Cable One, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q 

For the quarterly period ended September 30, 2017

or

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 ☐

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.

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:

CABLE ONE, INC.

FORM 10-Q

 TABLE OF CONTENTS

PART I:  FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements

CABLE ONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

CABLE ONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 2016, 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.

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):

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

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.

The 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):

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.

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

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.

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

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.

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):   

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.

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

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): 

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):

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). 

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.

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:

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:

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:  

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.  

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.

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):

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:

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 for the time periods specified:

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:

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.

Comparison 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):

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

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):

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:

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%.

Comparison 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):

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

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):

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:

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.