UNITED STATES

SEC URITIES 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 September 30, 2017

 

or

 

   ☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 1-36863

 


 

Cable One, Inc.  

(Exact name of registrant as specified in its charter)

 


 

 

Delaware

 

13-3060083

(State or Other Jurisdiction of   Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

   

210 E. Earll Drive, Phoenix, Arizona

 

85012

(Address of Principal Executive Offices)

 

(Zip Code)

 

(602) 364-6000

(Registrant ’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

   

 

 

 

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 
   

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

Indicate the number of shares outstanding of each of the issuer ’s classes of common stock as of the latest practicable date:

 

Description of Class

Shares Outstanding as of November 3, 2017

Common Stock, par value $0.01

5,729,380

 

 

CABLE ONE, INC.

FORM 10-Q

  TABLE OF CONTENTS

 

PART I:  FINANCIAL INFORMATION

1

   

Item 1.      Condensed Consolidated Financial Statements

1

   

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

   

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

31

   

Item 4.      Controls and Procedures

31

   

PART II: OTHER INFORMATION

31

   

Item 1.      Legal Proceedings

31

   

Item 1A.   Risk Factors

31

   

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

32

   

Item 3.      Defaults Upon Senior Securities

32

   

Item 4.      Mine Safety Disclosures

32

   

Item 5.      Other Information

32

   

Item 6.      Exhibits

32

   

SIGNATURES

33

 

 

PART I:  FINANCIAL INFORMATION

 

Item 1.      Condensed C onsolidated F inancial S tatements

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except par value and share data)

September 30, 2017

 

December 31, 2016

 

( Unaudited)

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

118,701

 

$

138,040

Accounts receivable, net

 

54,085

 

 

32,526

Income tax receivable

 

18,127

   

4,547

Prepaid assets

 

12,053

 

 

10,824

Total Current Assets

 

202,966

 

 

185,937

Property, plant and equipment, net

 

810,393

 

 

619,621

Intangibles, net

 

968,557

 

 

497,480

Goodwill

 

177,809

 

 

84,928

Other assets

 

5,508

 

 

9,305

Total Assets

$

2,165,233

 

$

1,397,271

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

$

101,310

 

$

82,703

Deferred revenue

 

37,158

 

 

22,190

Long-term debt - current portion

 

12,813

 

 

6,250

Total Current Liabilities

 

151,281

 

 

111,143

Long-term debt

 

1,164,070

 

 

530,886

Deferred income taxes

 

298,324

 

 

276,297

Accrued compensation and o ther liabilities

 

25,934

 

 

24,434

Total Liabilities

 

1,639,609

 

 

942,760

 

 

 

 

 

 

Commitments and contingencies (see Note 12)

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

Preferred stock ($0.01 par value; 4 ,000,000 shares authorized; none issued or outstanding)

 

-

   

-

Common stock ($0.01 par value; 40,000,000 shares authorized; 5,887,899   shares issued; and 5,728,358   and 5,708,223   shares outstanding as of September 30, 2017 and December 31, 2016, respectively)

 

60

 

 

59

Additional paid-in capital

 

25,590

 

 

17,669

Retained earnings

 

577,892

 

 

511,776

Accumulated other comprehensive loss

 

(441)

 

 

(446)

Treasury stock, at cost ( 159,541   and 179,676   shares held as of September 30, 2017 and December 31, 2016, respectively)

 

(77,477)

 

 

(74,547)

Total Stockholders' Equity

 

525,624

 

 

454,511

Total Liabilities and Stockholders' Equity

$

2,165,233

 

$

1,397,271

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in thousands, except per share and share data)

2017

 

2016

 

2017

 

2016

Revenues

$

253,846

 

$

205,536

 

$

702,315

 

$

612,898

Costs and expenses

                     

Operating (excluding depreciation and amortization)

 

91,894

   

75,631

   

245,026

   

227,731

Selling, general and administrative

 

51,968

   

48,807

   

148,695

   

136,182

Depreciation and amortization

 

45,580

   

36,218

   

130,875

   

105,600

(Gain) loss on disposal of assets

 

2,506

   

1,060

   

(3,180)

   

1,625

Total operating costs and expenses  

 

191,948

   

161,716

   

521,416

   

471,138

Income from operations

 

61,898

   

43,820

   

180,899

   

141,760

Interest expense

 

(14,019 )

   

(7,529)

   

(33,408)

   

(22,633)

Other income (expense), net

 

278

   

4,329

   

243

   

5,023

Income before income taxes

 

48,157

   

40,620

   

147,734

   

124,150

Provision for income taxes

 

16,643

   

19,746

   

54,430

   

49,598

Net income

$

31,514

 

$

20,874

 

$

93,304

 

$

74,552

 

                     

Other comprehensive gain (loss), net of tax

 

1

   

28

   

5

   

83

Comprehensive income

$

31,515

 

$

20,902

 

$

93,309

 

$

74,635

                       

Net income per common share:

                     

Basic

$

5.55

 

$

3.65

 

$

16.43

 

$

12.96

Diluted

$

5.48

 

$

3.63

 

$

16.24

 

$

12.91

Weighted ave rage common shares outstanding:

                     

Basic

 

5,680,600

   

5,720,257

   

5,678,485

   

5,753,204

Diluted

 

5,753,910

   

5,755,161

   

5,745,783

   

5,776,504

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

                   

Additional

           

Treasury

   

Accumulated Other

   

Total

   

Common Stock

   

Paid-In

   

Retained

   

Stock,

   

Comprehensive

   

Stockholders

( in thousands, except share data)

 

Shares

   

Amount

   

Capital

   

Earnings

   

at cost

   

Loss

   

Equity

Balance at December 31, 2016

    5,708,223     $ 59     $ 17,669     $ 511,776     $ (74,547 )   $ (446 )   $ 454,511  

Net income

    -       -       -       93,304       -       -       93,304  

Changes in pension, net of tax

    -       -       -       -       -       5       5  

Equity-based compensation

    -       -       7,921       -       -       -       7,921  

Issuance of equity awards, net of forfeitures

    24,292       1       -       -       -       -       1  

Repurchases of common stock

    (700 )     -       -       -       (399 )     -       (399 )

Withholding tax for equity awards

    (3,457 )     -       -       -       (2,531 )     -       (2,531 )

Dividends paid to stockholders

    -       -       -       (27,188 )     -       -       (27,188 )

Balance at September 30, 2017

    5,728,358     $ 60     $ 25,590     $ 577,892     $ (77,477 )   $ (441 )   $ 525,624  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine Months Ended September 30,

(in thousands)

 

2017

   

2016

Cash flows from operating activities:

               

Net income

  $ 93,304     $ 74,552  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    130,875       105,600  

Amortization of debt issuance costs

    2,183       1,233  

Equity-based compensation

    7,921       9,653  

Write-off of debt issuance costs

    613       -  

Gain on sale of cable system

    -       (4,165 )

Deferred income taxes

    11,307       563  

(Gain) loss on disposal of assets

    (3,180 )     1,625  

Changes in operating assets and liabilities:

               

Accounts receivable, net

    (6,532 )     3,737  

Income tax receivable

    (13,580 )     -  

Prepaid assets

    884       (4,292 )

Accounts payable and accrued liabilities

    (6,618 )     6,433  

Deferred revenue

    452       (460 )

Income taxes payable

    -       (2,938 )

Other assets and liabilities, net

    2,159       2,031  

Net cash provided by operating activities

    219,788       193,572  
                 

Cash flows from investing activities:

               

Purchase of business, net of cash acquired

    (727,947 )     -  

Capital expenditures

    (128,830 )     (91,343 )

Change in accrued expenses related to capital expenditures

    1,982       (17,706 )

Proceeds from sale of cable system, net

    -       6,752  

Acquisition of cable system

    -       (760 )

Proceeds from sales of property, plant and equipment

    11,334       377  

Net cash used in investing activities

    (843,461 )     (102,680 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of long-term debt

    750,000       -  

Payment of debt issuance costs

    (15,224 )     -  

Payments on long-term debt

    (97,825 )     (2,512 )

Repurchase s of common stock

    (399 )     (56,141 )

Payment of withholding tax for equity awards

    (2,531 )     -  

Dividends paid to stockholders

    (27,188 )     (25,874 )

Cash overdraft

    (2,499 )     (1,863 )

Net cash provided by (used in) financing activities

    604,334       (86,390 )
                 

Change in cash and cash equivalents

    (19,339 )     4,502  

Cash and cash equivalents, beginning of period

    138,040       119,199  

Cash and cash equivalents, end of period

  $ 118,701     $ 123,701  
                 

Supplemental cash flow disclosures:

               

Cash paid for interest

  $ 20,437     $ 14,781  

Cash paid for income taxes

  $ 57,397     $ 51,372  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

CABLE ONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business. Cable One, Inc. (“Cable One” or the “Company”) owns and operates cable systems that provide data, video and voice services to residential and commercial subscribers in 21 Western, Midwestern and Southern states of the United States of America. Prior to July 1, 2015, Cable One operated as a wholly owned subsidiary of Graham Holdings Company (“GHC”). As of September 30, 2017, Cable One provided service to 637,653 data customers, 370,713 video customers and 135,515 voice customers. On May 1, 2017, Cable One completed the acquisition of all of the outstanding equity interests of RBI Holding LLC (“NewWave”) and NewWave became a wholly owned subsidiary of Cable One. Cable One paid a purchase price of $740.2 million in cash on a debt-free basis and subject to customary post-closing adjustments. See Note 2 for details on this transaction.

 

Unless otherwise stated or the context otherwise indicates, all references in this Quarterly Report on Form 10-Q to “Cable One,” “us,” “our,” “we” or the “Company” refer to Cable One, Inc. and its wholly owned subsidiaries.

 

Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“GAAP”) for interim financial information; and (ii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such rule, certain notes and other financial information normally required by GAAP have been omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations and cash flows as of and for the periods presented herein. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The Company’s interim results of operations may not be indicative of its future results.

 

The December 31, 2016 year-end balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by GAAP.

 

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

 

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company, including its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Segment Reporting. Accounting Standard Codification (“ASC”) 280 - Segment Reporting requires the disclosure of factors used to identify an enterprise’s reportable segments. The Company’s operations are organized and managed on the basis of cable systems within its geographic regions. Each cable system derives revenues from the delivery of similar products and services to a customer base that is also similar. Each cable system deploys similar technology to deliver the Company’s products and services, operates within a similar regulatory environment, has similar economic characteristics and is managed by the Company’s chief operating decision maker as part of an aggregate of all cable systems. Management evaluated the criteria for aggregation under ASC 280 and believes that the Company meets each of the respective criteria set forth therein. Accordingly, management has identified one reportable segment.

 

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates and underlying assumptions.

 

Change in Accounting Estimate. As a result of additional information available from new systems and processes, the Company changed its accounting estimate related to the capitalization of certain internal labor and related costs associated with construction and customer installation activities beginning in the first quarter of 2017. Capitalized labor costs increased $6.2 million in the third quarter of 2017 compared to the third quarter of 2016 and $17.2 million for the nine months ended September 30, 2017 compared to the year ago period primarily as a result of the change in estimate.

 

 

Recently Adopted and Issued Accounting Pronouncements. In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting . ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with Topic 718. The ASU is effective for all entities for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04 , Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes Step 2 of the current goodwill impairment test under ASC 350 and replaces it with a simplified model. Under the simplified model, a goodwill impairment will be calculated as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. The amount of any impairment under the simplified model may differ from what would have been recognized under the two-step test. The ASU is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019, with early adoption permitted. The provisions of ASU 2017-04 would not have affected our last goodwill impairment assessment, but no assurance can be provided that the simplified testing methodology will not affect our goodwill impairment assessment in the future.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business . The purpose of the amendment is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, the amendments in ASU 2017-01 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is evaluating the impact of adopting this guidance on any future transactions.

 

In August 201 6, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) : Classification of Certain Cash Receipts and Cash Payments . The guidance clarifies the way in which certain cash receipts and cash payments should be classified on the statement of cash flows and also how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 is effective for the first quarter of 2018, with early adoption permitted. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. ASU 2016-09 was effective beginning in the first quarter of 2017. The Company will prospectively record a deferred tax benefit or expense associated with the difference between book and tax for equity-based compensation expense, which is expected to result in increased volatility to the Company’s income tax expense. The Company also established an accounting policy election to assume zero forfeitures for stock award grants and account for forfeitures when they occur, which prospectively impacts stock compensation expense. Other aspects of the adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . ASU 2016-02 requires lessees to record most of their leases on the balance sheet, which will be recognized as a right-of-use asset and a lease liability. The Company will be required to classify each separate lease component as an operating or finance lease at the lease commencement date. Initial measurement of the right-of-use asset and lease liability is the same for operating and finance leases, however, expense recognition and amortization of the right-of-use asset differs. Operating leases will reflect lease expense on a straight-line basis similar to current operating leases. The straight-line expense will reflect the interest expense on the lease liability (effective interest method) and amortization of the right-of-use asset, which will be presented as a single line item in the operating expense section of the income statement. Finance leases will reflect a front-loaded expense pattern similar to the pattern for current capital leases. ASU 2016-02 is effective for the first quarter of 2019, with early adoption permitted. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements.

 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 provides new guidance related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also expands the required disclosures to include the disaggregation of revenue from contracts with customers into categories that depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors. During 2016, the FASB issued additional interpretive guidance relating to the standard which covered the topics of principal versus agent considerations and identifying performance obligations and licensing. The standard is effective in the first quarter of 2018. The two permitted transition methods under the standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company has substantially completed the review of its revenue arrangements and has concluded that the majority of its residential customer revenue is not under an extended contract and will be evaluated on a month-to-month basis and, as such, the Company does not anticipate significant changes related to revenue recognition for such customers. However, the Company expects that the standard will impact the timing of recognition of installation revenue related to its business contracts. In addition, the standard requires the deferral of any contract acquisition costs, such as customer incentives, commission payments and discounts. The Company does not currently defer any contract acquisition costs, but will defer these costs in the future, which could have an impact on the timing of operating expense recognition. The Company is currently in the process of evaluating which method of transition will be utilized and identifying and implementing changes to its process, policies and internal controls to meet the standard’s reporting and disclosure requirements.

 

2 .

NEWWAVE ACQUISITION

 

On January 18, 2017, the Company announced that it had entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire NewWave from funds affiliated with GTCR LLC. NewWave was a cable operator providing data, video and voice services to residential and business customers throughout non-urban areas of Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas. Cable One and NewWave shared similar strategies, customer demographics, and products. Accordingly, the acquisition of NewWave offers the Company opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies. The Company paid a purchase price of $740.2 million in cash and completed the transaction on May 1, 2017. See Note 6 for details regarding the financing of the acquisition.

 

The Company accounted for the NewWave acquisition as a business combination pursuant to ASC 805 - Business Combinations . Accordingly, acquisition costs are not included as components of consideration transferred, and instead are accounted for as expenses in the period in which the costs are incurred. During the three and nine months ended September 30, 2017, the Company incurred acquisition-related costs of $0.6 million and $5.3 million, respectively, which are included in Selling, general and administrative expenses within the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income.

 

In accordance with ASC 805, the Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The adjustments described below were developed based on management's assumptions and estimates, including assumptions relating to the consideration paid and the allocation thereof to the assets acquired and liabilities assumed from NewWave based on preliminary estimates of fair value. The preliminary estimates of the fair values of consideration transferred and assets acquired and liabilities assumed are based on the information that was available as of the acquisition date. The Company believes that the information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The preliminary measurements of fair value set forth herein are subject to change and such changes could be material. During the third quarter of 2017, the Company recorded a $0.9 million increase to Prepaid assets, a $1.2 million increase to Accounts payable and accrued liabilities and a $0.8 million reduction in purchase price consideration, resulting in a net decrease to recognized goodwill of $0.6 million. The Company expects to finalize the valuation as soon as practicable but no later than one year from the acquisition date. The following table summarizes the provisional allocation of the purchase price consideration as of the acquisition date (in thousands):

 

 

 

Provisional

Allocation

Assets

   

Cash and cash equivalents

  $ 12,220

Accounts receivable

    15,027

Prepaid assets

    2,113

Property, plant and equipment

    192,234

Intangible s

    476,300

Other assets

    370

Total

    698,264
       

Liabilities

     

Accounts payable and accrued liabilities

    25,742

Deferred revenue

    14,516

Deferred income taxes

    10,720

Total

    50,978
       

Net assets acquired

    647,286

Purchase price consideration

    740,166

Goodwill recognized

  $ 92,880

 

 

Acquired intangible assets consist of the following (dollars in thousands):

 

   

Provisional

Estimated

F air Value

   

Provisional Estimated Weighted Average

Useful Life (in years)

Franchise agreements

  $ 320,000    

Indefinite

Customer relationships

  $ 155,000       14

Trademark and trade name

  $ 1,300       1

 

The total weighted average amortization period for the acquired intangibles is 13.9 years.

 

The acquisition produced $ 92.9 million of goodwill, increasing the Company’s goodwill balance to $177.8 million. Goodwill represents the excess of the purchase price consideration over the fair value of the underlying net assets acquired and largely results from expected future synergies from combining operations as well as an assembled workforce, which does not qualify for separate recognition. As an indefinite-lived asset, goodwill is not amortized but rather is subject to impairment testing on at least an annual basis. Goodwill arising from the NewWave acquisition is deductible for tax purposes.

 

T he Company recognized revenues of $47.5 million and $79.7 million and net income of $2.8 million and $4.9 million for the three and nine months ended September 30, 2017, respectively, relating to the NewWave operations, which included charges for the amortization of acquired intangible assets of $3.1 million and $5.2 million, respectively.

 

The following unaudited pro forma condensed combined results of operations for the three and nine months ended September 30, 2017 and 2016 have been prepared as if the acquisition of NewWave had occurred on January 1, 2016 and include adjustments for depreciation expense, amortization of intangibles, interest expense from financing, non-recurring acquisition-related costs and the related aggregate impact on the provision for income taxes (in thousands, except per share data):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

   

2017

   

2016

   

2017

   

2016

Revenues

  $ 253,846     $ 250,644     $ 766,231     $ 747,593

Net income

  $ 31,514     $ 18,558     $ 95,326     $ 66,028

Net income per common share:

                             

Basic

  $ 5.55     $ 3.24     $ 16.79     $ 11.48

Diluted

  $ 5.48     $ 3.22     $ 16.59     $ 11.43

 

The unaudited pro forma condensed combined results of operations is provided for informational purposes only and is not necessarily indicative of or intended to represent the results that would have been achieved had the NewWave acquisition been consummated as of January 1, 2016 or the results that may be achieved in the future.

 

 

3 .

REVENUES

 

The Company ’s revenues by product line were as follows (in thousands):   

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

   

2017

   

2016

   

2017

   

2016

Residential

                             

Data

  $ 109,340     $ 86,797     $ 302,696     $ 256,267

Video

    88,601       73,841       245,928       222,710

Voice

    11,265       10,475       32,549       32,733

Business services

    35,168       25,406       94,673       73,724

Advertising sales

    5,885       6,460       17,477       20,079

Other

    3,587       2,557       8,992       7,385

Total revenues

  $ 253,846     $ 205,536     $ 702,315     $ 612,898

 

The amount of franchise fees recorded on a gross basis and included in residential video revenues above was $4.1 million and $3.6 million for the three months ended September 30, 2017 and 2016, respectively, and $11.6 million and $10.7 million for the nine months ended September 30, 2017 and 2016, respectively.

 

4 .

PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist ed of the following (in thousands):  

 

   

September 30, 2017

   

December 31, 2016

Cable distribution systems

  $ 1,257,762     $ 1,048,790  

Customer premise equipment

    200,961       181,852  

Other equipment and fixtures

    379,205       359,957  

Buildings and leasehold improvements

    95,359       88,592  

Capitalized software

    88,651       83,815  

Construction in progress

    59,976       64,822  

Land

    11,593       9,612  

Total property, plant and equipment

    2,093,507       1,837,440  

Less accumulated depreciation

    (1,283,114 )     (1,217,819 )

Property, plant and equipment, net

  $ 810,393     $ 619,621  

 

Depreciation expense was $42.5 million and $36.2 million for the three months ended September 30, 2017 and 2016, respectively, and $125.6 million and $105.6 million for the nine months ended September 30, 2017 and 2016, respectively.

 

The Company's previous headquarters building and adjoining property were held for sale at December 31, 2016. In January 2017, the Company sold a portion of this property for $10.1 million in gross proceeds and recognized a related gain of $6.6 million. The remaining property’s carrying value of $4.6 million is included in Other assets in the Condensed Consolidated Balance Sheet as assets held for sale at September 30, 2017.

 

5 .

GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill at September 30, 2017 and December 31, 2016 was $177.8 million and $84.9 million, respectively, with the increase attributable to the NewWave acquisition on May 1, 2017. The Company historically has not recorded any impairment of goodwill.

 

 

Intangible assets (excluding goodwill) consisted of the following (dollars in thousands):   

 

               

September 30, 2017

   

Useful

   

Gross

           

Net

   

Life

   

Carrying

   

Accumulated

   

Carrying

   

Range (years)

   

Amount

   

Amortization

   

Amount

Amortized Intangible Assets

                                 

Cable franchise renewals and access rights

    1 - 25     $ 4,138     $ 3,863     $ 275

Customer relationships

      14       $ 155,000     $ 4,613     $ 150,387

NewWave trademark and trade name

      1       $ 1,300     $ 542     $ 758

Indefinite-Lived Intangible Assets (Excluding Goodwill)

                                 

Franchise agreements

              $ 817,137                

 

 

               

December 31, 2016

   

Useful

   

Gross

           

Net

   

Life

   

Carrying

   

Accumulated

   

Carrying

   

Range (years)

   

Amount

   

Amortization

   

Amount

Amortized Intangible Assets

                                 

Cable franchise renewals and access rights

    1 - 25     $ 4,138     $ 3,794     $ 344

Indefinite-Lived Intangible Assets (Excluding Goodwill)

                                 

Franchise agreements

              $ 497,136                

 

Amortization expense was $3.1 million and less than $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $5.2 million and less than $0.1 million for the nine months ended September 30, 2017 and 2016, respectively.

 

6 .

LONG-TERM DEBT

 

The carrying amount of long-term debt as of September 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

   

September 30, 2017

   

December 31, 2016

Notes

  $ 450,000     $ 450,000  

Senior Credit Facilities

    747,188       95,000  

Capital lease obligation

    271       284  

Total debt

    1,197,459       545,284  

Less unamortized debt issuance costs

    (20,576 )     (8,148 )

Less current portion of long-term debt

    (12,813 )     (6,250 )

Total Long-term debt

  $ 1,164,070     $ 530,886  

 

Senior Unsecured Notes. On June 17, 2015, the Company issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022 (the “Notes”). The Notes mature on June 15, 2022 and interest is payable on June 15 th and December 15 th of each year.

 

The Notes have not been, and will not be, registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state or other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any other applicable securities laws. The Notes were offered in the United States only to persons reasonably believed to be qualified institutional buyers in reliance on the exemption from registration set forth in Rule 144A under the Securities Act and outside the United States to non-U.S. persons in reliance on the exemption from registration set forth in Regulation S under the Securities Act.

 

The Notes were issued pursuant to an indenture (the “Indenture”) dated as of June 17, 2015. The Indenture provides for early redemption of the Notes, at the option of the Company, at the prices and subject to the terms specified in the Indenture. The Indenture includes certain covenants relating to debt incurrence, liens, restricted payments, asset sales and transactions with affiliates, changes in control and mergers or sales of all or substantially all of the Company ’s assets. The Indenture also provides for customary events of default (subject, in certain cases, to customary grace periods).

 

Senior Credit Facilities. On June 30, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the other agents party thereto.  The Credit Agreement provided for a five-year revolving credit facility in an aggregate principal amount of $200 million (the “Revolving Credit Facility”) and a five-year term loan facility in an aggregate principal amount of $100 million (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Original Credit Facilities”). Concurrently with its entry into the Credit Agreement, the Company borrowed the full amount of the Term Loan Facility (the “Term Loan”).

 

Borrowings under the Original Credit Facilities bore interest, at the Company’s option, at a rate per annum determined by reference to either the London Interbank Offered Rate (“LIBOR”) or an adjusted base rate, in each case plus an applicable interest rate margin. The applicable interest rate margin with respect to LIBOR borrowings was a rate per annum between 1.50% and 2.25% and the applicable interest rate margin with respect to adjusted base rate borrowings was a rate per annum between 0.50% and 1.25%, in each case determined on a quarterly basis by reference to a pricing grid based upon the Company’s total net leverage ratio. In addition, the Company is required to pay commitment fees on any unused portion of the Revolving Credit Facility at a rate between 0.25% per annum and 0.40% per annum, determined by reference to the pricing grid.

 

 

The Revolving Credit Facility also gives the Company the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility of $3.1 million at September 30, 2017 were held for the benefit of certain general and liability insurance matters and bore interest at a rate of 1.75% per annum. The Company had $196.9 million available for borrowing under the Revolving Credit Facility at September 30, 2017.

 

On May 1, 2017, the Company entered into a Restatement Agreement (the “Restatement Agreement”) with JPMorgan, as administrative agent, and the lenders party thereto, pursuant to which the Company amended and restated the Credit Agreement (as so amended and restated, the “Amended and Restated Credit Agreement”) and incurred $750 million of senior secured loans (the “New Loans”) which were used, together with cash on hand, to (i) finance the transactions contemplated by the Merger Agreement, (ii) repay in full the Term Loan and (iii) pay related fees and expenses.

 

The New Loans consist of (a) a five-year incremental term “A” loan in an aggregate principal amount of $250 million (the “Term Loan A”) and (b) a seven-year incremental term “B” loan in an aggregate principal amount of $500 million (the “Term Loan B” and, together with the Term Loan A and the Revolving Credit Facility, the “Senior Credit Facilities”), which are guaranteed by the Company’s wholly owned subsidiaries and are secured, subject to certain exceptions, by substantially all assets of the Company and the guarantors.

 

The interest margins applicable to the New Loans under the Amended and Restated Credit Agreement are, at the Company’s option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (x) with respect to the Term Loan A, 2.25% to 1.50% for LIBOR loans and 1.25% to 0.50% for base rate loans, determined on a quarterly basis by reference to a pricing grid based on the Company’s total net leverage ratio and (y) with respect to the Term Loan B, 2.25% for LIBOR loans and 1.25% for base rate loans. The Term Loan A may be prepaid at any time without premium and amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% per annum for the third year after funding and 10.0% per annum for the fourth and fifth years after funding, with the balance due upon maturity. The Term Loan B amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum, with the balance due upon maturity. The Term Loan B is subject to a 1.0% prepayment penalty if prepaid within six months of funding, benefits from certain “most favored nation” pricing protections and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement. Other than as set forth above, the New Loans are subject to terms substantially similar to those under the Credit Agreement.

 

As of September 30, 2017, outstanding borrowings under the Term Loan A and Term Loan B were $248.4 million and $498.8 million, and bore interest at a rate of 3.07% per annum and 3.57% per annum, respectively.

 

In connection with the New Loans, the Company incurred $15.2 million in debt issuance costs, of which $0.6 million was written off during the quarter ended June 30, 2017. Unamortized debt issuance costs totaled $20.6 million and $8.1 million at September 30, 2017 and December 31, 2016, respectively.

 

The Company may, subject to the terms and conditions of the Amended and Restated Credit Agreement, obtain additional credit facilities of up to $425 million under the Amended and Restated Credit Agreement plus an unlimited amount so long as, on a pro forma basis, the Company’s First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is no greater than 1.80 to 1.00. The Amended and Restated Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including limitations on indebtedness, liens, restricted payments, prepayments of certain indebtedness, investments, dispositions of assets, restrictions on subsidiary distributions and negative pledge clauses, fundamental changes, transactions with affiliates and amendments to organizational documents. The Amended and Restated Credit Agreement also requires the Company to maintain specified ratios of total net leverage and first lien net leverage to consolidated operating cash flow. The Amended and Restated Credit Agreement also contains customary events of default, including non-payment of principal, interest, fees or other amounts, material inaccuracy of any representation or warranty, failure to observe or perform any covenant, default in respect of other material debt of the Company and of its restricted subsidiaries, bankruptcy or insolvency, the entry against the Company or any of its restricted subsidiaries of a material judgment, the occurrence of certain ERISA events, impairment of the loan documentation and the occurrence of a change of control. 

 

 

The Company was in compliance with all debt covenants as of September 30, 2017. 

 

As of September 30, 2017, the future maturities of long-term debt were as follows (in thousands): 

 

Years Ending December 31,

 

Amount

2017 (remaining months)

  $ 2,817

2018

    14,392

2019

    20,642

2020

    26,892

2021

    30,017

Thereafter

    1,102,699

Total

  $ 1,197,459

 

7 .

FAIR VALUE MEASUREMENTS

 

The Company ’s deferred compensation liabilities were $19.3 million and $18.2 million at September 30, 2017 and December 31, 2016, respectively. These liabilities are included in Accounts payable and accrued liabilities (for the current portion) and Accrued compensation and other liabilities (for the noncurrent portion) in the Condensed Consolidated Balance Sheets. These liabilities represent the market value of a participant’s balance in a notional investment account that is comprised primarily of mutual funds, which is based on observable market prices. However, since the deferred compensation obligations are not exchanged in an active market, they are classified as Level 2 in the fair value hierarchy. Realized and unrealized gains (losses) on deferred compensation are included in operating income.

 

The carrying amounts and fair values of the Company ’s money market and commercial paper investments and long-term debt (including the current portion) as of September 30, 2017 were as follows (in thousands):

 

   

September 30, 2017

   

Carrying

   

Fair

   

Amount

   

Value

Assets:

             

Money market investments

  $ 25,038     $ 25,038

Commercial paper

  $ 84,879     $ 84,856

Long-term debt, including current portion :

             

Notes

  $ 450,000     $ 471,375

Senior Credit Facilities

  $ 747,188     $ 747,188

 

Money market investments are included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets. Commercial paper investments with original maturities of 90 days or less are also included in Cash and cash equivalents. These investments are primarily held in U.S. Treasury securities and registered money market funds. These investments were valued using a market approach based on the quoted market prices of the money market investments (Level 1) or inputs that include quoted market prices for investments similar to the commercial paper (Level 2). The fair value of the Notes was estimated based on market prices in active markets (Level 2). The fair value of the New Loans was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2). 

 

8 .

TREASURY STOCK

 

Share Repurchase Program. On July 1, 2015, the Company’s board of directors (the “Board”) authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of Company common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through September 30, 2017, the Company had repurchased 165,633 shares at an aggregate cost of $73.1 million. In 2017, the Company repurchased 700 shares at an aggregate cost of $0.4 million, of which all occurred during the first quarter.

 

 

Tax Withholding for Equity Awards . Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements. Shares of common stock with a fair market value equal to the applicable statutory minimum amount of the employee withholding taxes due are withheld by the Company upon vesting of restricted stock and exercises of stock appreciation rights (“SARs”) to pay the applicable statutory minimum amount of employee withholding taxes and are considered common stock repurchases. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The amounts remitted during the three and nine months ended September 30, 2017 were $2.1 million and $2.5 million, for which the Company withheld 2,791 and 3,457 shares of common stock, respectively. Treasury shares of 159,541 held at September 30, 2017 include the aforementioned shares withheld for withholding tax.

 

9 .

EQUITY-BASED COMPENSATION

 

On June 5, 2015, the Board adopted the Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “ Original 2015 Plan”), which became effective July 1, 2015. On May 2, 2017, the Company’s stockholders approved the Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation (the “2015 Plan”), which automatically terminated, replaced and superseded the Original 2015 Plan, except that any outstanding awards granted under the Original 2015 Plan will remain in effect pursuant to their terms. The 2015 Plan is designed to promote the interests of the Company and its stockholders by providing the employees and directors of the Company with incentives and rewards to encourage them to continue in the service of the Company and with a proprietary interest in pursuing the long-term growth, profitability and financial success of the Company. Any of the directors, officers and employees of the Company and its affiliates are eligible to be granted one or more of the following types of awards under the 2015 Plan: (1) incentive stock options, (2) non-qualified stock options, (3) restricted stock awards, (4) SARs, (5) restricted stock units (“RSUs”), (6) cash-based awards, (7) performance-based awards, (8) dividend equivalent rights and (9) other stock-based awards, including, without limitation, performance stock units and deferred stock units. The 2015 Plan includes the authority to grant awards that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended. Unless the 2015 Plan is sooner terminated by the Board, no awards may be granted under the 2015 Plan after May 2, 2027.

 

The 2015 Plan provides that, subject to certain adjustments for specified corporate events, the maximum number of shares of Company common stock that may be issued under the 2015 Plan is 334,870, which is equal to the number of remaining shares of Company common stock available for future issuance under the Original 2015 Plan as of May 2, 2017, regardless of whether such shares were subject to outstanding awards as of such date, and no more than 329,962 shares may be issued pursuant to incentive stock options. At September 30, 2017, 316,549 shares were available for issuance under the 2015 Plan.

 

Restricted Stock Awards. The Company has granted restricted shares of Company common stock subject to service-based and performance-based vesting conditions to employees of the Company. Restricted share awards generally cliff-vest on the three-year anniversary of the grant date or in four equal ratable installments beginning on the first anniversary of the grant date (generally subject to the holder’s continued employment with the Company through the applicable vesting date), except in the case of awards made to individuals (i) whose equity awards issued by GHC were forfeited in connection with the Company’s spin-off (the “spin-off”) from GHC (the “Replacement Shares”), which Replacement Shares vested on December 12, 2016 (with certain exceptions as provided in the applicable award agreement), or (ii) who did not receive an equity award from GHC in 2015 in anticipation of the spin-off (the “Staking Shares”), which Staking Shares are scheduled to cliff-vest on January 2, 2018. Performance-based restricted shares are or were subject to performance metrics related primarily to year-over-year or three-year cumulative growth in Adjusted EBITDA less capital expenditures or year-over-year growth in Adjusted EBITDA and capital expenditures as a percentage of total revenues. Restricted shares are subject to the terms and conditions of the Original 2015 Plan or the 2015 Plan (in the case of awards made on or following May 2, 2017) and are otherwise subject to the terms and conditions of the applicable award agreement.

 

The compensation arrangements for the Company ’s non-employee directors as of September 30, 2017 provided that each non-employee director is entitled to an annual retainer of $75,000 in cash, plus an additional annual cash retainer for each non-employee director who serves as a committee chair or as lead independent director and approximately $125,000 in RSUs.  Such RSUs will generally be granted on the date of the Company’s annual stockholders’ meeting and will vest on the earlier of the first anniversary of the grant date or the annual stockholders’ meeting date immediately following the grant date, subject to the director’s continued service through such vesting date.  Settlement of such RSUs will be in the form of one share of the Company’s common stock and will follow vesting, unless the director has previously elected to defer such settlement until his or her separation from service from the Board. Any dividends associated with RSUs granted prior to the 2017 annual grant of RSUs will be converted into Dividend Equivalent Units (“DEUs”), which will be delivered at the time of settlement of the associated RSUs. Commencing with the 2017 annual grant of RSUs, dividends associated with RSUs will be paid out in cash at the time of settlement. As of September 30, 2017, 3,178 RSUs, including DEUs, were vested and deferred.

 

 

Restricted shares, RSUs and DEUs are collectively referred to as “restricted stock.” A summary of restricted stock activities is as follows:

 

           

Weighted

Average

           

Grant Date

   

Restricted

   

Fair Value

   

Stock

   

Per Share

Outstanding as of December 31, 2016

    38,425     $ 402.21

Granted

    16,821     $ 631.10

G ranted due to performance achievement

    5,006     $ 433.66

Forfeited

    (4,943 )   $ 437.17

Vested

    (3,163 )   $ 415.39

Outstanding as of September 30, 2017

    52,146     $ 473.61
               

Vested and unissued as of September 30, 2017

    3,178     $ 436.37

 

Compensation expense associated with restricted stock is recognized on a straight-line basis over the vesting period. Equity-based compensation expense for restricted stock was $2.2 million and $5.5 million for the three and nine months ended September 30, 2017, respectively.  At September 30, 2017, there was $8.8 million of unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.0 years.

 

Stock Appreciation Rights. The Company has granted SARs to certain executives and other employees of the Company. The SARs are scheduled to vest in four equal ratable installments beginning on the first anniversary of the grant date (generally subject to the holder’s continued employment with the Company through the applicable vesting date). The SARs are subject to the terms and conditions of the Original 2015 Plan or the 2015 Plan (in the case of awards made on or following May 2, 2017) and will otherwise be subject to the terms and conditions of the applicable award agreement.

 

A summary of SAR activity is as follows:

   

Stock Appreciation Rights

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Fair
Value

   

Aggregate Intrinsic

Value

( in thousands )

   

Weighted

Average Remaining Contractual

Term

(in y ears)

Outstanding as of December 31, 2016

    136,000     $ 426.80     $ 88.07     $ 26,510       8.7

Granted

    24,432     $ 632.15     $ 140.44     $ -       9.3

Exercised

    (21,450 )   $ 422.31     $ 87.22                

Forfeited

    (11,652 )   $ 422.31     $ 87.22                

Outstanding as of September 30, 2017

    127,330     $ 467.37     $ 98.34     $ 32,437       8.2
                                       

Vested and exercisable as of September 30, 2017

    39,673     $ 422.61     $ 87.29     $ 11,882       7.9

 

The fair value of the SARs was measured based on the Black-Scholes model. The weighted average inputs used in the model for grants awarded during the nine months ended September 30, 2017 were as follows:  

 

   

2017

Expected volatility

    20.83

%

Risk-free interest rate

    2.13

%

Expected term (in years)

    6.25  

Expected dividend yield

    0.95

%

 

Compensation expense associated with SARs is recognized on a straight-line basis over the vesting period. Equity-based compensation expense for SARs was $0.9 million and $2.4 million for the three and nine months ended September 30, 2017, respectively. At September 30, 2017, there was $8.2 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.5 years.

 

 

Compensation Expense . Total equity-based compensation expense recognized was $3.1 million and $3.2 million for the three months ended September 30, 2017 and 2016, respectively, and $7.9 million and $9.7 million for the nine months ended September 30, 2017 and 2016, respectively, and was included in Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations and Comprehensive Income. The Company recognized an income tax benefit of $2.0 million related to equity-based awards during the nine months ended September 30, 2017. The deferred tax asset related to all outstanding equity-based awards was $6.8 million as of September 30, 2017.  

 

10 .

INCOME TAXES

 

The Company ’s effective tax rate was 34.6% and 48.6% for the three months ended September 30, 2017 and 2016, respectively, and 36.8% and 40.0% for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the effective tax rate for the three months ended September 30, 2017 compared to the same quarter in the prior year primarily relates to $4.1 million of income tax adjustments associated with certain pre-spin-off items and a $0.7 million adjustment associated with a change in a state apportionment calculation recorded in the third quarter of 2016, coupled with $1.7 million of income tax benefits primarily attributable to equity-based awards recorded in the third quarter of 2017. The decrease in the effective tax rate for the nine months ended September 30, 2017 compared to the prior year period primarily relates to a net $2.6 million income tax adjustment mainly associated with certain pre-spin-off items recorded in 2016 and $1.7 million of income tax benefits primarily attributable to equity-based awards recorded throughout 2017.

 

1 1 .

NET INCOME PER SHARE

 

Basic net income per common share is computed by dividing the net income allocable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per share further includes any common shares available to be issued upon vesting or exercise of outstanding equity awards if such inclusion would be dilutive.

 

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except share and per share amounts):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

   

2017

   

2016

   

2017

   

2016

Numerator:

                             

Net income

  $ 31,514     $ 20,874     $ 93,304     $ 74,552

Denominator:

                             

Weighted average common shares outstanding - basic

    5,680,600       5,720,257       5,678,485       5,753,204

Effect of dilutive equity awards (1)

    73,310       34,904       67,298       23,300

Weighted average common shares outstanding - diluted

    5,753,910       5,755,161       5,745,783       5,776,504
                               

Net income per share:

                             

Basic

  $ 5.55     $ 3.65     $ 16.43     $ 12.96

Diluted

  $ 5.48     $ 3.63     $ 16.24     $ 12.91

    


(1)

SARs outstanding that were not included in the diluted net income per share calculation because the effect would have been anti-dilutive were 2,669 and 0 for the three months ended September 30, 2017 and 2016, respectively, and 2,354 and 12,787 for the nine months ended September 30, 2017 and 2016, respectively.

 

1 2 .

COMMITMENTS AND CONTINGENCIES

 

Litigation and Legal Matters.  The Company is subject to complaints and administrative proceedings and is a defendant in various civil lawsuits that have arisen in the ordinary course of its business. Such matters include: contract disputes; actions alleging negligence; invasion of privacy; trademark, copyright and patent infringement; violations of applicable wage and hour laws; statutory or common law claims involving current and former employees; and other matters. Although the outcomes of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows. Also, based on currently available information, management is of the opinion that either future material losses from existing legal proceedings are not reasonably possible or that future material losses in excess of the amounts accrued are not reasonably possible.

 

 

Regulation in the Cable Industry. The operation of a cable system is extensively regulated by the Federal Communications Commission (the “FCC”), some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. The Telecommunications Act of 1996 altered the regulatory structure governing the nation’s communications providers. It removed barriers to competition in both the cable television market and the voice services market. Among other things, it reduced the scope of cable rate regulation and encouraged additional competition in the video programming industry by allowing telephone companies to provide video programming in their own telephone service areas. Future legislative and regulatory changes could adversely affect the Company’s operations.

 

GHC Agreements. On June 16, 2015, the Company entered into several agreements with GHC that set forth the principal actions taken in connection with the spin-off and that govern the relationship of the parties following the spin-off, including a Separation and Distribution Agreement, a Tax Matters Agreement and an Employee Matters Agreement. The aggregate costs and reimbursements paid to GHC totaled less than $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively.

 

 

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited condensed 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 as filed with the SEC on March 1, 2017. Our results of operations for the three and nine months ended September 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 796,110 residential and business customers out of approximately 2.1 million homes passed as of September 30, 2017. Of these customers, 637,653 subscribed to data services, 370,713 subscribed to video services and 135,515 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 nine months of 2017, they are residential data (43.1%), residential video (35.0%), business services (data, video and voice – 13.5%), residential voice (4.6%) and advertising sales (2.5%). 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 $740.2 million in cash on a debt-free basis and subject to customary post-closing adjustments. See Note 2 of the Notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for details on this transaction. Our results of operations for the nine months ended September 30, 2017 include five 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, our ability to offer higher access speeds than many of our competitors and our Wi-Fi support service.

 

 

 

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. In September 2017, several parties, including the American Cable Association and NCTA – the Internet & Television Association (the “NCTA”), filed petitions for certiorari with the U.S. Supreme Court. Responses to the petitions are due in December 2017. In May 2017, the FCC issued a Notice of Proposed Rulemaking to revise the Open Internet rules previously adopted in the Order, and comments were filed by August 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 September 30, 2017, our total PSUs increased 185,717 year-over-year, with increases in residential data, video and voice PSUs of 114,842 , 38,271 , and 10,785 , respectively, and an increase in business PSUs of 21,819 . Our total customer relationships increased 138,022 , or 21.0%, year-over-year. The year-over-year increases were primarily attributable to new customers acquired as a result of the NewWave acquisition.

 

 

The following table provides an overview of selected customer data for our cable systems f or the time periods specified:

 

   

As of September 30,

   

Annual Net Gain/(Loss)

   

2017

   

2016

   

Change

   

% Change

Residential data PSUs

    581,510       466,668       114,842       24.6  

Residential video PSUs (1)

    353,860       315,589       38,271       12.1  

Residential voice PSUs

    111,295       100,510       10,785       10.7  

Total residential PSUs

    1,046,665       882,767       163,898       18.6  
                                 

Business data PSUs (2)

    56,143       43,905       12,238       27.9  

Business video PSUs

    16,853       13,797       3,056       22.1  

Business voice PSUs (3)

    24,220       17,695       6,525       36.9  

Total business PSUs

    97,216       75,397       21,819       28.9  
                                 

Total PSUs

    1,143,881       958,164       185,717       19.4  
                                 

Total residential customer relationships

    731,099       607,399       123,700       20.4  

Total business customer relationships

    65,011       50,689       14,322       28.3  

Total customer relationships

    796,110       658,088       138,022       21.0  

  


(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 September 30,

   

Annual Net Gain/(Loss)

   

2017

   

2016

   

Change

   

% Change

Residential data PSUs

    471,537       466,668       4,869       1.0  

Residential video PSUs (1)

    274,258       315,589       (41,331 )     (13.1 )

Residential voice PSUs

    89,259       100,510       (11,251 )     (11.2 )

Total residential PSUs

    835,054       882,767       (47,713 )     (5.4 )
                                 

Business data PSUs (2)

    47,525       43,905       3,620       8.2  

Business video PSUs

    13,002       13,797       (795 )     (5.8 )

Business voice PSUs (3)

    19,440       17,695       1,745       9.9  

Total business PSUs

    79,967       75,397       4,570       6.1  
                                 

Total PSUs

    915,021       958,164       (43,143 )     (4.5 )
                                 

Total residential customer relationships

    593,388       607,399       (14,011 )     (2.3 )

Total business customer relationships

    53,926       50,689       3,237       6.4  

Total customer relationships

    647,314       658,088       (10,774 )     (1.6 )

 


(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 September 30, 2017 to Three Months Ended September 30, 2016

 

Revenues

 

Revenues increased $48.3 million, or 23.5%, due primarily to increases in residential data, residential video and business services revenues of $22.5 million, $14.8 million and $9.8 million, respectively. The increase was the result of the NewWave operations and organic growth in our higher margin product lines of residential data and business services. Revenues for the third quarter of 2017 were negatively impacted by approximately $1.6 million due to lost revenues from waived service offering charges associated with Hurricane Harvey.

 

Revenues by service offering were as follows for the three months ended September 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 September 30,

                 
   

2017

   

2016

   

2017 vs. 2016

           

% of

           

% of

    $    

%

   

Revenues

   

Revenues

   

Revenues

   

Revenues

   

Change

   

Change

Residential data

  $ 109,340       43.1     $ 86,797       42.2     $ 22,543       26.0  

Residential video

    88,601       34.9       73,841       35.9       14,760       20.0  

Residential voice

    11,265       4.4       10,475       5.1       790       7.5  

Business services

    35,168       13.9       25,406       12.4       9,762       38.4  

Advertising sales

    5,885       2.3       6,460       3.2       (575 )     (8.9 )

Other

    3,587       1.4       2,557       1.2       1,030       40.3  

Total revenues

  $ 253,846       100.0     $ 205,536       100.0     $ 48,310       23.5  

 

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

 

   

Three Months Ended September 30,

   

2017 vs. 2016

   

2017

   

2016

   

$ Change

   

% Change

Residential data (1)

  $ 62.49     $ 62.07     $ 0.42       0.7  

Residential video (1)

  $ 81.96     $ 76.85     $ 5.11       6.6  

Residential voice (1)

  $ 33.26     $ 34.18     $ (0.92 )     (2.7 )

Business services (2)

  $ 181.37     $ 168.80     $ 12.57       7.4  

 


(1)

Average monthly per unit values represent the applicable residential service revenues divided by the corresponding average of the number of PSUs at the be ginning 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 be ginning and end of each period.

 

Revenues by service offering, excluding the impact of revenues related to NewWave, were as follows for the three months ended September 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 September 30,

                 
   

2017

   

2016

   

2017 vs. 2016

           

% of

           

% of

    $    

%

   

Revenues

   

Revenues

   

Revenues

   

Revenues

   

Change

   

Change

Residential data

  $ 93,317       45.2     $ 86,797       42.2     $ 6,520       7.5  

Residential video

    68,260       33.1       73,841       35.9       (5,581 )     (7.6 )

Residential voice

    8,908       4.3       10,475       5.1       (1,567 )     (15.0 )

Business services

    28,103       13.6       25,406       12.4       2,697       10.6  

Advertising sales

    5,496       2.7       6,460       3.2       (964 )     (14.9 )

Other

    2,266       1.1       2,557       1.2       (291 )     (11.4 )

Total revenues

  $ 206,350       100.0     $ 205,536       100.0     $ 814       0.4  

 

 

Average monthly revenue per unit, excluding the impact of revenues and customers attained as a result of the NewWave acquisition, were as follows for the three months ended September 30, 2017 and 2016:

 

   

Three Months Ended September 30,

   

2017 vs. 2016

   

2017

   

2016

   

$ Change

   

% Change

Residential data (1)

  $ 65.74     $ 62.07     $ 3.67       5.9  

Residential video (1)

  $ 81.41     $ 76.85     $ 4.56       5.9  

Residential voice (1)

  $ 32.75     $ 34.18     $ (1.43 )     (4.2 )

Business services (2)

  $ 174.52     $ 168.80     $ 5.72       3.4  

 


(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 $22.5 million, or 26.0%, due primarily to an increase in residential data customers of 24.6% year-over-year as a result of the NewWave operations and organic subscriber growth, a reduction in package discounting and increased subscriptions to premium tiers by residential customers.

 

Residential video service revenues increased $14.8 million, or 20.0%, due primarily to an increase in residential video customers of 12.1% as a result of the NewWave operations and a rate adjustment in the first quarter of 2017.

 

Residential voice service revenues increased $0.8 million, or 7.5%, due primarily to an increase in residential voice customers of 10.7% as a result of the NewWave operations.

 

Business services revenues increased $9.8 million, or 38.4%, due primarily to the NewWave operations, 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 28.3% year-over-year. Overall, business services comprised 13.9% of our total revenues for the third quarter of 2017 compared to 12.4% of our total revenues for the third quarter of 2016.

 

Advertising sales revenues decreased $0.6 million, or 8.9%, due primarily to a decrease in political advertising and fewer video customers to be reached by advertising spots.

 

Other revenues increased $1.0 million, or 40.3%, due primarily to the NewWave operations.

 

Operating Costs and Expenses

 

Operating expenses (excluding depreciation and amortization) were $91.9 million in the third quarter of 2017 and increased $16.3 million, or 21.5%, compared to the third quarter of 2016. Operating expenses as a percentage of revenues were 36.2% for the third quarter of 2017 compared to 36.8% for the year ago quarter. Additional operating expenses attributable to the NewWave operations were $24.2 million for the third quarter of 2017. This increase was partially offset by a $4.8 million decrease in labor costs associated with our change in accounting estimate for capitalized labor discussed in Note 1 of the Notes to our condensed consolidated financial statements, a $0.9 million decrease in backbone and internet connectivity fees, a $0.7 million decrease in programming costs resulting from fewer video subscribers and a $0.7 million decrease in contract labor.

 

Selling, general and administrative expenses increased $3.2 million, or 6.5%, to $52.0 million. Selling, general and administrative expenses as a percentage of revenues were 20.5% and 23.7% for third quarter of 2017 and 2016, respectively. Additional selling, general and administrative expenses attributable to the NewWave operations were $5.9 million for the third quarter of 2017. We also had increases in deferred compensation expenses of $1.1 million and insurance costs of $1.0 million, which were offset by decreases in acquisition-related costs of $2.0 million and marketing costs of $1.3 million, as well as a $1.4 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor.

 

Depreciation and amortization increased $9.4 million, or 25.8%, including $12.2 million attributable to the NewWave operations. The increase was due primarily to new assets placed in service since the third 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 third quarter of 2016. As a percentage of revenues, depreciation and amortization expense was 18.0% for the third quarter of 2017 compared to 17.6% for the third quarter of 2016.

 

 

We recognized a $2.5 million loss on disposal of assets for the third quarter of 2017, including $1.3 million associated with damage caused by Hurricane Harvey, compared to a $1.1 million net loss on disposal of assets for the year ago quarter.

 

Interest Expense

 

Interest expense increased $6.5 million, or 86.2%, due primarily to additional debt incurred to finance the NewWave acquisition.

 

Other Income (Expense)

 

Other income of $0.3 million in the third quarter of 2017 was primarily attributable to interest income. Other income of $4.3 million in the third quarter of 2016 consisted of a net gain on the sale of a cable system and interest income.

 

Provision for Income Taxes

 

Provision for income taxes decreased $3.1 million, or 15.7%. Our effective tax rate was 34.6% and 48.6% for the third quarter of 2017 and 2016, respectively. The decrease in our effective tax rate was due primarily to $4.1 million of income tax adjustments associated with certain pre-spin-off items and a $0.7 million adjustment associated with a change in a state apportionment calculation recorded in the third quarter of 2016, coupled with $1.7 million of income tax benefits primarily attributable to equity-based awards recorded in the third quarter of 2017.

 

Net Income

 

As a result of the factors described above, our net income was $31.5 million for the third quarter of 2017 compared to $20.9 million for the third quarter of 2016, an increase of 51.0%.

 

Co mparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016

 

Revenues

 

Revenues increased $89.4 million, or 14.6%, due primarily to increases in residential data, residential video and business services revenues of $46.4 million, $23.2 million and $20.9 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.

 

Revenues by service offering were as follows for the nine months ended September 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):

 

   

Nine Months Ended September 30,

                 
   

2017

   

2016

   

2017 vs. 2016

           

% of

           

% of

    $    

%

   

Revenues

   

Revenues

   

Revenues

   

Revenues

   

Change

   

Change

Residential data

  $ 302,696       43.1     $ 256,267       41.8     $ 46,429       18.1  

Residential video

    245,928       35.0       222,710       36.3       23,218       10.4  

Residential voice

    32,549       4.6       32,733       5.4       (184 )     (0.6 )

Business services

    94,673       13.5       73,724       12.0       20,949       28.4  

Advertising sales

    17,477       2.5       20,079       3.3       (2,602 )     (13.0 )

Other

    8,992       1.3       7,385       1.2       1,607       21.8  

Total revenues

  $ 702,315       100.0     $ 612,898       100.0     $ 89,417       14.6  

 

 

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

 

   

Nine Months Ended September 30,

   

2017 vs. 2016

   

2017

   

2016

   

$ Change

   

% Change

Residential data (1)

  $ 63.25     $ 61.39     $ 1.86       3.0  

Residential video (1)

  $ 81.37     $ 74.37     $ 7.00       9.4  

Residential voice (1)

  $ 34.15     $ 34.39     $ (0.24 )     (0.7 )

Business services (2)

  $ 178.92     $ 167.05     $ 11.87       7.1  

 


(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 nine months ended September 30, 2017 and 2016, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):

 

   

Nine Months Ended September 30,

                 
   

2017

   

2016

   

2017 vs. 2016

           

% of

           

% of

    $    

%

   

Revenues

   

Revenues

   

Revenues

   

Revenues

   

Change

   

Change

Residential data

  $ 275,932       44.3     $ 256,267       41.8     $ 19,665       7.7  

Residential video

    211,554       34.0       222,710       36.3       (11,156 )     (5.0 )

Residential voice

    28,578       4.6       32,733       5.4       (4,155 )     (12.7 )

Business services

    82,967       13.3       73,724       12.0       9,243       12.5  

Advertising sales

    16,817       2.7       20,079       3.3       (3,262 )     (16.2 )

Other

    6,786       1.1       7,385       1.2       (599 )     (8.1 )

Total revenues

  $ 622,634       100.0     $ 612,898       100.0     $ 9,736       1.6  

 

Average monthly revenue per unit, excluding the impact of revenues and customers attained as a result of the NewWave acquisition were as follows for the nine months ended September 30, 2017 and 2016:

 

   

Nine Months Ended September 30,

   

2017 vs. 2016

   

2017

   

2016

   

$ Change

   

% Change

Residential data (1)

  $ 65.19     $ 61.39     $ 3.80       6.2  

Residential video (1)

  $ 80.94     $ 74.37     $ 6.57       8.8  

Residential voice (1)

  $ 33.96     $ 34.39     $ (0.43 )     (1.3 )

Business services (2)

  $ 174.84     $ 167.05     $ 7.79       4.7  

 


(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 $46.4 million, or 18.1%, due primarily to an increase in residential data customers of 24.6% year-over-year as a result of the NewWave operations and organic subscriber growth, a reduction in package discounting and increased subscriptions to premium tiers by residential customers.

 

Residential video service revenues increased $23.2 million, or 10.4%, due primarily to an increase in residential video customers of 12.1% as a result of the NewWave operations and a rate adjustment in the first quarter of 2017.

 

Residential voice service revenues decreased $0.2 million, or 0.6%, due primarily to a decrease in legacy Cable One voice customers of 11.2%, partially offset by increased customers as a result of the NewWave operations.

 

Business services revenues increased $20.9 million, or 28.4%, due primarily to the NewWave operations, 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 28.3% year-over-year. Overall, business services comprised 13.5% of our total revenues for the nine months ended September 30, 2017 compared to 12.0% of our total revenues for the nine months ended September 30, 2016.

 

 

Advertising sales revenues decreased $2.6 million, or 13.0%, due primarily to a decrease in political advertising and fewer video customers to be reached by advertising spots.

 

Other revenues increased $1.6 million, or 21.8%, due primarily to the NewWave operations.

 

Operating Costs and Expenses

 

Operating expenses ( excluding depreciation and amortization) were $245.0 million for the nine months ended September 30, 2017 and increased $17.3 million, or 7.6%, compared to the year ago period. Operating expenses as a percentage of revenues were 34.9% for the first three quarters of 2017 compared to 37.2% for the first three quarters of 2016. Additional operating expenses attributable to the NewWave operations were $40.3 million since the acquisition date. This increase was partially offset by a $13.5 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor, a $3.5 million decrease in programming costs resulting from fewer video subscribers, a $2.5 million decrease in backbone and internet connectivity fees, and lower group insurance and repairs and maintenance costs.

 

Selling, general and administrative expenses increased $12.5 million, or 9.2%, to $148.7 million. Selling, general and administrative expenses as a percentage of revenues were 21.2% and 22.2% for the nine months ended September 30, 2017 and 2016, respectively. Additional selling, general and administrative expenses attributable to the NewWave operations were $10.7 million for the first three quarters of 2017. The remaining increase was due to higher acquisition-related costs of $2.1 million, deferred compensation costs of $1.7 million and severance costs of $1.5 million, partially offset by a $3.8 million decrease in labor costs associated with our aforementioned change in accounting estimate for capitalized labor.

 

Depreciation and amortization increased $25.3 million, or 23.9%, including $20.1 million attributable to the NewWave operations. The increase was due primarily to new assets placed in service since the third 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 third quarter of 2016. As a percentage of revenues, depreciation and amortization expense was 18.6% for the nine months ended September 30, 2017 compared to 17.2% for the nine months ended September 30, 2016.

 

We recognized a net gain on disposal of assets of $3.2 million for the first three quarters of 2017, primarily related to a gain recognized on the sale of a portion of a non-operating property that included our previous headquarters building, partially offset by a loss on fixed asset disposals, of which $1.3 million was associated with damage caused by Hurricane Harvey. In the first three quarters of 2016, we recognized a net loss of $1.6 million on disposals of assets.

 

Interest Expense

 

Interest expense increased $10.8 million, or 47.6%, due primarily to additional debt incurred to finance the NewWave acquisition.

 

Other Income (Expense)

 

Other income for the nine months ended September 30, 2017 primarily consisted of interest income of $0.8 million, partially offset by a $0.6 million write-off of debt issuance costs related to the additional debt incurred to finance the NewWave acquisition. Other income of $5.0 million for the comparable year ago period consisted of a $4.3 million gain on the sale of a cable system, interest income and certain tax credits.

 

Provision for Income Taxes

 

Provision for income taxes increased $4.8 million, or 9.7%. Our effective tax rate was 36.8% and 40.0% for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the effective tax rate primarily relates to a net $2.6 million income tax adjustment mainly associated with certain pre-spin-off items recorded in 2016 and $1.7 million of income tax benefits primarily attributable to equity-based awards recorded throughout 2017.

 

 

Net Income

 

As a result of the factors described above, our net income was $93.3 million for the nine months ended September 30, 2017 compared to $74.6 million for the nine months ended September 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, not as superior to, or as a substitute for, net income reported in accordance with GAAP. Adjusted EBITDA is reconciled to net income below.

 

Adjusted EBITDA is defined as net income plus interest expense, 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 measures.

 

We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the measure used in the leverage ratio calculation under our outstanding Senior Credit Facilities and Notes to determine compliance with the covenants contained in the Senior Credit Facilities and ability to take certain actions under the Indenture governing the Notes. For the purpose of calculating compliance with the leverage covenants in our debt instruments, 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

September 30,

   

2017 vs. 2016

( dollars in thousands )

 

2017

   

2016

   

$ Change

   

% Change

Net income (1)

  $ 31,514     $ 20,874     $ 10,640       51.0  
                                 

Plus:   Interest expense

    14,019       7,529       6,490       86.2  

Provision for income taxes

    16,643       19,746       (3,103 )     (15.7 )

Depreciation and amortization

    45,580       36,218       9,362       25.8  

Equity-based compensation expense

    3,076       3,187       (111 )     (3.5 )

Severance expense

    350       -       350       NM  

(Gain) loss on deferred compensation

    1,485       358       1,127       NM  

Acquisition-related costs

    557       2,512       (1,955 )     (77.8 )

(Gain) loss on disposal of assets

    2,506       1,060       1,446       136.4  

Other (income) expense, net

    (278 )     (4,329 )     4,051       (93.6 )
                                 

Adjusted EBITDA (1)

  $ 115,452     $ 87,155     $ 28,297       32.5  

 

   

Nine Months Ended

September 30,

   

2017 vs. 2016

( dollars in thousands )

 

2017

   

2016

   

$ Change

   

% Change

Net income (1)

  $ 93,304     $ 74,552     $ 18,752       25.2  
                                 

Plus:   Interest expense

    33,408       22,633       10,775       47.6  

Provision for income taxes

    54,430       49,598       4,832       9.7  

Depreciation and amortization

    130,875       105,600       25,275       23.9  

Equity-based compensation expense

    7,921       9,653       (1,732 )     (17.9 )

Severance expense

    2,949       -       2,949       NM  

(Gain) loss on deferred compensation

    1,914       238       1,676       NM  

Acquisition-related costs

    5,280       3,056       2,224       72.8  

(Gain) loss on disposal of assets

    (3,180 )     1,625       (4,805 )     NM  

Other (income) expense, net

    (243 )     (5,023 )     4,780       (95.2 )
                                 

Adjusted EBITDA (1)

  $ 326,658     $ 261,932     $ 64,726       24.7  

 


NM = Not meaningful.

(1 )

Net income and Adjusted EBITDA include NewWave operations and the favorable impact of a reduction in expense of $6.2 million and $17.2 million for the three and nine months ended September 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 increased 37.3% to $28.7 million and 18.5% to $88.4 million and Adjusted EBITDA would have increased 12.4% to $98.0 million and 13.7% to $297.9 million for the three and nine months ended September 30, 2017, respectively. Excluding both the NewWave operations and the change in accounting estimate related to capitalized labor, net income would have increased 18.8% to $24.8 million and 4.2% to $77.7 million and Adjusted EBITDA would have increased 5.3% to $91.8 million and 7.1% to $280.6 million for the three and nine months ended September 30, 2017, respectively.

 

 

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

 

Financial Condition: Liquidity and Capital Resources

 

Liquidity

 

O ur 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 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):

 

   

Nine Months Ended September 30,

   

2017 vs. 2016

   

2017

   

2016

   

$ Change

   

% Change

Net cash provided by operating activities

  $ 219,788     $ 193,572     $ 26,216       13.5  

Net cash used in investing activities

    (843,461 )     (102,680 )     (740,781 )     NM  

Net cash provided by (used in) financing activities

    604,334       (86,390 )     690,724       NM  

Change in cash and cash equivalents

    (19,339 )     4,502       (23,841 )     NM  

Cash and cash equivalents, beginning of period

    138,040       119,199       18,841       NM  

Cash and cash equivalents, end of period

  $ 118,701     $ 123,701     $ (5,000 )     (4.0 )

 


NM = Not meaningful.

 

During the first three quarters of 2017, our cash and cash equivalents decreased $19.3 million. At September 30, 2017, we had $118.7 million of cash on hand compared to $138.0 million at December 31, 2016. Our working capital was $51.7 million and $74.8 million at September 30, 2017 and December 31, 2016, respectively.

 

N et cash provided by operating activities was $219.8 million and $193.6 million for the first three quarters of 2017 and 2016, respectively. The year-over-year increase in operating cash flow of $26.2 million was primarily attributable to an increase in Adjusted EBITDA of $64.7 million, partially offset by a $27.7 million difference in changes to net operating assets and liabilities, a $6.0 million increase in cash paid for taxes and a $5.7 million increase in cash paid for interest. The difference in changes in operating assets and liabilities primarily reflects changes in accounts receivable, income taxes receivable and accounts payable and accrued liabilities as a result of the timing of payments compared to the first three quarters of 2016.

 

N et cash used in investing activities was $843.5 million and $102.7 million for the first three quarters of 2017 and 2016, respectively. The increase of $740.8 million from the prior year period was due primarily to $727.9 million in net cash paid for the NewWave acquisition and a $17.8 million increase in cash paid for capital expenditures, partially offset by a $4.2 million increase in proceeds received for the sale of assets.

 

N et cash provided by financing activities was $604.3 million in the first three quarters of 2017 compared to net cash used in financing activities of $86.4 million for the first three quarters of 2016. The change was primarily attributable to $750.0 million of new debt incurred in connection with the NewWave acquisition, partially offset by the $97.8 million Term Loan repayment, the $15.2 million payment of debt issuance costs and a reduction in share repurchases of $55.7 million 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 third quarter of 2017, we have repurchased 165,633 shares at an aggregate cost of $73.1 million. In first three quarters 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 third quarter of 2017, the Board approved a quarterly dividend of $1.75 per share of common stock, which was paid on September 1, 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 $3.1 million at September 30, 2017 were held for the benefit of certain general and liability insurance matters and bore interest at a rate of 1.75% per annum. We had $196.9 million available for borrowing under the Revolving Credit Facility at September 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 the 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% per annum 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 September 30, 2017, outstanding borrowings under the Term Loan A and Term Loan B were $248.4 million and $498.8 million, and bore interest at a rate of 3.07% per annum and 3.57% 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 $20.6 million and $8.1 million at September 30, 2017 and December 31, 2016, respectively.

 

We were in compliance with all debt covenants as of September 30, 2017.

 

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 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 nine months ended September 30, 2017 and 2016 (in thousands):

 

   

Nine Months Ended September 30,

   

2017

   

2016

Customer premise equipment

  $ 24,907     $ 17,320

Commercial

    7,077       5,046

Scalable infrastructure

    30,811       32,645

Line extensions

    10,381       6,943

Upgrade/rebuild

    12,905       9,633

Support capital

    42,749       19,756

Total

  $ 128,830     $ 91,343

 

 

Contractual Obligations and Contingent Commitments

 

The following is a summary of our contractual obligations as of September 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)

  $ 54,036     $ 579     $ 2,817     $ 7,186     $ 64,618

2018

    182,335       1,794       14,392       21,212       219,733

2019

    130,043       1,300       20,642       13,997       165,982

2020

    62,756       909       26,892       7,494       98,051

2021

    28,889       611       30,017       4,714       64,231

Thereafter

    -       1,137       1,102,699       4,659       1,108,495

Total

  $ 458,059     $ 6,330     $ 1,197,459     $ 59,262     $ 1,721,110

 


( 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 Condensed 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 September 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 co sts 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 $2.2 million and $1.4 million for the three months ended September 30, 2017 and 2016, respectively, and $5.6 million and $4.2 million for the nine months ended September 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 Condensed Consolidated Statements of Operations and Comprehensive Income were $4.1 million and $3.6 million for the three months ended September 30, 2017 and 2016, respectively, and $11.6 million and $10.7 million for the nine months ended September 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 September 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 contractual obligations, 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 condensed 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 as 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 acquisition of NewWave;

 

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 as filed with the SEC on March 1, 2017.

 

Any forward-looking statements made by us in this document speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.      Controls and Procedures

 

Disclosure Controls and Pro cedures

 

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

 

Internal Control Over Financial Reporting

 

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

 

Except as disclosed above, t here has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II: OTHER INFORMATION

 

Item 1.      Legal Proceedings

 

None.

 

Item 1A.   Risk Factors

 

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

 

 

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

 

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

 

Period

 

Total Number

of Shares

Purchased

   

Average Price

Paid Per Share

   

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs (1)  

   

Maximum Dollar

Value of Shares

that May Yet Be

Purchased Under

the Plans or

Programs

July 1 to 31, 2017

    -     $ -       -     $ 176,865

August 1 to 31, 2017 (2)

    1,291     $ 748.50       -     $ 176,865

September 1 to 30, 2017 (2)

    1,500     $ 750.68       -     $ 176,865

Total

    2,791     $ 749.67       -        

 


(1)

On July 1, 2015, the Board authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of Company common stock), which was announced on August 7, 2015. Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases is based on a number of factors, including share price and business and market conditions.

 

(2)

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

 

Item 3.      Defaults Upon Senior Securities

 

None.

 

Item 4.      Mine Safety Disclosures

 

Not applicable.

 

Item 5.      Other Information

 

Not applicable.

 

Item 6 .     Exhibits

 

Exhibit

N umber

Description

 

 

31.1

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

 

 

31.2

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

 

 

32

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

 

101.INS

XBRL Instance Document.*

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.*

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.*

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.*

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.*

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.*

 


* Filed herewith.

** Furnished herewith.

 

 

SIGNATURES

 

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

 

Cable One, Inc .

(Registrant)

 

 

 

 

By:

/s/ Julia M. Laulis

 

 

Name:  

Julia M. Laulis

 

 

Title:  

President and Chief Executive Officer

 

 

Date: November 8, 2017

 

By:

/s/ Kevin P. Coyle

 

 

Name:  

Kevin P. Coyle

 

 

Title:  

Chief Financial Officer

 

 

D ate: November 8, 2017

 

33

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