Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and notes thereto as of and for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the SEC on March 1, 2017. Our results of operations for the three and six months ended June 30, 2017 may not be indicative of our future results.
Overview
Our Business
We are a fully integrated provider of data, video and voice services in 21 Western, Midwestern and Southern states. We provide these broadband services to residential and business customers in more than 750 communities. The markets we serve are primarily non-metropolitan, secondary markets, with 77% of our customers located in seven states: Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma and Texas. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We are the seventh-largest cable system operator in the United States based on customers and revenues in 2016, providing service to 805,483 residential and business customers out of approximately 2.1
million homes passed as of June 30, 2017. Of these customers, 640,337 subscribed to data services, 384,004 subscribed to video services and 138,286 subscribed to voice services.
We generate substantially all of our revenues through five primary products. Ranked by share of our total revenues through the first six months of 2017, they are residential data (43.1%), residential video (35.1%), business services (data, video and voice – 13.3%), residential voice (4.7%) and advertising sales (2.6%). The profit margins, growth rates and capital intensity of our five primary products vary significantly due to competition, product maturity and relative costs.
On May 1, 2017, we completed the acquisition of all of the outstanding equity interests of NewWave, and NewWave became a wholly owned subsidiary of ours. We paid a purchase price of $741.0 million in cash on a debt-free basis and subject to customary post-closing adjustments. See Note 2 of the Notes to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for details on this transaction. Our results of operations for the three and six months ended June 30, 2017 include two months of NewWave operations following the completion of the acquisition.
Prior to 2012, we were focused on growing revenues through subscriber retention and growth in overall primary service units (“PSUs”). Accordingly, our strategies consisted of, among others, offering promotional discounts to new and existing subscribers adding new services and to subscribers purchasing more than one service offering. Since 2012, we have adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. We believe the declining profitability of residential video services is primarily due to competition from other content providers and increasing programming costs and retransmission fees, and the declining revenues from residential voice services is primarily due to the increasing use of wireless voice services in addition to, or instead of, landline voice service. Beginning in 2013, we shifted our focus away from maximizing customer PSUs and towards growing and maintaining our higher margin businesses, namely residential data and business services. Separately, we have also focused on retaining customers with a high expected lifetime value (“LTV”), who are less attracted by discounting, require less support and churn less. This strategy focuses on increasing Adjusted EBITDA, Adjusted EBITDA less capital expenditures and margins (see “
Use of Adjusted EBITDA
” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure).
The trends described above have impacted our four largest product lines in the following ways:
|
●
|
Residential data
. We experienced growth in the number of and revenues from our residential data customers every year since 2013. We expect this growth to continue due to projected increases in the number of potential customers for us to serve, as there are still a number of households in our markets that do not subscribe to data services from any provider. We expect to capture a portion of these customers and anticipate capturing additional market share from existing data subscribers due to our recent upgrades in broadband capacity and our ability to offer higher access speeds than many of our competitors.
|
|
●
|
Residential video
.
Residential video service is a competitive and highly penetrated business. As we focus on the higher-margin businesses of residential data and business services, we are de-emphasizing our residential video business and, as a result, expect residential video revenues to decline in the future.
|
|
●
|
Residential voice
.
We have experienced declines in residential voice customers as a result of homes in the United States deciding to terminate their landline voice service and exclusively use wireless voice service. We believe this trend will continue because of competition from wireless voice service. Revenues from residential voice customers have declined over recent years, and we expect this decline will continue.
|
|
●
|
Business services
. We have experienced significant growth in business data and voice customers and revenues and expect this to continue. We attribute this growth to our strategic focus shift on increasing sales to business customers. More recently, we have expanded our efforts to attract enterprise business customers. Margins in products sold to business customers have remained attractive, and we expect this trend to continue.
|
We continue to experience increased competition, particularly from telephone companies, cable overbuilders, over-the-top (“OTT”) video providers and direct broadcast satellite (“DBS”) television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. We made elevated levels of capital investments between 2012 and 2015 to increase our cable plant capacities and reliability, launch all-digital video services, which has freed up approximately three-fourths of average plant bandwidth for data services, and increase data capacity by moving from four-channel bonding to 32-channel bonding. We expect to continue devoting financial resources to infrastructure improvements, including in the new markets we acquired in the NewWave transaction, because we believe these investments are necessary to remain competitive.
Our goals are to continue to grow residential data and business services and to maintain profit margins to deliver strong Adjusted EBITDA. To achieve these goals, we intend to continue our industrial engineering-driven cost management, remain focused on customers with high LTV and follow through with further planned investments in broadband plant upgrades and new data services offerings for residential and business customers.
Our business is subject to extensive governmental regulation. Such regulation has led to increases in our operational and administrative expenses. In addition, we could be significantly impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative or judicial rulings. In 2015, the FCC used its Title II authority to regulate broadband internet access services through the Open Internet Order (the “Order”). According to the Order, the FCC will forbear from systematic rate regulation of internet access service at the subscriber level, which we believe will permit us to continue to manage data usage efficiently by establishing appropriate rates. However, the Order also imposes on all providers of broadband internet access service, including us, obligations that limit the ways certain types of traffic can be managed. In June 2016, the U.S. Court of Appeals for the D.C. Circuit upheld the Order in its entirety. On May 1, 2017, the U.S. Court of Appeals for the D.C. Circuit denied a petition for an
en banc
rehearing of the June 2016 decision upholding the Order. Parties have been granted until September 28, 2017 to file petitions for
certiorari
with the U.S. Supreme Court. In May 2017, the FCC issued a Notice of Proposed Rulemaking to revise the Open Internet rules previously adopted in the Order, and the FCC is seeking comment on its proposals with reply comments due by August 16, 2017. Congress also has proposed legislation regarding the Open Internet rules. We cannot predict whether or when future changes to the regulatory framework will occur at the FCC, in Congress or in the courts. We also cannot predict whether or to what extent the rules as revised by the FCC, Congress or the courts may affect our operations or impose costs on our business.
Results of Operations
PSUs and Customer Counts by Primary Products
As of June 30, 2017, our total PSUs increased 194,396 year-over-year, with increases in residential data, video and voice PSUs of 119,446, 41,834, and 10,713, respectively, and an increase in business PSUs of 22,403. Our total customer relationships increased 145,540, or 22.1%, year-over-year. The year-over-year increases were primarily attributable to new customers acquired as a result of the NewWave acquisition during the second quarter of 2017 and continued organic growth in our primary focus product lines of residential data and business services.
The following table provides an overview of selected customer data for our cable systems for the time periods specified:
|
|
As of June 30,
|
|
|
Annual Net Gain/(Loss)
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
Residential data PSUs
|
|
|
585,049
|
|
|
|
465,603
|
|
|
|
119,446
|
|
|
|
25.7
|
|
Residential video PSUs
(
1
)
|
|
|
366,816
|
|
|
|
324,982
|
|
|
|
41,834
|
|
|
|
12.9
|
|
Residential voice PSUs
|
|
|
114,519
|
|
|
|
103,806
|
|
|
|
10,713
|
|
|
|
10.3
|
|
Total residential PSUs
|
|
|
1,066,384
|
|
|
|
894,391
|
|
|
|
171,993
|
|
|
|
19.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business data PSUs
(
2
)
|
|
|
55,288
|
|
|
|
42,714
|
|
|
|
12,574
|
|
|
|
29.4
|
|
Business video PSUs
|
|
|
17,188
|
|
|
|
13,992
|
|
|
|
3,196
|
|
|
|
22.8
|
|
Business voice PSUs
(
3
)
|
|
|
23,767
|
|
|
|
17,134
|
|
|
|
6,633
|
|
|
|
38.7
|
|
Total business PSUs
|
|
|
96,243
|
|
|
|
73,840
|
|
|
|
22,403
|
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PSUs
|
|
|
1,162,627
|
|
|
|
968,231
|
|
|
|
194,396
|
|
|
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential customer relationships
|
|
|
741,225
|
|
|
|
610,293
|
|
|
|
130,932
|
|
|
|
21.5
|
|
Total business customer relationships
|
|
|
64,258
|
|
|
|
49,650
|
|
|
|
14,608
|
|
|
|
29.4
|
|
Total customer relationships
|
|
|
805,483
|
|
|
|
659,943
|
|
|
|
145,540
|
|
|
|
22.1
|
|
|
|
|
(1)
|
Residential video PSUs include all basic residential customers who receive video services and may have one or more digital set-top boxes or cable cards deployed. Residential bulk multi-dwelling accounts are included in our video PSUs at the individual unit level.
|
(2)
|
Business data PSUs include commercial accounts that receive data service via a cable modem and commercial accounts that receive broadband service optically via fiber connections.
|
(3)
|
Business voice customers who have multiple voice lines are only counted once in the PSU total.
|
The following table provides an overview of selected customer data for our legacy Cable One cable systems excluding the impact of PSUs and customers attained as a result of the NewWave acquisition for the time periods specified:
|
|
As of June 30,
|
|
|
Annual Net Gain/(Loss)
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
Residential data PSUs
|
|
|
474,815
|
|
|
|
465,603
|
|
|
|
9,212
|
|
|
|
2.0
|
|
Residential video PSUs
(
1
)
|
|
|
284,695
|
|
|
|
324,982
|
|
|
|
(40,287
|
)
|
|
|
(12.4
|
)
|
Residential voice PSUs
|
|
|
92,100
|
|
|
|
103,806
|
|
|
|
(11,706
|
)
|
|
|
(11.3
|
)
|
Total residential PSUs
|
|
|
851,610
|
|
|
|
894,391
|
|
|
|
(42,781
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business data PSUs
(
2
)
|
|
|
46,909
|
|
|
|
42,714
|
|
|
|
4,195
|
|
|
|
9.8
|
|
Business video PSUs
|
|
|
13,295
|
|
|
|
13,992
|
|
|
|
(697
|
)
|
|
|
(5.0
|
)
|
Business voice PSUs
(
3
)
|
|
|
19,156
|
|
|
|
17,134
|
|
|
|
2,022
|
|
|
|
11.8
|
|
Total business PSUs
|
|
|
79,360
|
|
|
|
73,840
|
|
|
|
5,520
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PSUs
|
|
|
930,970
|
|
|
|
968,231
|
|
|
|
(37,261
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential customer relationships
|
|
|
601,883
|
|
|
|
610,293
|
|
|
|
(8,410
|
)
|
|
|
(1.4
|
)
|
Total business customer relationships
|
|
|
53,426
|
|
|
|
49,650
|
|
|
|
3,776
|
|
|
|
7.6
|
|
Total customer relationships
|
|
|
655,309
|
|
|
|
659,943
|
|
|
|
(4,634
|
)
|
|
|
(0.7
|
)
|
|
|
|
(1)
|
Residential video PSUs include all basic residential customers who receive video services and may have one or more digital set-top boxes or cable cards deployed. Residential bulk multi-dwelling accounts are included in our video PSUs at the individual unit level.
|
(2)
|
Business data PSUs include commercial accounts that receive data service via a cable modem and commercial accounts that receive broadband service optically via fiber connections.
|
(3)
|
Business voice customers who have multiple voice lines are only counted once in the PSU total.
|
In recent years, our customer mix has shifted, causing subscribers to move from triple-play packages to single and double-play packages. This is because some residential video customers have defected to DBS and OTT offerings in lieu of video and more households have discontinued landline voice service. In addition, we have focused on selling data-only packages to new customers rather than on cross-selling video to these customers.
Co
mparison of Three Months Ended June 30, 2017 to Three Months Ended June 30, 2016
Revenues
Revenues increased $36.5 million, or 17.8%, due primarily to increases in residential data, residential video and business services revenues of $17.1 million, $10.9 million and $8.1 million, respectively. The increase was the result of the NewWave operations since May 1, 2017 and organic growth in our higher margin product lines of residential data and business services.
Revenues by service offering were as follows for the three months ended June 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 vs. 2016
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Change
|
|
|
Change
|
|
Residential data
|
|
$
|
103,155
|
|
|
|
42.8
|
|
|
$
|
86,031
|
|
|
|
42.1
|
|
|
$
|
17,124
|
|
|
|
19.9
|
|
Residential video
|
|
|
84,873
|
|
|
|
35.2
|
|
|
|
74,016
|
|
|
|
36.2
|
|
|
|
10,857
|
|
|
|
14.7
|
|
Residential voice
|
|
|
11,417
|
|
|
|
4.7
|
|
|
|
10,944
|
|
|
|
5.4
|
|
|
|
473
|
|
|
|
4.3
|
|
Business services
|
|
|
32,543
|
|
|
|
13.5
|
|
|
|
24,491
|
|
|
|
12.0
|
|
|
|
8,052
|
|
|
|
32.9
|
|
Advertising sales
|
|
|
5,970
|
|
|
|
2.5
|
|
|
|
6,616
|
|
|
|
3.2
|
|
|
|
(646
|
)
|
|
|
(9.8
|
)
|
Other
|
|
|
3,084
|
|
|
|
1.3
|
|
|
|
2,459
|
|
|
|
1.1
|
|
|
|
625
|
|
|
|
25.4
|
|
Total revenues
|
|
$
|
241,042
|
|
|
|
100.0
|
|
|
$
|
204,557
|
|
|
|
100.0
|
|
|
$
|
36,485
|
|
|
|
17.8
|
|
Average monthly revenue per unit for the indicated service offerings were as follows for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended June 30,
|
|
|
2017 vs. 2016
|
|
|
|
201
7
|
|
|
201
6
|
|
|
$
Change
|
|
|
% Change
|
|
Residential data
(1)
|
|
$
|
62.52
|
|
|
$
|
61.49
|
|
|
$
|
1.03
|
|
|
|
1.7
|
|
Residential video
(1)
|
|
$
|
82.11
|
|
|
$
|
74.59
|
|
|
$
|
7.52
|
|
|
|
10.1
|
|
Residential voice
(1)
|
|
$
|
35.09
|
|
|
$
|
34.55
|
|
|
$
|
0.54
|
|
|
|
1.6
|
|
Business services
(2)
|
|
$
|
180.38
|
|
|
$
|
166.61
|
|
|
$
|
13.77
|
|
|
|
8.3
|
|
|
|
|
(1)
|
Average monthly per unit values represent the applicable residential service revenues divided by the corresponding average of the number of PSUs at the beginning and end of each period, except that for any new PSUs added as a result of an acquisition occurring during the reporting period, the associated average monthly per unit values represent the applicable residential service revenues divided by the corresponding weighted average of the number of PSUs during such period.
|
(2)
|
Average monthly per unit values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period, except that for any new business customer relationships added as a result of an acquisition occurring during the reporting period, the associated average monthly per unit values represent business services revenues divided by the weighted average of the number of business customer relationships during such period.
|
Revenues by service offering, excluding the impact of revenues related to NewWave, were as follows for the three months ended June 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 vs. 2016
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Change
|
|
|
Change
|
|
Residential data
|
|
$
|
92,413
|
|
|
|
44.2
|
|
|
$
|
86,031
|
|
|
|
42.1
|
|
|
$
|
6,382
|
|
|
|
7.4
|
|
Residential video
|
|
|
70,840
|
|
|
|
33.9
|
|
|
|
74,016
|
|
|
|
36.2
|
|
|
|
(3,176
|
)
|
|
|
(4.3
|
)
|
Residential voice
|
|
|
9,803
|
|
|
|
4.7
|
|
|
|
10,944
|
|
|
|
5.4
|
|
|
|
(1,141
|
)
|
|
|
(10.4
|
)
|
Business services
|
|
|
27,901
|
|
|
|
13.4
|
|
|
|
24,491
|
|
|
|
12.0
|
|
|
|
3,410
|
|
|
|
13.9
|
|
Advertising sales
|
|
|
5,699
|
|
|
|
2.7
|
|
|
|
6,616
|
|
|
|
3.2
|
|
|
|
(917
|
)
|
|
|
(13.9
|
)
|
Other
|
|
|
2,200
|
|
|
|
1.1
|
|
|
|
2,459
|
|
|
|
1.1
|
|
|
|
(259
|
)
|
|
|
(10.5
|
)
|
Total revenues
|
|
$
|
208,856
|
|
|
|
100.0
|
|
|
$
|
204,557
|
|
|
|
100.0
|
|
|
$
|
4,299
|
|
|
|
2.1
|
|
Average monthly revenue per unit, excluding the impact of revenues and customers attained as a result of the NewWave acquisition in the second quarter of 2017 were as follows for the three months ended June 30, 2017 and 2016:
|
|
Three Months Ended June 30,
|
|
|
2017 vs. 2016
|
|
|
|
201
7
|
|
|
201
6
|
|
|
$
Change
|
|
|
% Change
|
|
Residential data
(1)
|
|
$
|
64.70
|
|
|
$
|
61.49
|
|
|
$
|
3.21
|
|
|
|
5.2
|
|
Residential video
(1)
|
|
$
|
81.65
|
|
|
$
|
74.59
|
|
|
$
|
7.06
|
|
|
|
9.5
|
|
Residential voice
(1)
|
|
$
|
34.98
|
|
|
$
|
34.55
|
|
|
$
|
0.43
|
|
|
|
1.2
|
|
Business services
(2)
|
|
$
|
175.69
|
|
|
$
|
166.61
|
|
|
$
|
9.08
|
|
|
|
5.4
|
|
|
|
|
(1)
|
Average monthly per unit values represent the applicable residential service revenues divided by the corresponding average of the number of PSUs at the beginning and end of each period.
|
(2)
|
Average monthly per unit values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period.
|
Residential data service revenues increased $17.1 million, or 19.9%, due primarily to an increase in residential data customers of 25.7% year-over-year as a result of the NewWave operations during the second quarter of 2017 and organic subscriber growth, a reduction in package discounting and increased subscriptions to premium tiers by residential customers.
Residential video service revenues increased $10.9 million, or 14.7%, due primarily to an increase in residential video customers of 12.9% as a result of the NewWave operations during the second quarter of 2017 and a rate adjustment in the first quarter of 2017.
Residential voice service revenues increased $0.5 million, or 4.3%, due primarily to an increase in residential voice customers of 10.3% as a result of the NewWave operations during the second quarter of 2017.
Business services revenues increased $8.1 million, or 32.9%, due primarily to the NewWave operations during the second quarter of 2017, growth in our business data and voice services to small and medium-sized businesses and enterprise customers and a rate adjustment for business video customers in the first quarter of 2017. Total business customer relationships increased 29.4% year-over-year. Overall, business services comprised 13.5% of our total revenues for the second quarter of 2017 compared to 12.0% of our total revenues for the second quarter of 2016.
Advertising sales revenues decreased $0.6 million, or 9.8%, primarily as a result of fewer video customers to be reached by advertising spots.
Other revenues increased $0.6 million, or 25.4%, in the second quarter of 2017.
Operating Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $83.9 million in the second quarter of 2017 and increased $8.2 million, or 10.8%, compared to the second quarter of 2016. Operating expenses as a percentage of revenues were 34.8% for the second quarter of 2017 compared to 37.0% for the year ago quarter. Additional operating expenses attributable to the NewWave operations were $15.9 million for the second quarter of 2017. This increase was partially offset by a $3.9 million decrease in labor costs associated with our change in accounting estimate for capitalized labor costs discussed in Note 1 of the Notes to our Consolidated Financial Statements, a $1.6 million decrease in programming costs resulting from fewer video subscribers, and a decrease in backbone and internet connectivity fees.
Selling, general and administrative expenses increased $7.7 million, or 17.7%, to $51.2 million. Selling, general and administrative expenses as a percentage of revenues were 21.2% and 21.3% for second quarter of 2017 and 2016, respectively. Additional selling, general and administrative expenses attributable to the NewWave operations were $5.0 million for the second quarter of 2017. The remaining increase was due to higher acquisition-related expenses of $2.8 million and severance costs of $1.3 million, partially offset by a $1.2 million decrease in labor costs in the second quarter of 2017 associated with our aforementioned change in accounting estimate for capitalized labor costs.
Depreciation and amortization increased $12.2 million, or 35.2%, including $7.9 million attributable to the NewWave operations. The increase was due primarily to new assets placed in service since the second quarter of 2016, including property, plant and equipment and amortized intangible assets acquired as part of the NewWave acquisition, partially offset by assets that became fully depreciated since the second quarter of 2016. As a percentage of revenues, depreciation and amortization expense was 19.5% for the second quarter of 2017 compared to 17.0% for the second quarter of 2016.
Interest Expense
Interest expense increased $4.2 million, or 56.1%, due primarily to additional debt incurred during the second quarter of 2017 to finance the NewWave acquisition.
Other Income (Expense)
Other expense of $0.3 million in the second quarter of 2017 was primarily attributable to the write-off of $0.6 million of debt issuance costs related to the additional debt incurred to finance the NewWave acquisition, partially offset by interest income. Other income of $0.2 million in the second quarter of 2016 consisted of interest income.
Provision for Income Taxes
Provision for income taxes increased $1.4 million, or 8.5%, due primarily to an increase in income before taxes of $3.4 million. Our effective tax rate was 38.6% and 38.3% for the three months ended June 30, 2017 and 2016, respectively.
Net Income
As a result of the factors described above, our net income was $28.6 million for the second quarter of 2017 compared to $26.6 million for the second quarter of 2016, an increase of 7.3%.
Co
mparison of Six Months Ended June 30, 2017 to Six Months Ended June 30, 2016
Revenues
Revenues increased $41.1 million, or 10.1%, due primarily to increases in residential data, residential video and business services revenues of $23.9 million, $8.5 million and $11.2 million, respectively. The increase was the result of the NewWave operations since May 1, 2017 and organic growth in our higher margin product lines of residential data and business services, partially offset by decreases in residential voice and advertising revenues of $1.0 million and $2.0 million, respectively.
Revenues by service offering were as follows for the six months ended June 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 vs. 2016
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Change
|
|
|
Change
|
|
Residential data
|
|
$
|
193,356
|
|
|
|
43.1
|
|
|
$
|
169,470
|
|
|
|
41.6
|
|
|
$
|
23,886
|
|
|
|
14.1
|
|
Residential video
|
|
|
157,328
|
|
|
|
35.1
|
|
|
|
148,869
|
|
|
|
36.5
|
|
|
|
8,459
|
|
|
|
5.7
|
|
Residential voice
|
|
|
21,284
|
|
|
|
4.7
|
|
|
|
22,258
|
|
|
|
5.5
|
|
|
|
(974
|
)
|
|
|
(4.4
|
)
|
Business services
|
|
|
59,505
|
|
|
|
13.3
|
|
|
|
48,318
|
|
|
|
11.9
|
|
|
|
11,187
|
|
|
|
23.2
|
|
Advertising sales
|
|
|
11,592
|
|
|
|
2.6
|
|
|
|
13,619
|
|
|
|
3.3
|
|
|
|
(2,027
|
)
|
|
|
(14.9
|
)
|
Other
|
|
|
5,404
|
|
|
|
1.2
|
|
|
|
4,828
|
|
|
|
1.2
|
|
|
|
576
|
|
|
|
11.9
|
|
Total revenues
|
|
$
|
448,469
|
|
|
|
100.0
|
|
|
$
|
407,362
|
|
|
|
100.0
|
|
|
$
|
41,107
|
|
|
|
10.1
|
|
Average monthly revenue per unit for the indicated service offerings were as follows for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended June 30,
|
|
|
2017 vs. 2016
|
|
|
|
201
7
|
|
|
201
6
|
|
|
$
Change
|
|
|
% Change
|
|
Residential data
(1)
|
|
$
|
63.33
|
|
|
$
|
60.97
|
|
|
$
|
2.36
|
|
|
|
3.9
|
|
Residential video
(1)
|
|
$
|
81.10
|
|
|
$
|
73.53
|
|
|
$
|
7.57
|
|
|
|
10.3
|
|
Residential voice
(1)
|
|
$
|
34.63
|
|
|
$
|
34.53
|
|
|
$
|
0.10
|
|
|
|
0.3
|
|
Business services
(2)
|
|
$
|
176.87
|
|
|
$
|
165.98
|
|
|
$
|
10.89
|
|
|
|
6.6
|
|
|
|
|
(1)
|
Average monthly per unit values represent the applicable residential service revenues divided by the corresponding average of the number of PSUs at the beginning and end of each period, except that for any new PSUs added as a result of an acquisition occurring during the reporting period, the associated average monthly per unit values represent the applicable residential service revenues divided by the corresponding weighted average of the number of PSUs during such period.
|
(2)
|
Average monthly per unit values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period, except that for any new business customer relationships added as a result of an acquisition occurring during the reporting period, the associated average monthly per unit values represent business services revenues divided by the weighted average of the number of business customer relationships during such period.
|
Revenues by service offering, excluding the impact of revenues related to NewWave, were as follows for the six months ended June 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 vs. 2016
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Change
|
|
|
Change
|
|
Residential data
|
|
$
|
182,614
|
|
|
|
43.9
|
|
|
$
|
169,470
|
|
|
|
41.6
|
|
|
$
|
13,144
|
|
|
|
7.8
|
|
Residential video
|
|
|
143,295
|
|
|
|
34.4
|
|
|
|
148,869
|
|
|
|
36.5
|
|
|
|
(5,574
|
)
|
|
|
(3.7
|
)
|
Residential voice
|
|
|
19,670
|
|
|
|
4.7
|
|
|
|
22,258
|
|
|
|
5.5
|
|
|
|
(2,588
|
)
|
|
|
(11.6
|
)
|
Business services
|
|
|
54,863
|
|
|
|
13.2
|
|
|
|
48,318
|
|
|
|
11.9
|
|
|
|
6,545
|
|
|
|
13.5
|
|
Advertising sales
|
|
|
11,321
|
|
|
|
2.7
|
|
|
|
13,619
|
|
|
|
3.3
|
|
|
|
(2,298
|
)
|
|
|
(16.9
|
)
|
Other
|
|
|
4,520
|
|
|
|
1.1
|
|
|
|
4,828
|
|
|
|
1.2
|
|
|
|
(308
|
)
|
|
|
(6.4
|
)
|
Total revenues
|
|
$
|
416,283
|
|
|
|
100.0
|
|
|
$
|
407,362
|
|
|
|
100.0
|
|
|
$
|
8,921
|
|
|
|
2.2
|
|
Average monthly revenue per unit, excluding the impact of revenues and customers attained as a result of the NewWave acquisition in the second quarter of 2017 were as follows for the six months ended June 30, 2017 and 2016:
|
|
Six Months Ended June 30,
|
|
|
2017 vs. 2016
|
|
|
|
201
7
|
|
|
201
6
|
|
|
$
Change
|
|
|
% Change
|
|
Residential data
(1)
|
|
$
|
64.49
|
|
|
$
|
60.97
|
|
|
$
|
3.52
|
|
|
|
5.8
|
|
Residential video
(1)
|
|
$
|
80.79
|
|
|
$
|
73.53
|
|
|
$
|
7.26
|
|
|
|
9.9
|
|
Residential voice
(1)
|
|
$
|
34.54
|
|
|
$
|
34.53
|
|
|
$
|
0.01
|
|
|
|
-
|
|
Business services
(2)
|
|
$
|
174.25
|
|
|
$
|
165.98
|
|
|
$
|
8.27
|
|
|
|
5.0
|
|
|
|
|
(1)
|
Average monthly per unit values represent the applicable residential service revenues divided by the corresponding average of the number of PSUs at the beginning and end of each period.
|
(2)
|
Average monthly per unit values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period.
|
Residential data service revenues increased $23.9 million, or 14.1%, due primarily to an increase in residential data customers of 25.7% year-over-year as a result of the NewWave operations during the second quarter of 2017 and organic subscriber growth, a reduction in package discounting and increased subscriptions to premium tiers by residential customers.
Residential video service revenues increased $8.5 million, or 5.7%, due primarily to an increase in residential video customers of 12.9% as a result of the NewWave operations during the second quarter of 2017 and a rate adjustment in the first quarter of 2017.
Residential voice service revenues decreased $1.0 million, or 4.4%, due primarily to a decrease in legacy Cable One voice customers, partially offset by increased customers as a result of the NewWave operations during the second quarter of 2017.
Business services revenues increased $11.2 million, or 23.2%, due primarily to the NewWave operations during the second quarter of 2017, growth in our business data and voice services to small and medium-sized businesses and enterprise customers and a rate adjustment for business video customers in the first quarter of 2017. Total business customer relationships increased 29.4% year-over-year. Overall, business services comprised 13.3% of our total revenues for the six months ended June 30, 2017 compared to 11.9% of our total revenues for the six months ended June 30, 2016.
Advertising sales revenues decreased $2.0 million, or 14.9%, primarily as a result of fewer video customers to be reached by advertising spots.
Other revenues increased $0.6 million, or 11.9%.
Operating Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $152.9 million for the six months ended June 30, 2017 and increased $0.8 million, or 0.5%, compared to the year ago period. Operating expenses as a percentage of revenues were 34.1% for the first half of 2017 compared to 37.3% for the first half of 2016. Additional operating expenses attributable to the NewWave operations were $15.9 million for the first half of 2017. This increase was partially offset by an $8.6 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor costs, a $2.8 million decrease in programming costs resulting from fewer video subscribers, a $1.6 million decrease in backbone and internet connectivity fees, and lower group insurance and repairs and maintenance costs.
Selling, general and administrative expenses increased $9.5 million, or 10.9%, to $96.9 million. Selling, general and administrative expenses as a percentage of revenues were 21.6% and 21.4% for the six months ended June 30, 2017 and 2016, respectively. Additional selling, general and administrative expenses attributable to the NewWave operations were $5.0 million for the first half of 2017. The remaining increase was due to increases in legacy Cable One acquisition-related expenses of $4.1 million and severance costs of $2.6 million, partially offset by a $2.4 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor costs.
Depreciation and amortization increased $15.9 million, or 22.9%, including $7.9 million attributable to the NewWave operations. The increase was due primarily to new assets placed in service since the second quarter of 2016, including property, plant and equipment and amortized intangible assets acquired as part of the NewWave acquisition, partially offset by assets that became fully depreciated since the second quarter of 2016. As a percentage of revenues, depreciation and amortization expense was 19.0% for the six months ended June 30, 2017 compared to 17.0% for the six months ended June 30, 2016.
We recognized a net gain on disposal of assets of $5.7 million in the first half of 2017, primarily related to the sale of a portion of a non-operating property that included our previous headquarters building. In the first half of 2016, we recognized a net loss of $0.6 million on disposals of assets.
Interest Expense
Interest expense increased $4.3 million, or 28.4%, due primarily to additional debt incurred during the second quarter of 2017 to finance the NewWave acquisition.
Other Income (Expense)
Other expense of less than $0.1 million for the six months ended June 30, 2017 was primarily attributable to the write-off of $0.6 million of debt issuance costs related to the additional debt incurred to finance the NewWave acquisition, largely offset by interest income. Other income of $0.7 million for the comparable year ago period consisted of interest income and certain tax credits.
Provision for Income Taxes
Provision for income taxes increased $7.9 million, or 26.6%, due primarily to an increase in income before taxes of $16.0 million. Our effective tax rate was 37.9% and 35.7% for the six months ended June 30, 2017 and 2016, respectively. The increase in the effective tax rate primarily relates to $2.2 million of income tax benefits from certain spin-off and state tax items recognized in the first quarter of 2016, which did not recur.
Net Income
As a result of the factors described above, our net income was $61.8 million for the six months ended June 30, 2017 compared to $53.7 million for the six months ended June 30, 2016.
Use of Adjusted EBITDA
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, and not as a substitute for, net income reported in accordance with GAAP. This term, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is reconciled to net income below.
Adjusted EBITDA is defined as net income plus interest expense, provision for income taxes, depreciation and amortization, equity-based compensation expense, severance expense, (gain) loss on deferred compensation, acquisition-related costs, (gain) loss on disposal of assets, other (income) expense, net, and other unusual operating expenses, as provided in the table below. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our business as well as other non-cash or special items and is unaffected by our capital structure or investment activities. This measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. These costs are evaluated through other financial metrics.
We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our outstanding Notes and Senior Credit Facilities to determine compliance with the covenants contained in the Notes and Senior Credit Facilities. For the purpose of calculating compliance with leverage covenants, we use a measure similar to Adjusted EBITDA, as presented. Adjusted EBITDA is also a significant performance measure used by us in our annual incentive compensation program. Adjusted EBITDA does not take into account cash used for mandatory debt service requirements or other non-discretionary expenditures, and thus does not represent residual funds available for discretionary uses.
|
|
Three Months Ended June 30,
|
|
|
2017 vs. 2016
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
Net income
(1)
|
|
$
|
28,576
|
|
|
$
|
26,633
|
|
|
$
|
1,943
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Interest expense
|
|
|
11,782
|
|
|
|
7,549
|
|
|
|
4,233
|
|
|
|
56.1
|
|
Provision for income taxes
|
|
|
17,967
|
|
|
|
16,558
|
|
|
|
1,409
|
|
|
|
8.5
|
|
Depreciation and amortization
|
|
|
46,890
|
|
|
|
34,689
|
|
|
|
12,201
|
|
|
|
35.2
|
|
Equity-based compensation expense
|
|
|
2,418
|
|
|
|
3,420
|
|
|
|
(1,002
|
)
|
|
|
(29.3
|
)
|
Severance expense
|
|
|
1,345
|
|
|
|
-
|
|
|
|
1,345
|
|
|
|
NM
|
|
(Gain) loss on deferred compensation
|
|
|
339
|
|
|
|
100
|
|
|
|
239
|
|
|
|
239.0
|
|
Acquisition-related costs
|
|
|
3,242
|
|
|
|
445
|
|
|
|
2,797
|
|
|
|
NM
|
|
(Gain) loss on disposal of assets
|
|
|
462
|
|
|
|
157
|
|
|
|
305
|
|
|
|
194.3
|
|
Other (income) expense, net
|
|
|
322
|
|
|
|
(183
|
)
|
|
|
505
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(1)
|
|
$
|
113,343
|
|
|
$
|
89,368
|
|
|
$
|
23,975
|
|
|
|
26.8
|
|
|
|
Six Months Ended June 30,
|
|
|
2017 vs. 2016
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
Net income
(1)
|
|
$
|
61,790
|
|
|
$
|
53,677
|
|
|
$
|
8,113
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Interest expense
|
|
|
19,389
|
|
|
|
15,104
|
|
|
|
4,285
|
|
|
|
28.4
|
|
Provision for income taxes
|
|
|
37,787
|
|
|
|
29,852
|
|
|
|
7,935
|
|
|
|
26.6
|
|
Depreciation and amortization
|
|
|
85,295
|
|
|
|
69,382
|
|
|
|
15,913
|
|
|
|
22.9
|
|
Equity-based compensation expense
|
|
|
4,845
|
|
|
|
6,466
|
|
|
|
(1,621
|
)
|
|
|
(25.1
|
)
|
Severance expense
|
|
|
2,599
|
|
|
|
-
|
|
|
|
2,599
|
|
|
|
NM
|
|
(Gain) loss on deferred compensation
|
|
|
429
|
|
|
|
(120
|
)
|
|
|
549
|
|
|
|
NM
|
|
Acquisition-related costs
|
|
|
4,723
|
|
|
|
544
|
|
|
|
4,179
|
|
|
|
NM
|
|
(Gain) loss on disposal of assets
|
|
|
(5,686
|
)
|
|
|
565
|
|
|
|
(6,251
|
)
|
|
|
NM
|
|
Other (income) expense, net
|
|
|
35
|
|
|
|
(693
|
)
|
|
|
728
|
|
|
|
(105.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(1)
|
|
$
|
211,206
|
|
|
$
|
174,777
|
|
|
$
|
36,429
|
|
|
|
20.8
|
|
|
|
NM = Not meaningful.
|
(1)
Net income and Adjusted EBITDA include two months of NewWave operations and the favorable impact of a reduction in expense of $5.1 million and $11.0 million for the three and six months ended June 30, 2017, respectively, due to a change in accounting estimate related to capitalized labor costs. Without the contribution from NewWave operations, net income would have been $26.5 million and $59.7 million and Adjusted EBITDA growth would have been 14.2% and 14.4% for the three and six months ended June 30, 2017, respectively. Excluding both the NewWave impact and the change in estimate related to capitalized labor, net income would have been $23.4 million and $52.9 million and Adjusted EBITDA growth would have been 8.4% and 8.1% for the three and six months ended June 30, 2017, respectively.
|
We believe Adjusted EBITDA is useful to investors in evaluating the operating performance of our company. Adjusted EBITDA and similar measures with similar titles are commonly used by investors, analysts and peers to compare performance in our industry, although our measure of Adjusted EBITDA may not be directly comparable to similar measures reported by other companies.
Financial Condition: Liquidity and Capital Resources
Liquidity
Our primary funding requirements are for our ongoing operations, planned capital expenditures, payments of quarterly dividends and share repurchases. We believe that existing cash balances, our Senior Credit Facilities, as amended, and operating cash flows will provide adequate support for these funding requirements over the next 12 months. However, our ability to fund operations, make planned capital expenditures, pay quarterly dividends and make share repurchases depends on future operating performance and cash flows, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
The following table shows a summary of our cash flows for the periods indicated (dollars in thousands):
|
|
Six Months Ended June 30,
|
|
|
2017 vs. 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
Net cash provided by operating activities
|
|
$
|
130,859
|
|
|
$
|
125,580
|
|
|
$
|
5,279
|
|
|
|
4.2
|
|
Net cash used in investing activities
|
|
|
(795,806
|
)
|
|
|
(75,522
|
)
|
|
|
(720,284
|
)
|
|
|
NM
|
|
Net cash provided by (used in) financing activities
|
|
|
616,700
|
|
|
|
(66,516
|
)
|
|
|
683,216
|
|
|
|
NM
|
|
Change in cash and cash equivalents
|
|
|
(48,247
|
)
|
|
|
(16,458
|
)
|
|
|
(31,789
|
)
|
|
|
193.2
|
|
Cash and cash equivalents, beginning of period
|
|
|
138,040
|
|
|
|
119,199
|
|
|
|
18,841
|
|
|
|
NM
|
|
Cash and cash equivalents, end of period
|
|
$
|
89,793
|
|
|
$
|
102,741
|
|
|
$
|
(12,948
|
)
|
|
|
(12.6
|
)
|
__________
During the first half of 2017, our cash and cash equivalents decreased $48.2 million. At June 30, 2017, we had $89.8 million of cash on hand compared to $138.0 million at December 31, 2016. Our working capital was $30.8 million and $74.8 million at June 30, 2017 and December 31, 2016, respectively.
Net cash provided by operating activities was $130.9 million and $125.6 million for the first half of 2017 and 2016, respectively. The year-over-year change in operating cash flow was primarily attributable to higher net income adjusted for depreciation and amortization, equity-based compensation, deferred taxes and gain on disposal of assets, partially offset by changes in operating assets and liabilities. The change in operating assets and liabilities was due primarily to a change in income taxes receivable and accounts payable and accrued liabilities as a result of the timing of payments compared to the first half of 2016.
Net cash used in investing activities was $795.8 million and $75.5 million for the first half of 2017 and 2016, respectively. The increase was due primarily to the NewWave acquisition during the second quarter of 2017 and increased capital expenditures, partially offset by $10.1 million in proceeds received for the sale of a non-operating property in the first quarter of 2017.
Net cash provided by financing activities was $616.7 million in the first half of 2017 compared to net cash used in financing activities of $66.5 million for the first half of 2016. The change was primarily attributable to new debt incurred in connection with the NewWave acquisition during the second quarter of 2017, partially offset by the payment of debt issuance costs, repayment of the Term Loan and a reduction in share repurchases compared to the comparable prior year period.
On July 1, 2015, the Board authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of our common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through the end of the second quarter of 2017, we have repurchased 165,633 shares at an aggregate cost of $73.1 million. During the first half of 2017, we repurchased 700 shares at an aggregate cost of $0.4 million, of which all occurred during the first quarter. Additionally, we currently expect to continue to pay quarterly cash dividends on shares of our common stock, subject to approval of the Board. During the second quarter of 2017, the Board approved a quarterly dividend of $1.50 per share of common stock, which was paid on June 2, 2017.
Financing Activity
On June 17, 2015, we issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022. The Notes mature on June 15, 2022 and interest is payable on June 15
th
and December 15
th
of each year. The Notes are jointly and severally guaranteed on a senior unsecured basis (the “Guarantees”) by each of our existing and future domestic subsidiaries that guarantee the Senior Credit Facilities (the “Guarantors”). The Notes are unsecured and senior obligations of the Company. The Guarantees are unsecured and senior obligations of the Guarantors. At our option, the Notes may be redeemed in whole or in part, at any time prior to June 15, 2018, at a price equal to 100% of the aggregate principal amount of the Notes plus accrued and unpaid interest, if any, to (but excluding) the redemption date plus a “make-whole” premium. We may also redeem the Notes, in whole or in part, at any time on or after June 15, 2018, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the redemption date. Additionally, at any time prior to June 15, 2018, we may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings at a price equal to 105.75% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to (but excluding) the redemption date. The Indenture includes certain covenants relating to debt incurrence, liens, restricted payments, assets sales and transactions with affiliates, changes in control and mergers or sales of all or substantially all of our assets.
On June 30, 2015, we entered into the Credit Agreement among the Company, as borrower, the lenders party thereto, JPMorgan, as administrative agent, and the other agents party thereto. The Credit Agreement provided for a five-year Revolving Credit Facility in an aggregate principal amount of $200 million and a five-year Term Loan Facility in an aggregate principal amount of $100 million. Concurrently with our entry into the Credit Agreement, we borrowed the full amount of the Term Loan Facility. The obligations under the Original Credit Facilities were obligations of the Company and were guaranteed by our subsidiary, Cable One VoIP LLC (“Cable One VoIP”). The obligations under the Original Credit Facilities were secured, subject to certain exceptions, by substantially all of the assets of the Company and Cable One VoIP.
Borrowings under the Original Credit Facilities bore interest, at our option, at a rate per annum determined by reference to either LIBOR or an adjusted base rate, in each case plus an applicable interest rate margin. The applicable interest rate margin with respect to LIBOR borrowings was a rate per annum between 1.50% and 2.25% and the applicable interest rate margin with respect to adjusted base rate borrowings was a rate per annum between 0.50% and 1.25%, in each case determined on a quarterly basis by reference to a pricing grid based upon our total net leverage ratio. In addition, we are required to pay commitment fees on any unused portion of the Revolving Credit Facility at a rate between 0.25% per annum and 0.40% per annum, determined by reference to the pricing grid.
The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility of $2.8 million at June 30, 2017 were held for the benefit of certain general and liability insurance matters and bore interest at a rate of 1.625% per annum. We had $197.2 million available for borrowing under the Revolving Credit Facility at June 30, 2017.
On May 1, 2017, we entered into the Restatement Agreement with JPMorgan, as administrative agent, and the lenders party thereto, pursuant to which we amended and restated the Credit Agreement and incurred $750 million of New Loans which were used, together with cash on hand, to (i) finance the transactions contemplated by the Merger Agreement, (ii) repay in full the Term Loan and (iii) pay related fees and expenses.
The New Loans consist of (a) a five-year Term Loan A in an aggregate principal amount of $250 million and (b) a seven-year Term Loan B in an aggregate principal amount of $500 million, which are guaranteed by our wholly owned subsidiaries and are secured, subject to certain exceptions, by substantially all assets of our company and the guarantors.
The interest margins applicable to the New Loans under the Amended and Restated Credit Agreement are, at our option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (x) with respect to the Term Loan A, 2.25% to 1.50% for LIBOR loans and 1.25% to 0.50% for base rate loans, determined on a quarterly basis by reference to a pricing grid based on our total net leverage ratio and (y) with respect to the Term Loan B, 2.25% for LIBOR loans and 1.25% for base rate loans. The Term Loan A may be prepaid at any time without premium and amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% for the third year after funding and 10.0% per annum for the fourth and fifth years after funding, with the outstanding balance due upon maturity. The Term Loan B amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum, with the balance due upon maturity. The Term Loan B is subject to a 1.0% prepayment penalty if prepaid within six months of funding, benefits from certain “most favored nation” pricing protections and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement. Other than as set forth above, the New Loans are subject to terms substantially similar to those under the Credit Agreement.
As of June 30, 2017, outstanding borrowings under the Term Loan A and Term Loan B were $250 million and $500 million, and bore interest at a rate of 2.93% per annum and 3.43% per annum, respectively.
In connection with the New Loans, we incurred $15.2 million in debt issuance costs, of which $0.6 million was written off during the quarter ended June 30, 2017. Unamortized debt issuance costs totaled $21.6 million and $8.1 million at June 30, 2017 and December 31, 2016, respectively.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.
We have adopted capital expenditure disclosure guidance as supported by the Internet & Television Association (“NCTA”). These disclosures are not required under GAAP, nor do they impact our accounting for capital expenditures under GAAP. The amounts of capital expenditures reported in this Quarterly Report on Form 10-Q are calculated in accordance with NCTA disclosure guidelines, which include assets acquired during the relevant periods.
The following table presents our major capital expenditure categories in accordance with NCTA disclosure guidelines for the six months ended June 30, 2017 and 2016 (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Customer premise equipment
|
|
$
|
13,941
|
|
|
$
|
12,248
|
|
Commercial
|
|
|
4,347
|
|
|
|
2,909
|
|
Scalable infrastructure
|
|
|
16,872
|
|
|
|
25,163
|
|
Line extensions
|
|
|
6,149
|
|
|
|
4,004
|
|
Upgrade/rebuild
|
|
|
10,239
|
|
|
|
6,459
|
|
Support capital
|
|
|
24,882
|
|
|
|
14,240
|
|
Total
|
|
$
|
76,430
|
|
|
$
|
65,023
|
|
Contractual Obligations and Contingent Commitments
The following is a summary of our contractual obligations remaining as of June 30, 2017 (in thousands):
Years ending December 31,
|
|
Programming
P
urchase
C
ommitments
|
|
|
Operating
L
eases
|
|
|
Total D
ebt
, including
Capital Leases
|
|
|
Other
P
urchase
O
bligations
(
1
)
|
|
|
Total
|
|
2017 (remaining months)
|
|
$
|
108,744
|
|
|
$
|
1,116
|
|
|
$
|
5,633
|
|
|
$
|
12,611
|
|
|
$
|
128,104
|
|
2018
|
|
|
180,550
|
|
|
|
1,761
|
|
|
|
14,392
|
|
|
|
19,204
|
|
|
|
215,907
|
|
2019
|
|
|
131,217
|
|
|
|
1,218
|
|
|
|
20,642
|
|
|
|
12,812
|
|
|
|
165,889
|
|
2020
|
|
|
62,401
|
|
|
|
827
|
|
|
|
26,892
|
|
|
|
6,878
|
|
|
|
96,998
|
|
2021
|
|
|
29,353
|
|
|
|
550
|
|
|
|
30,017
|
|
|
|
5,009
|
|
|
|
64,929
|
|
Thereafter
|
|
|
11
|
|
|
|
1,004
|
|
|
|
1,102,700
|
|
|
|
4,237
|
|
|
|
1,107,952
|
|
Total
|
|
$
|
512,276
|
|
|
$
|
6,476
|
|
|
$
|
1,200,276
|
|
|
$
|
60,751
|
|
|
$
|
1,779,779
|
|
|
|
|
(1)
|
Includes purchase obligations related to capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded from the table above. Any amounts for which we are liable under purchase orders are reflected in our Consolidated Balance Sheet within Accounts payable and accrued liabilities.
|
Programming and content purchases represent contracts that we have with cable television networks and broadcast stations to provide programming services to our subscribers. The amounts included above represent estimates of the future programming costs for these contract requirements and commitments based on tier placement as of June 30, 2017 and estimated subscriber numbers applied to the per-subscriber rates contained in these contracts. Actual amounts due under such contracts may differ from the amounts above based on the actual subscriber numbers and tier placements. In addition, programming purchases sometimes occur pursuant to non-binding commitments, which are not reflected in the summary above.
Total debt relates to principal repayment obligations as defined by the agreements described in the “Financing Activity” section above and for capital leases.
The following items are not included as contractual obligations due to various factors discussed below. However, we incur these costs as part of our operations:
|
●
|
We rent utility poles used in our operations. Generally, pole rentals are cancellable on short notice, but we anticipate that such rentals will recur. Rent expense for pole attachments was $1.9 million and $1.4 million for the three months ended June 30, 2017 and 2016, respectively, and $3.5 million and $2.9 million for the six months ended June 30, 2017 and 2016, respectively.
|
|
●
|
We pay franchise fees under multi-year franchise agreements based on a percentage of revenues generated from video service per year. Franchise fees and other franchise-related costs included in the Consolidated Statements of Operations and Comprehensive Income were $4.0 million and $3.6 million for the three months ended June 30, 2017 and 2016, respectively, and $7.5 million and $7.2 million for the six months ended June 30, 2017 and 2016, respectively.
|
|
●
|
We have cable franchise agreements requiring the construction of cable plant and the provision of services to customers within the franchise areas. In connection with these obligations under existing franchise agreements, we obtain surety bonds or letters of credit guaranteeing performance to municipalities and public utilities and payment of insurance premiums. Such surety bonds and letters of credit as of June 30, 2017 and December 31, 2016 totaled $8.8 million and $5.1 million, respectively. Payments under these arrangements are required only in the event of nonperformance. We do not expect that these contingent commitments will result in any amounts being paid.
|
Off-Balance Sheet Arrangements
With the exception of surety bonds and letters of credit noted above, we do not have any off-balance-sheet arrangements or financing activities with special-purpose entities.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
An accounting policy is considered to be critical if it is important to our results of operations and financial condition and if it requires management’s most difficult, subjective and complex judgments in its application. Except for the change in accounting estimate regarding labor capitalization as discussed in Note 1 of the Notes to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, there have been no material changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K filed with the SEC on March 1, 2017.
Cautionary Statement Regarding Forward-Looking Statements
This document contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the cable industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:
|
●
|
the effect of our acquisition of NewWave on our ability to retain and hire key personnel and to maintain relationships with customers, suppliers and other business partners;
|
|
●
|
the potential diversion of senior management’s attention from our ongoing operations due to the acquisition of NewWave;
|
|
●
|
uncertainties as to our ability and the amount of time necessary to realize the expected synergies and other benefits of the NewWave transaction;
|
|
●
|
our ability to integrate NewWave’s operations into our own in an efficient and effective manner;
|
|
●
|
rising levels of competition from historical and new entrants in our markets;
|
|
●
|
recent and future changes in technology;
|
|
●
|
our ability to continue to grow our business services product;
|
|
●
|
increases in programming costs and retransmission fees;
|
|
●
|
our ability to obtain support from vendors;
|
|
●
|
the effects of any significant acquisitions by us;
|
|
●
|
adverse economic conditions;
|
|
●
|
the integrity and security of our network and information systems;
|
|
●
|
legislative and regulatory efforts to impose new legal requirements on our data services;
|
|
●
|
changing and additional regulation of our data, video and voice services;
|
|
●
|
our ability to renew cable system franchises;
|
|
●
|
increases in pole attachment costs;
|
|
●
|
the failure to meet earnings expectations;
|
|
●
|
the adequacy of our risk management framework;
|
|
●
|
changes in tax and other laws and regulations;
|
|
●
|
changes in GAAP or other applicable accounting policies; and
|
|
●
|
the other risks and uncertainties detailed in the section titled “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 1, 2017.
|
Any forward-looking statements made by us in this document speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.