10-Q 1 cabo20170630_10q.htm FORM 10-Q cabo20170630_10q.htm 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 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

  

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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  

  

 

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.

 

 

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                  

  

 

             

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 15th and December 15th 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.

 

 

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. 

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

1

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.

 

 

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.

 

 

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. 

  

 

 

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.

 

 

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.

 

 

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  

   

 

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.

 

Operating Costs and Expenses

 

Operating expenses (excluding depreciation and amortization) were $83.9 million in the second quarter of 2017 and increased $8.2 million, or 10.8%, compared to the second quarter of 2016. Operating expenses as a percentage of revenues were 34.8% for the second quarter of 2017 compared to 37.0% for the year ago quarter. Additional operating expenses attributable to the NewWave operations were $15.9 million for the second quarter of 2017. This increase was partially offset by a $3.9 million decrease in labor costs associated with our change in accounting estimate for capitalized labor costs discussed in Note 1 of the Notes to our Consolidated Financial Statements, a $1.6 million decrease in programming costs resulting from fewer video subscribers, and a decrease in backbone and internet connectivity fees.

 

Selling, general and administrative expenses increased $7.7 million, or 17.7%, to $51.2 million. Selling, general and administrative expenses as a percentage of revenues were 21.2% and 21.3% for second quarter of 2017 and 2016, respectively. Additional selling, general and administrative expenses attributable to the NewWave operations were $5.0 million for the second quarter of 2017. The remaining increase was due to higher acquisition-related expenses of $2.8 million and severance costs of $1.3 million, partially offset by a $1.2 million decrease in labor costs in the second quarter of 2017 associated with our aforementioned change in accounting estimate for capitalized labor costs.

 

Depreciation and amortization increased $12.2 million, or 35.2%, including $7.9 million attributable to the NewWave operations. The increase was due primarily to new assets placed in service since the second quarter of 2016, including property, plant and equipment and amortized intangible assets acquired as part of the NewWave acquisition, partially offset by assets that became fully depreciated since the second quarter of 2016. As a percentage of revenues, depreciation and amortization expense was 19.5% for the second quarter of 2017 compared to 17.0% for the second quarter of 2016.

 

 

Interest Expense

 

Interest expense increased $4.2 million, or 56.1%, due primarily to additional debt incurred during the second quarter of 2017 to finance the NewWave acquisition.

 

Other Income (Expense)

 

Other expense of $0.3 million in the second quarter of 2017 was primarily attributable to the write-off of $0.6 million of debt issuance costs related to the additional debt incurred to finance the NewWave acquisition, partially offset by interest income. Other income of $0.2 million in the second quarter of 2016 consisted of interest income.

 

Provision for Income Taxes

 

Provision for income taxes increased $1.4 million, or 8.5%, due primarily to an increase in income before taxes of $3.4 million. Our effective tax rate was 38.6% and 38.3% for the three months ended June 30, 2017 and 2016, respectively.

 

Net Income

 

As a result of the factors described above, our net income was $28.6 million for the second quarter of 2017 compared to $26.6 million for the second quarter of 2016, an increase of 7.3%.

 

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

 

Revenues

 

Revenues increased $41.1 million, or 10.1%, due primarily to increases in residential data, residential video and business services revenues of $23.9 million, $8.5 million and $11.2 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, partially offset by decreases in residential voice and advertising revenues of $1.0 million and $2.0 million, respectively.

 

Revenues by service offering were as follows for the six 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):

 

   

Six Months Ended June 30,

                 
   

2017

   

2016

   

2017 vs. 2016

 
           

% of

           

% of

    $    

%

 
   

Revenues

   

Revenues

   

Revenues

   

Revenues

   

Change

   

Change

 

Residential data

  $ 193,356       43.1     $ 169,470       41.6     $ 23,886       14.1  

Residential video

    157,328       35.1       148,869       36.5       8,459       5.7  

Residential voice

    21,284       4.7       22,258       5.5       (974

)

    (4.4

)

Business services

    59,505       13.3       48,318       11.9       11,187       23.2  

Advertising sales

    11,592       2.6       13,619       3.3       (2,027

)

    (14.9

)

Other

    5,404       1.2       4,828       1.2       576       11.9  

Total revenues

  $ 448,469       100.0     $ 407,362       100.0     $ 41,107       10.1  

 

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

 

   

Six Months Ended June 30,

   

2017 vs. 2016

 
   

2017

   

2016

   

$ Change

   

% Change

 

Residential data (1)

  $ 63.33     $ 60.97     $ 2.36       3.9  

Residential video (1)

  $ 81.10     $ 73.53     $ 7.57       10.3  

Residential voice (1)

  $ 34.63     $ 34.53     $ 0.10       0.3  

Business services (2)

  $ 176.87     $ 165.98     $ 10.89       6.6  

     

(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 six 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):

 

   

Six Months Ended June 30,

                 
   

2017

   

2016

   

2017 vs. 2016

 
           

% of

           

% of

    $    

%

 
   

Revenues

   

Revenues

   

Revenues

   

Revenues

   

Change

   

Change

 

Residential data

  $ 182,614       43.9     $ 169,470       41.6     $ 13,144       7.8  

Residential video

    143,295       34.4       148,869       36.5       (5,574

)

    (3.7

)

Residential voice

    19,670       4.7       22,258       5.5       (2,588

)

    (11.6

)

Business services

    54,863       13.2       48,318       11.9       6,545       13.5  

Advertising sales

    11,321       2.7       13,619       3.3       (2,298

)

    (16.9

)

Other

    4,520       1.1       4,828       1.2       (308

)

    (6.4

)

Total revenues

  $ 416,283       100.0     $ 407,362       100.0     $ 8,921       2.2  

 

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 six months ended June 30, 2017 and 2016:

 

   

Six Months Ended June 30,

   

2017 vs. 2016

 
   

2017

   

2016

   

$ Change

   

% Change

 

Residential data (1)

  $ 64.49     $ 60.97     $ 3.52       5.8  

Residential video (1)

  $ 80.79     $ 73.53     $ 7.26       9.9  

Residential voice (1)

  $ 34.54     $ 34.53     $ 0.01       -  

Business services (2)

  $ 174.25     $ 165.98     $ 8.27       5.0  
     

(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 $23.9 million, or 14.1%, 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 $8.5 million, or 5.7%, 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 decreased $1.0 million, or 4.4%, due primarily to a decrease in legacy Cable One voice customers, partially offset by increased customers as a result of the NewWave operations during the second quarter of 2017.

 

Business services revenues increased $11.2 million, or 23.2%, 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 13.3% of our total revenues for the six months ended June 30, 2017 compared to 11.9% of our total revenues for the six months ended June 30, 2016.

 

Advertising sales revenues decreased $2.0 million, or 14.9%, primarily as a result of fewer video customers to be reached by advertising spots.

 

Other revenues increased $0.6 million, or 11.9%.

 

 

Operating Costs and Expenses

 

Operating expenses (excluding depreciation and amortization) were $152.9 million for the six months ended June 30, 2017 and increased $0.8 million, or 0.5%, compared to the year ago period. Operating expenses as a percentage of revenues were 34.1% for the first half of 2017 compared to 37.3% for the first half of 2016. Additional operating expenses attributable to the NewWave operations were $15.9 million for the first half of 2017. This increase was partially offset by an $8.6 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor costs, a $2.8 million decrease in programming costs resulting from fewer video subscribers, a $1.6 million decrease in backbone and internet connectivity fees, and lower group insurance and repairs and maintenance costs.

 

Selling, general and administrative expenses increased $9.5 million, or 10.9%, to $96.9 million. Selling, general and administrative expenses as a percentage of revenues were 21.6% and 21.4% for the six months ended June 30, 2017 and 2016, respectively. Additional selling, general and administrative expenses attributable to the NewWave operations were $5.0 million for the first half of 2017. The remaining increase was due to increases in legacy Cable One acquisition-related expenses of $4.1 million and severance costs of $2.6 million, partially offset by a $2.4 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor costs.

 

Depreciation and amortization increased $15.9 million, or 22.9%, including $7.9 million attributable to the NewWave operations. The increase was due primarily to new assets placed in service since the second quarter of 2016, including property, plant and equipment and amortized intangible assets acquired as part of the NewWave acquisition, partially offset by assets that became fully depreciated since the second quarter of 2016. As a percentage of revenues, depreciation and amortization expense was 19.0% for the six months ended June 30, 2017 compared to 17.0% for the six months ended June 30, 2016.

 

We recognized a net gain on disposal of assets of $5.7 million in the first half of 2017, primarily related to the sale of a portion of a non-operating property that included our previous headquarters building. In the first half of 2016, we recognized a net loss of $0.6 million on disposals of assets.

 

Interest Expense

 

Interest expense increased $4.3 million, or 28.4%, due primarily to additional debt incurred during the second quarter of 2017 to finance the NewWave acquisition.

 

Other Income (Expense)

 

Other expense of less than $0.1 million for the six months ended June 30, 2017 was primarily attributable to the write-off of $0.6 million of debt issuance costs related to the additional debt incurred to finance the NewWave acquisition, largely offset by interest income. Other income of $0.7 million for the comparable year ago period consisted of interest income and certain tax credits.

 

Provision for Income Taxes

 

Provision for income taxes increased $7.9 million, or 26.6%, due primarily to an increase in income before taxes of $16.0 million. Our effective tax rate was 37.9% and 35.7% for the six months ended June 30, 2017 and 2016, respectively. The increase in the effective tax rate 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.

 

Net Income

 

As a result of the factors described above, our net income was $61.8 million for the six months ended June 30, 2017 compared to $53.7 million for the six months ended June 30, 2016.

 

Use of Adjusted EBITDA

 

We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, and not as a substitute for, net income reported in accordance with GAAP. This term, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is reconciled to net income below.

 

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

 

 

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

 

   

Three Months Ended June 30,

   

2017 vs. 2016

 

(dollars in thousands)

 

2017

   

2016

   

$ Change

   

% Change

 

Net income (1)

  $ 28,576     $ 26,633     $ 1,943       7.3  
                                 

Plus:   Interest expense

    11,782       7,549       4,233       56.1  

Provision for income taxes

    17,967       16,558       1,409       8.5  

Depreciation and amortization

    46,890       34,689       12,201       35.2  

Equity-based compensation expense

    2,418       3,420       (1,002

)

    (29.3

)

Severance expense

    1,345       -       1,345       NM  

(Gain) loss on deferred compensation

    339       100       239       239.0  

Acquisition-related costs

    3,242       445       2,797       NM  

(Gain) loss on disposal of assets

    462       157       305       194.3  

Other (income) expense, net

    322       (183

)

    505       NM  
                                 

Adjusted EBITDA (1)

  $ 113,343     $ 89,368     $ 23,975       26.8  

 

   

Six Months Ended June 30,

   

2017 vs. 2016

 

(dollars in thousands)

 

2017

   

2016

   

$ Change

   

% Change

 

Net income (1)

  $ 61,790     $ 53,677     $ 8,113       15.1  
                                 

Plus:   Interest expense

    19,389       15,104       4,285       28.4  

Provision for income taxes

    37,787       29,852       7,935       26.6  

Depreciation and amortization

    85,295       69,382       15,913       22.9  

Equity-based compensation expense

    4,845       6,466       (1,621

)

    (25.1

)

Severance expense

    2,599       -       2,599       NM  

(Gain) loss on deferred compensation

    429       (120

)

    549       NM  

Acquisition-related costs

    4,723       544       4,179       NM  

(Gain) loss on disposal of assets

    (5,686

)

    565       (6,251

)

    NM  

Other (income) expense, net

    35       (693

)

    728       (105.1

)

                                 

Adjusted EBITDA (1)

  $ 211,206     $ 174,777     $ 36,429       20.8  
   

NM = Not meaningful.

(1)  Net income and Adjusted EBITDA include two months of NewWave operations and the favorable impact of a reduction in expense of $5.1 million and $11.0 million for the three and six months ended June 30, 2017, respectively, due to a change in accounting estimate related to capitalized labor costs. Without the contribution from NewWave operations, net income would have been $26.5 million and $59.7 million and Adjusted EBITDA growth would have been 14.2% and 14.4% for the three and six months ended June 30, 2017, respectively. Excluding both the NewWave impact and the change in estimate related to capitalized labor, net income would have been $23.4 million and $52.9 million and Adjusted EBITDA growth would have been 8.4% and 8.1% for the three and six months ended June 30, 2017, respectively.

 

We believe Adjusted EBITDA is useful to investors in evaluating the operating performance of our company. Adjusted EBITDA and similar measures with similar titles are commonly used by investors, analysts and peers to compare performance in our industry, although our measure of Adjusted EBITDA may not be directly comparable to similar measures reported by other companies.

 

 

Financial Condition: Liquidity and Capital Resources

 

Liquidity

 

Our primary funding requirements are for our ongoing operations, planned capital expenditures, payments of quarterly dividends and share repurchases. We believe that existing cash balances, our Senior Credit Facilities, as amended, and operating cash flows will provide adequate support for these funding requirements over the next 12 months. However, our ability to fund operations, make planned capital expenditures, pay quarterly dividends and make share repurchases depends on future operating performance and cash flows, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

 

The following table shows a summary of our cash flows for the periods indicated (dollars in thousands):

 

   

Six Months Ended June 30,

   

2017 vs. 2016

 
   

2017

   

2016

   

$ Change

   

% Change

 

Net cash provided by operating activities

  $ 130,859     $ 125,580     $ 5,279       4.2  

Net cash used in investing activities

    (795,806

)

    (75,522

)

    (720,284

)

    NM  

Net cash provided by (used in) financing activities

    616,700       (66,516

)

    683,216       NM  

Change in cash and cash equivalents

    (48,247

)

    (16,458

)

    (31,789

)

    193.2  

Cash and cash equivalents, beginning of period

    138,040       119,199       18,841       NM  

Cash and cash equivalents, end of period

  $ 89,793     $ 102,741     $ (12,948

)

    (12.6

)

__________

NM = Not meaningful.

 

During the first half of 2017, our cash and cash equivalents decreased $48.2 million. At June 30, 2017, we had $89.8 million of cash on hand compared to $138.0 million at December 31, 2016. Our working capital was $30.8 million and $74.8 million at June 30, 2017 and December 31, 2016, respectively.

 

Net cash provided by operating activities was $130.9 million and $125.6 million for the first half of 2017 and 2016, respectively. The year-over-year change in operating cash flow was primarily attributable to higher net income adjusted for depreciation and amortization, equity-based compensation, deferred taxes and gain on disposal of assets, partially offset by changes in operating assets and liabilities. The change in operating assets and liabilities was due primarily to a change in income taxes receivable and accounts payable and accrued liabilities as a result of the timing of payments compared to the first half of 2016.

 

Net cash used in investing activities was $795.8 million and $75.5 million for the first half of 2017 and 2016, respectively. The increase was due primarily to the NewWave acquisition during the second quarter of 2017 and increased capital expenditures, partially offset by $10.1 million in proceeds received for the sale of a non-operating property in the first quarter of 2017.

 

Net cash provided by financing activities was $616.7 million in the first half of 2017 compared to net cash used in financing activities of $66.5 million for the first half of 2016. The change was primarily attributable to new debt incurred in connection with the NewWave acquisition during the second quarter of 2017, partially offset by the payment of debt issuance costs, repayment of the Term Loan and a reduction in share repurchases compared to the comparable prior year period.

 

On July 1, 2015, the Board authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of our common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through the end of the second quarter of 2017, we have repurchased 165,633 shares at an aggregate cost of $73.1 million. During the first half of 2017, we repurchased 700 shares at an aggregate cost of $0.4 million, of which all occurred during the first quarter. Additionally, we currently expect to continue to pay quarterly cash dividends on shares of our common stock, subject to approval of the Board. During the second quarter of 2017, the Board approved a quarterly dividend of $1.50 per share of common stock, which was paid on June 2, 2017.

 

 

Financing Activity

 

On June 17, 2015, we issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022. The Notes mature on June 15, 2022 and interest is payable on June 15th and December 15th of each year. The Notes are jointly and severally guaranteed on a senior unsecured basis (the “Guarantees”) by each of our existing and future domestic subsidiaries that guarantee the Senior Credit Facilities (the “Guarantors”). The Notes are unsecured and senior obligations of the Company. The Guarantees are unsecured and senior obligations of the Guarantors. At our option, the Notes may be redeemed in whole or in part, at any time prior to June 15, 2018, at a price equal to 100% of the aggregate principal amount of the Notes plus accrued and unpaid interest, if any, to (but excluding) the redemption date plus a “make-whole” premium. We may also redeem the Notes, in whole or in part, at any time on or after June 15, 2018, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the redemption date. Additionally, at any time prior to June 15, 2018, we may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings at a price equal to 105.75% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to (but excluding) the redemption date. The Indenture includes certain covenants relating to debt incurrence, liens, restricted payments, assets sales and transactions with affiliates, changes in control and mergers or sales of all or substantially all of our assets.

 

On June 30, 2015, we entered into the Credit Agreement among the Company, as borrower, the lenders party thereto, 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 and a five-year Term Loan Facility in an aggregate principal amount of $100 million. Concurrently with our entry into the Credit Agreement, we borrowed the full amount of the Term Loan Facility. The obligations under the Original Credit Facilities were obligations of the Company and were guaranteed by our subsidiary, Cable One VoIP LLC (“Cable One VoIP”).  The obligations under the Original Credit Facilities were secured, subject to certain exceptions, by substantially all of the assets of the Company and Cable One VoIP.

 

Borrowings under the Original Credit Facilities bore interest, at our option, at a rate per annum determined by reference to either 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 our total net leverage ratio. In addition, we are 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.

 

The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility. 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. We had $197.2 million available for borrowing under the Revolving Credit Facility at June 30, 2017.

 

On May 1, 2017, we entered into the Restatement Agreement with JPMorgan, as administrative agent, and the lenders party thereto, pursuant to which we amended and restated the Credit Agreement and incurred $750 million of 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 Term Loan A in an aggregate principal amount of $250 million and (b) a seven-year Term Loan B in an aggregate principal amount of $500 million, which are guaranteed by our wholly owned subsidiaries and are secured, subject to certain exceptions, by substantially all assets of our company and the guarantors.

 

The interest margins applicable to the New Loans under the Amended and Restated Credit Agreement are, at our 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 our 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 outstanding balance due upon maturity. The Term Loan B amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum, with the 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, we 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.

 

Capital Expenditures

 

We have significant ongoing capital expenditure requirements. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.

 

We have adopted capital expenditure disclosure guidance as supported by the Internet & Television Association (“NCTA”). These disclosures are not required under GAAP, nor do they impact our accounting for capital expenditures under GAAP. The amounts of capital expenditures reported in this Quarterly Report on Form 10-Q are calculated in accordance with NCTA disclosure guidelines, which include assets acquired during the relevant periods.

 

The following table presents our major capital expenditure categories in accordance with NCTA disclosure guidelines for the six months ended June 30, 2017 and 2016 (in thousands):

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 

Customer premise equipment

  $ 13,941     $ 12,248  

Commercial

    4,347       2,909  

Scalable infrastructure

    16,872       25,163  

Line extensions

    6,149       4,004  

Upgrade/rebuild

    10,239       6,459  

Support capital

    24,882       14,240  

Total

  $ 76,430     $ 65,023  

 

Contractual Obligations and Contingent Commitments

 

The following is a summary of our contractual obligations remaining as of June 30, 2017 (in thousands):

 

Years ending December 31,

 

Programming Purchase Commitments

   

Operating

Leases

   

Total Debt, including

Capital Leases

   

Other Purchase

Obligations(1)

   

Total

 

2017 (remaining months)

  $ 108,744     $ 1,116     $ 5,633     $ 12,611     $ 128,104  

2018

    180,550       1,761       14,392       19,204       215,907  

2019

    131,217       1,218       20,642       12,812       165,889  

2020

    62,401       827       26,892       6,878       96,998  

2021

    29,353       550       30,017       5,009       64,929  

Thereafter

    11       1,004       1,102,700       4,237       1,107,952  

Total

  $ 512,276     $ 6,476     $ 1,200,276     $ 60,751     $ 1,779,779  
     

(1)

Includes purchase obligations related to capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded from the table above. Any amounts for which we are liable under purchase orders are reflected in our Consolidated Balance Sheet within Accounts payable and accrued liabilities.

 

Programming and content purchases represent contracts that we have with cable television networks and broadcast stations to provide programming services to our subscribers. The amounts included above represent estimates of the future programming costs for these contract requirements and commitments based on tier placement as of June 30, 2017 and estimated subscriber numbers applied to the per-subscriber rates contained in these contracts. Actual amounts due under such contracts may differ from the amounts above based on the actual subscriber numbers and tier placements. In addition, programming purchases sometimes occur pursuant to non-binding commitments, which are not reflected in the summary above.

 

 

Total debt relates to principal repayment obligations as defined by the agreements described in the “Financing Activity” section above and for capital leases.

 

The following items are not included as contractual obligations due to various factors discussed below. However, we incur these costs as part of our operations:

 

 

We rent utility poles used in our operations. Generally, pole rentals are cancellable on short notice, but we anticipate that such rentals will recur. Rent expense for pole attachments was $1.9 million and $1.4 million for the three months ended June 30, 2017 and 2016, respectively, and $3.5 million and $2.9 million for the six months ended June 30, 2017 and 2016, respectively.

 

 

We pay franchise fees under multi-year franchise agreements based on a percentage of revenues generated from video service per year. Franchise fees and other franchise-related costs included in the Consolidated Statements of Operations and Comprehensive Income were $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.

 

 

We have cable franchise agreements requiring the construction of cable plant and the provision of services to customers within the franchise areas. In connection with these obligations under existing franchise agreements, we obtain surety bonds or letters of credit guaranteeing performance to municipalities and public utilities and payment of insurance premiums. Such surety bonds and letters of credit as of June 30, 2017 and December 31, 2016 totaled $8.8 million and $5.1 million, respectively. Payments under these arrangements are required only in the event of nonperformance. We do not expect that these contingent commitments will result in any amounts being paid.

 

Off-Balance Sheet Arrangements

 

With the exception of surety bonds and letters of credit noted above, we do not have any off-balance-sheet arrangements or financing activities with special-purpose entities.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

 

An accounting policy is considered to be critical if it is important to our results of operations and financial condition and if it requires management’s most difficult, subjective and complex judgments in its application. Except for the change in accounting estimate regarding labor capitalization as discussed in Note 1 of the Notes to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, there have been no material changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K filed with the SEC on March 1, 2017.

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

This document contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the cable industry and our business and financial results. Forward-looking statements often include words such as “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:

 

 

the effect of our acquisition of NewWave on our ability to retain and hire key personnel and to maintain relationships with customers, suppliers and other business partners;

 

the potential diversion of senior management’s attention from our ongoing operations due to the acquisition of NewWave;

 

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

 

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

 

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

 

recent and future changes in technology;

 

our ability to continue to grow our business services product;

 

increases in programming costs and retransmission fees;

 

our ability to obtain support from vendors;

 

the effects of any significant acquisitions by us;

 

adverse economic conditions;

 

the integrity and security of our network and information systems;

 

legislative and regulatory efforts to impose new legal requirements on our data services;

 

changing and additional regulation of our data, video and voice services;

 

our ability to renew cable system franchises;

 

increases in pole attachment costs;

 

the failure to meet earnings expectations;

 

the adequacy of our risk management framework;

 

changes in tax and other laws and regulations;

 

changes in GAAP or other applicable accounting policies; and

 

the other risks and uncertainties detailed in the section titled “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 1, 2017.

 

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 to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the potential gain/loss arising from changes in market rates and prices, such as interest rates. There have been no significant changes to our market risk disclosures included in our Annual Report on Form 10-K filed with the SEC on March 1, 2017.

 

Item 4.     Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Internal Control Over Financial Reporting

 

As a result of the NewWave acquisition on May 1, 2017, we have implemented internal controls over financial reporting to include consolidation of NewWave and acquisition-related accounting and disclosures. The NewWave operations utilize separate information and accounting systems and processes. Our management is in the process of reviewing and evaluating the design and operating effectiveness of internal control over financial reporting relating to the NewWave operations.

 

 

Except as disclosed above, there has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II: OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

None.

 

Item 1A.  Risk Factors

 

There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 1, 2017.

 

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

 

The following table sets forth certain information relating to the purchases of our common stock by us and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) under the Exchange Act during the three months ended June 30, 2017 (dollars in thousands, except per share data):

 

Period

 

Total Number of

Shares Purchased

   

Average Price

Paid Per Share

   

Total Number of Shares

Purchased as Part of

Publicly Announced

Plans or Programs (1)

   

Maximum Dollar

Value of Shares that

May Yet Be

Purchased Under the

Plans or Programs

 

April 1 to 30, 2017

    -     $ -       -     $ 176,865  

May 1 to 31, 2017

    -     $ -       -     $ 176,865  

June 1 to 30, 2017 (2)

    149     $ 715.26       -     $ 176,865  

Total

    149     $ 715.26       -          
     

(1)

On July 1, 2015, the Board authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of Company common stock), which was announced on August 7, 2015. 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 is based on a number of factors, including share price and business and market conditions.

(2)

Represents shares withheld from employees to satisfy estimated tax withholding obligations in connection with the vesting of restricted shares and exercises of SARs under the 2015 Plan. The average price paid per share for the common stock withheld was based on the closing price of our common stock on the applicable vesting or exercise date.

 

Item 3.     Defaults Upon Senior Securities

 

None.

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

Not applicable.

 

 

Item 6.     Exhibits

 

Exhibit

 Number

Description

 

 

4.1

First Supplemental Indenture, dated as of May 1, 2017, among Avenue Broadband Communications LLC, Telecommunications Management, LLC, Ultra Communications Group, LLC, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K of Cable One, Inc. filed on May 4, 2017).

   

10.1

Restatement Agreement, dated as of May 1, 2017, among Cable One, Inc., Cable One VoIP, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cable One, Inc. filed on May 4, 2017).

   

10.2

Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (incorporated herein by reference to Annex B to the 2017 Proxy Statement of Cable One, Inc. filed on March 28, 2017).

   

10.3

Form of Non-Employee Director Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Cable One, Inc. filed on May 4, 2017).

   

31.1

Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

31.2

Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

32

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

   

101.INS

XBRL Instance Document.*

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.*

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.*

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.*

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.*

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.*

 __________

* Filed herewith.

** Furnished herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Cable One, Inc.

(Registrant)

 

 

 

 

By:

/s/ Julia M. Laulis

 

 

Name: 

Julia M. Laulis

 

 

Title: 

President and Chief Executive Officer

 

 

Date: August 8, 2017

 

By:

/s/ Kevin P. Coyle

 

 

Name: 

Kevin P. Coyle

 

 

Title: 

Chief Financial Officer

 

 

Date: August 8, 2017

 

 

33