Three Months Ended June 30, 20182019 to Three Months Ended June 30, 20172018
Revenues
Revenues increased $27.4$17.2 million, or 11.4%6.4%, due primarily to increases in residential data, business services and residential videodata revenues of $19.0 million, $6.0$11.3 million and $2.6$10.4 million, respectively. The increase was the result of an additional month of NewWave operations and organic growth in our higher margin product lines of business services and residential data, the acquired Clearwave operations, a residential video rate adjustment and the implementation of modem rental charges to certain business services,customers, partially offset by a decreasedecreases in residential voicevideo and advertising sales revenues.
Revenues by service offering were as follows for the three months ended June 30, 20182019 and 2017,2018, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 vs. 2017 | 2019 | 2018 | 2019 vs. 2018 | |||||||||||||||||||||||||||||||||||||||||||
Revenues | % of Total | Revenues | % of Total | $ Change | % Change | Revenues | % of Total | Revenues | % of Total | $ Change | % Change | |||||||||||||||||||||||||||||||||||||
Residential data | $ | 122,471 | 45.6 | $ | 103,497 | 42.9 | $ | 18,974 | 18.3 | $ | 132,824 | 46.5 | $ | 122,471 | 45.6 | $ | 10,353 | 8.5 | ||||||||||||||||||||||||||||||
Residential video | 87,462 | 32.6 | 84,873 | 35.2 | 2,589 | 3.1 | 84,033 | 29.4 | 87,462 | 32.6 | (3,429 | ) | (3.9 | ) | ||||||||||||||||||||||||||||||||||
Residential voice | 10,504 | 3.9 | 11,417 | 4.7 | (913 | ) | (8.0 | ) | 10,705 | 3.7 | 10,504 | 3.9 | 201 | 1.9 | ||||||||||||||||||||||||||||||||||
Business services | 38,485 | 14.3 | 32,493 | 13.5 | 5,992 | 18.4 | 49,759 | 17.4 | 38,485 | 14.3 | 11,274 | 29.3 | ||||||||||||||||||||||||||||||||||||
Advertising sales | 5,916 | 2.2 | 5,970 | 2.5 | (54 | ) | (0.9 | ) | 4,750 | 1.7 | 5,916 | 2.2 | (1,166 | ) | (19.7 | ) | ||||||||||||||||||||||||||||||||
Other | 3,576 | 1.4 | 2,741 | 1.2 | 835 | 30.5 | 3,579 | 1.3 | 3,576 | 1.4 | 3 | 0.1 | ||||||||||||||||||||||||||||||||||||
Total revenues | $ | 268,414 | 100.0 | $ | 240,991 | 100.0 | $ | 27,423 | 11.4 | $ | 285,650 | 100.0 | $ | 268,414 | 100.0 | $ | 17,236 | 6.4 | ||||||||||||||||||||||||||||||
Average monthly revenue per unit for the indicated service offerings were as follows for the three months ended June 30, 20182019 and 2017:2018:
Three Months Ended June 30, | 2018 vs. 2017 | Three Months Ended June 30, | 2019 vs. 2018 | |||||||||||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||||
Residential data (1) | $ | 68.47 | $ | 62.52 | $ | 5.95 | 9.5 | $ | 71.80 | $ | 68.47 | $ | 3.33 | 4.9 | ||||||||||||||||||
Residential video (1) | $ | 88.55 | $ | 82.11 | $ | 6.44 | 7.8 | $ | 93.43 | $ | 88.55 | $ | 4.88 | 5.5 | ||||||||||||||||||
Residential voice (1) | $ | 33.22 | $ | 35.09 | $ | (1.87 | ) | (5.3 | ) | |||||||||||||||||||||||
Business services (2) | $ | 185.29 | $ | 177.43 | $ | 7.86 | 4.4 | |||||||||||||||||||||||||
Residential voice (1), (2) | $ | 37.32 | $ | 33.22 | $ | 4.10 | 12.3 | |||||||||||||||||||||||||
Business services (2), (3) | $ | 218.77 | $ | 187.04 | $ | 31.73 | 17.0 | |||||||||||||||||||||||||
_________
|
|
|
|
Revenues by service offering, excluding the impact of revenues related to legacy NewWave cable systems, were as follows for the three months ended June 30, 2018 and 2017, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
Three Months Ended June 30, | ||||||||||||||||||||||||
2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||
Revenues | % of Total | Revenues | % of Total | $ Change | % Change | |||||||||||||||||||
Residential data | $ | 103,009 | 46.9 | $ | 92,693 | 44.4 | $ | 10,316 | 11.1 | |||||||||||||||
Residential video | 68,721 | 31.3 | 70,840 | 33.9 | (2,119 | ) | (3.0 | ) | ||||||||||||||||
Residential voice | 8,848 | 4.0 | 9,803 | 4.7 | (955 | ) | (9.7 | ) | ||||||||||||||||
Business services | 30,997 | 14.1 | 27,852 | 13.3 | 3,145 | 11.3 | ||||||||||||||||||
Advertising sales | 5,566 | 2.5 | 5,699 | 2.7 | (133 | ) | (2.3 | ) | ||||||||||||||||
Other | 2,299 | 1.2 | 1,919 | 1.0 | 380 | 19.8 | ||||||||||||||||||
Total revenues | $ | 219,440 | 100.0 | $ | 208,806 | 100.0 | $ | 10,634 | 5.1 | |||||||||||||||
Average monthly revenue per unit, excluding the impact of revenues and customers related to legacy NewWave cable systems, were as follows for the three months ended June 30, 2018 and 2017:
Three Months Ended June 30, | 2018 vs. 2017 | |||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Residential data (1) | $ | 70.62 | $ | 64.70 | $ | 5.92 | 9.2 | |||||||||
Residential video (1) | $ | 88.98 | $ | 81.65 | $ | 7.33 | 9.0 | |||||||||
Residential voice (1) | $ | 34.83 | $ | 34.98 | $ | (0.15 | ) | (0.4 | ) | |||||||
Business services (2) | $ | 179.81 | $ | 172.49 | $ | 7.32 | 4.2 | |||||||||
_________
(1) | Average monthly revenue per unit values represent the applicable quarterly residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by three. |
| (2) | The increases in residential voice and business services ARPU from the prior year were partially a result of certain passthrough fees that were historically reported on a net basis. Residential voice and business services ARPU for the three months ended June 30, 2019 would have been $33.14 and $214.64, respectively, if reported on a comparable basis. |
| Average monthly revenue per unit values represent quarterly business services revenues |
Residential data service revenues increased $19.0$10.4 million, or 18.3%8.5%, as a result of the NewWave operations, organic subscriber growth, a modem rental rate adjustment in the first quarter of 2018, a reduction in package discounting and increased customer subscriptions to premium tiers.
Residential video service revenues increased $2.6decreased $3.4 million, or 3.1%3.9%, due primarily to the incremental impact from the NewWave operations and a broadcast television surcharge increase in the first quarter of 2018, partially offset by an 11.8%9.4% year-over-year decrease in residential video subscribers.subscribers, partially offset by a rate adjustment beginning in February 2019.
Residential voice service revenues decreased $0.9increased $0.2 million, or 8.0%1.9%, due primarily to certain passthrough fees that were historically reported on a 9.3%net basis, partially offset by the impact of a 9.5% year-over-year decrease in residential voice subscribers.
Business services revenues increased $6.0$11.3 million, or 18.4%29.3%, due primarily to the NewWave operations, growth in our business data and voice services to small and medium-sized businesses and enterprise customers, the acquired Clearwave operations and a rate adjustment forimplementation of modem rental charges to certain business video customers induring the first quarter of 2018.2019. Total business customer relationships increased 8.3%9.8% year-over-year. Overall, business services comprised 14.3% of our total revenues for the second quarter of 2018 compared to 13.5% of our total revenues for the second quarter of 2017.
Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $91.8$95.7 million in the second quarter of 20182019 and increased $7.7$3.9 million, or 9.2%4.3%, compared to the second quarter of 20172018. The increase was primarily as a result of theattributable to additional month of NewWave operations.expenses related to Clearwave operations and various other operating expenses. Operating expenses as a percentage of revenues were 34.2%33.5% for the second quarter of 20182019 compared to 34.9%34.2% for the year-ago quarter. Operating expenses attributable to the NewWave operations were $23.6 million for the second quarter of 2018. Excluding the expenses associated with the NewWave operations, operating expenses would have been $68.1 million in the second quarter of 2018 compared to $68.0 million in the second quarter of 2017. Operating expenses as a percentage of revenues, excluding the impact of the NewWave operations, would have been 31.1% in the second quarter of 2018 compared to 32.6% in the second quarter of 2017.
Selling, general and administrative expenses were $54.2$60.1 million for the second quarter of 20182019 and increased $3.2$5.9 million, or 6.3%10.9%, compared to the second quarter of 2017.2018. The increase was primarily attributable to higher rebranding, acquisition-related and other expenses incurred during the second quarter of 2019 as well as additional expenses related to Clearwave operations. Selling, general and administrative expenses as a percentage of revenues were 20.2%21.0% and 21.1%20.2% for the second quarter of 2019 and 2018, and 2017, respectively. Selling, general and administrative expenses attributable to the NewWave operations were $7.8 million for the second quarter of 2018, an increase of $3.0 million from the second quarter of 2017. Excluding the expenses associated with the NewWaveClearwave operations, selling, general and administrative expenses would have been $46.4increased $4.7 million, compared to $46.1 million in the prior year quarter. Increases in medical insurance expenses of $2.0 million and marketing expenses of $1.4 million were offset by a decrease in acquisition-related costs of $3.2 million. Selling, general and administrative expenses as a percentage of revenues, excluding the impact of the NewWave operations, would have been 21.1% in the second quarter of 2018 and 22.1% in the second quarter of 2017.or 8.6%.
Depreciation and amortization expense was $49.0$54.8 million for the second quarter of 20182019 and increased $1.0$5.8 million, or 2.1%11.8%, comparedincluding a $3.1 million increase attributable to the second quarter of 2017.Clearwave operations. The increase was due primarily to new assets placed in service since the second quarter of 20172018 and the additional month of depreciation and amortization on property, plant and equipment and finite-lived intangible assetsrelated to the acquired as part of the NewWave acquisition,Clearwave operations, partially offset by assets that became fully depreciated since the second quarter of 2017. Depreciation and amortization expense related to the NewWave operations was $12.3 million for the second quarter of 2018 compared to $7.9 million in the second quarter of 2017.2018. As a percentage of revenues, depreciation and amortization expense was 19.2% for the second quarter of 2019 compared to 18.3% for the second quarter of 2018 compared to 19.9% for the second quarter of 2017.2018.
We recognized a $2.7$0.9 million net loss on asset disposals during the second quarter of 20182019 compared to a $0.5$2.7 million net loss on asset disposals in the second quarter of 2017.2018.
Interest Expense
Interest expense increased $3.2$3.6 million, or 26.9%23.8%, to $15.0$18.5 million, due primarily todriven by additional outstanding debt incurred on May 1, 2017and an increase in interest rates year-over-year.
OtherIncome (Expense), Net
We recognized other expense of $9.6 million during the second quarter of 2019, consisting primarily of a $6.5 million call premium related to finance the NewWave acquisition.$450 million Notes redemption and $4.9 million of debt issuance cost write-offs and expenses associated with financing transactions, partially offset by interest and investment income. We recognized other income of $0.9 million during the second quarter of 2018, consisting primarily of interest income.
Income Tax Provision
The income tax provision decreased $4.7$3.2 million, or 26.9%25.3%. Our effective tax rate was 22.6%20.8% and 38.6%22.6% for the second quarter of 20182019 and 2017,2018, respectively. The decrease in the effective tax rate was due primarily related to a reduction$1.7 million increase in the Federal corporate income tax rate from 35%benefits attributable to 21% asequity-based compensation awards, partially offset by a result of the 2017 Federal tax reform legislation and $1.2 million ofdecrease in income tax benefits attributable to state effective tax rate changes recorded during the second quarter of 2018.changes.
Comparison of Six Months Ended June 30, 20182019 to Six Months Ended June 30, 20172018
Revenues
Revenues increased $85.8$30.1 million, or 19.1%5.6%, due primarily to increases in business services and residential data residential video and business services revenues of $48.3 million, $18.9$20.7 million and $16.7$20.3 million, respectively. The increase was the result of four additional months of NewWave operations and organic growth in our higher margin product lines of business services and residential data, the acquired Clearwave operations, a residential video rate adjustment and the implementation of modem rental charges to certain business services.customers, partially offset by decreases in residential video and voice and advertising sales revenues.
Revenues by service offering were as follows for the six months ended June 30, 20182019 and 2017,2018, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
Six Months Ended June 30, | ||||||||||||||||||||||||
2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||
Revenues | % of Total | Revenues | % of Total | $ Change | % Change | |||||||||||||||||||
Residential data | $ | 242,330 | 45.4 | $ | 194,018 | 43.3 | $ | 48,312 | 24.9 | |||||||||||||||
Residential video | 176,219 | 33.0 | 157,328 | 35.1 | 18,891 | 12.0 | ||||||||||||||||||
Residential voice | 21,176 | 4.0 | 21,284 | 4.7 | (108 | ) | (0.5 | ) | ||||||||||||||||
Business services | 76,177 | 14.3 | 59,461 | 13.3 | 16,716 | 28.1 | ||||||||||||||||||
Advertising sales | 11,158 | 2.1 | 11,592 | 2.6 | (434 | ) | (3.7 | ) | ||||||||||||||||
Other | 7,115 | 1.2 | 4,742 | 1.0 | 2,373 | 50.0 | ||||||||||||||||||
Total revenues | $ | 534,175 | 100.0 | $ | 448,425 | 100.0 | $ | 85,750 | 19.1 | |||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||||||||
Revenues | % of Total | Revenues | % of Total | $ Change | % Change | |||||||||||||||||||
Residential data | $ | 262,635 | 46.5 | $ | 242,330 | 45.4 | $ | 20,305 | 8.4 | |||||||||||||||
Residential video | 167,836 | 29.7 | 176,219 | 33.0 | (8,383 | ) | (4.8 | ) | ||||||||||||||||
Residential voice | 20,329 | 3.6 | 21,176 | 4.0 | (847 | ) | (4.0 | ) | ||||||||||||||||
Business services | 96,903 | 17.2 | 76,177 | 14.3 | 20,726 | 27.2 | ||||||||||||||||||
Advertising sales | 9,479 | 1.7 | 11,158 | 2.1 | (1,679 | ) | (15.0 | ) | ||||||||||||||||
Other | 7,073 | 1.3 | 7,115 | 1.2 | (42 | ) | (0.6 | ) | ||||||||||||||||
Total revenues | $ | 564,255 | 100.0 | $ | 534,175 | 100.0 | $ | 30,080 | 5.6 | |||||||||||||||
Average monthly revenue per unit for the indicated service offerings were as follows for the six months ended June 30, 20182019 and 2017:2018:
Six Months Ended June 30, | 2018 vs. 2017 | Six Months Ended June 30, | 2019 vs. 2018 | |||||||||||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||||
Residential data (1) | $ | 68.00 | $ | 63.33 | $ | 4.67 | 7.4 | $ | 71.58 | $ | 68.00 | $ | 3.58 | 5.3 | ||||||||||||||||||
Residential video (1) | $ | 87.58 | $ | 81.10 | $ | 6.48 | 8.0 | $ | 92.44 | $ | 87.58 | $ | 4.86 | 5.5 | ||||||||||||||||||
Residential voice (1) | $ | 32.98 | $ | 34.63 | $ | (1.65 | ) | (4.8 | ) | |||||||||||||||||||||||
Business services (2) | $ | 184.68 | $ | 174.05 | $ | 10.63 | 6.1 | |||||||||||||||||||||||||
Residential voice (1), (2) | $ | 34.91 | $ | 32.98 | $ | 1.93 | 5.9 | |||||||||||||||||||||||||
Business services (2), (3) | $ | 217.11 | $ | 186.51 | $ | 30.60 | 16.4 | |||||||||||||||||||||||||
__________
(1) | Average monthly revenue per unit values represent the applicable year-to-date residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by six, except that for any new PSUs added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent the applicable residential service revenues (excluding installation and activation fees) divided by the pro-rated number of PSUs during such period. |
| (2) | The increases in residential voice and business services ARPU from the prior year were partially a result of certain passthrough fees that were historically reported on a net basis. Residential voice and business services ARPU for the six months ended June 30, 2019 would have been $32.85 and $215.00, respectively, if reported on a comparable basis. |
| Average monthly revenue per unit values represent year-to-date business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each period, divided by six, except that for any new business customer relationships added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent business services revenues |
Revenues by service offering, excluding the impact of revenues related to legacy NewWave cable systems, were as follows for the six months ended June 30, 2018 and 2017, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
Six Months Ended June 30, | ||||||||||||||||||||||||
2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||
Revenues | % of Total | Revenues | % of Total | $ Change | % Change | |||||||||||||||||||
Residential data | $ | 204,132 | 46.8 | $ | 183,214 | 44.0 | $ | 20,918 | 11.4 | |||||||||||||||
Residential video | 138,178 | 31.6 | 143,295 | 34.4 | (5,117 | ) | (3.6 | ) | ||||||||||||||||
Residential voice | 17,841 | 4.1 | 19,670 | 4.7 | (1,829 | ) | (9.3 | ) | ||||||||||||||||
Business services | 61,281 | 14.0 | 54,820 | 13.2 | 6,461 | 11.8 | ||||||||||||||||||
Advertising sales | 10,474 | 2.4 | 11,321 | 2.7 | (847 | ) | (7.5 | ) | ||||||||||||||||
Other | 4,682 | 1.1 | 3,920 | 1.0 | 762 | 19.4 | ||||||||||||||||||
Total revenues | $ | 436,588 | 100.0 | $ | 416,240 | 100.0 | $ | 20,348 | 4.9 | |||||||||||||||
Average monthly revenue per unit, excluding the impact of revenues and customers related to legacy NewWave cable systems, were as follows for the six months ended June 30, 2018 and 2017:
Six Months Ended June 30, | 2018 vs. 2017 | |||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Residential data (1) | $ | 70.22 | $ | 64.49 | $ | 5.73 | 8.9 | |||||||||
Residential video (1) | $ | 87.95 | $ | 80.79 | $ | 7.16 | 8.9 | |||||||||
Residential voice (1) | $ | 34.58 | $ | 34.54 | $ | 0.04 | 0.1 | |||||||||
Business services (2) | $ | 179.34 | $ | 171.33 | $ | 8.01 | 4.7 | |||||||||
__________
|
|
|
|
Residential data service revenues increased $48.3$20.3 million, or 24.9%8.4%, as a result of the NewWave operations, organic subscriber growth, a modem rental rate adjustment in the first quarter of 2018, a reduction in package discounting and increased customer subscriptions to premium tiers.
Residential video service revenues increased $18.9decreased $8.4 million, or 12.0%4.8%, due primarily to the NewWave operations and a broadcast television surcharge increase in the first quarter of 2018, partially offset by an 11.8%9.4% year-over-year decrease in residential video subscribers.subscribers, partially offset by a rate adjustment beginning in February 2019.
Residential voice service revenues decreased $0.1$0.8 million, or 0.5%4.0%, due primarily to a 9.3%9.5% year-over-year decrease in residential voice subscribers, partially offset by an additional four months of NewWave operations.certain passthrough fees that were historically reported on a net basis.
Operating Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $186.5$190.2 million for the six months ended June 30, 20182019 and increased $33.4$3.7 million, or 21.8%2.0%, compared to the year ago period. The increase was due primarily to additional expenses related to Clearwave operations and various other operating expenses. Operating expenses as a percentage of revenues were 33.7% for the first two quarters of 2019 compared to 34.9% for the first two quarters of 2018 compared to 34.1% for the first two quarters of 2017. Operating expenses attributable to the NewWave operations were $47.9 million and $16.1 million for the first two quarters of 2018 and 2017, respectively. Excluding the expenses associated with the NewWave operations, operating expenses would have been $138.6 million for the six months ended June 30, 2018, an increase of $1.5 million, or 1.1%, compared to the first two quarters of 2017. The increase was due primarily to higher repairs and maintenance costs of $0.9 million and contract labor costs of $0.7 million. Operating expenses as a percentage of revenues, excluding the impact of NewWave operations, would have been 31.7% for the six months ended June 30, 2018 compared to 32.9% for the six months ended June 30, 2017.2018.
Selling, general and administrative expenses increased $7.8$16.4 million, or 8.0%15.6%, to $105.1$121.5 million. Selling, general and administrative expenses as a percentage of revenues were 19.7%21.5% and 21.7%19.7% for the six months ended June 30, 2019 and 2018, and 2017, respectively. Selling, general and administrative expenses attributable to the NewWave operations were $14.2 million for the first two quarters of 2018 and increased $9.4 million from the same period in the prior year. Excluding the expenses associated with the NewWaveClearwave operations, selling, general and administrative expenses would have decreased $1.6 increased $14.1��million, or 1.7%13.4%, to $90.9 million due primarily to rebranding and acquisition-related costs incurred during the first two quarters of $4.7 million in 2017 and lower severance expense of $2.4 million, partially offset by higher medical insurance expense of $2.9 million, higher net compensation expense of $1.1 million2019 and higher marketing, costs of $1.0 million.equity-based compensation and insurance costs. Selling, general and administrative expenses as a percentage of revenues, excluding the impact of the NewWaveClearwave operations, would have been 20.8%21.6% for the six months ended June 30, 20182019 compared to 22.2%19.7% for the six months ended June 30, 2017.2018.
Depreciation and amortization expense increased $10.3$10.9 million, or 11.7%11.1%, including a $16.9$5.9 million increase attributable to the NewWaveClearwave operations. The increase was due primarily to new assets placed in service since the second quarter of 2017,2018, including property, plant and equipment and finite-lived intangible assets acquired as part of the NewWaveClearwave acquisition, partially offset by assets that became fully depreciated since the second quarter of 2017.2018. As a percentage of revenues, depreciation and amortization expense was 19.3% for the six months ended June 30, 2019 compared to 18.3% for the six months ended June 30, 2018 compared to 19.5% for the six months ended June 30, 2017.2018.
We recognized a net loss on asset disposals of $2.0 million in the first two quarters of 2019 compared to a net loss on asset disposals of $9.4 million in the first two quarters of 2018. In theThe first two quarters of 2017, we recognized2019 included a net gain of $5.7 million on asset disposals, primarily related to a gain recognized on the sale of a portion of a non-operating property that housed our former headquarters, while the prior year period included our previous headquarters building, net of a loss on fixedmore asset disposals.
Interest Expense
Interest expense increased $10.3$6.9 million, or 53.1%23.4%, to $29.7$36.6 million, due primarily todriven by additional outstanding debt incurred on May 1, 2017and an increase in interest rates year-over-year.
Other Income (Expense), Net
We recognized other expense of $7.8 million during the first two quarters of 2019, consisting primarily of a $6.5 million call premium related to finance the NewWave acquisition.$450 million Notes redemption and $4.9 million of debt issuance cost write-offs and expenses associated with financing transactions, partially offset by interest and investment income. We recognized other income of $1.5 million during the first two quarters of 2018, consisting primarily of interest income.
Income Tax Provision
The income tax provision decreased $14.0$0.5 million, or 38.1%2.1%. Our effective tax rate was 21.2%22.8% and 37.9%21.2% for the six months ended June 30, 20182019 and 2017,2018, respectively. The decreaseincrease in the effective tax rate was due primarily to a reduction$2.1 million decrease in the Federal corporate income tax rate, $2.5 million of income tax benefits attributable to equity-based compensation awards and $1.2 million of income tax benefits attributable to state effective tax rate changes recorded during the six months ended June 30, 2018.changes.
Use of Adjusted EBITDA
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income reported in accordance with GAAP. Adjusted EBITDA is reconciled to net income below.
Adjusted EBITDA is defined as net income plus interest expense, income tax provision, depreciation and amortization, equity-based compensation, severance expense, (gain) loss on deferred compensation, acquisition-related costs, (gain) loss on disposal of assets,asset disposals, system conversion costs, rebranding costs, other (income) expense and other unusual operating expenses, as provided in the tabletables below. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our business as well as other non-cash or special items and is unaffected by our capital structure or investment activities. This measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of debt financing. These costs are evaluated through other financial measures.
We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the measure used in the leverage ratio calculations under our outstanding Senior Credit Facilities and Notes to determine compliance with the covenants contained in the Senior Credit Facilities and ability to take certain actions under the Indenture governing the Notes.Second Restatement Agreement. Adjusted EBITDA is also a significant performance measure used by us in our annual incentive compensation program. Adjusted EBITDA does not take into account cash used for mandatory debt service requirements or other non-discretionary expenditures, and thus does not represent residual funds available for discretionary uses.
Three Months Ended June 30, | 2018 vs. 2017 | Three Months Ended June 30, | 2019 vs. 2018 | |||||||||||||||||||||||||||||
(dollars in thousands) | 2018 | 2017 | $ Change | % Change | ||||||||||||||||||||||||||||
(dollars in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||||||||
Net income | $ | 43,785 | $ | 27,860 | $ | 15,925 | 57.2 | $ | 36,395 | $ | 43,785 | $ | (7,390 | ) | (16.9 | ) | ||||||||||||||||
Plus: Interest expense | 14,953 | 11,782 | 3,171 | 26.9 | 18,516 | 14,953 | 3,563 | 23.8 | ||||||||||||||||||||||||
Income tax provision | 12,812 | 17,530 | (4,718 | ) | (26.9 | ) | 9,571 | 12,812 | (3,241 | ) | (25.3 | ) | ||||||||||||||||||||
Depreciation and amortization | 49,033 | 48,022 | 1,011 | 2.1 | 54,835 | 49,033 | 5,802 | 11.8 | ||||||||||||||||||||||||
Equity-based compensation | 2,506 | 2,418 | 88 | 3.6 | 3,082 | 2,506 | 576 | 23.0 | ||||||||||||||||||||||||
Severance expense | 241 | 1,345 | (1,104 | ) | (82.1 | ) | 15 | 377 | (362 | ) | (96.0 | ) | ||||||||||||||||||||
(Gain) loss on deferred compensation | 600 | 339 | 261 | 77.0 | ||||||||||||||||||||||||||||
Loss on deferred compensation | 78 | 600 | (522 | ) | (87.0 | ) | ||||||||||||||||||||||||||
Acquisition-related costs | - | 3,242 | (3,242 | ) | (100.0 | ) | 871 | - | 871 | NM | ||||||||||||||||||||||
(Gain) loss on disposal of assets, net | 2,734 | 462 | 2,272 | NM | ||||||||||||||||||||||||||||
Loss on asset disposals, net | 910 | 2,734 | (1,824 | ) | (66.7 | ) | ||||||||||||||||||||||||||
System conversion costs | 1,327 | - | 1,327 | NM | 777 | 1,327 | (550 | ) | (41.4 | ) | ||||||||||||||||||||||
Rebranding costs | 2,902 | - | 2,902 | NM | ||||||||||||||||||||||||||||
Other (income) expense, net | (882 | ) | 322 | (1,204 | ) | NM | 9,632 | (882 | ) | 10,514 | NM | |||||||||||||||||||||
Adjusted EBITDA (1) | $ | 127,109 | $ | 113,322 | $ | 13,787 | 12.2 | |||||||||||||||||||||||||
Adjusted EBITDA | $ | 137,584 | $ | 127,245 | $ | 10,339 | 8.1 | |||||||||||||||||||||||||
Six Months Ended June 30, | 2018 vs. 2017 | |||||||||||||||
(dollars in thousands) | 2018 | 2017 | $ Change | % Change | ||||||||||||
Net income (1) | $ | 84,438 | $ | 59,975 | $ | 24,463 | 40.8 | |||||||||
Plus: Interest expense | 29,676 | 19,389 | 10,287 | 53.1 | ||||||||||||
Income tax provision | 22,714 | 36,674 | (13,960 | ) | (38.1 | ) | ||||||||||
Depreciation and amortization | 97,811 | 87,558 | 10,253 | 11.7 | ||||||||||||
Equity-based compensation | 4,844 | 4,845 | (1 | ) | (0.0 | ) | ||||||||||
Severance expense | 241 | 2,599 | (2,358 | ) | (90.7 | ) | ||||||||||
(Gain) loss on deferred compensation | 516 | 429 | 87 | 20.3 | ||||||||||||
Acquisition-related costs | - | 4,723 | (4,723 | ) | (100.0 | ) | ||||||||||
(Gain) loss on disposal of assets, net | 9,368 | (5,686 | ) | 15,054 | NM | |||||||||||
System conversion costs | 2,167 | - | 2,167 | NM | ||||||||||||
Other (income) expense, net | (1,499 | ) | 35 | (1,534 | ) | NM | ||||||||||
Adjusted EBITDA (1) | $ | 250,276 | $ | 210,541 | $ | 39,735 | 18.9 | |||||||||
__________
NM = Not meaningful. |
Six Months Ended June 30, | 2019 vs. 2018 | |||||||||||||||
(dollars in thousands) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 75,134 | $ | 84,438 | $ | (9,304 | ) | (11.0 | ) | |||||||
Plus: Interest expense | 36,612 | 29,676 | 6,936 | 23.4 | ||||||||||||
Income tax provision | 22,235 | 22,714 | (479 | ) | (2.1 | ) | ||||||||||
Depreciation and amortization | 108,679 | 97,811 | 10,868 | 11.1 | ||||||||||||
Equity-based compensation | 6,103 | 4,844 | 1,259 | 26.0 | ||||||||||||
Severance expense | 178 | 508 | (330 | ) | (65.0 | ) | ||||||||||
Loss on deferred compensation | 253 | 516 | (263 | ) | (51.0 | ) | ||||||||||
Acquisition-related costs | 6,094 | - | 6,094 | NM | ||||||||||||
Loss on asset disposals, net | 2,013 | 9,368 | (7,355 | ) | (78.5 | ) | ||||||||||
System conversion costs | 2,173 | 2,167 | 6 | 0.3 | ||||||||||||
Rebranding costs | 3,412 | - | 3,412 | NM | ||||||||||||
Other (income) expense, net | 7,830 | (1,499 | ) | 9,329 | NM | |||||||||||
Adjusted EBITDA | $ | 270,716 | $ | 250,543 | $ | 20,173 | 8.1 | |||||||||
|
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance. Adjusted EBITDA and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of Adjusted EBITDA may not be directly comparable to similarly titled measures reported by other companies.
Financial Condition: Liquidity and Capital Resources
Liquidity
Our primary funding requirements are for our ongoing operations, planned capital expenditures, payments of quarterly dividends, share repurchases and share repurchases.to fund the Fidelity acquisition. We believe that existing cash balances, our Senior Credit Facilities and operating cash flows will provide adequate support for these funding requirements over the next 12 months. However, our ability to fund operations and acquisitions, make planned capital expenditures, pay quarterly dividends and make share repurchases depends on future operating performance and cash flows, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. As a result of the 2017 Federal tax reform legislation, we expect to realize approximately $38 million to $42 million of cash tax savings during 2018.
During the first two quarters of 2018,2019, our cash and cash equivalents increased $41.8decreased $161.8 million. At June 30, 2018,2019, we had $203.5$102.3 million of cash on hand compared to $161.8$264.1 million at December 31, 2017.2018. Our working capital was $134.2$12.7 million and $76.7$184.2 million at June 30, 20182019 and December 31, 2017,2018, respectively.
The following table shows a summary of our net cash flows for the periods indicated (dollars in thousands):
Six Months Ended June 30, | 2018 vs. 2017 | Six Months Ended June 30, | 2019 vs. 2018 | |||||||||||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||||
Net cash provided by operating activities | $ | 196,602 | $ | 130,859 | $ | 65,743 | 50.2 | $ | 212,494 | $ | 196,602 | $ | 15,892 | 8.1 | ||||||||||||||||||
Net cash used in investing activities | (91,816 | ) | (795,806 | ) | 703,990 | (88.5 | ) | (465,817 | ) | (91,816 | ) | (374,001 | ) | NM | ||||||||||||||||||
Net cash provided by (used in) financing activities | (63,016 | ) | 616,700 | (679,716 | ) | (110.2 | ) | 91,493 | (63,016 | ) | 154,509 | (245.2 | ) | |||||||||||||||||||
Change in cash and cash equivalents | 41,770 | (48,247 | ) | 90,017 | (186.6 | ) | ||||||||||||||||||||||||||
Increase (decrease) in cash and cash equivalents | (161,830 | ) | 41,770 | (203,600 | ) | NM | ||||||||||||||||||||||||||
Cash and cash equivalents, beginning of period | 161,752 | 138,040 | 23,712 | 17.2 | 264,113 | 161,752 | 102,361 | 63.3 | ||||||||||||||||||||||||
Cash and cash equivalents, end of period | $ | 203,522 | $ | 89,793 | $ | 113,729 | 126.7 | $ | 102,283 | $ | 203,522 | $ | (101,239 | ) | (49.7 | ) | ||||||||||||||||
NM = Not meaningful. |
Net cash provided by operating activities was $196.6$212.5 million and $130.9$196.6 million for the first two quarters of 20182019 and 2017,2018, respectively. The $65.7$15.9 million year-over-year increase was primarily attributable to an increase in Adjusted EBITDA of $39.7$20.2 million lower cash tax paymentsand an increase in 2018 compared to 2017accounts payable and accrued liabilities versus a favorable changedecrease in net operating assets and liabilities,the prior year, partially offset by a $14.1 millionan increase in cash paid for interest.interest and taxes as well as the Notes redemption call premium, acquisition-related costs and rebranding costs.
Net cash used in investing activities was $91.8$465.8 million and $795.8$91.8 million for the first two quarters of 20182019 and 2017,2018, respectively. The $704.0$374.0 million decreaseincrease in cash used from the prior year period was due primarily to the $728.8 million purchase of NewWaveClearwave acquisition in the prior year, partially offset by the receiptfirst quarter of $10.1 million of proceeds in 2017 from the sale of a non-operating property2019 and a $15.5 million year-over-year increase in cash paid forhigher capital expenditures primarily attributable to increased NewWave capital spending during 2018.expenditures.
Net cash provided by financing activities was $91.5 million for the first two quarters of 2019 compared to net cash used in financing activities wasof $63.0 million for the first two quarters of 2018 compared to net cash provided by financing activities of $616.7 million for the first two quarters of 2017.2018. The $679.7$154.5 million change in net cash flows from the prior year period was primarily a result of new debt incurred during the NewWave financing transactions that took place infirst two quarters of 2019 and fewer share repurchases, partially offset by higher payments on long-term debt, including the second quarterNotes redemption, the refinancing of 2017the $234.4 million Term Loan A-1 and a $22.2 million increase in year-over-year share repurchase activity.the payment of debt issuance costs.
On July 1, 2015, the Board authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of our common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through the end of the second quarter of 2018,2019, we have repurchased 199,861210,631 shares of our common stock at an aggregate cost of $95.8$104.9 million. During the first two quarters of 2018,six months ended June 30, 2019, we repurchased 34,0285,984 shares at an aggregate cost of $22.6 million, of which 30,717$5.1 million. No shares were repurchased for $20.3 million during the second quarter.three months ended June 30, 2019.
We currently expect to continue to pay quarterly cash dividends on shares of our common stock, subject to approval of the Board. During the second quarter of 2018, the Board approved a quarterly dividend of $1.75 per share of common stock, which was paid on June 8, 2018. On August 7, 2018,2019, the Board approved a quarterly dividend of $2.00 per share of common stock, which was paid on June 14, 2019. On August 6, 2019, the Board approved a quarterly dividend of $2.25 per share of common stock to be paid on September 7, 20186, 2019 to holders of record as of August 21, 2018.20, 2019.
Financing Activity
On June 17, 2015, we issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022. The Notes were jointly and severally guaranteed on a senior unsecured basis by each of our subsidiaries that guarantee the Senior Credit Facilities. The Notes were scheduled to mature on June 15, 2022 and interest iswas payable on June 15th and December 15th of each year. The Notes are jointly and severally guaranteed on a senior unsecured basis (the “Notes Guarantees”) by each of our subsidiaries that guarantee the Senior Credit Facilities (the “Notes Guarantors”). In addition, if one of our subsidiaries becomes a guarantor in respect of the Senior Credit Facilities or certain other indebtedness, it is required to provide (subject to customary exceptions) a Notes Guarantee. The Notes are unsecured and senior obligations of the Company. The Notes Guarantees are unsecured and senior obligations ofindenture governing the Notes Guarantors.
The Notes were issued pursuant to the Indenture. The Indenture providesprovided for early redemption of the Notes, at our option, at the prices and subject to the terms specified in the Indenture. The Indenture includes certain covenants relating toindenture.
On June 15, 2019, we redeemed all $450 million aggregate principal amount of outstanding Notes. In conjunction with the redemption, we incurred a $6.5 million call premium and wrote-off the remaining $3.8 million debt incurrence, liens, restricted payments, asset sales and transactionsissuance cost associated with affiliates, changes in control and mergers or sales of all or substantially all of our assets. The Indenture also provides for customary events of default (subject, in certain cases, to customary grace periods).the Notes.
On June 30, 2015, we entered into the Credit Agreement with the lenders party thereto, JPMorgan, as administrative agent, and the other agents party thereto. The Credit Agreementthereto, which provided for a five-yearthe Original Revolving Credit Facility in an aggregate principal amount of $200 million and a five-year Term Loan Facility in an aggregate principal amount of $100 million. Concurrently with the entry into the Credit Agreement, we borrowed the full amount of the Term Loan Facility. The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility.
On May 1, 2017, we and the lenders entered into the Amended and Restated Credit Agreement and we incurred $750 million of 2017 New Loans, the proceeds of which were used, together with cash on hand, to finance the NewWave acquisition, repay in full the Term Loan Facilitythen-existing term loans and pay related fees and expenses. The 2017 New Loans consistconsisted of the five-year Term Loan AA-1 in an original aggregate principal amount of $250 million and the seven-year Term Loan BB-1 in an original aggregate principal amount of $500 million.
On January 7, 2019, we entered into Amendment No. 2 with CoBank, as lender, and JPMorgan, as administrative agent, and incurred the new seven-year incremental Term Loan B-2 in an aggregate principal amount of $500$250 million, the proceeds of which were used to finance, in part, the Clearwave acquisition.
On April 12, 2019, we entered into Amendment No. 3 with CoBank, as lender, and JPMorgan, as administrative agent, to provide for the new delayed draw incremental Term Loan B-3 in an aggregate principal amount of $325 million. We drew the Term Loan B-3 in full on June 14, 2019.
The obligations underTerm Loan B-3 will mature on January 7, 2026 and may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). The interest rate applicable to the Term Loan B-3 is equal to, at our option, LIBOR or a base rate, plus an applicable margin equal to 2.0% for LIBOR loans and 1.0% for base rate loans. The principal amount of the Term Loan B-3 amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum (subject to customary adjustments in the event of any prepayment), with the balance due upon maturity.
On May 8, 2019, we entered into the Second Restatement Agreement with JPMorgan, as administrative agent, and the lenders party thereto, to amend and restate the Amended and Restated Credit Agreement. The Second Restatement Agreement provides for the $250 million aggregate principal amount Term Loan A-2, the $450 million aggregate principal amount Delayed Draw Term Loan A-2 and the $350 million New Revolving Credit Facility. The Second Restatement Agreement did not alter the principal terms of our previously established Term Loan B-1, Term Loan B-2 or Term Loan B-3.
A portion of the proceeds from the Term Loan A-2, the Term Loan B-3 and the New Revolving Credit Facility, together with cash on hand, were used to refinance the Original Revolving Credit Facility and Term Loan A-1, to redeem the Notes and for other general corporate purposes. We intend to use the remaining proceeds, together with proceeds from the Delayed Draw Term Loan A-2 and cash on hand, to finance the acquisition of Fidelity and for other general corporate purposes.
The Term Loan A-2 and New Revolving Credit Facility will mature on May 8, 2024 (unless certain of our existing indebtedness remains outstanding after certain specified dates, in which case the final maturity date of both facilities will be an earlier date as specified in the Second Restatement Agreement).
The principal amount of the Term Loan A-2 amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year following the closing date, 2.5% per annum for the second year following the closing date, 5.0% per annum for the third year following the closing date, 7.5% per annum for the fourth year following the closing date and 12.5% per annum for the fifth year following the closing date (in each case subject to customary adjustments in the event of any prepayment or in the event the Delayed Draw Term Loan A-2 is drawn), with the balance due upon maturity.
The Delayed Draw Term Loan A-2 will be available in a single drawing until February 8, 2020. Any loans under the Delayed Draw Term Loan A-2 will have the same terms as, and will constitute one class of term loans with, the loans under the Term Loan A-2 described above. We are required to pay a ticking fee, which accrues at a per annum rate of 0.30% on the average daily undrawn portion of the Delayed Draw Term Loan A-2 accruing during the period commencing on June 15, 2019 up to, but excluding, the date on which the lender’s commitments under the Delayed Draw Term Loan A-2 terminate.
The Senior Credit Facilities are guaranteed by our wholly owned domestic subsidiariesthe Guarantors and are secured, subject to certain exceptions, by substantially all assets of the Companyour and the guarantors.Guarantors’ assets.
On April 23, 2018, we entered into the Repricing Amendment to the Amended and Restated Credit Agreement to, among other things, (i) decrease the applicable margin for the Term Loan B to 1.75% for LIBOR borrowings and 0.75% for base rate borrowings, (ii) reset the period during which a prepayment premium in respect of the Term Loan B may be required for a Repricing Transaction until six months after the effective date of the Repricing Amendment and (iii) reset the period during which the Term Loan B benefits from certain “most favored nation” pricing protections until 12 months after the effective date of the Repricing Amendment. Other than as set forth above, all other material terms and provisions of theThe Senior Credit Facilities remain substantially the same. Excluding the costs of the transaction, the interest rate reduction is expectedmay be prepaid at any time without penalty or premium (subject to save us approximately $2.5 million annually in interest costs.customary LIBOR breakage provisions).
The interest margins applicable to the Senior Credit Facilities are, at our option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (i) with respect to the Term Loan AA-2, Delayed Draw Term Loan A-2 and theNew Revolving Credit Facility, 1.50%1.25% to 2.25%1.75% for LIBOR loans and 0.50%0.25% to 1.25%0.75% for base rate loans, determined on a quarterly basis by reference to a pricing grid based on our total net leverage ratio, and (ii) with respect to the Term Loan B,B-1, (x) for any day on or prior to April 22, 2018, 2.25% for LIBOR loans and 1.25% for base rate loans through April 22, 2018 and (y) for any day thereafter, 1.75% for LIBOR loans and 0.75% for base rate loans, after April 22, 2018. Theand (iii) with respect to the Term Loan A may be prepaid at any time without premiumB-2 and amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% per annum for the third year after funding and 10.0% per annum for the fourth and fifth years after funding, with the outstanding balance due upon maturity. The Term Loan B amortizes quarterly at aB-3, 2.0% for LIBOR loans and 1.0% for base rate (expressed as a percentage of the original principal amount) of 1.0% per annum, with the outstanding balance due upon maturity. The Term Loan B is subject to a 1.0% prepayment premium if prepaid in connection with a Repricing Transaction within six months of the effective date of the Repricing Amendment, benefits from certain “most favored nation” pricing protections and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement. Other than as set forth above, the New Loans are subject to terms substantially similar to those under the Credit Agreement.loans.
We may, subject to certain specified terms and provisions, obtain additional credit facilities of up to $425$600 million under the Amended and Restated CreditSecond Restatement Agreement plus an unlimited amount so long as, on a pro forma basis, our First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is no greater than 1.803.0 to 1.00. The Amended and Restated Credit Agreement contains customary representations, warranties and affirmative and negative covenants as well as customary events of default. The Amended and Restated Credit Agreement also requires us to maintain specified ratios of total net indebtedness and first lien net indebtedness to consolidated operating cash flow. 1.0.
We were in compliance with all debt covenants as of June 30, 2018.2019.
As of June 30, 2018,2019, outstanding borrowings under the Term Loan AA-2, Term Loan B-1, Term Loan B-2 and Term Loan BB-3 were $243.8$250.0 million, $490.0 million, $249.4 million and $495.0$325.0 million, respectively, and each bore interest at a rate of 4.09%rates ranging from 3.91% to 4.41% per annum. Letter of credit issuances under the New Revolving Credit Facility totaled $3.1$5.5 million and we had $196.9$344.5 million available for borrowing under the New Revolving Credit Facility at June 30, 2018.2019.
In connection with the Repricing Amendment,financing transactions during 2019, we incurred $12.4 million of debt issuance costs, of $2.1which $11.7 million was capitalized. We also wrote-off $4.2 million of which $0.1existing unamortized debt issuance costs, including the $3.8 million was expensed immediately.associated with the Notes. We recorded $1.0$1.3 million and $0.8$1.0 million of debt issuance cost amortization for the three months ended June 30, 20182019 and 2017,2018, respectively, and $2.0$2.4 million and $1.2$2.0 million for the six months ended June 30, 2019 and 2018, respectively. These amounts are reflected within interest expense in the condensed consolidated statements of operations and 2017,comprehensive income. Unamortized debt issuance costs totaled $22.6 million and $17.6 million at June 30, 2019 and December 31, 2018, respectively, of which $2.7 million and $0 are reflected within other noncurrent assets, respectively, and $19.9 million and $17.6 million are reflected as reductions to long-term debt in the condensed consolidated balance sheets, respectively.
During the first quarter of 2019, we entered into two interest rate swap agreements in order to convert our interest payment obligations with respect to an aggregate of $1.2 billion of our variable rate LIBOR indebtedness to a fixed rate. Under the first swap agreement, with respect to a notional amount of $850 million, our monthly payment obligation is determined at a fixed base rate of 2.653%. Under the second swap agreement, which is a forward-starting swap with respect to a notional amount of $350 million, our monthly payment obligation beginning in June 2020 is determined at a fixed base rate of 2.739%. Both interest rate swap agreements are scheduled to mature in the first quarter of 2029 but may be terminated prior to their scheduled maturity at our election or the financial institution counterparty as provided in each swap agreement.
Capital Expenditures
We have significant ongoing capital expenditure requirements. In addition, we expect to spend up to $50 million during 2018 and 2019, in addition to the $10 million spent in 2017, to enhance therequirements as well as capital enhancements associated with acquired NewWave systems byoperations, including rebuilding low capacity markets, launching all-digital video services, implementing 32-channel bonding, to enable a 1 Gbps download speed product launch, converting back office functions such as billing, accounting and service provisioning, and migrating products to legacy Cable One platforms.platforms and expanding our high-capacity fiber network. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.
We have adopted capital expenditure disclosure guidance as supported by the NCTA. These disclosures are not required under GAAP, nor do they impact our accounting for capital expenditures under GAAP. The amounts of capital expenditures reported in this Quarterly Report on Form 10-Q are calculated in accordance with NCTA disclosure guidelines.
The following table presents our capital expenditures by category in accordance with NCTA disclosure guidelines for the six months ended June 30, 20182019 and 20172018 (in thousands):
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Customer premise equipment | $ | 26,275 | $ | 13,941 | $ | 24,854 | $ | 26,275 | ||||||||
Commercial | 3,750 | 4,347 | 11,519 | 3,750 | ||||||||||||
Scalable infrastructure | 18,880 | 16,872 | 21,715 | 18,880 | ||||||||||||
Line extensions | 7,309 | 6,149 | 11,964 | 7,309 | ||||||||||||
Upgrade/rebuild | 9,856 | 10,239 | 13,394 | 9,856 | ||||||||||||
Support capital | 24,798 | 24,882 | 27,042 | 24,798 | ||||||||||||
Total | $ | 90,868 | $ | 76,430 | $ | 110,488 | $ | 90,868 | ||||||||
Contractual Obligations and Contingent Commitments
The following is a summary of our outstanding contractual obligations as of June 30, 2018 (in thousands):
Year ending December 31, | Programming Purchase Commitments (1) | Operating Lease Payments | Debt Payments (2) | Other Purchase Obligations (3) | Total | |||||||||||||||
2018 (remaining six months) | $ | 111,655 | $ | 948 | $ | 8,758 | $ | 13,239 | $ | 134,600 | ||||||||||
2019 | 167,592 | 1,477 | 20,642 | 17,552 | 207,263 | |||||||||||||||
2020 | 100,832 | 1,055 | 26,892 | 12,433 | 141,212 | |||||||||||||||
2021 | 32,739 | 763 | 30,017 | 7,256 | 70,775 | |||||||||||||||
2022 | 410 | 355 | 180,017 | 2,070 | 182,852 | |||||||||||||||
Thereafter | - | 472 | 922,683 | 4,559 | 927,714 | |||||||||||||||
Total | $ | 413,228 | $ | 5,070 | $ | 1,189,009 | $ | 57,109 | $ | 1,664,416 | ||||||||||
_________
|
|
|
|
|
|
We incurAs described in the section entitled “Financing Activity,” we incurred the following costs as part of our operations, however, they are not included within the contractual obligations table above for the reasons discussed below:additional indebtedness during 2019:
● |
|
● |
|
● |
|
● | On June 15, 2019, we redeemed all $450 million aggregate principal amount of |
Except as disclosed above, as of June 30, 2019, there have been no material changes to the contractual obligations and contingent commitments previously disclosed in the 2018 Form 10-K.
Off-Balance Sheet Arrangements
With the exception of the items discussed within the preceding “Contractual Obligations and Contingent Commitments” section, weWe do not have any off-balance sheet arrangements or financing arrangements with special-purpose entities.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
An accounting policy is considered to be critical if it is important to our results of operations and financial condition and if it requires management’s most difficult, subjective and complex judgments in its application. With the exception of changes to our revenue recognition accounting policy due to the adoption of the new revenue recognitionlease accounting standard effective January 1, 20182019 and the entry into interest rate swaps in the first quarter of 2019 discussed in notenotes 1 and 8, respectively, of the notes to our condensed consolidated financial statements within this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policy and estimate disclosures described in our 20172018 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential gain or loss arising from changes in market rates and prices, suchprices. As of June 30, 2019, the Company’s market risk sensitive instruments consisted of the Senior Credit Facilities and the interest rate swaps, as interest rates. There have been no material changeseach is described within the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition: Liquidity and Capital Resources—Financing Activity.” None of these instruments were entered into for trading purposes and all instruments relate to the marketinterest rate risk disclosures described in the 2017 Form 10-K.exposure category.
such outstanding debt. Based on the principal outstanding under the Senior Credit Facilities with exposure to LIBOR at June 30, 2019 and December 31, 2018, assuming, hypothetically, that the LIBOR applicable to the Senior Credit Facilities was 100 basis points higher, the Company’s annual interest expense would have increased $4.6 million and $7.3 million, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation as of June 30, 2018,2019, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on the Company’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2018 because of the material weakness in the Company’s internal control over financial reporting described below.
During the second quarter of 2018, the Company identified a material weakness in the Company’s internal controls over the NewWave billing system inherited as a result of the NewWave acquisition (the “NewWave billing system”). Specifically, the Company did not maintain effective access and change management controls to ensure that only authorized users had access to the NewWave billing system and underlying financial data and all changes to the system were authorized.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The identified deficiencies did not result in a misstatement to the Company’s consolidated financial statements or disclosures; however, the deficiencies, when aggregated, could result in misstatements of certain account balances (such as NewWave revenues, accounts receivables and deferred revenues) or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
As previously disclosed, the Company is integrating NewWave billing activities into its billing system and eliminating the NewWave billing system. The Company is targeting to complete the conversion of the NewWave billing system, which will remediate the material weakness described above, by the end of 2018.2019.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 20182019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
There have been no material changes to the risk factors previously disclosed in the 20172018 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth certain information relating to the purchases of our common stock repurchases by usthe Company and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) under the Exchange Act during the three months ended June 30, 20182019 (dollars in thousands, except per share data):
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
April 1 to 30, 2018 (2) | 6,280 | $ | 685.98 | 6,277 | $ | 170,127 | ||||||||||
May 1 to 31, 2018 | 17,464 | $ | 647.60 | 17,464 | $ | 158,817 | ||||||||||
June 1 to 30, 2018 | 6,976 | $ | 665.99 | 6,976 | $ | 154,171 | ||||||||||
Total | 30,720 | $ | 659.62 | 30,717 | $ | 154,171 | ||||||||||
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
April 1 to 30, 2019 (2) | 11 | $ | 996.24 | - | $ | 145,081 | ||||||||||
May 1 to 31, 2019 (2) | 2 | $ | 1,080.75 | - | $ | 145,081 | ||||||||||
June 1 to 30, 2019 | - | $ | - | - | $ | 145,081 | ||||||||||
Total | 13 | $ | 1,009.24 | - | $ | 145,081 | ||||||||||
_________
| On July 1, 2015, the Board authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of common stock), which was announced on August 7, 2015. The authorization does not have an expiration date. Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases |
(2) |
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
Exhibit Number | Description |
10.1 | |
10.2 | |
31.1 | |
31.2 | |
| |
|
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
|
|
|
101.SCH | Inline XBRL Taxonomy Extension Schema Document.* |
|
|
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
|
|
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
|
|
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* |
|
|
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* |
| 104 | The cover page of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in Inline XBRL (included within the Exhibit 101 attachments). |
__________
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cable One, Inc. (Registrant) |
| ||
|
| ||
By: | /s/ Julia M. Laulis | ||
Name: | Julia M. Laulis | ||
Title: | Chair of the Board, President and Chief Executive Officer | ||
Date: August 7, 2019
By: | /s/ Steven S. Cochran |
| |
| Name: |
|
|
| Title: |
Chief |
|
Date: August 9, 2018
|
| ||
|
| ||
|
| ||
Date: August 9, 20187, 2019
3734