Note 3 - Acquisitions

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Business Combination Disclosure [Text Block]

3. ACQUISITIONS

The Company accounted for certain acquisitions as business combinations pursuant to ASC 805. In accordance with ASC 805, the Company uses its best estimates and assumptions to assign fair value to the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date based on the information that was available as of the acquisition date. The Company believes that the information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed for each acquisition, however, preliminary measurements of fair value for each acquisition are subject to change during the measurement period, and such changes could be material. The Company expects to finalize the valuation after each acquisition as soon as practicable but no later than one year after the acquisition date.

Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired in a business combination and represents the future economic benefits expected to arise from anticipated synergies and intangible assets acquired that do not qualify for separate recognition, including an assembled workforce, noncontractual relationships and other agreements. As an indefinite-lived asset, goodwill is not amortized but rather is subject to impairment testing on at least an annual basis.

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. The Company incurred $9.6 million, $1.8 million and $5.9 million of acquisition-related costs in 2019, 2018 and 2017, respectively. These costs are included in selling, general and administrative expenses within the Company’s consolidated statements of operations and comprehensive income.

The following acquisitions occurred during the periods presented:

NewWave. On May 1, 2017, the Company acquired all the outstanding equity interests in NewWave for $740.2 million in cash on a debt-free basis. Refer to note 9 for details regarding the financing of the transaction. NewWave provides 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. The acquisition of NewWave offered the Company opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies.

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

	Purchase Price Allocation
Assets Acquired
Cash and cash equivalents	$	12,220
Accounts receivable		15,027
Prepaid and other current assets		2,286
Property, plant and equipment		192,234
Intangible assets		476,300
Other noncurrent assets		1,184
Total Assets Acquired		699,251
Liabilities Assumed
Accounts payable and accrued liabilities		25,125
Deferred revenue		14,516
Deferred income taxes		6,644
Total Liabilities Assumed		46,285
Net assets acquired		652,966
Purchase price consideration		740,166
Goodwill recognized	$	87,200

Acquired identifiable intangible assets associated with the NewWave acquisition consist of the following (dollars in thousands):

	Fair Value		Useful Life (in years)
Customer relationships	$	160,000		14
Trademark and trade name	$	1,300		3
Franchise agreements	$	315,000	Indefinite

Customer relationships and franchise agreements were valued using the MPEEM of the income approach. Significant assumptions used in the valuations include projected revenue growth rates, future EBITDA margins, future capital expenditures and an appropriate discount rate. No residual value was assigned to the acquired customer relationships or trademark and trade name.

The measurement period for the NewWave acquisition ended on April 30, 2018.

The NewWave acquisition resulted in the recognition of $87.2 million of goodwill, which is deductible for tax purposes.

Clearwave. On January 8, 2019, the Company acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. The Company funded the purchase price of $358.8 million with cash on hand and Term Loan B-2 borrowings as defined and described in note 9. The Clearwave acquisition provides the Company with a premier fiber network within its existing footprint, further enables the Company to supply its customers with enhanced business services solutions and provides a platform to allow the Company to replicate Clearwave’s strategy in several of its other markets.

The following table summarizes the allocation of the Clearwave purchase price consideration as of the acquisition date (in thousands):

	Original Estimate		Measurement Period Adjustment			Preliminary Purchase Price Allocation
Assets Acquired
Cash and cash equivalents	$	1,913	$	-		$	1,913
Accounts receivable		1,294		-			1,294
Prepaid and other current assets		311		-			311
Property, plant and equipment		120,472		-			120,472
Intangible assets		89,700		-			89,700
Other noncurrent assets		3,533		-			3,533
Total Assets Acquired		217,223		-			217,223
Liabilities Assumed
Accounts payable and accrued liabilities		2,128		-			2,128
Deferred revenue, short-term portion		4,322		-			4,322
Deferred income taxes		30,104		2,667			32,771
Other noncurrent liabilities		5,057		-			5,057
Total Liabilities Assumed		41,611		2,667			44,278
Net assets acquired		175,612		(2,667	)		172,945
Purchase price consideration		358,830		-			358,830
Goodwill recognized	$	183,218	$	2,667		$	185,885

Acquired identifiable intangible assets associated with the Clearwave acquisition consist of the following (dollars in thousands):

	Fair Value		Useful Life (in years)
Customer relationships	$	83,000		17
Trade name	$	6,700	Indefinite

Customer relationships were valued using the MPEEM of the income approach. Significant assumptions used in the valuations include projected revenue growth rates, future EBITDA margins, future capital expenditures and an appropriate discount rate. No residual value was assigned to the acquired customer relationships.

During 2019, the Company recorded a measurement period adjustment increasing both deferred income taxes and goodwill by $2.7 million as a result of the Company’s election for Clearwave to be treated as a disregarded entity for U.S. Federal income tax purposes.

The Clearwave acquisition resulted in the recognition of $185.9 million of goodwill, which is not deductible for tax purposes.

For the period from January 8, 2019 to December 31, 2019, the Company recognized revenues of $27.4 million and net income of $5.1 million from Clearwave operations, which included acquired intangible assets amortization expense of $4.9 million.

Fidelity. On October 1, 2019, the Company acquired Fidelity, a provider of data, video and voice services to residential and business customers throughout Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. The Company funded the purchase price of $531.4 million with cash on hand and the Delayed Draw Term Loan A-2 as defined and described in note 9. Cable One and Fidelity share similar strategies, customer demographics and products. The Fidelity acquisition provides the Company opportunities for revenue growth and Adjusted EBITDA margin expansion as well as the potential to realize cost synergies.

The following table summarizes the allocation of the Fidelity purchase price consideration as of the acquisition date (in thousands):

	Original Estimate		Measurement Period Adjustments			Preliminary Purchase Price Allocation
Assets Acquired
Cash and cash equivalents	$	4,869	$	-		$	4,869
Accounts receivable		3,691		-			3,691
Prepaid and other current assets		1,756		-			1,756
Property, plant and equipment		173,806		98			173,904
Intangible assets		288,000		-			288,000
Other noncurrent assets		481		1,414			1,895
Total Assets Acquired		472,603		1,512			474,115
Liabilities Assumed
Accounts payable and accrued liabilities		8,426		369			8,795
Deferred revenue, short-term portion		1,464		332			1,796
Other noncurrent liabilities		2,670		1,045			3,715
Total Liabilities Assumed		12,560		1,746			14,306
Net assets acquired		460,043		(234	)		459,809
Purchase price consideration		529,349		2,043			531,392
Goodwill recognized	$	69,306	$	2,277		$	71,583

Acquired identifiable intangible assets associated with the Fidelity acquisition consist of the following (dollars in thousands):

	Fair Value		Useful Life (in years)
Customer relationships	$	119,000		14
Trademark and trade name	$	3,000		3
Franchise agreements	$	166,000	Indefinite

Customer relationships and franchise agreements were valued using the MPEEM of the income approach. Significant assumptions used in the valuations include projected revenue growth rates, future EBITDA margins, future capital expenditures and an appropriate discount rate. No residual value was assigned to the acquired customer relationships or trademark and trade name. The total weighted average amortization period for the acquired finite-lived intangible assets is 13.7 years.

Subsequent to the original estimates, the Company recorded certain measurement period adjustments related to the impact of the adoption ASC 842 as well as a true-up of working capital post-closing. These adjustments increased goodwill by $2.3 million and were based on information available as of the acquisition date and obtained during the measurement period and have been properly reflected in the Company’s consolidated balance sheet as of December 31, 2019.

The Fidelity acquisition resulted in the recognition of $71.6 million of goodwill, which is deductible for tax purposes.

For the three months ended December 31, 2019, the Company recognized revenues of $32.0 million and net income of $4.7 million from Fidelity operations, which included acquired intangible assets amortization expense of $2.4 million.

The following unaudited pro forma combined results of operations information for the years ended December 31, 2019 and 2018 has been prepared as if the Fidelity acquisition had occurred on January 1, 2018 and includes adjustments for depreciation expense of $(4.0) million and $(4.5) million, amortization expense of $6.9 million and $9.2 million, interest expense of $10.9 million and $15.2 million, acquisition related costs of $(5.5) million and zero and the related aggregate impact on the income tax provision of $(2.1) million and $(5.0) million for 2019 and 2018, respectively (in thousands, except per share data):

	(Unaudited)
	Year Ended December 31,
	2019		2018
Revenues	$	1,261,027	$	1,186,044
Net income	$	189,020	$	159,348
Net income per common share:
Basic	$	33.28	$	28.03
Diluted	$	32.94	$	27.83

The unaudited pro forma combined results of operations information is provided for informational purposes only and is not necessarily intended to represent the results that would have been achieved had the Fidelity acquisition been consummated on January 1, 2018 or indicative of the results that may be achieved in the future.