UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended | June 30, 2019March 31, 2020
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from__________ to __________ |
Commission File No.: 000-09881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
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Virginia | | 54-1162807 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
500 Shentel Way, Edinburg, Virginia 22824
(Address of principal executive offices) (Zip Code)
(540) 984-4141
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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| | | |
Common Stock (No Par Value) | SHEN | NASDAQ Global Select Market | 49,856,91449,842,000 |
(Title of Class) | (Trading Symbol) | (Name of Exchange on which Registered) | (The number of shares of the registrant's common stock outstanding on July 31, 2019)April 24, 2020) |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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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 ☑☒
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
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| | Page Numbers |
PART I. | FINANCIAL INFORMATION | | | |
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Item 1. | Financial Statements | | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. | OTHER INFORMATION | | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| | SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | | | | | |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS | | | | | |
(in thousands) | | | | | |
| | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 98,091 |
| | $ | 85,086 |
| $ | 120,232 |
| | $ | 101,651 |
|
Accounts receivable, net of allowance for doubtful accounts of $516 and $534, respectively | | 59,561 |
| | 54,407 |
| |
Accounts receivable, net of allowance for doubtful accounts of $410 and $533, respectively | | 61,526 |
| | 63,541 |
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Income taxes receivable | | 4,144 |
| | 5,282 |
| 8,157 |
| | 10,306 |
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Inventory, net of allowances of $69 and $113, respectively | | 6,566 |
| | 5,265 |
| |
Inventory, net of allowances of $71 and $66, respectively | | 7,071 |
| | 5,728 |
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Prepaid expenses and other | | 53,786 |
| | 60,162 |
| 60,923 |
| | 60,527 |
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Total current assets | | 222,148 |
| | 210,202 |
| 257,909 |
| | 241,753 |
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Investments | | 11,563 |
| | 10,788 |
| 12,011 |
| | 12,388 |
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Property, plant and equipment, net | | 695,725 |
| | 701,359 |
| 695,920 |
| | 701,514 |
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Intangible assets, net | | 324,890 |
| | 366,029 |
| 299,458 |
| | 314,147 |
|
Goodwill | | 149,070 |
| | 146,497 |
| 149,070 |
| | 149,070 |
|
Operating lease right-of-use assets | | 369,715 |
| | — |
| 382,973 |
| | 392,589 |
|
Deferred charges and other assets | | 48,929 |
| | 49,891 |
| 53,436 |
| | 53,352 |
|
Total assets | | $ | 1,822,040 |
| | $ | 1,484,766 |
| $ | 1,850,777 |
| | $ | 1,864,813 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Current maturities of long-term debt, net of unamortized loan fees | | $ | 27,939 |
| | $ | 20,618 |
| $ | 31,672 |
| | $ | 31,650 |
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Accounts payable | | 27,657 |
| | 35,987 |
| 30,384 |
| | 40,295 |
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Advanced billings and customer deposits | | 7,914 |
| | 7,919 |
| 8,414 |
| | 8,358 |
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Accrued compensation | | 6,817 |
| | 9,452 |
| 5,787 |
| | 10,075 |
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Current operating lease liabilities | | 42,941 |
| | — |
| 44,204 |
| | 42,567 |
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Accrued liabilities and other | | 14,513 |
| | 14,563 |
| 19,183 |
| | 14,391 |
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Total current liabilities | | 127,781 |
| | 88,539 |
| 139,644 |
| | 147,336 |
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Long-term debt, less current maturities, net of unamortized loan fees | | 719,067 |
| | 749,624 |
| 680,531 |
| | 688,464 |
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Other long-term liabilities: | | | | | | | |
Deferred income taxes | | 128,582 |
| | 127,453 |
| 137,674 |
| | 137,567 |
|
Deferred lease | | — |
| | 22,436 |
| |
Asset retirement obligations | | 30,779 |
| | 28,584 |
| 37,422 |
| | 36,914 |
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Retirement plan obligations | | 10,355 |
| | 11,519 |
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Benefit plan obligations | | 11,980 |
| | 12,675 |
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Noncurrent operating lease liabilities | | 327,868 |
| | — |
| 343,723 |
| | 352,439 |
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Other liabilities | | 15,559 |
| | 14,364 |
| 19,153 |
| | 16,990 |
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Total other long-term liabilities | | 513,143 |
| | 204,356 |
| 549,952 |
| | 556,585 |
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Shareholders’ equity: | | | | | | | |
Common stock, no par value, authorized 96,000; 49,857 and 49,630 issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | — |
| | — |
| |
Common stock, no par value, authorized 96,000; 49,842 and 49,671 issued and outstanding at March 31, 2020 and December 31, 2019, respectively | | — |
| | — |
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Additional paid in capital | | 47,138 |
| | 47,456 |
| 43,158 |
| | 42,110 |
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Retained earnings | | 413,571 |
| | 386,511 |
| 443,290 |
| | 430,010 |
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Accumulated other comprehensive income, net of taxes | | 1,340 |
| | 8,280 |
| |
Accumulated other comprehensive (loss) income, net of taxes | | (5,798 | ) | | 308 |
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Total shareholders’ equity | | 462,049 |
| | 442,247 |
| 480,650 |
| | 472,428 |
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Total liabilities and shareholders’ equity | | $ | 1,822,040 |
| | $ | 1,484,766 |
| $ | 1,850,777 |
| | $ | 1,864,813 |
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See accompanying notes to unaudited condensed consolidated financial statements.
| | SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | | | | | SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | | | | | (in thousands, except per share amounts) |
| Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
Operating revenue: | 2019 | | 2018 | | 2019 | | 2018 | |
Revenue: | | 2020 | | 2019 |
Service revenue and other | $ | 142,059 |
| | $ | 140,492 |
| | $ | 285,290 |
| | $ | 277,051 |
| $ | 140,188 |
| | $ | 143,231 |
|
Equipment revenue | 16,855 |
| | 16,009 |
| | 32,467 |
| | 33,588 |
| 13,000 |
| | 15,612 |
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Total operating revenue | 158,914 |
| | 156,501 |
| | 317,757 |
| | 310,639 |
| |
Total revenue | | 153,188 |
| | 158,843 |
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Operating expenses: | | | | | | | | | | |
Cost of services | 49,497 |
| | 49,134 |
| | 99,015 |
| | 98,476 |
| 49,565 |
| | 49,518 |
|
Cost of goods sold | 15,874 |
| | 15,166 |
| | 30,511 |
| | 30,971 |
| 12,671 |
| | 14,637 |
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Selling, general and administrative | 27,170 |
| | 29,915 |
| | 55,892 |
| | 58,665 |
| 30,991 |
| | 28,722 |
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Depreciation and amortization | 42,353 |
| | 41,117 |
| | 83,532 |
| | 84,604 |
| 36,911 |
| | 41,179 |
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Total operating expenses | 134,894 |
| | 135,332 |
| | 268,950 |
| | 272,716 |
| 130,138 |
| | 134,056 |
|
Operating income | 24,020 |
| | 21,169 |
| | 48,807 |
| | 37,923 |
| 23,050 |
| | 24,787 |
|
Other income (expense): | | | | | | | | | | |
Interest expense | (7,522 | ) | | (8,851 | ) | | (15,476 | ) | | (18,183 | ) | (6,211 | ) | | (7,954 | ) |
Other | 1,176 |
| | 839 |
| | 2,463 |
| | 1,828 |
| 733 |
| | 1,287 |
|
Income before income taxes | 17,674 |
| | 13,157 |
| | 35,794 |
| | 21,568 |
| 17,572 |
| | 18,120 |
|
Income tax expense | 4,524 |
| | 3,531 |
| | 8,734 |
| | 5,359 |
| 4,292 |
| | 4,210 |
|
Net income | 13,150 |
| | 9,626 |
| | 27,060 |
| | 16,209 |
| 13,280 |
| | 13,910 |
|
Other comprehensive income (loss): | | | | | | | | |
Unrealized gain (loss) on interest rate hedge, net of tax | (4,212 | ) | | 833 |
| | (6,940 | ) | | 3,895 |
| |
Other comprehensive income: | | | | |
Unrealized loss on interest rate hedge, net of tax | | (6,106 | ) | | (2,728 | ) |
Comprehensive income | $ | 8,938 |
| | $ | 10,459 |
| | $ | 20,120 |
| | $ | 20,104 |
| $ | 7,174 |
| | $ | 11,182 |
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| | | | | | | | | | |
Net income per share, basic and diluted: | | | | | | | | | | |
Basic net income per share | $ | 0.26 |
| | $ | 0.19 |
| | $ | 0.54 |
| | $ | 0.33 |
| $ | 0.27 |
| | $ | 0.28 |
|
Diluted net income per share | $ | 0.26 |
| | $ | 0.19 |
| | $ | 0.54 |
| | $ | 0.32 |
| $ | 0.27 |
| | $ | 0.28 |
|
Weighted average shares outstanding, basic | 49,848 |
| | 49,547 |
| | 49,812 |
| | 49,511 |
| 49,888 |
| | 49,775 |
|
Weighted average shares outstanding, diluted | 50,142 |
| | 50,070 |
| | 50,118 |
| | 50,029 |
| 50,036 |
| | 50,115 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
(in thousands, except per share amounts) |
| | Shares of Common Stock (no par value) | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance, March 31, 2019 | | 49,844 |
| | $ | 46,641 |
| | $ | 400,421 |
| | $ | 5,552 |
| | $ | 452,614 |
|
Net income | | — |
| | — |
| | 13,150 |
| | — |
| | 13,150 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (4,212 | ) | | (4,212 | ) |
Stock based compensation | | 17 |
| | 695 |
| | — |
| | — |
| | 695 |
|
Stock options exercised | | 1 |
| | (94 | ) | | — |
| | — |
| | (94 | ) |
Common stock issued | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
Shares retired for settlement of employee taxes upon issuance of vested equity awards | | (5 | ) | | (112 | ) | | — |
| | — |
| | (112 | ) |
Balance, June 30, 2019 | | 49,857 |
| | $ | 47,138 |
| | $ | 413,571 |
| | $ | 1,340 |
| | $ | 462,049 |
|
| | | | | | | | | | |
| | Shares of Common Stock (no par value) | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance, December 31, 2018 | | 49,630 |
| | $ | 47,456 |
| | $ | 386,511 |
| | $ | 8,280 |
| | $ | 442,247 |
|
Net income | | — |
| | — |
| | 27,060 |
| | — |
| | 27,060 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (6,940 | ) | | (6,940 | ) |
Stock based compensation | | 184 |
| | 2,497 |
| | — |
| | — |
| | 2,497 |
|
Stock options exercised | | 29 |
| | 81 |
| | — |
| | — |
| | 81 |
|
Common stock issued | | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
Shares retired for settlement of employee taxes upon issuance of vested equity awards | | (62 | ) | | (2,912 | ) | | — |
| | — |
| | (2,912 | ) |
Common stock issued to acquire non-controlling interest in nTelos | | 76 |
| | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2019 | | 49,857 |
| | $ | 47,138 |
| | $ | 413,571 |
| | $ | 1,340 |
| | $ | 462,049 |
|
| | | | | | | | | | |
| | Shares of Common Stock (no par value) | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total |
Balance, March 31, 2018 | | 49,539 |
| | $ | 45,075 |
| | $ | 359,885 |
| | $ | 11,292 |
| | $ | 416,252 |
|
Net income | | — |
| | — |
| | 9,626 |
| | — |
| | 9,626 |
|
Other comprehensive gain, net of tax | | — |
| | — |
| | — |
| | 833 |
| | 833 |
|
Stock based compensation | | 28 |
| | 1,370 |
| | — |
| | — |
| | 1,370 |
|
Common stock issued | | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Shares retired for settlement of employee taxes upon issuance of vested equity awards | | (9 | ) | | (278 | ) | | — |
| | — |
| | (278 | ) |
Balance, June 30, 2018 | | 49,558 |
| | $ | 46,172 |
| | $ | 369,511 |
| | $ | 12,125 |
| | $ | 427,808 |
|
| | | | | | | | | | |
| | Shares of Common Stock (no par value) | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total |
Balance, December 31, 2017 | | 49,328 |
| | $ | 44,787 |
| | $ | 297,205 |
| | $ | 8,230 |
| | $ | 350,222 |
|
Change in Accounting Principle - Adoption of ASU 2014-09 | | — |
| | — |
| | 56,097 |
| | — |
| | 56,097 |
|
Net income | | — |
| | — |
| | 16,209 |
| | — |
| | 16,209 |
|
Other comprehensive gain, net of tax | | — |
| | — |
| | — |
| | 3,895 |
| | 3,895 |
|
Stock based compensation | | 205 |
| | 3,407 |
| | — |
| | — |
| | 3,407 |
|
Stock options exercised | | 15 |
| | 104 |
| | — |
| | — |
| | 104 |
|
Common stock issued | | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Shares retired for settlement of employee taxes upon issuance of vested equity awards | | (66 | ) | | (2,136 | ) | | — |
| | — |
| | (2,136 | ) |
Common stock issued to acquire non-controlling interest in nTelos | | 76 |
| | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2018 | | 49,558 |
| | $ | 46,172 |
| | $ | 369,511 |
| | $ | 12,125 |
| | $ | 427,808 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | | | | |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | |
(in thousands) | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
Cash flows from operating activities: | | | | |
Net income | | $ | 27,060 |
| | $ | 16,209 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | | 72,737 |
| | 71,637 |
|
Amortization | | 10,795 |
| | 12,967 |
|
Accretion of asset retirement obligations | | 708 |
| | 471 |
|
Bad debt expense | | 764 |
| | 758 |
|
Stock based compensation expense, net of amount capitalized | | 2,307 |
| | 3,407 |
|
Deferred income taxes | | 3,434 |
| | (8,004 | ) |
Net gain from patronage and investments | | (2,081 | ) | | (1,576 | ) |
Amortization of long-term debt issuance costs | | 1,648 |
| | 2,365 |
|
Changes in assets and liabilities: | | | | |
Accounts receivable | | (4,561 | ) | | (11,060 | ) |
Inventory, net | | (1,301 | ) | | (503 | ) |
Current income taxes | | 1,138 |
| | 16,722 |
|
Operating lease right-of-use assets | | 25,389 |
| | — |
|
Waived management fee | | 19,320 |
| | 18,606 |
|
Other assets | | (8,679 | ) | | (968 | ) |
Accounts payable | | 6,311 |
| | 2,486 |
|
Lease liabilities | | (21,880 | ) | | — |
|
Deferred lease | | — |
| | 1,353 |
|
Other deferrals and accruals | | (3,477 | ) | | 2,274 |
|
Net cash provided by operating activities | | 129,632 |
| | 127,144 |
|
| | | | |
Cash flows from investing activities: | | | | |
Capital expenditures | | (79,124 | ) | | (62,322 | ) |
Cash disbursed for acquisitions | | (10,000 | ) | | (52,000 | ) |
Proceeds from sale of assets | | 108 |
| | 447 |
|
Other | | (3 | ) | | (3 | ) |
Net cash used in investing activities | | (89,019 | ) | | (113,878 | ) |
| | | | |
Cash flows from financing activities: | | | | |
Principal payments on long-term debt | | (24,777 | ) | | (24,250 | ) |
Proceeds from revolving credit facility borrowings | | — |
| | 15,000 |
|
Principal payments on revolving credit facility | | — |
| | (15,000 | ) |
Proceeds from exercises of stock options | | 81 |
| | — |
|
Taxes paid for equity award issuances | | (2,912 | ) | | (2,032 | ) |
Net cash used in financing activities | | (27,608 | ) | | (26,282 | ) |
Net increase (decrease) in cash and cash equivalents | | 13,005 |
| | (13,016 | ) |
Cash and cash equivalents, beginning of period | | 85,086 |
| | 78,585 |
|
Cash and cash equivalents, end of period | | $ | 98,091 |
| | $ | 65,569 |
|
|
| | | | | | | | | | | | | | | | | | | |
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
(in thousands) |
| | Shares of Common Stock (no par value) | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance, December 31, 2019 | | 49,671 |
| | $ | 42,110 |
| | $ | 430,010 |
| | $ | 308 |
| | $ | 472,428 |
|
Net income | | — |
| | — |
| | 13,280 |
| | — |
| | 13,280 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (6,106 | ) | | (6,106 | ) |
Stock based compensation | | 137 |
| | 2,985 |
| | — |
| | — |
| | 2,985 |
|
Common stock issued | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
Shares retired for settlement of employee taxes upon issuance of vested equity awards | | (42 | ) | | (1,945 | ) | | — |
| | — |
| | (1,945 | ) |
Common stock issued to acquire non-controlling interest in nTelos | | 76 |
| | — |
| | — |
| | — |
| | — |
|
Balance, March 31, 2020 | | 49,842 |
| | $ | 43,158 |
| | $ | 443,290 |
| | $ | (5,798 | ) | | $ | 480,650 |
|
| | | | | | | | | | |
| | Shares of Common Stock (no par value) | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance, December 31, 2018 | | 49,630 |
| | $ | 47,456 |
| | $ | 388,496 |
| | $ | 8,280 |
| | $ | 444,232 |
|
Net income | | — |
| | — |
| | 13,910 |
| | — |
| | 13,910 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (2,728 | ) | | (2,728 | ) |
Stock based compensation | | 167 |
| | 1,802 |
| | — |
| | — |
| | 1,802 |
|
Stock options exercised | | 28 |
| | 175 |
| | — |
| | — |
| | 175 |
|
Common stock issued | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
Shares retired for settlement of employee taxes upon issuance of vested equity awards | | (57 | ) | | (2,800 | ) | | — |
| | — |
| | (2,800 | ) |
Common stock issued to acquire non-controlling interest in nTelos | | 76 |
| | — |
| | — |
| | — |
| | — |
|
Balance, March 31, 2019 | | 49,844 |
| | $ | 46,641 |
| | $ | 402,406 |
| | $ | 5,552 |
| | $ | 454,599 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
|
| | | | | | | |
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | | | |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | |
(in thousands) | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net income | $ | 13,280 |
| | $ | 13,910 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 32,468 |
| | 35,520 |
|
Amortization of intangible assets | 4,868 |
| | 5,659 |
|
Accretion of asset retirement obligations | 404 |
| | 350 |
|
Bad debt expense | 205 |
| | 367 |
|
Stock based compensation expense, net of amount capitalized | 2,905 |
| | 1,714 |
|
Deferred income taxes | 2,135 |
| | (3,378 | ) |
Gain from patronage and investments | (339 | ) | | (1,140 | ) |
Amortization of long-term debt issuance costs | 674 |
| | 963 |
|
Changes in assets and liabilities: | | | |
Accounts receivable | 2,543 |
| | (3,127 | ) |
Inventory, net | (1,343 | ) | | (1,975 | ) |
Current income taxes | 2,149 |
| | 7,588 |
|
Operating lease right-of-use assets | 12,939 |
| | 7,779 |
|
Waived management fee | 9,798 |
| | 9,628 |
|
Other assets | (3,489 | ) | | (1,460 | ) |
Accounts payable | (4,400 | ) | | 4,641 |
|
Lease liabilities | (10,402 | ) | | (9,662 | ) |
Other deferrals and accruals | (3,287 | ) | | (5,714 | ) |
Net cash provided by operating activities | 61,108 |
| | 61,663 |
|
| | | |
Cash flows used in investing activities: | | | |
Capital expenditures | $ | (32,299 | ) | | (44,420 | ) |
Cash disbursed for acquisitions | — |
| | (10,000 | ) |
Proceeds from sale of assets and other | 274 |
| | 45 |
|
Net cash used in investing activities | (32,025 | ) | | (54,375 | ) |
| | | |
Cash flows used in financing activities: | | | |
Principal payments on long-term debt | $ | (8,530 | ) | | (19,889 | ) |
Taxes paid for equity award issuances | (1,945 | ) | | (2,698 | ) |
Other | (27 | ) | | 72 |
|
Net cash used in financing activities | (10,502 | ) | | (22,515 | ) |
Net increase (decrease) in cash and cash equivalents | 18,581 |
| | (15,227 | ) |
Cash and cash equivalents, beginning of period | 101,651 |
| | 85,086 |
|
Cash and cash equivalents, end of period | $ | 120,232 |
| | $ | 69,859 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Other Information
The interim condensedaccompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited. In the opinion of management, allRegulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation of the interim results have been reflected thereinincluded. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed(U.S. GAAP) have been omitted. These consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The information contained herein should be read in conjunction with the audited consolidated financial statements includedand notes contained in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2018.2019.
The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingencies at the date of the unaudited interim consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.
T-Mobile Acquisition of Sprint
On April 1, 2020, T-Mobile US, Inc. (“T-Mobile”) announced the completion of its business combination with Sprint Corporation (“Sprint”) and subsequently delivered to the Company a notice of Network Technology Conversion, Brand Conversion and Combination Conversion (a “Conversion Notice”) pursuant to the terms of our affiliate agreement. The affiliate agreement provides for a 90-day period following receipt of the Conversion Notice for the parties to negotiate mutually agreeable terms and conditions under which the Company would continue as an affiliate of T-Mobile. The affiliate agreement further provides that, if T-Mobile and the Company have not negotiated a mutually acceptable agreement within the 90-day period, then T-Mobile would have a period of 60 days thereafter to exercise an option to purchase the assets of our Wireless operations for 90% of the "Entire Business Value," (as defined under our affiliate agreement). If T-Mobile does not exercise its purchase option, the Company would then have a 60-day period to exercise an option to purchase the legacy T-Mobile network and subscribers in our service area. If the Company does not exercise its purchase option, T-Mobile must sell or decommission its legacy network and customers in our service area. The outcome of these proceedings could significantly impact our business operations and financial statements.
COVID-19
On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. While we do not operate in the densely populated urban markets that have been most-affected by the pandemic, our postpaid gross additions, equipment revenue, and cost of goods sold decreased as stay-at-home directives led to the temporary closure of approximately 40% of our Sprint-branded retail stores in mid-March.
Our wireless and broadband internet services are essential during a time of social distancing. Nonetheless, national unemployment rates increased markedly in April. Sprint also adopted the Keep Americans Connected pledge and T-Mobile chose to change subscriber collection policies following its April 1, 2020 acquisition of Sprint. It is reasonably possible that these risks and uncertainties could impact the collectability of our accounts receivable and revenue. It is also reasonably possible that they could impact the measurement of our wireless segment’s contract asset, which is reduced by an estimated refund obligation for amounts that T-Mobile is later unable to collect from its subscribers. We update that estimate based upon trends in our refund experience. To-date, our collection experience and expected credit losses have not been materially affected. We will continue to monitor the impacts of this unprecedented pandemic and will prospectively revise our estimates as appropriate.
We do not currently anticipate any material impairments of our long-lived assets or of our indefinite-lived intangible assets as a result of COVID-19.
Revision of Prior Period Financial Statements
In connection with the preparation of our unaudited condensed consolidated financial statements for the three months ended March 31, 2020, we determined that certain errors existed in our previously issued financial statements. Specifically:
Prepaid and other assets, as of December 31, 2019, were understated by $2.7 million, deferred tax liabilities were understated by $0.7 million, and retained earnings were understated by $2.0 million as the result of a failure to properly account for handsets that were utilized as demo phones in certain wireless retail stores within our area of operation. All of the impact to retained earnings is attributable to 2017 and prior years.
Property, plant and equipment, net, and deferred income tax liabilities as of December 31, 2019 were understated by $1.4 million and $0.4 million, respectively. Depreciation expense was overstated by $1.4 million for the year and quarter ended
December 31, 2019. Income tax expense and net income were understated by $0.4 million and $1.0 million, respectively, for the year and quarter ended December 31, 2019.
We evaluated these errors under the U.S. Securities and Exchange Commission's ("SEC's") authoritative guidance on materiality and the quantification of the effect of prior period misstatements on financial statements, and we have determined that the impact of these errors on our prior period consolidated financial statements is immaterial. However, since the correction of these errors in the first quarter of 2020 could have become material to our results of operations for the year ending December 31, 2020, we revised our prior period financial statements to correct these errors herein. For the year and quarter ended December 31, 2019, the correction of these errors resulted in a $0.02 increase in both basic and diluted earnings per share.
Adoption of New Accounting Principles
There have been no developments related to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's unaudited condensed consolidated financial statements and note disclosures, from those disclosed in the Company's 20182019 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:
The Company adopted ASU No. 2018-02,2016-13, Income StatementFinancial Instruments - Reporting Comprehensive Income (Topic 220),Credit Losses ("ASC 326"): Measurement of Credit Losses on Financial Instruments, as of January 1, 2019. The Company elected not2020 using the modified retrospective transition method. ASC 326 requires the application of a current expected credit loss (“CECL”) impairment model to reclassify stranded income tax effects from accumulated other comprehensive income (OCI)financial assets measured at amortized cost including trade accounts receivable, net investments in leases, and certain off-balance-sheet credit exposures. Under the CECL model, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. Furthermore, the CECL model requires financial assets with similar risk characteristics to retained earnings and has implemented this election as its accounting policy as of January 1, 2019. The Company utilizes the portfolio approach as its policybe analyzed on a collective basis. There was no significant impact to release the income tax effects from accumulated OCI as the entire portfolio is liquidated, sold, or extinguished.condensed consolidated financial statements upon adoption.
The Company adopted ASU No. 2016-02,2018-15, LeasesIntangibles - (“Topic 842Goodwill and Other - Internal-Use Software ("ASC 350"): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract,” or “the new lease standard”) on as of January 1, 2019. Topic 842 replaces previous leasing guidance2020. ASC 350 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with a comprehensive lease measurementthe requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Upon adoption of the standard, implementation costs were capitalized in the period incurred and recognition standard and expanded disclosure requirements. Topic 842 requires lesseeswill be amortized over the term of the hosting arrangement. There was no significant impact to recognize most leases on their balance sheet as liabilities, with corresponding right-of-use, or ROU assets. The Company adopted the new lease standard utilizing the modified retrospective approach. As a result, comparable period information has not been retrospectively updated. The modified retrospective approach includes a package of optional practical expedients that we elected to apply. As a result, the Company did not reassess prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard. In those circumstances where the Company is the lessee, we have elected to account for non-lease components associated with our leases (e.g., maintenance costs) and lease components as a single lease component for substantially all of our asset classes under Topic 842. condensed consolidated financial statements upon adoption.
Note 2. Leases
The Company leases various cell sites, warehouses, retail stores, and office facilities for use in our business. These agreements include fixed rental payments as well as variable rental payments, such as those based on relevant inflation indices. The accounting lease term includes optional renewal periods that we are reasonably certain to exercise based on our assessment of relevant contractual and economic factors. The related lease payments are discounted at lease commencement using the Company's incremental borrowing rate in order to measure the lease liability and ROU asset.
The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the observable unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate. Under the new lease standard, leases are remeasured upon the occurrence of certain events or modifications.
Adoption of the new lease standard did not materially impact the Company's consolidated net earnings, cash flows, liquidity, or loan covenants.
The cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet for the adoption of the new lease standard were as follows: |
| | | | | | | | | | | | |
(in thousands) | | December 31, 2018 As Previously Reported | | Effect of the Adoption of ASC Topic 842 (Leases) | | January 1, 2019 As Adjusted |
Assets | | | | | | |
Prepaid expenses and other | | $ | 60,162 |
| | $ | (11,580 | ) | | $ | 48,582 |
|
Property, plant and equipment, net | | 701,359 |
| | 1,789 |
| | 703,148 |
|
Operating lease right-of-use assets | | — |
| | 369,344 |
| | 369,344 |
|
Intangible assets, net | | 366,029 |
| | (13,828 | ) | | 352,201 |
|
Liabilities | | | | | | |
Current operating lease liabilities | | — |
| | 38,773 |
| | 38,773 |
|
Accrued liabilities and other | | 14,563 |
| | (412 | ) | | 14,151 |
|
Deferred Lease | | 22,436 |
| | (22,436 | ) | | — |
|
Noncurrent operating lease liabilities | | — |
| | 328,156 |
| | 328,156 |
|
Other liabilities | | 14,364 |
| | 1,644 |
| | 16,008 |
|
In addition to recognizing the operating lease liabilities and right-of-use assets, Topic 842 also reclassified prepaid and deferred rent balances, off-market leases, and lease incentives into the right-of-use assets.
The following table shows the components of lease income and costs: |
| | | | | | | | |
(in thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Lease income from operating leases - fixed | | $ | 2,042 |
| | $ | 4,070 |
|
| |
| |
|
Operating lease expense | | 16,752 |
| | 33,660 |
|
| |
|
| |
|
|
Amortization of finance lease assets | | 123 |
| | 241 |
|
Interest on finance lease liabilities | | 23 |
| | 45 |
|
Subtotal finance lease cost | | 146 |
| | 286 |
|
| |
|
| |
|
|
Total lease expense | | $ | 16,898 |
| | $ | 33,946 |
|
Substantially all of the Company's sublease income from operating leases relates to fixed lease payments.
All operating lease expenses, including short-term and variable lease expenses, are split between cost of service and selling, general and administrative expense in the condensed consolidated statements of operations based on the use of the facility that the rent is being paid on. Operating lease expense includes variable lease payments and short-term lease expense, both of which are immaterial. Variable lease expenses represent payments that are dependent on a rate or index, or on usage of the asset.
The following table summarizes other information related to operating and finance leases:
|
| | | | | | | | |
(in thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| |
|
| |
|
|
Operating cash flows used by leases | | $ | 15,873 |
| | $ | 30,544 |
|
Leased assets obtained in exchange for new operating lease liabilities | | 21,172 |
| | 25,760 |
|
The following table summarizes the lease terms and discount rates:
|
| | | |
| | June 30, 2019 |
Weighted-average remaining lease term (years)
| | |
Operating leases | | 8 |
|
Finance leases | | 16 |
|
Weighted-average discount rate | | |
Operating leases | | 4.8 | % |
Finance leases | | 5.2 | % |
The following table summarizes the expected maturity of lease liabilities at June 30, 2019:
|
| | | | | | | | | | | | |
(in thousands) | | Operating Leases | | Finance Leases | | Total |
2019 | | $ | 27,397 |
| | $ | 92 |
| | $ | 27,489 |
|
2020 | | 62,536 |
| | 174 |
| | 62,710 |
|
2021 | | 61,151 |
| | 174 |
| | 61,325 |
|
2022 | | 58,134 |
| | 174 |
| | 58,308 |
|
2023 | | 54,491 |
| | 174 |
| | 54,665 |
|
2024 and thereafter | | 184,800 |
| | 1,699 |
| | 186,499 |
|
Total lease payments | | 448,509 |
| | 2,487 |
| | 450,996 |
|
Less: Interest | | 77,700 |
| | 771 |
| | 78,471 |
|
Present value of lease liabilities | | $ | 370,809 |
| | $ | 1,716 |
| | $ | 372,525 |
|
The Company's finance lease liabilities are presented in the accrued liabilities and other and the other liabilities lines of the unaudited condensed consolidated balance sheets. The related finance lease assets are included in the property, plant and equipment line.
Our commitments under leases existing as of December 31, 2018 were approximately $55.1 million for the year ending December 31, 2019, $104.4 million in total for the years ending December 31, 2020 and 2021, $97.6 million in total for the years ending December 31, 2022 and 2023 and $168.5 million in total for years thereafter.
The Company is also the lessor on agreements to lease assets such as collocation space at cell sites and dedicated fiber-optic strands to third parties. These agreements were accounted for as operating leases both before and after adoption of the new lease standard. The new lease standard did not have a significant impact on the recognition of lease revenue associated with these agreements. The following table summarizes the total minimum rental receipts under lease agreements at June 30, 2019:
|
| | | | |
(in thousands) | | Operating Leases |
2019 | | $ | 3,635 |
|
2020 | | 6,453 |
|
2021 | | 4,377 |
|
2022 | | 3,280 |
|
2023 | | 1,653 |
|
2024 and thereafter | | 4,520 |
|
Total lease income | | $ | 23,918 |
|
Note 32. Revenue from Contracts with Customers
The Company earns revenue primarily through the sale of its wireless service. Additional revenue is earned from the sale of wireless equipment; from business, residential and enterprise services which provide video, broadband, voice and data services; and from tower and other services. Refer to Note 14,13, Segment Reporting, for a tabular summary of our revenue streams, which are discussed further below.
Wireless Segment Revenue
Under our affiliate agreement with Sprint, we have historically earned and recognized monthly revenue of $1.5 million for providing service to Sprint customers who pass through our network area ("travel revenue"). While we continue to provide these services to Sprint, the agreed upon payments were suspended by Sprint on April 30, 2019. Accordingly, we have ceased recognizing revenue for the three and six months ended June 30, 2019.
services provided after that date until a new prospective fee can be agreed. We have triggered the final dispute resolution option with Sprint which we expect will lead to a resolution for travel fee revenue in the second quarter of 2020.
Below is a summary of the Wireless service
The Company earns revenue primarily through the sale of its wireless service by providing network access to Sprint under the affiliate agreement. Wireless service revenue is variable based on billed revenue to Sprint’s subscribers that originated in the Company's affiliate area, less applicable fees retained by Sprint.
The Company's revenue related to Sprint’s postpaid customers is the amount that Sprint bills its postpaid subscribers, reduced by customer credits, write-offs of receivables, and 8% management and 8.6% service fees. The Company is also charged for the costs of subsidized handsets sold through Sprint’s national channels as well as commissions paid by Sprint to third-party resellers in the Company's service territory.
The Company's revenue related to Sprint’s prepaid customers is the amount that Sprint bills its prepaid subscribers, reduced by costs to acquire and support the customers, based on national averages for Sprint’s prepaid programs, and a 6% management fee.
The Company considers Sprint, rather than Sprint's subscribers, to be the customer and the Company's performance obligation is to provide Sprint a series of continuous network access services within the Sprint Affiliate Area. The Company determined that reimbursements to Sprint including the cost of prepaid handsets and commissions, and postpaid commissions paid by Sprint to third-party resellers, represent consideration payable to a customer. These reimbursements are initially recorded as asegment's contract asset and are subsequently recognized as a reduction of revenue over the expected benefit period between 21 and 53 months. Contract asset balances and activity for 2019 were as follows:asset:
|
| | | | | | | | |
(in millions) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Beginning balance | | $ | 70.4 |
| | $ | 65.7 |
|
Contract payments | | 17.5 |
| | 35.7 |
|
Contract amortization | | (14.1 | ) | | (27.6 | ) |
Ending balance | | $ | 73.8 |
| | $ | 73.8 |
|
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Beginning Balance | | $ | 84,663 |
| | $ | 65,674 |
|
Contract payments | | 18,245 |
| | 18,151 |
|
Contract amortization against revenue | | (16,710 | ) | | (13,454 | ) |
Ending Balance | | $ | 86,198 |
| | $ | 70,371 |
|
Our Wireless equipment
The Company also earns revenue through the sale of wireless equipment. The Company owns and operates Sprint-branded retail stores within thecontract asset is reduced by an estimated obligation to refund amounts that Sprint Affiliate Areais later unable to collect from which the Company sells equipment, primarily wireless handsets, and service to Sprint subscribers. The Company's equipment is predominantly sold to subscribers through Sprint's equipment financing plans. Under the equipment financing plans, Sprint purchases the equipment from the Company and resells the equipment to its subscribers. The CompanyThis refund obligation totaled $7.0 million at both March 31, 2020 and December 31, 2019.
Broadband Segment Revenue
Below is the principal in these equipment financing transactions, as it controls and bears the risk of ownershipa summary of the inventory prior to sale, and accordingly, revenue and handset costs are recorded on a gross basis, and the corresponding cost of the equipment is recorded separately to cost of goods sold.
Business, residential and enterprise
The Company also earns revenue in the Cable and Wireline segments from the sale of business, residential, and enterprise services to customers where the performance obligations are to provide cable, broadband, and telephone network services, sell and lease equipment and wiring services, and lease fiber-optic cable. The Company's arrangements for residential services are generally composed of contracts that are cancellable at the customer’s discretion without penalty at any time. As there are multiple performance obligations in these arrangements, the Company recognizes revenue based on the standalone selling price of each distinct good or service. The Company generally recognizes this revenue over time as customers simultaneously receive and consume the benefits of the service, with the exception of equipment sales and home wiring which are recognized as revenue at a point in time when control transfers and when installation is complete, respectively.
Installation fees are allocated to services and are recognized ratably over the longer of theBroadband segment's capitalized contract term or the period the unrecognized portion of the fee remains material to the contract, typically 10 and 11 months for Cable and Wireline customers, respectively. Additionally, the Company incurs commission and installation costs related to in-house employees and third-party vendors which are capitalized and amortized over the expected benefit period which is approximately 44 months and 72 months for Cable and Wireline, respectively.
Tower and Other
The Company also earns revenue from tower and other services. Tower revenue consists primarily of tower collocation space on cell towers owned by the Company accounted for under Topic 842, Leases. Other revenue includes network access-related charges for service provided to customers across the segments.
acquisition costs:
Future performance obligations
On June 30, 2019,March 31, 2020, the Company had approximately $3.4$3.2 million allocated to unsatisfied performance obligations which excludes contracts with original expected duration of one year or less. The following table summarizes the approximate amounts expected tothat will be recognized as revenue after June 30, 2019.
|
| | | | |
| | Amount Expected to be Recognized as Revenue: |
(in millions) | | |
2019 | | $ | 0.4 |
|
2020 | | 0.7 |
|
2021 | | 0.7 |
|
2022 and thereafter | | 1.6 |
|
Total | | $ | 3.4 |
|
Contract acquisition costs and costs to fulfill contracts
Capitalized contract costs represent contract fulfillment costs and contract acquisition costs which include commissions and installation costs in our Cable and Wireline segments. Capitalized contract costs are amortized on a straight-line basis over the average customer life. The Company elected to apply the practical expedient to expense contract acquisition costs when incurred, if the amortization period would be twelve months or less. The amortization of these costs is included in cost of services, and selling, general and administrative expenses. Amortized and capitalized costs for Cable and Wireline contracts were as follows:
|
| | | | | | | | |
(in millions) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Beginning Balance | | $ | 10.4 |
| | $ | 10.1 |
|
Contract payments | | 1.5 |
| | 3.2 |
|
Contract amortization | | (1.4 | ) | | (2.8 | ) |
Ending Balance | | $ | 10.5 |
| | $ | 10.5 |
|
Note 4. Acquisitions
Big Sandy
On February 28, 2019, the Company completed its preliminary valuation for the acquisition of the assets of Big Sandy Broadband, Inc. ("Big Sandy") for $10 million and recorded $4.6 million of property, plant and equipment; $2.8 million of subscriber relationships; and $2.6 million of goodwill which is reported in the Cable segment and was accounted for as a business combination under ASC 805, Business Combinations. The estimated remaining useful lives of the acquired property, plant and equipment were approximately 2.5 years to 12.5 years and the estimated useful lives for subscriber relationships were 7 yearssatisfied at the timerate of the acquisition. Big Sandy was a provider of cable television, telephone and high speed internet services. Our preliminary allocation of the acquisition price is based on our preliminary estimate of fair value for each of the acquired assets and liabilities. These estimates may be revised during the one year measurement period provided by the authoritative guidance applicable to business combinations.approximately $0.8 million per year.
Note 5. Customer Concentration3. Investments
Significant Contractual Relationship
In 1999, the Company executed a Management Agreement (the “Agreement”) with Sprint whereby the Company committed to construct and operate a PCS network using CDMA air interface technology. The Agreement has been amended numerous times. Under the amended Agreement, the Company is the exclusive PCS Affiliate of Sprint providing wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz spectrum ranges in its territory across a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio. Effective February 1, 2018, the Company amended its Agreement with Sprint to expand its wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia.
As an exclusive PCS Affiliate of Sprint, the Company has the exclusive right to build, own and maintain its portion of Sprint’s nationwide PCS network, in the aforementioned areas, to Sprint’s specifications. The initial termInvestments consist of the Agreement extends through November 2029, with two successive 10-year renewal periods, unless terminated by either party under provisions outlined in the Agreement. Upon non-renewal by either party, the Company may cause Sprint to buy or Sprint may cause the Company to sell the business, at 90% of Entire Business Value ("EBV") as defined in the Agreement. EBV is defined as i) the fair market value of a going concern paid by a willing buyer to a willing seller; ii) valued as if the business will continue to utilize existing brands and operate under existing agreements; and, iii) valued as if Shentel has continued access to the spectrum. Determination of EBV is made by an independent appraisal process.
Note 6. Earnings Per Share ("EPS")
Basic EPS was computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS was computed under the treasury stock method by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include unvested equity awards that are expected to vest and shares that the Company is contractually obligated to issue in the future.
The following table indicates the computation of basic and diluted earnings per share:following:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Calculation of net income per share: | | | | | | | | |
Net income | | $ | 13,150 |
| | $ | 9,626 |
| | $ | 27,060 |
| | $ | 16,209 |
|
Basic weighted average shares outstanding | | 49,848 |
| | 49,547 |
| | 49,812 |
| | 49,511 |
|
Basic net income per share | | $ | 0.26 |
| | $ | 0.19 |
| | $ | 0.54 |
| | $ | 0.33 |
|
| | | | | | | | |
Effect of stock options outstanding: | | | | | | | | |
Basic weighted average shares outstanding | | 49,848 |
| | 49,547 |
| | 49,812 |
| | 49,511 |
|
Effect from dilutive shares and options outstanding | | 294 |
| | 523 |
| | 306 |
| | 518 |
|
Diluted weighted average shares outstanding | | 50,142 |
| | 50,070 |
| | 50,118 |
| | 50,029 |
|
Diluted net income per share | | $ | 0.26 |
| | $ | 0.19 |
| | $ | 0.54 |
| | $ | 0.32 |
|
|
| | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
SERP Investments at fair value | $ | 1,706 |
| | $ | 2,278 |
|
Cost method investments | 9,739 |
| | 9,497 |
|
Equity method investments | 566 |
| | 613 |
|
Total investments | $ | 12,011 |
| | $ | 12,388 |
|
SERP Investments at fair value: The computationSupplemental Executive Retirement Plan (“SERP”) is a benefit plan that provides deferred compensation to certain employees. The Company holds the related investments in a rabbi trust as a source of diluted EPS does not include certain unvested awards, on a weighted average basis, because their inclusion would have an anti-dilutive effect on EPS.funding for future payments under the plan. The awards excluded becauseSERP’s investments were designated as trading securities and will be liquidated and paid out to the participants upon retirement. The benefit obligation to participants is always equal to the value of their anti-dilutive effect were as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive | | 85 |
| | 23 |
| | 108 |
| | 115 |
|
the SERP assets under ASC 710
Note 7Compensation. InvestmentsChanges to the investments fair value are presented in Other income (expense), while the reciprocal changes in the liability are presented in selling, general and administrative expense.
Investments consistCost Method Investments: Our investment in CoBank’s Class A common stock represented substantially all of our cost method investments with a balance of $9.0 million and $8.7 million at March 31, 2020 and December 31, 2019, respectively. We recognized approximately $1.0 million and $0.9 million of patronage income in Other income (expense) in the three months ended March 31, 2020 and 2019, respectively. Historically, approximately 75% of the following: |
| | | | | | | |
(in thousands) | June 30, 2019 | | December 31, 2018 |
Domestic equity funds | $ | 1,690 |
| | $ | 1,409 |
|
International equity funds | 417 |
| | 370 |
|
Total investments carried at fair value | 2,107 |
| | 1,779 |
|
| | | |
CoBank | 8,147 |
| | 7,705 |
|
Equity in other telecommunications partners | 777 |
| | 782 |
|
Total investments carried at cost | 8,924 |
| | 8,487 |
|
| | | |
Other | 532 |
| | 522 |
|
Total equity method investments | 532 |
| | 522 |
|
| | | |
Total investments | $ | 11,563 |
| | $ | 10,788 |
|
patronage distributions were in cash and 25% in equity.
Equity Method Investments: At March 31, 2020, the Company had a 20.0% ownership interest in Valley Network Partnership (“ValleyNet”). The Company determines classificationand ValleyNet purchase capacity on one another’s fiber network. We recognized revenue of $0.2 million from providing service to ValleyNet during both of the three months ended March 31, 2020 and 2019. We recognized cost of service of $0.8 million and $0.7 million for investments at the date individual investments are acquired. The appropriatenessuse of such classification is periodically reassessed. The Company monitorsValleyNet’s network during both of the value of all investments,three months ended March 31, 2020 and based on factors such as market conditions, financial information and industry conditions, the Company reflects impairments in values when warranted. The domestic and international equity funds are carried at their fair value as determined by using the net asset value expedient.2019, respectively.
Note 8. 4. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
| | (in thousands) | | Estimated Useful Lives | | June 30, 2019 | | December 31, 2018 | |
($ in thousands) | | Estimated Useful Lives | | March 31, 2020 | | December 31, 2019 |
Land | | $ | 6,936 |
| | $ | 6,723 |
| | $ | 7,143 |
| | $ | 6,976 |
|
Buildings and structures | | 10 - 40 years | | 227,825 |
| | 213,657 |
| 10 | - | 40 | years | | 238,728 |
| | 232,730 |
|
Cable and fiber | | 4 - 40 years | | 319,750 |
| | 309,928 |
| 15 | - | 40 | years | | 348,658 |
| | 334,260 |
|
Equipment and software | | 2 - 17 years | | 813,393 |
| | 791,401 |
| 3 | - | 20 | years | | 870,089 |
| | 867,898 |
|
Plant in service | | 1,367,904 |
| | 1,321,709 |
| | | | 1,464,618 |
| | 1,441,864 |
|
Plant under construction | | 81,191 |
| | 81,409 |
| | | | 59,097 |
| | 56,827 |
|
Total property, plant and equipment | | 1,449,095 |
| | 1,403,118 |
| | | | 1,523,715 |
| | 1,498,691 |
|
Less: accumulated amortization and depreciation | | 753,370 |
| | 701,759 |
| | 827,795 |
| | 797,177 |
|
Property, plant and equipment, net | | $ | 695,725 |
| | $ | 701,359 |
| | | | $ | 695,920 |
| | $ | 701,514 |
|
Note 9. 5. Goodwill and Other Intangible Assets
Goodwill by segment consisted of the following:
|
| | | | | | | |
(in thousands) | June 30, 2019 | | December 31, 2018 |
Wireless | $ | 146,383 |
| | $ | 146,383 |
|
Cable | 2,677 |
| | 104 |
|
Wireline | 10 |
| | 10 |
|
Total Goodwill | $ | 149,070 |
| | $ | 146,497 |
|
There were no changes to goodwill during the three months ended March 31, 2020.
IntangibleOther intangible assets consisted of the following:
| | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization and Other | | Net | | Gross Carrying Amount | | Accumulated Amortization and Other | | Net | Gross Carrying Amount | | Accumulated Amortization and Other | | Net | | Gross Carrying Amount | | Accumulated Amortization and Other | | Net |
Non-amortizing intangibles: | | | | | | | | | | | | |
Indefinite-lived intangibles: | | | | | | | | | | | | |
Cable franchise rights | $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
| | $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
| $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
| | $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
|
FCC spectrum licenses | | 13,839 |
| | — |
| | 13,839 |
| | 13,839 |
| | — |
| | 13,839 |
|
Railroad crossing rights | 141 |
| | — |
| | 141 |
| | 141 |
| | — |
| | 141 |
| 141 |
| | — |
| | 141 |
| | 141 |
| | — |
| | 141 |
|
Total non-amortizing intangibles | 64,475 |
| | — |
| | 64,475 |
| | 64,475 |
| | — |
| | 64,475 |
| |
Total indefinite-lived intangibles | | 78,314 |
| | — |
| | 78,314 |
| | 78,314 |
| | — |
| | 78,314 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Finite-lived intangibles: | Finite-lived intangibles: | | | | | | | | | | | |
Sprint affiliate contract expansion - Wireless | 455,305 |
| | (197,783 | ) | | 257,522 |
| | 455,305 |
| | (167,830 | ) | | 287,475 |
| 455,305 |
| | (241,231 | ) | | 214,074 |
| | 455,305 |
| | (226,712 | ) | | 228,593 |
|
Favorable leases - Wireless | — |
| | — |
| | — |
| | 15,743 |
| | (1,919 | ) | | 13,824 |
| |
FCC spectrum licenses | | 4,659 |
| | (160 | ) | | 4,499 |
| | 4,659 |
| | (97 | ) | | 4,562 |
|
Acquired subscribers - Cable | 28,065 |
| | (25,399 | ) | | 2,666 |
| | 25,265 |
| | (25,250 | ) | | 15 |
| 28,065 |
| | (25,700 | ) | | 2,365 |
| | 28,065 |
| | (25,600 | ) | | 2,465 |
|
Other intangibles | 463 |
| | (236 | ) | | 227 |
| | 463 |
| | (223 | ) | | 240 |
| 463 |
| | (257 | ) | | 206 |
| | 463 |
| | (250 | ) | | 213 |
|
Total finite-lived intangibles | 483,833 |
| | (223,418 | ) | | 260,415 |
| | 496,776 |
| | (195,222 | ) | | 301,554 |
| 488,492 |
| | (267,348 | ) | | 221,144 |
| | 488,492 |
| | (252,659 | ) | | 235,833 |
|
Total intangible assets | $ | 548,308 |
| | $ | (223,418 | ) | | $ | 324,890 |
| | $ | 561,251 |
| | $ | (195,222 | ) | | $ | 366,029 |
| $ | 566,806 |
| | $ | (267,348 | ) | | $ | 299,458 |
| | $ | 566,806 |
| | $ | (252,659 | ) | | $ | 314,147 |
|
We acquired Big Sandy Broadband, Inc. (“Big Sandy”) on February 28, 2019. The $10 million acquisition price was allocated as follows within our broadband segment: $4.6 million of property, plant and equipment; $2.8 million of subscriber relationships; and $2.6 million of goodwill.
In 2016, we acquired nTelos Holdings Corp. and immediately transferred certain of the acquired assets to Sprint in an interrelated nonmonetary exchange. In the exchange, we received a corresponding expansion of our Sprint Affiliate Area, future billings associated with Sprint subscribers already in that expanded area, and an increase in the price that Sprint would pay to buy our Wireless asset group in the event that either party chooses not to renew the affiliate agreement. Sprint also agreed to waive up to $4.2 million of our monthly management fee, not to exceed $255.6 million in total, over a multi-year period. We accounted for these collective rights as an affiliate contract expansion (“ACE”) intangible, which is amortized over the expected benefit period and is further reduced by the amount of waivedas management fees received from Sprint which were $9.7are waived by Sprint. We realized management fee waivers of $9.8 million and $19.3
$9.6 million for during the three and six months ended June 30, March 31, 2020 and 2019 respectively. Since May 6, 2016,, respectively, and $147.0 million since the date of the non-monetary exchange, waived management fees received frombusiness combination.
During 2017 and 2018, we entered into purchase agreements with Sprint have totaled $117.7to further expand our affiliate territory to include areas around Parkersburg, West Virginia, and Richmond, Virginia, respectively. The relevant portion of these payments were also capitalized as ACE intangible assets.
Amounts paid in connection with the acquisition of a business are presented as amortization expense in our income statement. Amounts paid to Sprint outside of a business combination are accounted for as consideration paid to a customer with amortization presented as a reduction of Service and other revenue in our unaudited condensed consolidated statements of comprehensive income.
Amortization of intangible assets was $4.9 million and we expect to collect another $137.9$5.7 million through 2022. for the three months ended March 31, 2020 and 2019, respectively.
Note 106. Other Assets and Accrued Liabilities
Prepaid expenses and other, classified as current assets, included the following:
|
| | | | | | | | |
(in thousands) | | March 31, 2020 | | December 31, 2019 |
Wireless contract asset | | $ | 46,552 |
| | $ | 44,844 |
|
Broadband contract acquisition and fulfillment costs | | 4,029 |
| | 4,898 |
|
Prepaid maintenance expenses | | 3,252 |
| | 3,329 |
|
Interest rate swaps | | — |
| | 1,382 |
|
Other | | 7,090 |
| | 6,074 |
|
Prepaid expenses and other | | $ | 60,923 |
| | $ | 60,527 |
|
Deferred charges and other assets, classified as long-term assets, included the following:
|
| | | | | | | | |
(in thousands) | | March 31, 2020 | | December 31, 2019 |
Wireless contract asset | | $ | 39,646 |
| | $ | 39,819 |
|
Broadband contract acquisition and fulfillment costs | | 7,634 |
| | 6,107 |
|
Interest rate swaps | | — |
| | 1,252 |
|
Prepaid expenses and other | | 6,156 |
| | 6,174 |
|
Deferred charges and other assets | | $ | 53,436 |
| | $ | 53,352 |
|
Accrued liabilities and other, classified as current liabilities, included the following:
|
| | | | | | | | |
(in thousands) | | March 31, 2020 | | December 31, 2019 |
Sales and property taxes payable | | $ | 5,259 |
| | $ | 3,789 |
|
Accrued programming costs | | 3,053 |
| | 3,023 |
|
Interest rate swaps | | 2,731 |
| | — |
|
Asset retirement obligations | | 137 |
| | 148 |
|
Financing leases | | 97 |
| | 94 |
|
FCC spectrum license obligations | | 28 |
| | 105 |
|
Other current liabilities | | 7,878 |
| | 7,232 |
|
Accrued liabilities and other | | $ | 19,183 |
| | $ | 14,391 |
|
Other liabilities, classified as long-term liabilities, included the following:
|
| | | | | | | | |
(in thousands) | | March 31, 2020 | | December 31, 2019 |
Noncurrent portion of deferred lease revenue | | $ | 12,291 |
| | $ | 12,449 |
|
FCC spectrum license obligations | | 1,703 |
| | 1,699 |
|
Noncurrent portion of financing leases | | 1,543 |
| | 1,591 |
|
Interest rate swaps | | 2,769 |
| | — |
|
Other | | 847 |
| | 1,251 |
|
Other liabilities | | $ | 19,153 |
| | $ | 16,990 |
|
Market expectations of the projected London Interbank Offering Rate (LIBOR) decreased significantly during the first quarter of 2020, which drove the fair value of our interest rate swaps to a liability. Refer to Note 9, Derivatives and Hedging for more information.
The Company uses derivative financial instruments to manage its exposure toNote 7. Leases
At March 31, 2020, our operating leases had a weighted average remaining lease term of nine years and a weighted average discount rate of 4.3%. Our finance leases had a weighted average remaining lease term of fifteen years and a weighted average discount rate of 5.1%.
During the three months ended March 31, 2020 and 2019, we recognized $17.8 million and $16.9 million of operating lease expense, respectively. We recognized $0.1 million of interest rate risk for its long-term variable-rate debt through interest rate swaps. The Company's interest rate swaps are all designated as cash flow hedges, and involvedepreciation expense on finance leases during the receiptthree months ended March 31, 2020 and 2019. Operating lease expense is presented in cost of variable-rate amounts from counterpartiesservice or selling, general and administrative expense based on the use of the relevant facility. Variable lease payments and short-term lease expense were both immaterial. We remitted $15.5 million and $14.7 million of operating lease payments during the three months ended March 31, 2020 and 2019, respectively. We also obtained $3.3 million and $4.6 million of leased assets in exchange for new operating lease liabilities during the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The outstanding notional amounts of the cash flow hedge which is composed of interest rate swap contracts were $361.9 millionthree months ended March 31, 2020 and $384.0 million as of June 30, 2019, and December 31, 2018, respectively.
The following table below presentssummarizes the fair valueexpected maturity of the Company’s derivative financial instruments as well as their classification in the condensed consolidated balance sheets. The fair value of these instruments was estimated using an income approach and observable market inputs (Level II):
lease liabilities at March 31, 2020: |
| | | | | | | | |
(in thousands) | | June 30, 2019 | | December 31, 2018 |
Balance sheet location of derivative financial instruments: | | | | |
Prepaid expenses and other | | $ | 2,275 |
| | $ | 4,930 |
|
Deferred charges and other assets, net | | 1,733 |
| | 8,323 |
|
Total derivatives designated as hedging instruments | | $ | 4,008 |
| | $ | 13,253 |
|
|
| | | | | | | | | | | | |
(in thousands) | | Operating Leases | | Finance Leases | | Total |
2020 | | $ | 45,222 |
| | $ | 108 |
| | $ | 45,330 |
|
2021 | | 66,042 |
| | 174 |
| | 66,216 |
|
2022 | | 64,256 |
| | 174 |
| | 64,430 |
|
2023 | | 60,770 |
| | 174 |
| | 60,944 |
|
2024 | | 56,105 |
| | 174 |
| | 56,279 |
|
2025 and thereafter | | 191,726 |
| | 1,532 |
| | 193,258 |
|
Total lease payments | | 484,121 |
| | 2,336 |
| | 486,457 |
|
Less: Interest | | 96,194 |
| | 696 |
| | 96,890 |
|
Present value of lease liabilities | | $ | 387,927 |
| | $ | 1,640 |
| | $ | 389,567 |
|
We recognized $2.1 million and $2.0 million of operating lease revenue during the three months ended March 31, 2020 and 2019, respectively, related to the cell site colocation space and dedicated fiber optic strands that we lease to our customers, which is included in Service and other revenue in the unaudited condensed consolidated statements of comprehensive income. Substantially all of our lease revenue relates to fixed lease payments.
Below is a summary of our minimum rental receipts under the lease agreements in place at March 31, 2020:
|
| | | | |
(in thousands) | | Operating Leases |
2020 | | $ | 5,527 |
|
2021 | | 5,775 |
|
2022 | | 4,742 |
|
2023 | | 3,112 |
|
2024 | | 1,915 |
|
2025 and thereafter | | 4,192 |
|
Total | | $ | 25,263 |
|
Note 8. Long-Term Debt
Our syndicated Credit Agreement includes a $75 million, five-year undrawn revolving credit facility, as well as the following outstanding term loans:
|
| | | | | | | |
(in thousands) | March 31, 2020 | | December 31, 2019 |
Term loan A-1 | $ | 251,288 |
| | $ | 258,571 |
|
Term loan A-2 | 472,221 |
| | 473,469 |
|
| 723,509 |
| | 732,040 |
|
Less: unamortized loan fees | 11,306 |
| | 11,926 |
|
Total debt, net of unamortized loan fees | $ | 712,203 |
| | $ | 720,114 |
|
Term Loan A-1 bears interest at one-month LIBOR plus a margin of 1.50%, while Term Loan A-2 bears interest at one-month LIBOR plus a margin of 1.75%. LIBOR resets monthly. Our cash payments for interest were $5.8 million and $7.2 million during the three months ended March 31, 2020 and 2019, respectively.
As shown below, as of March 31, 2020, the Company was in compliance with the financial covenants in its credit agreements.
The table below summarizes changes in accumulated other comprehensive income (loss) by component:
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
(in thousands) | Gains (Losses) on Cash Flow Hedges | | Income Tax (Expense) Benefit | | Accumulated Other Comprehensive Income (Loss), net of taxes |
Balance as of December 31, 2018 | $ | 13,253 |
| | $ | (4,973 | ) | | $ | 8,280 |
|
Net change in unrealized gain (loss) | (6,771 | ) | | 1,688 |
| | (5,083 | ) |
Amounts reclassified from accumulated other comprehensive income to interest expense | (2,474 | ) | | 617 |
| | (1,857 | ) |
Net current period other comprehensive income (loss) | (9,245 | ) | | 2,305 |
| | (6,940 | ) |
Balance as of June 30, 2019 | $ | 4,008 |
| | $ | (2,668 | ) | | $ | 1,340 |
|
|
| | | | | | |
| Actual | | Covenant Requirement |
Total leverage ratio | 2.41 |
| | 3.25 | or Lower |
Debt service coverage ratio | 5.48 |
| | 2.00 | or Higher |
Minimum liquidity balance (in millions) | $ | 195.0 |
| | $25.0 | or Higher |
Note 11. Other Assets9. Derivatives and Accrued LiabilitiesHedging
Prepaid expensesThe Company's interest rate swaps are pay-fixed (1.16%), receive-variable (one month LIBOR) that hedged approximately 45.4% of outstanding debt with outstanding notional amounts totaling $328.7 and other, classified$339.8 million March 31, 2020 and December 31, 2019, respectively.
The fair value of these instruments was estimated using an income approach and observable market inputs. The hedge was determined to be highly effective and therefore all of the change in its fair value was recognized through Other comprehensive income. During the three months ended March 31, 2020 the fair market value decreased by $8.1 million due to a decline in the one month LIBOR. They were presented as current assets, included the following:follows:
|
| | | | | | | | |
(in thousands) | | June 30, 2019 | | December 31, 2018 |
Prepaid rent | | $ | — |
| | $ | 11,245 |
|
Prepaid maintenance expenses | | 3,499 |
| | 3,981 |
|
Interest rate swaps | | 2,275 |
| | 4,930 |
|
Contract asset | | 43,879 |
| | 37,957 |
|
Other | | 4,133 |
| | 2,049 |
|
Prepaid expenses and other | | $ | 53,786 |
| | $ | 60,162 |
|
|
| | | | | | | | |
(in thousands) | | March 31, 2020 | | December 31, 2019 |
Balance sheet location of derivative financial instruments: | |
| |
|
Prepaid expenses and other | | $ | — |
| | $ | 1,382 |
|
Deferred charges and other assets, net | | — |
| | 1,252 |
|
Accrued liabilities and other | | 2,731 |
| | — |
|
Other liabilities | | 2,769 |
| | — |
|
Total derivatives designated as hedging instruments | | $ | 5,500 |
| | $ | 2,634 |
|
Deferred charges andThe table below summarizes changes in accumulated other assets, classified as long-term assets, included the following:comprehensive income (loss) by component:
|
| | | | | | | | |
(in thousands) | | June 30, 2019 | | December 31, 2018 |
Interest rate swaps | | $ | 1,733 |
| | $ | 8,323 |
|
Contract asset | | 40,438 |
| | 37,848 |
|
Other | | 6,758 |
| | 3,720 |
|
Deferred charges and other assets | | $ | 48,929 |
| | $ | 49,891 |
|
|
| | | | | | | | | | | |
(in thousands) | Gains (Losses) on Cash Flow Hedges | | Income Tax (Expense) Benefit | | Accumulated Other Comprehensive Income (Loss), net of taxes |
Balance as of December 31, 2019 | $ | 2,634 |
| | $ | (2,326 | ) | | $ | 308 |
|
Net change in unrealized gain (loss) | (7,706 | ) | | 1,921 |
| | (5,785 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) to interest expense | (428 | ) | | 107 |
| | (321 | ) |
Net current period other comprehensive income (loss) | (8,134 | ) | | 2,028 |
| | (6,106 | ) |
Balance as of March 31, 2020 | $ | (5,500 | ) | | $ | (298 | ) | | $ | (5,798 | ) |
Accrued liabilities and other, classified as current liabilities, included the following:
|
| | | | | | | | |
(in thousands) | | June 30, 2019 | | December 31, 2018 |
Sales and property taxes payable | | $ | 5,171 |
| | $ | 4,281 |
|
Asset retirement obligations | | 478 |
| | 582 |
|
Accrued programming costs | | 3,021 |
| | 2,886 |
|
Financing leases | | 88 |
| | — |
|
Other current liabilities | | 5,755 |
| | 6,814 |
|
Accrued liabilities and other | | $ | 14,513 |
| | $ | 14,563 |
|
Other liabilities, classified as long-term liabilities, included the following:
|
| | | | | | | | |
(in thousands) | | June 30, 2019 | | December 31, 2018 |
Noncurrent portion of deferred lease revenue | | $ | 12,327 |
| | $ | 12,593 |
|
Noncurrent portion of financing leases | | 1,629 |
| | — |
|
Other | | 1,603 |
| | 1,771 |
|
Other liabilities | | $ | 15,559 |
| | $ | 14,364 |
|
Topic 842 requires the Company to include fixed payments for maintenance activities in its measurement of lease liabilities since the Company elected not to separate lease and non-lease components. Liabilities for the Company's financing leases were established with the adoption of Topic 842, as of January 1, 2019, to reflect the present value of fixed payments for maintenance activities. Refer to Note 2, Leases, for additional information.
Note 1210. Long-Term Debt
Total debt consisted of the following:
|
| | | | | | | | |
(in thousands) | | June 30, 2019 | | December 31, 2018 |
Term loan A-1 | | $ | 274,919 |
| | $ | 287,699 |
|
Term loan A-2 | | 485,540 |
| | 497,537 |
|
| | 760,459 |
| | 785,236 |
|
Less: unamortized loan fees | | 13,453 |
| | 14,994 |
|
Total debt, net of unamortized loan fees | | $ | 747,006 |
| | $ | 770,242 |
|
| | | | |
Current maturities of long-term debt, net of current unamortized loan fees | | $ | 27,939 |
| | $ | 20,618 |
|
Long-term debt, less current maturities, net of unamortized loan fees | | $ | 719,067 |
| | $ | 749,624 |
|
As of June 30, 2019, the Company's indebtedness totaled approximately $747.0 million, net of unamortized loan fees of $13.5 million, with an annualized overall weighted average interest rate of approximately 3.79%. As of June 30, 2019, the Term Loan A-1 bears interest at one-month London Interbank Offered Rate ("LIBOR") plus a base rate of 1.75%, while the Term Loan A-2 bears interest at one-month LIBOR plus a base rate of 2.00%. LIBOR resets monthly.
The amended Term Loan A-1 requires quarterly principal repayments of $3.6 million, which began on December 31, 2018 and continue through September 30, 2019, increasing to $7.3 million quarterly from December 31, 2019 through September 30, 2022; then increasing to $10.9 million quarterly from December 31, 2022 through September 30, 2023, with the remaining balance due November 8, 2023. The amended Term Loan A-2 requires quarterly principal repayments of $1.2 million which began on December 31, 2018 and continue through September 30, 2025, with the remaining balance due November 8, 2025. In addition to its required quarterly repayments, the Company paid an additional $15.0 million in the first quarter of 2019 with no prepayment penalties.
The Company paid cash for interest, net of amounts capitalized, of $14.5 million and $16.9 million during the six months ended June 30, 2019 and 2018, respectively.
As shown below, as of June 30, 2019, the Company was in compliance with the covenants in its credit agreement.
|
| | | | | | |
| | Actual | | Covenant Requirement |
Total leverage ratio | | 2.41 |
| | 3.50 or Lower |
Debt service coverage ratio | | 4.61 |
| | 2.00 or Higher |
Minimum liquidity balance (in millions) | | $ | 172.9 |
| | $25.0 or Higher |
Note 13. Income Taxes
The Company files U.S. federal income tax returns and various state income tax returns. The Company is not subject to any state or federal income tax audits as of June 30, 2019.March 31, 2020. The Company's returns are generally open to examination from 20152016 forward and the net operating losses acquired in the acquisition of nTelos are open to examination from 2002 forward.
The Company’s effective tax rate for the three months ended June 30, 2019March 31, 2020 was approximately 25.6%24.4%, as compared with approximately 26.8%23.2% for the three months ended June 30, 2018. The Company’s effective tax rate for the six months ended June 30, 2019 was approximately 24.4%, which was consistent with approximately 24.8% for the six months ended June 30, 2018. The effective tax rate has fluctuated in recent periods due to share based compensation tax benefits that are recognized as incurred. The Company paid cash income taxes of $4.2 million in the six months ended June 30,March 31, 2019. The Company receivedhad 0 significant cash payments or refunds for income tax refunds of $3.4 million intaxes during the sixthree months ended June 30, 2018.March 31, 2020 and 2019.
Note 11. Stock Compensation
During the three months ended March 31, 2020, the Company granted approximately 70 thousand restricted stock units (RSUs) to employees and approximately 14 thousand RSUs to members of the board of directors, at a market price of $48.47 per award. Under the terms of the award agreements, the RSUs granted to employees vest in fourths on the anniversary date of the grants through 2024. The RSUs granted to the members of the board of directors vest fully on the first anniversary of the grant date. Additionally, approximately 40 thousand Relative Total Shareholder Return (“RTSR”) awards were granted to employees at a value of $56.32 per award. Pursuant to the terms of the RTSR awards, the Company’s stock performance over a three-year period, ending December 31, 2022, will be compared to a group of peer companies, and the actual number of shares to be issued will be determined based upon the performance of the Company’s stock as compared with that of the peer group. The actual number of shares to be issued ranges from 0 shares (if the Company’s stock performance is in the bottom 25% of the peer group) to 150% of the awards granted (if the Company’s stock performance is in the top 25% of the peer group). The Company's stock based compensation award vesting is subject to requirements relating to continued employment with the Company through the service or performance periods, and to special vesting provisions in case of a change of control, death, disability or retirement.
We utilize the treasury stock method to calculate the impact on diluted earnings per share that potentially dilutive stock-based compensation awards have. The following table indicates the computation of basic and diluted earnings per share:
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands, except per share amounts) | 2020 | | 2019 |
Calculation of net income per share: | | | |
Net income | $ | 13,280 |
| | $ | 13,910 |
|
Basic weighted average shares outstanding | 49,888 |
| | 49,775 |
|
Basic net income per share | $ | 0.27 |
| | $ | 0.28 |
|
| | | |
Effect of stock-based compensation awards outstanding: | | | |
Basic weighted average shares outstanding | 49,888 |
| | 49,775 |
|
Effect from dilutive shares and options outstanding | 148 |
| | 340 |
|
Diluted weighted average shares outstanding | 50,036 |
| | 50,115 |
|
Diluted net income per share | $ | 0.27 |
| | $ | 0.28 |
|
There were fewer than 125 thousand anti-dilutive awards outstanding during the three months ended March 31, 2020 and 2019.
Note 12. Commitments and Contingencies
We are committed to make payments to satisfy our lease liabilities and long-term debt. The scheduled payments under those obligations are summarized in the respective notes above. We are also committed to make annual payments of approximately $108.0 thousand on our FCC spectrum license obligation through 2039.
The Company is subject to claims and legal actions that may arise in the ordinary course of business. The Company does not believe that any of these pending claims or legal actions are either probable or reasonably possible of a material loss.
Note 1413. Segment Reporting
The Company's reportable segments, which the Company operates and manages as strategic business units that are organized according to major product and service offerings, include: Wireless, Cable, Wireline and Other. Three Months Ended March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | Wireless | | Broadband | | Tower | | Corporate & Eliminations | | Consolidated |
External revenue | | | | | | | | | |
Postpaid | $ | 74,928 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 74,928 |
|
Prepaid | 13,109 |
| | — |
| | — |
| | — |
| | 13,109 |
|
Tower lease | — |
| | — |
| | 1,797 |
| | — |
| | 1,797 |
|
Cable, residential and SMB (1) | — |
| | 34,943 |
| | — |
| | — |
| | 34,943 |
|
Fiber, enterprise and wholesale | — |
| | 5,488 |
| | — |
| | — |
| | 5,488 |
|
Rural local exchange carrier | — |
| | 4,756 |
| | — |
| | — |
| | 4,756 |
|
Travel, installation, and other | 3,351 |
| | 1,816 |
| | — |
| | — |
| | 5,167 |
|
Service revenue and other | 91,388 |
| | 47,003 |
| | 1,797 |
| | — |
| | 140,188 |
|
Equipment | 12,750 |
| | 250 |
| | — |
| | — |
| | 13,000 |
|
Total external revenue | 104,138 |
| | 47,253 |
| | 1,797 |
| | — |
| | 153,188 |
|
Revenue from other segments | — |
| | 2,533 |
| | 1,933 |
| | (4,466 | ) | | — |
|
Total revenue | 104,138 |
| | 49,786 |
| | 3,730 |
| | (4,466 | ) | | 153,188 |
|
Operating expenses |
|
| | | | | | | | |
Cost of services | 33,439 |
| | 19,243 |
| | 939 |
| | (4,056 | ) | | 49,565 |
|
Cost of goods sold | 12,528 |
| | 143 |
| | — |
| | — |
| | 12,671 |
|
Selling, general and administrative | 9,428 |
| | 9,499 |
| | 526 |
| | 11,538 |
| | 30,991 |
|
Depreciation and amortization | 25,299 |
| | 10,871 |
| | 470 |
| | 271 |
| | 36,911 |
|
Total operating expenses | 80,694 |
| | 39,756 |
| | 1,935 |
| | 7,753 |
| | 130,138 |
|
Operating income (loss) | $ | 23,444 |
| | $ | 10,030 |
| | $ | 1,795 |
| | $ | (12,219 | ) | | $ | 23,050 |
|
_______________________________________________________
| |
(1) | SMB refers to Small and Medium Businesses. |
Three Months Ended March 31, 2019:
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | Wireless |
| Broadband | | Tower |
| Corporate & Eliminations |
| Consolidated |
External revenue |
|
|
|
|
| |
|
|
|
|
|
|
|
|
Postpaid | $ | 76,182 |
|
| $ | — |
| | $ | — |
|
| $ | — |
|
| $ | 76,182 |
|
Prepaid | 13,130 |
|
| — |
| | — |
|
| — |
|
| 13,130 |
|
Tower lease | — |
|
| — |
| | 1,763 |
|
| — |
|
| 1,763 |
|
Cable, residential and SMB | — |
|
| 32,426 |
| | — |
|
| — |
|
| 32,426 |
|
Fiber, enterprise and wholesale | — |
|
| 4,828 |
| | — |
|
| — |
|
| 4,828 |
|
Rural local exchange carrier | — |
|
| 5,238 |
| | — |
|
| — |
|
| 5,238 |
|
Travel, installation, and other | 8,018 |
|
| 1,646 |
| | — |
|
| — |
|
| 9,664 |
|
Service revenue and other | 97,330 |
|
| 44,138 |
| | 1,763 |
|
| — |
|
| 143,231 |
|
Equipment | 15,291 |
|
| 321 |
| | — |
|
| — |
|
| 15,612 |
|
Total external revenue | 112,621 |
|
| 44,459 |
| | 1,763 |
|
| — |
|
| 158,843 |
|
Revenue from other segments | — |
|
| 2,422 |
| | 1,270 |
|
| (3,692 | ) |
| — |
|
Total revenue | 112,621 |
|
| 46,881 |
| | 3,033 |
|
| (3,692 | ) |
| 158,843 |
|
Operating expenses |
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cost of services | 32,532 |
|
| 19,061 |
| | 946 |
|
| (3,021 | ) |
| 49,518 |
|
Cost of goods sold | 14,427 |
|
| 211 |
| | — |
|
| (1 | ) |
| 14,637 |
|
Selling, general and administrative | 11,079 |
|
| 7,569 |
| | 283 |
|
| 9,791 |
|
| 28,722 |
|
Depreciation and amortization | 30,370 |
| | 9,991 |
| | 680 |
| | 138 |
| | 41,179 |
|
Total operating expenses | 88,408 |
|
| 36,832 |
| | 1,909 |
|
| 6,907 |
|
| 134,056 |
|
Operating income (loss) | $ | 24,213 |
|
| $ | 10,049 |
| | $ | 1,124 |
|
| $ | (10,599 | ) |
| $ | 24,787 |
|
A general descriptionreconciliation of the products and services offered andtotal of the customers served by each of these segmentsreportable segments’ operating income to consolidated income before taxes is as follows:
Wireless provides digital wireless service as a Sprint PCS Affiliate to a portion of a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio. In these areas, we are the exclusive provider of Sprint-branded wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz spectrum bands. |
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2020 | | 2019 |
Total consolidated operating income | $ | 23,050 |
| | $ | 24,787 |
|
Interest expense | (6,211 | ) | | (7,954 | ) |
Other | 733 |
| | 1,287 |
|
Income before income taxes | $ | 17,572 |
| | $ | 18,120 |
|
Cable provides video, broadband and voice services in franchise areas in portions of Virginia, West Virginia, western Maryland, and eastern Kentucky, and leases fiber optic facilities throughout its service area. It does not include video, broadband and voice services provided to customers in Shenandoah County, Virginia.
Wireline provides regulated and unregulated voice services, video, broadband, long distance access services, and leases fiber optic facilities throughout portions of Virginia, West Virginia, Maryland and Pennsylvania.
Other operations are represented by Shenandoah Telecommunications Company, the parent holding company that provides investing and management services to its subsidiaries.
Three Months Ended June 30, 2019
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated |
External revenue | | | | | | | | | | | | |
Service revenue | | $ | 94,350 |
| | $ | 30,716 |
| | $ | 5,558 |
| | $ | — |
| | $ | — |
| | $ | 130,624 |
|
Equipment revenue | | 16,548 |
| | 255 |
| | 52 |
| | — |
| | — |
| | 16,855 |
|
Tower revenue | | 1,654 |
| | — |
| | — |
| | — |
| | — |
| | 1,654 |
|
Other revenue | | 318 |
| | 2,238 |
| | 7,225 |
| | — |
| | — |
| | 9,781 |
|
Total external revenue | | 112,870 |
| | 33,209 |
| | 12,835 |
| | — |
| | — |
| | 158,914 |
|
Internal revenue | | 1,270 |
| | 1,481 |
| | 6,692 |
| | — |
| | (9,443 | ) | | — |
|
Total operating revenue | | 114,140 |
| | 34,690 |
| | 19,527 |
| | — |
| | (9,443 | ) | | 158,914 |
|
Operating expenses | | | | | | | | | | | | |
Cost of services | | 33,563 |
| | 15,701 |
| | 8,979 |
| | — |
| | (8,746 | ) | | 49,497 |
|
Cost of goods sold | | 15,742 |
| | 112 |
| | 19 |
| | — |
| | 1 |
| | 15,874 |
|
Selling, general and administrative | | 10,592 |
| | 5,536 |
| | 1,988 |
| | 9,752 |
| | (698 | ) | | 27,170 |
|
Depreciation and amortization | | 32,219 |
| | 6,555 |
| | 3,447 |
| | 132 |
| | — |
| | 42,353 |
|
Total operating expenses | | 92,116 |
| | 27,904 |
| | 14,433 |
| | 9,884 |
| | (9,443 | ) | | 134,894 |
|
Operating income (loss) | | $ | 22,024 |
| | $ | 6,786 |
| | $ | 5,094 |
| | $ | (9,884 | ) | | $ | — |
| | $ | 24,020 |
|
Three Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated |
External revenue | | | | | | | | | | | | |
Service revenue | | $ | 95,690 |
| | $ | 28,748 |
| | $ | 5,301 |
| | $ | — |
| | $ | — |
| | $ | 129,739 |
|
Equipment revenue | | 15,819 |
| | 144 |
| | 46 |
| | — |
| | — |
| | 16,009 |
|
Tower revenue | | 1,636 |
| | — |
| | — |
| | — |
| | — |
| | 1,636 |
|
Other revenue | | 364 |
| | 2,122 |
| | 6,631 |
| | — |
| | — |
| | 9,117 |
|
Total external revenue | | 113,509 |
| | 31,014 |
| | 11,978 |
| | — |
| | — |
| | 156,501 |
|
Internal revenue | | 1,244 |
| | 1,097 |
| | 7,134 |
| | — |
| | (9,475 | ) | | — |
|
Total operating revenue | | 114,753 |
| | 32,111 |
| | 19,112 |
| | — |
| | (9,475 | ) | | 156,501 |
|
Operating expenses | | | | | | | | | | | | |
Cost of services | | 33,488 |
| | 15,125 |
| | 9,373 |
| | 12 |
| | (8,864 | ) | | 49,134 |
|
Cost of goods sold | | 15,082 |
| | 63 |
| | 20 |
| | 1 |
| | — |
| �� | 15,166 |
|
Selling, general and administrative | | 12,367 |
| | 4,661 |
| | 1,686 |
| | 11,812 |
| | (611 | ) | | 29,915 |
|
Depreciation and amortization | | 31,565 |
| | 6,179 |
| | 3,240 |
| | 133 |
| | — |
| | 41,117 |
|
Total operating expenses | | 92,502 |
| | 26,028 |
| | 14,319 |
| | 11,958 |
| | (9,475 | ) | | 135,332 |
|
Operating income (loss) | | $ | 22,251 |
| | $ | 6,083 |
| | $ | 4,793 |
| | $ | (11,958 | ) | | $ | — |
| | $ | 21,169 |
|
Six Months Ended June 30, 2019
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated |
External revenue | | | | | | | | | | | | |
Service revenue | | $ | 191,425 |
| | $ | 60,421 |
| | $ | 11,043 |
| | $ | — |
| | $ | — |
| | $ | 262,889 |
|
Equipment revenue | | 31,839 |
| | 525 |
| | 103 |
| | — |
| | — |
| | 32,467 |
|
Tower revenue | | 3,325 |
| | — |
| | — |
| | — |
| | — |
| | 3,325 |
|
Other revenue | | 665 |
| | 4,503 |
| | 13,908 |
| | — |
| | — |
| | 19,076 |
|
Total external revenue | | 227,254 |
| | 65,449 |
| | 25,054 |
| | — |
| | — |
| | 317,757 |
|
Internal revenue | | 2,540 |
| | 2,950 |
| | 13,382 |
| | — |
| | (18,872 | ) | | — |
|
Total operating revenue | | 229,794 |
| | 68,399 |
| | 38,436 |
| | — |
| | (18,872 | ) | | 317,757 |
|
Operating expenses | | | | | | | | | | | | |
Cost of services | | 67,041 |
| | 31,348 |
| | 18,130 |
| | — |
| | (17,504 | ) | | 99,015 |
|
Cost of goods sold | | 30,169 |
| | 287 |
| | 55 |
| | — |
| | — |
| | 30,511 |
|
Selling, general and administrative | | 21,954 |
| | 11,262 |
| | 3,831 |
| | 20,213 |
| | (1,368 | ) | | 55,892 |
|
Depreciation and amortization | | 63,269 |
| | 13,013 |
| | 6,980 |
| | 270 |
| | — |
| | 83,532 |
|
Total operating expenses | | 182,433 |
| | 55,910 |
| | 28,996 |
| | 20,483 |
| | (18,872 | ) | | 268,950 |
|
Operating income (loss) | | $ | 47,361 |
| | $ | 12,489 |
| | $ | 9,440 |
| | $ | (20,483 | ) | | $ | — |
| | $ | 48,807 |
|
Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated |
External revenue | | | | | | | | | | | | |
Service revenue | | $ | 187,855 |
| | $ | 57,219 |
| | $ | 10,609 |
| | $ | — |
| | $ | — |
| | $ | 255,683 |
|
Equipment revenue | | 33,193 |
| | 303 |
| | 92 |
| | — |
| | — |
| | 33,588 |
|
Tower revenue | | 3,294 |
| |
|
| |
|
| |
|
| |
|
| | 3,294 |
|
Other revenue | | 732 |
| | 4,172 |
| | 13,170 |
| | — |
| | — |
| | 18,074 |
|
Total external revenue | | 225,074 |
| | 61,694 |
| | 23,871 |
| | — |
| | — |
| | 310,639 |
|
Internal revenue | | 2,483 |
| | 2,128 |
| | 14,948 |
| | — |
| | (19,559 | ) | | — |
|
Total operating revenue | | 227,557 |
| | 63,822 |
| | 38,819 |
| | — |
| | (19,559 | ) | | 310,639 |
|
Operating expenses | | | | | | | | | | | | |
Cost of services | | 67,238 |
| | 30,281 |
| | 19,175 |
| | 12 |
| | (18,230 | ) | | 98,476 |
|
Cost of goods sold | | 30,809 |
| | 119 |
| | 42 |
| | 1 |
| | — |
| | 30,971 |
|
Selling, general and administrative | | 24,502 |
| | 9,609 |
| | 3,403 |
| | 22,480 |
| | (1,329 | ) | | 58,665 |
|
Depreciation and amortization | | 65,490 |
| | 12,203 |
| | 6,634 |
| | 277 |
| | — |
| | 84,604 |
|
Total operating expenses | | 188,039 |
| | 52,212 |
| | 29,254 |
| | 22,770 |
| | (19,559 | ) | | 272,716 |
|
Operating income (loss) | | $ | 39,518 |
| | $ | 11,610 |
| | $ | 9,565 |
| | $ | (22,770 | ) | | $ | — |
| | $ | 37,923 |
|
Note 15. Subsequent Events
During the second quarter of 2019, the Company agreed to purchase certain indefinite-lived FCC spectrum licenses and to assume the leases for certain other FCC spectrum licenses covering portions of Virginia and West Virginia. We plan to use these licenses in our Cable segment to provide fixed wireless broadband coverage. The Company agreed to pay $17.0 million at close of these agreements and approximately $4.0 million over the remaining lease terms of approximately 20 years. On July 9, 2019, we closed on the purchase of the indefinite-lived licenses and remitted $13.8 million to the seller. Assumption of the leased licenses is expected to close at various dates during the third quarter of 2019, following customary regulatory approvals.
| |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements. All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters, including information concerning our response to COVID-19, are forward-looking statements. We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct. The Company’s actual results could be materially different from its expectations because of various factors, including those discussed belowthat may include natural disasters, pandemics and underoutbreaks of contagious diseases and other adverse public health developments, such as COVID-19, natural disasters, changes in general economic conditions, increases in costs, changes in regulation and other competitive factors. Updates to the caption “RiskRisk Factors described in “Item 1A-Risk Factors” as provided in the Company’sour Annual Report on Form 10-K for its fiscalthe year ended December 31, 2018. 2019, may be found below in Part II, under the heading “Item 1A-Risk Factors.
The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2018,2019, including the consolidated financial statements and related notes included therein.
Overview
Shenandoah Telecommunications Company (Shentel) provides(“Shentel”, “we”, “our”, “us”, or the “Company”), is a broadprovider of a comprehensive range of diversifiedwireless and broadband communications products and services through its high speed, state-of-the-art network to customers in the Mid-Atlantic portion of the United States. The Company’s services include: wireless voiceManagement’s Discussion and data; cable video, internet and digital voice; fiber network and services; and regulated local and long distance telephone. ShentelAnalysis is the exclusive personal communications service (“PCS”) Affiliate of Sprint in a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio. For more information, please visit www.shentel.com.
2019 Developments
Big Sandy Broadband, Inc. Acquisition:On February 28, 2019, the Company acquired the assets of Big Sandy Broadband, Inc., ("Big Sandy”), a provider of cable television, telephone and high speed internet services in eastern Kentucky. The Company's investment will allow the Cable segmentorganized around our reporting segments. Refer to expand its footprint into the adjacent markets of eastern Kentucky. See Note 413, AcquisitionsSegment Reporting, in our unaudited condensed consolidated financial statements for additional information.
2020 Developments
FiberT-Mobile business combination with Sprint: On April 1, 2020, T-Mobile US, Inc. (“T-Mobile”) announced the completion of its business combination with Sprint Corporation (“Sprint”) and subsequently delivered to the Home (FTTH):Company a notice of Network Technology Conversion, Brand Conversion and Combination Conversion (a “Conversion Notice”) pursuant to the terms of the Company’s affiliate agreement with Sprint. As described in more detail in the Company’s 2019 Annual Report on Form 10-K, our Wireless segment has been an affiliate of Sprint since 1995.
The affiliate agreement provides for a 90-day period following receipt of the Conversion Notice for the parties to negotiate mutually agreeable terms and conditions under which the Company would continue as an affiliate of T-Mobile. The affiliate agreement further provides that, if T-Mobile and the Company have not negotiated a mutually acceptable agreement within the 90-day period, then T-Mobile would have a period of 60 days thereafter to exercise an option to purchase the assets of our Wireless operations for 90% of the “Entire Business Value” (as defined under our affiliate agreement). If T-Mobile does not exercise its purchase option, the Company would then have a 60-day period to exercise an option to purchase the legacy T-Mobile network and subscribers in our service area. If the Company does not exercise its purchase option, T-Mobile must sell or decommission its legacy network and customers in our service area.
COVID-19: We have been closely monitoring the latest developments around the outbreak of a new strain of coronavirus ("COVID-19") and its impact globally. As we focus on our community and do our part to stop COVID-19 from spreading, we have taken the following actions to keep families and businesses safe and connected virtually:
In our Broadband segment, we expanded our service offerings by temporarily increasing the minimum speed and data allowance of June 30, 2019,our broadband service to 50 Mbps and by 250 GB, respectively, each at no additional charge, and introducing a new $25 per month prepaid internet service.
In our Wireless segment, we have supported Sprint’s adoption of the Keep Americans Connected pledge while temporarily closing approximately 40% of the Sprint branded retail locations in our service area to comply with federal and state mandates.
We have implemented alternative working arrangements where practicable to keep our employees safe and maintained our geographically redundant equipment, diverse fiber facilities and monitoring services to support maximum uptime of all our essential networks and services.
While these actions did not have a material impact on our first quarter operating results nor do we expect them to impact our long-term growth prospects, we do expect them to temporarily dislocate our wireless operating momentum until the economies in the markets that we serve re-open.
For example, changing macroeconomic factors could impact the collectability of accounts receivable and revenue in our Broadband segment, and macroeconomic factors and the Keep Americans Connected pledge could impact our recognition of wireless service revenue in our Wireless segment in future periods. In addition, the measurement of our contract asset, which is reduced by our estimated obligation to refund amounts that Sprint or T-Mobile are later unable to collect from subscribers, could be impacted by macroeconomic factors, the Keep Americans Connected pledge, or any change to credit or collection policies that T-Mobile might make after its April 1, 2020 acquisition of Sprint.
As we focus on our community and do our part to stop COVID-19 from spreading, we will continue to evaluate the impact of COVID-19 on our business and operations, including the effect of related state, local and federal government guidelines. The virus and related macroeconomic factors may impact the demand for our products and services, the ways in which our customers use our products and services and our suppliers’ and vendors’ ability to provide products and services to us. Some of these factors could increase the demand for our products and services, while others could decrease demand or make it more difficult for us to serve our customers. Due to the uncertainty surrounding the magnitude and duration of COVID-19, we are inunable at this time to predict the initial stageimpact of deployingCOVID-19 on our new FTTH product, in our Cable segment, which leverages our existing robust fiber network and commercial customer base to target certain residential areas in three initial markets within our wireless service territory. We incurred $0.8 million and $1.0 millionfinancial condition, results of FTTH expenses in the three and six months ending June 30, 2019, respectively. We expect to continue to incur expenses related to the initiation of FTTH in the select markets, in advance of generating revenue from this new product.
operations or cash flow.
Results of Operations
Three Months Ended June 30, 2019March 31, 2020 Compared with the Three Months Ended June 30, 2018March 31, 2019
The Company'sCompany’s consolidated results from operations are summarized as follows:
| | | | Three Months Ended June 30, | | Change | | Three Months Ended March 31, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % | | 2020 | % of Revenue | | 2019 | % of Revenue | | $ | | % |
Operating revenue | | $ | 158,914 |
| 100.0 | % | | $ | 156,501 |
| 100.0 | % | | 2,413 |
| | 1.5 | % | |
Revenue | | | $ | 153,188 |
| 100.0 |
| | $ | 158,843 |
| 100.0 |
| | (5,655 | ) | | (3.6 | ) |
Operating expenses | | 134,894 |
| 84.9 | % | | 135,332 |
| 86.5 | % | | (438 | ) | | (0.3 | )% | | 130,138 |
| 85.0 |
| | 134,056 |
| 84.4 |
| | (3,918 | ) | | (2.9 | ) |
Operating income | | 24,020 |
| 15.1 | % | | 21,169 |
| 13.5 | % | | 2,851 |
| | 13.5 | % | | 23,050 |
| 15.0 |
| | 24,787 |
| 15.6 |
| | (1,737 | ) | | (7.0 | ) |
| | | | | | | | | | | | | | | | | | | | |
Interest expense | | (7,522 | ) | (4.7 | )% | | (8,851 | ) | (5.7 | )% | | (1,329 | ) | | (15.0 | )% | | (6,211 | ) | (4.1 | ) | | (7,954 | ) | (5.0 | ) | | (1,743 | ) | | (21.9 | ) |
Other income, net | | 1,176 |
| 0.7 | % | | 839 |
| 0.5 | % | | 337 |
| | 40.2 | % | |
Other income | | | 733 |
| 0.5 |
| | 1,287 |
| 0.8 |
| | (554 | ) | | (43.0 | ) |
Income before taxes | | 17,674 |
| 11.1 | % | | 13,157 |
| 8.4 | % | | 4,517 |
| | 34.3 | % | | 17,572 |
| 11.5 |
| | 18,120 |
| 11.4 |
| | (548 | ) | | (3.0 | ) |
Income tax expense | | 4,524 |
| 2.8 | % | | 3,531 |
| 2.3 | % | | 993 |
| | 28.1 | % | | 4,292 |
| 2.8 |
| | 4,210 |
| 2.7 |
| | 82 |
| | 1.9 |
|
Net income | | $ | 13,150 |
| 8.3 | % | | $ | 9,626 |
| 6.2 | % | | 3,524 |
| | 36.6 | % | | $ | 13,280 |
| 8.7 |
| | $ | 13,910 |
| 8.8 |
| | (630 | ) | | (4.5 | ) |
Operating revenueRevenue
DuringRevenue decreased approximately $5.7 million, or 3.6%, during the three months ended June 30, 2019, operating revenue increased approximately $2.4 million, or 1.5%,March 31, 2020 compared with the three months ended June 30, 2018, driven by growth in the Cable and Wireline segments.
Operating expenses
During the three months ended June 30,March 31, 2019, operating expenses decreased approximately $0.4 million, or 0.3%, compared with the three months ended June 30, 2018. The decrease was primarily due to a decline of $8.5 million in selling, general and administrative expenses in ourthe Wireless and Other segments.
Interest expense
During the three months ended June 30, 2019, interest expense decreased approximately $1.3 million, or 15.0%, compared with the three months ended June 30, 2018. The decrease in interest expense was primarily attributable to the 2018 amendments to the Credit Facility Agreement that reduced the applicable base interest rate by 75 basis points, and scheduled reductions of principal,segment, partially offset by growth of $2.9 million and $0.7 million in the effectBroadband and Tower segments, respectively. The Wireless segment recognized $4.5 million in lower travel revenue in the first quarter of increases in LIBOR.
Other income, net
During the three months ended June 30, 2019, other income, net increased approximately $0.3 million, or 40.2%,2020 compared with the three months ended June 30, 2018. The increase in other income, net was primarily attributable to the growth infirst quarter of 2019 due to the valueongoing dispute with Sprint over resetting of our investments.
Income tax expense
During the three months ended June 30, 2019, income tax expense increased approximately $1.0 million, or 28.1%, compared with the three months ended June 30, 2018. The increase was consistent with the growth in our income before taxes.
Our effective tax rate for the three months ended June 30, 2019 was approximately 25.6%, as compared with approximately 26.8% for the three months ended June 30, 2018.
Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018
The Company's consolidated results from operations are summarized as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % |
Operating revenue | | $ | 317,757 |
| 100.0 | % | | $ | 310,639 |
| 100.0 | % | | 7,118 |
| | 2.3 | % |
Operating expenses | | 268,950 |
| 84.6 | % | | 272,716 |
| 87.8 | % | | (3,766 | ) | | (1.4 | )% |
Operating income | | 48,807 |
| 15.4 | % | | 37,923 |
| 12.2 | % | | 10,884 |
| | 28.7 | % |
| | | | | | | | | | |
Interest expense | | (15,476 | ) | (4.9 | )% | | (18,183 | ) | (5.9 | )% | | (2,707 | ) | | 14.9 | % |
Other income, net | | 2,463 |
| 0.8 | % | | 1,828 |
| 0.6 | % | | 635 |
| | 34.7 | % |
Income before taxes | | 35,794 |
| 11.3 | % | | 21,568 |
| 6.9 | % | | 14,226 |
| | 66.0 | % |
Income tax expense | | 8,734 |
| 2.7 | % | | 5,359 |
| 1.7 | % | | 3,375 |
| | 63.0 | % |
Net income | | $ | 27,060 |
| 8.5 | % | | $ | 16,209 |
| 5.2 | % | | 10,851 |
| | 66.9 | % |
Operating revenue
During the six months ended June 30, 2019, operating revenue increased approximately $7.1 million, or 2.3%, compared with the six months ended June 30, 2018, driven by subscriber growth in the Wireless and Cable segments.travel fee. Refer to the discussion of the results of operations for the Wireless, Broadband and CableTower segments, included within this quarterly report, for additional information.
Operating expenses
During the six months ended June 30, 2019, operatingOperating expenses decreased approximately $3.8$3.9 million, or 1.4%2.9%, during the three months ended March 31, 2020 compared with the sixthree months ended June 30, 2018.March 31, 2019. The decrease was primarily due to a $2.2 million decline in Wireless operating expenses driven by depreciation and amortization expense primarilyas certain assets acquired from nTelos became fully depreciated and lower amortization expense on our affiliate contract expansion rights, which is recognized on an accelerated method that declines over time,cost of goods sold and a $2.8 million decline in selling, general and administrative expenses drivenrelated to temporary retail store closures. This decrease was partially offset by an increase in Broadband operating expenses incurred for the Wireless and Other segments.launch of our new fiber-to-the-home service, Glo Fiber.
Interest expense
During the six months ended June 30, 2019, interestInterest expense decreased approximately $2.7$1.7 million, or 14.9%21.9%, during the three months ended March 31, 2020 compared with the sixthree months ended June 30, 2018.March 31, 2019. The decrease in interest expense was primarily attributable to the 2018 amendments to the Credit Facility Agreement that reducedreduction of the applicable base interest rate by 7525 basis points and principal repayments.repayments on our Credit Facility term loans, combined with the effect of year-over-year declines in LIBOR.
Other income net
During the six months ended June 30, 2019, otherOther income net increaseddecreased approximately $0.6 million, or 34.7%43.0%, during the three months ended March 31, 2020 compared with the sixthree months ended June 30, 2018.March 31, 2019. The increase in other income, netdecrease was primarily attributabledue to growtha decline in the value of our investments.
Income tax expense
Duringinvestments that are used to fund our obligation under the six months ended June 30, 2019, income tax expense increased approximately $3.4 million, or 63.0%, compared with the six months ended June 30, 2018. The increase was consistent with the growth in our income before taxes.
Our effective tax rate for the six months ended June 30, 2019 was approximately 24.4%, which was consistent with approximately 24.8% for six months ended June 30, 2018.
supplemental executive retirement plan.
Wireless
Wireless earns postpaid, prepaid and wholesale revenues from Sprint for their subscribers that use our Wireless network service in our Wireless network coverage area. The Company's wireless revenue is variable based on billed revenues to Sprint's subscribers in our Affiliate Area less applicable fees retained by Sprint. Sprint retains an 8% Management Fee and an 8.6% Net Service Fee on postpaid revenues and a 6% Management Fee on prepaid wireless revenues. For postpaid, the Company is also charged for the costs of subsidized handsets sold through Sprint's national channels as well as commissions paid by Sprint to third-party dealers in our Sprint Affiliate Area. Sprint also charges the Company separately to acquire and support prepaid customers. These charges are calculated based on Sprint's national averages for its prepaid programs, and are billed per user or per gross additional customer, as appropriate.
The following tables indicate selected operating statistics of Wireless, including Sprint subscribers:
|
| | | | | | |
| | June 30, 2019 (4) | | June 30, 2018 (4) |
Retail PCS subscribers - postpaid | | 811,719 |
| | 780,658 |
|
Retail PCS subscribers - prepaid | | 269,039 |
| | 252,054 |
|
PCS market POPS (000) (1) | | 7,227 |
| | 7,023 |
|
PCS covered POPS (000) (1) | | 6,285 |
| | 5,908 |
|
CDMA base stations (sites) | | 1,910 |
| | 1,770 |
|
Towers owned | | 217 |
| | 193 |
|
Cell site leases | | 200 |
| | 192 |
|
|
| | | | | | |
| | March 31, 2020 | | March 31, 2019 |
Postpaid: | | | | |
Retail PCS total subscribers | | 847,771 |
| | 800,952 |
|
Retail PCS phone subscribers | | 738,410 |
| | 722,830 |
|
Retail PCS connected device subscribers | | 109,361 |
| | 78,122 |
|
Gross PCS total subscriber additions | | 51,991 |
| | 50,847 |
|
Gross PCS phone additions | | 36,734 |
| | 37,786 |
|
Gross PCS connected device additions | | 15,257 |
| | 13,061 |
|
Net PCS total subscriber additions | | 3,577 |
| | 5,776 |
|
Net PCS phone additions (losses) | | (2,311 | ) | | 105 |
|
Net PCS connected device additions | | 5,888 |
| | 5,671 |
|
PCS monthly retail total churn % | | 1.91 | % | | 1.89 | % |
PCS monthly phone churn % | | 1.76 | % | | 1.74 | % |
PCS monthly connected device churn % | | 2.97 | % | | 3.35 | % |
Prepaid: | | | | |
Retail PCS subscribers | | 279,096 |
| | 267,220 |
|
Gross PCS subscriber additions | | 39,074 |
| | 40,979 |
|
Net PCS subscriber additions | | 5,084 |
| | 8,516 |
|
PCS monthly retail churn % | | 4.13 | % | | 4.14 | % |
| | | | |
PCS market POPS (000) (1) | | 7,227 |
| | 7,023 |
|
PCS covered POP (000) (1) | | 6,325 |
| | 6,261 |
|
Macro base stations (cell sites) | | 1,966 |
| | 1,874 |
|
_______________________________________________________
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 (4) | | 2018 (4) |
Gross PCS subscriber additions - postpaid | | 52,799 |
| | 44,629 |
| | 103,646 |
| | 87,706 |
|
Net PCS subscriber additions - postpaid (2) | | 10,767 |
| | 5,797 |
| | 16,543 |
| | 44,061 |
|
Gross PCS subscriber additions - prepaid | | 33,753 |
| | 33,840 |
| | 74,732 |
| | 73,951 |
|
Net PCS subscriber additions - prepaid (3) | | 1,819 |
| | 1,863 |
| | 10,335 |
| | 26,232 |
|
PCS average monthly retail churn % - postpaid | | 1.74 | % | | 1.67 | % | | 1.81 | % | | 1.78 | % |
PCS average monthly retail churn % - prepaid | | 3.97 | % | | 4.25 | % | | 4.06 | % | | 4.32 | % |
| |
(1) | "POPS" refers to the estimated population of a given geographic area. Market POPS are those within a market area which we are authorized to serve under our Sprint PCS affiliate agreement,agreements, and Covered POPS are those covered by our network. The data source for POPS is U.S. census data. |
| |
(2) | For the six months ended June 30, 2018 Net PCS subscriber additions - postpaid were 5,718 excluding the acquisition of the expansion area on February 1, 2018.
|
| |
(3) | For the six months ended June 30, 2018 Net PCS subscriber additions - prepaid were 10,541 excluding the acquisition of the expansion area on February 1, 2018.
|
| |
(4) | Beginning February 1, 2018 includes Richmond Expansion Area except for gross PCS subscriber additions.
|
The subscriber statistics above, excluding gross additions, include the Richmond Expansion AreaWireless results from operations are summarized as follows:
|
| | | |
| | February 1, 2018 |
| | Expansion Area |
PCS subscribers - postpaid | | 38,343 |
|
PCS subscribers - prepaid | | 15,691 |
|
Acquired PCS market POPS (000) | | 1,082 |
|
Acquired PCS covered POPS (000) | | 602 |
|
Acquired CDMA base stations (sites) | | 105 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
($ in thousands) | | 2020 | % of Revenue | | 2019 | % of Revenue | | $ | | % |
Wireless revenue: | | | | | | | | | | |
Gross postpaid billings | | $ | 103,096 |
| 99.0 |
| | $ | 101,869 |
| 90.5 |
| | 1,227 |
| | 1.2 | % |
Allocated bad debt | | (5,013 | ) | (4.8 | ) | | (4,393 | ) | (3.9 | ) | | 620 |
| | 14.1 | % |
Amortization of contract asset and other | | (6,838 | ) | (6.6 | ) | | (5,188 | ) | (4.6 | ) | | 1,650 |
| | 31.8 | % |
Sprint management fee and net service fee | | (16,317 | ) | (15.7 | ) | | (16,106 | ) | (14.3 | ) | | 211 |
| | 1.3 | % |
Total postpaid service revenue | | 74,928 |
| 72.0 |
| | 76,182 |
| 67.6 |
| | (1,254 | ) | | (1.6 | )% |
Gross prepaid billings | | 30,936 |
| 29.7 |
| | 29,533 |
| 26.2 |
| | 1,403 |
| | 4.8 | % |
Amortization of contract asset and other | | (15,892 | ) | (15.3 | ) | | (14,537 | ) | (12.9 | ) | | 1,355 |
| | 9.3 | % |
Sprint management fee | | (1,935 | ) | (1.9 | ) | | (1,866 | ) | (1.7 | ) | | 69 |
| | 3.7 | % |
Total prepaid service revenue | | 13,109 |
| 12.6 |
| | 13,130 |
| 11.7 |
| | (21 | ) | | (0.2 | )% |
Travel and other | | 3,351 |
| 3.2 |
| | 8,018 |
| 7.1 |
| | (4,667 | ) | | (58.2 | )% |
Wireless service revenue and other | | 91,388 |
| 87.8 |
| | 97,330 |
| 86.4 |
| | (5,942 | ) | | (6.1 | )% |
Equipment revenue | | 12,750 |
| 12.2 |
| | 15,291 |
| 13.6 |
| | (2,541 | ) | | (16.6 | )% |
Total wireless revenue | | 104,138 |
| 100.0 |
| | 112,621 |
| 100.0 |
| | (8,483 | ) | | (7.5 | )% |
Wireless operating expenses: | | | | | | | | | | |
Cost of services | | 33,439 |
| 32.1 |
| | 32,532 |
| 28.9 |
| | 907 |
| | 2.8 | % |
Cost of goods sold | | 12,528 |
| 12.0 |
| | 14,427 |
| 12.8 |
| | (1,899 | ) | | (13.2 | )% |
Selling, general and administrative | | 9,428 |
| 9.1 |
| �� | 11,079 |
| 9.8 |
| | (1,651 | ) | | (14.9 | )% |
Depreciation and amortization | | 25,299 |
| 24.3 |
| | 30,370 |
| 27.0 |
| | (5,071 | ) | | (16.7 | )% |
Total wireless operating expenses | | 80,694 |
| 77.5 |
| | 88,408 |
| 78.5 |
| | (7,714 | ) | | (8.7 | )% |
Wireless operating income | | $ | 23,444 |
| 22.5 |
| | $ | 24,213 |
| 21.5 |
| | (769 | ) | | (3.2 | )% |
Three Months Ended June 30, 2019 Compared with the Three Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % |
Wireless operating revenue | | | | | | | | | | |
Wireless service revenue | | $ | 94,350 |
| 82.7 | % | | $ | 95,690 |
| 83.4 | % | | (1,340 | ) | | (1.4 | )% |
Tower lease revenue | | 2,921 |
| 2.6 | % | | 2,878 |
| 2.5 | % | | 43 |
| | 1.5 | % |
Equipment revenue | | 16,548 |
| 14.5 | % | | 15,819 |
| 13.8 | % | | 729 |
| | 4.6 | % |
Other revenue | | 321 |
| 0.2 | % | | 366 |
| 0.3 | % | | (45 | ) | | (12.3 | )% |
Total Wireless operating revenue | | 114,140 |
| 100.0 | % | | 114,753 |
| 100.0 | % | | (613 | ) | | (0.5 | )% |
Wireless operating expenses | | | | | | | | | | |
Cost of services | | 33,563 |
| 29.4 | % | | 33,488 |
| 29.2 | % | | 75 |
| | 0.2 | % |
Cost of goods sold | | 15,742 |
| 13.8 | % | | 15,082 |
| 13.1 | % | | 660 |
| | 4.4 | % |
Selling, general and administrative | | 10,592 |
| 9.3 | % | | 12,367 |
| 10.8 | % | | (1,775 | ) | | (14.4 | )% |
Depreciation and amortization | | 32,219 |
| 28.2 | % | | 31,565 |
| 27.5 | % | | 654 |
| | 2.1 | % |
Total Wireless operating expenses | | 92,116 |
| 80.7 | % | | 92,502 |
| 80.6 | % | | (386 | ) | | (0.4 | )% |
Wireless operating income | | $ | 22,024 |
| 19.3 | % | | $ | 22,251 |
| 19.4 | % | | (227 | ) | | (1.0 | )% |
Operating Revenue
Under our affiliate agreement with Sprint, we have historically earned and recognized monthly revenue of $1.5 million for providing service to Sprint customers who pass through our network area ("Travel Revenue").area. While we continue to provide these services to Sprint, the agreed upon payments were suspended by Sprint on April 30, 2019. Accordingly, we have ceased recognizing revenue for the services provided after that date until a new prospective fee can be agreed. We have triggered the final dispute resolution option with Sprint and expect to resolveresolution during the new travel fees in the thirdsecond quarter 2019.of 2020.
Wireless operating revenue decreased slightly to $114.1approximately $8.5 million, or 8%, for the three months ended June 30, 2019, compared with $114.8 million for the three months ended June 30, 2018. Travel Revenue declined $3.0 million from second quarter 2018 due to the suspension by Sprint of Travel Revenue payments in April 2019 and the cessation of recognizing Travel Revenue until the parties finalize travel fees. The Travel Revenue decline was substantially offset by increases in subscriber service revenue of $0.9 million, in equipment revenue of $0.7 million, and in roaming revenue of $0.5 million.
The table below provides additional detail for Wireless service revenue.
|
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change |
($ in thousands) | | 2019 | | 2018 | | $ | | % |
Wireless service revenue: | | | | | | | | |
Postpaid billings (1) | | $ | 97,779 |
| | $ | 96,127 |
| | 1,652 |
| | 1.7 | % |
Amortization of deferred contract and other costs | | (5,636 | ) | | (4,615 | ) | | (1,021 | ) | | (22.1 | )% |
Sprint management fee | | (7,781 | ) | | (7,803 | ) | | 22 |
| | 0.3 | % |
Net service fee | | (8,365 | ) | | (8,303 | ) | | (62 | ) | | (0.7 | )% |
Total postpaid service revenue | | 75,997 |
| | 75,406 |
| | 591 |
| | 0.8 | % |
Prepaid billings | | 30,328 |
| | 27,915 |
| | 2,413 |
| | 8.6 | % |
Amortization of deferred contract and other costs | | (14,814 | ) | | (12,876 | ) | | (1,938 | ) | | (15.1 | )% |
Sprint management fee | | (1,911 | ) | | (1,754 | ) | | (157 | ) | | (9.0 | )% |
Total prepaid service revenue | | 13,603 |
| | 13,285 |
| | 318 |
| | 2.4 | % |
Travel and other revenue | | 4,750 |
| | 6,999 |
| | (2,249 | ) | | (32.1 | )% |
Total service revenue | | $ | 94,350 |
| | $ | 95,690 |
| | (1,340 | ) | | (1.4 | )% |
| |
(1) | Postpaid net billings are defined under the terms of the affiliate contract with Sprint to be the gross billings to customers within our wireless network coverage area less billing credits and adjustments and allocated write-offs of uncollectible accounts. |
The increase in postpaid service revenue during the three months ended June 30, 2019, was primarily attributable to the addition of 31,061 postpaid PCS retail subscribers.
The increase in prepaid service revenue during the three months ended June 30, 2019, was primarily attributable to the addition 16,985 prepaid PCS retail subscribers.
Cost of services
During the three months ended June 30, 2019, cost of services increased approximately $0.1 million or 0.2%,March 31, 2020 compared with the three months ended June 30, 2018March 31, 2019. The decrease was primarily attributable to the aforementioned $4.5 million decline in travel revenue, a $2.5 million decline in equipment revenue as retail stores closed amidst the COVID-19 outbreak, $3.0 million in higher amortized customer contract costs partially offset by a $1.7 million increase in postpaid and prepaid revenue from growth in subscribers.
Cost of services
Cost of services increased approximately $0.9 million, or 3%, for the three months ended March 31, 2020 compared with the three months ended March 31, 2019, primarily due to lower backhaul circuit costs.higher cell site rent expense related to our network expansion.
Cost of goods sold
DuringCost of goods sold decreased approximately $1.9 million, or 13%, for the three months ended June 30, 2019, cost of goods sold increased approximately $0.7 million, or 4.4%,March 31, 2020 compared with the three months ended June 30, 2018. Higher cost of goods sold reflect an increase in salesMarch 31, 2019 due to a larger percentagelower volume of activations originating from Shentel-ownedequipment sales driven by temporary closure of certain retail stores.
Selling, general and administrative
DuringSelling, general and administrative expense decreased approximately $1.7 million, or 15%, for the three months ended June 30, 2019, selling, general and administrative costs decreased approximately $1.8 million, or 14.4%,March 31, 2020 compared with the three months ended June 30, 2018March 31, 2019 primarily due to reductions in transactionallower advertising expense of approximately $1.0 million, and a $0.8 million sales and use tax expenses.settlement gain.
Depreciation and amortization
DuringDepreciation and amortization decreased approximately $5.1 million, or 17%, for the three months ended June 30, 2019, depreciation and amortization increased approximately $0.7 million, or 2.1%,March 31, 2020 compared with the three months ended June 30, 2018March 31, 2019. Depreciation expense declined $4.6 million as certain assets acquired from nTelos in 2016 became fully depreciated. Amortization expense also declined primarily from the continued deployment of property, plant and equipment necessary to support the expansionas a result of our wireless service territory.
Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % |
Wireless operating revenue | | | | | | | | | | |
Wireless service revenue | | $ | 191,425 |
| 83.3 | % | | $ | 187,855 |
| 82.6 | % | | 3,570 |
| | 1.9 | % |
Tower lease revenue | | 5,860 |
| 2.6 | % | | 5,774 |
| 2.5 | % | | 86 |
| | 1.5 | % |
Equipment revenue | | 31,839 |
| 13.9 | % | | 33,193 |
| 14.6 | % | | (1,354 | ) | | (4.1 | )% |
Other revenue | | 670 |
| 0.2 | % | | 735 |
| 0.3 | % | | (65 | ) | | (8.8 | )% |
Total Wireless operating revenue | | 229,794 |
| 100.0 | % | | 227,557 |
| 100.0 | % | | 2,237 |
| | 1.0 | % |
Wireless operating expenses | | | | | | | | | | |
Cost of services | | 67,041 |
| 29.2 | % | | 67,238 |
| 29.5 | % | | (197 | ) | | (0.3 | )% |
Cost of goods sold | | 30,169 |
| 13.1 | % | | 30,809 |
| 13.5 | % | | (640 | ) | | (2.1 | )% |
Selling, general and administrative | | 21,954 |
| 9.6 | % | | 24,502 |
| 10.8 | % | | (2,548 | ) | | (10.4 | )% |
Depreciation and amortization | | 63,269 |
| 27.5 | % | | 65,490 |
| 28.8 | % | | (2,221 | ) | | (3.4 | )% |
Total Wireless operating expenses | | 182,433 |
| 79.4 | % | | 188,039 |
| 82.6 | % | | (5,606 | ) | | (3.0 | )% |
Wireless operating income | | $ | 47,361 |
| 20.6 | % | | $ | 39,518 |
| 17.4 | % | | 7,843 |
| | 19.8 | % |
Operating Revenue
Under our affiliate agreement with Sprint we have historically earned and recognized monthly revenue of $1.5 million for providing service to Sprint customers who pass through our network area. While we continue to provide these services to Sprint, the agreed upon fee was suspended on April 30, 2019. Accordingly, we have ceased recognizing revenue for the services provided after that date until a new prospective fee can be agreed.
During the six months ended June 30, 2019, operating revenue increased approximately $2.2 million, or 1.0%, compared with the six months ended June 30, 2018. This increase in operating revenue was driven by a 4.0% increase in postpaid subscribers and a 6.7% increase in prepaid PCS subscribers, and was partially offset by a reduction in travel and other revenue. Refer to the detailed Wireless service revenue chart provided below for additional information.
The table below provides additional detail for Wireless service revenue.
|
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Change |
($ in thousands) | | 2019 | | 2018 | | $ | | % |
Wireless service revenue: | | | | | | | | |
Postpaid billings (1) | | $ | 195,255 |
| | $ | 189,417 |
| | 5,838 |
| | 3.1 | % |
Amortization of deferred contract and other costs | | (10,824 | ) | | (9,080 | ) | | (1,744 | ) | | 19.2 | % |
Sprint management fee | | (15,543 | ) | | (15,203 | ) | | (340 | ) | | 2.2 | % |
Net service fee | | (16,709 | ) | | (16,258 | ) | | (451 | ) | | 2.8 | % |
Total postpaid service revenue | | 152,179 |
| | 148,876 |
| | 3,303 |
| | 2.2 | % |
Prepaid billings | | 59,861 |
| | 54,256 |
| | 5,605 |
| | 10.3 | % |
Amortization of deferred contract and other costs | | (29,351 | ) | | (25,664 | ) | | (3,687 | ) | | 14.4 | % |
Sprint management fee | | (3,777 | ) | | (3,403 | ) | | (374 | ) | | 11.0 | % |
Total prepaid service revenue | | 26,733 |
| | 25,189 |
| | 1,544 |
| | 6.1 | % |
Travel and other revenue | | 12,513 |
| | 13,790 |
| | (1,277 | ) | | (9.3 | )% |
Total service revenue | | $ | 191,425 |
| | $ | 187,855 |
| | 3,570 |
| | 1.9 | % |
| |
(1) | Postpaid net billings are defined under the terms of the affiliate contract with Sprint to be the gross billings to customers within our wireless network coverage area less billing credits and adjustments and allocated write-offs of uncollectible accounts. |
The increase in postpaid service revenue during the six months ended June 30, 2019, was primarily attributable to the addition of 31,061 postpaid PCS retail subscribers.
The increase in prepaid service revenue during the six months ended June 30, 2019, was primarily attributable to the addition of 16,985 prepaid PCS retail subscribers.
Cost of services
During the six months ended June 30, 2019, cost of services decreased approximately $0.2 million or 0.3%, compared with the six months ended June 30, 2018 primarily from a $3.3 million reduction in backhaul circuit costs, partially offset by a $2.5 million increase in net rent expense driven by the addition of new cell sites.
Cost of goods sold
During the six months ended June 30, 2019, cost of goods sold decreased approximately $0.6 million, or 2.1%, compared with the six months ended June 30, 2018. Lower cost of goods sold reflects a reduction in sales in Shentel-owned stores.
Selling, general and administrative
During the six months ended June 30, 2019, selling, general and administrative costs decreased approximately $2.5 million, or 10.4%, compared with the six months ended June 30, 2018 primarily due to reductions in transactional tax expenses.
Depreciation and amortization
During the six months ended June 30, 2019, depreciation and amortization decreased approximately $2.2 million, or 3.4%, compared with the six months ended June 30, 2018 primarily from lower amortization expense on our affiliate contract expansion rights,asset which is recognized onamortizes under an accelerated method that declines over time.
CableOur Broadband segment provides broadband, video and voice services to residential and commercial customers in portions of Virginia, West Virginia, Maryland, and Kentucky, via fiber optic and hybrid fiber coaxial (“HFC”) cable. The Broadband segment also leases dark fiber and provides Ethernet and Wavelength fiber optic services to enterprise and wholesale customers throughout the entirety of our service area. The Broadband segment also provides voice and digital subscriber line (“DSL”) telephone services to customers in Virginia’s Shenandoah County as a Rural Local Exchange Carrier (“RLEC”). These integrated networks are connected by an approximately 6,300 fiber route mile network. This fiber optic network also supports our Wireless segment operations and these intercompany transactions are reported at their market value.
The following table indicates selected operating statistics of Cable:Broadband:
|
| | | | | | |
| | June 30, 2019 | | June 30, 2018 |
Homes passed (1) | | 189,762 |
| | 185,016 |
|
Customer relationships (2) | | | | |
Video users | | 40,497 |
| | 42,483 |
|
Non-video customers | | 43,024 |
| | 35,773 |
|
Total customer relationships | | 83,521 |
| | 78,256 |
|
Video | | | | |
Customers (3) | | 42,874 |
| | 44,800 |
|
Penetration (4) | | 22.6 | % | | 24.2 | % |
Digital video penetration (5) | | 90.3 | % | | 76.9 | % |
Broadband | | | | |
Users (3) | | 71,893 |
| | 65,466 |
|
Penetration (4) | | 37.9 | % | | 35.4 | % |
Voice | | | | |
Users (3) | | 23,805 |
| | 22,882 |
|
Penetration (4) | | 12.5 | % | | 12.4 | % |
Total revenue generating units (6) | | 138,572 |
| | 133,148 |
|
Fiber route miles | | 3,657 |
| | 3,426 |
|
Total fiber miles (7) | | 143,762 |
| | 133,702 |
|
Average revenue generating units | | 138,016 |
| | 132,287 |
|
|
| | | | | | |
|
| March 31, 2020 |
| March 31, 2019 |
Broadband homes passed (1) (2) |
| 212,129 |
|
| 206,113 |
|
Broadband customer relationships (3) |
| 103,287 |
|
| 95,933 |
|
| | | | |
Video: |
|
|
|
|
|
RGUs |
| 53,067 |
|
| 59,202 |
|
Penetration (4) |
| 25.0 | % |
| 28.7 | % |
Digital video penetration (5) |
| 94.3 | % |
| 85.7 | % |
Broadband: |
|
|
|
|
|
RGUs |
| 86,667 |
|
| 78,867 |
|
Penetration (4) |
| 40.9 | % |
| 38.3 | % |
Voice: |
|
|
|
|
|
RGUs |
| 31,836 |
|
| 30,737 |
|
Penetration (4) |
| 16.3 | % |
| 16.2 | % |
Total Cable and Glo Fiber RGUs |
| 171,570 |
|
| 168,806 |
|
|
|
|
|
|
|
RLEC homes passed |
| 25,848 |
|
| 25,798 |
|
RLEC customer relationships (3) | | 10,111 |
| | 11,101 |
|
RLEC RGUs: |
| | | |
Data RLEC |
| 7,947 |
|
| 8,744 |
|
Penetration (4) |
| 30.7 | % |
| 33.9 | % |
Voice RLEC |
| 14,137 |
|
| 15,262 |
|
Penetration (4) |
| 54.7 | % |
| 59.2 | % |
Total RLEC RGUs |
| 22,084 |
|
| 24,006 |
|
|
|
|
|
|
|
Total RGUs | | 193,654 |
| | 192,812 |
|
|
|
|
|
|
|
Fiber route miles |
| 6,273 |
|
| 5,799 |
|
Total fiber miles (6) |
| 334,802 |
|
| 303,511 |
|
| |
(1) | Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information. Homes passed have access to video, broadband and voice services. |
| |
(2) | Includes approximately 16,600 RLEC homes passed where we are the dual incumbent telephone and cable provider. |
| |
(3) | Customer relationships represent the number of billed customers who receive at least one of our services. |
| |
(3) | Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer. Where services are provided on a bulk basis for video, broadband, or voice services, such as to hotels and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above.
|
| |
(4) | Penetration is calculated by dividing the number of users by the number of homes passed or available homes, as appropriate. |
| |
(5) | Digital video penetration is calculated by dividing the number of digital video users by total video users. Digital video users are video customers who receive any level of video service via digital transmission. A dwelling with one or more digital set-top boxes or digital adapters counts as one digital video user. |
| |
(6) | Revenue generating units are the sum of video, voice and broadband users.
|
| |
(7) | Total fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. |
Three Months Ended June 30, 2019 Compared with the Three Months Ended June 30, 2018Broadband results from operations are summarized as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % |
Cable operating revenue | | | | | | | | | | |
Service revenue | | $ | 30,716 |
| 88.5 | % | | $ | 28,748 |
| 89.5 | % | | 1,968 |
| | 6.8 | % |
Equipment revenue | | 255 |
| 0.7 | % | | 144 |
| 0.4 | % | | 111 |
| | 77.1 | % |
Other revenue | | 3,719 |
| 10.8 | % | | 3,219 |
| 10.1 | % | | 500 |
| | 15.5 | % |
Total Cable operating revenue | | 34,690 |
| 100.0 | % | | 32,111 |
| 100.0 | % | | 2,579 |
| | 8.0 | % |
Cable operating expenses | | | | | | | | | | |
Cost of services | | 15,701 |
| 45.3 | % | | 15,125 |
| 47.1 | % | | 576 |
| | 3.8 | % |
Cost of goods sold | | 112 |
| 0.3 | % | | 63 |
| 0.2 | % | | 49 |
| | 77.8 | % |
Selling, general and administrative | | 5,536 |
| 16.0 | % | | 4,661 |
| 14.5 | % | | 875 |
| | 18.8 | % |
Depreciation and amortization | | 6,555 |
| 18.8 | % | | 6,179 |
| 19.3 | % | | 376 |
| | 6.1 | % |
Total Cable operating expenses | | 27,904 |
| 80.4 | % | | 26,028 |
| 81.1 | % | | 1,876 |
| | 7.2 | % |
Cable operating income | | $ | 6,786 |
| 19.6 | % | | $ | 6,083 |
| 18.9 | % | | 703 |
| | 11.6 | % |
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
($ in thousands) | | 2020 | % of Revenue | | 2019 | % of Revenue | | $ | | % |
Broadband revenue | | | | | | | | | | |
Cable, residential and SMB | | $ | 34,943 |
| 70.2 | | $ | 32,426 |
| 69.2 |
| | 2,517 |
| | 7.8 |
|
Fiber, enterprise and wholesale | | 7,645 |
| 15.4 | | 6,563 |
| 14.0 |
| | 1,082 |
| | 16.5 |
|
Rural local exchange carrier | | 5,132 |
| 10.3 | | 5,681 |
| 12.1 |
| | (549 | ) | | (9.7 | ) |
Equipment and other | | 2,066 |
| 4.1 | | 2,211 |
| 4.7 |
| | (145 | ) | | (6.6 | ) |
Total broadband revenue | | 49,786 |
| 100.0 | | 46,881 |
| 100.0 | % | | 2,905 |
| | 6.2 |
|
Broadband operating expenses | | | | | | | | | | |
Cost of services | | 19,243 |
| 38.7 | | 19,061 |
| 40.7 |
| | 182 |
| | 1.0 |
|
Cost of goods sold | | 143 |
| 0.3 | | 211 |
| 0.5 |
| | (68 | ) | | (32.2 | ) |
Selling, general, and administrative | | 9,499 |
| 19.1 | | 7,569 |
| 16.1 |
| | 1,930 |
| | 25.5 |
|
Depreciation and amortization | | 10,871 |
| 21.8 | | 9,991 |
| 21.3 |
| | 880 |
| | 8.8 |
|
Total broadband operating expenses | | 39,756 |
| 79.9 | | 36,832 |
| 78.6 |
| | 2,924 |
| | 7.9 |
|
Broadband operating income | | $ | 10,030 |
| 20.1 | | $ | 10,049 |
| 21.4 |
| | (19 | ) | | (0.2 | ) |
ServiceCable, residential and small and medium business (SMB) revenue
DuringCable, residential and SMB revenue increased during the three months ended June 30, 2019, serviceMarch 31, 2020 approximately $2.5 million, or 7.8%, primarily driven by broadband subscriber growth.
Fiber, enterprise and wholesale revenue
Fiber, enterprise and wholesale revenue increased during the three months ended March 31, 2020 approximately $2.0$1.1 million, or 6.8%16.5%, due primarily to an increase in new enterprise and backhaul connections.
Rural local exchange carrier (RLEC) revenue
RLEC revenue decreased approximately $0.5 million, or 9.7%, compared with the three months ended June 30, 2018. The increase was primarily attributableMarch 31, 2019 due to a full quarter of Big Sandy results, increasesdecline in broadbandresidential data subscribers and higher averageswitched access revenue per customer ("ARPU") related to broadband customers upgrading to higher-speed data access packages and increases in video rates.from other carriers.
Other revenueCost of services
Other revenue is mainly comprisedCost of fiber services were comparable with three months ended March 31, 2019.
Cost of goods sold
Cost of goods sold were comparable with three months ended March 31, 2019.
Selling, general and installation services. Duringadministrative
Selling, general and administrative expense increased $1.9 million or 25% compared with the three months ended June 30,March 31, 2019, other revenueprimarily due to $1.3 million of expenses incurred to support Glo Fiber in four markets and a $0.3 million increase in advertising expenses.
Depreciation and amortization
Depreciation and amortization increased approximately $0.5$0.9 million or 15.5%9%, compared with the three months ended June 30, 2018March 31, 2019, primarily attributableas a result of our network expansion and the introduction of fiber to expansion of the Company's fiber network and increased demand for fiber services.home service under our brand, Glo Fiber.
Tower
Operating expenses
During the three months ended June 30, 2019, operating expenses increased approximately $1.9 million, or 7.2%, compared with the three months ended June 30, 2018 primarily dueOur Tower segment owns 226 cell towers and leases colocation space on those towers to professional fees associated with starting our FTTH product offering and higher repair and maintenance expense associated with maintaining our growing network. We expect to continue to incur expenses related to the initiation of FTTH in select markets, in advance of generating revenue from this new product.
Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % |
Cable operating revenue | | | | | | | | | | |
Service revenue | | $ | 60,421 |
| 88.3 | % | | $ | 57,219 |
| 89.7 | % | | 3,202 |
| | 5.6 | % |
Equipment revenue | | 525 |
| 0.8 | % | | 303 |
| 0.5 | % | | 222 |
| | 73.3 | % |
Other revenue | | 7,453 |
| 10.9 | % | | 6,300 |
| 9.8 | % | | 1,153 |
| | 18.3 | % |
Total Cable operating revenue | | 68,399 |
| 100.0 | % | | 63,822 |
| 100.0 | % | | 4,577 |
| | 7.2 | % |
Cable operating expenses | | | | | | | | | | |
Cost of services | | 31,348 |
| 45.8 | % | | 30,281 |
| 47.4 | % | | 1,067 |
| | 3.5 | % |
Cost of goods sold | | 287 |
| 0.4 | % | | 119 |
| 0.2 | % | | 168 |
| | 141.2 | % |
Selling, general and administrative | | 11,262 |
| 16.5 | % | | 9,609 |
| 15.1 | % | | 1,653 |
| | 17.2 | % |
Depreciation and amortization | | 13,013 |
| 19.0 | % | | 12,203 |
| 19.1 | % | | 810 |
| | 6.6 | % |
Total Cable operating expenses | | 55,910 |
| 81.7 | % | | 52,212 |
| 81.8 | % | | 3,698 |
| | 7.1 | % |
Cable operating income | | $ | 12,489 |
| 18.3 | % | | $ | 11,610 |
| 18.2 | % | | 879 |
| | 7.6 | % |
Service revenue
During the six months ended June 30, 2019, service revenue increased approximately $3.2 million, or 5.6%, compared with the six months ended June 30, 2018. The increase in service revenue was primarily attributable to the addition of 5,265 customer relationships, of which approximately 2,000 were acquired from Big Sandy,Wireless segment, as well as broadband customers upgrade to higher-speed data access packages and increases in video rates.other wireless communications providers. Substantially all of our owned towers are built on ground that we lease from the respective landlords. The colocation space that we lease to our Wireless segment is priced at our estimate of fair market value, which updates from time to time based upon our observation of the market.
Other revenue
Other revenue is mainly comprised of fiber services and installation services. During the six months ended June 30, 2019, other revenue increased approximately $1.2 million, or 18.3%, compared with the six months ended June 30, 2018 primarily attributable to expansion of the Company's fiber network and increased demand for fiber services.
Operating expenses
During the six months ended June 30, 2019, operating expenses increased approximately $3.7 million, or 7.1%, compared with the six months ended June 30, 2018 primarily due to professional fees associated with starting our FTTH product offering and higher repair and maintenance expense associated with maintaining our growing network. We expect to continue to incur expenses related to the initiation of FTTH in select markets, in advance of generating revenue from this new product.
Wireline
The following table includesindicates selected operating statistics of the Wireline operations:Tower segment:
|
| | | | | | |
| | June 30, 2019 | | June 30, 2018 |
Long distance subscribers | | 9,461 |
| | 8,930 |
|
Video customers (1) | | 4,520 |
| | 4,850 |
|
Broadband customers | | 14,643 |
| | 14,694 |
|
Fiber route miles | | 2,176 |
| | 2,099 |
|
Total fiber miles (2) | | 163,363 |
| | 157,008 |
|
|
| | | | | | |
| | March 31, 2020 | | March 31, 2019 |
Towers owned | | 226 |
| | 211 |
|
Tenants (1) | | 408 |
| | 368 |
|
Average tenants per tower | | 1.8 |
| | 1.7 |
|
| |
(1) | Wireline’s video service passes approximately 16,500 homes. |
| |
(2) | Fiber miles are measured by taking the numberIncludes 203 and 175 intercompany tenants for our Wireless segment as of fiber strands in a cableMarch 31, 2020 and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.2019, respectively.
|
Three Months Ended June 30, 2019 Compared with the Three Months Ended June 30, 2018Tower results from operations are summarized as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % |
Wireline operating revenue | | | | | | | | | | |
Service revenue | | $ | 5,955 |
| 30.5 | % | | $ | 5,725 |
| 30.0 | % | | 230 |
| | 4.0 | % |
Carrier access and fiber revenue | | 12,835 |
| 65.7 | % | | 12,468 |
| 65.2 | % | | 367 |
| | 2.9 | % |
Equipment revenue | | 52 |
| 0.3 | % | | 46 |
| 0.2 | % | | 6 |
| | 13.0 | % |
Other revenue | | 685 |
| 3.5 | % | | 873 |
| 4.6 | % | | (188 | ) | | (21.5 | )% |
Total Wireline operating revenue | | 19,527 |
| 100.0 | % | | 19,112 |
| 100.0 | % | | 415 |
| | 2.2 | % |
Wireline operating expenses | | | | | | | | | | |
Cost of services | | 8,979 |
| 46.0 | % | | 9,373 |
| 49.0 | % | | (394 | ) | | (4.2 | )% |
Costs of goods sold | | 19 |
| 0.1 | % | | 20 |
| 0.1 | % | | (1 | ) | | (5.0 | )% |
Selling, general and administrative | | 1,988 |
| 10.2 | % | | 1,686 |
| 8.8 | % | | 302 |
| | 17.9 | % |
Depreciation and amortization | | 3,447 |
| 17.6 | % | | 3,240 |
| 17.0 | % | | 207 |
| | 6.4 | % |
Total Wireline operating expenses | | 14,433 |
| 73.9 | % | | 14,319 |
| 74.9 | % | | 114 |
| | 0.8 | % |
Wireline operating income | | $ | 5,094 |
| 26.1 | % | | $ | 4,793 |
| 25.1 | % | | 301 |
| | 6.3 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
($ in thousands) | | 2020 | % of Revenue | | 2019 | % of Revenue | | $ | | % |
Tower revenue | | $ | 3,730 |
| 100.0 | | $ | 3,033 |
| 100.0 | | 697 |
| | 23.0 |
Tower operating expenses | | 1,935 |
| 51.9 | | 1,909 |
| 62.9 | | 26 |
| | 1.4 |
Tower operating income | | $ | 1,795 |
| 48.1 | | $ | 1,124 |
| 37.1 | | 671 |
| | 59.7 |
Operating revenueRevenue
DuringRevenue increased approximately $0.7 million, or 23%, during the three months ended June 30, 2019, total operating revenue increased approximately $0.4 millionMarch 31, 2020 compared with the three months ended June 30, 2018. TheMarch 31, 2019. This increase was due to a 10.9% increase in operating revenue was primarily attributable totenants and an 11.4% increase in the timing of receiving regulatory support funds.lease rate.
Operating expenses
During the three months ended June 30, 2019, total operatingOperating expenses were comparable to the three months ended June 30, 2018.
Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Change |
($ in thousands) | | 2019 | % of Revenue | | 2018 | % of Revenue | | $ | | % |
Wireline operating revenue | | | | | | | | | | |
Service revenue | | $ | 11,808 |
| 30.7 | % | | $ | 11,615 |
| 29.9 | % | | 193 |
| | 1.7 | % |
Carrier access and fiber revenue | | 25,164 |
| 65.5 | % | | 25,322 |
| 65.2 | % | | (158 | ) | | (0.6 | )% |
Equipment revenue | | 103 |
| 0.3 | % | | 92 |
| 0.2 | % | | 11 |
| | 12.0 | % |
Other revenue | | 1,361 |
| 3.5 | % | | 1,790 |
| 4.7 | % | | (429 | ) | | (24.0 | )% |
Total Wireline operating revenue | | 38,436 |
| 100.0 | % | | 38,819 |
| 100.0 | % | | (383 | ) | | (1.0 | )% |
Wireline operating expenses | | | | | | | | | | |
Cost of services | | 18,130 |
| 47.2 | % | | 19,175 |
| 49.4 | % | | (1,045 | ) | | (5.4 | )% |
Costs of goods sold | | 55 |
| 0.1 | % | | 42 |
| 0.1 | % | | 13 |
| | 31.0 | % |
Selling, general and administrative | | 3,831 |
| 10.0 | % | | 3,403 |
| 8.8 | % | | 428 |
| | 12.6 | % |
Depreciation and amortization | | 6,980 |
| 18.1 | % | | 6,634 |
| 17.1 | % | | 346 |
| | 5.2 | % |
Total Wireline operating expenses | | 28,996 |
| 75.4 | % | | 29,254 |
| 75.4 | % | | (258 | ) | | (0.9 | )% |
Wireline operating income | | $ | 9,440 |
| 24.6 | % | | $ | 9,565 |
| 24.6 | % | | (125 | ) | | (1.3 | )% |
Operating revenue
During the six months ended June 30, 2019, total operating revenue was consistent with the six months ended June 30, 2018.
Operating expenses
During the six months ended June 30, 2019, total operating expenses were consistent with the six months ended June 30, 2018.prior year quarter.
Non-GAAP Financial Measures
Adjusted OIBDA
Adjusted OIBDA represents Operating income before depreciation, amortization of intangible assets, stock-based compensation and certain other items of revenue, expense, gain or loss not reflective of our operating performance, which may or may not be recurring in nature.
Adjusted OIBDA is a non-GAAP financial measure that we use to evaluate our operating performance in comparison to our competitors. Management believes that analysts and investors use Adjusted OIBDA as a supplemental measure of operating performance to facilitate comparisons with other telecommunications companies. This measure isolates and evaluates operating performance by excluding the cost of financing (e.g., interest expense), as well as the non-cash depreciation and amortization of past capital investments, non-cash share-based compensation expense, and certain other items of revenue, expense, gain or loss not reflective of our operating performance, which may or may not be recurring in nature.
During Q2 2019, we modified our definition of Adjusted OIBDA to exclude the benefit received from the waived management fee and non-cash amortization of deferred contract costs, as well as certain other immaterial items. This change enhances the comparability of our non-GAAP performance measure with similar performance measures reported by comparable companies in our industry. We have applied this change consistently to all comparable periods presented below.
Adjusted OBIDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for operating income, from operations, net income or any other measure of financial performance reported in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
The following tables reconcile Adjusted OIBDA to operating income, which we consider to be the most directly comparable GAAP financial measure:
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| | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Consolidated |
Operating income | | $ | 22,024 |
| | $ | 6,786 |
| | $ | 5,094 |
| | $ | (9,884 | ) | | $ | 24,020 |
|
Depreciation and amortization | | 32,219 |
| | 6,555 |
| | 3,447 |
| | 132 |
| | 42,353 |
|
OIBDA | | 54,243 |
| | 13,341 |
| | 8,541 |
| | (9,752 | ) | | 66,373 |
|
Share-based compensation expense | | — |
| | — |
| | — |
| | 593 |
| | 593 |
|
Adjusted OIBDA | | $ | 54,243 |
| | $ | 13,341 |
| | $ | 8,541 |
| | $ | (9,159 | ) | | $ | 66,966 |
|
Additionally, we realized cash savings of $9.7 million during the period from the waiver of Sprint's Management Fee. These cash savings are accounted for as a reduction of the affiliate contract enhancement asset, which was recognized in conjunction with the 2016 nTelos acquisition. The remaining waived management fee balance at June 30, 2019 was $137.9 million, which we expect to realize through 2022. |
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Three Months Ended March 31, 2020 | | | | | | | | | | |
(in thousands) | | Wireless | | Broadband | | Tower | | Corporate & Eliminations | | Consolidated |
Operating income | | $ | 23,444 |
| | $ | 10,030 |
| | $ | 1,795 |
| | $ | (12,219 | ) | | $ | 23,050 |
|
Depreciation | | 21,010 |
| | 10,717 |
| | 470 |
| | 271 |
| | 32,468 |
|
Amortization of intangible assets | | 4,714 |
| | 154 |
| | — |
| | — |
| | 4,868 |
|
OIBDA | | 49,168 |
| | 20,901 |
| | 2,265 |
| | (11,948 | ) | | 60,386 |
|
Share-based compensation expense | | — |
| | — |
| | — |
| | 2,905 |
| | 2,905 |
|
Non-recurring deal advisory fees | | — |
| | — |
| | — |
| | 910 |
| | 910 |
|
Adjusted OIBDA | | $ | 49,168 |
| | $ | 20,901 |
| | $ | 2,265 |
| | $ | (8,133 | ) | | $ | 64,201 |
|
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| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | | | | |
(in thousands) | | Wireless | | Broadband | | Tower | | Corporate & Eliminations | | Consolidated |
Operating income | | $ | 24,213 |
| | $ | 10,049 |
| | $ | 1,124 |
| | $ | (10,599 | ) | | $ | 24,787 |
|
Depreciation | | 24,752 |
| | 9,950 |
| | 680 |
| | 138 |
| | 35,520 |
|
Amortization of intangible assets | | 5,618 |
| | 41 |
| | — |
| | — |
| | 5,659 |
|
OIBDA | | 54,583 |
| | 20,040 |
| | 1,804 |
| | (10,461 | ) | | 65,966 |
|
Share-based compensation expense | | — |
| | — |
| | — |
| | 1,714 |
| | 1,714 |
|
Adjusted OIBDA | | $ | 54,583 |
| | $ | 20,040 |
| | $ | 1,804 |
| | $ | (8,747 | ) | | $ | 67,680 |
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Three Months Ended June 30, 2018 | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Consolidated |
Operating income | | $ | 22,251 |
| | $ | 6,083 |
| | $ | 4,793 |
| | $ | (11,958 | ) | | $ | 21,169 |
|
Depreciation and amortization | | 31,565 |
| | 6,179 |
| | 3,240 |
| | 133 |
| | 41,117 |
|
OIBDA | | 53,816 |
| | 12,262 |
| | 8,033 |
| | (11,825 | ) | | 62,286 |
|
Share-based compensation expense | | — |
| | — |
| | — |
| | 1,370 |
| | 1,370 |
|
Adjusted OIBDA | | $ | 53,816 |
| | $ | 12,262 |
| | $ | 8,033 |
| | $ | (10,455 | ) | | $ | 63,656 |
|
Additionally, we realized cash savings of $9.6 million during the period from the waiver of Sprint's Management Fee, as discussed above.
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Six Months Ended June 30, 2019 | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Consolidated |
Operating income | | $ | 47,361 |
| | $ | 12,489 |
| | $ | 9,440 |
| | $ | (20,483 | ) | | $ | 48,807 |
|
Depreciation and amortization | | 63,269 |
| | 13,013 |
| | 6,980 |
| | 270 |
| | 83,532 |
|
OIBDA | | 110,630 |
| | 25,502 |
| | 16,420 |
| | (20,213 | ) | | 132,339 |
|
Share-based compensation expense | | — |
| | — |
| | — |
| | 2,307 |
| | 2,307 |
|
Adjusted OIBDA | | $ | 110,630 |
| | $ | 25,502 |
| | $ | 16,420 |
| | $ | (17,906 | ) | | $ | 134,646 |
|
Additionally, we realized cash savings of $19.3 million during the period from the waiver of Sprint's Management Fee, as discussed above.
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Six Months Ended June 30, 2018 | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Consolidated |
Operating income | | $ | 39,518 |
| | $ | 11,610 |
| | $ | 9,565 |
| | $ | (22,770 | ) | | $ | 37,923 |
|
Depreciation and amortization | | 65,490 |
| | 12,203 |
| | 6,634 |
| | 277 |
| | 84,604 |
|
OIBDA | | 105,008 |
| | 23,813 |
| | 16,199 |
| | (22,493 | ) | | 122,527 |
|
Share-based compensation expense | | — |
| | — |
| | — |
| | 3,407 |
| | 3,407 |
|
Adjusted OIBDA | | $ | 105,008 |
| | $ | 23,813 |
| | $ | 16,199 |
| | $ | (19,086 | ) | | $ | 125,934 |
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Additionally, we realized cash savings of $18.6 million during the period from the waiver of Sprint's Management Fee, as discussed above.
Financial Condition, Liquidity and Capital Resources
As of June 30, 2019 our Cash and cash equivalents totaled $98.1 million and the availability under our revolving line of credit was $75.0 million, for a total available liquidity of $173.1 million.
Sources and Uses of CashCash: .
Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations, and proceeds available under our Credit Facility.
As of March 31, 2020 our cash and cash equivalents totaled $120.2 million and the availability under our revolving line of credit was $75.0 million, for total available liquidity of $195.2 million.
The Company generated approximately $129.6$61.1 million of net cash from operations induring the first sixthree months of 2019, representing an increase of $2.5 million or 2.0%, comparedended March 31, 2020, consistent with the first sixthree months of 2018, driven by:
a $10.9 million increase in net income, and was partially offset by
$7.6 million increase in net cash outflows from income taxes, and
$0.8 million as the result of a change in working capital.ended March 31, 2019.
Net cash used in investing activities decreased $24.9$22.4 million or 21.8%, forduring the sixthree months ended June 30, 2019. Cash used in investing activities forMarch 31, 2020, compared with the sixthree months ended June 30,March 31, 2019 was primarily for:due to the following:
$79.110.0 million for capital expenditures primarily driven by capacity upgrades and network expansion across our Wireless and Cable segments; and
investmentsdecline in our wireless, cable and fiber networks, other infrastructure investments, made on a recurring basis.acquisitions. In 2018, we acquired2019, the Sprint Territory Expansion Area for $52.0 million and in 2019 weCompany acquired Big Sandy Broadband, Inc. for $10.0 million.
$12.1 million which was integrated intodecrease in capital expenditures due primarily to a $17.0 million decline in Wireless segment as the Ntelos and Parkersburg network expansions were completed in the first half of 2019 partially offset by $5.0 million in higher spending in Broadband segment driven by our Cable segment.
We expect our investments in our networks and infrastructure to expand in support of our continued growth.Glo Fiber market expansion.
Net cash used in financing activities increased $1.3decreased $12.0 million, or 5.0%53.4%, forduring the sixthree months ended June 30, 2019. The use of cash for the six months ended June 30, 2019, wasMarch 31, 2020 primarily from increaseddriven by:
$11.4 million decrease in principal paymentsrepayments on our long-term debt.term loans, and
$0.8 million decrease in payments for taxes related to share-based compensation vesting events.
Indebtedness: As of March 31, 2020, the Company’s indebtedness totaled approximately $712.2 million, net of unamortized loan fees of $11.3 million, with an annualized overall weighted average interest rate of approximately 3.2%. Refer to Note 8, Long-Term Debt for information about the Company's Credit Facility and financial covenants.
Borrowing Capacity.Capacity: As of June 30, 2019,March 31, 2020, the Company’s outstanding debt principal, under the Credit Facility, totaled $760.5$723.5 million, with an estimated annualized effective interest rate of 3.79%3.2% after considering the impact of the interest rate swap contracts and unamortized loan costs.
As of June 30, 2019, the Company wasMarch 31, 2020, we were in compliance with the financial covenants in itsour Credit Facility agreement.
We believe thatexpect our cash on hand, available funds under our revolving credit facility, and our cash flow from operations and borrowings expectedwill be sufficient to be available under our existing credit facilities will provide sufficient cash to enable us to fund planned capital expenditures, make scheduled principal and interest payments, meet our other cash requirements and maintain compliance with the terms of our financing agreementsanticipated liquidity needs for at leastbusiness operations for the next twelve months. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our credit facilities.facility. Thereafter, capital expenditures will likely be required to continue planned capital upgrades to the acquired wireless networkand broadband networks and provide increased capacity to meet our expected growth in demand for our products and services. The actual amount and timing of our future capital requirements may differ materially from our estimate depending on the demand for our products and services, including the outcome of a potential amendment of our wireless affiliate agreement with T-Mobile, new market developments and expansion opportunities.
Our cash flows from operations could be adversely affected by events outside our control, including, without limitation, changes in overall economic conditions, regulatory requirements, changes in technologies, demand for our products and services, availability of labor resources and capital, changes in our relationship with Sprint, natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as COVID-19, and other conditions. The Wireless segment’s operations are dependent upon Sprint’sT-Mobile’s ability to execute certain functions such as billing, customer care, and collections; our ability to develop and implement successful marketing programs and new products and services; and our ability to effectively and economically manage other operating activities under our agreements with Sprint. Our ability to attract and maintain a sufficient customer base, particularly in our cableBroadband markets, is also critical to our ability to maintain a positive cash flow from operations. The foregoing events individually or collectively could affect our results.
Critical Accounting Policies
Critical accounting policies are those policies that affect our more significant judgments and estimates used inThere have been no material changes to the preparation of our unaudited condensed consolidated financial statements. For a more detailed discussion of our critical accounting policies please refer toas previously disclosed in Part II, Item 8 of our 2018Annual Report on Form 10-K.10-K for the year ended December 31, 2019.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s market risks relate primarily to changes in interest rates. The Company’s interest rate risk generally involves two components. The first component is outstanding debt with variable rates. As of June 30, 2019,March 31, 2020, the Company had $760.5$723.5 million of gross variable rate debt outstanding, bearing interest at a weighted average rate of 3.79% as determined on a quarterly basis.3.2%. An increase in market interest rates of 1.00% would add approximately $7.5$7.1 million to annual interest expense, excluding the effect of theour interest rate swap.swaps. The swaps cover notional principal equal to $328.7 million, or approximately 50% or $361.9 million45.4% as of June 30, 2019 of the outstanding variable rate debt through maturity in 2023.March 31, 2020. The Company is required to pay a combined fixed rate of approximately 1.16% and receive a variable rate based on one month LIBOR (2.44% for June 2019)(1.60% at March 31, 2020), to manage a portion of its interest rate risk. Changes in the net interest paid or received under the swaps would offset approximately 50%a corresponding portion of the change in interest expense on the variable rate debt outstanding. The swap agreements currently reduce annual interest expense by approximately $2.3 million, based on the spread between the fixed rate and the variable rate currently in effect on our debt.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our President and Chief Executive Officer, who is the Principal Executive Officer, and the Senior Vice President - Finance and Chief Financial Officer, who is the Principal Financial Officer, and the Vice President and Chief Accounting Officer, who is the Principal Accounting Officer, conducted an evaluation of our disclosure controls and procedures, (as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly report on Form 10-Q.
As disclosed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2018,2019, we identified material weaknesses in internal control over financial reporting. The material weaknesses will not be considered remediated until the applicable enhanced controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As remediation has not yet been completed, our President and Chief Executive Officer, and our Senior Vice President - Finance and Chief Financial Officer, and our Vice President - Chief Accounting Officer, have concluded that our disclosure controls and procedures continued to be ineffective as of June 30, 2019.March 31, 2020.
In light of the material weaknesses, management performed additional analysis and other procedures to ensure that our unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP).
Notwithstanding the material weaknesses, management has concluded that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Changes in Internal Control Overover Financial Reporting
There have been no changes inAs part of the Company’s continued remediation efforts, during the period ended March 31, 2020 the Company hired several experienced accounting professionals to further strengthen its technical accounting and internal control over financial reporting (as definedcapabilities. Aside from these actions and the ongoing execution of Management's Remediation Plan, there were no changes in Rules 13a-15(f) and 15d-15(f) ofour internal control over financial reporting during the Exchange Act) as of June 30, 2019,most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’sour internal control over financial reporting.
Management is continuing to implement the material weakness remediation plans as disclosed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2018. We believe that these actions and the improvements we expect to achieve will effectively remediate the material weaknesses. However, these material weaknesses will not be considered remediated until the enhanced controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.PART II
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PART II. | OTHER INFORMATION |
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ITEM 1A. | Risk FactorsRISK FACTORS |
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. As of June 30,March 31, 2020, except as described below, there have been no significant changes to the Risk Factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.
Risks Related to the Business Combination between T-Mobile and Sprint could cause significant volatility in the trading and value of the Company’s common stock
As previously disclosed, on April 1, 2020, T-Mobile US, Inc. (“T-Mobile”) announced the completion of its business combination with Sprint Corporation (“Sprint”) and subsequently delivered to the Company a notice of Network Technology Conversion, Brand Conversion and Combination Conversion (a “Conversion Notice”) pursuant to the terms of the Company’s affiliate agreement with Sprint.
Delivery of the Conversion Notice initiated the process set forth in the affiliate agreement to determine the nature of the Company’s relationship with the combined entity (“New T-Mobile”). The affiliate agreement provides for a 90-day period following receipt of the Conversion Notice for the parties to negotiate mutually agreeable terms and conditions under which the Company would continue as an affiliate of New T-Mobile. The affiliate agreement further provides that, if New T-Mobile and the Company have not negotiated a mutually acceptable agreement within the 90-day period, then New T-Mobile would have a period of 60 days thereafter to exercise an option to purchase the assets of our Wireless operations for 90% of the “Entire Business Value” (as defined under our affiliate agreement). If New T-Mobile does not exercise its purchase option, the Company would then have a 60-day period to exercise an option to purchase the legacy T-Mobile network and subscribers in our service area. If the Company does not exercise its purchase option, New T-Mobile must sell or decommission its legacy network and customers in our service area.
As previously disclosed, the Company’s management has been in discussions with New T-Mobile regarding the future of the Company’s Wireless operations; however, there can be no assurance as to the outcome of these discussions, including, without limitation, the terms or conditions under which the Company could continue as an affiliate of New T-Mobile or the terms of any purchase of the legacy T-Mobile subscriber and network assets in our service area or the terms to finance such an asset purchase, the timing or terms of any sale of the assets of the Company’s Wireless operations to New T-Mobile (including the value received by the Company pursuant to a negotiated transaction or as a result of the appraisal process under the affiliate agreement), or the use of proceeds from any such sale transaction or the post-closing composition or capital structure of the Company’s remaining operations and business following any such sale transaction. The pending discussions and any ensuring transaction with the New T-Mobile could cause significant volatility in the trading and value of the Company’s common stock.
The affiliate agreement also provides that 90 days following delivery of the Conversion Notice, New T-Mobile may effect a Technology Conversion, Brand Conversion and Combination Conversion (each as defined in the affiliate agreement), following which New T-Mobile is permitted to take certain competitive and other actions that could directly or indirectly adversely affect the Company’s Wireless business and operations.
Uncertainty about the Company’s relationship with New T-Mobile, particularly the effects on customers, distributors, and employees could have a material effect on the Company. These uncertainties may impair our ability to attract and retain customers for our Wireless segment, and retain and motivate key personnel during the pendency of the discussions with New T-Mobile, as existing and prospective employees may experience uncertainty about their future roles with New T-Mobile. Additionally, these uncertainties could cause our third party distributors and dealers to seek to change, cancel or fail to renew existing business relationships with us. Competitors may also target our existing customers by highlighting potential uncertainties and integration difficulties that may result from the uncertainties at this time.
In addition, management and financial resources have been diverted and will continue to be diverted toward the negotiations with New T-Mobile regarding the future of the Company’s Wireless operations. We have incurred, and expect to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with these negotiations and related planning. These costs could adversely affect our financial condition and results of operations prior to the determination of the future of our Wireless operations.
Risks Related to Our Business
The COVID-19 pandemic, and the future outbreak of other highly infectious or contagious diseases, could disrupt the operation on our business resulting in adverse impacts to our financial condition, results of operations, and cash flow.
Since being reported in December 2019 in China, an outbreak of a new strain of coronavirus (“COVID-19”) has spread globally, including to every state in the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic and the United States declared a national emergency. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets, and another pandemic in the future could have similar effects. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of COVID-19 on the Company, and there is no guarantee that efforts by Shentel, designed to address adverse impacts of the Coronavirus, will be effective.
Governments in the markets that we operate have mandated residents to stay at home and have temporarily closed businesses that are not considered essential. Although our businesses are considered essential, the Company has not identified anytemporarily closed approximately 40% of its Sprint branded retail stores as a result of the COVID-19 pandemic, which will adversely affect postpaid subscriber gross additions in the Wireless segment. In addition, the current COVID-19 pandemic, or a future pandemic, could have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:
additional disruptions or delays in our operations or network performance, as well as network maintenance and construction, testing, supervisory and customer support activities, and inventory and supply procurement;
increases in operating costs, inventory shortages and/or a decrease in productivity related to travel bans and social distancing efforts, which could include delays in our ability to install broadband services at customer locations or require our vendors and contractors to incur additional costs that may be passed onto us;
a deterioration in our ability to operate in affected areas or delays in the supply of products or services to us from vendors that are needed updatesfor our efficient operations;
a decrease in the ability of our counterparties to meet their obligations to us in full, or at all;
a general reduction in business and economic activity may severely impact our customers and may cause them to be unable to pay for services provided; and
the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption.
Shentel has implemented policies and procedures designed to mitigate the risk factors included in our most recent Form 10-K.of adverse impacts of the COVID-19 pandemic, or a future pandemic, on the Company’s operations, but it may incur additional costs to ensure continuity of business operations caused by COVID-19, or other future pandemics, which could adversely affect its financial condition and results of operations. However, the extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and actions taken to contain COVID-19 or its impact.
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
None.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
The following table provides information about shares repurchased during the first quarter ended March 31, 2020, to settle employee tax withholding related to the vesting of stock awardsawards. There have been no repurchases of shares during the three months endedJune 30, 2019:
of January, February and March 2020 through the share repurchase program.
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| | | | | |
| Number of Shares Surrendered | Average Price Paid per Share |
April 1 to April 30 | 402 |
| $ | 41.50 |
|
May 1 to May 31 | 1,864 |
| 42.62 |
|
June 1 to June 30 | 3,104 |
| 38.18 |
|
Total | 5,370 |
| $ | 39.97 |
|
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| | | | | | | | | | | | | |
($ in thousands, except per share amounts) | Number of Shares Surrendered | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value that May Yet be Purchased under the Plans or Programs |
January 1 to January 31 | — |
| | N/A |
| | — |
| | $ | 72,765 |
|
February 1 to February 29 | 42,398 |
| | $ | 45.87 |
| | — |
| | $ | 72,765 |
|
March 1 to March 31 | 14 |
| | $ | 46.79 |
| | — |
| | $ | 72,765 |
|
Total | 42,412 |
| | | | — |
| | $ | 72,765 |
|
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(a) | The following exhibits are filed with this Quarterly Report on Form 10-Q: |
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3.1 | Amended and Restated Bylaws of Shenandoah Telecommunications Company, as amended effective April 16, 2019 |
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31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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31.2* | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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31.3* | Certification of Principal Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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32** | Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. |
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(101) | Formatted in XBRL (Extensible Business Reporting Language) |
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| 101.INS | 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 |
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| 101.SCH | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
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** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act. |
EXHIBIT INDEX
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Exhibit No. | Exhibit |
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| Amended and Restated Bylaws of Shenandoah Telecommunications Company, as amended effective April 16, 2019 |
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| Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| Certification of Principal Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. |
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(101) | Formatted in XBRL (Extensible Business Reporting Language) |
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| 101.INS | 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 |
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| 101.SCH | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
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** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act. |
SIGNATURES
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.
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| SHENANDOAH TELECOMMUNICATIONS COMPANY |
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| /s/James J. Volk |
| James J. Volk |
| Senior Vice President - Chief Financial Officer (Principal Financial Officer) |
| Date: August 6, 2019April 30, 2020 |