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

cabo20200331_10q.htm
0001632127 CABLE ONE, INC. false --12-31 Q1 2020 0.01 0.01 4,000,000 4,000,000 0 0 0 0 0.01 0.01 40,000,000 40,000,000 5,887,899 5,887,899 5,724,857 5,715,377 163,042 172,522 2.25 2.00 0 1 7 22.0 22.0 On May 8, 2019, $250 million was drawn. On October 1, 2019, an additional $450 million was drawn. The Term Loan A-2 interest rate spread can vary between 1.25% and 1.75%, determined on a quarterly basis by reference to a pricing grid based on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement). All other applicable margins are fixed. Per annum amortization rates for years one through five following the closing date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively. Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). Equity-based compensation awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per common share calculation. The excluded number of anti-dilutive equity-based compensation awards totaled 0 and 2,739 for the three months ended March 31, 2020 and 2019, respectively. On May 8, 2019, $250.0 million was drawn. 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Table of Contents



 

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 March 31, 2020

 

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)

 

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

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.01

 

CABO

 

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically 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 May 6, 2020
Common stock, par value $0.01  5,728,335

 

 

 

 

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 17
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk 26
     

Item 4.

Controls and Procedures 26
   

PART II: OTHER INFORMATION

26
   

Item 1.

Legal Proceedings 26
     

Item 1A.

Risk Factors 26
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds 28
     

Item 3.

Defaults Upon Senior Securities 28
     

Item 4.

Mine Safety Disclosures 28
     

Item 5.

Other Information 28
     

Item 6.

Exhibits 29
   
SIGNATURES 30

 

References herein to “Cable One,” “us,” “our,” “we” or the “Company” refer to Cable One, Inc., together with its wholly owned subsidiaries.

 

 

 

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 our industry, business, strategy, dividend policy, financial results and financial condition as well as anticipated impacts from the COVID-19 pandemic on the Company and future responses. 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, which are discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”) and this Quarterly Report on Form 10-Q:

 

 

the duration and severity of the COVID-19 pandemic and its effects on our business, financial condition, results of operations and cash flows;

 

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 acquisitions and strategic investments by us;

 

risks that our rebranding may not produce the benefits expected;

 

damage to our reputation or brand image;

 

risks that the implementation of our new enterprise resource planning (“ERP”) system disrupts business operations;

 

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 (who we refer to as associates);

 

legislative or regulatory efforts to impose network neutrality and other new requirements on our data services;

 

additional regulation of our video and voice 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 level of indebtedness on our business, financial condition or results of operations and cash flows;

 

the restrictions the terms of our indebtedness place on our business and corporate actions;

 

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 and strategic investments;

 

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

 

the other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), including but not limited to in our 2019 Form 10-K and this Quarterly Report on Form 10-Q.

 

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.

 

ii

 

 

PART I:  FINANCIAL INFORMATION

 

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(dollars in thousands, except par values)

 

March 31, 2020

   

December 31, 2019

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 241,894     $ 125,271  

Accounts receivable, net

    35,386       38,452  

Income taxes receivable

    16,028       2,146  

Prepaid and other current assets

    24,476       15,619  

Total Current Assets

    317,784       181,488  

Property, plant and equipment, net

    1,210,306       1,201,271  

Intangible assets, net

    1,301,228       1,312,381  

Goodwill

    429,597       429,597  

Other noncurrent assets

    39,444       27,094  

Total Assets

  $ 3,298,359     $ 3,151,831  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Accounts payable and accrued liabilities

  $ 131,119     $ 136,993  

Deferred revenue

    24,886       23,640  

Current portion of long-term debt

    28,935       28,909  

Total Current Liabilities

    184,940       189,542  

Long-term debt

    1,805,700       1,711,937  

Deferred income taxes

    295,732       303,314  

Interest rate swap liability

    175,524       78,612  

Other noncurrent liabilities

    25,572       26,857  

Total Liabilities

    2,487,468       2,310,262  
                 

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 5,724,857 and 5,715,377 shares outstanding as of March 31, 2020 and December 31, 2019, respectively)

    59       59  

Additional paid-in capital

    54,419       51,198  

Retained earnings

    1,036,877       980,355  

Accumulated other comprehensive loss

    (152,783 )     (68,158 )

Treasury stock, at cost (163,042 and 172,522 shares held as of March 31, 2020 and December 31, 2019, respectively)

    (127,681 )     (121,885 )

Total Stockholders' Equity

    810,891       841,569  

Total Liabilities and Stockholders' Equity

  $ 3,298,359     $ 3,151,831  

 

See accompanying notes to the condensed consolidated financial statements.

 

1

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 

(dollars in thousands, except per share data)

 

2020

   

2019

 

Revenues

  $ 321,196     $ 278,605  

Costs and Expenses:

               

Operating (excluding depreciation and amortization)

    105,928       94,518  

Selling, general and administrative

    62,884       61,443  

Depreciation and amortization

    65,279       53,844  

(Gain) loss on asset sales and disposals, net

    (5,621 )     1,103  

Total Costs and Expenses

    228,470       210,908  

Income from operations

    92,726       67,697  

Interest expense

    (18,674 )     (18,096 )

Other income, net

    1,734       1,802  

Income before income taxes

    75,786       51,403  

Income tax provision

    6,460       12,664  

Net income

  $ 69,326     $ 38,739  
                 

Net Income per Common Share:

               

Basic

  $ 12.17     $ 6.83  

Diluted

  $ 12.05     $ 6.78  

Weighted Average Common Shares Outstanding:

               

Basic

    5,697,904       5,674,120  

Diluted

    5,755,059       5,716,585  
                 

Unrealized loss on cash flow hedges and other, net of tax

  $ (84,625 )   $ (29,069 )

Comprehensive income (loss)

  $ (15,299 )   $ 9,670  

 

See accompanying notes to the condensed consolidated financial statements.

 

2

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

Common Stock

   

 

Additional

Paid-In

   

Retained

   

Accumulated Other

Comprehensive

   

 

Treasury

Stock,

   

 

Total

Stockholders’

 

(dollars in thousands, except per share data)

 

Shares

   

Amount

   

Capital

   

Earnings

    Loss    

at cost

   

Equity

 

Balance at December 31, 2019

    5,715,377     $ 59     $ 51,198     $ 980,355     $ (68,158 )   $ (121,885 )   $ 841,569  

Net income

    -       -       -       69,326       -       -       69,326  

Unrealized loss on cash flow hedges and other, net of tax

    -       -       -       -       (84,625 )     -       (84,625 )

Equity-based compensation

    -       -       3,221       -       -       -       3,221  

Issuance of equity awards, net of forfeitures

    13,252       -       -       -       -       -       -  

Withholding tax for equity awards

    (3,772 )     -       -       -       -       (5,796 )     (5,796 )

Dividends paid to stockholders ($2.25 per common share)

    -       -       -       (12,804 )     -       -       (12,804 )

Balance at March 31, 2020

    5,724,857     $ 59     $ 54,419     $ 1,036,877     $ (152,783 )   $ (127,681 )   $ 810,891  

 

 

 

Common Stock

   

Additional

Paid-In

   

Retained

    Accumulated Other Comprehensive    

Treasury

Stock,

   

Total

Stockholders’

 

(dollars in thousands, except per share data)

 

Shares

   

Amount

   

Capital

   

Earnings

    Loss    

at cost

   

Equity

 

Balance at December 31, 2018

    5,703,402     $ 59     $ 38,898     $ 850,292     $ (96 )   $ (113,795 )   $ 775,358  

Lease accounting standard adoption cumulative adjustment

    -       -       -       8       -       -       8  

Net income

    -       -       -       38,739       -       -       38,739  

Unrealized loss on cash flow hedges and other, net of tax

    -       -       -       -       (29,069 )     -       (29,069 )

Equity-based compensation

    -       -       3,021       -       -       -       3,021  

Issuance of equity awards, net of forfeitures

    5,222       -       -       -       -       -       -  

Repurchases of common stock

    (5,984 )     -       -       -       -       (5,073 )     (5,073 )

Withholding tax for equity awards

    (3,310 )     -       -       -       -       (2,554 )     (2,554 )

Dividends paid to stockholders ($2.00 per common share)

    -       -       -       (11,395 )     -       -       (11,395 )

Balance at March 31, 2019

    5,699,330     $ 59     $ 41,919     $ 877,644     $ (29,165 )   $ (121,422 )   $ 769,035  

 

See accompanying notes to the condensed consolidated financial statements.

 

3

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three Months Ended March 31,

 

(in thousands)

 

2020

   

2019

 

Cash flows from operating activities:

               

Net income

  $ 69,326     $ 38,739  

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

               

Depreciation and amortization

    65,279       53,844  

Amortization of debt issuance costs

    1,106       1,118  

Equity-based compensation

    3,221       3,021  

Increase in deferred income taxes

    20,108       7,102  

(Gain) loss on asset sales and disposals, net

    (5,621 )     1,103  

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

               

Decrease in accounts receivable, net

    3,066       2,831  

(Increase) decrease in income taxes receivable

    (13,882 )     6,055  

Increase in prepaid and other current assets

    (8,857 )     (8,341 )

Increase (decrease) in accounts payable and accrued liabilities

    (13,789 )     1,442  

Increase in deferred revenue

    1,246       820  

Other, net

    (2,703 )     (3,356 )

Net cash provided by operating activities

    118,500       104,378  
                 

Cash flows from investing activities:

               

Purchase of business, net of cash acquired

    -       (356,917 )

Capital expenditures

    (64,757 )     (46,627 )

Decrease in accrued expenses related to capital expenditures

    (8,238 )     (7,751 )

Proceeds from sales of property, plant and equipment

    518       6,326  

Issuance of note receivable

    (3,540 )     -  

Net cash used in investing activities

    (76,017 )     (404,969 )
                 

Cash flows from financing activities:

               

Proceeds from long-term debt borrowings

    100,000       250,000  

Payment of debt issuance costs

    -       (2,410 )

Payments on long-term debt

    (7,260 )     (4,531 )

Repurchases of common stock

    -       (5,073 )

Payment of withholding tax for equity awards

    (5,796 )     (2,554 )

Dividends paid to stockholders

    (12,804 )     (11,395 )

Net cash provided by financing activities

    74,140       224,037  
                 

Increase (decrease) in cash and cash equivalents

    116,623       (76,554 )

Cash and cash equivalents, beginning of period

    125,271       264,113  

Cash and cash equivalents, end of period

  $ 241,894     $ 187,559  
                 

Supplemental cash flow disclosures:

               

Cash paid for interest, net of capitalized interest

  $ 17,152     $ 9,421  

Cash paid for income taxes, net of refunds received

  $ (930 )   $ (59 )

 

See accompanying notes to the condensed consolidated financial statements.

 

4

 

CABLE ONE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.        DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business. Cable One is a fully integrated provider of data, video and voice services to residential and business subscribers in 21 Western, Midwestern and Southern U.S. states. As of March 31, 2020, Cable One provided service to approximately 921,000 residential and business customers, of which approximately 793,000 subscribed to data services, 303,000 subscribed to video services and 136,000 subscribed to voice services.

 

On January 8, 2019, the Company acquired Delta Communications, L.L.C. (“Clearwave”) for a purchase price of $358.8 million in cash on a debt-free basis. On October 1, 2019, the Company acquired Fidelity Communications Co.’s data, video and voice business and certain related assets (collectively, “Fidelity”) for a purchase price of $531.4 million in cash on a debt-free basis. Refer to note 2 for details on these transactions.

 

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 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 2019 Form 10-K.

 

The December 31, 2019 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 2019 Form 10-K, but does not include all disclosures required by GAAP. The Company’s interim results of operations may not be indicative of its future results.

 

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

 

Segment Reporting. Accounting Standard Codification (“ASC”) 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. The Company’s operations are organized and managed on the basis of operating systems within its geographic divisions. Each operating system derives revenues from the delivery of similar products and services to a customer base that is also similar. Each operating 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 operating systems within the Company’s material geographic divisions. Management evaluated the criteria for aggregation under ASC 280 and has concluded that the Company meets each of the respective criteria set forth therein. Accordingly, management has identified 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.

 

Recently Adopted Accounting Pronouncements. In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation, setup and other upfront costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing such costs incurred to develop or obtain internal-use software. The ASU specifies which costs are to be expensed and which are to be capitalized, the period over which capitalized costs are to be amortized, the process for identifying and recognizing impairment and the proper presentation of such costs within the consolidated financial statements. The Company adopted the updated guidance on January 1, 2020 on a prospective basis. The adoption of this ASU has resulted in the capitalization of $2.7 million of costs that would have been expensed as incurred under previous guidance, which will be amortized over the life of the applicable hosting arrangement. Amortization of such costs will be included in operating or selling, general and administrative expenses upon implementation, rather than depreciation and amortization expense, within the consolidated financial statements.

 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to recognize an allowance for expected lifetime credit losses through earnings concurrent with the recognition of a financial asset measured at amortized cost. The estimate of expected credit losses is required to be adjusted each reporting period over the life of the financial asset. The ASU was effective January 1, 2020 and required adoption on a modified retrospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued But Not Yet Adopted Accounting Pronouncements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued at the end of 2021. The ASU may be adopted at any time through December 31, 2022. The Company currently holds certain debt and interest rate swaps that reference LIBOR. The Company plans to adopt ASU 2020-04 when the contracts underlying such instruments are amended as a result of reference rate reform, which is expected to occur prior to the end of 2021. The Company is currently evaluating the expected impact of the adoption of this guidance on its consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions related to intraperiod tax allocations, foreign subsidiaries and interim reporting that are present within existing GAAP. The ASU also provides updated guidance regarding the tax treatment of certain franchise taxes, goodwill and nontaxable entities, among other items. In addition, ASU 2019-12 clarifies that the effect of a change in tax laws or rates should be reflected in the annual effective tax rate computation during the interim period that includes the enactment date. The ASU is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Certain provisions must be adopted on prescribed retrospective, modified retrospective and prospective bases, while other provisions may be adopted on either a retrospective or modified retrospective basis. The Company is currently evaluating its timing and method, where applicable, of adoption as well as the expected impact on its consolidated financial statements.

 

 

2.        ACQUISITIONS

 

The following table shows the change in carrying value of goodwill as a result of the Clearwave and Fidelity acquisitions during 2019 (in thousands):

 

   

Goodwill

 

Balance at December 31, 2018

  $ 172,129  

Clearwave acquisition goodwill recognized

    185,885  

Fidelity acquisition goodwill recognized

    71,583  

Balance at December 31, 2019

  $ 429,597  

 

Clearwave. On January 8, 2019, the Company acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois for a purchase price of $358.8 million. The Clearwave acquisition provides the Company with a premier fiber network within its existing footprint, further enables the Company to supply its customers with enhanced business services solutions and provides a platform to allow the Company to replicate Clearwave’s strategy in several of its other markets.

 

 

The following table summarizes the allocation of the Clearwave purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2019 (in thousands):

 

   

Purchase Price Allocation

 

Assets Acquired

       

Cash and cash equivalents

  $ 1,913  

Accounts receivable

    1,294  

Prepaid and other current assets

    311  

Property, plant and equipment

    120,472  

Intangible assets

    89,700  

Other noncurrent assets

    3,533  

Total Assets Acquired

  $ 217,223  
         

Liabilities Assumed

       

Accounts payable and accrued liabilities

  $ 2,128  

Deferred revenue, short-term portion

    4,322  

Deferred income taxes

    32,771  

Other noncurrent liabilities

    5,057  

Total Liabilities Assumed

  $ 44,278  
         

Net assets acquired

  $ 172,945  

Purchase price consideration

    358,830  

Goodwill recognized

  $ 185,885  

 

The measurement period ended on January 7, 2020, and no measurement period adjustments were recorded during 2020.

 

Fidelity. On October 1, 2019, the Company acquired Fidelity, a provider of data, video and voice services to residential and business customers throughout Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas for a purchase price of $531.4 million. Cable One and Fidelity share similar strategies, customer demographics and products. The Fidelity acquisition provides the Company opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies.

 

The following table summarizes the allocation of the Fidelity purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2019 (in thousands):

 

   

Preliminary

Purchase Price

Allocation

 

Assets Acquired

       

Cash and cash equivalents

  $ 4,869  

Accounts receivable

    3,691  

Prepaid and other current assets

    1,756  

Property, plant and equipment

    173,904  

Intangible assets

    288,000  

Other noncurrent assets

    1,895  

Total Assets Acquired

  $ 474,115  
         

Liabilities Assumed

       

Accounts payable and accrued liabilities

  $ 8,795  

Deferred revenue, short-term portion

    1,796  

Other noncurrent liabilities

    3,715  

Total Liabilities Assumed

  $ 14,306  
         

Net assets acquired

  $ 459,809  

Purchase price consideration

    531,392  

Goodwill recognized

  $ 71,583  

 

No measurement period adjustments were recorded during the three months ended March 31, 2020. The measurement period will end on September 30, 2020.

 

 

 

3.        REVENUES

 

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

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Residential

               

Data

  $ 154,990     $ 129,812  

Video

    85,322       83,802  

Voice

    12,427       9,624  

Business services

    57,862       47,143  

Other

    10,595       8,224  

Total revenues

  $ 321,196     $ 278,605  

 

Fees imposed on the Company by various governmental authorities, including franchise fees, are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities. These fees were $6.3 million and $4.1 million for the three months ended March 31, 2020 and 2019, respectively. As the Company acts as principal, these fees are reported in video and voice revenues on a gross basis with corresponding expenses included within operating expenses in the condensed consolidated statements of operations and comprehensive income.

 

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

 

Net accounts receivable from contracts with customers totaled $31.6 million and $32.3 million at March 31, 2020 and December 31, 2019, respectively.

 

Deferred commissions totaled $8.9 million and $8.6 million at March 31, 2020 and December 31, 2019, respectively, and were included within prepaid and other current assets and other noncurrent assets in the condensed consolidated balance sheets. Commission amortization expense was $1.4 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively, and was included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Deferred commissions of $3.7 million included within prepaid and other current assets in the condensed consolidated balance sheet as of March 31, 2020 are expected to be amortized over the next 12 months.

 

Current deferred revenue liabilities, consisting of refundable customer prepayments, up-front charges and installation fees, were $24.9 million and $23.6 million at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, the Company’s remaining performance obligations pertain to the refundable customer prepayments and consist of providing future data, video and voice services to customers. Of the $23.6 million of current deferred revenue at December 31, 2019, $21.7 million was recognized during the three months ended March 31, 2020. Noncurrent deferred revenue liabilities, consisting of up-front charges and installation fees from business customers, were $6.1 million and $5.5 million as of March 31, 2020 and December 31, 2019, respectively, and were included within other noncurrent liabilities in the condensed consolidated balance sheets.

 

 

4.        OPERATING ASSETS AND LIABILITIES

 

Accounts receivable consisted of the following (in thousands):

 

   

March 31, 2020

   

December 31, 2019

 

Trade receivables

  $ 34,646     $ 33,467  

Other receivables

    3,737       6,186  

Less: Allowance for credit losses

    (2,997 )     (1,201 )

Total accounts receivable, net

  $ 35,386     $ 38,452  

 

The following table shows the change in the allowance for credit losses during the periods presented (in thousands):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Beginning balance

  $ 1,201     $ 2,045  

Additions - charged to costs and expenses

    2,118       1,570  

Deductions

    (2,271 )     (4,754 )

Recoveries of amounts previously written off

    1,949       2,090  

Ending balance

  $ 2,997     $ 951  

 

 

Prepaid and other current assets consisted of the following (in thousands):

 

   

March 31, 2020

   

December 31, 2019

 

Prepaid repairs and maintenance

  $ 7,196     $ 551  

Prepaid insurance

    847       1,548  

Prepaid rent

    3,035       1,499  

Prepaid software

    4,621       4,672  

Deferred commissions

    3,654       3,586  

All other current assets

    5,123       3,763  

Total prepaid and other current assets

  $ 24,476     $ 15,619  

 

Other noncurrent assets consisted of the following (in thousands):

 

   

March 31, 2020

   

December 31, 2019

 

Operating lease right-of-use assets

  $ 15,275     $ 16,924  

Investments

    7,806       206  

Deferred commissions

    5,252       5,042  

Note receivable

    3,540       -  

Debt issuance costs

    2,288       2,427  

All other noncurrent assets

    5,283       2,495  

Total other noncurrent assets

  $ 39,444     $ 27,094  

 

Accounts payable and accrued liabilities consisted of the following (in thousands):

 

   

March 31, 2020

   

December 31, 2019

 

Accounts payable

  $ 25,131     $ 36,351  

Accrued programming costs

    19,615       19,620  

Accrued compensation and related benefits

    13,259       23,189  

Accrued sales and other operating taxes

    9,637       9,501  

Accrued franchise fees

    3,662       4,201  

Subscriber deposits

    6,495       6,550  

Operating lease liabilities

    4,218       4,601  

Interest rate swap liability

    26,448       11,045  

Accrued insurance costs

    6,670       6,174  

Cash overdrafts

    4,737       5,801  

All other accrued liabilities

    11,247       9,960  

Total accounts payable and accrued liabilities

  $ 131,119     $ 136,993  

 

Other noncurrent liabilities consisted of the following (in thousands):

 

   

March 31, 2020

   

December 31, 2019

 

Operating lease liabilities

    10,048       11,146  

Accrued compensation and related benefits

    6,390       7,154  

Deferred revenue

    6,061       5,514  

All other noncurrent liabilities

    3,073       3,043  

Total other noncurrent liabilities

  $ 25,572     $ 26,857  

 

 

5.        PROPERTY, PLANT AND EQUIPMENT

 

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

 

   

March 31, 2020

   

December 31, 2019

 

Cable distribution systems

  $ 1,820,201     $ 1,779,964  

Customer premise equipment

    271,856       266,190  

Other equipment and fixtures

    453,467       444,799  

Buildings and improvements

    115,254       113,331  

Capitalized software

    102,794       99,988  

Construction in progress

    81,552       93,352  

Land

    13,350       13,361  

Right-of-use assets

    10,268       10,187  

Property, plant and equipment, gross

    2,868,742       2,821,172  

Less: Accumulated depreciation and amortization

    (1,658,436 )     (1,619,901 )

Property, plant and equipment, net

  $ 1,210,306     $ 1,201,271  

 

 

Depreciation and amortization expense for property, plant and equipment was $54.1 million and $49.7 million for the three months ended March 31, 2020 and 2019, respectively.

 

In January 2019, a portion of the Company’s previous headquarters building and adjoining property was sold for $6.3 million in gross proceeds and the Company recognized a related gain of $1.6 million.

 

 

6.        GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill was $429.6 million at both March 31, 2020 and December 31, 2019. The Company has not historically recorded any impairment of goodwill.

 

 

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

 

             

March 31, 2020

   

December 31, 2019

 
   

Useful Life

Range

(in years)

   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net

Carrying

Amount

   

Gross Carrying Amount

   

Accumulated Amortization

   

Net

Carrying

Amount

 

Finite-Lived Intangible Assets

                                                         

Franchise renewals

  1 25     $ 2,927     $ 2,927     $ -     $ 2,927     $ 2,895     $ 32  

Customer relationships

  14 17       362,000       48,341       313,659       362,000       37,470       324,530  

Trademarks and trade names

  2.7 3       4,300       1,802       2,498       4,300       1,552       2,748  

Total finite-lived intangible assets

            $ 369,227     $ 53,070     $ 316,157     $ 369,227     $ 41,917     $ 327,310  
                                                           

Indefinite-Lived Intangible Assets

                                                         

Franchise agreements

                            $ 978,371                     $ 978,371  

Trade name

                              6,700                       6,700  

Total indefinite-lived intangible assets

                            $ 985,071                     $ 985,071  
                                                           

Total intangible assets, net

                            $ 1,301,228                     $ 1,312,381  

 

Intangible asset amortization expense was $11.2 million and $4.1 million for the three months ended March 31, 2020 and 2019, respectively.

 

As of March 31, 2020, the future amortization of existing finite-lived intangible assets was as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2020 (remaining nine months)

  $ 33,281  

2021

    39,059  

2022

    34,314  

2023

    27,845  

2024

    23,083  

Thereafter

    158,575  

Total

  $ 316,157  

 

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

 

 

 

7.        DEBT

 

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

 

   

March 31, 2020

   

December 31, 2019

 

Senior Credit Facilities (as defined below)

  $ 1,845,965     $ 1,753,045  

Finance lease liabilities

    5,844       5,943  

Total debt

    1,851,809       1,758,988  

Less: Unamortized debt issuance costs

    (17,174 )     (18,142 )

Less: Current portion of long-term debt

    (28,935 )     (28,909 )

Total long-term debt

  $ 1,805,700     $ 1,711,937  

 

The second amended and restated credit agreement among the Company and its lenders (the “Credit Agreement”) provides for senior secured term loans in original aggregate principal amounts of $700 million (the “Term Loan A-2”), $500 million (the “Term Loan B-1”), $250 million (the “Term Loan B-2”) and $325 million (the “Term Loan B-3”) as well as a $350 million revolving credit facility that will mature on May 8, 2024 (the “Revolving Credit Facility” and, together with the Term Loan A-2, the Term Loan B-1, the Term Loan B-2 and the Term Loan B-3, the “Senior Credit Facilities”). 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. Refer to the table below summarizing the Company’s outstanding term loans and note 9 to the Company’s audited consolidated financial statements included in the 2019 Form 10-K for further details on the Company’s Senior Credit Facilities.

 

In January 2020, the Company issued letters of credit totaling $22.0 million under the Revolving Credit Facility on behalf of a third-party entity to guarantee such entity’s performance obligations under a Federal Communications Commission (“FCC”) broadband funding program. The fair value of the letters of credit approximates face value based on the short-term nature of the agreements. The third party has pledged certain assets in favor of the Company as collateral for issuing the letters of credit. The Company would be liable for up to $22.0 million if the third party were to fail to satisfy all or some of its performance obligations under the FCC program. As of March 31, 2020, the Company has assessed the likelihood of non-performance associated with the guarantee to be remote, and therefore, no liability has been accrued within the condensed consolidated balance sheet.

 

In March 2020, the Company borrowed $100 million under the Revolving Credit Facility for general corporate purposes, including for potential small acquisitions and investments. The entire balance was outstanding and bore interest at a rate of 2.43% per annum as of March 31, 2020. Letter of credit issuances under the Revolving Credit Facility totaled $28.7 million at March 31, 2020 and were held for the benefit of performance obligations under government grant programs and certain general and liability insurance matters and bore interest at a rate of 1.63% per annum. As of March 31, 2020, the Company had $1.8 billion of aggregate outstanding term loans and Revolving Credit Facility borrowings and $221.3 million available for additional borrowing under the Revolving Credit Facility.

 

A summary of the Company’s outstanding term loans as of March 31, 2020 is as follows (dollars in thousands):

 

Instrument

 

Draw Date

 

Original Principal

   

Amortization Per Annum(1)

   

Outstanding Principal

 

Final

Maturity

Date

 

Balance

Due Upon

Maturity

 

Benchmark Rate

 

Applicable

Margin(2)

   

Interest

Rate

 

Term Loan A-2

5/8/2019

  $ 700,000    

 

Varies(4)     $ 689,652  

5/8/2024

  $ 513,945  

LIBOR

    1.50%       2.49%  
  10/1/2019(3)                                                    

Term Loan B-1

5/1/2017

    500,000       1.0%       486,250  

5/1/2024

    466,250  

LIBOR

    1.75%       2.74%  

Term Loan B-2

1/7/2019

    250,000       1.0%       247,500  

1/7/2026

    233,125  

LIBOR

    2.00%       2.99%  

Term Loan B-3

6/14/2019

    325,000       1.0%       322,563  

1/7/2026

    303,875  

LIBOR

    2.00%       2.99%  

Total

  $ 1,775,000             $ 1,745,965       $ 1,517,195                    

 


(1)

Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions).

(2)

The Term Loan A-2 interest rate spread can vary between 1.25% and 1.75%, determined on a quarterly basis by reference to a pricing grid based on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement). All other applicable margins are fixed.

(3)

On May 8, 2019, $250 million was drawn. On October 1, 2019, an additional $450 million was drawn.

(4)

Per annum amortization rates for years one through five following the closing date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively.

 

The Company recorded debt issuance cost amortization of $1.1 million for both the three months ended March 31, 2020 and 2019 within interest expense in the condensed consolidated statements of operations and comprehensive income. Unamortized debt issuance costs totaled $19.5 million and $20.6 million at March 31, 2020 and December 31, 2019, respectively, of which $2.3 million and $2.4 million are reflected within other noncurrent assets, respectively, and $17.2 million and $18.1 million are reflected as reductions to long-term debt, respectively, in the condensed consolidated balance sheets.

 

 

As of March 31, 2020, the future maturities of outstanding borrowings were as follows (in thousands): 

 

Year Ending December 31,

 

Amount

 

2020 (remaining nine months)

  $ 21,241  

2021

    37,106  

2022

    54,677  

2023

    81,033  

2024

    1,109,158  

Thereafter

    542,750  

Total

  $ 1,845,965  

 

The Company was in compliance with all debt covenants as of March 31, 2020. 

 

 

8.        INTEREST RATE SWAPS

 

The Company is party to two interest rate swap agreements, designated as cash flow hedges, to manage the risk of fluctuations in interest expense on its variable rate LIBOR debt. Changes in the fair values of the interest rate swaps are reported through other comprehensive income until the underlying hedged debt’s interest expense impacts net income, at which point the corresponding change in fair value is reclassified from accumulated other comprehensive income to interest expense.

 

A summary of the significant terms of the Company’s interest rate swap agreements is as follows (dollars in thousands):

 

   

Entry Date

 

Effective Date

 

Maturity Date(1)

 

Notional Amount

 

Settlement Type

 

Settlement

Frequency

 

Fixed

Base Rate

 

Swap A

 

3/7/2019

 

3/11/2019

 

3/11/2029

  $ 850,000  

Receive one-month LIBOR, pay fixed

 

Monthly

    2.653%  

Swap B

 

3/6/2019

 

6/15/2020

 

2/28/2029

    350,000  

Receive one-month LIBOR, pay fixed

 

Monthly

    2.739%  

Total

              $ 1,200,000                

 


(1)

Each swap  may be terminated prior to the scheduled maturity at the election of the Company or the financial institution counterparty under the terms provided in each swap agreement.

 

The combined fair values of the Company’s interest rate swaps are reflected within the condensed consolidated balance sheets as follows (in thousands):

 

   

March 31, 2020

   

December 31, 2019

 

Liabilities:

               

Current portion:

               

Accounts payable and accrued liabilities

  $ 26,448     $ 11,045  

Noncurrent portion:

               

Interest rate swap liability

  $ 175,524     $ 78,612  

Total

  $ 201,972     $ 89,657  
                 

Stockholders’ Equity:

               

Accumulated other comprehensive loss

  $ 152,185     $ 67,556  

 

The combined effect of the Company’s interest rate swaps on the condensed consolidated statements of operations and comprehensive income is as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Interest expense

  $ 2,084     $ 68  
                 

Unrealized loss on cash flow hedges, gross

  $ (112,315 )   $ (38,586 )

Less: Tax effect

    27,686       9,517  

Unrealized loss on cash flow hedges, net of tax

  $ (84,629 )   $ (29,069 )

 

The Company does not hold any derivative instruments for speculative trading purposes.

 

 

 

9.        FAIR VALUE MEASUREMENTS

 

Financial Assets and Liabilities. The Company has estimated the fair values of its financial instruments as of March 31, 2020 using available market information or other appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the following fair value estimates are not necessarily indicative of the amounts the Company would realize in an actual market exchange.

 

The carrying amounts, fair values and related fair value hierarchy levels of the Company’s financial assets and liabilities as of March 31, 2020 were as follows (dollars in thousands):

 

   

March 31, 2020

   

Carrying

   

Fair

 

Fair Value

   

Amount

   

Value

 

Hierarchy

Assets:

                 

Cash and cash equivalents:

                 

Money market investments

  $ 211,344     $ 211,344  

Level 1

Commercial paper

  $ 10,047     $ 9,962  

Level 2

Liabilities:

                 

Long-term debt (including current portion):

                 

Term loans

  $ 1,745,965     $ 1,712,242  

Level 2

Revolving Credit Facility borrowings

  $ 100,000     $ 100,000  

Level 2

Other noncurrent liabilities (including current portion):

                 

Interest rate swaps

  $ 201,972     $ 201,972  

Level 2

 

Money market investments are primarily held in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (level 1). Commercial paper is primarily held with high-quality companies and is valued using quoted market prices for investments similar to the commercial paper (level 2). Money market investments and commercial paper with original maturities of three months or less are included within cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the term loans and the Revolving Credit Facility borrowings are estimated based on market prices for similar instruments in active markets (level 2). Interest rate swaps are measured at fair value within the condensed consolidated balance sheets on a recurring basis, with fair value determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (level 2).

 

The 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. Assets acquired, including identifiable intangible assets and goodwill, and liabilities assumed in acquisitions are recorded at fair value on the respective acquisition dates, subject to potential future measurement period adjustments. Nonfinancial assets are subject to fair value adjustments when there is evidence that impairment may exist. No material impairments were recorded during the three months ended March 31, 2020 or 2019.

 

 

10.      TREASURY STOCK

 

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements. Treasury shares of 163,042 held at March 31, 2020 include shares repurchased under the Company’s share repurchase program and shares withheld for withholding tax, as described below.

 

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 March 31, 2020, the Company had repurchased 210,631 shares of its common stock at an aggregate cost of $104.9 million. No shares were repurchased during the three months ended March 31, 2020.

 

 

Tax Withholding for Equity Awards. At the employee’s option, shares of common stock are withheld by the Company upon the vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to cover the applicable statutory minimum amount of employee withholding taxes, which the Company then pays to the taxing authorities in cash. The amounts remitted during the three months ended March 31, 2020 and 2019 were $5.8 million and $2.6 million, for which the Company withheld 3,772 and 3,310 shares of common stock, respectively.

 

 

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. At March 31, 2020, 151,367 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 requisite service period, which is generally the vesting period of the award, with forfeitures recognized as incurred. Equity-based compensation expense was $3.2 million and $3.0 million for the three months ended March 31, 2020 and 2019, 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 $5.2 million related to equity-based compensation awards during the three months ended March 31, 2020. The deferred tax asset related to all outstanding equity-based compensation awards was $3.1 million as of March 31, 2020.

 

Restricted Stock Awards. Restricted shares, RSUs and DEUs are collectively referred to as “restricted stock.” A summary of restricted stock activity during the three months ended March 31, 2020 is as follows:

 

   

Restricted

Stock

   

Weighted

Average Grant

Date Fair Value

Per Share

 

Outstanding as of December 31, 2019

    38,873     $ 728.77  

Granted

    9,985     $ 1,533.78  

Forfeited

    (5,207 )   $ 735.85  

Vested and issued

    (10,332 )   $ 668.01  

Outstanding as of March 31, 2020

    33,319     $ 987.75  
                 

Vested and deferred as of March 31, 2020

    5,678     $ 527.85  

 

Equity-based compensation expense for restricted stock was $2.5 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, there was $18.6 million of unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.5 years.

 

Stock Appreciation Rights. A summary of SARs activity during the three months ended March 31, 2020 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, 2019

    90,410     $ 676.41     $ 153.90     $ 73,419       7.5  

Granted

    -     $ -     $ -     $ -       -  

Exercised

    (12,798 )   $ 521.25     $ 113.27     $ 13,333       -  

Forfeited

    (6,141 )   $ 828.40     $ 194.44                  

Outstanding as of March 31, 2020

    71,471     $ 691.13     $ 157.69     $ 68,103       7.4  
                                         

Exercisable as of March 31, 2020

    36,446     $ 564.37     $ 125.09     $ 39,349       6.5  

 

 

Equity-based compensation expense for SARs was $0.7 million and $1.2 million for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, there was $5.7 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.4 years.

 

 

12.      INCOME TAXES

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (“NOL”) carrybacks to offset up to 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

 

The Company’s effective tax rate was 8.5% and 24.6% for the three months ended March 31, 2020 and 2019, respectively. The decrease in the effective tax rate was primarily related to a $7.0 million income tax benefit attributable to the NOL carryback provision of the CARES Act, a $4.2 million increase in income tax benefits attributable to equity-based compensation awards and a $1.1 million decrease in income tax expenses attributable to state effective tax rate changes.

 

 

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. The denominator used in calculating diluted net income per common share further includes any common shares available to be issued upon vesting or exercise of outstanding equity-based compensation 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 (dollars in thousands, except per share amounts):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Numerator:

               

Net income

  $ 69,326     $ 38,739  

Denominator:

               

Weighted average common shares outstanding - basic

    5,697,904       5,674,120  

Effect of dilutive equity-based compensation awards (1)

    57,155       42,465  

Weighted average common shares outstanding - diluted

    5,755,059       5,716,585  
                 

Net Income per Common Share:

               

Basic

  $ 12.17     $ 6.83  

Diluted

  $ 12.05     $ 6.78  

 


(1)

Equity-based compensation awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per common share calculation. The excluded number of anti-dilutive equity-based compensation awards totaled 0 and 2,739 for the three months ended March 31, 2020 and 2019, respectively.

 

 

14.      COMMITMENTS AND CONTINGENCIES

 

Contractual Obligations. The Company has obligations to make future payments for goods and services under certain contractual arrangements. These contractual obligations secure the future rights to various goods and services to be used in the normal course of the Company’s operations. In accordance with applicable accounting rules, the future rights and obligations pertaining to firm commitments, such as certain purchase obligations under contracts, are not reflected as assets or liabilities in the consolidated balance sheets. As of March 31, 2020, there have been no material changes to the contractual obligations previously disclosed in the 2019 Form 10-K.

 

 

In addition, the Company incurs recurring utility pole rental costs and fees imposed by various governmental authorities, including franchise fees, as part of its operations. However, these costs are not included in the Company’s contractual obligations as they are cancellable on short notice, in the case of pole rental costs, or are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities, in the case of fees imposed by governmental authorities. The Company also has franchise agreements requiring plant construction and the provision of services to customers within the franchise areas. In connection with these obligations under existing franchise agreements, the Company obtains surety bonds or letters of credit guaranteeing performance to municipalities and public utilities and payment of insurance premiums. Payments under these arrangements are required only in the remote event of nonperformance. As discussed in note 7 to the condensed consolidated financial statements, the Company issued letters of credit totaling $22.0 million in January 2020 on behalf of a third-party entity to guarantee such entity’s performance obligations under an FCC broadband funding program. As of March 31, 2020, the Company has assessed the likelihood of non-performance associated with the guarantee to be remote, and therefore, no liability has been accrued within the condensed consolidated balance sheet.

 

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

 

Regulation in the Company’s Industry. The Company’s operations are extensively regulated by 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. Future legislative and regulatory changes could adversely affect the Company’s operations.

 

 

 

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

 

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, 2019 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our 2019 Form 10-K. Our results of operations and financial condition discussed herein may not be indicative of our future results and trends.

 

Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all totals, percentages and year-over-year changes are calculated using exact numbers. Minor differences may exist due to rounding.

 

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 950 communities. The markets we serve are primarily non-metropolitan, secondary and tertiary markets, with 79% 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 provided service to approximately 921,000 residential and business customers out of approximately 2.3 million homes passed as of March 31, 2020. Of these customers, approximately 793,000 subscribed to data services, 303,000 subscribed to video services and 136,000 subscribed to voice services.

 

We generate substantially all of our revenues through four primary products. Ranked by share of our total revenues through the first three months of 2020, they are residential data (48.3%), residential video (26.6%), business services (data, voice and video – 18.0%) and residential voice (3.9%). The profit margins, growth rates and capital intensity of our four primary products vary significantly due to competition, product maturity and relative costs.

 

On January 8, 2019, we acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. We paid a purchase price of $358.8 million in cash on a debt-free basis. On October 1, 2019, we acquired Fidelity, a provider of connectivity services to residential and business customers throughout Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. We paid a purchase price of $531.4 million in cash on a debt-free basis.

 

Beginning in 2013, we shifted our focus towards growing our higher margin businesses, namely residential data and business services, rather than our prior concentration on growing revenues through subscriber retention and maximizing customer primary service units (“PSUs”). We adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. 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 are primarily due to the increasing use of wireless voice services instead of residential voice services. Separately, we have also focused on retaining customers who are likely to produce higher relative value over the life of their service relationships with us, 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).

 

Excluding the effects of our recent acquisitions and the COVID-19 pandemic, the trends described above have impacted our four primary product lines in the following ways:

 

Residential data. We have experienced growth in residential data customers and revenues every year since 2013. We expect this growth to continue as our upgrades in broadband capacity, ability to offer higher access speeds than many of our competitors and Wi-Fi support service will enable us to capture additional market share from both data subscribers who use other providers as well as households in our footprint that do not yet subscribe to data services from any provider. 

 

Residential video. Residential video service is an increasingly costly and fragmenting business, with programming costs and retransmission fees continuing to escalate in the face of a proliferation of streaming content alternatives. For example, we are currently evaluating whether to renew our programming agreement with Turner Broadcasting, which expired on April 30, 2020. We intend to continue our strategy of focusing on the higher-margin businesses of residential data and business services while de-emphasizing our residential video business. As a result, we expect that residential video revenues from our existing customer base will decline further in the future.

 

17

 

Residential voice. We have experienced declines in residential voice customers as a result of consumers in the United States deciding to terminate their residential voice services and exclusively use wireless voice services. 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.

 

Business services. We have experienced significant growth in business data customers and revenues, and we expect this growth to continue over the long-term. We attribute this growth to our strategic focus on increasing sales to business customers and our efforts to attract enterprise business customers. Margins of products sold to business customers have remained attractive, which we expect will 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. In addition, a key objective of our capital allocation process is to invest in initiatives designed to drive revenue and Adjusted EBITDA expansion. Over the last three years, more than 50% of our total capital expenditures have been focused on infrastructure improvements that were intended to grow these measures. We continue to invest capital to, among other things, increase our plant and data capacities as well as network reliability. We offer Gigabit data service to over 97% of our homes passed, and we have begun deploying DOCSIS 3.1 to further increase our network capacity and enable future growth in our residential data and business services product lines.

 

We expect to continue to devote financial resources to infrastructure improvements, including in certain of the new markets we have acquired, because we believe these investments are necessary to continually meet our customers’ needs and to remain competitive. The capital enhancements associated with acquired operations include rebuilding low capacity markets; reclaiming bandwidth from analog video services; implementing 32-channel bonding; deploying DOCSIS 3.1; converting back office functions such as billing, accounting and service provisioning; migrating products to Cable One platforms; and expanding our high-capacity fiber network.

 

Our primary goals are to continue growing residential data and business services revenues, to increase profit margins and to deliver strong Adjusted EBITDA and Adjusted EBITDA less capital expenditures. To achieve these goals, we intend to continue our disciplined cost management approach, remain focused on customers with expected higher relative value and follow through with further planned investments in broadband plant upgrades, including the deployment of DOCSIS 3.1 capabilities and new data service offerings for residential and business customers. We also plan to continue seeking broadband-related acquisition and strategic investment opportunities in rural markets.

 

COVID-19 Update

 

We represent a part of the United States’ critical infrastructure, and our continued operation is essential to connectivity services that are vital during the COVID‐19 national emergency. At the same time, the spread of the COVID-19 pandemic has caused us to modify our operations, including restricting our technicians from entering customer homes and businesses; closing or limiting access to local offices and our corporate headquarters for associates, customers and others; limiting non-essential travel for associates; instituting an expanded work-from-home program, including enhancing our technological capabilities to support such efforts; implementing “purpose pay” to provide a 25% premium to base pay for certain associates who are required to leave their homes to perform their essential job functions; and establishing health protocols to protect our associates, customers and others.

 

In addition, in an effort to help ease the financial burden and provide continued connectivity for our customers and communities impacted by the COVID-19 pandemic, beginning in March 2020, we initially committed to do the following for 60 days under the FCC’s Keep Americans Connected Pledge: waive late charges and suspend disconnection of data services for residential and business customers who are unable to pay their bill due to disruptions caused by the pandemic and open free Wi-Fi hotspots in local office parking lots and other public areas across our footprint for public use, which are now in place at more than 140 locations. These commitments are currently scheduled to continue through June 30, 2020.

 

Other actions taken by us beginning in March 2020 to assist customers and the communities we serve during the COVID-19 pandemic included discontinuing charging data overage fees; offering a low-cost 15 Megabit per second (“Mbps”) residential data plan for $10 per month through June 30, 2020 to help low-income families and those impacted by the pandemic, such as seniors and college students; donating $300,000 to support community relief efforts; and supporting various other local relief efforts.

 

18

 

For the three months ended March 31, 2020, the COVID-19 pandemic did not materially impact our results of operations.

 

We anticipate a larger-than-usual quarterly increase in new residential data customers and resulting revenues in the second quarter of 2020 stemming from the COVID-19 pandemic, offset by lower data overage fees, late charges and reconnect fees resulting from our actions in response to the pandemic as well as a negative impact on advertising and business services revenues resulting from the pandemic. In addition, we expect to incur higher labor, bad debt and other expenses for the second quarter of 2020 as a result of the pandemic and our associated response efforts.

 

We continue to monitor the rapidly evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our associates, customers, suppliers, business partners and others. The degree to which the COVID-19 pandemic impacts our operations, business, financial results and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, potential legislative or regulatory efforts to impose new requirements on our data services and how quickly and to what extent normal economic and operating conditions can resume.

 

Refer to the section entitled “Risks Factors” in this Quarterly Report on Form 10-Q for additional risks we face due to the COVID-19 pandemic.

 

Results of Operations

 

PSU and Customer Counts

 

The following table provides an overview of selected subscriber data for the time periods specified (in thousands, except percentages):

 

   

As of March 31,

   

Annual Net Gain/(Loss)

 
   

2020

   

2019

   

Change

   

% Change

 

Residential data PSUs

    713       611       102       16.7  

Residential video PSUs

    288       305       (17 )     (5.5 )

Residential voice PSUs

    102       97       5       4.8  

Total residential PSUs

    1,103       1,013       90       8.9  
                                 

Business data PSUs

    79       67       12       18.4  

Business video PSUs

    15       16       (1 )     (4.0 )

Business voice PSUs

    35       29       6       21.5  

Total business services PSUs

    129       111       18       16.1  
                                 

Total data PSUs

    793       678       114       16.9