UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| (Mark One) |
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
Cable One, Inc.
(Exact name of registrant as specified in its charter)
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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| Non-accelerated filer | ☐ |
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| 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
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 October 30, 2020 |
| Common stock, par value $0.01 |
CABLE ONE, INC.
FORM 10-Q
| PART I: FINANCIAL INFORMATION |
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| Item 1. Condensed Consolidated Financial Statements |
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| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. Controls and Procedures |
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| PART II: OTHER INFORMATION |
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| Item 1. Legal Proceedings |
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| Item 1A. Risk Factors |
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| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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| Item 3. Defaults Upon Senior Securities |
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| Item 4. Mine Safety Disclosures |
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| Item 5. Other Information |
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| Item 6. Exhibits |
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| SIGNATURES |
References herein to “Cable One,” “us,” “our,” “we” or the “Company” refer to Cable One, Inc., together with its wholly owned subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business, strategy, acquisitions and strategic investments, dividend policy, financial results and financial condition as well as anticipated impacts from the COVID-19 pandemic on the Company and future responses. Forward-looking statements often include words such as “will,” “should,” “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors, which are discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and this Quarterly Report on Form 10-Q:
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the duration and severity of the COVID-19 pandemic and its effects on our business, financial condition, results of operations and cash flows; |
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rising levels of competition from historical and new entrants in our markets; |
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recent and future changes in technology; |
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our ability to continue to grow our business services products; |
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increases in programming costs and retransmission fees; |
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our ability to obtain hardware, software and operational support from vendors; |
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the effects of any acquisitions and strategic investments by us; |
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risks that our rebranding may not produce the benefits expected; |
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damage to our reputation or brand image; |
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risks that the implementation of our new enterprise resource planning (“ERP”) system disrupts business operations; |
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adverse economic conditions; |
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the integrity and security of our network and information systems; |
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the impact of possible security breaches and other disruptions, including cyber-attacks; |
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our failure to obtain necessary intellectual and proprietary rights to operate our business and the risk of intellectual property claims and litigation against us; |
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our ability to retain key employees (who we refer to as associates); |
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legislative or regulatory efforts to impose network neutrality and other new requirements on our data services; |
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additional regulation of our video and voice services; |
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our ability to renew cable system franchises; |
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increases in pole attachment costs; |
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changes in local governmental franchising authority and broadcast carriage regulations; |
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the potential adverse effect of our level of indebtedness on our business, financial condition or results of operations and cash flows; |
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the restrictions the terms of our indebtedness place on our business and corporate actions; |
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the possibility that interest rates will rise, causing our obligations to service our variable rate indebtedness to increase significantly; |
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our ability to incur future indebtedness, including the expected timing for closing the Notes Offering (as defined below); |
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fluctuations in our stock price; |
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our ability to continue to pay dividends; |
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dilution from equity awards and potential stock issuances; |
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provisions in our charter, by-laws and Delaware law that could discourage takeovers and limit the judicial forum for certain disputes and the liabilities for directors; and |
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the other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), including but not limited to in our 2019 Form 10-K and this Quarterly Report on Form 10-Q. |
Any forward-looking statements made by us in this document speak only as of the date on which they are made. We are under no obligation, and expressly disclaim any obligation, except as required by law, to update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CABLE ONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (dollars in thousands, except par values) | September 30, 2020 | December 31, 2019 | ||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Income taxes receivable | ||||||||
| Prepaid and other current assets | ||||||||
| Total Current Assets | ||||||||
| Equity method investment | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other noncurrent assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Current portion of long-term debt | ||||||||
| Total Current Liabilities | ||||||||
| Long-term debt | ||||||||
| Deferred income taxes | ||||||||
| Interest rate swap liability | ||||||||
| Other noncurrent liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (refer to note 14) | ||||||||
| Stockholders' Equity | ||||||||
| Preferred stock ( par value; shares authorized; issued or outstanding) | ||||||||
| Common stock ( par value; shares authorized; and shares issued; and and shares outstanding as of September 30, 2020 and December 31, 2019, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost ( and shares held as of September 30, 2020 and December 31, 2019, respectively) | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (dollars in thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Operating (excluding depreciation and amortization) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| (Gain) loss on asset sales and disposals, net | ( | ) | ||||||||||||||
| Total Costs and Expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax provision | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net Income per Common Share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted Average Common Shares Outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Unrealized gain (loss) on cash flow hedges and other, net of tax | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Treasury | Total | |||||||||||||||||||||||||
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| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | ||||||||||||||||||||||
| (dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges and other, net of tax | - | |||||||||||||||||||||||||||
| Equity-based compensation | - | |||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | ||||||||||||||||||||||||||||
| Withholding tax for equity awards | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends paid to stockholders ( per common share) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Treasury | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | |||||||||||||||||||||||
| (dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges and other, net of tax | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Equity-based compensation | - | |||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | ||||||||||||||||||||||||||||
| Withholding tax for equity awards | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends paid to stockholders ($ per common share) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Treasury | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | |||||||||||||||||||||||
| (dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges and other, net of tax | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Equity-based compensation | - | |||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | ||||||||||||||||||||||||||||
| Withholding tax for equity awards | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends paid to stockholders ( per common share) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Treasury | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Stock, | Stockholders’ | |||||||||||||||||||||||
| (dollars in thousands, except per share data) | Shares | Amount | Capital | Earnings | Loss | at cost | Equity | |||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Lease accounting standard adoption cumulative adjustment | - | |||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges and other, net of tax | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Equity-based compensation | - | |||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | ||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Withholding tax for equity awards | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends paid to stockholders ( per common share) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance costs | ||||||||
| Equity-based compensation | ||||||||
| Write-off of debt issuance costs | ||||||||
| Increase in deferred income taxes | ||||||||
| (Gain) loss on asset sales and disposals, net | ( | ) | ||||||
| Changes in operating assets and liabilities, net of effects from acquisitions: | ||||||||
| (Increase) decrease in accounts receivable, net | ( | ) | ||||||
| (Increase) decrease in income taxes receivable | ( | ) | ||||||
| Increase in prepaid and other current assets | ( | ) | ( | ) | ||||
| Increase in accounts payable and accrued liabilities | ||||||||
| Increase (decrease) in deferred revenue | ( | ) | ||||||
| Other, net | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of business, net of cash acquired | ( | ) | ( | ) | ||||
| Purchases of equity investments | ( | ) | ||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Decrease in accrued expenses related to capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from sales of property, plant and equipment | ||||||||
| Issuance of note and other receivables | ( | ) | ||||||
| Settlement of note and other receivables | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from equity issuance | ||||||||
| Proceeds from long-term debt borrowings | ||||||||
| Payment of equity issuance costs | ( | ) | ||||||
| Payment of debt issuance costs | ( | ) | ||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||
| Repurchases of common stock | ( | ) | ||||||
| Payment of withholding tax for equity awards | ( | ) | ( | ) | ||||
| Dividends paid to stockholders | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental cash flow disclosures: | ||||||||
| Cash paid for interest, net of capitalized interest | $ | $ | ||||||
| Cash paid for income taxes, net of refunds received | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
CABLE ONE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
Description of Business. Cable One is a fully integrated provider of data, video and voice services to residential and business subscribers in
On January 8, 2019, the Company acquired Delta Communications, L.L.C. (“Clearwave”) for a purchase price of $
On May 4, 2020, we made a $
Basis of Presentation. The condensed consolidated financial statements and accompanying notes thereto have been prepared in accordance with: (i) GAAP for interim financial information; and (ii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the SEC. As permitted under such guidance, certain notes and other financial information normally required by GAAP have been omitted. Management believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations and cash flows as of and for the periods presented herein. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the 2019 Form 10-K.
The December 31, 2019 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 2019 Form 10-K, but does not include all disclosures required by GAAP. The Company’s interim results of operations may not be indicative of its future results.
Certain reclassifications have been made to prior period amounts to conform to the current year presentation.
Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company, including its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting. Accounting Standard Codification (“ASC”) 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. Historically, the Company’s operations were organized and managed on the basis of its geographic divisions. Effective in the second quarter of 2020, as a result of progress made in the Company’s staged rebranding initiative and the further alignment of service offerings and product pricing for recent acquisitions with its legacy business, the Company reevaluated the chief operating decision maker’s review and assessment of the Company’s operating performance for purposes of performance monitoring and resource allocation. The Company determined that its operations, including the decisions to allocate resources and deploy capital, are organized and managed on a consolidated basis and are not based on any predetermined geographic division. Accordingly, management has identified operating segment, which is its reportable segment, under this organizational and reporting structure.
Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates and underlying assumptions.
Indefinite-Lived Intangible Assets. The Company’s unit of account for its franchise agreements was historically established at the geographic division level. The Company reevaluates the unit of account used to test for impairment periodically or whenever events or substantive changes in circumstances occur to ensure impairment testing is performed at an appropriate level. Effective in the second quarter of 2020, as a result of progress made in the Company’s staged rebranding initiative and the further alignment of service offerings and product pricing for recent acquisitions with its legacy business, the Company reevaluated the basis of its franchise agreements unit of account for use in impairment assessments and identified a single unit of account for its franchise agreements based on a reevaluation of the Company’s current operations and the use of its assets.
Goodwill. The Company tests goodwill for impairment at the reporting unit level, which was historically established at the geographic division level. The Company reevaluates the determination of its reporting units used to test for impairment periodically or whenever events or substantive changes in circumstances occur. Effective in the second quarter of 2020, as a result of progress made in the Company’s staged rebranding initiative and the further alignment of service offerings and product pricing for recent acquisitions with its legacy business, the Company reevaluated the basis of its goodwill reporting units and identified four geographic divisions that were aggregated into a single goodwill reporting unit based on the chief operating decision maker’s current performance monitoring and resource allocation process and the economic similarity of the four divisions.
Recently Adopted Accounting Pronouncements. In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation, setup and other upfront costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing such costs incurred to develop or obtain internal-use software. The ASU specifies which costs are to be expensed and which are to be capitalized, the period over which capitalized costs are to be amortized, the process for identifying and recognizing impairment and the proper presentation of such costs within the consolidated financial statements. The Company adopted the updated guidance on January 1, 2020 on a prospective basis. The adoption of this ASU has resulted in the capitalization of $
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to recognize an allowance for expected lifetime credit losses through earnings concurrent with the recognition of a financial asset measured at amortized cost. The estimate of expected credit losses is required to be adjusted each reporting period over the life of the financial asset. The ASU was effective January 1, 2020 and required adoption on a modified retrospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Recently Issued But Not Yet Adopted Accounting Pronouncements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued at the end of 2021. The ASU may be adopted at any time through December 31, 2022. The Company currently holds certain debt and interest rate swaps that reference LIBOR. The Company plans to adopt ASU 2020-04 when the contracts underlying such instruments are amended as a result of reference rate reform, which is expected to occur prior to the end of 2021. The Company is currently evaluating the expected impact of the adoption of this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions related to intraperiod tax allocations, foreign subsidiaries and interim reporting that are present within existing GAAP. The ASU also provides updated guidance regarding the tax treatment of certain franchise taxes, goodwill and nontaxable entities, among other items. In addition, ASU 2019-12 clarifies that the effect of a change in tax laws or rates should be reflected in the annual effective tax rate computation during the interim period that includes the enactment date. The ASU is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Certain provisions must be adopted on prescribed retrospective, modified retrospective and prospective bases, while other provisions may be adopted on either a retrospective or modified retrospective basis. The Company plans to adopt ASU 2019-12 in the first quarter of 2021 on a prospective basis and does not expect the updated guidance to have a material impact on its consolidated financial statements upon adoption, but it may have an impact in the future.
| 2. | ACQUISITIONS |
The change in carrying value of goodwill as a result of the Clearwave and Fidelity acquisitions during 2019 and the Valu-Net acquisition during 2020 was as follows (in thousands):
| Goodwill | ||||
| Balance at December 31, 2018 | $ | |||
| Clearwave acquisition goodwill recognized | ||||
| Fidelity acquisition goodwill recognized | ||||
| Balance at December 31, 2019 | $ | |||
| Valu-Net acquisition goodwill recognized | ||||
| Balance at September 30, 2020 | $ | |||
Clearwave. On January 8, 2019, the Company acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois for a purchase price of $
A summary of the allocation of the Clearwave purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2019, is as follows (in thousands):
| Purchase Price Allocation | ||||
| Assets Acquired | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Prepaid and other current assets | ||||
| Property, plant and equipment | ||||
| Intangible assets | ||||
| Other noncurrent assets | ||||
| Total Assets Acquired | $ | |||
| Liabilities Assumed | ||||
| Accounts payable and accrued liabilities | $ | |||
| Deferred revenue, short-term portion | ||||
| Deferred income taxes | ||||
| Other noncurrent liabilities | ||||
| Total Liabilities Assumed | $ | |||
| Net assets acquired | $ | |||
| Purchase price consideration | ||||
| Goodwill recognized | $ | |||
The measurement period ended on January 7, 2020, and no measurement period adjustments were recorded during 2020.
Fidelity. On October 1, 2019, the Company acquired Fidelity, a provider of data, video and voice services to residential and business customers throughout Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas for a purchase price of $
A summary of the allocation of the Fidelity purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2019, was as follows (in thousands):
| Purchase Price Allocation | ||||
| Assets Acquired | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Prepaid and other current assets | ||||
| Property, plant and equipment | ||||
| Intangible assets | ||||
| Other noncurrent assets | ||||
| Total Assets Acquired | $ | |||
| Liabilities Assumed | ||||
| Accounts payable and accrued liabilities | $ | |||
| Deferred revenue, short-term portion | ||||
| Other noncurrent liabilities | ||||
| Total Liabilities Assumed | $ | |||
| Net assets acquired | $ | |||
| Purchase price consideration | ||||
| Goodwill recognized | $ | |||
The measurement period ended on September 30, 2020, and no measurement period adjustments were recorded during 2020.
Valu-Net. On July 1, 2020, the Company acquired Valu-Net, an all-fiber internet service provider headquartered in Kansas, for a purchase price of $
Acquired identifiable intangible assets associated with the Valu-Net acquisition consisted of the following (dollars in thousands):
| Fair Value | Useful Life (in years) | |||||||
| Customer relationships | $ | |||||||
| Trademark and trade name | $ | Indefinite | ||||||
| Franchise agreements | $ | Indefinite | ||||||
Customer relationships and franchise agreements were valued using the multi-period excess earnings method 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.
| 3. | REVENUES |
Revenues by product line and other revenue-related disclosures were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Residential | ||||||||||||||||
| Data | $ | $ | $ | $ | ||||||||||||
| Video | ||||||||||||||||
| Voice | ||||||||||||||||
| Business services | ||||||||||||||||
| Other | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| Franchise and other regulatory fees | $ | $ | $ | $ | ||||||||||||
| Deferred commission amortization | $ | $ | $ | $ | ||||||||||||
Other revenues are comprised primarily of advertising sales, customer late charges and reconnect fees.
Fees imposed on the Company by various governmental authorities, including franchise fees, are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities. As the Company acts as principal, these fees are reported in video and voice revenues on a gross basis with corresponding expenses included within operating expenses in the condensed consolidated statements of operations and comprehensive income.
Commission amortization expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income.
Current deferred revenue liabilities consist of refundable customer prepayments, up-front charges and installation fees. As of September 30, 2020, the Company’s remaining performance obligations pertain to the refundable customer prepayments and consist of providing future data, video and voice services to customers. Of the $
| 4. | OPERATING ASSETS AND LIABILITIES |
Accounts receivable consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Trade receivables | $ | $ | ||||||
| Related party receivable(1) | ||||||||
| Other receivables | ||||||||
| Less: Allowance for credit losses | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
| (1) | Balance at September 30, 2020 relates to a receivable due from Wisper for wireless spectrum auction purchases, which was received in full in October 2020. |
Net accounts receivable from contracts with customers totaled $
The change in the allowance for credit losses were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Beginning balance | $ | $ | $ | $ | ||||||||||||
| Additions - charged to costs and expenses | ( | ) | ||||||||||||||
| Deductions - write-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recoveries of amounts previously written off | ||||||||||||||||
| Ending balance | $ | $ | $ | $ | ||||||||||||
Prepaid and other current assets consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Prepaid repairs and maintenance | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Prepaid rent | ||||||||
| Prepaid software | ||||||||
| Deferred commissions | ||||||||
| All other current assets | ||||||||
| Total prepaid and other current assets | $ | $ | ||||||
Other noncurrent assets consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Cost method equity investments(1) | ||||||||
| Assets held for sale(2) | ||||||||
| Deferred commissions | ||||||||
| Software implementation costs | ||||||||
| Debt issuance costs | ||||||||
| All other noncurrent assets | ||||||||
| Total other noncurrent assets | $ | $ | ||||||
| (1) | Balance at September 30, 2020 related primarily to the $ |
| (2) | Balance at September 30, 2020 related to the Anniston System assets contributed to Hargray on October 1, 2020. Refer to notes 1 and 15 for details on this transaction. |
Accounts payable and accrued liabilities consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued programming costs | ||||||||
| Accrued compensation and related benefits | ||||||||
| Accrued sales and other operating taxes | ||||||||
| Accrued franchise fees | ||||||||
| Deposits | ||||||||
| Operating lease liabilities | ||||||||
| Interest rate swap liability | ||||||||
| Accrued insurance costs | ||||||||
| Cash overdrafts | ||||||||
| Equity investment payable(1) | ||||||||
| All other accrued liabilities | ||||||||
| Total accounts payable and accrued liabilities | $ | $ | ||||||
| (1) | Consists of the unfunded portion of the Company’s equity investment in Wisper at September 30, 2020. Refer to note 1 for details on this transaction. |
Other noncurrent liabilities consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Operating lease liabilities | $ | $ | ||||||
| Accrued compensation and related benefits | ||||||||
| Deferred revenue | ||||||||
| All other noncurrent liabilities | ||||||||
| Total other noncurrent liabilities | $ | $ | ||||||
| 5. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Cable distribution systems | $ | $ | ||||||
| Customer premise equipment | ||||||||
| Other equipment and fixtures | ||||||||
| Buildings and improvements | ||||||||
| Capitalized software | ||||||||
| Construction in progress | ||||||||
| Land | ||||||||
| Right-of-use assets | ||||||||
| Property, plant and equipment, gross | ||||||||
| Less: Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
The balance at September 30, 2020 included $
Depreciation and amortization expense for property, plant and equipment was $
In January 2019, a portion of the Company’s previous headquarters building and adjoining property was sold for $
| 6. | GOODWILL AND INTANGIBLE ASSETS |
The carrying amount of goodwill was $
Intangible assets consisted of the following (dollars in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
| Useful Life Range (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
| Finite-Lived Intangible Assets | |||||||||||||||||||||||||||||
| Franchise renewals | – | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Customer relationships | – | ||||||||||||||||||||||||||||
| Trademarks and trade names | – | ||||||||||||||||||||||||||||
| Total finite-lived intangible assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Indefinite-Lived Intangible Assets | |||||||||||||||||||||||||||||
| Franchise agreements | $ | $ | |||||||||||||||||||||||||||
| Trade name | |||||||||||||||||||||||||||||
| Total indefinite-lived intangible assets | $ | $ | |||||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | |||||||||||||||||||||||||||
The increase in intangible assets from December 31, 2019 related to customer relationships, trade name and franchise assets associated with the Valu-Net acquisition on July 1, 2020.
Intangible asset amortization expense was $
The future amortization of existing finite-lived intangible assets as of September 30, 2020 was as follows (in thousands):
| Year Ending December 31, | Amount | |||
| 2020 (remaining three months) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | $ | |||
Actual amortization expense in future periods may differ from the amounts above as a result of intangible asset acquisitions or divestitures, changes in useful life estimates, impairments or other relevant factors.
| 7. | DEBT |
The carrying amount of long-term debt consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Senior Credit Facilities (as defined below) | $ | $ | ||||||
| Finance lease liabilities | ||||||||
| Total debt | ||||||||
| Less: Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Less: Current portion of long-term debt | ( | ) | ( | ) | ||||
| Total long-term debt | $ | $ | ||||||
As of September 30, 2020, the second amended and restated credit agreement among the Company and its lenders (the “Credit Agreement”) provided for senior secured term loans in original aggregate principal amounts of $
In January 2020, the Company issued letters of credit totaling $
In March 2020, the Company borrowed $
A summary of the Company’s outstanding term loans as of September 30, 2020 is as follows (dollars in thousands):
| Instrument | Draw Date | Original Principal | Amortization Per Annum(1) | Outstanding Principal | Final Maturity Date | Balance Due Upon Maturity | Benchmark Rate | Applicable Margin(2) | Interest Rate | ||||||||||||||||
| Term Loan A-2 | 5/8/2019 | $ | Varies(4) | $ | 5/8/2024 | $ | LIBOR | ||||||||||||||||||
| 10/1/2019(3) | |||||||||||||||||||||||||
| Term Loan B-1 | 5/1/2017 | 5/1/2024 | LIBOR | ||||||||||||||||||||||
| Term Loan B-2 | 1/7/2019 | 1/7/2026 | LIBOR | ||||||||||||||||||||||
| Term Loan B-3 | 6/14/2019 | 1/7/2026 | LIBOR | ||||||||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||||||||||
| (1) | Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). |
| (2) | The Term Loan A-2 interest rate spread can vary between |
| (3) | On May 8, 2019, $ |
| (4) | Per annum amortization rates for years one through five following the closing date are |
Unamortized debt issuance costs consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Revolving Credit Facility portion: | ||||||||
| Other noncurrent assets | $ | $ | ||||||
| Term loans portion: | ||||||||
| Long-term debt (contra account) | ||||||||
| Total | $ | $ | ||||||
The Company recorded debt issuance cost amortization of $
The future maturities of outstanding borrowings as of September 30, 2020 were as follows (in thousands):
| Year Ending December 31, | Amount | |||
| 2020 (remaining three months) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | $ | |||
The Company was in compliance with all debt covenants as of September 30, 2020.
| 8. | INTEREST RATE SWAPS |
The Company is party to two interest rate swap agreements, designated as cash flow hedges, to manage the risk of fluctuations in interest rates on its variable rate LIBOR debt. Changes in the fair values of the interest rate swaps are reported through other comprehensive income until the underlying hedged debt’s interest expense impacts net income, at which point the corresponding change in fair value is reclassified from accumulated other comprehensive income to interest expense.
A summary of the significant terms of the Company’s interest rate swap agreements is as follows (dollars in thousands):
| Entry Date | Effective Date | Maturity Date(1) | Notional Amount | Settlement Type | Settlement Frequency | Fixed Base Rate | ||||||||||||
| Swap A | 3/7/2019 | 3/11/2019 | 3/11/2029 | $ | Receive one-month LIBOR, pay fixed | Monthly | ||||||||||||
| Swap B | 3/6/2019 | 6/15/2020 | 2/28/2029 | Receive one-month LIBOR, pay fixed | Monthly | |||||||||||||
| Total | $ | |||||||||||||||||
| (1) | Each swap may be terminated prior to the scheduled maturity at the election of the Company or the financial institution counterparty under the terms provided in each swap agreement. |
The combined fair values of the Company’s interest rate swaps are reflected within the condensed consolidated balance sheets as follows (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| Liabilities: | ||||||||
| Current portion: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Noncurrent portion: | ||||||||
| Interest rate swap liability | $ | $ | ||||||
| Total | $ | $ | ||||||
| Stockholders’ Equity: | ||||||||
| Accumulated other comprehensive loss | $ | $ | ||||||
The combined effect of the Company’s interest rate swaps on the condensed consolidated statements of operations and comprehensive income is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest expense | $ | $ | $ | $ | ||||||||||||
| Unrealized (gain) loss on cash flow hedges, gross | $ | ( | ) | $ | $ | $ | ||||||||||
| Less: Tax effect | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized (gain) loss on cash flow hedges, net of tax | $ | ( | ) | $ | $ | $ | ||||||||||
The Company does not hold any derivative instruments for speculative trading purposes.
| 9. | FAIR VALUE MEASUREMENTS |
Financial Assets and Liabilities. The Company has estimated the fair values of its financial instruments as of September 30, 2020 using available market information or other appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the following fair value estimates are not necessarily indicative of the amounts the Company would realize in an actual market exchange.
The carrying amounts, fair values and related fair value hierarchy levels of the Company’s financial assets and liabilities as of September 30, 2020 were as follows (dollars in thousands):
| September 30, 2020 | ||||||||||
| Carrying | Fair | Fair Value | ||||||||
| Amount | Value | Hierarchy | ||||||||
| Assets: | ||||||||||
| Cash and cash equivalents: | ||||||||||
| Money market investments | $ | $ | Level 1 | |||||||
| Commercial paper | $ | $ | Level 2 | |||||||
| Liabilities: | ||||||||||
| Long-term debt (including current portion): | ||||||||||
| Term loans | $ | $ | Level 2 | |||||||
| Other noncurrent liabilities (including current portion): | ||||||||||
| Interest rate swaps | $ | $ | Level 2 | |||||||
Money market investments are held primarily in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (level 1). Commercial paper is held primarily with high-quality companies and is valued using quoted market prices for investments similar to the commercial paper (level 2). Money market investments and commercial paper with original maturities of three months or less are included within cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the term loans are estimated based on market prices for similar instruments in active markets (level 2). Interest rate swaps are measured at fair value within the condensed consolidated balance sheets on a recurring basis, with fair value determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (level 2).
The carrying amounts of accounts receivable, accounts payable and other financial assets and liabilities approximate fair value because of the short-term nature of these instruments.
Nonfinancial Assets and Liabilities. The Company’s nonfinancial assets, such as property, plant and equipment, intangible assets and goodwill, are not measured at fair value on a recurring basis. Assets acquired, including identifiable intangible assets and goodwill, and liabilities assumed in acquisitions are recorded at fair value on the respective acquisition dates, subject to potential future measurement period adjustments. Nonfinancial assets are subject to fair value adjustments when there is evidence that impairment may exist. No material impairments were recorded during the nine months ended September 30, 2020 or 2019.
| 10. | STOCKHOLDERS’ EQUITY |
Public Equity Offering. In May 2020, the Company completed the Public Offering of
Treasury Stock. Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements. Treasury shares of
Share Repurchase Program. On July 1, 2015, the Company’s board of directors (the “Board”) authorized up to $
Tax Withholding for Equity Awards. At the employee’s option, shares of common stock are withheld by the Company upon the vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to cover the applicable statutory minimum amount of employee withholding taxes, which the Company then pays to the taxing authorities in cash. The amounts remitted during the three months ended September 30, 2020 and 2019 were less than $
| 11. | EQUITY-BASED COMPENSATION |
The Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “2015 Plan”) provides for grants of incentive stock options, non-qualified stock options, restricted stock awards, SARs, restricted stock units (“RSUs”), cash-based awards, performance-based awards, dividend equivalent units (“DEUs” and together with restricted stock awards and RSUs, “Restricted Stock”) and other stock-based awards, including performance stock units and deferred stock units. Directors, officers and employees of the Company and its affiliates are eligible for grants under the 2015 Plan as part of the Company’s approach to long-term incentive compensation. At September 30, 2020,
Compensation expense associated with equity-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the award, with forfeitures recognized as incurred. The Company’s equity-based compensation expense, included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income, was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Restricted Stock | $ | $ | $ | $ | ||||||||||||
| SARs | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company recognized income tax benefits of $
Restricted Stock. A summary of Restricted Stock activity during the nine months ended September 30, 2020 is as follows:
| Restricted Stock | Weighted Average Grant Date Fair Value Per Share | |||||||
| Outstanding as of December 31, 2019 | $ | |||||||
| Granted | $ | |||||||
| Forfeited | ( | ) | $ | |||||
| Vested and issued | ( | ) | $ | |||||
| Outstanding as of September 30, 2020 | $ | |||||||
| Vested and deferred as of September 30, 2020 | $ | |||||||
At September 30, 2020, there was $
Stock Appreciation Rights. A summary of SARs activity during the nine months ended September 30, 2020 is as follows:
| Stock Appreciation Rights | Weighted Average Exercise Price | Weighted Average Grant Date Fair | Aggregate Intrinsic Value (in thousands) | Weighted Average Remaining Contractual Term (in years) | ||||||||||||||||
| Outstanding as of December 31, 2019 | $ | $ | $ | |||||||||||||||||
| Granted | $ | $ | $ | - | ||||||||||||||||
| Exercised | ( | ) | $ | $ | $ | - | ||||||||||||||
| Forfeited | ( | ) | $ | $ | ||||||||||||||||
| Outstanding as of September 30, 2020 | $ | $ | $ | |||||||||||||||||
| Exercisable as of September 30, 2020 | $ | $ | $ | |||||||||||||||||
At September 30, 2020, there was $
The grant date fair value of the SARs is measured using the Black-Scholes valuation model. The weighted average inputs used in the model for grants awarded during the nine months ended September 30, 2020 were as follows:
| Inputs | ||||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Expected dividend yield | % | |||
| 12. | INCOME TAXES |
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (“NOL”) carrybacks to offset up to 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.
The Company’s effective tax rate was
| 13. | NET INCOME PER COMMON SHARE |
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The denominator used in calculating diluted net income per common share further includes any common shares available to be issued upon vesting or exercise of outstanding equity-based compensation awards if such inclusion would be dilutive, calculated using the treasury stock method.
The computation of basic and diluted net income per common share (dollars in thousands, except per share amounts) was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Effect of dilutive equity-based compensation awards(1) | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
| Net Income per Common Share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Supplemental Net Income per Common Share Disclosure: | ||||||||||||||||
| Anti-dilutive shares from equity-based compensation awards(1) | ||||||||||||||||
| (1) | Equity-based compensation awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per common share calculation. |
| 14. | COMMITMENTS AND CONTINGENCIES |
Contractual Obligations. The Company has obligations to make future payments for goods and services under certain contractual arrangements. These contractual obligations secure the future rights to various goods and services to be used in the normal course of the Company’s operations. In accordance with applicable accounting rules, the future rights and obligations pertaining to firm commitments, such as certain purchase obligations under contracts, are not reflected as assets or liabilities in the consolidated balance sheets. As of September 30, 2020, there have been no material changes to the contractual obligations previously disclosed in the 2019 Form 10-K.
In addition, the Company incurs recurring utility pole rental costs and fees imposed by various governmental authorities, including franchise fees, as part of its operations. However, these costs are not included in the Company’s contractual obligations as they are cancellable on short notice, in the case of pole rental costs, or are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities, in the case of fees imposed by governmental authorities. The Company also has franchise agreements requiring plant construction and the provision of services to customers within the franchise areas. In connection with these obligations under existing franchise agreements, the Company obtains surety bonds or letters of credit guaranteeing performance to municipalities and public utilities and payment of insurance premiums. Payments under these arrangements are required only in the remote event of nonperformance. The Company issued letters of credit totaling $
Litigation and Legal Matters. The Company is subject to complaints and administrative proceedings and has been a defendant in various civil lawsuits that have arisen in the ordinary course of its business. Such matters include contract disputes; actions alleging negligence, invasion of privacy, trademark, copyright and patent infringement, and violations of applicable wage and hour laws; statutory or common law claims involving current and former employees; and other matters. Although the outcomes of any legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, the Company believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its business, financial condition, results of operations or cash flows.
Regulation in the Company’s Industry. The Company’s operations are extensively regulated by the FCC, some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. Future legislative and regulatory changes could adversely affect the Company’s operations.
15. SUBSEQUENT EVENTS
In July 2020, the Company entered into an agreement with Hargray to contribute the Anniston System in exchange for a minority equity interest (less than
On October 26, 2020, the Company priced an offering of $
On October 30, 2020, the Company and certain of its wholly owned subsidiaries entered into a Third Restatement Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the lenders party thereto to amend and restate the Credit Agreement (the “Third Restatement Agreement”). The Third Restatement Agreement amended the Credit Agreement to (i) upsize the Term Loan B-3 by $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2019 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our 2019 Form 10-K. Our results of operations and financial condition discussed herein may not be indicative of our future results and trends.
Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all totals, percentages and year-over-year changes are calculated using exact numbers. Minor differences may exist due to rounding.
Any discussion of consolidated results or performance for the three and nine months ended September 30, 2020 is inclusive of the Fidelity and Valu-Net operations from their respective acquisition dates, as applicable. Fidelity and Valu-Net are collectively referred to as the “acquired operations.”
Overview
We are a fully integrated provider of data, video and voice services in 21 Western, Midwestern and Southern states. We provide these broadband services to residential and business customers in more than 950 communities as of September 30, 2020. The markets we serve are primarily non-metropolitan, secondary and tertiary markets, with approximately 78% of our customers located in seven states as of September 30, 2020: Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma and Texas. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We provided service to approximately 984,000 residential and business customers out of approximately 2.4 million homes passed as of September 30, 2020. Of these customers, approximately 866,000 subscribed to data services, 277,000 subscribed to video services and 132,000 subscribed to voice services as of September 30, 2020.
We generate substantially all of our revenues through four primary products. Ranked by share of our total revenues through the first nine months of 2020, they are residential data (49.9%), residential video (25.9%), business services (data, voice and video: 17.8%) and residential voice (3.6%). The profit margins, growth rates and capital intensity of our four primary products vary significantly due to competition, product maturity and relative costs.
On January 8, 2019, we acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. We paid a purchase price of $358.8 million in cash on a debt-free basis. On October 1, 2019, we acquired Fidelity, a provider of connectivity services to residential and business customers throughout Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. We paid a purchase price of $531.4 million in cash on a debt-free basis. On July 1, 2020, we acquired Valu-Net, an all-fiber internet service provider headquartered in Kansas with approximately 5,000 residential data subscribers at the time of the acquisition. We paid a purchase price of $38.9 million in cash on a debt-free basis.
On May 4, 2020, we made a $27.2 million minority equity investment (less than 10%) in Nextlink, a wireless internet service provider. On July 10, 2020, we acquired a $25.3 million minority equity interest (approximately 40%) in Wisper, a wireless internet service provider. On September 28, 2020, we entered into a definitive agreement to acquire a minority equity interest (approximately 45%) in MBI, a data, video and voice services provider, for approximately $574 million in cash, subject to adjustment for transaction expenses. MBI’s network passes approximately 630,000 homes and has upgraded systems and a high-capacity plant with more than 15,800 network plant miles, including over 4,100 fiber route miles, capable of delivering Gigabit speeds across its footprint. The MBI Investment is expected to close during the fourth quarter of 2020. On October 1, 2020, we contributed the assets of the Anniston System in exchange for a minority equity interest (less than 20%) in Hargray, a data, video and voice services provider. The Anniston System had approximately 19,000 residential data subscribers at the time of the asset contribution.
Beginning in 2013, we shifted our focus towards growing our higher margin businesses, namely residential data and business services, rather than our prior concentration on growing revenues through subscriber retention and maximizing customer primary service units (“PSUs”). We adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. The declining profitability of residential video services is due primarily to increasing programming costs and retransmission fees and competition from other content providers, and the declining revenues from residential voice services are due primarily to the increasing use of wireless voice services instead of residential voice services. Separately, we have also focused on retaining customers who are likely to produce higher relative value over the life of their service relationships with us, are less attracted by discounting, require less support and churn less. This strategy focuses on increasing Adjusted EBITDA, Adjusted EBITDA less capital expenditures and margins (refer to the section entitled “Use of Adjusted EBITDA” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure).
Excluding the effects of our recently completed and possible future acquisitions and divestitures, the trends described above and the COVID-19 pandemic have impacted, and are expected to further impact, our four primary product lines in the following ways:
| ● |
Residential data. We have experienced growth in residential data customers and revenues every year since 2013, and that growth accelerated during the nine months ended September 30, 2020, in part as a result of the COVID-19 pandemic and our associated responses discussed below, including the now-concluded temporary suspension of data services disconnections. We expect growth for this product line to continue over the long-term as upgrades in our broadband capacity, our ability to offer higher access speeds than many of our competitors, the reliability and the flexibility of our data service offerings and our Wi-Fi support service will enable us to capture additional market share from both data subscribers who use other providers as well as households in our footprint that do not yet subscribe to data services from any provider. |
| ● |
Residential video. Residential video service is an increasingly costly and fragmenting business, with programming costs and retransmission fees continuing to escalate in the face of a proliferation of streaming content alternatives. We intend to continue our strategy of focusing on the higher-margin businesses of residential data and business services while de-emphasizing our residential video business. We experienced a slightly accelerated decline in organic residential video customers and revenues during the nine months ended September 30, 2020 as a result of our response to the COVID-19 pandemic. As a result of our video strategy, we expect that residential video customers and revenues will decline further in the future. |
| ● |
Residential voice. We have experienced declines in residential voice customers as a result of consumers in the United States deciding to terminate their residential voice services and exclusively use wireless voice services. We believe this trend will continue because of competition from wireless voice service providers. Revenues from residential voice customers have declined over recent years, and we expect this decline will continue. |
| ● |
Business services. We have experienced significant growth in business data customers and revenues, and we expect this growth to continue over the long-term. We attribute this growth to our strategic focus on increasing sales to business customers and our efforts to attract enterprise business customers. Margins for products sold to business customers have remained attractive, which we expect will continue. During the nine months ended September 30, 2020, the COVID-19 pandemic and our associated responses, including business sales associates working from home, resulted in suppressed sales growth from small business customers while at the same time the pandemic presented additional subscriber acquisition and upgrade opportunities primarily for larger and enterprise businesses in need of faster and more reliable data and voice services. |
We continue to experience increased competition, particularly from telephone companies, cable and municipal overbuilders, over-the-top (“OTT”) video providers and direct broadcast satellite (“DBS”) television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. In addition, a key objective of our capital allocation process is to invest in initiatives designed to drive revenue and Adjusted EBITDA expansion. Over our last three fiscal years, more than 50% of our total capital expenditures were focused on infrastructure improvements that were intended to grow these measures. We continue to invest capital to, among other things, increase our plant and data capacities as well as network reliability. As of September 30, 2020, we offered Gigabit data service to approximately 97% of our homes passed. We are also deploying DOCSIS 3.1 to further increase our network capacity and enable future growth in our residential data and business services product lines.
We expect to continue to devote financial resources to infrastructure improvements, including in certain of the new markets we have acquired, because we believe these investments are necessary to continually meet our customers’ needs and to remain competitive. The capital enhancements associated with recent acquisitions include rebuilding low capacity markets; reclaiming bandwidth from analog video services; implementing 32-channel bonding; deploying DOCSIS 3.1; converting back office functions such as billing, accounting and service provisioning; migrating products to legacy Cable One platforms; and expanding our high-capacity fiber network.
Our primary goals are to continue growing residential data and business services revenues, to increase profit margins and to deliver strong Adjusted EBITDA and Adjusted EBITDA less capital expenditures. To achieve these goals, we intend to continue our disciplined cost management approach, remain focused on customers with expected higher relative value and follow through with further planned investments in broadband plant upgrades, including the deployment of DOCSIS 3.1 capabilities and new data service offerings for residential and business customers while at the same time balancing the impact of the COVID-19 pandemic on our business, associates, customers and other stakeholders. We also plan to continue seeking broadband-related acquisition and strategic investment opportunities in rural markets.
COVID-19 Update
We represent a part of the United States’ critical infrastructure, and our continued operation is essential to connectivity services that are vital during the COVID‐19 pandemic. At the same time, the spread of the COVID-19 pandemic has caused us to modify our operations, including restricting our technicians from entering customer homes and businesses; closing or limiting access to local offices and our corporate headquarters for associates, customers and others; limiting non-essential travel for associates; instituting an expanded work-from-home program, including enhancing our technological capabilities to support such efforts; implementing several compensation-related enhancements, including “purpose pay,” which provided a 25% premium to base pay for certain associates who were required to leave their homes to perform their essential job functions and was concluded in early September 2020; and establishing health protocols and providing personal protective equipment to protect our associates, customers and others.
In addition, in an effort to help ease the financial burden and provide continued connectivity for our customers and communities impacted by the COVID-19 pandemic, beginning in March 2020, we initially committed to do the following for 60 days under the FCC’s Keep Americans Connected Pledge: waive late charges and suspend disconnection of data services for residential and business customers who are unable to pay their bill due to disruptions caused by the pandemic and open free public Wi-Fi hotspots in local office parking lots and other public areas across our footprint, which are in place at nearly 140 locations. These commitments were scheduled to conclude on June 30, 2020; however, we continued to waive late charges for residential and small business data and voice customers through July 31, 2020 and have extended access to our free public Wi-Fi hotspots through the end of 2020.
Other actions taken by us beginning in March 2020 to assist customers and the communities we serve during the COVID-19 pandemic included discontinuing charging data overage fees, which was later extended through the end of June 2020; offering a low-cost 15 Megabit per second residential data plan for $10 per month for the first three months of service to help low-income families and those most impacted by the pandemic, which is available through December 31, 2020; donating more than $300,000 for community relief efforts and supporting various other local relief efforts; and partnering with communities, hospitals, medical centers and other essential institutions to address their broadband connection needs and challenges. Further, we have agreed to participate in a program that helps school districts and states provide internet access for students in low-income households. We also revised a majority of our residential data plans to provide 50 to 300 Gigabits of additional data based on the plan as of July 1, 2020, and we continued to work with residential and small business data and voice customers who have been harmed financially by the COVID-19 pandemic to keep them connected by offering flexible payment plans. Meanwhile, to meet the increased demand from new residential data customers, we focused on data-only connects for most of the second and third quarters of 2020.
In addition to the effects to our primary product lines noted above, the COVID-19 pandemic and our associated responses negatively impacted Adjusted EBITDA by $3.3 million and $19.8 million during the three and nine months ended September 30, 2020, respectively. The negative impacts were driven primarily by a decrease in revenues from the now-concluded suspensions of data overage fees, late charges and reconnect fees, although these items continued to have an adverse effect throughout the third quarter of 2020, and diminished growth in business services revenues, coupled with higher labor costs and other operating expenses. These negative Adjusted EBITDA impacts were more than offset by a greater-than-usual gain in residential data customers during the second and third quarters of 2020 and the associated increase in residential data revenues as well as lower travel costs. For the three months ended September 30, 2020, we also recorded sequentially lower bad debt expense as collections of receivables were better than originally estimated.
The planned implementation of our new ERP system because of resource challenges and inefficiencies that resulted from the COVID-19 pandemic remains on schedule for implementation by the summer of 2021.
We expect the negative impacts associated with the actions we took in response to the pandemic to largely dissipate during the fourth quarter of 2020, due primarily to the resumption of billing late charges, reconnect fees and data overage fees for a full quarter as well as the normalization of labor costs. In addition, the increase in residential data revenues associated with the significant number of residential data customers acquired during the COVID-19 pandemic is anticipated to continue during the fourth quarter of 2020. However, we continue to face various uncertainties related to the impact of the COVID-19 pandemic on the overall economy and our business, including whether we are able to sustain continued customer growth, our level of bad debt expense and if some of the expense reductions realized during the third quarter of 2020 will continue or if those expenses will return to more normal levels given the fluid situation regarding pandemic-related restrictions across the country.
We continue to monitor the evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our associates, customers, suppliers, business partners and others. The degree to which the COVID-19 pandemic impacts our operations, business, financial results and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, potential legislative or regulatory efforts to impose new requirements on our data services and how quickly and to what extent normal economic and operating conditions can resume.
Refer to the section entitled “Risks Factors” in this Quarterly Report on Form 10-Q for additional risks we face due to the COVID-19 pandemic.
Results of Operations
PSU and Customer Counts
Selected subscriber data for the periods presented was as follows (in thousands, except percentages):
| As of September 30, |
Annual Net Gain/(Loss) |
|||||||||||||||
| 2020 |
2019 |
Change |
% Change |
|||||||||||||
| Residential data PSUs |
784 | 619 | 165 | 26.7 | ||||||||||||
| Residential video PSUs |
263 | 283 | (20 | ) | (7.1 | ) | ||||||||||
| Residential voice PSUs |
96 | 91 | 4 | 4.9 | ||||||||||||
| Total residential PSUs |
1,143 | 993 | 150 | 15.1 | ||||||||||||
| Business data PSUs |
81 | 70 | 11 | 16.2 | ||||||||||||
| Business video PSUs |
14 | 15 | (1 | ) | (7.5 | ) | ||||||||||
| Business voice PSUs |
36 | 30 | 6 | 20.3 | ||||||||||||
| Total business services PSUs |
131 | 115 | 16 | 14.2 | ||||||||||||
| Total data PSUs |
866 | 689 | 177 | 25.6 | ||||||||||||
| Total video PSUs |
277 | 298 | (21 | ) | (7.1 | ) | ||||||||||
| Total voice PSUs |
132 | 121 | 11 | 8.7 | ||||||||||||
| Total PSUs |
1,274 | 1,108 | 166 | 15.0 | ||||||||||||
| Residential customer relationships |
897 | 744 | 153 | 20.5 | ||||||||||||
| Business customer relationships |
87 | 77 | 10 | 12.4 | ||||||||||||
| Total customer relationships |
984 | 821 | 162 | 19.8 | ||||||||||||
In recent years, our customer mix has shifted, causing subscribers to move from triple-play packages combining data, video and voice services to single and double-play packages. This is largely because some residential video customers have defected to DBS services and OTT offerings and households continue to terminate residential voice service. In addition, we have focused on selling data-only packages to new customers rather than cross-selling video to these customers. Meanwhile, the COVID-19 pandemic and our responses to it have accelerated this customer mix shift.
Use of Nonfinancial Metrics and Average Monthly Revenue per Unit (“ARPU”)
We use various nonfinancial metrics to measure, manage and monitor our operating performance on an ongoing basis. Such metrics include homes passed, PSUs and customer relationships. Homes passed represents the number of serviceable and marketable homes and businesses passed by our active plant. A PSU represents a single subscription to a particular service offering. Residential bulk multi-dwelling PSUs are classified as residential and are counted at the individual unit level. Business voice customers who have multiple voice lines are counted as a single PSU. A customer relationship represents a single customer who subscribes to one or more PSUs.
We believe homes passed, PSU and customer relationship counts are useful to investors in evaluating our operating performance. Similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measures of homes passed, PSUs and customer relationships may not be directly comparable to similarly titled measures reported by other companies.
We use ARPU to evaluate and monitor the amount of revenue generated by each type of service subscribed to by customers and the contribution to total revenues as well as to analyze and compare growth patterns. Residential ARPU values represent the applicable residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by the number of months in the period, except that for any new PSUs added as a result of an acquisition occurring during the period, the associated ARPU values represent the applicable residential service revenues (excluding installation and activation fees) divided by the pro-rated average number of PSUs during such period. Business services ARPU values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period, divided by the number of months in the period, except that for any new business customer relationships added as a result of an acquisition occurring during the period, the associated ARPU values represent business services revenues divided by the pro-rated average number of business customer relationships during such period.
We believe ARPU is useful to investors in evaluating our operating performance. ARPU and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of ARPU may not be directly comparable to similarly titled measures reported by other companies.
Comparison of Three Months Ended September 30, 2020 to Three Months Ended September 30, 2019
Revenues
Revenues increased $54.0 million, or 18.9%, due primarily to increases in residential data and business services revenues of $40.2 million and $8.8 million, respectively. The increase was primarily the result of the acquired operations, which contributed $37.1 million, and organic growth in our higher margin product lines of residential data and business services, partially offset by decreases in organic residential video, residential voice and other revenues. Certain actions we took in response to the COVID-19 pandemic, which have generally concluded and included waiving late charges, suspending collection activities (which reduced reconnect fees) and temporarily discontinuing charging data overage fees, negatively impacted consolidated revenues by $3.5 million during the three months ended September 30, 2020. This negative impact on consolidated revenues, of which $1.9 million was associated with other revenues, was more than offset in the third quarter of 2020 by a larger-than-usual gain in residential data customers during the second and third quarters of 2020 and the associated increase in residential data revenues related to the COVID-19 pandemic.
Revenues by service offering for the three months ended September 30, 2020 and 2019, together with the percentages of total revenues that each item represented for the periods presented, were as follows (dollars in thousands):
| Three Months Ended September 30, |
||||||||||||||||||||||||
| 2020 |
2019 |
2020 vs. 2019 |
||||||||||||||||||||||
| Revenues |
% of Total |
Revenues |
% of Total |
$ Change |
% Change |
|||||||||||||||||||
| Residential data |
$ | 174,527 | 51.5 | $ | 134,320 | 47.1 | $ | 40,207 | 29.9 | |||||||||||||||
| Residential video |
83,553 | 24.6 | 80,999 | 28.4 | 2,554 | 3.2 | ||||||||||||||||||
| Residential voice |
11,490 | 3.4 | 10,254 | 3.6 | 1,236 | 12.1 | ||||||||||||||||||
| Business services |
59,441 | 17.5 | 50,662 | 17.8 | 8,779 | 17.3 | ||||||||||||||||||
| Other |
9,951 | 3.0 | 8,756 | 3.1 | 1,195 | 13.6 | ||||||||||||||||||
| Total revenues |
$ | 338,962 | 100.0 | $ | 284,991 | 100.0 | $ | 53,971 | 18.9 | |||||||||||||||
Residential data service revenues increased $40.2 million, or 29.9%, due primarily to the acquired operations, organic subscriber growth, including a larger-than-usual subscriber gain during the second and third quarters of 2020 as a result of the COVID-19 pandemic, a reduction in package discounting and increased customer subscriptions to premium tiers.
Residential video service revenues increased $2.6 million, or 3.2%, due primarily to the acquired operations and a rate adjustment, partially offset by a 16.0% year-over-year decrease in residential video subscribers, excluding the acquired operations.
Residential voice service revenues increased $1.2 million, or 12.1%, due primarily to the acquired operations, partially offset by a 14.2% year-over-year decrease in residential voice subscribers, excluding the acquired operations.
Business services revenues increased $8.8 million, or 17.3%, due primarily to the acquired operations and organic growth in our business data and voice services to small and medium-sized businesses and enterprise customers. Total business customer relationships increased 12.4% year-over-year.
Other revenues increased $1.2 million, or 13.6%, due primarily to the acquired operations, partially offset by actions we took in response to the COVID-19 pandemic, which have generally concluded and included temporarily waiving late charges and suspending collection activities (which reduced reconnect fees).
ARPU for the indicated service offerings for the three months ended September 30, 2020 and 2019 were as follows:
| Three Months Ended September 30, |
2020 vs. 2019 |
|||||||||||||||
| 2020 |
2019 |
$ Change |
% Change |
|||||||||||||
| Residential data |
$ | 74.69 | $ | 72.09 | $ | 2.60 | 3.6 | |||||||||
| Residential video |
$ | 102.72 | $ | 93.42 | $ | 9.30 | 10.0 | |||||||||
| Residential voice |
$ | 39.17 | $ | 36.85 | $ | 2.32 | 6.3 | |||||||||
| Business services |
$ | 229.10 | $ | 219.92 | $ | 9.18 | 4.2 | |||||||||
Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $107.3 million for the three months ended September 30, 2020 and increased $12.4 million, or 13.1%, compared to the three months ended September 30, 2019. Operating expenses as a percentage of revenues were 31.7% and 33.3% for the three months ended September 30, 2020 and 2019, respectively. The increase in operating expenses was primarily attributable to $12.2 million of additional expenses related to the acquired operations, a $2.1 million increase in labor costs and a $1.4 million increase in repairs and maintenance costs, partially offset by a $3.3 million decrease in programming expenses. On a consolidated basis, operating expenses for the three months ended September 30, 2020 reflect $4.0 million of increased labor costs and other operating expenses as a result of the COVID-19 pandemic.
Selling, general and administrative expenses were $62.6 million for the three months ended September 30, 2020 and increased $3.7 million, or 6.3%, compared to the three months ended September 30, 2019. Selling, general and administrative expenses as a percentage of revenues were 18.5% and 20.7% for the three months ended September 30, 2020 and 2019, respectively. The increase in selling, general and administrative expenses was primarily attributable to $7.2 million of additional expenses related to the acquired operations and a $3.1 million increase in labor and other compensation-related costs, partially offset by decreases of $2.9 million in bad debt expense and $2.7 million in rebranding costs. On a consolidated basis, selling, general and administrative expenses for the three months ended September 30, 2020 reflect $4.1 million in reduced expenses primarily attributable to lower bad debt expense, as collections of receivables during the three months ended September 30, 2020 were better than originally estimated, and lower travel costs resulting from the COVID-19 pandemic.
Depreciation and amortization expense was $71.4 million for the three months ended September 30, 2020, including $12.5 million attributable to the acquired operations, and increased $22.7 million, or 46.5%, compared to the three months ended September 30, 2019. The remaining increase was due primarily to new assets placed in service since the third quarter of 2019, partially offset by assets that became fully depreciated since the third quarter of 2019. As a percentage of revenues, depreciation and amortization expense was 21.1% and 17.1% for the three months ended September 30, 2020 and 2019, respectively.
Interest Expense
Interest expense was $17.6 million for the three months ended September 30, 2020 and increased $1.5 million, or 9.2%, compared to the three months ended September 30, 2019. The increase was driven primarily by additional outstanding debt and higher interest rate swap settlement expense, partially offset by lower interest rates.
Other Income, Net
Other income of $3.2 million and $1.6 million for the three months ended September 30, 2020 and September 30, 2019, respectively, consisted of interest and investment income.
Income Tax Provision
Income tax provision was $15.5 million for the three months ended September 30, 2020 and decreased $0.3 million, or 1.8%, compared to the three months ended September 30, 2019. Our effective tax rate was 19.0% and 24.1% for the three months ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate was due primarily to a $3.2 million increase in income tax benefits attributable to the NOL carryback provision of the CARES Act.
Net Income
Net income was $66.3 million for the three months ended September 30, 2020 compared to $49.8 million for the three months ended September 30, 2019, an increase of $16.5 million.
Unrealized Gain (Loss) on Cash Flow Hedges and Other, Net of Tax
Unrealized gain on cash flow hedges and other, net of tax was $5.8 million for the three months ended September 30, 2020 and increased $33.9 million, or 120.7%, compared to the three months ended September 30, 2019 due primarily to favorable changes in forward interest rates.
Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019
Revenues
Revenues increased $139.2 million, or 16.4%, due primarily to increases in residential data and business services revenues of $96.6 million and $28.2 million, respectively. The increase was primarily the result of the acquired operations, which contributed $102.3 million, and organic growth in our higher margin product lines of residential data and business services, partially offset by decreases in organic residential video and other revenues. Certain actions we took in response to the COVID-19 pandemic, which have generally concluded and included temporarily discontinuing charging data overage fees, waiving late charges and suspending collection activities (which reduced reconnect fees), negatively impacted consolidated revenues by $12.1 million during the nine months ended September 30, 2020. This negative impact on consolidated revenues, of which $7.4 million was associated with other revenues, was more than offset by a larger-than-usual gain in residential data customers and the associated increase in residential data revenues related to the COVID-19 pandemic during the second and third quarters of 2020.
Revenues by service offering for the nine months ended September 30, 2020 and 2019, together with the percentages of total revenues that each item represented for the periods presented, were as follows (dollars in thousands):
| Nine Months Ended September 30, |
||||||||||||||||||||||||
| 2020 |
2019 |
2020 vs. 2019 |
||||||||||||||||||||||
| Revenues |
% of Total |
Revenues |
% of Total |
$ Change |
% Change |
|||||||||||||||||||
| Residential data |
$ | 493,532 | 49.9 | $ | 396,955 | 46.7 | $ | 96,577 | 24.3 | |||||||||||||||
| Residential video |
256,203 | 25.9 | 248,834 | 29.3 | 7,369 | 3.0 | ||||||||||||||||||
| Residential voice |
36,038 | 3.6 | 30,584 | 3.6 | 5,454 | 17.8 | ||||||||||||||||||
| Business services |
175,771 | 17.8 | 147,564 | 17.4 | 28,207 | 19.1 | ||||||||||||||||||
| Other |
26,917 | 2.8 | 25,309 | 3.0 | 1,608 | 6.4 | ||||||||||||||||||
| Total revenues |
$ | 988,461 | 100.0 | $ | 849,246 | 100.0 | $ | 139,215 | 16.4 | |||||||||||||||
Residential data service revenues increased $96.6 million, or 24.3%, due primarily to the acquired operations, organic subscriber growth, including a larger-than-usual subscriber gain in the second and third quarters of 2020 as a result of the COVID-19 pandemic, a reduction in package discounting and increased customer subscriptions to premium tiers.
Residential video service revenues increased $7.4 million, or 3.0%, due primarily to the acquired operations and a rate adjustment, partially offset by a 16.0% year-over-year decrease in residential video subscribers, excluding the acquired operations.
Residential voice service revenues increased $5.5 million, or 17.8%, due primarily to the acquired operations and the recognition of certain passthrough fees that were historically reported on a net basis, partially offset by a 14.2% year-over-year decrease in residential voice subscribers, excluding the acquired operations.
Business services revenues increased $28.2 million, or 19.1%, due primarily to the acquired operations and organic growth in our business data and voice services to small and medium-sized businesses and enterprise customers. Total business customer relationships increased 12.4% year-over-year.
ARPU for the indicated service offerings for the nine months ended September 30, 2020 and 2019 were as follows:
| Nine Months Ended September 30, |
2020 vs. 2019 |
|||||||||||||||
| 2020 |
2019 |
$ Change |
% Change |
|||||||||||||
| Residential data |
$ | 73.73 | $ | 71.74 | $ | 1.99 | 2.8 | |||||||||
| Residential video |
$ | 101.25 | $ | 92.90 | $ | 8.35 | 9.0 | |||||||||
| Residential voice(1) |
$ | 39.97 | $ | 35.53 | $ | 4.44 | 12.5 | |||||||||
| Business services(1) |
$ | 227.92 | $ | 219.39 | $ | 8.53 | 3.9 | |||||||||
| (1) |
The increases in residential voice and business services ARPU from the prior year were partially a result of certain passthrough fees that were reported on a net basis prior to the second quarter of 2019. Residential voice and business services ARPU for the nine months ended September 30, 2020 would have been $34.64 and $224.22, respectively, if reported on a comparable basis. |
Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $319.3 million for the nine months ended September 30, 2020 and increased $34.2 million, or 12.0%, compared to the nine months ended September 30, 2019. Operating expenses as a percentage of revenues were 32.3% and 33.6% for the nine months ended September 30, 2020 and 2019, respectively. The increase in operating expenses was due primarily to $33.5 million of additional expenses related to the acquired operations, a $7.3 million increase in labor costs and $3.8 million of higher repairs and maintenance costs, partially offset by a $11.0 million decrease in programming expenses. On a consolidated basis, operating expenses for the nine months ended September 30, 2020 reflect $8.1 million of increased labor costs and other operating expenses as a result of the COVID-19 pandemic.
Selling, general and administrative expenses were $190.5 million for the nine months ended September 30, 2020 and increased $10.1 million, or 5.6%, compared to the nine months ended September 30, 2019. Selling, general and administrative expenses as a percentage of revenues were 19.3% and 21.2% for the nine months ended September 30, 2020 and 2019, respectively. The increase in selling, general and administrative expenses was primarily attributable to $19.5 million of additional expenses related to the acquired operations and an $8.7 million increase in labor and other compensation-related costs, partially offset by decreases of $5.6 million in rebranding costs, $4.9 million in health insurance costs, $3.4 million in acquisition-related costs, $2.3 million in system conversion costs and $2.0 million in repairs and maintenance costs. The lower health insurance costs were due to reduced claims activity in connection with stay-at-home orders issued during the pandemic. The COVID-19 pandemic did not have a material impact on selling, general and administrative expenses for the nine months ended September 30, 2020 as increases in bad debt expense and charitable donations were offset by lower travel costs.
Depreciation and amortization expense was $202.3 million for the nine months ended September 30, 2020, including $34.3 million attributable to the acquired operations, and increased $44.9 million, or 28.5%, compared to the nine months ended September 30, 2019. The remaining increase was due primarily to new assets placed in service since the third quarter of 2019, partially offset by assets that became fully depreciated since the third quarter of 2019. As a percentage of revenues, depreciation and amortization expense was 20.5% and 18.5% for the nine months ended September 30, 2020 and 2019, respectively.
We recognized a net gain on asset sales and disposals of $3.1 million during the nine months ended September 30, 2020 compared to a net loss on asset sales and disposals of $4.4 million during the nine months ended September 30, 2019. The nine months ended September 30, 2020 included a $6.6 million non-cash gain on the sale of certain tower properties. The nine months ended September 30, 2019 included a $1.6 million gain on the sale of a non-operating property that housed our former headquarters.
Interest Expense
Interest expense was $52.8 million for the nine months ended September 30, 2020 and increased $0.2 million, or 0.3%, compared to the nine months ended September 30, 2019.
Other Income (Expense)
Other income of $6.6 million for the nine months ended September 30, 2020 consisted of interest and investment income. Other expense of $6.2 million for the nine months ended September 30, 2019 consisted of a $6.5 million call premium related to the redemption of our previously outstanding senior notes and $4.9 million of debt issuance cost write-offs, partially offset by interest and investment income.
Income Tax Provision
Income tax provision was $35.2 million for the nine months ended September 30, 2020 and decreased $2.9 million, or 7.5%, compared to the nine months ended September 30, 2019. Our effective tax rate was 15.1% and 23.3% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate was due primarily to a $13.0 million increase in income tax benefits attributable to the NOL carryback provision of the CARES Act, a $6.0 million increase in income tax benefits attributable to equity-based compensation awards and a $1.3 million decrease in income tax expenses attributable to state effective tax rate changes.
Net Income
Net income was $198.2 million for the nine months ended September 30, 2020 compared to $125.0 million for the nine months ended September 30, 2019, an increase of $73.2 million.
Unrealized Loss on Cash Flow Hedges and Other, Net of Tax
Unrealized loss on cash flow hedges and other, net of tax was $88.3 million for the nine months ended September 30, 2020 and decreased $2.8 million, or 3.1%, compared to the nine months ended September 30, 2019 due primarily to lower unrealized losses on our interest rate swaps.
Use of Adjusted EBITDA
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income reported in accordance with GAAP. Adjusted EBITDA is reconciled to net income below.
Adjusted EBITDA is defined as net income plus interest expense, income tax provision, depreciation and amortization, equity-based compensation, severance expense, (gain) loss on deferred compensation, acquisition-related costs, (gain) loss on asset sales and disposals, system conversion costs, rebranding costs, other (income) expense and other unusual expenses, as provided in the following table. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our business as well as other non-cash or special items and is unaffected by our capital structure or investment activities. This measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of debt financing. These costs are evaluated through other financial measures.
We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the measure used in the leverage ratio calculations under our Senior Credit Facilities to determine compliance with the covenants contained in the Credit Agreement. Adjusted EBITDA is also a significant performance measure used by us in our annual incentive compensation program. Adjusted EBITDA does not take into account cash used for mandatory debt service requirements or other non-discretionary expenditures, and thus does not represent residual funds available for discretionary uses.
| Three Months Ended September 30, |
2020 vs. 2019 |
|||||||||||||||
| (dollars in thousands) |
2020 |
2019 |
$ Change |
% Change |
||||||||||||
| Net income |
$ | 66,287 | $ | 49,835 | $ | 16,452 | 33.0 | |||||||||
| Plus: Interest expense |
17,560 | 16,079 | 1,481 | 9.2 | ||||||||||||
| Income tax provision |
15,515 | 15,801 | (286 | ) | (1.8 | ) | ||||||||||
| Depreciation and amortization |
71,421 | 48,737 | 22,684 | 46.5 | ||||||||||||
| Equity-based compensation |
3,867 | 3,058 | 809 | 26.5 | ||||||||||||
| Severance expense |
- | 37 | (37 | ) | (100.0 | ) | ||||||||||
| Loss on deferred compensation |
93 | 41 | 52 | 126.8 | ||||||||||||
| Acquisition-related costs |
563 | 1,228 | (665 | ) | (54.2 | ) | ||||||||||
| Loss on asset sales and disposals, net |
1,511 | 2,362 | (851 | ) | (36.0 | ) | ||||||||||
| System conversion costs |
248 | 1,114 | (866 | ) | (77.7 | ) | ||||||||||
| Rebranding costs |
517 | 3,246 | (2,729 | ) | (84.1 | ) | ||||||||||
| Other income, net |
(3,231 | ) | (1,582 | ) | (1,649 | ) | 104.2 | |||||||||
| Adjusted EBITDA |
$ | 174,351 | $ | 139,956 | $ | 34,395 | 24.6 | |||||||||
| Nine Months Ended September 30, |
2020 vs. 2019 |
|||||||||||||||
| (dollars in thousands) |
2020 |
2019 |
$ Change |
% Change |
||||||||||||
| Net income |
$ | 198,153 | $ | 124,969 | $ | 73,184 | 58.6 | |||||||||
| Plus: Interest expense |
52,849 | 52,691 | 158 | 0.3 | ||||||||||||
| Income tax provision |
35,184 | 38,036 | (2,852 | ) | (7.5 | ) | ||||||||||
| Depreciation and amortization |
202,284 | 157,416 | 44,868 | 28.5 | ||||||||||||
| Equity-based compensation |
10,514 | 9,161 | 1,353 | 14.8 | ||||||||||||
| Severance expense |
- | 215 | (215 | ) | (100.0 | ) | ||||||||||
| Loss on deferred compensation |
72 | 294 | (222 | ) | (75.5 | ) | ||||||||||
| Acquisition-related costs |
3,873 | 7,322 | (3,449 | ) | (47.1 | ) | ||||||||||
| (Gain) loss on asset sales and disposals, net |
(3,122 | ) | 4,375 | (7,497 | ) | (171.4 | ) | |||||||||
| System conversion costs |
944 | 3,287 | (2,343 | ) | (71.3 | ) | ||||||||||
| Rebranding costs |
1,095 | 6,658 | (5,563 | ) | (83.6 | ) | ||||||||||
| Other (income) expense, net |
(6,620 | ) | 6,248 | (12,868 | ) | (206.0 | ) | |||||||||
| Adjusted EBITDA |
$ | 495,226 | $ | 410,672 | $ | 84,554 | 20.6 | |||||||||
We believe that Adjusted EBITDA is useful to investors in evaluating our operating performance. Adjusted EBITDA and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of Adjusted EBITDA may not be directly comparable to similarly titled measures reported by other companies.
Financial Condition: Liquidity and Capital Resources
Liquidity
Our primary funding requirements are for our ongoing operations, capital expenditures, potential acquisitions and strategic investments, including the MBI Investment, payments of quarterly dividends and share repurchases. We believe that existing cash balances, our Senior Credit Facilities, the net proceeds of the Notes Offering and operating cash flows will provide adequate support for these funding requirements over the next 12 months. However, our ability to fund operations, make capital expenditures, make future acquisitions and strategic investments, 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, including the impact of the COVID-19 pandemic, some of which are beyond our control.
In light of the volatility in the debt markets resulting from the COVID-19 pandemic as well as our desire to enhance our flexibility in pursuing acquisitions and strategic investments, in May 2020, we completed the Public Offering and raised $469.8 million, after deducting underwriting discounts and offering expenses.
A summary of our net cash flows for the periods indicated was as follows (dollars in thousands):
| Nine Months Ended September 30, |
2020 vs. 2019 |
|||||||||||||||
| 2020 |
2019 |
$ Change |
% Change |
|||||||||||||
| Net cash provided by operating activities |
$ | 398,980 | $ | 335,185 | $ | 63,795 | 19.0 | |||||||||
| Net cash used in investing activities |
(299,844 | ) | (527,622 | ) | 227,778 | (43.2 | ) | |||||||||
| Net cash provided by financing activities |
400,925 | 74,172 | 326,753 | NM | ||||||||||||
| Increase (decrease) in cash and cash equivalents |
500,061 | (118,265 | ) | 618,326 | NM | |||||||||||
| Cash and cash equivalents, beginning of period |
125,271 | 264,113 | (138,842 | ) | (52.6 | ) | ||||||||||
| Cash and cash equivalents, end of period |
$ | 625,332 | $ | 145,848 | $ | 479,484 | NM | |||||||||
| NM = Not meaningful. |
The $63.8 million year-over-year increase in net cash provided by operating activities was primarily attributable to an increase in Adjusted EBITDA of $84.6 million, lower cash paid for rebranding costs and acquisition costs and a notes redemption call premium paid in the second quarter of 2019, partially offset by higher cash paid for taxes and unfavorable changes in accounts receivable.
The $227.8 million decrease in net cash used in investing activities from the prior year period was due primarily to $356.9 million of net cash outflows related to the Clearwave acquisition in the first quarter of 2019, partially offset by a $45.9 million increase in cash paid for capital expenditures, $38.3 million of net cash outflows related to the Valu-Net acquisition in the third quarter of 2020, $37.2 million of equity investments during 2020 and lower proceeds from sales of property, plant and equipment during the first nine months of 2020.
The $326.8 million increase in net cash provided by financing activities from the prior year period was due primarily to $469.8 million of net proceeds from the Public Offering in the second quarter of 2020, partially offset by a $151.1 million reduction in net debt borrowings compared to the prior year quarter.
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 third quarter of 2020, we have repurchased 210,631 shares of our common stock at an aggregate cost of $104.9 million. No shares were repurchased during the nine months ended September 30, 2020.
We currently expect to continue to pay quarterly cash dividends on shares of our common stock, subject to approval of the Board. During the third quarter of 2020, the Board approved a quarterly dividend of $2.50 per share of common stock, which was paid on September 4, 2020.
Financing Activity
As of September 30, 2020, the Credit Agreement provided for the Term Loan A-2, the Term Loan B-1, the Term Loan B-2, the Term Loan B-3 and the Revolving Credit Facility. 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.
In January 2020, we issued letters of credit totaling $22.0 million under the Revolving Credit Facility on behalf of Wisper to guarantee its performance obligations under an FCC broadband funding program. The fair value of the letters of credit approximates face value based on the short-term nature of the agreements. We would be liable for up to $22.0 million if Wisper were to fail to satisfy all or some of its performance obligations under the FCC program. Wisper pledged certain assets in favor of us as collateral for issuing the letters of credit, which pledge was terminated in the third quarter of 2020 at the same time that we closed an equity investment in Wisper, and Wisper has guaranteed and indemnified us in connection with such letters of credit. As of September 30, 2020, we have assessed the likelihood of non-performance associated with the guarantee to be remote, and therefore, no liability has been accrued within the condensed consolidated balance sheet.
In March 2020, we borrowed $100 million under the Revolving Credit Facility for general corporate purposes, including for small acquisitions and investments. The outstanding balance was repaid in full in May 2020 using a portion of the net proceeds from the Public Offering. Letter of credit issuances under the Revolving Credit Facility totaled $29.6 million and were held for the benefit of performance obligations under government grant programs and certain general and liability insurance matters and bore interest at a rate of 1.63% per annum. As of September 30, 2020, we had $1.7 billion of aggregate outstanding term loans and $320.4 million available for borrowing under the Revolving Credit Facility.
A summary of our outstanding term loans as of September 30, 2020 is as follows (dollars in thousands):
| Instrument |
Draw Date |
Original Principal |
Amortization Per Annum(1) |
Outstanding Principal |
Final Maturity Date |
Balance Due Upon Maturity |
Benchmark Rate |
Applicable Margin(2) |
Interest Rate |
||||||||||||||||||||
| Term Loan A-2 |
5/8/2019 |
$ | 700,000 |
|
Varies(4) | $ | 680,866 | 5/8/2024 |
$ | 513,945 | LIBOR |
1.50% | 1.65% | ||||||||||||||||
| 10/1/2019(3) | |||||||||||||||||||||||||||||
| Term Loan B-1 |
5/1/2017 |
500,000 | 1.0% | 483,750 | 5/1/2024 |
466,250 | LIBOR |
1.75% | 1.90% | ||||||||||||||||||||
| Term Loan B-2 |
1/7/2019 |
250,000 | 1.0% | 246,250 | 1/7/2026 |
233,125 | LIBOR |
2.00% | 2.15% | ||||||||||||||||||||
| Term Loan B-3 |
6/14/2019 |
325,000 | 1.0% | 320,938 | 1/7/2026 |
303,875 | LIBOR |
2.00% | 2.15% | ||||||||||||||||||||
| Total |
$ | 1,775,000 | $ | 1,731,804 | $ | 1,517,195 | |||||||||||||||||||||||
| (1) |
Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). |
| (2) |
The Term Loan A-2 interest rate spread can vary between 1.25% and 1.75%, determined on a quarterly basis by reference to a pricing grid based on our Total Net Leverage Ratio. All other applicable margins are fixed. |
| (3) |
On May 8, 2019, $250 million was drawn. On October 1, 2019, an additional $450 million was drawn. |
| (4) |
Per annum amortization rates for years one through five following the closing date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively. |
Unamortized debt issuance costs consisted of the following (in thousands):
| September 30, 2020 |
December 31, 2019 |
|||||||
| Revolving Credit Facility portion: |
||||||||
| Other noncurrent assets |
$ | 2,008 | $ | 2,427 | ||||
| Term loans portion: |
||||||||
| Long-term debt (contra account) |
15,230 | 18,142 | ||||||
| Total |
$ | 17,238 | $ | 20,569 | ||||
We recorded debt issuance cost amortization of $1.1 million for both the three months ended September 30, 2020 and 2019 and $3.3 million and $3.5 million for the nine months ended September 30, 2020 and 2019, respectively, within interest expense in the condensed consolidated statements of operations and comprehensive income.
We were in compliance with all debt covenants as of September 30, 2020.
During the first quarter of 2019, we entered into two interest rate swap agreements in order to convert our interest payment obligations with respect to an aggregate of $1.2 billion of our variable rate LIBOR indebtedness to a fixed rate. Under the first swap agreement effective in March 2019, with respect to a notional amount of $850 million, our monthly payment obligation is determined at a fixed base rate of 2.653%. Under the second swap agreement effective in June 2020, with respect to a notional amount of $350 million, our monthly payment is determined at a fixed base rate of 2.739%. Both interest rate swap agreements are scheduled to mature in the first quarter of 2029 but each may be terminated prior to the scheduled maturity at our election or that of the financial institution counterparty under the terms provided in each swap agreement. We recognized losses of $7.7 million and $0.9 million on interest rate swaps during the three months ended September 30, 2020 and 2019, respectively, and $14.8 million and $1.3 million during the nine months ended September 30, 2020 and 2019, respectively, which were reflected in interest expense within the condensed consolidated statements of operations and comprehensive income.
In May 2020, we completed the Public Offering of 287,500 shares of our common stock for total net proceeds of $469.8 million, after deducting underwriting discounts and offering expenses. We used a portion of the net proceeds to repay in full our outstanding borrowings of $100 million under the Revolving Credit Facility in May 2020 and for the Valu-Net and Wisper transactions. We expect to use the remainder of the proceeds for general corporate purposes, including for additional acquisitions and strategic investments.
On October 26, 2020, we priced the Notes Offering of $650.0 million of 4.0% senior notes due 2030. The Notes Offering is expected to close on November 9, 2020, subject to customary closing conditions. We expect to use the net proceeds from the Notes Offering for general corporate purposes, which may include acquisitions and strategic investments, including the MBI Investment.
On October 30, 2020, we and certain of our wholly owned subsidiaries entered into the Third Restatement Agreement with JPMorgan, as administrative agent, and the lenders party thereto to amend and restate the Credit Agreement. The Third Restatement Agreement amended the Credit Agreement to (i) upsize the Term Loan B-3 by $300.0 million and extend the scheduled maturity of the Term Loan B-2 and the Term Loan B-3 to October 30, 2027, (ii) increase the aggregate principal amount of commitments under the Revolving Credit Facility by $150.0 million to $500.0 million and extend the scheduled maturity of the Revolving Credit Facility and the Term Loan A-2 to October 30, 2025 and (iii) reset the amortization schedule of the Term Loan A-2 so that the Term Loan A-2 will amortize in equal quarterly installments following the date of the amendment and restatement at a rate (expressed as a percentage of the outstanding principal amount on October 30, 2020) of 2.5% per annum for each of the first two years, 5.0% per annum for the third year, 7.5% per annum for the fourth year and 12.5% per annum for the fifth year (in each case subject to customary adjustments in the event of any prepayment), with the balance due upon maturity. Except as described above, the Third Restatement Agreement did not make any material changes to the terms of the Term Loan A-2, the Term Loan B-2, the Term Loan B-3 or the Revolving Credit Facility. We used the net proceeds from the TLB-3 Upsize, together with cash on hand, to repay all $483.8 million aggregate principal amount of our outstanding Term Loan B-1.
Refer to notes 9 and 11 to our audited consolidated financial statements included in the 2019 Form 10-K and notes 7, 8 and 15 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our financing activity, outstanding debt and interest rate swaps.
Capital Expenditures
We have significant ongoing capital expenditure requirements as well as capital enhancements associated with acquired operations, including rebuilding low capacity markets; reclaiming bandwidth from analog video services; implementing 32-channel bonding; deploying DOCSIS 3.1; converting back office functions such as billing, accounting and service provisioning; migrating products to legacy Cable One platforms; and expanding our high-capacity fiber network. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.
Our capital expenditures by category for the nine months ended September 30, 2020 and 2019 were as follows (in thousands):
| Nine Months Ended September 30, |
||||||||
| 2020 |
2019(1) |
|||||||
| Customer premise equipment |
$ | 52,210 | $ | 40,764 | ||||
| Commercial |
36,888 | 29,376 | ||||||
| Scalable infrastructure |
30,851 | 30,481 | ||||||
| Line extensions |
14,436 | 12,793 | ||||||
| Upgrade/rebuild |
43,882 | 22,522 | ||||||
| Support capital |
39,727 | 40,388 | ||||||
| Total |
$ | 217,994 | $ | 176,324 | ||||
| (1) |
Capital expenditures associated with Clearwave operations for the nine months ended September 30, 2019 have been reclassified from scalable infrastructure, line extensions and support capital to commercial to conform with the current period presentation. |
Contractual Obligations and Contingent Commitments
As of September 30, 2020, except for the letters of credit totaling $22.0 million issued on behalf of Wisper to guarantee its performance obligations under an FCC broadband funding program, there have been no material changes to the contractual obligations and contingent commitments previously disclosed in the 2019 Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or financing arrangements with special-purpose entities.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated 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.
Changes in Critical Accounting Policies and Estimates
Goodwill. We test goodwill for impairment at the reporting unit level, which was historically established at the geographic division level. We reevaluate the determination of our reporting units used to test for impairment periodically or whenever events or substantive changes in circumstances occur. Effective in the second quarter of 2020, as a result of progress made in our staged rebranding initiative and the further alignment of service offerings and product pricing for recent acquisitions with our legacy business, we reevaluated the basis of our goodwill reporting units and identified a single goodwill reporting unit based on the chief operating decision maker’s current performance monitoring and resource allocation process and the similarity of our geographic divisions.
Indefinite-Lived Intangible Assets. The unit of account for our franchise agreements was historically established at the geographic division level. We reevaluate the unit of account used to test for impairment periodically or whenever events or substantive changes in circumstances occur to ensure impairment testing is performed at an appropriate level. Effective in the second quarter of 2020, as a result of progress made in our staged rebranding initiative and the further alignment of service offerings and product pricing for recent acquisitions with our legacy business, we reevaluated the basis of our franchise agreements unit of account for use in impairment assessments and identified a single unit of account for franchise agreements based on a reevaluation of our current operations and the use of our assets.
Except as disclosed above, there have been no material changes to our critical accounting policy and estimate disclosures described in our 2019 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from changes in market rates and prices. There have been no material changes to the market risk disclosures described in the 2019 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation as of September 30, 2020 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on the Company’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control Over Financial Reporting
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 September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
Except as set forth below, there have been no material changes to the risk factors previously disclosed in the 2019 Form 10-K.
Risks Relating to Our Business
The COVID-19 pandemic has impacted our operations and adversely affected our business, financial results and financial condition, and the duration and extent to which it will continue to do so is uncertain and difficult to predict.
The COVID-19 pandemic has significantly impacted the United States and other countries, which has resulted in international, Federal, state and local governments implementing numerous measures to try to reduce the spread of the virus that causes COVID-19, including travel restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns.
We represent a part of the United States’ critical infrastructure, and our continued operation is essential to connectivity services that are vital during the COVID‐19 pandemic. At the same time, the spread of the COVID-19 pandemic has caused us to modify our operations, including restricting our technicians from entering customer homes and businesses; closing or limiting access to local offices and our corporate headquarters for associates, customers and others; limiting non-essential travel for associates; instituting an expanded work-from-home program, including enhancing our technological capabilities to support such efforts; implementing several compensation-related enhancements, including “purpose pay,” which provided a 25% premium to base pay for certain associates who were required to leave their homes to perform their essential job functions and was concluded in early September 2020; establishing health protocols and providing personal protective equipment to protect our associates, customers and others; temporarily discontinuing charging data overage fees, waiving late charges and suspending disconnection of data services for residential and business customers who were unable to pay due to disruptions caused by the pandemic, each of which has concluded; and introducing a new lower-cost residential data plan. We have taken and may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our associates, customers, suppliers, business partners and others.
As a result of the COVID-19 outbreak and the related responses by us and from governmental authorities, our operations have been impacted as described above, which has resulted, and may continue to result, in various negative impacts associated with the pandemic, such as reduced revenues from data overage fees, late charges, reconnect fees, and advertising and business services as well as increased expenses, which combined to suppress Adjusted EBITDA for the nine months ended September 30, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — COVID-19 Update” in this Quarterly Report on Form 10-Q for additional information. Additionally, our business, financial results and financial condition have been and could be further adversely affected in a number of ways, which may include, but are not limited to, the following:
| ● |
further disruptions to our regular, ongoing operations and restrictions on our sales and marketing efforts, especially related to business services; |
| ● |
interruptions to our engineering, design and implementation of plant and infrastructure as well as other important business activities; |
| ● |
limitations on associate resources and availability, including in our call centers and among our technicians, due to health protocols, sickness, government restrictions, the desire of associates to avoid contact with large groups of people, school closures or other factors, which may further constrain capacity to respond to the increased demand for our products and services; |
| ● |
the potential further diversion of senior management’s attention in the event that key associates contract COVID-19 and, consequently, have limited ability or become unable to work; |
| ● |
interruptions or delays receiving and limited availability of necessary hardware, software and operational supplies, equipment and support; |
| ● |
possible further reductions of revenues, Adjusted EBITDA, and/or Adjusted EBITDA margin and increased expenses as well as greater difficulty in collecting customer receivables resulting from, among other things, our actions to assist customers and support our associates during the COVID-19 crisis; |
| ● |
a fluctuation in interest rates that could result from market uncertainties; |
| ● |
an increase in the cost of or the difficulty to obtain debt or equity financing, which could affect our financial condition or our ability to fund operations or future acquisition or investment opportunities; |
| ● |
a further delay in the implementation of our new ERP system; |
| ● |
potential legislative or regulatory efforts to impose new requirements on our data services; |
| ● |
changes to the carrying value of our goodwill and intangible assets; and |
| ● |
an increase in regulatory restrictions or continued market volatility that could hinder our ability to execute our business strategies, including acquisitions and strategic investments, as well as negatively impact our stock price. |
Additionally, the COVID-19 pandemic could negatively affect our internal control over financial reporting, including as a result of a portion of our personnel working from home. Accordingly, new processes, procedures and controls have been and may continue to be required to respond to changes in our business environment.
The potential effects of the COVID-19 pandemic may also impact many of our other risk factors previously disclosed in the 2019 Form 10-K and/or the other risk factors included in this Quarterly Report on Form 10-Q. The degree to which the pandemic impacts our operations, business, financial results and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume.
We recently made several acquisitions and strategic investments, and may make other acquisitions and strategic investments, which expose us to risks and uncertainties associated with acquisitions and strategic investments.
We completed the acquisition of RBI Holding LLC (NewWave) in May 2017, the Clearwave acquisition in January 2019 and the Fidelity acquisition in October 2019. In addition, we have made and may make other acquisitions and strategic investments, including the MBI Investment (each such acquired business or investee, a “Strategic Acquiree” and, collectively, the “Strategic Acquirees”). Such acquisitions and strategic investments could involve a number of risks and uncertainties, including:
| ● |
uncertainties as to the timing of any acquisition or strategic investment and the risk that such transactions may not be completed in a timely manner or at all; |
| ● |
the possibility that any or all of the conditions to the consummation of any acquisition or strategic investment may not be satisfied or waived, including failure to receive any required regulatory approvals (or any conditions, limitations or restrictions placed in connection with such approvals); |
| ● |
the difficulty in integrating new Strategic Acquirees and their operations in an efficient and effective manner; |
| ● |
the challenge in achieving strategic objectives, cost savings and other anticipated benefits; |
| ● |
the potential loss of key associates of a Strategic Acquiree; |
| ● |
the potential diversion of senior management’s attention from our ongoing operations; |
| ● |
the difficulty of maintaining relationships with the customers, suppliers and other business partners of a Strategic Acquiree; |
| ● |
the difficulty and amount of time necessary to realize expected synergies and other benefits of the acquisitions or strategic investments; |
| ● |
the risks associated with integrating financial reporting and internal control systems; |
| ● |
the difficulty in adapting and expanding information technology systems and other business processes to incorporate the Strategic Acquirees; |
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potential future impairments of goodwill associated with the Strategic Acquirees; |
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in some cases, the potential for increased regulation; |
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risks relating to minority ownership positions in our strategic investments, including our initial minority ownership position in MBI, such as our ability to appoint only a minority of members of the board of managers of MBI, the fact that the managers of MBI will not owe the same fiduciary duties to us that directors of a corporation would owe to stockholders and the limited category of transactions for which our consent will be needed under MBI’s operating agreement; and |
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uncertainties related to the exercise of the call option or the put option in the MBI Investment, including our ability to finance the purchase of the remaining membership interests in MBI on terms acceptable to us or at all. |
If a Strategic Acquiree fails to operate as anticipated, cannot be successfully integrated with our existing business or one or more of the other risks and uncertainties identified above occur in connection with our acquisitions and strategic investments, our operations, business, results of operations and financial condition could be materially negatively affected.
Implementation of our new ERP system could disrupt business operations.
We are planning to implement our new ERP system by the summer of 2021. The implementation requires significant investments of time, money and resources and may result in the diversion of senior management’s attention from our ongoing operations. Furthermore, the implementation will result in changes to many of our existing operational, financial and administrative business processes, including, but not limited to, our budgeting, purchasing, receiving, provisioning, servicing, accounting and reporting processes. The new ERP system will require both the implementation of new internal controls and changes to existing internal control frameworks and procedures. If additional unexpected delays, technical problems or other significant issues arise in connection with the implementation, including as a result of the COVID-19 pandemic, it could have a material negative impact on our operations, business, financial results and financial condition.
Risks Relating to Our Common Stock and the Securities Market
Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and Delaware law may discourage takeovers and the concentration of ownership of our common stock will affect the voting results of matters submitted for stockholder approval.
Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may discourage, delay or prevent a merger or acquisition that is opposed by our Board or certain stockholders holding a significant percentage of the voting power of our outstanding voting stock. These include provisions that:
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prior to the full declassification of our board following our annual meeting of stockholders to be held in 2023, divide our Board into three classes of directors, standing for election on a staggered basis, such that only approximately one-third of the directors constituting our Board may change each year; |
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do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of our stockholders; |
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provide that only our Chief Executive Officer and a majority of our directors, and not our stockholders, may call a special meeting of our stockholders; |
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require the approval of our Board or the affirmative vote of stockholders holding at least 66 2/3% of the voting power of our capital stock to amend our Amended and Restated By-laws; and |
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limit our ability to enter into business combination transactions with certain stockholders. |
These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of our Company, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.
Our Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, associates or stockholders.
Our Amended and Restated Certificate of Incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our Company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer or associate of the Company to the Company or the Company’s stockholders, (iii) action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”) or (iv) action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our Amended and Restated Certificate of Incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other associates, which may discourage such lawsuits against us and our directors, officers and associates. Alternatively, if a court were to find these provisions of our Amended and Restated Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
Our Amended and Restated Certificate of Incorporation includes provisions limiting the personal liability of our directors for breaches of fiduciary duty under the DGCL.
Our Amended and Restated Certificate of Incorporation contains a provision permitted under the DGCL relating to the liability of directors. This provision eliminates a director’s personal liability to the fullest extent permitted by the DGCL for monetary damages resulting from a breach of fiduciary duty; provided that such provision will not eliminate or limit a director’s liability:
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for any breach of the director’s duty of loyalty; |
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for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; |
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under Section 174 of the DGCL (including for unlawful dividends); or |
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for any transaction from which the director derives an improper personal benefit. |
The principal effect of the limitation on liability provision is that a stockholder will be unable to prosecute an action for monetary damages against a director unless the stockholder can demonstrate a basis for liability for which indemnification is not available under the DGCL. This provision, however, should not limit or eliminate our rights or any stockholder’s rights to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director’s fiduciary duty. This provision will not alter a director’s liability under federal securities laws. The inclusion of this provision in our Amended and Restated Certificate of Incorporation may discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited us and our stockholders.
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Certain information relating to common stock repurchases by the Company and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) under the Exchange Act during the three months ended September 30, 2020 were as follows (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) |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
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| July 1 to 31, 2020(2) |
21 | $ | 1,776.67 | - | $ | 145,081 | ||||||||||
| August 1 to 31, 2020 |
- | $ | - | - | $ | 145,081 | ||||||||||
| September 1 to 30, 2020 |
- | $ | - | - | $ | 145,081 | ||||||||||
| Total |
21 | $ | 1,776.67 | - | ||||||||||||
| (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 common stock), which was announced on August 7, 2015. The authorization does not have an expiration date. 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. |
| (2) |
Represents shares withheld from associates to satisfy estimated tax withholding obligations in connection with the vesting of restricted stock and/or 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 the Company’s common stock on the applicable vesting or exercise measurement date. |
| DEFAULTS UPON SENIOR SECURITIES |
None.
| MINE SAFETY DISCLOSURES |
Not applicable.
| OTHER INFORMATION |
Not applicable.
| EXHIBITS |
| Exhibit Number |
Description |
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| 2.1 |
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| 10.1 |
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| 31.1 |
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| 31.2 |
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| 32 |
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| 101.INS |
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
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| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document.* |
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| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
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| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
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| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document.* |
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| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document.* |
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| 104 |
The cover page of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments). |
* Filed herewith.
** Furnished herewith.
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) |
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| By: |
/s/ Julia M. Laulis |
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Name: |
Julia M. Laulis |
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Title: |
Chair of the Board, President and Chief Executive Officer |
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Date: November 5, 2020
| By: |
/s/ Steven S. Cochran |
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Name: |
Steven S. Cochran |
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Title: |
Senior Vice President and Chief Financial Officer |
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Date: November 5, 2020