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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 June 30, 2017

or

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

Commission File Number: 1-36863

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
(Do not check if a smaller reporting company)
		Emerging growth company	☐

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

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

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

Description of Class	Shares Outstanding as of August 4, 2017
Common Stock, par value $0.01	5,725,853

CABLE ONE, INC.

FORM 10-Q

 TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	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	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION	31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
	Signatures	33

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PART I:  FINANCIAL INFORMATION

Item 1.     Consolidated Financial Statements

CABLE ONE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)	June 30, 2017			December 31, 2016
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	89,793		$	138,040
Accounts receivable, net		45,812			32,526
Income tax receivable		16,539			4,547
Prepaid assets		13,256			10,824
Total Current Assets		165,400			185,937
Property, plant and equipment, net		803,383			619,621
Intangibles, net		971,673			497,480
Goodwill		178,374			84,928
Other assets		5,664			9,305
Total Assets	$	2,124,494		$	1,397,271
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities	$	86,601		$	82,703
Deferred revenue		36,795			22,190
Long-term debt - current portion		11,250			6,250
Total Current Liabilities		134,646			111,143
Long-term debt		1,167,458			530,886
Deferred income taxes		294,850			276,297
Accrued compensation and other liabilities		24,392			24,434
Total Liabilities		1,621,346			942,760
Commitments and contingencies (see Note 12)
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 5,725,095 and 5,708,223 shares outstanding as of June 30, 2017 and December 31, 2016, respectively)		59			59
Additional paid-in capital		22,514			17,669
Retained earnings		556,401			511,776
Accumulated other comprehensive loss		(442	)		(446	)
Treasury stock, at cost (162,804 and 179,676 shares held as of June 30, 2017 and December 31, 2016, respectively)		(75,384	)		(74,547	)
Total Stockholders' Equity		503,148			454,511
Total Liabilities and Stockholders' Equity	$	2,124,494		$	1,397,271

See accompanying notes to unaudited Consolidated Financial Statements.

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CABLE ONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, except per share and share data)	2017			2016			2017			2016
Revenues	$	241,042		$	204,557		$	448,469		$	407,362
Costs and expenses
Operating (excluding depreciation and amortization)		83,849			75,672			152,932			152,100
Selling, general and administrative		51,194			43,482			96,927			87,375
Depreciation and amortization		46,890			34,689			85,295			69,382
(Gain) loss on disposal of assets		462			157			(5,686	)		565
Total operating costs and expenses		182,395			154,000			329,468			309,422
Income from operations		58,647			50,557			119,001			97,940
Interest expense		(11,782	)		(7,549	)		(19,389	)		(15,104	)
Other income (expense), net		(322	)		183			(35	)		693
Income before income taxes		46,543			43,191			99,577			83,529
Provision for income taxes		17,967			16,558			37,787			29,852
Net income	$	28,576		$	26,633		$	61,790		$	53,677
Other comprehensive gain (loss), net of tax		2			(28	)		4			(55	)
Comprehensive income	$	28,578		$	26,605		$	61,794		$	53,622
Net income per common share:
Basic	$	5.03		$	4.64		$	10.88		$	9.30
Diluted	$	4.97		$	4.62		$	10.76		$	9.27
Weighted average common shares outstanding:
Basic		5,678,394			5,743,465			5,677,411			5,769,859
Diluted		5,745,617			5,766,312			5,740,837			5,788,385

See accompanying notes to unaudited Consolidated Financial Statements.

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CABLE ONE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

						Additional					Treasury			Accumulated Other			Total
	Common Stock					Paid-In		Retained			Stock,			Comprehensive			Stockholders’
(in thousands, except share data)	Shares			Amount		Capital		Earnings			at cost			Loss			Equity
Balance at December 31, 2016		5,708,223		$	59	$	17,669	$	511,776		$	(74,547	)	$	(446	)	$	454,511
Net income		-			-		-		61,790			-			-			61,790
Changes in pension, net of tax		-			-		-		-			-			4			4
Equity-based compensation		-			-		4,845		-			-			-			4,845
Issuance of restricted stock awards, net of forfeitures		18,238			-		-		-			-			-			-
Repurchases of common stock		(700	)		-		-		-			(399	)		-			(399	)
Withholding tax for equity awards		(666	)		-		-		-			(438	)		-			(438	)
Dividends paid to stockholders		-			-		-		(17,165	)		-			-			(17,165	)
Balance at June 30, 2017		5,725,095		$	59	$	22,514	$	556,401		$	(75,384	)	$	(442	)	$	503,148

See accompanying notes to unaudited Consolidated Financial Statements.

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CABLE ONE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
(in thousands)	2017			2016
Cash flows from operating activities:
Net income	$	61,790		$	53,677
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		85,295			69,382
Amortization of debt issuance costs		1,191			809
Equity-based compensation		4,845			6,466
Write-off of debt issuance costs		613			-
Deferred income taxes		7,832			(3,330	)
(Gain) loss on disposal of assets		(5,686	)		565
Changes in operating assets and liabilities:
Accounts receivable, net		1,741			3,612
Income tax receivable		(11,992	)		-
Prepaid assets		(1,248	)		(1,388	)
Accounts payable and accrued liabilities		(14,073	)		(4,974	)
Deferred revenue		89			(160	)
Income taxes payable		-			(23	)
Other assets and liabilities, net		462			944
Net cash provided by operating activities		130,859			125,580
Cash flows from investing activities:
Purchase of business, net of cash acquired		(728,783	)		-
Capital expenditures		(76,430	)		(65,023	)
Change in accrued expenses related to capital expenditures		(1,505	)		(10,958	)
Proceeds from sales of property, plant and equipment		10,912			459
Net cash used in investing activities		(795,806	)		(75,522	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		750,000			-
Payment of debt issuance costs		(15,224	)		-
Payments on long-term debt		(95,008	)		(1,258	)
Repurchases of common stock		(399	)		(46,511	)
Payment of withholding tax for equity awards		(438	)		-
Dividends paid to stockholders		(17,165	)		(17,303	)
Cash overdraft		(5,066	)		(1,444	)
Net cash provided by (used in) financing activities		616,700			(66,516	)
Change in cash and cash equivalents		(48,247	)		(16,458	)
Cash and cash equivalents, beginning of period		138,040			119,199
Cash and cash equivalents, end of period	$	89,793		$	102,741
Supplemental cash flow disclosures:
Cash paid for interest	$	14,031		$	14,248
Cash paid for income taxes	$	41,947		$	32,615

See accompanying notes to unaudited Consolidated Financial Statements.

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CABLE ONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business. Cable One, Inc. (“Cable One” or the “Company”) 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 of America. Prior to July 1, 2015, Cable One operated as a wholly owned subsidiary of Graham Holdings Company (“GHC”). As of June 30, 2017, Cable One provided service to 640,337 data customers, 384,004 video customers and 138,286 voice customers. On May 1, 2017, Cable One completed the acquisition of all of the outstanding equity interests of RBI Holding LLC (“NewWave”) and NewWave became a wholly owned subsidiary of Cable One. Cable One paid a purchase price of $741.0 million in cash on a debt-free basis and subject to customary post-closing adjustments. See Note 2 for details on this transaction.

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 accompanying Consolidated Financial Statements 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 rule, certain notes and other financial information normally required by GAAP have been omitted. Management believes the accompanying 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 Consolidated Financial Statements are unaudited and should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The Company’s interim results of operations may not be indicative of its future results.

The December 31, 2016 year-end balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by GAAP.

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

Principles of Consolidation. The accompanying 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 enterprise’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 believes 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 Consolidated Financial Statements in conformity with GAAP requires management to make 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.

Change in Accounting Estimate. As a result of additional information available from new systems and processes, the Company changed its accounting estimate related to the capitalization of certain internal labor and related costs associated with construction and customer installation activities beginning in the first quarter of 2017. Capitalized labor costs increased $5.1 million in the second quarter of 2017 compared to the second quarter of 2016 and $11.0 million for the six months ended June 30, 2017 compared to the year ago period as a result of the change in estimate.

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Recently Adopted and Issued 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 Topic 718. The ASU is effective for all entities for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of adopting this guidance on its Consolidated Financial Statements.

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 2 of the current goodwill impairment test under ASC 350 and replaces it with a simplified model. Under the simplified model, a 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 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 provisions of ASU 2017-04 would not have affected our last goodwill impairment assessment, but no assurance can be provided that the simplified testing methodology will not affect our goodwill impairment assessment 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. For public entities, the amendments in ASU 2017-01 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is evaluating the impact of adopting this guidance on any future transactions.

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 on the statement 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 is effective for the first quarter of 2018, with early adoption permitted. The Company is evaluating the impact of adopting this guidance on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. ASU 2016-09 was effective beginning in the first quarter of 2017. The Company will prospectively record a deferred tax benefit or expense associated with the difference between book and tax for equity-based compensation expense, which is expected to result in increased volatility to the Company’s income tax expense.The Company also established an accounting policy election to assume zero forfeitures for stock award grants and account for forfeitures when they occur which prospectively impacts stock compensation expense. Other aspects of the adoption of ASU 2016-09 did not have a material impact to the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to record most of their leases on the balance sheet, which will be recognized as a right-of-use asset and a 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 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. The straight-line expense will reflect the interest expense on the lease liability (effective interest method) and amortization of the right-of-use asset, which will be presented as a single line item in the operating expense section of the income statement. Finance leases will reflect a front-loaded expense pattern similar to the pattern for current capital leases. ASU 2016-02 is effective for the first quarter of 2019, with early adoption permitted. The Company is evaluating the impact of adopting this guidance on its Consolidated Financial Statements.

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 standard also expands the required disclosures to include the disaggregation of revenue from contracts with customers into categories that depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors. During 2016, the FASB issued additional interpretive guidance relating to the standard which covered the topics of principal versus agent considerations and identifying performance obligations and licensing. The standard is effective for the Company in the first quarter of 2018. The two permitted transition methods under the standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company is currently in the process of evaluating which method of transition will be utilized. Further, the Company is currently conducting an assessment to prepare for implementation of this guidance. To date, this assessment has included using workshops and questionnaires to identify revenue streams, analyzing contracts and assessing other areas that may result in different accounting treatment under this topic, including installation and commission structure. The Company has reached a preliminary conclusion that the majority of its residential customer revenue is not under an extended contract and will be evaluated on a month-to-month basis, and as such, does not anticipate significant changes related to revenue recognition for such customers. Revenue related to business contracts, installation and other up-front charges, costs to obtain contracts and other topics are still being evaluated. The Company continues to evaluate the impact of the standard on related disclosures as well as the acquired NewWave operations.

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2. NEWWAVE ACQUISITION

On January 18, 2017, Cable One announced that it had entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire NewWave from funds affiliated with GTCR LLC, a private equity firm based in Chicago. NewWave was a cable operator providing data, video and voice services to residential and business customers throughout non-urban areas of Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas. Cable One and NewWave shared similar strategies, customer demographics, and products. Accordingly, the acquisition of NewWave offers the Company opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies. The Company paid a purchase price of $741.0 million in cash and completed the transaction on May 1, 2017. See Note 6 for details regarding the financing of the acquisition.

The Company accounted for the NewWave acquisition as a business combination pursuant to ASC 805 - Business Combinations. Accordingly, acquisition costs are not included as components of consideration transferred, and instead are accounted for as expenses in the period in which the costs are incurred. During the three and six months ended June 30, 2017, the Company incurred acquisition-related costs of approximately $3.2 million and $4.7 million, respectively, which are included in Selling, general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Income.

In accordance with ASC 805, Cable One uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill as of the acquisition date is measured as the excess of purchase price consideration over the fair value of net tangible and identifiable intangible assets acquired. The adjustments described below were developed based on Cable One management's assumptions and estimates, including assumptions relating to the consideration paid and the allocation thereof to the assets acquired and liabilities assumed from NewWave based on preliminary estimates of fair value. The preliminary estimates of the fair values of consideration transferred and assets acquired and liabilities assumed are based on the information that was available as of the acquisition date. Cable One believes that the information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The preliminary measurements of fair value set forth herein are subject to change and such changes could be material. The Company expects to finalize the valuation as soon as practicable but no later than one year from the acquisition date. The following table summarizes the provisional allocation of the purchase price consideration as of the acquisition date (in thousands):

	Provisional Allocation
Assets
Cash and cash equivalents	$	12,220
Accounts receivable		15,027
Prepaid assets		1,184
Property, plant and equipment		192,234
Intangibles		476,300
Other assets		370
Total		697,335
Liabilities
Accounts payable and accrued liabilities		24,542
Deferred revenue		14,516
Deferred income taxes		10,720
Total		49,778
Net assets acquired		647,557
Purchase price consideration		741,003
Goodwill recognized	$	93,446

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Acquired intangible assets consist of the following (dollars in thousands):

	Provisional Estimated Fair Value		Provisional Estimated Weighted Average Useful Life (in years)
Franchise agreements	$	320,000	Indefinite
Customer relationships	$	155,000		14
Trademark and trade name	$	1,300		1

The total weighted average amortization period for the acquired intangibles is 13.9 years.

The acquisition produced $93.4 million of goodwill, increasing the Company’s goodwill balance to $178.4 million at June 30, 2017. Goodwill represents the excess of the purchase price consideration over the fair value of the underlying net assets acquired and largely results from expected future synergies from combining operations as well as an assembled workforce, which does not qualify for separate recognition. As an indefinite-lived asset, goodwill is not amortized but rather is subject to impairment testing on at least an annual basis. Goodwill arising from the NewWave acquisition is deductible for tax purposes.

For the period from May 1, 2017 to June 30, 2017, the Company recognized revenue of $32.2 million and net income of $2.1 million relating to NewWave, which included charges for the amortization of acquired intangible assets of $2.1 million.

The following unaudited pro forma combined results of operations for the three and six months ended June 30, 2017 and 2016 have been prepared as if the acquisition of NewWave had occurred on January 1, 2016 and include adjustments for depreciation expense, amortization of intangibles, interest expense from financing, non-recurring acquisition-related transaction fees and the related aggregate impact on the provision for income taxes (in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Revenues	$	257,195	$	249,790	$	512,385	$	496,950
Net income	$	30,585	$	23,922	$	63,525	$	47,550
Net income per common share:
Basic	$	5.39	$	4.17	$	11.19	$	8.24
Diluted	$	5.32	$	4.15	$	11.07	$	8.21

The unaudited pro forma combined results of operations is provided for informational purposes only and is not necessarily indicative of or intended to represent the results that would have been achieved had the NewWave acquisition been consummated as of January 1, 2016 or the results that may be achieved in the future.

3. REVENUES

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Residential
Data	$	103,155	$	86,031	$	193,356	$	169,470
Video		84,873		74,016		157,328		148,869
Voice		11,417		10,944		21,284		22,258
Business services		32,543		24,491		59,505		48,318
Advertising sales		5,970		6,616		11,592		13,619
Other		3,084		2,459		5,404		4,828
Total revenues	$	241,042	$	204,557	$	448,469	$	407,362

The amount of franchise fees recorded on a gross basis and included in residential video revenues above was $4.0 million and $3.6 million for the three months ended June 30, 2017 and 2016, respectively, and $7.5 million and $7.2 million for the six months ended June 30, 2017 and 2016, respectively.

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4. PROPERTY, PLANT AND EQUIPMENT

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

	June 30, 2017			December 31, 2016
Cable distribution systems	$	1,243,192		$	1,048,790
Customer premise equipment		201,360			181,852
Other equipment and fixtures		380,871			359,957
Buildings and leasehold improvements		94,426			88,592
Capitalized software		87,752			83,815
Construction in progress		53,335			64,822
Land		11,591			9,612
Total property, plant and equipment		2,072,527			1,837,440
Less accumulated depreciation		(1,269,144	)		(1,217,819	)
Property, plant and equipment, net	$	803,383		$	619,621

Depreciation expense was $44.8 million and $34.7 million for the three months ended June 30, 2017 and 2016, respectively, and $83.2 million and $69.3 million for the six months ended June 30, 2017 and 2016, respectively.

The Company's previous headquarters building and adjoining property were held for sale at December 31, 2016. In January 2017, the Company sold a portion of this property for $10.1 million in gross proceeds and recognized a related gain of $6.6 million. The remaining property’s carrying value of $4.6 million is included in Other assets in the Consolidated Balance Sheet as assets held for sale at June 30, 2017.

5. GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill at June 30, 2017 and December 31, 2016 was $178.4 million and $84.9 million, respectively, with the increase attributable to the NewWave acquisition on May 1, 2017. The Company historically has not recorded any impairment of goodwill.

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

					June 30, 2017
	Useful				Gross				Net
	Life				Carrying		Accumulated		Carrying
	Range (years)				Amount		Amortization		Amount
Amortized Intangible Assets
Cable franchise renewals and access rights		1	-	25	$	4,138	$	3,840	$	298
Customer relationships			14		$	155,000	$	1,845	$	153,155
NewWave trademark and trade name			1		$	1,300	$	217	$	1,083
Indefinite-Lived Intangible Assets (Excluding Goodwill)
Franchise agreements					$	817,137

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				December 31, 2016
	Useful			Gross				Net
	Life			Carrying		Accumulated		Carrying
	Range (years)			Amount		Amortization		Amount
Amortized Intangible Assets
Cable franchise renewals and access rights	1	-	25	$	4,138	$	3,794	$	344
Indefinite-Lived Intangible Assets (Excluding Goodwill)
Franchise agreements				$	497,136

6. LONG-TERM DEBT

The carrying amount of long-term debt as of June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

	June 30, 2017			December 31, 2016
Notes	$	450,000		$	450,000
Senior Credit Facilities		750,000			95,000
Capital lease obligation		276			284
Total debt		1,200,276			545,284
Less unamortized debt issuance costs		(21,568	)		(8,148	)
Less current portion of long-term debt		(11,250	)		(6,250	)
Total Long-term debt	$	1,167,458		$	530,886

Senior Unsecured 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 15^th and December 15^th of each year.

The Notes have not been, and will not be, registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state or other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any other applicable securities laws. The Notes were offered in the United States only to persons reasonably believed to be qualified institutional buyers in reliance on the exemption from registration set forth in Rule 144A under the Securities Act and outside the United States to non-U.S. persons in reliance on the exemption from registration set forth in Regulation S under the Securities Act.

The Notes were issued pursuant to an indenture (the “Indenture”) dated as of June 17, 2015. 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” and, together with the Revolving Credit Facility, the “Original Credit Facilities”). Concurrently with its entry into the Credit Agreement, the Company borrowed the full amount of the Term Loan Facility (the “Term Loan”).

Borrowings under the Original Credit Facilities bore interest, at the Company’s option, at a rate per annum determined by reference to either the London Interbank Offered Rate (“LIBOR”) or an adjusted base rate, in each case plus an applicable interest rate margin. The applicable interest rate margin with respect to LIBOR borrowings was a rate per annum between 1.50% and 2.25% and the applicable interest rate margin with respect to adjusted base rate borrowings was a rate per annum between 0.50% and 1.25%, in each case determined on a quarterly basis by reference to a pricing grid based upon the Company’s total net leverage ratio. In addition, the Company is required to pay commitment fees on any unused portion of the Revolving Credit Facility at a rate between 0.25% per annum and 0.40% per annum, determined by reference to the pricing grid.

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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. Letter of credit issuances under the Revolving Credit Facility of $2.8 million at June 30, 2017 were held for the benefit of certain general and liability insurance matters and bore interest at a rate of 1.625% per annum. The Company had $197.2 million available for borrowing under the Revolving Credit Facility at June 30, 2017.

On May 1, 2017, the Company entered into a Restatement Agreement (the “Restatement Agreement”) with JPMorgan, as administrative agent, and the lenders party thereto, pursuant to which the Company amended and restated the Credit Agreement (as so amended and restated, the “Amended and Restated Credit Agreement”) and incurred $750 million of senior secured loans (the “New Loans”) which were used, together with cash on hand, to (i) finance the transactions contemplated by the Merger Agreement, (ii) repay in full the Term Loan and (iii) pay related fees and expenses.

The New Loans consist of (a) a five-year incremental term “A” loan in an aggregate principal amount of $250 million (the “Term Loan A”) and (b) a seven-year incremental 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”), which are guaranteed by the Company’s wholly owned subsidiaries and are secured, subject to certain exceptions, by substantially all assets of the Company and the guarantors.

The interest margins applicable to the New Loans under the Amended and Restated Credit Agreement are, at the Company’s option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (x) with respect to the Term Loan A, 2.25% to 1.50% for LIBOR loans and 1.25% to 0.50% 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 (y) with respect to the Term Loan B, 2.25% for LIBOR loans and 1.25% for base rate loans. 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% for the third year after funding and 10.0% per annum for the fourth and fifth years after funding, with the 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 balance due upon maturity. The Term Loan B is subject to a 1.0% prepayment penalty if prepaid within six months of funding, 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.

As of June 30, 2017, outstanding borrowings under the Term Loan A and Term Loan B were $250 million and $500 million, and bore interest at a rate of 2.93% per annum and 3.43% per annum, respectively.

In connection with the New Loans, the Company incurred $15.2 million in debt issuance costs, of which $0.6 million was written off during the quarter ended June 30, 2017. Unamortized debt issuance costs totaled $21.6 million and $8.1 million at June 30, 2017 and December 31, 2016, respectively.

The Company may, subject to the terms and conditions of the Amended and Restated Credit Agreement, 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, including limitations on indebtedness, liens, restricted payments, prepayments of certain indebtedness, investments, dispositions of assets, restrictions on subsidiary distributions and negative pledge clauses, fundamental changes, transactions with affiliates and amendments to organizational documents. The Amended and Restated Credit Agreement also requires the Company to maintain specified ratios of total net leverage and first lien net leverage to consolidated operating cash flow. The Amended and Restated Credit Agreement also contains customary events of default, including non-payment of principal, interest, fees or other amounts, material inaccuracy of any representation or warranty, failure to observe or perform any covenant, default in respect of other material debt of the Company and of its restricted subsidiaries, bankruptcy or insolvency, the entry against the Company or any of its restricted subsidiaries of a material judgment, the occurrence of certain ERISA events, impairment of the loan documentation and the occurrence of a change of control. 

The Company was in compliance with all debt covenants as of June 30, 2017. 

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As of June 30, 2017, the future maturities of long-term debt were as follows (in thousands): 

Years Ending December 31,	Amount
2017 (remaining months)	$	5,633
2018		14,392
2019		20,642
2020		26,892
2021		30,017
Thereafter		1,102,700
Total	$	1,200,276

7. FAIR VALUE MEASUREMENTS

The Company’s deferred compensation liabilities were $17.9 million and $18.2 million at June 30, 2017 and December 31, 2016, respectively. These liabilities are included in Accounts payable and accrued liabilities (for the current portion) and Accrued compensation and other liabilities (for the noncurrent portion) in the Consolidated Balance Sheets. These liabilities represent the market value of a participant’s balance in a notional investment account that is comprised primarily of mutual funds, which is based on observable market prices. However, since the deferred compensation obligations are not exchanged in an active market, they are classified as Level 2 in the fair value hierarchy. Realized and unrealized gains (losses) on deferred compensation are included in operating income.

The carrying amounts and fair values of the Company’s money market and commercial paper investments and long-term debt (including the current portion) as of June 30, 2017 were as follows (in thousands):

	June 30, 2017
	Carrying		Fair
	Amount		Value
Assets:
Money market investments	$	32,248	$	32,248
Commercial paper	$	39,957	$	39,942
Long-term debt, including current portion:
Notes	$	450,000	$	473,625
Senior Credit Facilities	$	750,000	$	750,000

Money market investments are included in Cash and cash equivalents in the Consolidated Balance Sheets. Commercial paper investments with original maturities of 90 days or less are also included in Cash and cash equivalents. These investments are primarily held in U.S. Treasury securities and registered money market funds. These investments were valued using a market approach based on the quoted market prices of the money market investments (Level 1) or inputs that include quoted market prices for investments similar to the commercial paper (Level 2). The fair value of the Notes was estimated based on market prices in active markets (Level 2). The fair value of the New Loans was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2). 

8. TREASURY STOCK

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 Company common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through June 30, 2017, the Company had repurchased 165,633 shares at an aggregate cost of $73.1 million. During the first half of 2017, the Company repurchased 700 shares at an aggregate cost of $0.4 million, of which all occurred during the first quarter.

Restricted Stock Tax Withholding. Treasury stock is recorded at cost and is presented as a reduction of Stockholders’ equity in the Consolidated Financial Statements. Shares of common stock with a fair market value equal to the applicable statutory minimum amount of the employee withholding taxes due are withheld by the Company upon vesting of restricted stock and exercises of stock appreciation rights (“SARs”) to pay the applicable statutory minimum amount of employee withholding taxes and are considered common stock repurchases. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The amounts remitted during the three and six months ended June 30, 2017 were $0.1 million and $0.4 million, for which the Company withheld 149 and 666 shares of common stock, respectively. Treasury shares of 162,804 held at June 30, 2017 include the aforementioned shares withheld for withholding tax.

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9. EQUITY-BASED COMPENSATION

On June 5, 2015, the Board adopted the Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “Original 2015 Plan”), which became effective July 1, 2015. On May 2, 2017, the Company’s stockholders approved the Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation (the “2015 Plan”), which automatically terminated, replaced and superseded the Original 2015 Plan, except that any outstanding awards granted under the Original 2015 Plan will remain in effect pursuant to their terms. The 2015 Plan is designed to promote the interests of the Company and its stockholders by providing the employees and directors of the Company with incentives and rewards to encourage them to continue in the service of the Company and with a proprietary interest in pursuing the long-term growth, profitability and financial success of the Company. Any of the directors, officers and employees of the Company and its affiliates are eligible to be granted one or more of the following types of awards under the 2015 Plan: (1) incentive stock options, (2) non-qualified stock options, (3) restricted stock awards, (4) SARs, (5) restricted stock units (“RSUs”), (6) cash-based awards, (7) performance-based awards, (8) dividend equivalent rights and (9) other stock-based awards, including, without limitation, performance stock units and deferred stock units. The 2015 Plan includes the authority to grant awards that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended. Unless the 2015 Plan is sooner terminated by the Board, no awards may be granted under the 2015 Plan after May 2, 2027.

The 2015 Plan provides that, subject to certain adjustments for specified corporate events, the maximum number of shares of Company common stock that may be issued under the 2015 Plan is 334,870, which is equal to the number of remaining shares of Company common stock available for future issuance under the Original 2015 Plan as of May 2, 2017, regardless of whether such shares were subject to outstanding awards as of such date, and no more than 329,962 shares may be issued pursuant to incentive stock options. At June 30, 2017, 331,552 shares were available for issuance under the 2015 Plan.

Restricted Stock Awards. The Company has granted restricted shares of Company common stock subject to service-based and performance-based vesting conditions to employees of the Company. Restricted share awards generally cliff-vest on the three-year anniversary of the grant date or in four equal ratable installments beginning on the first anniversary of the grant date (generally subject to the holder’s continued employment with the Company through the applicable vesting date), except in the case of awards made to individuals (i) whose equity awards issued by GHC were forfeited in connection with the Company’s spin-off (the “spin-off”) from GHC (the “Replacement Shares”), which Replacement Shares vested on December 12, 2016 (with certain exceptions as provided in the applicable award agreement), or (ii) who did not receive an equity award from GHC in 2015 in anticipation of the spin-off (the “Staking Shares”), which Staking Shares are scheduled to cliff-vest on January 2, 2018. Performance-based restricted shares are or were subject to performance metrics related primarily to year-over-year or three-year cumulative growth in Adjusted EBITDA less capital expenditures or year-over-year growth in Adjusted EBITDA and capital expenditures as a percentage of total revenues. Restricted shares are subject to the terms and conditions of the Original 2015 Plan or the 2015 Plan (in the case of awards made on or following May 2, 2017) and are otherwise subject to the terms and conditions of the applicable award agreement.

The compensation arrangements for the Company’s non-employee directors as of June 30, 2017 provided that each non-employee director is entitled to an annual retainer of $75,000 in cash, plus an additional annual cash retainer for each non-employee director who serves as a committee chair or as lead independent director and approximately $125,000 in RSUs.  Such RSUs will generally be granted on the date of the Company’s annual stockholders’ meeting and will vest on the earlier of the first anniversary of the grant date or the annual stockholders’ meeting date immediately following the grant date, subject to the director’s continued service through such vesting date.  Settlement of such RSUs will be in the form of one share of the Company’s common stock and will follow vesting, unless the director has previously elected to defer such settlement until his or her separation from service from the Board. Any dividends associated with RSUs granted prior to the 2017 annual grant of RSUs will be converted into Dividend Equivalent Units (“DEUs”), which will be delivered at the time of settlement of the associated RSUs. Commencing with the 2017 annual grant of RSUs, dividends associated with RSUs will be paid out in cash at the time of settlement. As of June 30, 2017, 3,175 RSUs, including DEUs, were vested and deferred.

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Restricted shares, RSUs and DEUs are collectively referred to as “restricted stock.” A summary of restricted stock activities for the six months ended June 30, 2017 is as follows:

				Weighted Average
				Grant Date
	Restricted			Fair Value
	Stock			Per Share
Outstanding as of December 31, 2016		38,425		$	402.21
Granted		15,660		$	624.42
Granted due to performance achievement		5,006		$	433.66
Forfeited		(3,992	)	$	418.58
Vested		(1,693	)	$	436.29
Outstanding as of June 30, 2017		53,406		$	466.62
Vested and unissued as of June 30, 2017		3,175		$	436.06

Compensation expense associated with restricted stock is recognized on a straight-line basis over the vesting period. The expense recognized each period is dependent upon the Company’s estimate of the number of shares that will ultimately vest. Equity-based compensation expense for restricted stock was $1.6 million and $3.3 million for the three and six months ended June 30, 2017, respectively.  At June 30, 2017, there was $9.8 million of unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.3 years.

Stock Appreciation Rights. The Company has granted SARs to certain executives and other employees of the Company. The SARs are scheduled to vest in four equal ratable installments beginning on the first anniversary of the grant date (generally subject to the holder’s continued employment with the Company through the applicable vesting date). The SARs are subject to the terms and conditions of the Original 2015 Plan or the 2015 Plan (in the case of awards made on or following May 2, 2017) and will otherwise be subject to the terms and conditions of the applicable award agreement.

A summary of SAR activity is as follows:

	Stock Appreciation Rights			Weighted Average Exercise Price		Weighted Average Fair Value		Aggregate Intrinsic Value (in thousands)		Weighted Average Remaining Contractual Term (in years)
Outstanding as of December 31, 2016		136,000		$	426.80	$	88.07	$	26,510		8.7
Granted		21,572		$	620.64	$	138.01	$	-		9.5
Exercised		(6,775	)	$	422.31	$	87.22
Forfeited		(8,700	)	$	422.31	$	87.22
Outstanding as of June 30, 2017		142,097		$	456.72	$	95.74	$	36,118		8.4
Vested and exercisable as of June 30, 2017		24,150		$	422.81	$	87.33	$	6,957		8.2

The fair value of the SARs was measured based on the Black-Scholes model. The weighted average inputs used in the model for the six months ended June 30, 2017 were as follows:  

	2017
Expected volatility		20.90	%
Risk-free interest rate		2.14	%
Expected term (in years)		6.25
Expected dividend yield		0.96	%

Compensation expense associated with SARs is recognized on a straight-line basis over the vesting period. Equity-based compensation expense for SARs was $0.8 million and $1.5 million for the three and six months ended June 30, 2017, respectively. At June 30, 2017, there was $8.9 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.4 years.

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Compensation Expense. Total equity-based compensation expense recognized was $2.4 million and $3.4 million for the three months ended June 30, 2017 and 2016, respectively, and $4.8 million and $6.5 million for the six months ended June 30, 2017 and 2016, respectively, and was included in Selling, general and administrative expenses within the Consolidated Statements of Operations and Comprehensive Income. The Company has recorded an income tax benefit of $3.7 million related to equity-based awards granted through June 30, 2017. The deferred tax asset related to all outstanding equity-based awards was $6.3 million as of June 30, 2017.  

10. INCOME TAXES

The Company’s effective tax rate was 38.6% and 38.3% for the three months ended June 30, 2017 and 2016, respectively, and 37.9% and 35.7% for the six months ended June 30, 2017 and 2016, respectively. The increase in the effective tax rate for the six months ended June 30, 2017 as compared to the prior year period primarily relates to $2.2 million of income tax benefits from certain spin-off and state tax items recognized in the first quarter of 2016, which did not recur.

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1. NET INCOME PER SHARE

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Numerator:
Net income	$	28,576	$	26,633	$	61,790	$	53,677
Denominator:
Weighted average common shares outstanding - basic		5,678,394		5,743,465		5,677,411		5,769,859
Effect of dilutive equity awards (1)		67,223		22,847		63,426		18,526
Weighted average common shares outstanding - diluted		5,745,617		5,766,312		5,740,837		5,788,385
Net income per share:
Basic	$	5.03	$	4.64	$	10.88	$	9.30
Diluted	$	4.97	$	4.62	$	10.76	$	9.27

⁽¹⁾ SARs outstanding that were not included in the diluted net income per share calculation because the effect would have been anti-dilutive were 2,477 and 12,098 for the three months ended June 30, 2017 and 2016, respectively, and 1,438 and 6,830 for the six months ended June 30, 2017 and 2016, respectively.

12. 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 the exposure to future material losses from existing legal proceedings is not reasonably possible or that future material losses in excess of the amounts accrued are not reasonably possible.

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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.

GHC Agreements. On June 16, 2015, Cable One entered into several agreements with GHC that set forth the principal actions taken in connection with the spin-off and that govern the relationship of the parties following the spin-off, including a Separation and Distribution Agreement, a Tax Matters Agreement and an Employee Matters Agreement. The aggregate costs and reimbursements paid to GHC totaled $0.1 million and $0.3 million for the three and six months ended June 30, 2017, respectively.

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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 unaudited Consolidated Financial Statements and related 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, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the SEC on March 1, 2017. Our results of operations for the three and six months ended June 30, 2017 may not be indicative of our future results.

Overview

Our Business

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 the seventh-largest cable system operator in the United States based on customers and revenues in 2016, providing service to 805,483 residential and business customers out of approximately 2.1 million homes passed as of June 30, 2017. Of these customers, 640,337 subscribed to data services, 384,004 subscribed to video services and 138,286 subscribed to voice services.

We generate substantially all of our revenues through five primary products. Ranked by share of our total revenues through the first six months of 2017, they are residential data (43.1%), residential video (35.1%), business services (data, video and voice – 13.3%), residential voice (4.7%) and advertising sales (2.6%). The profit margins, growth rates and capital intensity of our five primary products vary significantly due to competition, product maturity and relative costs.

On May 1, 2017, we completed the acquisition of all of the outstanding equity interests of NewWave, and NewWave became a wholly owned subsidiary of ours. We paid a purchase price of $741.0 million in cash on a debt-free basis and subject to customary post-closing adjustments. See Note 2 of the Notes to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for details on this transaction. Our results of operations for the three and six months ended June 30, 2017 include two months of NewWave operations following the completion of the acquisition.

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 competition from other content providers and increasing programming costs and retransmission fees, 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, landline 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 (see “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 recent upgrades in broadband capacity and our ability to offer higher access speeds than many of our competitors. 

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● 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 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 landline voice service and exclusively use wireless voice service. We believe this trend will continue because of competition from wireless voice service. 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 and voice customers and revenues and expect this to continue. We attribute this growth to our strategic focus shift on increasing sales to business customers. More recently, we have expanded our 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 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 2015 to increase our cable plant capacities and reliability, launch all-digital video services, which has freed up approximately three-fourths 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.

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”). According to the Order, the FCC will forbear from systematic rate regulation of internet access service at the subscriber level, which we believe will permit us to continue to manage data usage efficiently by establishing appropriate rates. However, the Order also imposes on all providers of broadband internet access service, including us, obligations that limit the ways certain types of traffic can be managed. In June 2016, the U.S. Court of Appeals for the D.C. Circuit upheld the Order in its entirety. On May 1, 2017, the U.S. Court of Appeals for the D.C. Circuit denied a petition for an en banc rehearing of the June 2016 decision upholding the Order. Parties have been granted until September 28, 2017 to file petitions for certiorari with the U.S. Supreme Court. In May 2017, the FCC issued a Notice of Proposed Rulemaking to revise the Open Internet rules previously adopted in the Order, and the FCC is seeking comment on its proposals with reply comments due by August 16, 2017. Congress also has proposed legislation regarding the Open Internet rules. We cannot predict whether or when future changes to the regulatory framework will occur at the FCC, in Congress or in the courts. We also cannot predict whether or to what extent the rules as revised by the FCC, Congress or the courts may affect our operations or impose costs on our business.

Results of Operations

PSUs and Customer Counts by Primary Products

As of June 30, 2017, our total PSUs increased 194,396 year-over-year, with increases in residential data, video and voice PSUs of 119,446, 41,834, and 10,713, respectively, and an increase in business PSUs of 22,403. Our total customer relationships increased 145,540, or 22.1%, year-over-year. The year-over-year increases were primarily attributable to new customers acquired as a result of the NewWave acquisition during the second quarter of 2017 and continued organic growth in our primary focus product lines of residential data and business services.

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

	As of June 30,				Annual Net Gain/(Loss)
	2017		2016		Change		% Change
Residential data PSUs		585,049		465,603		119,446		25.7
Residential video PSUs (1)		366,816		324,982		41,834		12.9
Residential voice PSUs		114,519		103,806		10,713		10.3
Total residential PSUs		1,066,384		894,391		171,993		19.2
Business data PSUs (2)		55,288		42,714		12,574		29.4
Business video PSUs		17,188		13,992		3,196		22.8
Business voice PSUs (3)		23,767		17,134		6,633		38.7
Total business PSUs		96,243		73,840		22,403		30.3
Total PSUs		1,162,627		968,231		194,396		20.1
Total residential customer relationships		741,225		610,293		130,932		21.5
Total business customer relationships		64,258		49,650		14,608		29.4
Total customer relationships		805,483		659,943		145,540		22.1

(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.

The following table provides an overview of selected customer data for our legacy Cable One cable systems excluding the impact of PSUs and customers attained as a result of the NewWave acquisition for the time periods specified:

	As of June 30,				Annual Net Gain/(Loss)
	2017		2016		Change			% Change
Residential data PSUs		474,815		465,603		9,212			2.0
Residential video PSUs (1)		284,695		324,982		(40,287	)		(12.4	)
Residential voice PSUs		92,100		103,806		(11,706	)		(11.3	)
Total residential PSUs		851,610		894,391		(42,781	)		(4.8	)
Business data PSUs (2)		46,909		42,714		4,195			9.8
Business video PSUs		13,295		13,992		(697	)		(5.0	)
Business voice PSUs (3)		19,156		17,134		2,022			11.8
Total business PSUs		79,360		73,840		5,520			7.5
Total PSUs		930,970		968,231		(37,261	)		(3.8	)
Total residential customer relationships		601,883		610,293		(8,410	)		(1.4	)
Total business customer relationships		53,426		49,650		3,776			7.6
Total customer relationships		655,309		659,943		(4,634	)		(0.7	)

(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 to single and double-play packages. This is because some residential video customers have defected to DBS and OTT offerings in lieu of video and more households have discontinued landline voice service. In addition, we have focused on selling data-only packages to new customers rather than on cross-selling video to these customers.

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Comparison of Three Months Ended June 30, 2017 to Three Months Ended June 30, 2016

Revenues

Revenues increased $36.5 million, or 17.8%, due primarily to increases in residential data, residential video and business services revenues of $17.1 million, $10.9 million and $8.1 million, respectively. The increase was the result of the NewWave operations since May 1, 2017 and organic growth in our higher margin product lines of residential data and business services.

Revenues by service offering were as follows for the three months ended June 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):

	Three Months Ended June 30,
	2017				2016				2017 vs. 2016
			% of				% of		$			%
	Revenues		Revenues		Revenues		Revenues		Change			Change
Residential data	$	103,155		42.8	$	86,031		42.1	$	17,124			19.9
Residential video		84,873		35.2		74,016		36.2		10,857			14.7
Residential voice		11,417		4.7		10,944		5.4		473			4.3
Business services		32,543		13.5		24,491		12.0		8,052			32.9
Advertising sales		5,970		2.5		6,616		3.2		(646	)		(9.8	)
Other		3,084		1.3		2,459		1.1		625			25.4
Total revenues	$	241,042		100.0	$	204,557		100.0	$	36,485			17.8

Average monthly revenue per unit for the indicated service offerings were as follows for the three months ended June 30, 2017 and 2016:

	Three Months Ended June 30,				2017 vs. 2016
	2017		2016		$ Change		% Change
Residential data (1)	$	62.52	$	61.49	$	1.03		1.7
Residential video (1)	$	82.11	$	74.59	$	7.52		10.1
Residential voice (1)	$	35.09	$	34.55	$	0.54		1.6
Business services (2)	$	180.38	$	166.61	$	13.77		8.3

(1)

Average monthly per unit values represent the applicable residential service revenues divided by the corresponding average of the number of PSUs at the beginning and end of each period, except that for any new PSUs added as a result of an acquisition occurring during the reporting period, the associated average monthly per unit values represent the applicable residential service revenues divided by the corresponding weighted average of the number of PSUs during such period.

(2)

Average monthly per unit values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period, except that for any new business customer relationships added as a result of an acquisition occurring during the reporting period, the associated average monthly per unit values represent business services revenues divided by the weighted average of the number of business customer relationships during such period.

Revenues by service offering, excluding the impact of revenues related to NewWave, were as follows for the three months ended June 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):

	Three Months Ended June 30,
	2017				2016				2017 vs. 2016
			% of				% of		$			%
	Revenues		Revenues		Revenues		Revenues		Change			Change
Residential data	$	92,413		44.2	$	86,031		42.1	$	6,382			7.4
Residential video		70,840		33.9		74,016		36.2		(3,176	)		(4.3	)
Residential voice		9,803		4.7		10,944		5.4		(1,141	)		(10.4	)
Business services		27,901		13.4		24,491		12.0		3,410			13.9
Advertising sales		5,699		2.7		6,616		3.2		(917	)		(13.9	)
Other		2,200		1.1		2,459		1.1		(259	)		(10.5	)
Total revenues	$	208,856		100.0	$	204,557		100.0	$	4,299			2.1

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Average monthly revenue per unit, excluding the impact of revenues and customers attained as a result of the NewWave acquisition in the second quarter of 2017 were as follows for the three months ended June 30, 2017 and 2016:

	Three Months Ended June 30,				2017 vs. 2016
	2017		2016		$ Change		% Change
Residential data (1)	$	64.70	$	61.49	$	3.21		5.2
Residential video (1)	$	81.65	$	74.59	$	7.06		9.5
Residential voice (1)	$	34.98	$	34.55	$	0.43		1.2
Business services (2)	$	175.69	$	166.61	$	9.08		5.4

(1)	Average monthly per unit values represent the applicable residential service revenues divided by the corresponding average of the number of PSUs at the beginning and end of each period.
(2)	Average monthly per unit values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period.

Residential data service revenues increased $17.1 million, or 19.9%, due primarily to an increase in residential data customers of 25.7% year-over-year as a result of the NewWave operations during the second quarter of 2017 and organic subscriber growth, a reduction in package discounting and increased subscriptions to premium tiers by residential customers.

Residential video service revenues increased $10.9 million, or 14.7%, due primarily to an increase in residential video customers of 12.9% as a result of the NewWave operations during the second quarter of 2017 and a rate adjustment in the first quarter of 2017.

Residential voice service revenues increased $0.5 million, or 4.3%, due primarily to an increase in residential voice customers of 10.3% as a result of the NewWave operations during the second quarter of 2017.

Business services revenues increased $8.1 million, or 32.9%, due primarily to the NewWave operations during the second quarter of 2017, 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 2017. Total business customer relationships increased 29.4% year-over-year. Overall, business services comprised 13.5% of our total revenues for the second quarter of 2017 compared to 12.0% of our total revenues for the second quarter of 2016.

Advertising sales revenues decreased $0.6 million, or 9.8%, primarily as a result of fewer video customers to be reached by advertising spots.

Other revenues increased $0.6 million, or 25.4%, in the second quarter of 2017.