Cable One, Inc. - Quarter Report: 2019 March (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q 

 

(Mark One)

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

 

For the quarterly period ended March 31, 2019

 

or

 

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

 

Commission File Number: 001-36863

 

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Cable One, Inc. 

(Exact name of registrant as specified in its charter)

 

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Delaware		13-3060083
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
210 E. Earll Drive, Phoenix, Arizona		85012
(Address of Principal Executive Offices)		(Zip Code)

 

(602) 364-6000

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
Common Stock, par value $0.01		CABO		New York Stock Exchange

 

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 every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

 

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

 

Large accelerated filer	☑		Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☐
			Emerging growth company	☐

 

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

 

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

 

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

 

Description of Class	Shares Outstanding as of May 3, 2019
Common stock, par value $0.01	5,699,603

 

 

 

CABLE ONE, INC.

FORM 10-Q

 TABLE OF CONTENTS

 

PART I:  FINANCIAL INFORMATION		1
Item 1.	Condensed Consolidated Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II: OTHER INFORMATION		30
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
SIGNATURES		32

    

 

 

(dollars in thousands, except par values)		March 31, 2019				December 31, 2018
Assets
Current Assets:
Cash and cash equivalents		$	187,559			$	264,113
Accounts receivable, net			28,410				29,947
Income taxes receivable			4,658				10,713
Prepaid and other current assets			21,742				13,090
Total Current Assets			242,369				317,863
Property, plant and equipment, net			965,396				847,979
Intangible assets, net			1,039,427				953,851
Goodwill			355,347				172,129
Other noncurrent assets			21,698				11,412
Total Assets		$	2,624,237			$	2,303,234
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities		$	92,216			$	94,134
Deferred revenue			24,096				18,954
Current portion of long-term debt			24,892				20,625
Total Current Liabilities			141,204				133,713
Long-term debt			1,385,475				1,142,056
Deferred income taxes			269,816				242,127
Other noncurrent liabilities			58,707				9,980
Total Liabilities			1,855,202				1,527,876
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 5,699,330 and 5,703,402 shares outstanding as of March 31, 2019 and December 31, 2018, respectively)			59				59
Additional paid-in capital			41,919				38,898
Retained earnings			877,644				850,292
Accumulated other comprehensive loss			(29,165	)			(96	)
Treasury stock, at cost (188,569 and 184,497 shares held as of March 31, 2019 and December 31, 2018, respectively)			(121,422	)			(113,795	)
Total Stockholders' Equity			769,035				775,358
Total Liabilities and Stockholders' Equity		$	2,624,237			$	2,303,234

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		Three Months Ended
		March 31,
(dollars in thousands, except per share data)		2019				2018
Revenues		$	278,605			$	265,761
Costs and Expenses:
Operating (excluding depreciation and amortization)			94,518				94,739
Selling, general and administrative			61,443				50,949
Depreciation and amortization			53,844				48,778
Loss on asset disposals, net			1,103				6,634
Total Costs and Expenses			210,908				201,100
Income from operations			67,697				64,661
Interest expense			(18,096	)			(14,723	)
Other income, net			1,802				617
Income before income taxes			51,403				50,555
Income tax provision			12,664				9,902
Net income		$	38,739			$	40,653
Net Income per Common Share:
Basic		$	6.83			$	7.13
Diluted		$	6.78			$	7.08
Weighted Average Common Shares Outstanding:
Basic			5,674,120				5,702,539
Diluted			5,716,585				5,742,648
Deferred gain (loss) on cash flow hedges and other, net of tax		$	(29,069	)		$	1
Comprehensive income		$	9,670			$	40,654

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										Additional								Accumulated Other				Treasury				Total
		Common Stock								Paid-In				Retained				Comprehensive				Stock,				Stockholders’
(dollars in thousands, except per share data)		Shares				Amount				Capital				Earnings				Loss				at cost				Equity
Balance at December 31, 2018			5,703,402			$	59			$	38,898			$	850,292			$	(96	)		$	(113,795	)		$	775,358
Lease accounting standard adoption cumulative adjustment			-				-				-				8				-				-				8
Net income			-				-				-				38,739				-				-				38,739
Deferred loss on cash flow hedges and other, net of tax			-				-				-				-				(29,069	)			-				(29,069	)
Equity-based compensation			-				-				3,021				-				-				-				3,021
Issuance of equity awards, net of forfeitures			5,222				-				-				-				-				-				-
Repurchases of common stock			(5,984	)			-				-				-				-				(5,073	)			(5,073	)
Withholding tax for equity awards			(3,310	)			-				-				-				-				(2,554	)			(2,554	)
Dividends paid to stockholders ($2.00 per common share)			-				-				-				(11,395	)			-				-				(11,395	)
Balance at March 31, 2019			5,699,330			$	59			$	41,919			$	877,644			$	(29,165	)		$	(121,422	)		$	769,035

										Additional								Accumulated Other				Treasury				Total
		Common Stock								Paid-In				Retained				Comprehensive				Stock,				Stockholders’
(dollars in thousands, except per share data)		Shares				Amount				Capital				Earnings				Loss				at cost				Equity
Balance at December 31, 2017			5,731,442			$	59			$	28,412			$	728,386			$	(352	)		$	(80,058	)		$	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 ($1.75 per common share)			-				-				-				(10,035	)			-				-				(10,035	)
Balance at March 31, 2018			5,732,441			$	59			$	30,750			$	759,004			$	(351	)		$	(89,552	)		$	699,910

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		Three Months Ended March 31,
(in thousands)		2019				2018
Cash flows from operating activities:
Net income		$	38,739			$	40,653
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			53,844				48,778
Amortization of debt issuance cost			1,118				970
Equity-based compensation			3,021				2,338
Increase (decrease) in deferred income taxes			7,102				5,710
Loss on asset disposals, net			1,103				6,634
Changes in operating assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable, net			2,831				4,453
Decrease in income taxes receivable			6,055				4,549
Increase in prepaid and other current assets			(8,341	)			(8,576	)
Increase (decrease) in accounts payable and accrued liabilities			1,442				(11,663	)
Increase in deferred revenue			820				2,772
Other, net			(3,356	)			(1,926	)
Net cash provided by operating activities			104,378				94,692
Cash flows from investing activities:
Purchase of business, net of cash acquired			(356,917	)			-
Capital expenditures			(46,627	)			(41,019	)
Decrease in accrued expenses related to capital expenditures			(7,751	)			(4,826	)
Proceeds from sales of property, plant and equipment			6,326				226
Net cash used in investing activities			(404,969	)			(45,619	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			250,000				-
Payment of debt issuance costs			(2,410	)			-
Payments on long-term debt			(4,531	)			(2,816	)
Repurchases of common stock			(5,073	)			(2,295	)
Payment of withholding tax for equity awards			(2,554	)			(7,199	)
Dividends paid to stockholders			(11,395	)			(10,035	)
Change in cash overdraft			-				(2,987	)
Net cash provided by (used in) financing activities			224,037				(25,332	)
Increase (decrease) in cash and cash equivalents			(76,554	)			23,741
Cash and cash equivalents, beginning of period			264,113				161,752
Cash and cash equivalents, end of period		$	187,559			$	185,493
Supplemental cash flow disclosures:
Cash paid for interest, net of capitalized interest		$	9,421			$	7,072
Cash paid for income taxes, net of refunds received		$	(59	)		$	35

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1.	DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business. Cable One, Inc., together with its wholly owned subsidiaries (collectively, “Cable One,” “us,” “our,” “we” or the “Company”) is a fully integrated provider of data, video and voice services to residential and business subscribers in 21 Western, Midwestern and Southern U.S. states. As of March 31, 2019, Cable One provided service to 818,330 residential and business customers, of which 678,385 subscribed to data services, 320,611 subscribed to video services and 125,486 subscribed to voice services.

 

On January 8, 2019, the Company acquired Delta Communications, L.L.C. (“Clearwave”) for a purchase price of $358.8 million in cash on a debt-free basis. Refer to note 2 for details on this transaction and note 7 for details on the related financing.

 

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, 2018 (the “2018 Form 10-K”).

 

The December 31, 2018 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 2018 Form 10-K, but does not include all disclosures required by GAAP. The Company’s interim results of operations may not be indicative of its future results.

 

Certain amounts in the tables in this Quarterly Report on Form 10-Q may not foot due to rounding.

 

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 entity’s reportable segments. The Company’s operations are organized and managed on the basis of operating systems within its geographic divisions. Each operating system derives revenues from the delivery of similar products and services to a customer base that is also similar. Each operating 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 operating systems. Management evaluated the criteria for aggregation under ASC 280 and has concluded 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.

 

Recently Adopted Accounting Pronouncements. In June 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU was effective January 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and also simplifies the application of hedge accounting under GAAP. The ASU was effective January 1, 2019. The adoption of this guidance 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 substantially all of their leases on the balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability with the exception of short-term leases. The Company is required to classify each separate lease component as an operating or a finance lease at the lease commencement date. Initial measurement of the ROU asset and lease liability is the same for both operating and finance leases, however, expense recognition and amortization of the ROU asset differs. Operating leases reflect lease expense on a straight-line basis similar to previous operating leases while finance leases reflect a front-loaded expense pattern similar to previous capital leases. The Company adopted the updated guidance on January 1, 2019.

 

With respect to the adoption of ASU 2016-02, the Company elected the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption is as originally reported under ASC 840 - Leases. Upon adoption on January 1, 2019, the Company recorded ROU assets of $14.9 million and lease liabilities of $13.3 million. The adoption of this guidance did not have a material impact on Company’s consolidated financial statements.

 

The new standard provides several optional practical expedients in transition. The Company elected the lessee and lessor transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs.

 

The Company also made certain lessee accounting policy elections, including a short-term lease exception policy, permitting the exclusion of short-term leases (leases with terms of 12 months or less) from the recognition requirements of the standard, and an accounting policy to account for lease and non-lease components as a single component for all classes of assets. The portfolio approach, which allows a lessee to account for its leases at a portfolio level, was elected for certain equipment and fiber leases in which the difference in accounting for each asset separately would not have been materially different from accounting for the assets as a combined unit. As a lessee, the Company also elected the practical expedient not to reevaluate whether any expired or existing land easements are, or contain, leases.

 

The Company provides residential and business customers with certain hardware to deliver data, video and voice services. As a lessor, the Company elected the practical expedient not to separate lease components from the associated non-lease component for all classes of assets. The Company concluded the non-lease components would otherwise be accounted for under the new revenue recognition standard and both the timing and pattern of transfer are the same for the non-lease components and associated lease component based on the interrelated nature of the services provided and the underlying leased hardware and, if accounted for separately, the lease component would be classified as an operating lease.

 

Refer to note 6 for the requisite disclosures regarding the amount, timing and any uncertainty regarding lease-related cash flows.

 

Recently Issued But Not Yet Adopted Accounting Pronouncements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation, setup and other upfront costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing such costs incurred to develop or obtain internal-use software. The update specifies which costs are to be expensed and which are to be capitalized, the period over which capitalized costs are to be amortized, the process for identifying and recognizing impairment and the proper presentation of such costs within the consolidated financial statements. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019 and may be adopted either retrospectively or prospectively. The Company is currently evaluating its method of adoption as well as the expected impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to recognize an allowance for expected lifetime credit losses through earnings concurrent with the recognition of a financial asset measured at amortized cost. The estimate of expected credit losses is required to be adjusted each reporting period over the life of the financial asset. The update is effective for annual and interim periods beginning after December 15, 2019 and requires a modified retrospective adoption approach. The Company does not expect ASU 2016-13 to have a material impact on its consolidated financial statements upon adoption, but it may have an impact in the future.

 

 

 

2.	CLEARWAVE ACQUISITION

 

On November 9, 2018, the Company entered into an agreement to acquire Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. The acquisition provides the Company with a premier fiber network within its existing footprint, further enables the Company to supply its customers with enhanced business services solutions and provides a platform to allow the Company to replicate Clearwave’s strategy in several of its other markets. The transaction closed on January 8, 2019 and was funded with cash on hand and the additional seven-year incremental term “B” loan borrowings described in note 7. The Company paid a purchase price of $358.8 million in cash on a debt-free basis.

 

The Company accounted for the Clearwave 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 months ended March 31, 2019, the Company incurred acquisition-related costs of $5.2 million, including $3.3 million associated with the Clearwave acquisition. These costs are included in selling, general and administrative expenses within the Company’s condensed consolidated statement 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 identifiable intangible assets acquired and liabilities assumed at the acquisition date 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. 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 current allocation of the purchase price consideration as of the acquisition date (in thousands):

 

 

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

 

 

No residual value was assigned to the acquired customer relationships.

 

 

The acquisition produced $183.2 million of goodwill, increasing the Company’s goodwill balance from $172.1 million at December 31, 2018 to $355.3 million at March 31, 2019. 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 Clearwave acquisition is not deductible for tax purposes.

 

For the period from January 8, 2019 to March 31, 2019, the Company recognized revenue of $6.1 million and net income of $1.0 million from Clearwave operations, which included acquired intangible assets amortization expense of $1.1 million.

 

 

3.

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 for both the three months ended March 31, 2019 and 2018. As the Company acts as principal, these fees are reported in video revenues on a gross basis with corresponding expenses included within operating expenses in the condensed consolidated statements of operations and comprehensive income.

 

Other revenues are comprised primarily of customer late charges and reconnect fees.

 

Net accounts receivable from contracts with customers totaled $27.9 million and $29.8 million at March 31, 2019 and December 31, 2018, respectively.

 

Deferred commissions totaled $7.5 million and $7.8 million at March 31, 2019 and December 31, 2018, respectively, and were included within prepaid and other current assets and other noncurrent assets in the condensed consolidated balance sheets. Commission amortization expense was $1.0 million and $0.8 million for the three months ended March 31, 2019 and 2018, respectively, and was included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Deferred commissions of $2.7 million included within prepaid and other current assets in the condensed consolidated balance sheet as of March 31, 2019 are expected to be amortized over the next 12 months.

 

Current deferred revenue liabilities, consisting of refundable customer prepayments, up-front charges and installation fees, were $24.1 million and $19.0 million at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, the Company’s remaining performance obligations pertain to the refundable customer prepayments and consist of providing future data, video and voice services to customers. Of the $19.0 million of current deferred revenue at December 31, 2018, $18.1 million was recognized during the three months ended March 31, 2019. Noncurrent deferred revenue liabilities, consisting of up-front charges and installation fees from business customers, were $5.1 million and $2.8 million as of March 31, 2019 and December 31, 2018, respectively, and were included within other noncurrent liabilities in the condensed consolidated balance sheets.

 

 

 

4.	PROPERTY, PLANT AND EQUIPMENT

 

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

 

 

Depreciation expense was $49.7 million and $46.0 million for the three months ended March 31, 2019 and 2018, respectively.

 

In January 2019, the remaining portion of the Company's previous headquarters building and adjoining property was sold for $6.3 million in gross proceeds and the Company recognized a related gain of $1.6 million. The property’s carrying value of $4.6 million was included within other noncurrent assets in the condensed consolidated balance sheet as assets held for sale at December 31, 2018.

 

 

5.	GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill was $355.3 million and $172.1 million at March 31, 2019 and December 31, 2018, respectively. The increase related to goodwill recognized upon the acquisition of Clearwave in January 2019. The Company has not historically recorded any impairment of goodwill.

 

 

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

 

 

Intangible asset amortization expense was $4.1 million and $2.8 million for the three months ended March 31, 2019 and 2018, respectively.

 

As of March 31, 2019, the future amortization of intangible assets was as follows (in thousands):

 

 

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

 

 

 

6.        LEASES

 

As a lessee, the Company has operating leases for buildings, equipment, data centers, fiber optic networks and towers and finance leases for certain buildings and fiber optic networks. These leases have remaining lease terms ranging from under 1 year to 24 years, with some including an option to extend the lease for up to 15 additional years and some including an option to terminate the lease within 1 year.

 

As a lessor, the Company has operating leases for the use of its fiber optic networks, towers and customer premise equipment. These leases have remaining lease terms ranging from under one year to eight years, with some including a lessee option to extend the leases for up to five additional years and some including an option to terminate the lease within one year.

 

Significant judgment is required when determining whether a fiber optic contract contains a lease, defining the duration of the lease term and selecting the discount rate.

 

●

The Company concluded it was the lessee or lessor for fiber arrangements only when the asset is specifically identifiable and both substantially all the economic benefit is obtained and the right to direct the use of the asset exists.

 

●

The Company’s lease terms are only for periods in which there are enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. The Company’s lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

●

Most of the Company’s leases do not contain an implicit interest rate. Therefore, the Company held discussions with lenders, evaluated its published credit score and incorporated interest rates on currently-held debt in determining discount rates that reflect what the Company would pay to borrow on a collateralized basis over similar terms for its lease obligations.

 

As of March 31, 2019, additional operating leases that have not yet commenced were not material.

 

Lessee Financial Information. The Company’s ROU assets and lease liabilities consisted of the following (in thousands):

 

 

 

The components of the Company’s lease expense were as follows (in thousands):

 

 

Finance lease expense is included within depreciation and amortization expense and interest expense, and operating lease expense is included within operating expenses and selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income.

 

Supplemental lessee financial information is as follows (dollars in thousands):

 

__________

(1)	Includes $3.3 million of ROU assets acquired in the Clearwave transaction.

 

As of March 31, 2019, the future maturities of existing lease liabilities were as follows (in thousands):

 

 

As of December 31, 2018, the Company’s outstanding operating lease obligations under the previous accounting guidance were as follows (in thousands):

 

 

 

Lessor Financial Information. The Company’s lease income was as follows (in thousands):

 

 

As of March 31, 2019, the future maturities of existing lease receivables were as follows (in thousands):

 

 

As of March 31, 2019, the current and noncurrent portions of operating lease receivables were $0.4 million and $0.7 million, respectively, and were included within accounts receivable and other noncurrent assets in the condensed consolidated balance sheet, respectively.

 

 

7.

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 are jointly and severally guaranteed on a senior unsecured basis by each of the subsidiaries that guarantee the Senior Credit Facilities (as defined below). The Notes mature on June 15, 2022 and interest is payable on June 15th and December 15th of each year. The indenture governing the Notes 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.

 

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, which provided for a five-year revolving credit facility in an aggregate principal amount of $200 million (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 the Company incurred $750 million of senior secured loans (the “2017 New Loans”), the proceeds of which were used, together with cash on hand, to finance the acquisition of NewWave Communications (“NewWave”), repay in full the existing term loans and pay related fees and expenses. The 2017 New Loans consist of a five-year term “A” loan in an original aggregate principal amount of $250 million (the “Term Loan A”) and a seven-year term “B” loan in an original aggregate principal amount of $500 million (the “Term Loan B”).

 

 

On January 7, 2019, the Company entered into Amendment No. 2 to the Amended and Restated Credit Agreement (“Amendment No. 2”) with CoBank, ACB (“CoBank”), as lender, and JPMorgan, as administrative agent, and incurred a new seven-year incremental term “B” loan in an aggregate principal amount of $250 million (the “Term Loan B-2” and, together with the Revolving Credit Facility, the Term Loan A and the Term Loan B, the “Senior Credit Facilities”), the proceeds of which were used to finance, in part, the Clearwave acquisition.

 

The Senior Credit Facilities are guaranteed by the Company’s wholly owned subsidiaries (the “Guarantors”) and are secured, subject to certain exceptions, by substantially all of the assets of the Company and the Guarantors.

 

The Term Loan A, Term Loan B and Term Loan B-2 may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions).

 

The interest margins applicable to the Senior Credit Facilities are, at the Company’s option, equal to either 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, (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 day thereafter, 1.75% for LIBOR loans and 0.75% for base rate loans, and (iii) with respect to the Term Loan B-2, 2.00% for LIBOR loans and 1.00% for base rate loans.

 

The Company may, subject to certain specified terms and provisions, obtain additional credit facilities of up to $425.0 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 Company was in compliance with all debt covenants as of March 31, 2019. 

 

As of March 31, 2019, outstanding borrowings under the Term Loan A, Term Loan B and Term Loan B-2 were $234.4 million, $491.3 million and $250.0 million, respectively, and bore interest at rates of 4.25%, 4.25% and 4.49% per annum, respectively. Letter of credit issuances under the Revolving Credit Facility totaled $4.1 million and the Company had $195.9 million available for borrowing under the Revolving Credit Facility at March 31, 2019.

 

In connection with Amendment No. 2, the Company incurred capitalizable debt issuance costs of $2.4 million. The Company recorded $1.1 million and $1.0 million of debt issuance cost amortization for the three months ended March 31, 2019 and 2018, respectively. These amounts are reflected within interest expense in the condensed consolidated statements of operations and comprehensive income. Unamortized debt issuance costs totaled $18.9 million and $17.6 million at March 31, 2019 and December 31, 2018, respectively. These amounts are reflected as a reduction to long-term debt in the condensed consolidated balance sheets.

 

As of March 31, 2019, the future maturities of outstanding debt, excluding lease liability payment obligations, were as follows (in thousands): 

 

 

 

 

8.	INTEREST RATE SWAPS

 

The Company is party to two interest rate swap agreements, designated as cash flow hedges, to manage the risk of fluctuations in interest expense on its variable rate LIBOR debt. Under the first swap agreement, with respect to a notional amount of $850.0 million, the Company’s monthly payment obligation is determined at a fixed base rate of 2.653% beginning in March 2019. Under the second swap agreement, which is a forward-starting interest rate swap with respect to a notional amount of $350.0 million, the Company’s monthly payment obligation beginning in June 2020 is determined at a fixed base rate of 2.739%. Both interest rate swap agreements are scheduled to mature in the first quarter of 2029 but may be terminated prior to their scheduled maturity at the election of the Company or the financial institution counterparty as provided in each swap agreement. The Company does not hold any derivative instruments for speculative trading purposes. As of March 31, 2019, the Company’s interest rate swap liabilities were recorded at their combined fair value of $38.6 million, with the current and noncurrent portions reflected in accounts payable and accrued expenses and other noncurrent liabilities, respectively, within the condensed consolidated balance sheet.

 

Changes in the fair values of the interest rate swaps are reported through other comprehensive income until the underlying hedged debt’s interest expense impacts net income, at which point the corresponding change in fair value is reclassified from accumulated other comprehensive income to interest expense. A $38.6 million, or $29.1 million net of tax, loss was recorded through other comprehensive income within the condensed consolidated statement of operations and comprehensive income for the three months ended March 31, 2019. The Company expects that $2.3 million of this loss in accumulated other comprehensive income within the condensed consolidated balance sheet will be reclassified to interest expense within the condensed consolidated statement of operations and comprehensive income within the next 12 months. The Company recognized a $0.1 million loss on interest rate swaps during the three months ended March 31, 2019, which was reflected in interest expense within the condensed consolidated statement of operations and comprehensive income.

 

 

9.	FAIR VALUE MEASUREMENTS

 

Financial Assets and Liabilities. The Company has estimated the fair values of its financial instruments as of March 31, 2019 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 following fair value estimates are not necessarily indicative of the amounts the Company would realize in an actual market exchange.

 

The carrying amounts, fair values and related fair value hierarchy levels of the Company’s financial assets and liabilities as of March 31, 2019 were as follows (dollars in thousands):

 

 

Money market investments are primarily held in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (Level 1). Commercial paper is primarily held with high-quality companies and is valued using quoted market prices for investments similar to the commercial paper (Level 2). Money market investments and commercial paper with original maturities of three months or less are included within cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the Notes and Senior Credit Facilities are estimated based on market prices for similar instruments in active markets (Level 2). Interest rate swaps are measured at fair value within the condensed consolidated balance sheets on a recurring basis, with fair value determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (Level 2). The current portion of the Company’s interest rate swaps is included within accounts payable and accrued expenses while the long-term portion is included within other noncurrent liabilities in the condensed consolidated balance sheet.

 

The Company’s deferred compensation liability was $2.5 million and $3.0 million at March 31, 2019 and December 31, 2018, respectively. The current portion of this liability is included within accounts payable and accrued liabilities and the noncurrent portion is included within other noncurrent liabilities in the condensed consolidated balance sheets. This liability represents the market value of participant balances in a notional investment account that is comprised primarily of mutual funds, whose value is based on observable market prices. However, since the deferred compensation liability is not exchanged in an active market, it is classified as Level 2 in the fair value hierarchy.

 

The carrying amounts of accounts receivable, accounts payable and other financial 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. The assets acquired, including identifiable intangible assets and goodwill, and liabilities assumed in the Clearwave acquisition were recorded at fair value on the acquisition date of January 8, 2019, subject to potential future measurement period adjustments discussed in note 2. Nonfinancial 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, 2019 or 2018.

 

 

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 $250.0 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, 2019, the Company had repurchased 210,631 shares of its common stock at an aggregate cost of $104.9 million. During the three months ended March 31, 2019, the Company repurchased 5,984 shares at an aggregate cost of $5.1 million.

 

Tax Withholding for Equity Awards. At the employee’s option, shares of common stock are withheld by the Company upon vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to pay the applicable statutory minimum amount of employee withholding taxes. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The Company remitted $2.6 million during the three months ended March 31, 2019, for which the Company withheld 3,310 shares of common stock. Treasury shares of 188,569 held at March 31, 2019 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 to long-term incentive compensation. At March 31, 2019, 202,753 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 was $3.0 million and $2.3 million for the three months ended March 31, 2019 and 2018, respectively, and was included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. The Company recognized an income tax benefit of $1.0 million related to equity-based awards during the three months ended March 31, 2019. The deferred tax asset related to all outstanding equity-based awards was $3.5 million as of March 31, 2019.

 

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, 2019 is as follows:

 

 

 

Equity-based compensation expense for restricted stock was $1.8 million and $1.4 million for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, there was $13.4 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, 2019 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, 2019 were as follows:  

 

 

Equity-based compensation expense for SARs was $1.2 million and $0.9 million for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, there was $9.3 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.4 years.

 

 

12.	INCOME TAXES

 

The Company’s effective tax rate was 24.6% and 19.6% for the three months ended March 31, 2019 and 2018, respectively. The increase in the effective tax rate primarily related to a $1.4 million decrease in income tax benefits attributable to equity-based compensation awards and a $0.9 million increase in income tax expenses attributable to state effective tax rate changes recorded during the three months ended March 31, 2019.

 

 

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 common share calculation. The excluded number of anti-dilutive equity-based awards totaled 2,739 and 5,355 for the three months ended March 31, 2019 and 2018, respectively.

 

 

14.	COMMITMENTS AND CONTINGENCIES

 

Litigation and Legal Matters. The Company is subject to complaints and administrative proceedings and has been 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 any legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, the Company believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its business, financial condition, results of operations or cash flows.

 

Regulation in the Company’s 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. Future legislative and regulatory changes could adversely affect the Company’s operations.

 

 

15.	SUBSEQUENT EVENT

 

Fidelity Acquisition. On April 1, 2019, the Company entered into a definitive agreement with Fidelity Communications Co. to acquire its data, video and voice business and certain related assets (collectively, “Fidelity”) for $525.9 million in cash, subject to customary post-closing adjustments. Fidelity is a cable operator that provides residential and business services to customers throughout greater Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. Cable One and Fidelity share similar strategies, customer demographics and products. Accordingly, the acquisition of Fidelity 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 all-cash transaction is expected to be funded through a combination of cash on hand, revolving credit facility capacity and the proceeds of the new indebtedness described below. The transaction is subject to certain regulatory approvals and other customary closing conditions and is expected to be completed during the fourth quarter of 2019.

 

Delayed Draw Incremental Term Loan B-3. On April 12, 2019, the Company and certain of its subsidiaries entered into Amendment No. 3 to the Amended and Restated Credit Agreement (“Amendment No. 3”) with CoBank, as lender, and JPMorgan, as administrative agent, to provide for a new delayed draw incremental term “B-3” loan facility in an aggregate principal amount of $325.0 million (the “Term Loan B-3”). Subject to the satisfaction of certain conditions, the Company may borrow under the Term Loan B-3 in a single drawing at any time prior to October 9, 2019. No amounts have been drawn under the Term Loan B-3 as of May 9, 2019.

 

The Term Loan B-3 will mature on January 7, 2026 and may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). The interest rate applicable to the Term Loan B-3 will be, at the Company’s option, equal to LIBOR or a base rate, plus an applicable margin equal to 2.0% for LIBOR loans and 1.0% for base rate loans. The principal amount of the Term Loan B-3 will amortize in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum (subject to customary adjustments in the event of any prepayment), with the balance due upon maturity.

 

 

The Company will be required to pay a ticking fee, which will accrue at a per annum rate that will range between 0.375% and 0.625%, on the daily average unused amount of the aggregate commitments of the lender under the Term Loan B-3, accruing during the period commencing on May 28, 2019 up to, but excluding, the date on which the lender’s commitments under the Term Loan B-3 terminate.

 

Second Restatement Agreement to Amended and Restated Credit Agreement. On May 8, 2019, the Company and its wholly owned subsidiaries entered into a Second Restatement Agreement with JPMorgan, as administrative agent, and the lenders party thereto, to amend and restate the Amended and Restated Credit Agreement (the “Second Restatement Agreement”).

 

The Second Restatement Agreement provides for a new senior secured term “A” loan facility in an aggregate principal amount of $250.0 million (the “New Term Loan A”), a new senior secured delayed draw term “A” loan facility in an aggregate principal amount of $450.0 million (the “Delayed Draw Term Loan A”) and a new $350.0 million senior secured revolving credit facility (the “New Revolving Credit Facility”). The Second Restatement Agreement did not alter the principal terms of the Company’s previously established Term Loan B, Term Loan B-2 and Term Loan B-3.

 

A portion of the proceeds from the new credit facilities were used to refinance the Company's existing Revolving Credit Facility and Term Loan A, and the Company intends to use the remaining proceeds, together with the proceeds of the Term Loan B-3 and cash on hand, to redeem the Notes on or after June 15, 2019, to finance the acquisition of Fidelity and for other general corporate purposes. This Quarterly Report on Form 10-Q is not, and shall not be deemed to be, a notice of optional redemption of the Notes.

 

The New Term Loan A and New Revolving Credit Facility will mature on May 8, 2024 (unless certain of the Company’s existing indebtedness remains outstanding after certain specified dates, in which case the final maturity date of both facilities will be an earlier date as specified in the documentation for the new credit facilities). The New Term Loan A and New Revolving Credit Facility will bear interest, at the Company’s option, at a rate per annum determined by reference to either LIBOR or an adjusted base rate, in each case plus an applicable interest rate margin. The applicable interest rate margin with respect to LIBOR borrowings will be a rate per annum between 1.25% and 1.75% and with respect to adjusted base rate borrowings will be a rate per annum between 0.25% and 0.75%, in each case determined on a quarterly basis by reference to a pricing grid based upon the Company’s total net leverage ratio.

 

The principal amount of the New Term Loan A will amortize in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year following the closing date, 2.5% per annum for the second year following the closing date, 5.0% per annum for the third year following the closing date, 7.5% per annum for the fourth year following the closing date and 12.5% per annum for the fifth year following the closing date (in each case subject to customary adjustments in the event of any prepayment or in the event the Delayed Draw Term Loan A is drawn), with the balance due upon maturity.

 

The Delayed Draw Term Loan A will be available in a single drawing until February 8, 2020. Any loans under this Delayed Draw Term Loan A will have the same terms as, and will constitute one class of term loans with, the loans under the New Term Loan A described above.

 

 

 

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