Quarterly Report (10-q)

Date : 08/06/2019 @ 3:42PM
Source : Edgar (US Regulatory)
Stock : Shenandoah Telecommunications Company (SHEN)
Quote : 36.44  0.0 (0.00%) @ 12:00AM

Quarterly Report (10-q)

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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from__________ to __________
Commission File No.: 000-09881
SHENIMAGEA09.JPG
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia
 
54-1162807
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

500 Shentel Way , Edinburg , Virginia     22824
(Address of principal executive offices)  (Zip Code)

( 540 ) 984-4141
(Registrant's telephone number, including area code)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock (No Par Value)
SHEN
NASDAQ Global Select Market
49,856,914
(Title of Class)
(Trading Symbol)
(Name of Exchange on which Registered)
(The number of shares of the registrant's common stock outstanding on July 31, 2019)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer 
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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




SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX

 
 
Page
Numbers
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 






SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
 
(in thousands)
 
 
 
 
 
 
June 30,
2019
 
December 31, 2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
98,091

 
$
85,086

Accounts receivable, net of allowance for doubtful accounts of $516 and $534, respectively
 
59,561

 
54,407

Income taxes receivable
 
4,144

 
5,282

Inventory, net of allowances of $69 and $113, respectively
 
6,566

 
5,265

Prepaid expenses and other
 
53,786

 
60,162

Total current assets
 
222,148

 
210,202

Investments
 
11,563

 
10,788

Property, plant and equipment, net
 
695,725

 
701,359

Intangible assets, net
 
324,890

 
366,029

Goodwill
 
149,070

 
146,497

Operating lease right-of-use assets
 
369,715

 

Deferred charges and other assets
 
48,929

 
49,891

Total assets
 
$
1,822,040

 
$
1,484,766

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
 
$
27,939

 
$
20,618

Accounts payable
 
27,657

 
35,987

Advanced billings and customer deposits
 
7,914

 
7,919

Accrued compensation
 
6,817

 
9,452

Current operating lease liabilities
 
42,941

 

Accrued liabilities and other
 
14,513

 
14,563

Total current liabilities
 
127,781

 
88,539

Long-term debt, less current maturities, net of unamortized loan fees
 
719,067

 
749,624

Other long-term liabilities:
 
 
 
 
Deferred income taxes
 
128,582

 
127,453

Deferred lease
 

 
22,436

Asset retirement obligations
 
30,779

 
28,584

Retirement plan obligations
 
10,355

 
11,519

Noncurrent operating lease liabilities
 
327,868

 

Other liabilities
 
15,559

 
14,364

Total other long-term liabilities
 
513,143

 
204,356

Shareholders’ equity:
 
 
 
 
Common stock, no par value, authorized 96,000; 49,857 and 49,630 issued and outstanding at June 30, 2019 and December 31, 2018, respectively
 

 

Additional paid in capital
 
47,138

 
47,456

Retained earnings
 
413,571

 
386,511

Accumulated other comprehensive income, net of taxes
 
1,340

 
8,280

Total shareholders’ equity
 
462,049

 
442,247

Total liabilities and shareholders’ equity
 
$
1,822,040

 
$
1,484,766


See accompanying notes to unaudited condensed consolidated financial statements.

3


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Operating revenue:
2019
 
2018
 
2019
 
2018
Service revenue and other
$
142,059

 
$
140,492

 
$
285,290

 
$
277,051

Equipment revenue
16,855

 
16,009

 
32,467

 
33,588

Total operating revenue
158,914

 
156,501

 
317,757

 
310,639

Operating expenses:
 
 
 
 
 
 
 
Cost of services
49,497

 
49,134

 
99,015

 
98,476

Cost of goods sold
15,874

 
15,166

 
30,511

 
30,971

Selling, general and administrative
27,170

 
29,915

 
55,892

 
58,665

Depreciation and amortization
42,353

 
41,117

 
83,532

 
84,604

Total operating expenses
134,894

 
135,332

 
268,950

 
272,716

Operating income
24,020

 
21,169

 
48,807

 
37,923

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(7,522
)
 
(8,851
)
 
(15,476
)
 
(18,183
)
Other
1,176

 
839

 
2,463

 
1,828

Income before income taxes
17,674

 
13,157

 
35,794

 
21,568

Income tax expense
4,524

 
3,531

 
8,734

 
5,359

Net income
13,150

 
9,626

 
27,060

 
16,209

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate hedge, net of tax
(4,212
)
 
833

 
(6,940
)
 
3,895

Comprehensive income
$
8,938

 
$
10,459

 
$
20,120

 
$
20,104

 
 
 
 
 
 
 
 
Net income per share, basic and diluted:
 
 
 
 
 
 
 
Basic net income per share
$
0.26

 
$
0.19

 
$
0.54

 
$
0.33

Diluted net income per share
$
0.26

 
$
0.19

 
$
0.54

 
$
0.32

Weighted average shares outstanding, basic
49,848

 
49,547

 
49,812

 
49,511

Weighted average shares outstanding, diluted
50,142

 
50,070

 
50,118

 
50,029

 
See accompanying notes to unaudited condensed consolidated financial statements.


4


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance, March 31, 2019
 
49,844

 
$
46,641

 
$
400,421

 
$
5,552

 
$
452,614

Net income
 

 

 
13,150

 

 
13,150

Other comprehensive loss, net of tax
 

 

 

 
(4,212
)
 
(4,212
)
Stock based compensation
 
17

 
695

 

 

 
695

Stock options exercised
 
1

 
(94
)
 

 

 
(94
)
Common stock issued
 

 
8

 

 

 
8

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(5
)
 
(112
)
 

 

 
(112
)
Balance, June 30, 2019
 
49,857

 
$
47,138

 
$
413,571

 
$
1,340

 
$
462,049

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance, December 31, 2018
 
49,630

 
$
47,456

 
$
386,511

 
$
8,280

 
$
442,247

Net income
 

 

 
27,060

 

 
27,060

Other comprehensive loss, net of tax
 

 

 

 
(6,940
)
 
(6,940
)
Stock based compensation
 
184

 
2,497

 

 

 
2,497

Stock options exercised
 
29

 
81

 

 

 
81

Common stock issued
 

 
16

 

 

 
16

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(62
)
 
(2,912
)
 

 

 
(2,912
)
Common stock issued to acquire non-controlling interest in nTelos
 
76

 

 

 

 

Balance, June 30, 2019
 
49,857

 
$
47,138

 
$
413,571

 
$
1,340

 
$
462,049

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
Balance, March 31, 2018
 
49,539

 
$
45,075

 
$
359,885

 
$
11,292

 
$
416,252

Net income
 

 

 
9,626

 

 
9,626

Other comprehensive gain, net of tax
 

 

 

 
833

 
833

Stock based compensation
 
28

 
1,370

 

 

 
1,370

Common stock issued
 

 
5

 

 

 
5

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(9
)
 
(278
)
 

 

 
(278
)
Balance, June 30, 2018
 
49,558

 
$
46,172

 
$
369,511

 
$
12,125

 
$
427,808

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
Balance, December 31, 2017
 
49,328

 
$
44,787

 
$
297,205

 
$
8,230

 
$
350,222

Change in Accounting Principle - Adoption of ASU 2014-09
 

 

 
56,097

 

 
56,097

Net income
 

 

 
16,209

 

 
16,209

Other comprehensive gain, net of tax
 

 

 

 
3,895

 
3,895

Stock based compensation
 
205

 
3,407

 

 

 
3,407

Stock options exercised
 
15

 
104

 

 

 
104

Common stock issued
 

 
10

 

 

 
10

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(66
)
 
(2,136
)
 

 

 
(2,136
)
Common stock issued to acquire non-controlling interest in nTelos
 
76

 

 

 

 

Balance, June 30, 2018
 
49,558

 
$
46,172

 
$
369,511

 
$
12,125

 
$
427,808

See accompanying notes to unaudited condensed consolidated financial statements.

5


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
 
(in thousands)
 
 
 
 
 
 
Six Months Ended
June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
27,060

 
$
16,209

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
72,737

 
71,637

Amortization
 
10,795

 
12,967

Accretion of asset retirement obligations
 
708

 
471

Bad debt expense
 
764

 
758

Stock based compensation expense, net of amount capitalized
 
2,307

 
3,407

Deferred income taxes
 
3,434

 
(8,004
)
Net gain from patronage and investments
 
(2,081
)
 
(1,576
)
Amortization of long-term debt issuance costs
 
1,648

 
2,365

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,561
)
 
(11,060
)
Inventory, net
 
(1,301
)
 
(503
)
Current income taxes
 
1,138

 
16,722

Operating lease right-of-use assets
 
25,389

 

Waived management fee
 
19,320

 
18,606

Other assets
 
(8,679
)
 
(968
)
Accounts payable
 
6,311

 
2,486

Lease liabilities
 
(21,880
)
 

Deferred lease
 

 
1,353

Other deferrals and accruals
 
(3,477
)
 
2,274

Net cash provided by operating activities
 
129,632

 
127,144

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(79,124
)
 
(62,322
)
Cash disbursed for acquisitions
 
(10,000
)
 
(52,000
)
Proceeds from sale of assets
 
108

 
447

Other
 
(3
)
 
(3
)
Net cash used in investing activities
 
(89,019
)
 
(113,878
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(24,777
)
 
(24,250
)
Proceeds from revolving credit facility borrowings
 

 
15,000

Principal payments on revolving credit facility
 

 
(15,000
)
Proceeds from exercises of stock options
 
81

 

Taxes paid for equity award issuances
 
(2,912
)
 
(2,032
)
Net cash used in financing activities
 
(27,608
)
 
(26,282
)
Net increase (decrease) in cash and cash equivalents
 
13,005

 
(13,016
)
Cash and cash equivalents, beginning of period
 
85,086

 
78,585

Cash and cash equivalents, end of period
 
$
98,091

 
$
65,569


See accompanying notes to unaudited condensed consolidated financial statements.

6


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 . Basis of Presentation

The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The information contained herein should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 .

Adoption of New Accounting Principles

There have been no developments related to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's unaudited condensed consolidated financial statements and note disclosures, from those disclosed in the Company's 2018 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:

The Company adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), as of January 1, 2019. The Company elected not to reclassify stranded income tax effects from accumulated other comprehensive income (OCI) to retained earnings and has implemented this election as its accounting policy as of January 1, 2019. The Company utilizes the portfolio approach as its policy to release the income tax effects from accumulated OCI as the entire portfolio is liquidated, sold, or extinguished.

The Company adopted ASU No. 2016-02, Leases (“ Topic 842 ” or “ the new lease standard ”) on January 1, 2019. Topic 842 replaces previous leasing guidance with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. Topic 842 requires lessees to recognize most leases on their balance sheet as liabilities, with corresponding right-of-use, or ROU assets. The Company adopted the new lease standard utilizing the modified retrospective approach. As a result, comparable period information has not been retrospectively updated. The modified retrospective approach includes a package of optional practical expedients that we elected to apply. As a result, the Company did not reassess prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard. In those circumstances where the Company is the lessee, we have elected to account for non-lease components associated with our leases (e.g., maintenance costs) and lease components as a single lease component for substantially all of our asset classes under Topic 842. 

Note 2 . Leases

The Company leases various cell sites, warehouses, retail stores, and office facilities for use in our business. These agreements include fixed rental payments as well as variable rental payments, such as those based on relevant inflation indices. The accounting lease term includes optional renewal periods that we are reasonably certain to exercise based on our assessment of relevant contractual and economic factors. The related lease payments are discounted at lease commencement using the Company's incremental borrowing rate in order to measure the lease liability and ROU asset.
The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the observable unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate. Under the new lease standard, leases are remeasured upon the occurrence of certain events or modifications.
Adoption of the new lease standard did not materially impact the Company's consolidated net earnings, cash flows, liquidity, or loan covenants.


7


The cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet for the adoption of the new lease standard were as follows:
(in thousands)
 
December 31, 2018 As Previously Reported
 
Effect of the Adoption of ASC Topic 842 (Leases)
 
January 1, 2019 As Adjusted
Assets
 
 
 
 
 
 
Prepaid expenses and other
 
$
60,162

 
$
(11,580
)
 
$
48,582

Property, plant and equipment, net
 
701,359

 
1,789

 
703,148

Operating lease right-of-use assets
 

 
369,344

 
369,344

Intangible assets, net
 
366,029

 
(13,828
)
 
352,201

Liabilities
 
 
 
 
 
 
Current operating lease liabilities
 

 
38,773

 
38,773

Accrued liabilities and other
 
14,563

 
(412
)
 
14,151

Deferred Lease
 
22,436

 
(22,436
)
 

Noncurrent operating lease liabilities
 

 
328,156

 
328,156

Other liabilities
 
14,364

 
1,644

 
16,008


In addition to recognizing the operating lease liabilities and right-of-use assets, Topic 842 also reclassified prepaid and deferred rent balances, off-market leases, and lease incentives into the right-of-use assets.
The following table shows the components of lease income and costs:
(in thousands)
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Lease income from operating leases - fixed
 
$
2,042

 
$
4,070


 

 

Operating lease expense
 
16,752

 
33,660


 


 


Amortization of finance lease assets
 
123

 
241

Interest on finance lease liabilities
 
23

 
45

Subtotal finance lease cost
 
146

 
286


 


 


Total lease expense
 
$
16,898

 
$
33,946

Substantially all of the Company's sublease income from operating leases relates to fixed lease payments.

All operating lease expenses, including short-term and variable lease expenses, are split between cost of service and selling, general and administrative expense in the condensed consolidated statements of operations based on the use of the facility that the rent is being paid on. Operating lease expense includes variable lease payments and short-term lease expense, both of which are immaterial. Variable lease expenses represent payments that are dependent on a rate or index, or on usage of the asset.

The following table summarizes other information related to operating and finance leases:
(in thousands)
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 


 


Operating cash flows used by leases
 
$
15,873

 
$
30,544

Leased assets obtained in exchange for new operating lease liabilities
 
21,172

 
25,760








8


The following table summarizes the lease terms and discount rates:
 
 
June 30,
2019
Weighted-average remaining lease term (years)
 
 
   Operating leases
 
8

   Finance leases
 
16

Weighted-average discount rate
 
 
   Operating leases
 
4.8
%
   Finance leases
 
5.2
%

The following table summarizes the expected maturity of lease liabilities at June 30, 2019 :
(in thousands)
 
Operating Leases
 
Finance Leases
 
Total
2019
 
$
27,397

 
$
92

 
$
27,489

2020
 
62,536

 
174

 
62,710

2021
 
61,151

 
174

 
61,325

2022
 
58,134

 
174

 
58,308

2023
 
54,491

 
174

 
54,665

2024 and thereafter
 
184,800

 
1,699

 
186,499

   Total lease payments
 
448,509

 
2,487

 
450,996

Less: Interest
 
77,700

 
771

 
78,471

   Present value of lease liabilities
 
$
370,809

 
$
1,716

 
$
372,525


The Company's finance lease liabilities are presented in the accrued liabilities and other and the other liabilities lines of the unaudited condensed consolidated balance sheets. The related finance lease assets are included in the property, plant and equipment line.

Our commitments under leases existing as of December 31, 2018 were approximately $55.1 million for the year ending December 31, 2019, $104.4 million in total for the years ending December 31, 2020 and 2021, $97.6 million in total for the years ending December 31, 2022 and 2023 and $168.5 million in total for years thereafter.

The Company is also the lessor on agreements to lease assets such as collocation space at cell sites and dedicated fiber-optic strands to third parties. These agreements were accounted for as operating leases both before and after adoption of the new lease standard. The new lease standard did not have a significant impact on the recognition of lease revenue associated with these agreements. The following table summarizes the total minimum rental receipts under lease agreements at June 30, 2019 :
(in thousands)
 
Operating Leases
2019
 
$
3,635

2020
 
6,453

2021
 
4,377

2022
 
3,280

2023
 
1,653

2024 and thereafter
 
4,520

   Total lease income
 
$
23,918



Note 3 . Revenue from Contracts with Customers

The Company earns revenue primarily through the sale of its wireless service. Additional revenue is earned from the sale of wireless equipment; from business, residential and enterprise services which provide video, broadband, voice and data services; and from tower and other services. Refer to Note 14, Segment Reporting , for a tabular summary of revenue for the three and six months ended June 30, 2019 .

9



Wireless service
The Company earns revenue primarily through the sale of its wireless service by providing network access to Sprint under the affiliate agreement. Wireless service revenue is variable based on billed revenue to Sprint’s subscribers that originated in the Company's affiliate area, less applicable fees retained by Sprint.

The Company's revenue related to Sprint’s postpaid customers is the amount that Sprint bills its postpaid subscribers, reduced by customer credits, write-offs of receivables, and 8% management and 8.6% service fees. The Company is also charged for the costs of subsidized handsets sold through Sprint’s national channels as well as commissions paid by Sprint to third-party resellers in the Company's service territory.

The Company's revenue related to Sprint’s prepaid customers is the amount that Sprint bills its prepaid subscribers, reduced by costs to acquire and support the customers, based on national averages for Sprint’s prepaid programs, and a 6% management fee.

The Company considers Sprint, rather than Sprint's subscribers, to be the customer and the Company's performance obligation is to provide Sprint a series of continuous network access services within the Sprint Affiliate Area. The Company determined that reimbursements to Sprint including the cost of prepaid handsets and commissions, and postpaid commissions paid by Sprint to third-party resellers, represent consideration payable to a customer. These reimbursements are initially recorded as a contract asset and are subsequently recognized as a reduction of revenue over the expected benefit period between 21 and 53 months. Contract asset balances and activity for 2019 were as follows:
(in millions)
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Beginning balance
 
$
70.4

 
$
65.7

Contract payments
 
17.5

 
35.7

Contract amortization
 
(14.1
)
 
(27.6
)
Ending balance
 
$
73.8

 
$
73.8



Wireless equipment
The Company also earns revenue through the sale of wireless equipment. The Company owns and operates Sprint-branded retail stores within the Sprint Affiliate Area from which the Company sells equipment, primarily wireless handsets, and service to Sprint subscribers. The Company's equipment is predominantly sold to subscribers through Sprint's equipment financing plans. Under the equipment financing plans, Sprint purchases the equipment from the Company and resells the equipment to its subscribers. The Company is the principal in these equipment financing transactions, as it controls and bears the risk of ownership of the inventory prior to sale, and accordingly, revenue and handset costs are recorded on a gross basis, and the corresponding cost of the equipment is recorded separately to cost of goods sold.

Business, residential and enterprise
The Company also earns revenue in the Cable and Wireline segments from the sale of business, residential, and enterprise services to customers where the performance obligations are to provide cable, broadband, and telephone network services, sell and lease equipment and wiring services, and lease fiber-optic cable. The Company's arrangements for residential services are generally composed of contracts that are cancellable at the customer’s discretion without penalty at any time. As there are multiple performance obligations in these arrangements, the Company recognizes revenue based on the standalone selling price of each distinct good or service. The Company generally recognizes this revenue over time as customers simultaneously receive and consume the benefits of the service, with the exception of equipment sales and home wiring which are recognized as revenue at a point in time when control transfers and when installation is complete, respectively.

Installation fees are allocated to services and are recognized ratably over the longer of the contract term or the period the unrecognized portion of the fee remains material to the contract, typically 10 and 11 months for Cable and Wireline customers, respectively. Additionally, the Company incurs commission and installation costs related to in-house employees and third-party vendors which are capitalized and amortized over the expected benefit period which is approximately 44 months and 72 months for Cable and Wireline, respectively.

Tower and Other
The Company also earns revenue from tower and other services. Tower revenue consists primarily of tower collocation space on cell towers owned by the Company accounted for under Topic 842, Leases. Other revenue includes network access-related charges for service provided to customers across the segments.


10



Future performance obligations
On June 30, 2019 , the Company had approximately $3.4 million allocated to unsatisfied performance obligations, which excludes contracts with original expected duration of one year or less. The following table summarizes the approximate amounts expected to be recognized as revenue after June 30, 2019 .
 
 
Amount Expected to be Recognized as Revenue:
(in millions)
 
 
2019
 
$
0.4

2020
 
0.7

2021
 
0.7

2022 and thereafter
 
1.6

Total
 
$
3.4



Contract acquisition costs and costs to fulfill contracts
Capitalized contract costs represent contract fulfillment costs and contract acquisition costs which include commissions and installation costs in our Cable and Wireline segments. Capitalized contract costs are amortized on a straight-line basis over the average customer life. The Company elected to apply the practical expedient to expense contract acquisition costs when incurred, if the amortization period would be twelve months or less. The amortization of these costs is included in cost of services, and selling, general and administrative expenses. Amortized and capitalized costs for Cable and Wireline contracts were as follows:

(in millions)
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Beginning Balance
 
$
10.4

 
$
10.1

Contract payments
 
1.5

 
3.2

Contract amortization
 
(1.4
)
 
(2.8
)
Ending Balance
 
$
10.5

 
$
10.5



Note 4 . Acquisitions

Big Sandy

On February 28, 2019, the Company completed its preliminary valuation for the acquisition of the assets of Big Sandy Broadband, Inc. ("Big Sandy") for $10 million and recorded $4.6 million of property, plant and equipment; $2.8 million of subscriber relationships; and $2.6 million of goodwill which is reported in the Cable segment and was accounted for as a business combination under ASC 805, Business Combinations . The estimated remaining useful lives of the acquired property, plant and equipment were approximately 2.5 years to 12.5 years and the estimated useful lives for subscriber relationships were 7 years at the time of the acquisition. Big Sandy was a provider of cable television, telephone and high speed internet services. Our preliminary allocation of the acquisition price is based on our preliminary estimate of fair value for each of the acquired assets and liabilities. These estimates may be revised during the one year measurement period provided by the authoritative guidance applicable to business combinations.

Note 5. Customer Concentration

Significant Contractual Relationship

In 1999, the Company executed a Management Agreement (the “Agreement”) with Sprint whereby the Company committed to construct and operate a PCS network using CDMA air interface technology. The Agreement has been amended numerous times. Under the amended Agreement, the Company is the exclusive PCS Affiliate of Sprint providing wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz spectrum ranges in its territory across a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio. Effective February 1, 2018, the Company amended its Agreement with Sprint to expand its wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia.


11


As an exclusive PCS Affiliate of Sprint, the Company has the exclusive right to build, own and maintain its portion of Sprint’s nationwide PCS network, in the aforementioned areas, to Sprint’s specifications. The initial term of the Agreement extends through November  2029 , with two successive  10 -year renewal periods, unless terminated by either party under provisions outlined in the Agreement. Upon non-renewal by either party, the Company may cause Sprint to buy or Sprint may cause the Company to sell the business, at  90%  of Entire Business Value ("EBV") as defined in the Agreement. EBV is defined as i) the fair market value of a going concern paid by a willing buyer to a willing seller; ii) valued as if the business will continue to utilize existing brands and operate under existing agreements; and, iii) valued as if Shentel has continued access to the spectrum. Determination of EBV is made by an independent appraisal process.

Note 6. Earnings Per Share ("EPS")

Basic EPS was computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS was computed under the treasury stock method by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include unvested equity awards that are expected to vest and shares that the Company is contractually obligated to issue in the future.

The following table indicates the computation of basic and diluted earnings per share:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands, except per share amounts)
 
2019
 
2018
 
2019
 
2018
Calculation of net income per share:
 
 
 
 
 
 
 
 
Net income
 
$
13,150

 
$
9,626

 
$
27,060

 
$
16,209

Basic weighted average shares outstanding
 
49,848

 
49,547

 
49,812

 
49,511

Basic net income per share
 
$
0.26

 
$
0.19

 
$
0.54

 
$
0.33

 
 
 
 
 
 
 
 
 
Effect of stock options outstanding:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
49,848

 
49,547

 
49,812

 
49,511

Effect from dilutive shares and options outstanding
 
294

 
523

 
306

 
518

Diluted weighted average shares outstanding
 
50,142

 
50,070

 
50,118

 
50,029

Diluted net income per share
 
$
0.26

 
$
0.19

 
$
0.54

 
$
0.32



The computation of diluted EPS does not include certain unvested awards, on a weighted average basis, because their inclusion would have an anti-dilutive effect on EPS. The awards excluded because of their anti-dilutive effect were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive
 
85

 
23

 
108

 
115


 

12


Note 7 Investments

Investments consist of the following:
(in thousands)
June 30,
2019
 
December 31,
2018
Domestic equity funds
$
1,690

 
$
1,409

International equity funds
417

 
370

Total investments carried at fair value
2,107

 
1,779

 
 
 
 
CoBank
8,147

 
7,705

Equity in other telecommunications partners
777

 
782

Total investments carried at cost
8,924

 
8,487

 
 
 
 
Other
532

 
522

Total equity method investments
532

 
522

 
 
 
 
Total investments
$
11,563

 
$
10,788



The Company determines classification for investments at the date individual investments are acquired. The appropriateness of such classification is periodically reassessed. The Company monitors the value of all investments, and based on factors such as market conditions, financial information and industry conditions, the Company reflects impairments in values when warranted. The domestic and international equity funds are carried at their fair value as determined by using the net asset value expedient.

Note 8. Property, Plant and Equipment

Property, plant and equipment consisted of the following:
(in thousands)
 
Estimated Useful Lives
 
June 30,
2019
 
December 31, 2018
Land
 
 
 
$
6,936

 
$
6,723

Buildings and structures
 
10 - 40 years
 
227,825

 
213,657

Cable and fiber
 
4 - 40 years
 
319,750

 
309,928

Equipment and software
 
2 - 17 years
 
813,393

 
791,401

Plant in service
 
 
 
1,367,904

 
1,321,709

Plant under construction
 
 
 
81,191

 
81,409

Total property, plant and equipment
 
 
 
1,449,095

 
1,403,118

Less: accumulated amortization and depreciation
 
 
 
753,370

 
701,759

Property, plant and equipment, net
 
 
 
$
695,725

 
$
701,359


Note 9. Goodwill and Other Intangible Assets

Goodwill by segment consisted of the following:
(in thousands)
June 30,
2019
 
December 31, 2018
Wireless
$
146,383

 
$
146,383

Cable
2,677

 
104

Wireline
10

 
10

Total Goodwill
$
149,070

 
$
146,497







13


Intangible assets consisted of the following:
 
June 30, 2019
 
December 31, 2018
(in thousands)
Gross
Carrying
Amount
 
Accumulated Amortization and Other
 
Net
 
Gross
Carrying
Amount
 
Accumulated Amortization and Other
 
Net
Non-amortizing intangibles:
 
 
 
 
 
 
 
 
 
 
 
Cable franchise rights
$
64,334

 
$

 
$
64,334

 
$
64,334

 
$

 
$
64,334

Railroad crossing rights
141

 

 
141

 
141

 

 
141

Total non-amortizing intangibles
64,475

 

 
64,475

 
64,475

 

 
64,475

 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangibles:
Sprint affiliate contract expansion - Wireless
455,305

 
(197,783
)
 
257,522

 
455,305

 
(167,830
)
 
287,475

Favorable leases - Wireless

 

 

 
15,743

 
(1,919
)
 
13,824

Acquired subscribers - Cable
28,065

 
(25,399
)
 
2,666

 
25,265

 
(25,250
)
 
15

Other intangibles
463

 
(236
)
 
227

 
463

 
(223
)
 
240

Total finite-lived intangibles
483,833

 
(223,418
)
 
260,415

 
496,776

 
(195,222
)
 
301,554

Total intangible assets
$
548,308

 
$
(223,418
)
 
$
324,890

 
$
561,251

 
$
(195,222
)
 
$
366,029



Affiliate contract expansion is amortized over the expected benefit period and is further reduced by the amount of waived management fees received from Sprint which were $9.7 million and $19.3 million for the three and six months ended June 30, 2019 , respectively. Since May 6, 2016, the date of the non-monetary exchange, waived management fees received from Sprint have totaled $117.7 million , and we expect to collect another $137.9 million through 2022.

Note 10 Derivatives and Hedging

The Company uses derivative financial instruments to manage its exposure to interest rate risk for its long-term variable-rate debt through interest rate swaps. The Company's interest rate swaps are all designated as cash flow hedges, and involve the receipt of variable-rate amounts from counterparties in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The outstanding notional amounts of the cash flow hedge which is composed of interest rate swap contracts were $361.9 million  and $384.0 million  as of  June 30, 2019 and December 31, 2018 , respectively.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the condensed consolidated balance sheets. The fair value of these instruments was estimated using an income approach and observable market inputs (Level II):
(in thousands)
 
June 30,
2019
 
December 31,
2018
Balance sheet location of derivative financial instruments:
 
 
 
 
Prepaid expenses and other
 
$
2,275

 
$
4,930

Deferred charges and other assets, net
 
1,733

 
8,323

Total derivatives designated as hedging instruments
 
$
4,008

 
$
13,253














14


The table below summarizes changes in accumulated other comprehensive income (loss) by component:
 
Six Months Ended June 30, 2019
(in thousands)
Gains (Losses) on
Cash Flow
Hedges
 
Income Tax
(Expense)
Benefit
 
Accumulated
Other
Comprehensive
Income (Loss), net of taxes
Balance as of December 31, 2018
$
13,253

 
$
(4,973
)
 
$
8,280

Net change in unrealized gain (loss)
(6,771
)
 
1,688

 
(5,083
)
Amounts reclassified from accumulated other comprehensive income to interest expense
(2,474
)
 
617

 
(1,857
)
Net current period other comprehensive income (loss)
(9,245
)
 
2,305

 
(6,940
)
Balance as of June 30, 2019
$
4,008

 
$
(2,668
)
 
$
1,340



Note 11. Other Assets and Accrued Liabilities

Prepaid expenses and other, classified as current assets, included the following:
(in thousands)
 
June 30,
2019
 
December 31, 2018
Prepaid rent
 
$

 
$
11,245

Prepaid maintenance expenses
 
3,499

 
3,981

Interest rate swaps
 
2,275

 
4,930

Contract asset
 
43,879

 
37,957

Other
 
4,133

 
2,049

Prepaid expenses and other
 
$
53,786

 
$
60,162



Deferred charges and other assets, classified as long-term assets, included the following:
(in thousands)
 
June 30,
2019
 
December 31, 2018
Interest rate swaps
 
$
1,733

 
$
8,323

Contract asset
 
40,438

 
37,848

Other
 
6,758

 
3,720

Deferred charges and other assets
 
$
48,929

 
$
49,891



Accrued liabilities and other, classified as current liabilities, included the following:
(in thousands)
 
June 30,
2019
 
December 31, 2018
Sales and property taxes payable
 
$
5,171

 
$
4,281

Asset retirement obligations
 
478

 
582

Accrued programming costs
 
3,021

 
2,886

Financing leases
 
88

 

Other current liabilities
 
5,755

 
6,814

Accrued liabilities and other
 
$
14,513

 
$
14,563










15


Other liabilities, classified as long-term liabilities, included the following:
(in thousands)
 
June 30,
2019
 
December 31, 2018
Noncurrent portion of deferred lease revenue
 
$
12,327

 
$
12,593

Noncurrent portion of financing leases
 
1,629

 

Other
 
1,603

 
1,771

Other liabilities
 
$
15,559

 
$
14,364



Topic 842 requires the Company to include fixed payments for maintenance activities in its measurement of lease liabilities since the Company elected not to separate lease and non-lease components. Liabilities for the Company's financing leases were established with the adoption of Topic 842, as of January 1, 2019, to reflect the present value of fixed payments for maintenance activities. Refer to Note 2, Leases , for additional information.

Note 12 . Long-Term Debt

Total debt consisted of the following:
(in thousands)
 
June 30,
2019
 
December 31, 2018
Term loan A-1
 
$
274,919

 
$
287,699

Term loan A-2
 
485,540

 
497,537

 
 
760,459

 
785,236

Less: unamortized loan fees
 
13,453

 
14,994

Total debt, net of unamortized loan fees
 
$
747,006

 
$
770,242

 
 
 
 
 
Current maturities of long-term debt, net of current unamortized loan fees
 
$
27,939

 
$
20,618

Long-term debt, less current maturities, net of unamortized loan fees
 
$
719,067

 
$
749,624



As of June 30, 2019 , the Company's indebtedness totaled approximately $747.0 million , net of unamortized loan fees of $13.5 million , with an annualized overall weighted average interest rate of approximately 3.79% . As of June 30, 2019 , the Term Loan A-1 bears interest at one-month London Interbank Offered Rate ("LIBOR") plus a base rate of 1.75% , while the Term Loan A-2 bears interest at one-month LIBOR plus a base rate of 2.00% . LIBOR resets monthly.

The amended Term Loan A-1 requires quarterly principal repayments of $3.6 million , which began on December 31, 2018 and continue through September 30, 2019, increasing to $7.3 million quarterly from December 31, 2019 through September 30, 2022; then increasing to $10.9 million quarterly from December 31, 2022 through September 30, 2023, with the remaining balance due November 8, 2023. The amended Term Loan A-2 requires quarterly principal repayments of $1.2 million which began on December 31, 2018 and continue through September 30, 2025 , with the remaining balance due November 8, 2025 . In addition to its required quarterly repayments, the Company paid an additional $15.0 million in the first quarter of 2019 with no prepayment penalties.

The Company paid cash for interest, net of amounts capitalized, of $14.5 million and $16.9 million during the six months ended June 30, 2019 and 2018 , respectively.

As shown below, as of June 30, 2019 , the Company was in compliance with the covenants in its credit agreement.
 
 
 
Actual
 
Covenant Requirement
Total leverage ratio
 
2.41

 
3.50 or Lower
Debt service coverage ratio
 
4.61

 
2.00 or Higher
Minimum liquidity balance (in millions)
 
$
172.9

 
$25.0 or Higher



16


Note 13. Income Taxes

The Company files U.S. federal income tax returns and various state income tax returns. The Company is not subject to any state or federal income tax audits as of June 30, 2019 . The Company's returns are generally open to examination from 2015 forward and the net operating losses acquired in the acquisition of nTelos are open to examination from 2002 forward.

The Company’s effective tax rate for the three months ended June 30, 2019  was approximately  25.6% , as compared with approximately  26.8%  for the three months ended June 30, 2018 . The Company’s effective tax rate for the  six months ended June 30, 2019  was approximately  24.4% , which was consistent with approximately  24.8%  for the  six months ended June 30, 2018 . The effective tax rate has fluctuated in recent periods due to share based compensation tax benefits that are recognized as incurred. The Company paid cash income taxes of $4.2 million in the six months ended June 30, 2019 . The Company received cash income tax refunds of $3.4 million in the six months ended June 30, 2018 .

Note 14 . Segment Reporting

The Company's reportable segments, which the Company operates and manages as strategic business units that are organized according to major product and service offerings, include: Wireless, Cable, Wireline and Other. A general description of the products and services offered and the customers served by each of these segments is as follows:
Wireless provides digital wireless service as a Sprint PCS Affiliate to a portion of a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio.  In these areas, we are the exclusive provider of Sprint-branded wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz spectrum bands. 
Cable provides video, broadband and voice services in franchise areas in portions of Virginia, West Virginia, western Maryland, and eastern Kentucky, and leases fiber optic facilities throughout its service area. It does not include video, broadband and voice services provided to customers in Shenandoah County, Virginia.
Wireline provides regulated and unregulated voice services, video, broadband, long distance access services, and leases fiber optic facilities throughout portions of Virginia, West Virginia, Maryland and Pennsylvania.
Other operations are represented by Shenandoah Telecommunications Company, the parent holding company that provides investing and management services to its subsidiaries.

Three Months Ended June 30, 2019  
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
External revenue
 
 
 
 
 
 
 
 
 
 
 
 
Service revenue
 
$
94,350

 
$
30,716

 
$
5,558

 
$

 
$

 
$
130,624

Equipment revenue
 
16,548

 
255

 
52

 

 

 
16,855

Tower revenue
 
1,654

 

 

 

 

 
1,654

Other revenue
 
318

 
2,238

 
7,225

 

 

 
9,781

Total external revenue
 
112,870

 
33,209

 
12,835

 

 

 
158,914

Internal revenue
 
1,270

 
1,481

 
6,692

 

 
(9,443
)
 

Total operating revenue
 
114,140

 
34,690

 
19,527

 

 
(9,443
)
 
158,914

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 
33,563

 
15,701

 
8,979

 

 
(8,746
)
 
49,497

Cost of goods sold
 
15,742

 
112

 
19

 

 
1

 
15,874

Selling, general and administrative
 
10,592

 
5,536

 
1,988

 
9,752

 
(698
)
 
27,170

Depreciation and amortization
 
32,219

 
6,555

 
3,447

 
132

 

 
42,353

Total operating expenses
 
92,116

 
27,904

 
14,433

 
9,884

 
(9,443
)
 
134,894

Operating income (loss)
 
$
22,024

 
$
6,786

 
$
5,094

 
$
(9,884
)
 
$

 
$
24,020








17



Three Months Ended June 30, 2018
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
External revenue
 
 
 
 
 
 
 
 
 
 
 
 
Service revenue
 
$
95,690

 
$
28,748

 
$
5,301

 
$

 
$

 
$
129,739

Equipment revenue
 
15,819

 
144

 
46

 

 

 
16,009

Tower revenue
 
1,636

 

 

 

 

 
1,636

Other revenue
 
364

 
2,122

 
6,631

 

 

 
9,117

Total external revenue
 
113,509

 
31,014

 
11,978

 

 

 
156,501

Internal revenue
 
1,244

 
1,097

 
7,134

 

 
(9,475
)
 

Total operating revenue
 
114,753

 
32,111

 
19,112

 

 
(9,475
)
 
156,501

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 
33,488

 
15,125

 
9,373

 
12

 
(8,864
)
 
49,134

Cost of goods sold
 
15,082

 
63

 
20

 
1

 

 
15,166

Selling, general and administrative
 
12,367

 
4,661

 
1,686

 
11,812

 
(611
)