Cable One, Inc. - Quarter Report: 2018 March (Form 10-Q)

 

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(in thousands, except par value and share data)		March 31, 2018				December 31, 2017
Assets
Current Assets:
Cash and cash equivalents		$	185,493			$	161,752
Accounts receivable, net			25,477				29,930
Income taxes receivable			16,782				21,331
Prepaid and other current assets			19,474				10,898
Total Current Assets			247,226				223,911
Property, plant and equipment, net			820,009				831,892
Intangibles, net			962,933				965,745
Goodwill			172,129				172,129
Other assets			11,489				10,955
Total Assets		$	2,213,786			$	2,204,632
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities		$	98,379			$	117,855
Deferred revenue			17,780				15,008
Current portion of long-term debt			15,938				14,375
Total Current Liabilities			132,097				147,238
Long-term debt			1,157,273				1,160,682
Deferred income taxes			212,864				207,154
Other liabilities			11,642				13,111
Total Liabilities			1,513,876				1,528,185
Commitments and contingencies (refer to note 14)
Stockholders' Equity
Preferred stock ($0.01 par value; 4,000,000 shares authorized; none issued or outstanding)			-				-
Common stock ($0.01 par value; 40,000,000 shares authorized; 5,887,899 shares issued; and 5,732,441 and 5,731,442 shares outstanding as of March 31, 2018 and December 31, 2017, respectively)			59				59
Additional paid-in capital			30,750				28,412
Retained earnings			759,004				728,386
Accumulated other comprehensive loss			(351	)			(352	)
Treasury stock, at cost (155,458 and 156,457 shares held as of March 31, 2018 and December 31, 2017, respectively)			(89,552	)			(80,058	)
Total Stockholders' Equity			699,910				676,447
Total Liabilities and Stockholders' Equity		$	2,213,786			$	2,204,632

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		Three Months Ended
		March 31,
(in thousands, except per share and share data)		2018				2017
Revenues		$	265,761			$	207,434
Costs and expenses
Operating (excluding depreciation and amortization)			94,739				69,083
Selling, general and administrative			50,949				46,385
Depreciation and amortization			48,778				39,536
(Gain) loss on disposal of assets, net			6,634				(6,146	)
Total costs and expenses			201,100				148,858
Income from operations			64,661				58,576
Interest expense			(14,723	)			(7,606	)
Other income (expense), net			617				287
Income before income taxes			50,555				51,257
Income tax provision			9,902				19,144
Net income		$	40,653			$	32,113
Net income per common share:
Basic		$	7.13			$	5.66
Diluted		$	7.08			$	5.60
Weighted average common shares outstanding:
Basic			5,702,539				5,671,838
Diluted			5,742,648				5,730,901
Other comprehensive gain (loss), net of tax		$	1			$	2
Comprehensive income		$	40,654			$	32,115
Dividends declared per common share		$	1.75			$	1.50

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										Additional								Treasury				Accumulated Other				Total
		Common Stock								Paid-In				Retained				Stock,				Comprehensive				Stockholders’
(in thousands, except share data)		Shares				Amount				Capital				Earnings				at cost				Loss				Equity
Balance at December 31, 2017			5,731,442			$	59			$	28,412			$	728,386			$	(80,058	)		$	(352	)		$	676,447
Net income			-				-				-				40,653				-				-				40,653
Changes in pension, net of tax			-				-				-				-				-				1				1
Equity-based compensation			-				-				2,338				-				-				-				2,338
Issuance of equity awards, net of forfeitures			14,077				-				-				-				-				-				-
Repurchases of common stock			(3,311	)			-				-				-				(2,295	)			-				(2,295	)
Withholding tax for equity awards			(9,767	)			-				-				-				(7,199	)			-				(7,199	)
Dividends paid to stockholders			-				-				-				(10,035	)			-				-				(10,035	)
Balance at March 31, 2018			5,732,441			$	59			$	30,750			$	759,004			$	(89,552	)		$	(351	)		$	699,910

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		Three Months Ended March 31,
(in thousands)		2018				2017
Cash flows from operating activities:
Net income		$	40,653			$	32,113
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			48,778				39,536
Amortization of debt issuance cost			970				400
Equity-based compensation			2,338				2,427
Change in deferred income taxes			5,710				(203	)
(Gain) loss on disposal of assets, net			6,634				(6,146	)
Changes in operating assets and liabilities:
Accounts receivable, net			4,453				2,009
Income taxes receivable			4,549				4,547
Prepaid and other current assets			(8,576	)			(3,336	)
Accounts payable and accrued liabilities			(11,663	)			(7,977	)
Deferred revenue			2,772				527
Income taxes payable			-				14,758
Other assets and liabilities, net			(1,926	)			(395	)
Net cash provided by operating activities			94,692				78,260
Cash flows from investing activities:
Capital expenditures			(41,019	)			(35,917	)
Change in accrued expenses related to capital expenditures			(4,826	)			(1,143	)
Proceeds from sales of property, plant and equipment			226				10,075
Net cash used in investing activities			(45,619	)			(26,985	)
Cash flows from financing activities:
Payments on long-term debt			(2,816	)			(1,254	)
Repurchases of common stock			(2,295	)			(399	)
Payment of withholding tax for equity awards			(7,199	)			(331	)
Dividends paid to stockholders			(10,035	)			(8,579	)
Change in cash overdraft			(2,987	)			(5,285	)
Net cash used in financing activities			(25,332	)			(15,848	)
Change in cash and cash equivalents			23,741				35,427
Cash and cash equivalents, beginning of period			161,752				138,040
Cash and cash equivalents, end of period		$	185,493			$	173,467
Supplemental cash flow disclosures:
Cash paid for interest, net of capitalized interest		$	7,072			$	743
Cash paid for income taxes, net of refunds		$	35			$	42

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1.        DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business. Cable One, Inc. (“Cable One”) 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. As of March 31, 2018, Cable One provided service to 651,550 data customers, 350,874 video customers and 131,920 voice customers.

 

On May 1, 2017, Cable One completed the acquisition of all of the outstanding equity interests of RBI Holding LLC (“NewWave”), which became a wholly owned subsidiary of Cable One. Refer to note 4 for details on the transaction and note 8 for details on the related financing.

 

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 condensed consolidated financial statements and accompanying notes thereto 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 guidance, certain notes and other financial information normally required by GAAP have been omitted. Management believes the 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 consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 1, 2018 (the “2017 Form 10-K”). The December 31, 2017 year-end balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by GAAP. The Company’s interim results of operations may not be indicative of its future results.

 

Principles of Consolidation. The 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 entity’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 certain 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.

 

Revenue Recognition. The Company recognizes revenue in accordance with ASC 606 - Revenue from Contracts with Customers. Residential revenues are generated through subscriptions for data, video and voice services, which are sold individually and through bundles, typically at a discounted rate on month to month terms, without penalty for cancellations. If a customer has bundled subscriptions, the sales price is allocated amongst the product lines based on the relative standalone selling prices charged to customers with unbundled service agreements. Business revenues are generated through subscriptions for data, video and voice services which are also sold individually and through bundles with varying contract terms ranging from one month to several years.

 

 

The Company generally receives an allocation of scheduled advertising time as part of its distribution agreement with cable networks, which the Company sells to local, regional and national advertisers with terms that are generally less than one year. In most cases, the available advertising time is sold by the Company’s internal sales force. Since the Company is acting as principal in these arrangements, the advertising that is sold is reported as revenue on a gross basis. In cases where advertising time is sold by agencies, the Company is not acting as a principal and the advertising sold is reported net of agency fees. Advertising revenues are recognized when the commercials are aired.

 

The unit of account for ASC 606 is a performance obligation, which is a requirement within a contract to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, performance is satisfied. Our residential and business portfolio may include a single performance obligation or multiple performance obligations that are delivered in a similar pattern of transfer. Customers are billed for various services to which they subscribe based upon published or contracted rates for each service. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation based on the published or contracted rate. These performance obligations are generally satisfied over time as customers simultaneously receive and consume the benefits of the Company’s defined performance obligations. Advertising revenues are recognized at a point in time when the underlying performance obligation is complete.

 

The Company also incurs incremental internal costs to acquire residential and business customers, such as commission costs, and third-party costs to service specific contracts. These costs are capitalized as contract assets and amortized over the applicable period. For commissions, the amortization period is the average customer tenure, which was approximately five years for both residential and business customers. All other costs are amortized over the contract period.

 

Recently Adopted 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 was effective January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact in the future.

 

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 two of the previous goodwill impairment test under ASC 350 and replaces it with a simplified model. Under the simplified model, 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 previous 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 Company elected to early adopt the standard on January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact 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. The ASU was effective January 1, 2018. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements as no asset acquisitions or business combinations have occurred since the effective date, but may have an impact in the future.

 

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 within the consolidated statements 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 was effective January 1, 2018. The adoption of this guidance did not have a material impact on the classification of any cash flows within the Company’s consolidated statements of cash flows, but may have an impact in the future.

 

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 new standard provides a single principles-based, five step model to be applied to all contracts with customers: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when each performance obligation is satisfied. The updated guidance also requires additional disclosures regarding the nature, timing and any uncertainty regarding potential revenue recognition.

 

 

We adopted the updated guidance on January 1, 2018 on a full retrospective basis, which required us to reflect the impact of the updated guidance for all periods presented. Upon adoption, we also implemented changes in our presentation of certain revenues and expenses, which resulted in the deferral of all business installation revenues and residential and business commission expenses over a period of time instead of immediate recognition. The adoption of the new standard did not have a material impact on our consolidated results of operations or financial position for any period presented. Refer to note 3 for further details of the impact on the Company’s 2017 condensed consolidated financial statements and the requisite disclosures regarding the nature, timing and any uncertainty regarding potential revenue recognition.

 

Recently Issued But Not Yet Adopted Accounting Pronouncements. 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 as a right-of-use asset and a corresponding 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 both 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 while finance leases will reflect a front-loaded expense pattern similar to current capital leases. ASU 2016-02 is effective for the first quarter of 2019, with early adoption permitted. The adoption of this update will result in an increase to the Company’s asset and liability balances due to new and existing operating leases being recorded on the balance sheet. The Company continues to evaluate the impact of adopting this guidance on its consolidated financial statements.

 

 

2.	REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

As previously disclosed in note 2 to the Company’s consolidated financial statements included in the 2017 Form 10-K, the Company changed its accounting for the capitalization of certain internal labor and related costs associated with construction and customer installation activities commencing in the first quarter of 2017. The Company initially classified the entire change as a change in accounting estimate. During the fourth quarter of 2017, the Company determined that a portion of what had previously been reflected as a change in estimate should have been categorized as a change in accounting principle, a portion was determined to be the correction of an error and a portion remained a change in estimate. The changes determined to be a change in estimate or change in accounting principle were applied prospectively for all of 2017. The Company estimates that the change in principle resulted in a decrease in operating expenses (excluding depreciation and amortization) of approximately $3.8 million and $3.9 million, a decrease in selling, general and administrative expenses of approximately $0.1 million and $0.1 million and an increase in depreciation and amortization expense of $0.2 million and $0.7 million for the three months ended March 31, 2017 and March 31, 2018, respectively, compared to the results under the prior principle. Although the Company determined the error to be immaterial to its previously issued financial statements, the cumulative effect of the error would have been material if corrected in 2017. Therefore, as disclosed in the 2017 Form 10-K, the Company revised its historical financial statements to properly reflect the impact of the labor capitalization, including the related impact to depreciation expense and income taxes. In connection with this revision, the Company also corrected for other previously identified immaterial errors. The financial statements for the three months ended March 31, 2017 included in this Quarterly Report on Form 10-Q have been similarly revised to reflect the correction of these errors and should be read in conjunction with note 2 and note 17 in the 2017 Form 10-K.

 

The following tables present the effect of the revision on the condensed consolidated financial statements for the three months ended March 31, 2017 (in thousands, except per share data):

 

 

 

 

3.	ADOPTION OF NEW REVENUE RECOGNITION STANDARD

 

The Company adopted ASC 606 on January 1, 2018, using the full retrospective method, resulting in a recasting of prior period consolidated financial statements. The impact of the ASC 606 adoption on the 2017 condensed consolidated financial statements was as follows (in thousands, except per share data):

 

 

 

(1)  Refer to note 2 for details regarding this revision.

 

The adoption of ASC 606 did not result in any changes to previously reported total cash flows from operations, financing or investing activities.

 

A summary of changes in timing and presentation to historical financials is presented below:

 

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The decrease to total assets reflects a decrease in accounts receivable to remove amounts billed to customers for which the performance obligation has not been satisfied partially offset by the deferral of incremental costs (commissions paid) to obtain a contract which had been historically expensed immediately.

 

•

The net decrease in total liabilities reflects a decrease in deferred revenue to remove amounts billed to customers for which the performance obligation has not been satisified partially offset by the recognition of deferred revenue related to certain up-front fees collected from our business services customers which had been historically recognized when billed in addition to the tax effect of establishing deferred commissions and deferred revenue.

 

•

The change in revenues and expenses is due to the deferral of all business installation revenues and certain upfront fees and all residential and business commission expenses over a period of time, instead of immediate recognition.

 

 

4.	NEWWAVE ACQUISITION

 

On May 1, 2017, the Company acquired all of the outstanding equity interests in NewWave for $740.2 million in cash on a debt-free basis. Refer to note 8 for details regarding the financing of the transaction. 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 following table summarizes the allocation of the purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2017 (in thousands):

 

 

 

No measurement period adjustments were recorded during the three months ended March 31, 2018.

 

 

5.

REVENUES

 

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

 

 

Fees imposed on the Company by various governmental authorities are passed through monthly to the Company’s customers and are periodically remitted to authorities. These fees were $4.1 million and $3.5 million for the three months ended March 31, 2018 and 2017, respectively, and were reported in residential data, video and voice revenues on a gross basis with a corresponding operating expense because the Company is acting as a principal.

 

Other is comprised primarily of customer late charges, activation fees and reconnect fees.

 

A significant portion of our revenue is derived from customers who may cancel their subscriptions at any time without penalty. As such, the amount of revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from our existing customers. Revenue from customers with a contractually specified term and non-cancelable service period will be recognized over the term of the underlying contract, which generally ranges from one to five years.

 

Contract Liabilities. Timing of revenue recognition may differ from the timing of invoicing to customers. Residential and business services customers are invoiced for subscription services in advance of the service period. Deferred revenue liabilities, or contract liabilities, are recorded when the Company collects payments in advance of performing the services.

 

Current deferred revenue liabilities consisting primarily of refundable customer prepayments were $17.8 million and $15.0 million as of March 31, 2018 and December 31, 2017. Long-term deferred revenue liabilities consisting primarily of installation charges or up-front fees from business services customers, were $2.2 million and $3.1 million as of March 31, 2018 and December 31, 2017, respectively, and were included in other liabilities in the condensed consolidated balance sheet.

 

Contract Costs. The Company recognizes an asset for incremental costs of obtaining a contract with a customer. Accordingly, deferred commissions paid to obtain residential customers are recognized using a portfolio approach over a calculated average customer life. Deferred commissions were included in prepaid and other current assets and other assets in the condensed consolidated balance sheet and totaled $7.7 million and $7.5 million as of March 31, 2018 and December 31, 2017, respectively. Approximately $2.8 million of currently deferred commissions are expected to be amortized to selling, general and administrative expenses over the next 12 months.

 

Significant Judgments. The Company often provides multiple services to a customer. Provision of customer premise equipment, installation services, and additional service tiers may have a significant level of integration and interdependency with the subscription of data, video, voice, or connectivity services provided. Judgment is required to determine whether provision of customer premise equipment, installation services, and additional service tiers are considered distinct and accounted for separately, or not distinct and accounted for together with the subscription services.

 

The transaction price for a bundle of residential services is frequently less than the sum of the standalone selling prices of each individual service. The Company allocates these bundled services amongst the services to which the discount relates based on the relative standalone selling prices of those services. Standalone selling prices of the Company’s residential data and video services are directly observable, while standalone selling prices for the Company’s residential voice services are estimated using the adjusted market assessment approach which relies upon information from peers and competitors who sell residential voice services individually.

 

The Company also incurs incremental internal costs to acquire residential and business customers, such as commission costs, and third party costs to service specific contracts. These costs are capitalized as contract assets and amortized over the applicable period. For commissions, the amortization period is the average customer tenure. Amortized commission expense was $0.8 million and $0.7 million for the three months ended March 31, 2018 and 2017, respectively, and was included in selling, general and administrative expenses within the condensed consolidated statements of operations and comprehensive income.

 

 

 

6.	PROPERTY, PLANT AND EQUIPMENT

 

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

 

 

Depreciation expense was $46.0 million and $39.5 million for the three months ended March 31, 2018 and 2017, 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 sheets as assets held for sale at both March 31, 2018 and December 31, 2017.

 

 

7.	GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill at both March 31, 2018 and December 31, 2017 was $172.1 million and reflected $87.2 million of goodwill associated with the NewWave acquisition. The Company has not historically recorded any impairment of goodwill.

 

 

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

 

 

 

Amortization expense was $2.8 million and less than $0.1 million for the three months ended March 31, 2018 and 2017, respectively.

 

 

As of March 31, 2018, the future amortization of intangible assets was as follows (in thousands):

 

 

Actual amortization expense in future periods may differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, impairments or other relevant factors.

 

 

8.	LONG-TERM DEBT

 

The carrying amount of long-term debt consisted of the following (in thousands):

 

 

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 15th and December 15th of each year.

 

The Notes were issued pursuant to an indenture dated as of June 17, 2015 (the “Indenture”). 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”). Concurrently with its entry into the Credit Agreement, the Company borrowed the full amount of the Term Loan Facility. 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. On May 1, 2017, the Company and the lenders amended and restated the Credit Agreement (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 finance the NewWave acquisition, repay in full the Term Loan Facility and pay related fees and expenses.

 

The New Loans consist of a five-year term “A” loan in an aggregate principal amount of $250 million (the “Term Loan A”) and a seven-year 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”). The obligations under the Amended and Restated Credit Agreement are guaranteed by the Company’s wholly owned domestic subsidiaries and are secured, subject to certain exceptions, by substantially all assets of the Company and the guarantors.

 

 

The interest margins applicable to the Senior Credit Facilities are, at the Company’s option, equal to either the London Interbank Offered Rate (“LIBOR”) or a base rate, plus an applicable margin equal to, (i) with respect to the Term Loan A, and the Revolving Credit Facility, 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% 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 (ii) with respect to the Term Loan B, (x) for any day on or prior to April 22, 2018, 2.25% for LIBOR loans and 1.25% for base rate loans and (y) for any date after April 22, 2018, 1.75% for LIBOR loans and 0.75% for base rate loans. The Term Loan A may be prepaid at any time without premium and amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% per annum for the third year after funding and 10.0% per annum for the fourth and fifth years after funding, with the outstanding balance due upon maturity. The Term Loan B amortizes quarterly at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum, with the outstanding balance due upon maturity. The Term Loan B is subject to a 1.0% prepayment premium if prepaid in connection with a “Repricing Transaction” (as defined in the Amended and Restated Credit Agreement) within six months of the effective date of the Repricing Amendment (as defined below), 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.

 

The Company may, subject to certain specified terms and provisions, 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 as well as customary events of default. The Amended and Restated Credit Agreement also requires the Company to maintain specified ratios of total net indebtedness and first lien net indebtedness to consolidated operating cash flow. Refer to note 8 to the Company’s consolidated financial statements included in the 2017 Form 10-K for additional information.

 

The Company was in compliance with all debt covenants as of March 31, 2018. 

 

As of March 31, 2018, outstanding borrowings under the Term Loan A and Term Loan B were $245.3 million and $496.3 million, and bore interest at a rate of 4.06% per annum and 4.56% per annum, respectively. Letter of credit issuances under the Revolving Credit Facility totaled $3.1 million and the Company had $196.9 million available for borrowing under the Revolving Credit Facility at March 31, 2018.

 

The Company recorded $1.0 million and $0.4 million of debt issuance cost amortization for the three months ended March 31, 2018 and 2017, respectively. These amounts were reflected in interest expense in the condensed consolidated statements of operations and comprehensive income.

 

As of March 31, 2018, the future maturities of long-term debt were as follows (in thousands): 

 

 

On April 23, 2018, the Company amended the Amended and Restated Credit Agreement. Debt issuance costs incurred for the repricing in connection with this amendment totaled $2.0 million. Refer to note 15 for further discussion of this amendment.

 

 

9.	FAIR VALUE MEASUREMENTS

 

A three-level hierarchy is established by GAAP for disclosure of fair value measurements, based on the reliability of inputs used in the valuation of an instrument as of the measurement date, as follows:

 

●	Level 1 – inputs to the valuation methodology are quoted prices for identical instruments in active markets.

 

●

Level 2 – inputs to the valuation methodology include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and inputs that are observable for the instrument, either directly or indirectly, and are significant to the fair value measurement.

 

 

●	Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

Financial Assets and Liabilities. The Company has estimated the fair value of its financial instruments as of March 31, 2018 using available market information or other appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented in the condensed consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a current market exchange.

 

The carrying amounts, fair values and related fair value hierarchies of the Company’s financial assets and liabilities 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 Senior Credit Facilities is equal to the carrying value.

 

The Company’s deferred compensation liabilities were $17.6 million and $20.2 million at March 31, 2018 and December 31, 2017, respectively. The current portions of these liabilities are included within accounts payable and accrued liabilities and the noncurrent portions are included within other liabilities in the condensed consolidated balance sheets. These liabilities represent the market value of participants’ balances 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.

 

The carrying amounts of accounts receivable, accounts payable and other current assets and liabilities approximate fair value because of the short-term nature of these instruments.

 

Nonfinancial Assets and Liabilities. The Company’s nonfinancial assets such as property, plant and equipment, intangible assets and goodwill are not measured at fair value on a recurring basis. However, such assets are subject to fair value adjustments when there is evidence that impairment may exist. No material impairments were recorded during the three months ended March 31, 2018 and 2017.

 

 

10.	TREASURY STOCK

 

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements.

 

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 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 March 31, 2018, the Company had repurchased 169,144 shares at an aggregate cost of $75.6 million. During the three months ended March 31, 2018, the Company repurchased 3,311 shares at an aggregate cost of $2.3 million.

 

 

Tax Withholding for Equity Awards. 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 amount remitted during the three months ended March 31, 2018 was $7.2 million, for which the Company withheld 9,767 shares of common stock. Treasury shares of 155,458 held at March 31, 2018 include such shares withheld for withholding tax.

 

 

11.	EQUITY-BASED COMPENSATION

 

The Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “2015 Plan”) provides for grants of incentive stock options, non-qualified stock options, restricted stock awards, SARs, restricted stock units (“RSUs”), cash-based awards, performance-based awards, dividend equivalent units (“DEUs”), and other stock-based awards, including performance stock units and deferred stock units. Directors, officers and employees of the Company and its affiliates are eligible for grants under the 2015 Plan as part of the Company’s approach on long-term incentive compensation.

 

Restricted stock awards granted to employees are subject to service-based vesting and certain awards are also subject to performance-based vesting and generally cliff-vest on the three-year anniversary of the grant date or, for certain service-based awards, in four equal ratable installments beginning on the first anniversary of the grant date. SARs granted to employees vest in four equal ratable installments beginning on the first anniversary of the grant date. RSUs are generally granted to non-employee directors on the date of the Company’s annual stockholders’ meeting and vest on the earlier of the first anniversary of the grant date or the annual stockholders’ meeting date immediately following the grant date. In January 2018, certain non-employee directors who elected to defer all or a portion of their annual cash fees were granted RSU awards in lieu of such fees, and such RSUs will vest in full on the date immediately preceding the date of the 2018 annual stockholders’ meeting. The settlement of these RSUs will follow vesting, unless the director has previously elected to defer such settlement until the earliest of his or her separation from service from the Board, a date specified by the director or a change in control of the Company.

 

The 2015 Plan provides, that, subject to certain adjustments for specified corporate events, the maximum number of shares of common stock that may be issued under the 2015 Plan is 334,870. At March 31, 2018, 266,731 shares were available for issuance under the 2015 Plan.

 

Compensation expense associated with equity based awards is recognized on a straight-line basis over the vesting period, with forfeitures recognized as incurred. Equity-based compensation expense of $2.3 million and $2.4 million for the three months ended March 31, 2018 and 2017, respectively, 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 $2.4 million related to equity-based awards during the three months ended March 31, 2018. The deferred tax asset related to all outstanding equity-based awards was $2.7 million as of March 31, 2018.  

 

Restricted Stock Awards. Restricted shares, RSUs and DEUs are collectively referred to as “restricted stock.” A summary of restricted stock activity during the three months ended March 31, 2018 is as follows:

 

 

 

Equity-based compensation expense for restricted stock was $1.4 million and $1.7 million for the three months ended March 31, 2018 and 2017. At March 31, 2018, there was $10.2 million of unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.7 years.

 

Stock Appreciation Rights. A summary of SAR activity during the three months ended March 31, 2018 is as follows:

 

 

The grant date fair value of the Company’s SARs is measured using the Black-Scholes valuation model. The weighted average inputs used in the model for grants awarded during the three months ended March 31, 2018 were as follows:  

 

 

Equity-based compensation expense for SARs was $0.9 million and $0.7 million for the three months ended March 31, 2018. At March 31, 2018, there was $7.9 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.3 years.

 

 

12.	INCOME TAXES

 

The Company’s effective tax rate was 19.6% and 37.3% for the three months ended March 31, 2018 and 2017, respectively. The decrease in the effective tax rate for the three months ended March 31, 2018 compared to the same quarter in the prior year primarily relates to a reduction in the Federal corporate income tax rate from 35% to 21% as a result of the 2017 Federal tax reform legislation and $2.4 million of income tax benefits attributable to equity-based compensation awards recorded during the three months ended March 31, 2018.

 

The Company recognized the income tax effects of the 2017 Federal tax reform legislation in its consolidated financial statements included in the 2017 Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC 740 – Income Taxes. As such, the Company’s financial results for 2017 reflected the income tax effects of the 2017 Federal tax reform legislation for which the accounting under ASC 740 was complete as well as provisional amounts for those specific income tax effects of the 2017 Federal tax reform legislation for which the accounting under ASC 740 was incomplete but a reasonable estimate could be determined. The Company has recognized the provisional tax impacts related to acceleration of depreciation and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements included in the 2017 Form 10-K. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the 2017 Federal tax reform legislation. The accounting is expected to be complete when the Company’s 2017 Federal corporate income tax return is filed later in 2018.

 

 

 

13.	NET INCOME PER COMMON SHARE

 

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

 

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

 

                          

(1)

Equity-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per share calculation. The excluded number of anti-dilutive equity-based awards totaled 5,355 and 443 for the three months ended March 31, 2018 and 2017, respectively.

 

 

14.	COMMITMENTS AND CONTINGENCIES

 

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

 

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

 

 

15.	SUBSEQUENT EVENT

 

On April 23, 2018, the Company entered into Amendment No. 1 (the “Repricing Amendment”) to the Amended and Restated Credit Agreement. The Repricing Amendment amended the Amended and Restated Credit Agreement to, among other things, (i) decrease the applicable margin for the Term Loan B to 1.75% for LIBOR borrowings and 0.75% for base rate borrowings, (ii) reset the period during which a prepayment premium in respect of the Term Loan B may be required for a Repricing Transaction until six months after the effective date of the Repricing Amendment and (iii) reset the period during which the Term Loan B benefits from certain “most favored nation” pricing protections until 12 months after the effective date of the Repricing Amendment. Other than as set forth above, all other material terms and provisions of the Senior Credit Facilities remain substantially the same. Debt issuance costs incurred for the repricing totaled $2.0 million.

 

 

 

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