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Section 1: 10-Q (FORM 10-Q)

cabo20180930_10q.htm
 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-36863

___________

 

Cable One, Inc. 

(Exact name of registrant as specified in its charter)

___________

 

Delaware

 

13-3060083

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

  

210 E. Earll Drive, Phoenix, Arizona

 

85012

(Address of Principal Executive Offices)

 

(Zip Code)

 

(602) 364-6000

(Registrant’s telephone number, including area code)

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

   

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 
   

Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

 

Description of Class  Shares Outstanding as of November 2, 2018
Common stock, par value $0.01 5,703,524

                     

 

 

 

CABLE ONE, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I:  FINANCIAL INFORMATION  1
   
Item 1.     Condensed Consolidated Financial Statements  1
   
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
   

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

32
   
Item 4.     Controls and Procedures 32
   
PART II: OTHER INFORMATION 33
   
Item 1.     Legal Proceedings 33
   
Item 1A.  Risk Factors 33
   

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

34
   

Item 3.     Defaults Upon Senior Securities

34
   
Item 4.     Mine Safety Disclosures  34
   
Item 5.     Other Information 34
   
Item 6.     Exhibits  34
   
SIGNATURES 35

   

i

 

 

PART I:  FINANCIAL INFORMATION

 

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(in thousands, except par value and share data)

 

September 30, 2018

   

December 31, 2017

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 236,901     $ 161,752  

Accounts receivable, net

    28,168       29,930  

Income taxes receivable

    8,566       21,331  

Prepaid and other current assets

    16,694       10,898  

Total Current Assets

    290,329       223,911  

Property, plant and equipment, net

    837,206       831,892  

Intangible assets, net

    956,832       965,745  

Goodwill

    172,129       172,129  

Other noncurrent assets

    11,452       10,955  

Total Assets

  $ 2,267,948     $ 2,204,632  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Accounts payable and accrued liabilities

  $ 101,565     $ 117,855  

Deferred revenue

    18,681       15,008  

Current portion of long-term debt

    19,063       14,375  

Total Current Liabilities

    139,309       147,238  

Long-term debt

    1,147,048       1,160,682  

Deferred income taxes

    225,780       207,154  

Other noncurrent liabilities

    10,476       13,111  

Total Liabilities

    1,522,613       1,528,185  
                 

Commitments and contingencies (refer to note 14)

               
                 

Stockholders' Equity

               

Preferred stock ($0.01 par value; 4,000,000 shares authorized; none issued or outstanding)

    -       -  

Common stock ($0.01 par value; 40,000,000 shares authorized; 5,887,899 shares issued; and 5,705,059 and 5,731,442 shares outstanding as of September 30, 2018 and December 31, 2017, respectively)

    59       59  

Additional paid-in capital

    35,674       28,412  

Retained earnings

    819,687       728,386  

Accumulated other comprehensive loss

    (350 )     (352 )

Treasury stock, at cost (182,840 and 156,457 shares held as of September 30, 2018 and December 31, 2017, respectively)

    (109,735 )     (80,058 )

Total Stockholders' Equity

    745,335       676,447  

Total Liabilities and Stockholders' Equity

  $ 2,267,948     $ 2,204,632  

 

See accompanying notes to the condensed consolidated financial statements.

 

1

Table of Contents

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands, except per share and share data)

 

2018

   

2017

   

2018

   

2017

 

Revenues

  $ 268,268     $ 253,833     $ 802,443     $ 702,258  

Costs and expenses

                               

Operating (excluding depreciation and amortization)

    91,956       91,894       278,478       245,026  

Selling, general and administrative

    59,439       51,806       164,584       149,156  

Depreciation and amortization

    50,414       46,712       148,225       134,270  

(Gain) loss on asset disposals, net

    3,140       2,506       12,508       (3,180 )

Total costs and expenses

    204,949       192,918       603,795       525,272  

Income from operations

    63,319       60,915       198,648       176,986  

Interest expense

    (15,460 )     (14,019 )     (45,136 )     (33,408 )

Other income, net

    1,503       278       3,002       243  

Income before income taxes

    49,362       47,174       156,514       143,821  

Income tax provision

    11,048       16,269       33,762       52,943  

Net income

  $ 38,314     $ 30,905     $ 122,752     $ 90,878  
                                 

Net income per common share:

                               

Basic

  $ 6.75     $ 5.44     $ 21.58     $ 16.00  

Diluted

  $ 6.70     $ 5.37     $ 21.44     $ 15.82  

Weighted average common shares outstanding:

                               

Basic

    5,674,224       5,680,600       5,687,849       5,678,485  

Diluted

    5,717,575       5,753,910       5,725,520       5,745,783  
                                 

Other comprehensive income, net of tax

    1       1       2       5  

Comprehensive income

  $ 38,315     $ 30,906     $ 122,754     $ 90,883  
                                 

Dividends declared per common share

  $ 2.00     $ 1.75     $ 5.50     $ 4.75  

 

See accompanying notes to the condensed consolidated financial statements.

 

2

Table of Contents

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

                                           

Accumulated

         
                   

Additional

           

Treasury

    Other    

Total

 

 

 

Common Stock

   

Paid-In

   

Retained

   

Stock,

    Comprehensive    

Stockholders’

 

(in thousands, except per share and share data)

 

Shares

   

Amount

   

Capital

   

Earnings

   

at cost

    Loss    

Equity

 

Balance at December 31, 2017

    5,731,442     $ 59     $ 28,412     $ 728,386     $ (80,058 )   $ (352 )   $ 676,447  

Net income

    -       -       -       122,752       -       -       122,752  

Changes in pension, net of tax

    -       -       -       -       -       2       2  

Equity-based compensation

    -       -       7,262       -       -       -       7,262  

Issuance of equity awards, net of forfeitures

    17,635       -       -       -       -       -       -  

Repurchases of common stock

    (34,028 )     -       -       -       (22,556 )     -       (22,556 )

Withholding tax for equity awards

    (9,990 )     -       -       -       (7,121 )     -       (7,121 )

Dividends paid to stockholders ($5.50 per common share)

    -       -       -       (31,451 )     -       -       (31,451 )

Balance at September 30, 2018

    5,705,059     $ 59     $ 35,674     $ 819,687     $ (109,735 )   $ (350 )   $ 745,335  

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3

Table of Contents

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine Months Ended September 30,

 

(in thousands)

 

2018

   

2017

 

Cash flows from operating activities:

               

Net income

  $ 122,752     $ 90,878  

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

               

Depreciation and amortization

    148,225       134,270  

Amortization of debt issuance cost

    3,088       2,183  

Equity-based compensation

    7,262       7,921  

Write-off of debt issuance costs

    110       613  

Increase in deferred income taxes

    18,626       9,820  

(Gain) loss on asset disposals, net

    12,508       (3,180 )

Changes in operating assets and liabilities, net of effects from acquisitions:

               

(Increase) decrease in accounts receivable

    1,762       (6,009 )

(Increase) decrease in income taxes receivable

    12,765       (13,580 )

(Increase) decrease in prepaid and other current assets

    (5,796 )     884  

Decrease in accounts payable and accrued liabilities

    (14,437 )     (6,618 )

Increase in deferred revenue

    3,673       119  

Change in other noncurrent assets and liabilities, net

    (2,921 )     2,487  

Net cash provided by operating activities

    307,617       219,788  
                 

Cash flows from investing activities:

               

Purchase of business, net of cash acquired

    -       (727,947 )

Capital expenditures

    (159,170 )     (128,830 )

Increase (decrease) in accrued expenses related to capital expenditures

    1,740       1,982  

Proceeds from sales of property, plant and equipment

    1,827       11,334  

Net cash used in investing activities

    (155,603 )     (843,461 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of long-term debt

    -       750,000  

Payment of debt issuance costs

    (2,131 )     (15,224 )

Payments on long-term debt

    (10,013 )     (97,825 )

Repurchases of common stock

    (22,556 )     (399 )

Payment of withholding tax for equity awards

    (7,121 )     (2,531 )

Dividends paid to stockholders

    (31,451 )     (27,188 )

Decrease in cash overdraft

    (3,593 )     (2,499 )

Net cash provided by (used in) financing activities

    (76,865 )     604,334  
                 

Increase (decrease) in cash and cash equivalents

    75,149       (19,339 )

Cash and cash equivalents, beginning of period

    161,752       138,040  

Cash and cash equivalents, end of period

  $ 236,901     $ 118,701  
                 

Supplemental cash flow disclosures:

               

Cash paid for interest, net of capitalized interest

  $ 35,571     $ 20,437  

Cash paid for income taxes, net of refunds received

  $ 2,366     $ 57,397  

 

See accompanying notes to the condensed consolidated financial statements.

 

4

Table of Contents

 

CABLE ONE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.        DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business. Cable One, Inc. (“Cable One”) owns and operates cable systems that provide data, video and voice services to residential and commercial subscribers in 21 Western, Midwestern and Southern states of the United States. As of September 30, 2018, Cable One provided service to 801,179 residential and business customers, of which 660,799 subscribed to data services, 328,921 subscribed to video services and 127,972 subscribed to voice services.

 

On May 1, 2017, Cable One completed the acquisition of all the outstanding equity interests of RBI Holding LLC (“NewWave”), which became a wholly owned subsidiary of Cable One. Refer to note 4 for details on the transaction and note 8 for details on the related financing.

 

Unless otherwise stated or the context otherwise indicates, all references in this Quarterly Report on Form 10-Q to “Cable One,” “us,” “our,” “we” or the “Company” refer to Cable One, Inc. and its wholly owned subsidiaries.

 

Basis of Presentation. The condensed consolidated financial statements and accompanying notes thereto have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“GAAP”) for interim financial information; and (ii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such guidance, certain notes and other financial information normally required by GAAP have been omitted. Management believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations and cash flows as of and for the periods presented herein. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”).

 

The December 31, 2017 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 2017 Form 10-K, but does not include all disclosures required by GAAP. The Company’s interim results of operations may not be indicative of its future results.

 

Principles of Consolidation. The condensed consolidated financial statements include the accounts of the Company, including its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Segment Reporting. Accounting Standard Codification (“ASC”) 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. The Company’s operations are organized and managed on the basis of cable systems within its geographic regions. Each cable system derives revenues from the delivery of similar products and services to a customer base that is also similar. Each cable system deploys similar technology to deliver the Company’s products and services, operates within a similar regulatory environment, has similar economic characteristics and is managed by the Company’s chief operating decision maker as part of an aggregate of all cable systems. Management evaluated the criteria for aggregation under ASC 280 and has concluded that the Company meets each of the respective criteria set forth therein. Accordingly, management has identified one reportable segment.

 

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates and underlying assumptions.

 

Revenue Recognition. The Company recognizes revenue in accordance with ASC 606 - Revenue from Contracts with Customers. Residential revenues are generated through individual and bundled subscriptions for data, video and voice services on month to month terms, without penalty for cancellation. As bundled subscriptions are typically offered at discounted rates, the sales price is allocated amongst the respective product lines based on the relative selling price at which each service is sold under standalone service agreements. Business revenues are generated through individual and bundled subscriptions for data, video and voice services under contracts with terms ranging from one month to several years.

 

5

 

The Company also generally receives an allocation of scheduled advertising time as part of its distribution agreements with cable and broadcast networks, which the Company sells to local, regional and national advertisers under contracts with terms that are typically less than one year. In most instances, the available advertising time is sold directly by the Company’s internal sales force. As the Company is acting as principal in these arrangements, the advertising that is sold is reported as revenue on a gross basis. In instances where advertising time is sold by contracted third-party agencies, the Company is not acting as principal and the advertising sold is therefore reported net of agency fees. Advertising revenues are recognized when the related advertisements are aired.

 

The unit of account for revenue recognition is a performance obligation, which is a requirement to transfer a distinct good or service to a customer. Customers are billed for the services to which they subscribe based upon published or contracted rates, with the sales price being allocated to each performance obligation. For arrangements with multiple performance obligations, the sales price is allocated based on the relative standalone selling price for each subscribed service. Generally performance obligations are satisfied, and revenue is recognized, over the period of time in which customers simultaneously receive and consume the Company’s defined performance obligations, which are delivered in a similar pattern of transfer. Advertising revenue is recognized at the point in time when the underlying performance obligation is complete.

 

The Company also incurs certain incremental costs to acquire residential and business customers, such as commission costs and third-party costs to service specific customers. These costs are capitalized as contract assets and amortized over the applicable period. For commissions, the amortization period is the average customer tenure, which is approximately five years for both residential and business customers. All other costs are amortized over the requisite contract period.

 

Recently Adopted Accounting Pronouncements. In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with ASC 718. The ASU was effective January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact in the future.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step two of the previous goodwill impairment test under ASC 350 and replaces it with a simplified model. Under the simplified model, goodwill impairment will be calculated as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. The amount of any impairment under the simplified model may differ from what would have been recognized under the previous two-step test. The ASU is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019, with early adoption permitted. The Company elected to early adopt the standard on January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact in the future.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of the amendment is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU was effective January 1, 2018. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements as no asset acquisitions or business combinations have occurred since the effective date, but may have an impact in the future.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies the way in which certain cash receipts and cash payments should be classified within the consolidated statements of cash flows and also how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 was effective January 1, 2018. The adoption of this guidance did not have a material impact on the classification of any cash flows within the Company’s consolidated statements of cash flows, but may have an impact in the future.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides new guidance related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard provides a single principles-based, five step model to be applied to all contracts with customers: (i) identify the contract(s) with the customer, (ii) identify the performance obligation(s) in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligation(s) in the contract and (v) recognize revenue when each performance obligation is satisfied. The updated guidance also requires additional disclosures regarding the nature and timing of revenue recognition as well as any uncertainty surrounding potential revenue recognition. The Company adopted the updated guidance on January 1, 2018 on a full retrospective basis, which required all periods presented to reflect the impact of the updated guidance. Upon adoption, the Company also implemented changes in the presentation of certain revenues and expenses, which resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time instead of immediately. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements for any period presented. Refer to note 3 for further details of the impact on the Company’s 2017 consolidated financial statements and the requisite disclosures pertaining to the transition to the new standard.

 

6

 

Recently Issued But Not Yet Adopted Accounting Pronouncements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation, setup and other upfront costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing such costs incurred to develop or obtain internal-use software. The update specifies which costs are to be expensed and which are to be capitalized, the period over which capitalized costs are to be amortized, the process for identifying and recognizing impairment and the proper presentation of such costs within the consolidated financial statements. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted, and may be adopted either retrospectively or prospectively. The Company is currently evaluating the timing and method of adoption, as well as the expected impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The update is effective for the first quarter of 2019, with early adoption permitted. The Company does not expect ASU 2018-07 to have a material impact on the Company’s consolidated financial statements upon adoption, but it may have an impact in the future.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to recognize an allowance for expected lifetime credit losses through earnings concurrent with the recognition of a financial asset measured at amortized cost. The estimate of expected credit losses is required to be adjusted each reporting period over the life of the financial asset. The update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted after December 15, 2018, and requires a modified retrospective adoption approach. The Company does not expect ASU 2016-13 to have a material impact on its consolidated financial statements upon adoption, but it may have an impact in the future.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to record most of their leases on the balance sheet as a right-of-use asset and a corresponding lease liability. The Company will be required to classify each separate lease component as an operating or finance lease at the lease commencement date. Initial measurement of the right-of-use asset and lease liability is the same for both operating and finance leases, however, expense recognition and amortization of the right-of-use asset differs. Operating leases will reflect lease expense on a straight-line basis similar to current operating leases while finance leases will reflect a front-loaded expense pattern similar to current capital leases. The Company has identified several different categories of leases, such as buildings, land, towers, fiber and colocation sites. Various other categories have been or are currently being evaluated as to whether an actual or embedded lease exists. The Company’s adoption process of ASU 2016-02 is ongoing, including evaluating and quantifying the impact on its consolidated financial statements, implementing a selected technology solution and collecting and validating lease data. The Company will adopt the updated accounting guidance in the first quarter of 2019.

 

 

2.        REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

As previously disclosed in note 2 to the Company’s consolidated financial statements included in the 2017 Form 10-K, the Company changed its accounting for the capitalization of certain internal labor and related costs associated with construction and customer installation activities commencing in the first quarter of 2017. The Company initially classified the entire change as a change in accounting estimate. During the fourth quarter of 2017, the Company determined that a portion of what had previously been reflected as a change in estimate should have been categorized as a change in accounting principle, a portion was determined to be a correction of an error and a portion remained a change in estimate. The changes determined to be a change in estimate or change in accounting principle were applied prospectively for all of 2017.

 

7

 

The Company estimates that the change in principle resulted in a decrease in operating expenses (excluding depreciation and amortization) of approximately $4.3 million and $3.8 million, a decrease in selling, general and administrative expenses of approximately $0.1 million and $0.1 million and an increase in depreciation and amortization expense of $0.8 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively, compared to the results under the prior principle. The Company estimates that the change in principle resulted in a decrease in operating expenses (excluding depreciation and amortization) of approximately $11.8 million and $11.5 million, a decrease in selling, general and administrative expenses of approximately $0.2 million and $0.2 million and an increase in depreciation and amortization expense of $2.2 million and $0.7 million for the nine months ended September 30, 2018 and 2017, respectively, compared to the results under the prior principle.

 

Although the Company determined the error to be immaterial to its previously issued financial statements, the cumulative effect of the error would have been material if corrected in 2017. Therefore, as disclosed in the 2017 Form 10-K, the Company revised its historical consolidated financial statements to properly reflect the impact of the labor capitalization, including the related impact to depreciation expense and income taxes. In connection with this revision, the Company also corrected for other previously identified immaterial errors. The condensed consolidated financial statements for the three and nine months ended September 30, 2017 included in this Quarterly Report on Form 10-Q have been similarly revised to reflect the correction of these errors and should be read in conjunction with note 2 and note 17 in the 2017 Form 10-K.

 

The following tables present the effect of the revision on the condensed consolidated financial statements for the three and nine months ended September 30, 2017 (in thousands, except per share data):

 

   

Three Months Ended September 30, 2017

 
   

As Reported

   

Adjustment

   

As Revised

 
Condensed Consolidated Statement of Operations and Comprehensive Income Information                        

Costs and expenses

                       

Depreciation and amortization

  $ 45,580     $ 1,132     $ 46,712  

Total costs and expenses

    191,948       1,132       193,080  

Income from operations

    61,898       (1,132 )     60,766  

Income before income taxes

    48,157       (1,132 )     47,025  

Income tax provision

    16,643       (430 )     16,213  

Net income

  $ 31,514     $ (702 )   $ 30,812  
                         

Net income per common share:

                       

Basic

  $ 5.55     $ (0.13 )   $ 5.42  

Diluted

  $ 5.48     $ (0.13 )   $ 5.35  
                         

Comprehensive income

  $ 31,515     $ (702 )   $ 30,813  

 

   

Nine Months Ended September 30, 2017

 
   

As Reported

   

Adjustment

   

As Revised

 
Condensed Consolidated Statement of Operations and Comprehensive Income Information                        

Costs and expenses

                       

Selling, general and administrative

  $ 148,695     $ 523     $ 149,218  

Depreciation and amortization

    130,875       3,395       134,270  

Total costs and expenses

    521,416       3,918       525,334  

Income from operations

    180,899       (3,918 )     176,981  

Income before income taxes

    147,734       (3,918 )     143,816  

Income tax provision

    54,430       (1,489 )     52,941  

Net income

  $ 93,304     $ (2,429 )   $ 90,875  
                         

Net income per common share:

                       

Basic

  $ 16.43     $ (0.43 )   $ 16.00  

Diluted

  $ 16.24     $ (0.42 )   $ 15.82  
                         

Comprehensive income

  $ 93,309     $ (2,429 )   $ 90,880  
                         

Condensed Consolidated Statement of Cash Flows Information

 

Net income

  $ 93,304     $ (2,429 )   $ 90,875  

Depreciation and amortization

    130,875       3,395       134,270  

Increase in deferred income taxes

    11,307       (1,489 )     9,818  

Increase in accounts receivable, net

    (6,532 )     523       (6,009 )

Net cash provided by operating activities

  $ 219,788     $ -     $ 219,788  

 

8

 

 

3.        ADOPTION OF NEW REVENUE RECOGNITION STANDARD

 

The Company adopted ASC 606 on January 1, 2018 using the full retrospective method, resulting in a recasting of prior period consolidated financial statements. The adoption resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time, instead of immediately. The impact of the ASC 606 adoption on the comparative 2017 condensed consolidated financial statements was as follows (in thousands, except per share data):

 

   

December 31, 2017

 
   

As Reported

   

ASC 606

Adjustment

   

As Recasted

 

Condensed Consolidated Balance Sheet Information

                       

Assets

                       

Current Assets:

                       

Accounts receivable, net

  $ 51,141     $ (21,211 )   $ 29,930  

Prepaid and other current assets

    8,160       2,738       10,898  

Total Current Assets

    242,384       (18,473 )     223,911  

Other noncurrent assets

    6,179       4,776       10,955  

Total Assets

  $ 2,218,329     $ (13,697 )   $ 2,204,632  
                         

Liabilities and Stockholders' Equity

                       

Current Liabilities:

                       

Accounts payable and accrued liabilities

  $ 117,963     $ (108 )   $ 117,855  

Deferred revenue

    38,266       (23,258 )     15,008  

Total Current Liabilities

    170,604       (23,366 )     147,238  

Deferred income taxes

    205,636       1,518       207,154  

Other noncurrent liabilities

    9,991       3,120       13,111  

Total Liabilities

    1,546,913       (18,728 )     1,528,185  
                         

Stockholders' Equity

                       

Retained earnings

    723,354       5,032       728,386  

Total Stockholders' Equity

    671,416       5,031       676,447  

Total Liabilities and Stockholders' Equity

  $ 2,218,329     $ (13,697 )   $ 2,204,632  

 

   

Three Months Ended September 30, 2017

 
   

As Reported

/ Revised (1)

   

ASC 606

Adjustment

   

As Recasted

 
Condensed Consolidated Statement of Operations and Comprehensive Income Information                        

Revenues

  $ 253,846     $ (13 )   $ 253,833  

Costs and expenses

                       

Selling, general and administrative

    51,968       (162 )     51,806  

Total costs and expenses

    193,080       (162 )     192,918  

Income from operations

    60,766       149       60,915  

Income before income taxes

    47,025       149       47,174  

Income tax provision

    16,213       56       16,269  

Net income

  $ 30,812     $ 93     $ 30,905  
                         

Net income per common share:

                       

Basic

  $ 5.42     $ 0.02     $ 5.44  

Diluted

  $ 5.35     $ 0.02     $ 5.37  
                         

Comprehensive income

  $ 30,813     $ 93     $ 30,906  

 


(1)  Refer to note 2 for details regarding the revision. 

 

9

 

   

Nine Months Ended September 30, 2017

 
   

As Reported/

Revised (1)

   

ASC 606

Adjustment

   

As Recasted

 
Condensed Consolidated Statement of Operations and Comprehensive Income Information                        

Revenues

  $ 702,315     $ (57 )   $ 702,258  

Costs and expenses

                       

Selling, general and administrative

    149,218       (62 )     149,156  

Total costs and expenses

    525,334       (62 )     525,272  

Income from operations

    176,981       5       176,986  

Income before income taxes

    143,816       5       143,821  

Income tax provision

    52,941       2       52,943  

Net income

  $ 90,875     $ 3     $ 90,878  
                         

Net income per common share:

                       

Basic

  $ 16.00     $ -     $ 16.00  

Diluted

  $ 15.82     $ -     $ 15.82  
                         

Comprehensive income

  $ 90,880     $ 3     $ 90,883  
                         

Condensed Consolidated Statement of Cash Flows Information

                       

Net income

  $ 90,875     $ 3     $ 90,878  

Increase in deferred income taxes

    9,818       2       9,820  

Increase in deferred revenue

    452       (333 )     119  

Change in other noncurrent assets and liabilities, net

    2,159       328       2,487  

Net cash provided by operating activities

  $ 219,788     $ -     $ 219,788  

 


(1)  Refer to note 2 for details regarding the revision. 

 

The adoption of ASC 606 did not result in any changes to previously reported total net cash flows from operating, financing or investing activities.

 

A summary of changes in timing and presentation to the Company’s historical consolidated financial statements is presented below:

 

The net decrease in total assets reflects a decrease in accounts receivable to remove amounts billed to customers for which the associated performance obligations have not yet been satisfied, partially offset by the deferral of incremental costs incurred to obtain customers, which were historically expensed immediately.

   

The net decrease in total liabilities reflects a decrease in deferred revenue to remove amounts billed to customers for which the associated performance obligations have not yet been satisfied, partially offset by the recognition of deferred revenue related to certain up-front and installation fees collected from business customers, which were historically recognized when billed and the net tax effect of establishing additional deferred assets and liabilities.

   

The changes in revenues and expenses are a result of the deferred recognition of incremental customer acquisition costs and up-front and installation business services fees over a period of time, compared to the historical treatment of immediate recognition.

 

 

4.         NEWWAVE ACQUISITION

 

On May 1, 2017, the Company acquired all the outstanding equity interests in NewWave for $740.2 million in cash on a debt-free basis. Refer to note 8 for details regarding the financing of the transaction. NewWave was a cable operator providing data, video and voice services to residential and business customers throughout non-urban areas of Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas. Cable One and NewWave shared similar strategies, customer demographics, and products. Accordingly, the acquisition of NewWave offers the Company opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies.

 

10

 

The following table summarizes the allocation of the purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2017 (in thousands):

 

   

Purchase Price

Allocation

 

Assets Acquired

       

Cash and cash equivalents

  $ 12,220  

Accounts receivable

    15,027  

Prepaid and other current assets

    2,286  

Property, plant and equipment

    192,234  

Intangible assets

    476,300  

Other noncurrent assets

    1,184  

Total Assets Acquired

    699,251  
         

Liabilities Assumed

       

Accounts payable and accrued liabilities

    25,125  

Deferred revenue

    14,516  

Deferred income taxes

    6,644  

Total Liabilities Assumed

    46,285  
         

Net Assets Acquired

    652,966  

Purchase price consideration

    740,166  

Goodwill Recognized

  $ 87,200  

 

The measurement period ended on April 30, 2018 and no measurement period adjustments were recorded during 2018.

 

 

5.        REVENUES

 

The Company’s revenues by product line were as follows (in thousands):   

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Residential

                               

Data

  $ 124,089     $ 109,781     $ 366,418     $ 303,799  

Video

    84,570       88,601       260,788       245,928  

Voice

    10,169       11,265       31,345       32,549  

Business services

    39,581       35,156       115,757       94,616  

Advertising sales

    6,288       5,885       17,445       17,477  

Other

    3,571       3,145       10,690       7,889  

Total revenues

  $ 268,268     $ 253,833     $ 802,443     $ 702,258  

 

Fees imposed on the Company by various governmental authorities are passed through monthly to the Company’s customers and are periodically remitted to authorities. These fees were $4.0 million and $4.1 million for the three months ended September 30, 2018 and 2017, respectively, and $12.1 million and $11.6 million for the nine months ended September 30, 2018 and 2017, respectively. Further, as the Company acts as principal, these fees are reported in video revenues on a gross basis with corresponding expenses included within operating expenses in the condensed consolidated statements of operations and comprehensive income.

 

Other revenues are comprised primarily of customer late charges and reconnect fees.

 

A significant portion of the Company’s revenues are derived from customers who may cancel their subscriptions at any time without penalty. As such, the amount of deferred revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from the Company’s existing customers. Revenues from customers with contractually specified terms and non-cancelable service periods are recognized over the terms of the underlying contracts, which generally range from one to five years.

 

11

 

Contract Costs. The Company capitalizes the incremental costs incurred in obtaining customers, such as commission costs and certain third-party costs. Commission expense is recognized using a portfolio approach over the calculated average residential and business customer tenure. Deferred commissions totaled $7.7 million and $7.5 million as of September 30, 2018 and December 31, 2017, respectively, and were included within prepaid and other current assets and other noncurrent assets in the condensed consolidated balance sheets. Commission amortization expense was $1.0 million and $0.8 million for the three months ended September 30, 2018 and 2017, respectively, and $2.7 million and $2.4 million for the nine months ended September 30, 2018 and 2017, respectively, and was included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Deferred commissions of $2.8 million included within prepaid and other current assets in the condensed consolidated balance sheet as of September 30, 2018 are expected to be amortized over the next 12 months.

 

Contract Liabilities. As residential and business customers are billed for subscription services in advance of the service period, the timing of revenue recognition differs from the timing of billing. Deferred revenue liabilities are recorded when the Company collects payments in advance of providing the associated services. Current deferred revenue liabilities, consisting of refundable customer prepayments, up-front charges and installation fees, were $18.7 million and $15.0 million as of September 30, 2018 and December 31, 2017, respectively. Nearly all of the deferred revenue liabilities existing at December 31, 2017 were recognized within revenues in the condensed consolidated statement of operations and comprehensive income during the nine months ended September 30, 2018. Noncurrent deferred revenue liabilities, consisting of up-front charges and installation fees from business customers, were $2.7 million and $3.1 million as of September 30, 2018 and December 31, 2017, respectively, and were included within other noncurrent liabilities in the condensed consolidated balance sheets.

 

Significant Judgments. The Company often provides multiple services to a single customer. The provision of customer premise equipment, installation services and service upgrades may be highly integrated and interdependent with the data, video or voice services provided. Judgment is required to determine whether the provision of such customer premise equipment, installation services and service upgrades is considered distinct and accounted for separately, or not distinct and accounted for together with the related subscription service.

 

The transaction price for a bundle of services is frequently less than the sum of the standalone selling prices of each individual service. The Company allocates the sales price for such bundles to each individual service provided based on the relative standalone selling price for each subscribed service. Standalone selling prices of the Company’s residential data and video services are directly observable, while standalone selling prices for the Company’s residential voice services are estimated using the adjusted market assessment approach, which relies upon information from peer companies who sell residential voice services individually.

 

The Company also uses significant judgment to determine the appropriate period over which to amortize deferred residential and business commission costs, which was determined to be the average customer tenure. Based on historical data and current expectations, the Company determined the average customer tenure for both residential and business customers to be approximately five years.

 

 

6.        PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following (in thousands):  

 

   

September 30, 2018

   

December 31, 2017

 

Cable distribution systems

  $ 1,387,189     $ 1,329,451  

Customer premise equipment

    215,859       200,175  

Other equipment and fixtures

    393,926       378,968  

Buildings and leasehold improvements

    98,798       95,314  

Capitalized software

    95,661       89,773  

Construction in progress

    74,168       67,564  

Land

    11,946       11,585  

Property, plant and equipment, gross

    2,277,547       2,172,830  

Less: Accumulated depreciation

    (1,440,341 )     (1,340,938 )

Property, plant and equipment, net

  $ 837,206     $ 831,892  

 

12

 

Depreciation expense was $47.4 million and $43.6 million for the three months ended September 30, 2018 and 2017, respectively, and $139.5 million and $129.0 million for the nine months ended September 30, 2018 and 2017, respectively.

 

In January 2017, a portion of the Company's previous headquarters building and adjoining property was sold for $10.1 million in gross proceeds and the Company recognized a related gain of $6.6 million. The remaining property’s carrying value of $4.6 million is included within other noncurrent assets in the condensed consolidated balance sheets as assets held for sale at both September 30, 2018 and December 31, 2017.

 

 

7.        GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill at both September 30, 2018 and December 31, 2017 was $172.1 million and reflected $87.2 million of goodwill associated with the NewWave acquisition. The Company has not historically recorded any impairment of goodwill.

 

 

Intangible assets (excluding goodwill) consisted of the following (dollars in thousands):   

 

               

September 30, 2018

 
   

Useful

   

Gross

           

Net

 
   

Life

   

Carrying

   

Accumulated

   

Carrying

 
   

Range (years)

   

Amount

   

Amortization

   

Amount

 

Finite-Lived Intangible Assets

                                   

Cable franchise renewals and access rights

    1 - 25     $ 2,931     $ 2,889     $ 42  

Customer relationships

      14         158,095       14,286       143,809  

Trademarks and trade names

      2.7         1,219       609       610  

Total Finite-Lived Intangible Assets

              $ 162,245     $ 17,784     $ 144,461  
                                     

Indefinite-Lived Intangible Assets

                                   

Franchise agreements

              $ 812,371                  

 

               

December 31, 2017

 
   

Useful

   

Gross

           

Net

 
   

Life

   

Carrying

   

Accumulated

   

Carrying

 
   

Range (years)

   

Amount

   

Amortization

   

Amount

 

Finite-Lived Intangible Assets

                                   

Cable franchise renewals and access rights

    1 - 25     $ 4,138     $ 3,886     $ 252  

Customer relationships

      14         160,000       7,619       152,381  

Trademarks and trade names

      2.7         1,300       325       975  

Total Finite-Lived Intangible Assets

              $ 165,438     $ 11,830     $ 153,608  
                                     

Indefinite-Lived Intangible Assets

                                   

Franchise agreements

              $ 812,137                  

 

Intangible asset amortization expense was $3.0 million and $3.1 million for the three months ended September 30, 2018 and 2017, respectively, and $8.7 million and $5.3 million for the nine months ended September 30, 2018 and 2017, respectively.

 

As of September 30, 2018, the future amortization of intangible assets was as follows (in thousands):

 

Year Ending December 31,       

 

Amount

 

2018 (remaining three months)

  $ 2,981  

2019

    11,925  

2020

    11,437  

2021

    11,436  

2022

    11,433  

Thereafter

    95,249  

Total

  $ 144,461  

 

13

 

Actual amortization expense in future periods may differ from the amounts above as a result of new intangible asset acquisitions or divestitures, changes in useful life estimates, impairments or other relevant factors.

 

 

8.        LONG-TERM DEBT

 

The carrying amount of long-term debt consisted of the following (in thousands):

 

   

September 30, 2018

   

December 31, 2017

 

Notes (as defined below)

  $ 450,000     $ 450,000  

Senior Credit Facilities (as defined below)

    734,375       744,375  

Capital lease obligation

    255       267  

Total debt

    1,184,630       1,194,642  

Less unamortized debt issuance costs

    (18,519 )     (19,585 )

Less current portion

    (19,063 )     (14,375 )

Total long-term debt

  $ 1,147,048     $ 1,160,682  

 

Notes. On June 17, 2015, the Company issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022 (the “Notes”). The Notes mature on June 15, 2022 and interest is payable on June 15th and December 15th of each year. The Notes were issued pursuant to an indenture dated as of June 17, 2015 (the “Indenture”). The Indenture provides for early redemption of the Notes, at the option of the Company, at the prices and subject to the terms specified in the Indenture. The Indenture includes certain covenants relating to debt incurrence, liens, restricted payments, asset sales and transactions with affiliates, changes in control and mergers or sales of all or substantially all of the Company’s assets. The Indenture also provides for customary events of default (subject, in certain cases, to customary grace periods).

 

Senior Credit Facilities. On June 30, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the other agents party thereto. The Credit Agreement provided for a five-year revolving credit facility in an aggregate principal amount of $200 million (the “Revolving Credit Facility”) and a five-year term loan facility in an aggregate principal amount of $100 million (the “Term Loan Facility”). Concurrently with its entry into the Credit Agreement, the Company borrowed the full amount of the Term Loan Facility. The Revolving Credit Facility also gives the Company the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility.

 

On May 1, 2017, the Company and the lenders amended and restated the Credit Agreement (the “Amended and Restated Credit Agreement”) and the Company incurred $750 million of senior secured loans (the “New Loans”) which were used, together with cash on hand, to finance the NewWave acquisition, repay in full the Term Loan Facility and pay related fees and expenses. The New Loans consist of a five-year term “A” loan in an aggregate principal amount of $250 million (the “Term Loan A”) and a seven-year term “B” loan in an aggregate principal amount of $500 million (the “Term Loan B” and, together with the Term Loan A and the Revolving Credit Facility, the “Senior Credit Facilities”). The obligations under the Amended and Restated Credit Agreement are guaranteed by the Company’s wholly owned domestic subsidiaries and are secured, subject to certain exceptions, by substantially all assets of the Company and the guarantors.

 

On April 23, 2018, the Company entered into Amendment No. 1 (the “Repricing Amendment”) to the Amended and Restated Credit Agreement. The Repricing Amendment amended the Amended and Restated Credit Agreement to, among other things, (i) decrease the applicable margin for the Term Loan B to 1.75% for London Interbank Offered Rate (“LIBOR”) borrowings and 0.75% for base rate borrowings, (ii) reset the period during which a prepayment premium in respect of the Term Loan B may be required for a Repricing Transaction until six months after the effective date of the Repricing Amendment and (iii) reset the period during which the Term Loan B benefits from certain “most favored nation” pricing protections until 12 months after the effective date of the Repricing Amendment. Other than as set forth above, all other material terms and provisions of the Senior Credit Facilities described below remain substantially the same.

 

The interest margins applicable to the Senior Credit Facilities are, at the Company’s option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (i) with respect to the Term Loan A and the Revolving Credit Facility, 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% for base rate loans, determined on a quarterly basis by reference to a pricing grid based on the Company’s total net leverage ratio and (ii) with respect to the Term Loan B, (x) 2.25% for LIBOR loans and 1.25% for base rate loans through April 22, 2018 and (y) 1.75% for LIBOR loans and 0.75% for base rate loans after April 22, 2018.

 

14

 

The Term Loan A may be prepaid at any time without premium and amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% per annum for the third year after funding and 10.0% per annum for the fourth and fifth years after funding, with the outstanding balance due upon maturity. The Term Loan B amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum, with the outstanding balance due upon maturity. The Term Loan B is subject to a 1.0% prepayment premium if prepaid in connection with a “Repricing Transaction” (as defined in the Amended and Restated Credit Agreement) within six months of the effective date of the Repricing Amendment (as defined below), benefits from certain “most favored nation” pricing protections and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement. Other than as set forth above, the New Loans are subject to terms substantially similar to those under the Credit Agreement.

 

The Company may, subject to certain specified terms and provisions, obtain additional credit facilities of up to $425 million under the Amended and Restated Credit Agreement plus an unlimited amount so long as, on a pro forma basis, the Company’s First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is no greater than 1.80 to 1.00. The Amended and Restated Credit Agreement contains customary representations, warranties and affirmative and negative covenants as well as customary events of default. The Amended and Restated Credit Agreement also requires the Company to maintain specified ratios of total net indebtedness and first lien net indebtedness to consolidated operating cash flow.

 

The Company was in compliance with all debt covenants as of September 30, 2018. 

 

As of September 30, 2018, outstanding borrowings under the Term Loan A and Term Loan B were $240.6 million and $493.8 million, respectively, and each bore interest at a rate of 4.14% per annum. Letter of credit issuances under the Revolving Credit Facility totaled $4.1 million and the Company had $195.9 million available for borrowing under the Revolving Credit Facility at September 30, 2018.

 

In connection with the Repricing Amendment, the Company incurred debt issuance costs of $2.1 million, of which $0.1 million was expensed immediately. The Company recorded $1.1 million and $1.0 million of debt issuance cost amortization for the three months ended September 30, 2018 and 2017, respectively, and $3.1 million and $2.2 million for the nine months ended September 30, 2018 and 2017, respectively. These amounts are included within interest expense in the condensed consolidated statements of operations and comprehensive income.

 

As of September 30, 2018, the future maturities of long-term debt were as follows (in thousands): 

 

Year Ending December 31,

 

Amount

 

2018 (remaining three months)

  $ 4,379  

2019

    20,642  

2020

    26,892  

2021

    30,017  

2022

    630,017  

Thereafter

    472,683  

Total

  $ 1,184,630  

 

 

9.        FAIR VALUE MEASUREMENTS

 

A three-level hierarchy is established by GAAP for disclosure of fair value measurements, based on the reliability of inputs used in the valuation of an instrument as of the measurement date, as follows:

 

Level 1 – Inputs to the valuation methodology are quoted prices for identical instruments in active markets.

   

Level 2 – Inputs to the valuation methodology include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and directly or indirectly observable inputs that are significant to the fair value measurement.

   

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

15

 

Financial Assets and Liabilities. The Company has estimated the fair value of its financial instruments as of September 30, 2018 using available market information or other appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented in the condensed consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a current market exchange.

 

The carrying amounts, fair values and related fair value hierarchies of the Company’s financial assets and liabilities were as follows (in thousands):

 

   

September 30, 2018

 
   

Carrying

   

Fair

   

Fair Value

 
   

Amount

   

Value

   

Hierarchy

 

Assets:

                       

Cash and cash equivalents:

                       

Money market investments

  $ 38,518     $ 38,518    

 

Level 1  

Commercial paper

  $ 174,623     $ 174,543    

 

Level 2  

Liabilities:

                       

Long-term debt, including current portion:

                       

Notes

  $ 450,000     $ 458,438    

 

Level 2  

Senior Credit Facilities

  $ 734,375     $ 734,375       -  

 

Money market investments are primarily held in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (Level 1). Commercial paper is primarily held with high-quality companies and is valued using quoted market prices for investments similar to the commercial paper (Level 2). Money market investments and commercial paper with original maturities of 90 days or less are included within cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the Notes is estimated based on market prices for similar instruments in active markets (Level 2). The fair value of the Senior Credit Facilities is equal to the carrying value.

 

The Company’s deferred compensation liability was $3.1 million and $20.2 million at September 30, 2018 and December 31, 2017, respectively. The current portion of this liability is included within accounts payable and accrued liabilities and the noncurrent portion is included within other noncurrent liabilities in the condensed consolidated balance sheets. The majority of the balance at December 31, 2017 was paid out during the third quarter of 2018. This liability represents the market value of participant balances in a notional investment account that is comprised primarily of mutual funds, whose value is based on observable market prices. However, since the deferred compensation liability is not exchanged in an active market, it is classified as Level 2 in the fair value hierarchy.

 

The carrying amounts of accounts receivable, accounts payable and other financial assets and liabilities approximate fair value because of the short-term nature of these instruments.

 

Nonfinancial Assets and Liabilities. The Company’s nonfinancial assets, such as property, plant and equipment, intangible assets and goodwill, are not measured at fair value on a recurring basis. However, such assets are subject to fair value adjustments when there is evidence that impairment may exist. No material impairments were recorded during the nine months ended September 30, 2018 or 2017.

 

 

10.       TREASURY STOCK

 

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements.

 

Share Repurchase Program. On July 1, 2015, the Company’s board of directors (the “Board”) authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through September 30, 2018, the Company had repurchased 199,861 shares of its common stock at an aggregate cost of $95.8 million. During the nine months ended September 30, 2018, the Company repurchased 34,028 shares at an aggregate cost of $22.6 million. No shares were repurchased during the three months ended September 30, 2018.

 

16

 

Tax Withholding for Equity Awards. At the employee’s option, shares of common stock with a fair market value equal to the applicable statutory minimum amount of employee withholding taxes due are withheld by the Company upon vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to pay the applicable statutory minimum amount of employee withholding taxes. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The amounts remitted during the three and nine months ended September 30, 2018 were $0.2 million and $7.1 million, for which the Company withheld 220 and 9,990 shares of common stock, respectively. Treasury shares of 182,840 held at September 30, 2018 include such shares withheld for withholding tax.

 

 

11.       EQUITY-BASED COMPENSATION 

 

The Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “2015 Plan”) provides for grants of incentive stock options, non-qualified stock options, restricted stock awards, SARs, restricted stock units (“RSUs”), cash-based awards, performance-based awards, dividend equivalent units (“DEUs”) and other stock-based awards, including performance stock units and deferred stock units. Directors, officers and employees of the Company and its affiliates are eligible for grants under the 2015 Plan as part of the Company’s approach to long-term incentive compensation.

 

Restricted stock awards granted to employees are subject to service-based vesting and certain awards are also subject to performance-based vesting and generally cliff-vest on the three-year anniversary of the grant date or, for certain service-based awards, in four equal ratable installments beginning on the first anniversary of the grant date. SARs granted to employees vest in four equal ratable installments beginning on the first anniversary of the grant date. RSUs are generally granted to non-employee directors on the date of the Company’s annual stockholders’ meeting and vest on the earlier of the first anniversary of the grant date or the annual stockholders’ meeting date immediately following the grant date. Non-employee directors who elect to defer all or a portion of their annual cash fees are granted RSUs in lieu of such cash fees, with such RSUs generally vesting on the first anniversary of the grant date or, for such RSUs granted in January 2018, the date immediately preceding the 2018 annual stockholders’ meeting. The settlement of the RSUs follows vesting, unless the director previously elected to defer such settlement until the earliest of his or her separation from service from the Board, a date specified by the director or a change in control of the Company.

 

The 2015 Plan provides, that, subject to certain adjustments for specified corporate events, the maximum number of shares of common stock that may be issued under the 2015 Plan is 334,870. At September 30, 2018, 251,517 shares were available for issuance under the 2015 Plan.

 

Compensation expense associated with equity-based awards is recognized on a straight-line basis over the vesting period, with forfeitures recognized as incurred. Equity-based compensation expense was $2.4 million and $3.1 million for the three months ended September 30, 2018 and 2017, respectively, and $7.3 million and $7.9 million for the nine months ended September 30, 2018 and 2017, respectively, and was included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. The Company recognized an income tax benefit of $2.9 million related to equity-based awards during the nine months ended September 30, 2018. The deferred tax asset related to all outstanding equity-based awards was $3.7 million as of September 30, 2018.

 

Restricted Stock Awards. Restricted shares, RSUs and DEUs are collectively referred to as “restricted stock.” A summary of restricted stock activity during the nine months ended September 30, 2018 is as follows:

 

   

Restricted

Stock

   

Weighted

Average Grant

Date Fair Value

Per Share

 

Outstanding as of December 31, 2017

    51,290     $ 472.89  

Granted

    14,954     $ 693.50  

Forfeited

    (1,599 )   $ 624.53  

Vested and issued

    (24,962 )   $ 396.30  

Outstanding as of September 30, 2018

    39,683     $ 598.13  
                 

Vested and unissued as of September 30, 2018

    4,141     $ 493.69  

 

Equity-based compensation expense for restricted stock was $1.5 million and $2.2 million for the three months ended September 30, 2018 and 2017, respectively, and $4.5 million and $5.5 million for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018, there was $9.0 million of unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.3 years.

 

17

 

Stock Appreciation Rights. A summary of SAR activity during the nine months ended September 30, 2018 is as follows:

 

   

Stock

Appreciation

Rights

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Grant

Date Fair

Value

   

Aggregate

Intrinsic

Value

(in thousands)

   

Weighted

Average

Remaining

Contractual

Term

(in years)

 

Outstanding as of December 31, 2017

    102,458     $ 477.62     $ 100.91     $ 23,173       8.1  

Granted

    16,000     $ 704.90     $ 169.91     $ -       9.3  

Exercised

    (17,737 )   $ 433.15     $ 89.68                  

Forfeited

    (3,864 )   $ 422.31     $ 87.22                  

Outstanding as of September 30, 2018

    96,857     $ 525.51     $ 114.91     $ 34,684       7.3  
                                         

Vested and exercisable as of September 30, 2018

    35,358     $ 455.77     $ 95.70     $ 15,128       6.6  

 

The grant date fair value of the Company’s SARs is measured using the Black-Scholes valuation model. The weighted average inputs used in the model for grants awarded during the nine months ended September 30, 2018 were as follows:  

 

   

2018

 

Expected volatility

    22.47

%

Risk-free interest rate

    2.39

%

Expected term (in years)

    6.25  

Expected dividend yield

    0.99

%

 

Equity-based compensation expense for SARs was $0.9 million for both the three months ended September 30, 2018 and 2017 and $2.8 million and $2.4 million for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018, there was $6.4 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.3 years.

 

 

12.       INCOME TAXES

 

The Company’s effective tax rate was 22.4% and 34.5% for the three months ended September 30, 2018 and 2017, respectively, and 21.6% and 36.8% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in the effective tax rate for the three months ended September 30, 2018 compared to the same quarter in the prior year primarily relates to a reduction in the Federal corporate income tax rate from 35% to 21% as a result of the 2017 Federal tax reform legislation and $1.3 million of income tax benefits attributable to state effective tax rate changes recorded during the three months ended September 30, 2018. The decrease in the effective tax rate for the nine months ended September 30, 2018 compared to the prior year period was further impacted by $2.9 million of income tax benefits attributable to equity-based compensation awards recorded during the nine months ended September 30, 2018.

 

The Company recognized the income tax effects of the 2017 Federal tax reform legislation in its consolidated financial statements included in the 2017 Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC 740 – Income Taxes. As such, the Company’s financial results for 2017 reflected the income tax effects of the 2017 Federal tax reform legislation for which the accounting under ASC 740 was complete as well as provisional amounts for those specific income tax effects of the 2017 Federal tax reform legislation for which the accounting under ASC 740 was incomplete but a reasonable estimate could be determined. The Company has recognized the provisional tax impacts related to acceleration of depreciation and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements included in the 2017 Form 10-K. The accounting was completed when the Company’s 2017 Federal corporate income tax return was filed in October 2018.

 

18

 

 

13.       NET INCOME PER COMMON SHARE

 

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share further includes any common shares available to be issued upon vesting or exercise of outstanding equity awards if such inclusion would be dilutive, calculated using the treasury stock method.

 

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except share and per share amounts):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Numerator:

                               

Net income

  $ 38,314     $ 30,905     $ 122,752     $ 90,878  

Denominator:

                               

Weighted average common shares outstanding - basic

    5,674,224       5,680,600       5,687,849       5,678,485  

Effect of dilutive equity awards (1)

    43,351       73,310       37,671       67,298  

Weighted average common shares outstanding - diluted

    5,717,575       5,753,910       5,725,520       5,745,783  
                                 

Net income per common share:

                               

Basic

  $ 6.75     $ 5.44     $ 21.58     $ 16.00  

Diluted

  $ 6.70     $ 5.37     $ 21.44     $ 15.82  

 


(1)

Equity-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per share calculation. The excluded number of anti-dilutive equity-based awards totaled 1,589 and 2,669 for the three months ended September 30, 2018 and 2017, respectively, and 2,029 and 2,354 for the nine months ended September 30, 2018 and 2017, respectively.

 

 

14.       COMMITMENTS AND CONTINGENCIES

 

Litigation and Legal Matters. The Company is subject to complaints and administrative proceedings and is a defendant in various civil lawsuits that have arisen in the ordinary course of its business. Such matters include contract disputes; actions alleging negligence; invasion of privacy; trademark, copyright and patent infringement; violations of applicable wage and hour laws; statutory or common law claims involving current and former employees; and other matters. Although the outcomes of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows. Also, based on currently available information, management is of the opinion that either future material losses from existing legal proceedings are not reasonably possible or that future material losses in excess of the amounts accrued are not reasonably possible.

 

Regulation in the Cable Industry. The operation of a cable system is extensively regulated by the Federal Communications Commission (the “FCC”), some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. The Telecommunications Act of 1996 altered the regulatory structure governing the nation’s communications providers. It removed barriers to competition in both the cable television market and the voice services market. Among other things, it reduced the scope of cable rate regulation and encouraged additional competition in the video programming industry by allowing telephone companies to provide video programming in their own telephone service areas. Future legislative and regulatory changes could adversely affect the Company’s operations.

 

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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Regarding Forward-Looking Statements

 

This document contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the cable industry and our business, financial results and financial condition. Forward-looking statements often include words such as “will,” “should,” “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:

 

 

uncertainties as to our ability and the amount of time necessary to realize the expected synergies and other benefits of the acquisition of NewWave;

 

our ability to integrate NewWave’s operations into our own in an efficient and effective manner;

 

rising levels of competition from historical and new entrants in our markets;

 

recent and future changes in technology;

 

our ability to continue to grow our business services products;

 

increases in programming costs and retransmission fees;

 

our ability to obtain hardware, software and operational support from vendors;

 

the effects of any new significant acquisitions by us;

 

adverse economic conditions;

 

the integrity and security of our network and information systems;

 

the impact of possible security breaches and other disruptions, including cyber-attacks;

 

our failure to obtain necessary intellectual and proprietary rights to operate our business and the risk of intellectual property claims and litigation against us;

 

our ability to retain key employees;

 

changing and additional regulation of our data, video and voice services, including legislative and regulatory efforts to impose new legal requirements on our data services;

 

our ability to renew cable system franchises;

 

increases in pole attachment costs;

 

changes in local governmental franchising authority and broadcast carriage regulations;

 

the potential adverse effect of our indebtedness on our business, financial condition or results of operations and cash flows;

 

the possibility that interest rates will rise, causing our obligations to service our variable rate indebtedness to increase significantly;

 

our ability to incur future indebtedness;

 

fluctuations in our stock price;

 

our ability to continue to pay dividends;

 

dilution from equity awards and potential stock issuances in connection with acquisitions;

 

provisions in our charter, by-laws and Delaware law that could discourage takeovers;

 

changes in our estimates of the impact of the 2017 Federal tax reform legislation;

 

changes in GAAP or other applicable accounting policies;

 

the outcome of our efforts to complete the remediation of the material weakness in our internal control over financial reporting related to the NewWave billing system (as defined below) by the end of 2018; and

 

the other risks and uncertainties detailed in the section titled “Risk Factors” in our 2017 Form 10-K.

 

Any forward-looking statements made by us in this document speak only as of the date on which they are made. We are under no obligation, and expressly disclaim any obligation, except as required by law, to update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

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Table of Contents

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2017 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 2017 Form 10-K. Our results of operations for the three and nine months ended September 30, 2018 may not be indicative of our future results.

 

Overview

 

We are a fully integrated provider of data, video and voice services in 21 Western, Midwestern and Southern states. We provide these broadband services to residential and business customers in more than 750 communities. The markets we serve are primarily non-metropolitan, secondary markets, with 77% of our customers located in seven states: Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma and Texas. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We are among the 10 largest cable system operators in the United States based on customers and revenues in 2017, providing service to 801,179 residential and business customers out of approximately 2.1 million homes passed as of September 30, 2018. Of these customers, 660,799 subscribed to data services, 328,921 subscribed to video services and 127,972 subscribed to voice services.

 

We generate substantially all our revenues through five primary products. Ranked by share of our total revenues through the first nine months of 2018, they are residential data (45.7%), residential video (32.5%), business services (data, voice and video – 14.4%), residential voice (3.9%) and advertising sales (2.2%). The profit margins, growth rates and capital intensity of our five primary products vary significantly due to differences in competition, product maturity and relative costs.

 

On May 1, 2017, we completed the acquisition of all the outstanding equity interests of NewWave. We paid a purchase price of $740.2 million in cash on a debt-free basis, subject to customary post-closing adjustments. Our results of operations for the nine months ended September 30, 2018 include the full impact of NewWave operations, while our comparable results for 2017 include only five months of NewWave operations, as the acquisition was not completed until May 1, 2017.

 

Prior to 2012, we were focused on growing revenues through subscriber retention and growth in overall primary service units (“PSUs”). Accordingly, our strategies consisted of, among others, offering promotional discounts to new and existing subscribers adding new services and to subscribers purchasing more than one service offering. Since 2012, we have adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. We believe the declining profitability of residential video services is primarily due to increasing programming costs and retransmission fees and competition from other content providers, and the declining revenues from residential voice services is primarily due to the increasing use of wireless voice services in addition to, or instead of, residential voice service. Beginning in 2013, we shifted our focus away from maximizing customer PSUs and towards growing and maintaining our higher margin businesses, namely residential data and business services. Separately, we have also focused on retaining customers with a high expected lifetime value (“LTV”), who are less attracted by discounting, require less support and churn less. This strategy focuses on increasing Adjusted EBITDA, Adjusted EBITDA less capital expenditures and margins (refer to the section entitled “Use of Adjusted EBITDA” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure).

 

The trends described above have impacted our four largest product lines in the following ways:

 

 

Residential data. We experienced growth in the number of, and revenues from, our residential data customers every year since 2013. We expect this growth to continue due to projected increases in the number of potential customers for us to serve, as there are still a number of households in our markets that do not subscribe to data services from any provider. We expect to capture a portion of these customers and anticipate capturing additional market share from existing data subscribers due to our continued upgrades in broadband capacity, our ability to offer higher access speeds than many of our competitors and our Wi-Fi support service. 

     
 

Residential video. Residential video service is a competitive and highly penetrated business. As we focus on the higher-margin businesses of residential data and business services, we are de-emphasizing our residential video business and, as a result, expect residential video revenues to continue to decline in the future.

     
 

Residential voice. We have experienced declines in residential voice customers as a result of homes in the United States deciding to terminate their residential voice service and exclusively use wireless voice service. We believe this trend will continue because of competition from wireless voice service providers. Revenues from residential voice customers have declined over recent years, and we expect this decline will continue.

 

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Table of Contents

 

 

Business services. We have experienced significant growth in business data and voice customers and revenues and expect this growth to continue. We attribute this growth to our strategic focus shift on increasing sales to business customers and our recently expanded efforts to attract enterprise business customers. Margins in products sold to business customers have remained attractive, and we expect this trend to continue.

 

We continue to experience increased competition, particularly from telephone companies, cable and municipal overbuilders, over-the-top (“OTT”) video providers and direct broadcast satellite (“DBS”) television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. We made elevated levels of capital investments between 2012 and 2017 to increase our cable plant capacities and reliability, launch all-digital video services, which has freed up approximately half of average plant bandwidth for data services, and increase data capacity by moving from four-channel bonding to 32-channel bonding. We expect to continue devoting financial resources to infrastructure improvements, including in the new markets we acquired in the NewWave transaction, because we believe these investments are necessary to remain competitive. We expect to spend up to $50 million during 2018 and 2019, in addition to the $10 million spent in 2017, to enhance the acquired NewWave systems by rebuilding low capacity markets, launching all-digital video services, implementing 32-channel bonding to enable a 1 gigabit-per-second (“Gbps”) download speed product launch, converting back office functions such as billing, accounting and service provisioning and migrating products to legacy Cable One platforms.

 

Our goals are to continue to grow residential data and business services and to maintain profit margins to deliver strong Adjusted EBITDA. To achieve these goals, we intend to continue our industrial engineering-driven cost management, remain focused on customers with high LTV and follow through with further planned investments in broadband plant upgrades and new data services offerings for residential and business customers.

 

Our business is subject to extensive governmental regulation. Such regulation has led to increases in our operational and administrative expenses. In addition, we could be significantly impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative or judicial rulings. In 2015, the FCC used its Title II authority to regulate broadband internet access services through the Open Internet Order (the “Order”), which imposed on all providers of broadband internet access service, including us, obligations that limit the ways certain types of traffic can be managed and prescribes certain additional disclosure requirements. The Order was upheld in the courts, but in September 2017, several parties, including the American Cable Association and NCTA – The Internet & Television Association (the “NCTA”), filed petitions for certiorari with the U.S. Supreme Court. The FCC filed its response on August 2, 2018 and other parties filed responses on various dates in September 2018. On November 5, 2018, the U.S. Supreme Court denied the petitions. However, in December 2017, the FCC rescinded the majority of the open internet rules previously adopted in the Order, with the exception of the disclosure requirements. Several parties have challenged the FCC’s new rules in Federal courts, and those appeals are pending. Congress and numerous states also have proposed legislation regarding net neutrality. Several states, including Oregon and Washington, have adopted legislation that requires entities providing broadband internet access service in the state to comply with net neutrality requirements or that prohibits state and local government agencies from contracting with internet service providers that engage in certain network management activities based on paid prioritization, content blocking or other discrimination. The U.S. Department of Justice recently challenged California’s net neutrality law in Federal court. We cannot predict whether or when future changes to the regulatory framework will occur at the FCC, in Congress, at the state level or in the courts. We also cannot predict whether or to what extent the rules as revised by the FCC, Congress, the states or the courts may affect our operations or impose costs on our business.

 

Results of Operations

 

Revision of Previously Issued Financial Statements and Adoption of Revenue Recognition Standard

 

In conjunction with the error correction in the fourth quarter of 2017 associated with our historical accounting for certain categories of internal labor and related costs, we revised our historical consolidated financial statements to properly reflect the impact of the labor capitalization, including the related impact to depreciation expense and income taxes. As a result, the financial statements for the three and nine months ended September 30, 2017 have been revised to reflect the error correction. Refer to note 2 to the condensed consolidated financial statements for additional details.

 

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Further, we adopted the revenue recognition standard, ASC 606 - Revenue from Contracts with Customers, effective January 1, 2018, using the full retrospective method. The adoption resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time, instead of immediately. The financial statements for the three and nine months ended September 30, 2017 have been recasted to reflect the impact of the revenue recognition standard adoption. Refer to note 3 to the condensed consolidated financial statements for additional details.

 

PSU and Customer Counts

 

During the 12 months ended September 30, 2018, our total PSUs decreased 26,189, or 2.3%, compared to our total PSUs as of September 30, 2017. Residential data PSUs and business services PSUs increased 16,491 and 8,468, respectively, while residential video PSUs and residential voice PSUs decreased 41,296 and 9,852, respectively. Our total customer relationships increased 5,069, or 0.6%, year-over-year, with a 5,916 increase in business customer relationships being partially offset by an 847 decrease in residential customer relationships.

 

The following table provides an overview of selected customer data for the time periods specified:

 

   

As of September 30,

   

Annual Net Gain/(Loss)

 
   

2018

   

2017

   

Change

   

% Change

 

Residential data PSUs

    598,001       581,510       16,491       2.8  

Residential video PSUs (1)

    312,564       353,860       (41,296 )     (11.7 )

Residential voice PSUs

    101,443       111,295       (9,852 )     (8.9 )

Total residential PSUs

    1,012,008       1,046,665       (34,657 )     (3.3 )
                                 

Business data PSUs (2)

    62,798       56,143       6,655       11.9  

Business video PSUs

    16,357       16,853       (496 )     (2.9 )

Business voice PSUs (3)

    26,529       24,220       2,309       9.5  

Total business services PSUs

    105,684       97,216       8,468       8.7  
                                 

Total PSUs

    1,117,692       1,143,881       (26,189 )     (2.3 )
                                 

Total residential customer relationships

    730,252       731,099       (847 )     (0.1 )

Total business customer relationships

    70,927       65,011       5,916       9.1  

Total customer relationships

    801,179       796,110       5,069       0.6  

 


(1)

Residential video PSUs include all basic residential customers who receive video services and may have one or more digital set-top boxes or cable cards deployed. Residential bulk multi-dwelling accounts are included in our video PSUs at the individual unit level.

(2)

Business data PSUs include commercial accounts that receive data service via a cable modem and commercial accounts that receive broadband service optically via fiber connections.

(3)

Business voice customers who have multiple voice lines are only counted once in the PSU total.

 

In recent years, our customer mix has shifted, causing subscribers to move from triple-play packages combining data, video and voice services to single and double-play packages. This is largely because some residential video customers have defected to DBS services and OTT offerings and more households have discontinued residential voice service. In addition, we have focused on selling data-only packages to new customers rather than cross-selling video to these customers.

 

Comparison of Three Months Ended September 30, 2018 to Three Months Ended September 30, 2017

 

Revenues

 

Revenues increased $14.4 million, or 5.7%, due primarily to increases in residential data and business services revenues of $14.3 million and $4.4 million, respectively. The increase was the result of organic growth in our higher margin product lines of residential data and business services, partially offset by decreases in residential video and residential voice revenues.

 

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Revenues by service offering were as follows for the three months ended September 30, 2018 and 2017, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):

 

   

Three Months Ended September 30,

                 
   

2018

   

2017

   

2018 vs. 2017

 
   

Revenues

   

% of Total

   

Revenues

   

% of Total

   

$ Change

   

% Change

 

Residential data

  $ 124,089       46.3     $ 109,781       43.2     $ 14,308       13.0  

Residential video

    84,570       31.5       88,601       34.9       (4,031 )     (4.5 )

Residential voice

    10,169       3.8       11,265       4.4       (1,096 )     (9.7 )

Business services

    39,581       14.8       35,156       13.9       4,425       12.6  

Advertising sales

    6,288       2.3       5,885       2.3       403       6.8  

Other

    3,571       1.3       3,145       1.3       426       13.5  

Total revenues

  $ 268,268       100.0     $ 253,833       100.0     $ 14,435       5.7  

 

Average monthly revenue per unit for the indicated service offerings were as follows for the three months ended September 30, 2018 and 2017:

 

   

Three Months Ended September 30,

   

2018 vs. 2017

 
   

2018

   

2017

   

$ Change

   

% Change

 

Residential data (1)

  $ 68.83     $ 62.49     $ 6.34       10.1  

Residential video (1)

  $ 88.44     $ 81.96     $ 6.48       7.9  

Residential voice (1)

  $ 32.95     $ 33.26     $ (0.31 )     (0.9 )

Business services (2)

  $ 185.32     $ 180.13     $ 5.19       2.9  

 


(1)

Average monthly revenue per unit values represent the applicable quarterly residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by three.

(2)

Average monthly revenue per unit values represent quarterly business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each period, divided by three.

 

Residential data service revenues increased $14.3 million, or 13.0%, as a result of organic subscriber growth, a modem rental rate adjustment in the first quarter of 2018, a reduction in package discounting and increased customer subscriptions to premium tiers.

 

Residential video service revenues decreased $4.0 million, or 4.5%, due primarily to an 11.7% year-over-year decrease in residential video subscribers, partially offset by a broadcast television surcharge increase implemented in the first quarter of 2018.

 

Residential voice service revenues decreased $1.1 million, or 9.7%, due primarily to an 8.9% year-over-year decrease in residential voice subscribers.

 

Business services revenues increased $4.4 million, or 12.6%, due primarily to growth in our business data and voice services to small and medium-sized businesses and enterprise customers and a rate adjustment for business video customers in the first quarter of 2018. Total business customer relationships increased 9.1% year-over-year.

 

Costs and Expenses

 

Operating expenses (excluding depreciation and amortization) were $92.0 million in the third quarter of 2018 and increased $0.1 million, or 0.1%, compared to the third quarter of 2017. Operating expenses as a percentage of revenues were 34.3% for the third quarter of 2018 compared to 36.2% for the year-ago quarter.

 

Selling, general and administrative expenses were $59.4 million for the third quarter of 2018 and increased $7.6 million, or 14.7%, compared to the third quarter of 2017. The increase was primarily attributable to higher marketing expenses of $3.9 million, system conversion costs of $1.7 million, higher net compensation expenses of $0.8 million and higher insurance expenses of $0.8 million. Selling, general and administrative expenses as a percentage of revenues were 22.2% and 20.4% for the third quarter of 2018 and 2017, respectively.

 

Depreciation and amortization expense was $50.4 million for the third quarter of 2018 and increased $3.7 million, or 7.9%, compared to the third quarter of 2017. The increase was due primarily to new assets placed in service since the third quarter of 2017, partially offset by assets that became fully depreciated since the third quarter of 2017. As a percentage of revenues, depreciation and amortization expense was 18.8% for the third quarter of 2018 compared to 18.4% for the third quarter of 2017.

 

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Table of Contents

 

We recognized a $3.1 million net loss on asset disposals during the third quarter of 2018 compared to a $2.5 million net loss on asset disposals in the third quarter of 2017.

 

Interest Expense

 

Interest expense increased $1.4 million, or 10.3%, to $15.5 million, driven by an increase in interest rates year-over-year.

 

Income Tax Provision

 

The income tax provision decreased $5.2 million, or 32.1%. Our effective tax rate was 22.4% and 34.5% for the third quarter of 2018 and 2017, respectively. The decrease in the effective tax rate was due primarily to a reduction in the Federal corporate income tax rate from 35% to 21% as a result of the 2017 Federal tax reform legislation and $1.3 million of income tax benefits attributable to state effective tax rate changes recorded during the third quarter of 2018.

 

Comparison of Nine Months Ended September 30, 2018 to Nine Months Ended September 30, 2017

 

Revenues

 

Revenues increased $100.2 million, or 14.3%, due primarily to increases in residential data, business services and residential video revenues of $62.6 million, $21.1 million and $14.9 million, respectively. The increase was the result of organic growth in our higher margin product lines of residential data and business services and four additional months of NewWave operations.

 

Revenues by service offering were as follows for the nine months ended September 30, 2018 and 2017, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):

 

   

Nine Months Ended September 30,

                 
   

2018

   

2017

   

2018 vs. 2017

 
   

Revenues

   

% of Total

   

Revenues

   

% of Total

   

$ Change

   

% Change

 

Residential data

  $ 366,418       45.7     $ 303,799       43.3     $ 62,619       20.6  

Residential video

    260,788       32.5       245,928       35.0       14,860       6.0  

Residential voice

    31,345       3.9       32,549       4.6       (1,204 )     (3.7 )

Business services

    115,757       14.4       94,616       13.5       21,141       22.3  

Advertising sales

    17,445       2.2       17,477       2.5       (32 )     (0.2 )

Other

    10,690       1.3       7,889       1.1       2,801       35.5  

Total revenues

  $ 802,443       100.0     $ 702,258       100.0     $ 100,185       14.3  

 

Average monthly revenue per unit for the indicated service offerings were as follows for the nine months ended September 30, 2018 and 2017:

 

   

Nine Months Ended September 30,

   

2018 vs. 2017

 
   

2018

   

2017

   

$ Change

   

% Change

 

Residential data (1)

  $ 68.20     $ 63.25     $ 4.95       7.8  

Residential video (1)

  $ 87.80     $ 81.37     $ 6.43       7.9  

Residential voice (1)

  $ 32.90     $ 34.15     $ (1.25 )     (3.7 )

Business services (2)

  $ 185.10     $ 176.68     $ 8.42       4.8  

 


(1)

Average monthly revenue per unit values represent the applicable year-to-date residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by nine, except that for any new PSUs added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent the applicable residential service revenues (excluding installation and activation fees) divided by the pro-rated number of PSUs during such period.

(2)

Average monthly revenue per unit values represent year-to-date business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each period, divided by nine, except that for any new business customer relationships added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent business services revenues (excluding installation and activation fees) divided by the pro-rated number of business customer relationships during such period.

 

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Table of Contents

 

Revenues by service offering, excluding the impact of revenues related to legacy NewWave cable systems, were as follows for the nine months ended September 30, 2018 and 2017, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):

 

   

Nine Months Ended September 30,

                 
   

2018

   

2017

   

2018 vs. 2017

 
   

Revenues

   

% of Total

   

Revenues

   

% of Total

   

$ Change

   

% Change

 

Residential data

  $ 308,729       47.0     $ 276,888       44.5     $ 31,841       11.5  

Residential video

    204,927       31.2       211,554       34.0       (6,627 )     (3.1 )

Residential voice

    26,374       4.0       28,578       4.6       (2,204 )     (7.7 )

Business services

    93,369       14.2       82,910       13.3       10,459       12.6  

Advertising sales

    16,465       2.5       16,817       2.7       (352 )     (2.1 )

Other

    7,162       1.1       5,830       0.9       1,332       22.8  

Total revenues

  $ 657,026       100.0     $ 622,577       100.0     $ 34,449       5.5  

 

Average monthly revenue per unit for the indicated service offerings, excluding the impact of revenues and customers related to legacy NewWave cable systems, were as follows for the nine months ended September 30, 2018 and 2017:

 

   

Nine Months Ended September 30,

   

2018 vs. 2017

 
   

2018

   

2017

   

$ Change

   

% Change

 

Residential data (1)

  $ 70.30     $ 65.19     $ 5.11       7.8  

Residential video (1)

  $ 87.91     $ 80.94     $ 6.97       8.6  

Residential voice (1)

  $ 34.39     $ 33.96     $ 0.43       1.3  

Business services (2)

  $ 180.56     $ 172.44     $ 8.12       4.7  

 


(1)

Average monthly revenue per unit values represent the applicable year-to-date residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by nine.

(2)

Average monthly revenue per unit values represent year-to-date business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each period, divided by nine.

 

Residential data service revenues increased $62.6 million, or 20.6%, as a result of organic subscriber growth, the NewWave operations, a modem rental rate adjustment in the first quarter of 2018, a reduction in package discounting and increased customer subscriptions to premium tiers.

 

Residential video service revenues increased $14.9 million, or 6.0%, due primarily to the NewWave operations and a broadcast television surcharge increase implemented in the first quarter of 2018, partially offset by an 11.7% year-over-year decrease in residential video subscribers.

 

Residential voice service revenues decreased $1.2 million, or 3.7%, due primarily to an 8.9% year-over-year decrease in residential voice subscribers, partially offset by an additional four months of NewWave operations.

 

Business services revenues increased $21.1 million, or 22.3%, due primarily to growth in our business data and voice services to small and medium-sized businesses and enterprise customers, the NewWave operations and a rate adjustment for business video customers in the first quarter of 2018. Total business customer relationships increased 9.1% year-over-year.

 

Operating Costs and Expenses

 

Operating expenses (excluding depreciation and amortization) were $278.5 million for the nine months ended September 30, 2018 and increased $33.5 million, or 13.7%, compared to the year ago period. Operating expenses as a percentage of revenues were 34.7% for the first three quarters of 2018 compared to 34.9% for the first three quarters of 2017. The increase in operating expenses attributable to the NewWave operations was $30.7 million. Excluding the expenses associated with the NewWave operations, operating expenses would have been $207.5 million for the nine months ended September 30, 2018, an increase of $2.7 million, or 1.3%, compared to the first three quarters of 2017. The increase was due primarily to higher repairs and maintenance costs of $1.6 million, programming costs of $0.6 million and contract labor costs of $0.5 million. Operating expenses as a percentage of revenues, excluding the impact of NewWave operations, would have been 31.6% for the nine months ended September 30, 2018 compared to 32.9% for the nine months ended September 30, 2017.

 

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Table of Contents

 

Selling, general and administrative expenses increased $15.4 million, or 10.3%, to $164.6 million. Selling, general and administrative expenses as a percentage of revenues were 20.5% and 21.2% for the nine months ended September 30, 2018 and 2017, respectively. The increase in selling, general and administrative expenses attributable to the NewWave operations was $11.9 million. Excluding the expenses associated with the NewWave operations, selling, general and administrative expenses would have increased $3.6 million, or 2.6%, to $142.0 million due primarily to higher marketing costs of $4.5 million, medical insurance expense of $3.0 million and hiring and training costs of $0.7 million, partially offset by lower acquisition-related costs of $5.2 million. Selling, general and administrative expenses as a percentage of revenues, excluding the impact of the NewWave operations, would have been 21.6% for the nine months ended September 30, 2018 compared to 22.2% for the nine months ended September 30, 2017.

 

Depreciation and amortization expense increased $14.0 million, or 10.4%, including a $17.4 million increase attributable to the NewWave operations. The increase was due primarily to new assets placed in service since the third quarter of 2017, including property, plant and equipment and finite-lived intangible assets acquired as part of the NewWave acquisition, partially offset by assets that became fully depreciated since the third quarter of 2017. As a percentage of revenues, depreciation and amortization expense was 18.5% for the nine months ended September 30, 2018 compared to 19.1% for the nine months ended September 30, 2017.

 

We recognized a net loss on asset disposals of $12.5 million in the first three quarters of 2018. In the first three quarters of 2017, we recognized a net gain of $3.2 million on asset disposals, primarily due to a gain recognized on the sale of a portion of a non-operating property that included our previous headquarters building, net of an overall net loss on fixed asset disposals.

 

Interest Expense

 

Interest expense increased $11.7 million, or 35.1%, to $45.1 million due primarily to additional outstanding debt incurred on May 1, 2017 to finance the NewWave acquisition and an increase in interest rates year-over-year.

 

Income Tax Provision

 

The income tax provision decreased $19.2 million, or 36.2%. Our effective tax rate was 21.6% and 36.8% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in the effective tax rate was due primarily to a reduction in the Federal corporate income tax rate, $2.9 million of income tax benefits attributable to equity-based compensation awards and $2.3 million of income tax benefits attributable to state effective tax rate changes recorded during the nine months ended September 30, 2018.

 

Use of Adjusted EBITDA

 

We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income reported in accordance with GAAP. Adjusted EBITDA is reconciled to net income below.

 

Adjusted EBITDA is defined as net income plus interest expense, income tax provision, depreciation and amortization, equity-based compensation, severance expense, (gain) loss on deferred compensation, acquisition-related costs, (gain) loss on asset disposals, system conversion costs, rebranding costs, other (income) expense and other unusual operating expenses, as provided in the table below. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our business as well as other non-cash or special items and is unaffected by our capital structure or investment activities. This measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of debt financing. These costs are evaluated through other financial measures.

 

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Table of Contents

 

We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the measure used in the leverage ratio calculations under our outstanding Senior Credit Facilities and Notes to determine compliance with the covenants contained in the Senior Credit Facilities and ability to take certain actions under the Indenture governing the Notes. Adjusted EBITDA is also a significant performance measure used by us in our annual incentive compensation program. Adjusted EBITDA does not take into account cash used for mandatory debt service requirements or other non-discretionary expenditures, and thus does not represent residual funds available for discretionary uses.

 

   

Three Months Ended September 30,

   

2018 vs. 2017

 

(dollars in thousands)

 

2018

   

2017

   

$ Change

   

% Change

 

Net income