Cable One, Inc. - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q 

For the quarterly period ended June 30, 2015 

or

For the transition period from to

Commission File Number: 1-36863

Cable One, Inc. 

(Exact name of registrant as specified in its charter)

(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 ☐

*The registrant became subject to requirements on June 5, 2015.

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

CABLE ONE, INC.

FORM 10-Q

 TABLE OF CONTENTS

Part I:  FINANCIAL INFORMATION

Item 1.      Financial Statements

CABLE ONE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF PARENT COMPANY EQUITY

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following discussion and analysis of our financial condition and results of operations 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 financial statements and notes thereto as of and for the year ended December 31, 2014 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Registration Statement on Form 10.

Introduction

Management’s discussion and analysis of financial condition and results of operations, or “MD&A”, is a supplement to the accompanying Condensed Consolidated Financial Statements and provides additional information about our operations, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

Overview

Spin-Off Transaction

On November 13, 2014, GHC announced plans for the complete legal and structural separation of Cable One from GHC. The spin-off was completed on July 1, 2015 by way of a dividend of Cable One shares held by GHC to the holders of Graham Holdings Company Class A Common Stock and Graham Holdings Company Class B Common Stock, on a pro rata basis, as of the record date. Cable One has a single class of common stock. The distribution of Cable One common stock was tax-free to holders of GHC common stock for U.S. Federal income tax purposes. Immediately following the spin-off, GHC stockholders owned 100% of the outstanding shares of common stock of Cable One. Cable One is now operating as an independent, publicly traded company.

Our Business

We are a fully integrated provider of data, voice and video services in 19 Midwestern, Western and Southern states. We provide these broadband services to residential and business customers in 38 cable systems covering over 400 cities and towns. The markets we serve are primarily non-metropolitan, secondary markets, with 75% of our customers located in five states: Mississippi, Idaho, Oklahoma, Texas and Arizona. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We are the tenth-largest cable system operator in the United States based on customers and revenues in 2014, making services available to approximately 1,500,000 homes in the United States as of June 30, 2015.

As of June 30, 2015, we provided service to 672,021 residential and business customers out of approximately 1,542,000 homes passed. Of these customers, 399,878 subscribed to video services, 497,036 to data services and 138,742 to voice services.

We generate revenues through five primary products. Ranked by share of our total revenue through the first six months of 2015 they are residential video (42.8%), residential data (35.4%), business services (data, voice and video – 10.6%), residential voice (6.3%) and advertising sales (3.7%). The profit margins, growth rates and capital intensity of our five products vary significantly due to competition and product maturity.

Prior to 2012, we were focused on growing revenues through subscriber retention and growth in overall primary service units (“PSU”). To that end, 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 relatively recent trend, affecting the entire cable industry, of declining margins in residential video and voice services. We believe these declining margins are due to competition from other content providers, high levels of market penetration and increasing use of wireless voice services in addition to, or instead of, wireline voice. From 2013 and through the second quarter of 2015, we shifted our focus away from maximizing customer PSUs and towards growing and maintaining our higher margin businesses, namely data and business services. Separately, we have also focused on retaining customers with a relatively high expected life-time value (“LTV”), who are less attracted by discounting, require less support and churn less.

The trends described above have impacted our four largest product lines in the following ways:

We continue to experience increased competition, particularly from telephone companies, cable overbuilders, over-the-top video providers and satellite television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. We are investing at an aggressive pace by increasing cable plant capacities and reliability, launching all-digital video services and increasing data capacity by moving from four-channel bonding to 24-channel bonding, a 600% increase. We believe these investments are necessary to remain competitive. However, we anticipate that a significant amount of these capital projects will be completed in the near-term, freeing up sources of cash that would otherwise have been used on such investments.

The spin-off provided us the opportunity to further tailor our strategies to achieve greater operational focus and drive our return on investment. Our goals are to continue to grow residential data and business services and to maintain profit margins to deliver strong cash flow. To achieve these goals, we intend to continue our focus-driven cost management, remain focused on customers with high LTV and follow through with a planned investment in broadband plant upgrades.

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. On February 26, 2015, the FCC voted to use its Title II authority to regulate broadband Internet services. Chairman Wheeler has indicated that, under this regime, the FCC will forbear from systematic rate regulation at the subscriber level, which we believe will permit us to continue to manage data usage efficiently by establishing appropriate rates. However, we cannot predict whether or not future changes to the regulatory framework that are inconsistent with Chairman Wheeler’s announcement will occur.

 Results of Operations

Basis of Presentation

During the periods presented, Cable One functioned as part of the larger group of companies controlled by GHC, and, accordingly, GHC provided certain support and overhead functions to Cable One. These functions include finance, human resources, legal, information technology, general insurance, risk management and other corporate functions. The costs of such services have been allocated to Cable One based on the most relevant allocation methods to the service provided. Management believes such allocations are reasonable and were consistently applied; however, they may not be indicative of the actual expense that would have been incurred had Cable One been operating on a stand-alone basis. See Note 10 of the Notes to our Condensed Consolidated Financial Statements for details on these allocations.

During the periods presented, Cable One participated in a centralized approach to cash management and in financing its operations managed by GHC. Cash was transferred to GHC and GHC funded Cable One’s operating and investing activities as needed. Accordingly, cash and cash equivalents at the GHC level have not been allocated to Cable One in the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Cash transfers to and from GHC’s cash management accounts are included within net transfers to and from GHC in the Condensed Consolidated Statements of Parent Company Equity. Parent third-party debt and the related interest expense have not been allocated to Cable One for any of the periods presented as Cable One was not the legal obligor on the debt and GHC borrowings were not directly attributable to Cable One’s business.

Certain of Cable One’s eligible employees participate in the pension, post-retirement and deferred compensation plans of GHC. Although Cable One is a stand-alone, independent entity, after the spin-off, these employees remain entitled to the benefits under these plans accrued prior to the spin-off, but no longer accrue additional benefits under these plans. In addition, the liabilities in respect of the accrued benefits of certain Cable One employees under these plans remain at GHC (to the extent such liabilities were not already held by Cable One at the time of the spin-off). Therefore, the allocation of related expenses to Cable One in respect of these employees will not be reflected on Cable One’s financial statements in the periods following the spin-off. Allocations were equal to $1.1 million and $1.0 million for the three months ended June 30, 2015 and 2014, respectively, and $2.1 million and $1.9 million for the six months ended June 30, 2015 and 2014, respectively. However, deferred compensation and unfunded SERP benefits for a number of Cable One executives were assumed by Cable One following the spin-off, and will be reflected in Cable One’s financial statements for post spin-off periods.

The obligation for U.S. Federal and certain state income taxes attributable to the tax period prior to the spin-off were retained by Cable One, along with related deferred tax assets and liabilities. With respect to general insurance and workers’ compensation liabilities, Cable One assumed financial responsibility.

Also, in connection with the spin-off, on June 29, 2015, Cable One distributed $450 million to GHC, which was funded by new term loans and credit facilities. See “Liquidity and Capital Resources” for more information on Cable One’s capitalization activities.

As Cable One did not operate as a stand-alone entity during the periods presented, the condensed consolidated financial information included in this Quarterly Report may not necessarily be indicative of Cable One’s future performance and may not necessarily reflect what its financial position, results of operations or cash flows would have been had it operated as a stand-alone entity during the periods presented.

Customer Counts By Primary Products

Between July 1, 2014 and June 30, 2015, Cable One had a reduction of 101,003 residential PSUs, representing a decline of 9.5%. Including business customers, Cable One had a reduction of 96,192 PSUs, representing a decline of 8.5%, and a reduction of 26,678 total customer relationships, representing a decline of 3.8% for the 12 months ended June 30, 2015.

For the first half of 2015, Cable One had a reduction of 53,981 residential PSUs, representing a 5.3% decline from December 31, 2014. Including business customers, Cable One had a reduction of 53,528 PSUs during the first half of 2015, representing a 4.9% decline from December 31, 2014, and a reduction of 14,650 total customer relationships, representing a 2.1% decline from December 31, 2014.

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

In recent years, Cable One’s customer mix has shifted, causing subscribers to move from triple-play packages to single and double-play. This is because some residential video customers have defected to direct broadcast satellite (“DBS”) services and over-the-top (“OTT”) offerings in lieu of video and more households have discontinued landline voice service. In addition, Cable One has focused on selling data-only packages to new customers rather than on cross-selling video to these customers.

Comparison of Three Months Ended June 30, 2015 to Three Months Ended June 30, 2014

Revenues

Revenues declined $2.4 million, or 1.2%, due primarily to residential video and voice customer losses, partially offset by increases in residential data customers, growth in revenues from Cable One’s business services and the impact of video rate increases, along with a reduction in promotional discounts. Revenues from our business services grew due to increases in business video, data and voice customers.

Revenue by service offering was as follows for the three months ended June 30, 2015 and 2014, together with the percentages of revenue that each item represented for the periods presented (dollars in thousands):

For residential services, average monthly revenue per unit was as follows for the three months ended June 30, 2015 and 2014:

Residential video service revenues declined $6.7 million, or 7.3%, due primarily to basic video customer losses and digital customers purchasing fewer digital tiers of service, partially offset by video rate increases and a reduction in promotional discounts.

Residential data service revenues increased $8.4 million, or 12.7%, due primarily to an increase in residential data customers, a reduction in price discounting and subscribers purchasing enhanced data packages (which are more expensive than standard data packages).

Residential voice service revenues declined $4.8 million, or 30.6%, due primarily to declines in residential voice customers.

Business services increased $3.1 million, or 16.3%, due to growth in Cable One’s business video, data and voice services to small and medium-sized businesses.

Advertising revenues declined $1.6 million, or 17.6%, due to the negative impact of decreased video subscribers on the number of viewers available to be reached by ad spots.

Other revenues decreased $0.8 million, or 23.5%, due to the impact of a decreased number of customer relationships on installation, reconnects and late charges.

Operating Costs and Expenses

Operating expenses (excluding depreciation and amortization) declined $2.5 million, or 3.0%, due primarily to a reduction in residential video customers which significantly reduced programming costs. Programming costs declined and nonprogramming operating expenses were flat for the three months ended June 30, 2015 and June 30, 2014. Operating expenses (excluding depreciation and amortization) as a percentage of revenues were 39.0% and 39.8% for the three months ended June 30, 2015 and 2014, respectively.

Selling, general and administrative costs increased $6.1 million, or 13.1%, due mainly to an increase of $3.4 million in equity-based compensation expense related to the early vesting of a plan due to the spin-off. In addition, information system costs increased $1.5 million due to billing system conversion, and salary and benefits costs also increased. These increases were partially offset by a reduction in earnings on deferred compensation and decrease in bad debt expense. Selling, general and administrative expenses as a percentage of revenues were 25.8% and 22.6% for three months ended June 30, 2015 and 2014, respectively.

Depreciation and amortization increased $1.6 million, or 4.8%, largely as a result of significant capital additions in 2014.

Income from Operations

Income from operations declined $7.7 million, or 17.6%, due to declines in revenue accompanied by an increase in depreciation and selling, general and administrative costs, offset by a reduction in operating expenses.

We continue to focus on higher margin services, namely data and business services. Business services revenue increased 16.3% on a 7.1% increase in business PSUs. Overall, business services comprised 10.8% of our total revenue for the second quarter of 2015, compared to 9.2% of our total revenue for the second quarter of 2014. Due to rapidly rising programming rates and shrinking margins, video sales now have less value and emphasis. As residential video customers are down 19.1% from June 30, 2014, programming costs have been reduced accordingly.

Interest Expense

Interest expense was $1.0 million for the second quarter of 2015, attributable to our new long-term debt incurred in connection with the spin-off. No interest expense was incurred in 2014.

Provision for Income Taxes

Our estimated annual effective tax rate as of the end of the second quarter of 2015 was 38.5%, compared to 38.1% as of the end of the second quarter of 2014. 

Net Income

As a result of the factors described above, our net income was $21.4 million for the second quarter of 2015, as compared to $26.9 million for the second quarter of 2014.

Comparison of Six Months Ended June 30, 2015 to Six Months Ended June 30, 2014

Revenues 

Revenues declined $8.1 million, or 1.9%, due primarily to residential video and voice customer losses, partially offset by increases in residential data customers, growth in revenues from Cable One’s business services and the impact of video rate increases, along with a reduction in promotional discounts. Revenues from our business services grew due to increases in business video, data and voice customers.

Revenue by service offering was as follows for the six months ended June 30, 2015 and 2014, together with the percentages of revenue that each item represented for the periods presented (dollars in thousands):

For residential services, average monthly revenue per unit was as follows for the six months ended June 30, 2015 and 2014:

Residential video service revenues declined $16.0 million, or 8.4%, due primarily to basic video customer losses and digital customers purchasing fewer digital tiers of service, partially offset by video rate increases and a reduction in promotional discounts.

Residential data service revenues increased $12.3 million, or 9.4%, due primarily to an increase in residential data customers, a reduction in price discounting and subscribers purchasing enhanced data packages (which are more expensive than standard data packages).

Residential voice service revenues declined $6.6 million, or 20.5%, due primarily to declines in residential voice customers.

Business services increased $6.2 million, or 16.8%, due to growth in Cable One’s business video, data and voice services to small and medium-sized businesses.

Advertising revenues declined $2.1 million, or 12.5%, due to the negative impact of decreased video subscribers on the number of viewers available to be reached by ad spots.

Other revenues decreased $1.8 million, or 26.5%, due to the impact of a decreased number of customer relationships on installation, reconnects and late charges.

 Operating Costs and Expenses

Operating expenses (excluding depreciation and amortization) declined $9.1 million, or 5.4%, due primarily to a 19.1% reduction in residential video customers which significantly reduced programming costs. Programming costs declined and nonprogramming operating expenses were flat with increased internet bandwidth costs offset by lower fuel costs and lower data line expenses related to phone. Operating expenses (excluding depreciation and amortization) as a percentage of revenues were 39.5% and 41.0% for the six months ended June 30, 2015 and 2014, respectively.

Selling, general and administrative costs increased $7.9 million, or 8.4%, due mainly to an increase of $3.1 million in equity-based compensation expense related to the early vesting of a plan due to the spin-off transaction. In addition, information system costs were up $3.6 million due to billing system conversion, and increases in property taxes and salaries and benefits. These costs were partially offset by a reduction in earnings on deferred compensation, lower bad debt expense and lower marketing expense. Selling, general and administrative expenses as a percentage of revenues were 25.1% and 22.7% for six months ended June 30, 2015 and 2014, respectively.

Depreciation and amortization increased $4.2 million, or 6.3%, largely as a result of significant capital additions in 2014.

Income from Operations

Income from operations declined $11.1 million, or 13.4%, due to declines in revenue accompanied by an increase in depreciation and selling, general and administrative costs, offset by a reduction in operating expenses.

We continue to focus on higher margin services, namely data and business services. Business services revenue increased 16.8% on a 7.1% increase in business PSUs. Overall, business services comprised 10.6% of our total revenue for the six months ended June 30, 2015, compared to 8.9% of our total revenue for the six months ended June 30, 2014. Due to rapidly rising programming rates and shrinking margins, video sales now have less value and emphasis. As residential video customers are down 19.1% from June 30, 2014, programming costs have been reduced significantly.

Interest Expense

Interest expense was $1.0 million for the six months ended June 30, 2015, attributable to our new long-term debt incurred in connection with the spin-off. No interest expense was incurred in 2014.

Provision for Income Taxes

Our estimated annual effective tax rate as of the end of the second quarter of 2015 was 38.5%, compared to 38.1% as of the end of the second quarter of 2014. 

Net Income

As a result of the factors described above, our net income was $43.5 million for the six months ended June 30, 2015, as compared to $51.2 million for the six months ended June 30, 2014.

Use of Adjusted EBITDA and Free Cash Flow

We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net income reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and Free Cash Flow are reconciled to net income below.

Adjusted EBITDA is defined as net income plus net interest expense, income tax expense, depreciation and amortization, stock compensation expense, (gain) loss on sale or retirement of assets, and other non-recurring operating expenses, as defined 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 businesses 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.

Free Cash Flow is defined as Adjusted EBITDA, less capital expenditures.

We use Adjusted EBITDA and Free Cash Flow to assess our performance and our ability to service debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities and outstanding Notes to determine compliance with the covenants contained in the facilities and Notes. For the purpose of calculating compliance with leverage covenants, we use a measure similar to Adjusted EBITDA, as presented.

Free Cash Flow is reconciled to net cash provided by operating activities, as presented.

We believe Adjusted EBITDA is an appropriate measure for evaluating the operating performance of the Company. Adjusted EBITDA and similar measures with similar titles are common performance 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 similar measures reported by other companies.

We believe that Free Cash Flow is useful as it is also one of several indicators of our ability to make investments and/or return capital to our shareholders. We also believe that Free Cash Flow is one of several benchmarks used by analysts, investors and peers for comparison of performance in our industry, although our measure of Free Cash Flow may not be directly comparable to similar measures reported by other companies.

Financial Condition: Liquidity and Capital Resources

Liquidity

Our cash flows from operations have historically been distributed to GHC on a periodic basis, and we have historically relied on GHC to fund our working capital requirements and other cash requirements. In contemplation of the spin-off and the related dividend, we recapitalized our company through a series of financing transactions described below. Following these transactions, we believe that existing cash balances, credit facilities and operating cash flows will provide adequate funds to support our current operating plan and make planned capital expenditures for the next 12 months. However, our ability to fund operations and make planned capital expenditures 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.

During the second quarter of 2015, our cash and cash equivalents increased by $99.1 million and at June 30, 2015, we had approximately $105.5 million of cash on hand, compared to $6.4 million at December 31, 2014.

At June 30, 2015, we had a working capital surplus of $48.9 million. At December 31, 2014, we had a working capital deficit of $45.5 million. In connection with the spin-off, we incurred indebtedness in an aggregate principal amount of approximately $550 million, of which approximately $450 million was distributed to GHC prior to the consummation of the spin-off.

Our net cash provided by operating activities, as reported in our Condensed Consolidated Statements of Cash Flows, was $117.2 million and $114.3 million for the six months ended June 30, 2015 and 2014, respectively.

Financing Transactions

On June 17, 2015, the Company issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022. GHC is not be a guarantor and does not otherwise provide credit support for the Notes. The Notes mature on June 15, 2022 and bear interest at a rate of 5.75% per year. Interest on the Notes is payable on June 15 and December 15 of each year, beginning on December 15, 2015. The Notes are jointly and severally guaranteed on a senior unsecured basis by each of the Company’s existing and future domestic subsidiaries that initially guaranteed the Senior Credit Facilities (see below). The Notes are unsecured and senior obligations of the Company. The Guarantees are unsecured and senior obligations of the Guarantors. At the option of the Company, 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. The Company 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, the Company 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 105.750% 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 Cable One’s assets.

On June 30, 2015, the Company entered into a Credit Agreement among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents party thereto.  The Credit Agreement provides 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 its entry into the Credit Agreement, the Company borrowed the full amount of the Term Loan Facility. The obligations under the Senior Credit Facilities are obligations of the Company and are guaranteed by the Subsidiary.  The obligations under the Senior Credit Facilities are secured, subject to certain exceptions, by substantially all of the assets of the Company and the Subsidiary. Borrowings under the Senior Credit Facilities bear interest, at the Company’s option, at a rate per annum determined by reference to either the 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 will be a rate per annum between 1.50% and 2.25% and the applicable interest rate margin with respect to adjusted base rate borrowings will be 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. The Senior Credit Facilities may be prepaid at any time without premium.  The Term Loan Facility will amortize in equal quarterly installments at a rate of 2.5% per annum in the first year after funding, 5.0% per annum in the second year after funding, 7.5% per annum in the third year after funding, 10.0% per annum in the fourth year after funding and 15.0% per annum in the fifth year after funding, with the outstanding balance of the Term Loan Facility to be paid on the fifth anniversary of funding.

Capital Expenditures

We have significant ongoing capital expenditure requirements. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities. For the six months ended June 30, 2015, capital expenditures were $59.3 million, and we expect to spend $140 million to $165 million in total on capital expenditures for 2015. Capital expenditures were $177.4 million in 2014.

Cable One has adopted capital expenditure disclosure guidance as supported by the NCTA. These disclosures are not required under GAAP, nor do they impact Cable One’s accounting for capital expenditures under GAAP.

The following table presents our major capital expenditure categories in accordance with NCTA disclosure guidelines for the six months ended June 30, 2015 and the year ended December 31, 2014. The amounts below include assets acquired during the year, whereas the amounts reflected in our Condensed Consolidated Statements of Cash Flows are based on cash payments made during the relevant periods (in thousands):

Contractual Obligations and Contingent Commitments

In the first quarter of 2015, Cable One entered into a new programming purchase commitment of $17.1 million, substantially related to 2016.

The following is a summary of our contractual obligations as of June 30, 2015 (in thousands):

Programming and content purchases represent contracts that Cable One has with cable television networks and broadcast stations to provide programming services to its subscribers. The amounts included above represent estimates of the future programming costs for these contract requirements and commitments based on subscriber numbers and tier placement as of June 30, 2015 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.

Long-term debt relates to principal repayment obligations as defined by the agreements described in the financing transactions section above.

The following items are not included as contractual obligations due to various factors discussed below. However, we incur these costs as part of our operations:

Off-Balance Sheet Arrangements

Cable One does not have any off-balance-sheet arrangements or financing activities with special-purpose entities (SPEs). Transactions with related parties, as discussed in Note 10 to our condensed consolidated financial statements included elsewhere in this Quarterly Report, are in the ordinary course of business and are conducted on an arm’s-length basis.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements. On an ongoing basis, Cable One evaluates its estimates and assumptions. Cable One bases its 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 Cable One’s financial condition and results and if it requires management’s most difficult, subjective and complex judgments in its application. For a summary of all of Cable One’s significant accounting policies, see Note 2 to our historical financial statements included elsewhere in this Quarterly Report.

There have been no changes to the critical accounting policies and estimates included in our Registration Statement on Form 10 filed with the SEC on February 27, 2015, as amended.

CAUTIONARY STATEMENT CONCERNING 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:

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. Our financial instruments subject to market risk at June 30, 2015 are not significant.  

Item 4. Controls and Procedures

Disclosure Controls and Procedures 

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 15(d)-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. 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

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the quarter ended June 30, 2015 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 Registration Statement on Form 10-12B (File No. 001-36863), filed with the SEC on February 27, 2015, as amended.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits 

* Filed herewith.

** Furnished herewith.

SIGNATURE

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.

Date: August 6, 2015

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