0001632127 CABLE ONE, INC. false --12-31 Q2 2020 0.01 0.01 4,000,000 4,000,000 0 0 0 0 0.01 0.01 40,000,000 40,000,000 6,175,399 5,887,899 6,019,834 5,715,377 155,565 172,522 2.25 2.00 4.50 4.00 429.6 0 0 22.0 22.0 22.0 0 The Term Loan A-2 interest rate spread can vary between 1.25% and 1.75%, determined on a quarterly basis by reference to a pricing grid based on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement). All other applicable margins are fixed. Equity-based compensation 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. Represents note and other receivables issued to Wisper ISP, LLC, a wireless internet service provider (“Wisper”), and related accrued interest. In July 2020, the Company acquired an equity interest in Wisper for a total consideration of $25.3 million. See detailed discussion associated with this transaction in Note 7. On May 8, 2019, $250 million was drawn. On October 1, 2019, an additional $450 million was drawn. Per annum amortization rates for years one through five following the closing date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively. Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). Includes $27.2 million equity investment in a fixed wireless provider. On May 8, 2019, $250.0 million was drawn. 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Table of Contents



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 June 30, 2020

 

or

 

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

 

Commission File Number: 001-36863

 


 

Cable One, Inc. 

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

13-3060083

(State or Other Jurisdiction of Incorporation or Organization)

 

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

  

210 E. Earll Drive, Phoenix, Arizona

 

85012

(Address of Principal Executive Offices)

 

(Zip Code)

 

(602) 364-6000

(Registrant’s Telephone Number, Including Area Code)

 

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 July 31, 2020
Common stock, par value $0.016,020,339

 

 

 

 

 

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

18

   

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

30

   

Item 4.     Controls and Procedures

31

   

PART II: OTHER INFORMATION

31

   

Item 1.     Legal Proceedings

31

   

Item 1A.  Risk Factors

31

   

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

34

   

Item 3.     Defaults Upon Senior Securities

34

   

Item 4.     Mine Safety Disclosures

35

   

Item 5.     Other Information

35

   

Item 6.     Exhibits

35

   

SIGNATURES

36

 

References herein to “Cable One,” “us,” “our,” “we” or the “Company” refer to Cable One, Inc., together with its wholly owned subsidiaries.

 

i

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business, strategy, dividend policy, financial results and financial condition as well as anticipated impacts from the COVID-19 pandemic on the Company and future responses. Forward-looking statements often include words such as “will,” “should,” “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors, which are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and this Quarterly Report on Form 10-Q:

 

 

the duration and severity of the COVID-19 pandemic and its effects on our business, financial condition, results of operations and cash flows;

 

rising levels of competition from historical and new entrants in our markets;

 

recent and future changes in technology;

 

our ability to continue to grow our business services products;

 

increases in programming costs and retransmission fees;

 

our ability to obtain hardware, software and operational support from vendors;

 

the effects of any acquisitions and strategic investments by us;

 

risks that our rebranding may not produce the benefits expected;

 

damage to our reputation or brand image;

 

risks that the implementation of our new enterprise resource planning (“ERP”) system disrupts business operations;

 

adverse economic conditions;

 

the integrity and security of our network and information systems;

 

the impact of possible security breaches and other disruptions, including cyber-attacks;

 

our failure to obtain necessary intellectual and proprietary rights to operate our business and the risk of intellectual property claims and litigation against us;

 

our ability to retain key employees (who we refer to as associates);

 

legislative or regulatory efforts to impose network neutrality and other new requirements on our data services;

 

additional regulation of our video and voice services;

 

our ability to renew cable system franchises;

 

increases in pole attachment costs;

 

changes in local governmental franchising authority and broadcast carriage regulations;

 

the potential adverse effect of our level of indebtedness on our business, financial condition or results of operations and cash flows;

 

the restrictions the terms of our indebtedness place on our business and corporate actions;

 

the possibility that interest rates will rise, causing our obligations to service our variable rate indebtedness to increase significantly;

 

our ability to incur future indebtedness;

 

fluctuations in our stock price;

 

our ability to continue to pay dividends;

 

dilution from equity awards and potential stock issuances;

 

provisions in our charter, by-laws and Delaware law that could discourage takeovers and limit the judicial forum for certain disputes and the liabilities for directors; and

 

the other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), including but not limited to in our 2019 Form 10-K and this Quarterly Report on Form 10-Q.

 

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

 

ii

 

PART I:  FINANCIAL INFORMATION

 

 

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(dollars in thousands, except par values)

 

June 30, 2020

  

December 31, 2019

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $642,552  $125,271 

Accounts receivable, net

  41,351   38,452 

Income taxes receivable

  14,263   2,146 

Prepaid and other current assets

  19,638   15,619 

Total Current Assets

  717,804   181,488 

Property, plant and equipment, net

  1,233,419   1,201,271 

Intangible assets, net

  1,290,106   1,312,381 

Goodwill

  429,597   429,597 

Other noncurrent assets

  72,524   27,094 

Total Assets

 $3,743,450  $3,151,831 
         

Liabilities and Stockholders' Equity

        

Current Liabilities:

        

Accounts payable and accrued liabilities

 $152,840  $136,993 

Deferred revenue

  25,333   23,640 

Current portion of long-term debt

  28,945   28,909 

Total Current Liabilities

  207,118   189,542 

Long-term debt

  1,699,525   1,711,937 

Deferred income taxes

  303,353   303,314 

Interest rate swap liability

  184,182   78,612 

Other noncurrent liabilities

  25,726   26,857 

Total Liabilities

  2,419,904   2,310,262 
         

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; 6,175,399 and 5,887,899 shares issued; and 6,019,834 and 5,715,377 shares outstanding as of June 30, 2020 and December 31, 2019, respectively)

  62   59 

Additional paid-in capital

  527,641   51,198 

Retained earnings

  1,085,793   980,355 

Accumulated other comprehensive loss

  (162,242)  (68,158)

Treasury stock, at cost (155,565 and 172,522 shares held as of June 30, 2020 and December 31, 2019, respectively)

  (127,708)  (121,885)

Total Stockholders' Equity

  1,323,546   841,569 

Total Liabilities and Stockholders' Equity

 $3,743,450  $3,151,831 

 

See accompanying notes to the condensed consolidated financial statements.

 

1

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 

(dollars in thousands, except per share data)

 

2020

   

2019

   

2020

   

2019

 

Revenues

  $ 328,303     $ 285,650     $ 649,499     $ 564,255  

Costs and Expenses:

                               

Operating (excluding depreciation and amortization)

    106,028       95,688       211,956       190,206  

Selling, general and administrative

    64,994       60,103       127,878       121,546  

Depreciation and amortization

    65,584       54,835       130,863       108,679  

(Gain) loss on asset sales and disposals, net

    988       910       (4,633 )     2,013  

Total Costs and Expenses

    237,594       211,536       466,064       422,444  

Income from operations

    90,709       74,114       183,435       141,811  

Interest expense

    (16,615 )     (18,516 )     (35,289 )     (36,612 )

Other income (expense), net

    1,655       (9,632 )     3,389       (7,830 )

Income before income taxes

    75,749       45,966       151,535       97,369  

Income tax provision

    13,209       9,571       19,669       22,235  

Net income

  $ 62,540     $ 36,395     $ 131,866     $ 75,134  
                                 

Net Income per Common Share:

                               

Basic

  $ 10.72     $ 6.41     $ 22.87     $ 13.24  

Diluted

  $ 10.63     $ 6.35     $ 22.66     $ 13.13  

Weighted Average Common Shares Outstanding:

                               

Basic

    5,831,796       5,673,669       5,764,850       5,673,893  

Diluted

    5,883,417       5,730,238       5,819,633       5,723,296  
                                 

Unrealized loss on cash flow hedges and other, net of tax

  $ (9,459 )   $ (33,970 )   $ (94,084 )   $ (63,039 )

Comprehensive income

  $ 53,081     $ 2,425     $ 37,782     $ 12,095  

 

See accompanying notes to the condensed consolidated financial statements.

 

2

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

          

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 March 31, 2020

  5,724,857  $59  $54,419  $1,036,877  $(152,783) $(127,681) $810,891 

Net income

  -   -   -   62,540   -   -   62,540 

Unrealized loss on cash flow hedges and other, net of tax

  -   -   -   -   (9,459)  -   (9,459)

Equity-based compensation

  -   -   3,426   -   -   -   3,426 

Issuance of common stock

  287,500   3   469,796   -   -   -   469,799 

Issuance of equity awards, net of forfeitures

  7,494   -   -   -   -   -   - 

Withholding tax for equity awards

  (17)  -   -   -   -   (27)  (27)

Dividends paid to stockholders ($2.25 per common share)

  -   -   -   (13,624)  -   -   (13,624)

Balance at June 30, 2020

  6,019,834  $62  $527,641  $1,085,793  $(162,242) $(127,708) $1,323,546 

 

          

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 March 31, 2019

  5,699,330  $59  $41,919  $877,644  $(29,165) $(121,422) $769,035 

Net income

  -   -   -   36,395   -   -   36,395 

Unrealized loss on cash flow hedges and other, net of tax

  -   -   -   -   (33,970)  -   (33,970)

Equity-based compensation

  -   -   3,082   -   -   -   3,082 

Issuance of equity awards, net of forfeitures

  7,495   -   -   -   -   -   - 

Withholding tax for equity awards

  (13)  -   -   -   -   (210)  (210)

Dividends paid to stockholders ($2.00 per common share)

  -   -   -   (11,424)  -   -   (11,424)

Balance at June 30, 2019

  5,706,812  $59  $45,001  $902,615  $(63,135) $(121,632) $762,908 

 

          

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, 2019

  5,715,377  $59  $51,198  $980,355  $(68,158) $(121,885) $841,569 

Net income

  -   -   -   131,866   -   -   131,866 

Unrealized loss on cash flow hedges and other, net of tax

  -   -   -   -   (94,084)  -   (94,084)

Equity-based compensation

  -   -   6,647   -   -   -   6,647 

Issuance of common stock

  287,500   3   469,796   -   -   -   469,799 

Issuance of equity awards, net of forfeitures

  20,746   -   -   -   -   -   - 

Withholding tax for equity awards

  (3,789)  -   -   -   -   (5,823)  (5,823)

Dividends paid to stockholders ($4.50 per common share)

  -   -   -   (26,428)  -   -   (26,428)

Balance at June 30, 2020

  6,019,834  $62  $527,641  $1,085,793  $(162,242) $(127,708) $1,323,546 

 

          

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

  -   -   -   75,134   -   -   75,134 

Unrealized loss on cash flow hedges and other, net of tax

  -   -   -   -   (63,039)  -   (63,039)

Equity-based compensation

  -   -   6,103   -   -   -   6,103 

Issuance of equity awards, net of forfeitures

  12,717   -   -   -   -   -   - 

Repurchases of common stock

  (5,984)  -   -   -   -   (5,073)  (5,073)

Withholding tax for equity awards

  (3,323)  -   -   -   -   (2,764)  (2,764)

Dividends paid to stockholders ($4.00 per common share)

  -   -   -   (22,819)  -   -   (22,819)

Balance at June 30, 2019

  5,706,812  $59  $45,001  $902,615  $(63,135) $(121,632) $762,908 

 

See accompanying notes to the condensed consolidated financial statements.

 

3

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Six Months Ended June 30,

 

(in thousands)

 

2020

  

2019

 

Cash flows from operating activities:

        

Net income

 $131,866  $75,134 

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

 

Depreciation and amortization

  130,863   108,679 

Amortization of debt issuance costs

  2,212   2,409 

Equity-based compensation

  6,647   6,103 

Write-off of debt issuance costs

  -   4,207 

Increase in deferred income taxes

  30,827   11,647 

(Gain) loss on asset sales and disposals, net

  (4,633)  2,013 

Changes in operating assets and liabilities, net of effects from acquisitions:

        

(Increase) decrease in accounts receivable, net

  (2,899)  901 

(Increase) decrease in income taxes receivable

  (12,117)  8,020 

Increase in prepaid and other current assets

  (4,019)  (6,999)

Increase (decrease) in accounts payable and accrued liabilities

  (3,387)  5,004 

Increase (decrease) in deferred revenue

  1,693   (198)

Other, net

  (4,858)  (4,426)

Net cash provided by operating activities

  272,195   212,494 
         

Cash flows from investing activities:

        

Purchase of business, net of cash acquired

  -   (356,917)

Purchase of equity investment

  (27,245)  - 

Capital expenditures

  (143,416)  (110,488)

Decrease in accrued expenses related to capital expenditures

  (740)  (5,410)

Proceeds from sales of property, plant and equipment

  617   6,998 

Issuance of note and other receivables

  (7,288)  - 

Net cash used in investing activities

  (178,072)  (465,817)
         

Cash flows from financing activities:

        

Proceeds from equity issuance

  488,750   - 

Proceeds from long-term debt borrowings

  100,000   825,000 

Payment of equity issuance costs

  (18,951)  - 

Payment of debt issuance costs

  -   (11,671)

Payments on long-term debt

  (114,390)  (691,180)

Repurchases of common stock

  -   (5,073)

Payment of withholding tax for equity awards

  (5,823)  (2,764)

Dividends paid to stockholders

  (26,428)  (22,819)

Net cash provided by financing activities

  423,158   91,493 
         

Increase (decrease) in cash and cash equivalents

  517,281   (161,830)

Cash and cash equivalents, beginning of period

  125,271   264,113 

Cash and cash equivalents, end of period

 $642,552  $102,283 
         

Supplemental cash flow disclosures:

        

Cash paid for interest, net of capitalized interest

 $32,700  $34,687 

Cash paid for income taxes, net of refunds received

 $840  $3,001 

 

See accompanying notes to the condensed consolidated financial statements.

 

4

 

CABLE ONE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business. Cable One 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 June 30, 2020, Cable One provided service to approximately 962,000 residential and business customers, of which approximately 838,000 subscribed to data services, 290,000 subscribed to video services and 133,000 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. On October 1, 2019, the Company acquired Fidelity Communications Co.’s data, video and voice business and certain related assets (collectively, “Fidelity”) for a purchase price of $531.4 million in cash on a debt-free basis. Refer to note 2 for details on these transactions.

 

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 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 2019 Form 10-K.

 

The December 31, 2019 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 2019 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 reclassifications have been made to prior period amounts to conform to the current year presentation.

 

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

 

Segment Reporting. Accounting Standard Codification (“ASC”) 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. Historically, the Company’s operations were organized and managed on the basis of its geographic divisions. Effective in the second quarter of 2020, as a result of progress made in the Company’s staged rebranding initiative and the further alignment of service offerings and product pricing of recently acquired operations with its legacy business, the Company reevaluated the chief operating decision maker’s review and assessment of the Company’s operating performance for purposes of performance monitoring and resource allocation. The Company determined that its operations, including the decisions to allocate resources and deploy capital, are organized and managed on a consolidated basis and are not based on any predetermined geographic division. Accordingly, management has identified one operating segment, which is its reportable segment, under this organizational and reporting structure.

 

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.

 

Indefinite-Lived Intangible Assets. The Company’s unit of account for its franchise agreements was historically established at the geographic division level. The Company reevaluates the unit of account used to test for impairment periodically or whenever events or substantive changes in circumstances occur to ensure impairment testing is performed at an appropriate level. Effective in the second quarter of 2020, as a result of progress made in the Company’s staged rebranding initiative and the further alignment of service offerings and product pricing of recently acquired operations with its legacy business, the Company reevaluated the basis of its franchise agreements unit of account for use in impairment assessments and identified a single unit of account for its franchise agreements based on a reevaluation of the Company’s current operations and the use of its assets.

 

5

 

Goodwill. The Company tests goodwill for impairment at the reporting unit level, which was historically established at the geographic division level. The Company reevaluates the determination of its reporting units used to test for impairment periodically or whenever events or substantive changes in circumstances occur. Effective in the second quarter of 2020, as a result of progress made in the Company’s staged rebranding initiative and the further alignment of service offerings and product pricing of recently acquired operations with its legacy business, the Company reevaluated the basis of its goodwill reporting units and identified four geographic divisions that were aggregated into a single goodwill reporting unit based on the chief operating decision maker’s current performance monitoring and resource allocation process and the economic similarity of the four divisions.

 

Recently Adopted Accounting Pronouncements. In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 ASU 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. The Company adopted the updated guidance on January 1, 2020 on a prospective basis. The adoption of this ASU has resulted in the capitalization of $4.6 million of costs that will be amortized over the life of the applicable hosting arrangement. Amortization of such costs will be included in operating or selling, general and administrative expenses upon implementation, rather than depreciation and amortization expense, within the 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 ASU was effective January 1, 2020 and required adoption on a modified retrospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued But Not Yet Adopted Accounting Pronouncements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued at the end of 2021. The ASU may be adopted at any time through December 31, 2022. The Company currently holds certain debt and interest rate swaps that reference LIBOR. The Company plans to adopt ASU 2020-04 when the contracts underlying such instruments are amended as a result of reference rate reform, which is expected to occur prior to the end of 2021. The Company is currently evaluating the expected impact of the adoption of this guidance on its consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions related to intraperiod tax allocations, foreign subsidiaries and interim reporting that are present within existing GAAP. The ASU also provides updated guidance regarding the tax treatment of certain franchise taxes, goodwill and nontaxable entities, among other items. In addition, ASU 2019-12 clarifies that the effect of a change in tax laws or rates should be reflected in the annual effective tax rate computation during the interim period that includes the enactment date. The ASU is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Certain provisions must be adopted on prescribed retrospective, modified retrospective and prospective bases, while other provisions may be adopted on either a retrospective or modified retrospective basis. The Company is currently evaluating its timing and method, where applicable, of adoption as well as the expected impact on its consolidated financial statements.

 

6

 

 

2.

ACQUISITIONS

 

The change in carrying value of goodwill as a result of the Clearwave and Fidelity acquisitions during 2019 was as follows (in thousands):

 

  

Goodwill

 

Balance at December 31, 2018

 $172,129 

Clearwave acquisition goodwill recognized

  185,885 

Fidelity acquisition goodwill recognized

  71,583 

Balance at December 31, 2019

 $429,597 

 

Clearwave. On January 8, 2019, the Company acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois for a purchase price of $358.8 million. The Clearwave 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.

 

A summary of the allocation of the Clearwave purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2019, is as follows (in thousands):

 

   

Purchase Price

Allocation

 

Assets Acquired

       

Cash and cash equivalents

  $ 1,913  

Accounts receivable

    1,294  

Prepaid and other current assets

    311  

Property, plant and equipment

    120,472  

Intangible assets

    89,700  

Other noncurrent assets

    3,533  

Total Assets Acquired

  $ 217,223  
         

Liabilities Assumed

       

Accounts payable and accrued liabilities

  $ 2,128  

Deferred revenue, short-term portion

    4,322  

Deferred income taxes

    32,771  

Other noncurrent liabilities

    5,057  

Total Liabilities Assumed

  $ 44,278  
         

Net assets acquired

  $ 172,945  

Purchase price consideration

    358,830  

Goodwill recognized

  $ 185,885  

 

The measurement period ended on January 7, 2020, and no measurement period adjustments were recorded during 2020.

 

Fidelity. On October 1, 2019, the Company acquired Fidelity, a provider of data, video and voice services to residential and business customers throughout Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas for a purchase price of $531.4 million. Cable One and Fidelity share similar strategies, customer demographics and products. The Fidelity acquisition provides 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.

 

7

 

A summary of the allocation of the Fidelity purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2019, was as follows (in thousands):

 

   

Preliminary

Purchase Price

Allocation

 

Assets Acquired

       

Cash and cash equivalents

  $ 4,869  

Accounts receivable

    3,691  

Prepaid and other current assets

    1,756  

Property, plant and equipment

    173,904  

Intangible assets

    288,000  

Other noncurrent assets

    1,895  

Total Assets Acquired

  $ 474,115  
         

Liabilities Assumed

       

Accounts payable and accrued liabilities

  $ 8,795  

Deferred revenue, short-term portion

    1,796  

Other noncurrent liabilities

    3,715  

Total Liabilities Assumed

  $ 14,306  
         

Net assets acquired

  $ 459,809  

Purchase price consideration

    531,392  

Goodwill recognized

  $ 71,583  

 

No measurement period adjustments were recorded during the six months ended June 30, 2020. The measurement period will end on September 30, 2020.

 

 

3.

REVENUES

 

Revenues by product line and other revenue-related disclosures were as follows (in thousands):   

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Residential

                

Data

 $164,015  $132,824  $319,005  $262,635 

Video

  87,328   84,033   172,650   167,836 

Voice

  12,120   10,705   24,547   20,329 

Business services

  58,469   49,759   116,331   96,903 

Other

  6,371   8,329   16,966   16,552 

Total revenues

 $328,303  $285,650  $649,499  $564,255 
                 

Franchise and other regulatory fees

 $6,615  $6,240  $12,963  $10,337 

Deferred commission amortization

 $1,338  $942  $2,699  $1,942 

 

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

 

Fees imposed on the Company by various governmental authorities, including franchise fees, are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities. As the Company acts as principal, these fees are reported in video and voice revenues on a gross basis with corresponding expenses included within operating expenses in the condensed consolidated statements of operations and comprehensive income.

 

Commission amortization expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income.

 

Current deferred revenue liabilities consist of refundable customer prepayments, up-front charges and installation fees. As of June 30, 2020, 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 $23.6 million of current deferred revenue at December 31, 2019, nearly all was recognized during the six months ended June 30, 2020. Noncurrent deferred revenue liabilities consist of up-front charges and installation fees from business customers.

 

 

4.

OPERATING ASSETS AND LIABILITIES

 

Accounts receivable consisted of the following (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Trade receivables

 $46,092  $33,467 

Other receivables

  4,658   6,186 

Less: Allowance for credit losses

  (9,399)  (1,201)

Total accounts receivable, net

 $41,351  $38,452 

 

8

 

Net accounts receivable from contracts with customers totaled $36.7 million and $32.3 million at June 30, 2020 and December 31, 2019, respectively.

 

The change in the allowance for credit losses were as follows (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Beginning balance

 $2,997  $951  $1,201  $2,045 

Additions - charged to costs and expenses

  5,956   1,124   8,075   2,693 

Deductions - write-offs

  (966)  (2,250)  (3,239)  (7,003)

Recoveries of amounts previously written off

  1,412   1,341   3,362   3,431 

Ending balance

 $9,399  $1,166  $9,399  $1,166 

 

Prepaid and other current assets consisted of the following (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Prepaid repairs and maintenance

 $5,762  $551 

Prepaid insurance

  31   1,548 

Prepaid rent

  2,070   1,499 

Prepaid software

  3,428   4,672 

Deferred commissions

  3,879   3,586 

All other current assets

  4,468   3,763 

Total prepaid and other current assets

 $19,638  $15,619 

 

Other noncurrent assets consisted of the following (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Operating lease right-of-use assets

 $14,523  $16,924 

Equity investments(1)

  34,974   206 

Deferred commissions

  5,339   5,042 

Note and other receivables(2)

  7,288   - 

Software implementation costs

  4,569   - 

Debt issuance costs

  2,149   2,427 

All other noncurrent assets

  3,682   2,495 

Total other noncurrent assets

 $72,524  $27,094 

 


(1)

Balance at June 30, 2020 includes a $27.2 million equity investment in a fixed wireless provider made during the three months ended June 30, 2020.

(2)

Balance at June 30, 2020 represents a note and other receivables issued to Wisper ISP, LLC, a wireless internet service provider (“Wisper”). In July 2020, the Company closed an equity investment in Wisper for total consideration of $25.3 million. Refer to note 7 for details on this transaction.

 

Accounts payable and accrued liabilities consisted of the following (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Accounts payable

 $32,654  $36,351 

Accrued programming costs

  20,849   19,620 

Accrued compensation and related benefits

  21,768   23,189 

Accrued sales and other operating taxes

  11,990   9,501 

Accrued franchise fees

  3,904   4,201 

Subscriber deposits

  6,771   6,550 

Operating lease liabilities

  4,031   4,601 

Interest rate swap liability

  30,347   11,045 

Accrued insurance costs

  7,074   6,174 

Cash overdrafts

  3,718   5,801 

All other accrued liabilities

  9,734   9,960 

Total accounts payable and accrued liabilities

 $152,840  $136,993 

 

9

 

Other noncurrent liabilities consisted of the following (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Operating lease liabilities

 $9,533  $11,146 

Accrued compensation and related benefits

  6,568   7,154 

Deferred revenue

  5,287   5,514 

All other noncurrent liabilities

  4,338   3,043 

Total other noncurrent liabilities

 $25,726  $26,857 

 

 

5.

PROPERTY, PLANT AND EQUIPMENT

 

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

 

  

June 30, 2020

  

December 31, 2019

 

Cable distribution systems

 $1,854,449  $1,779,964 

Customer premise equipment

  279,742   266,190 

Other equipment and fixtures

  458,851   444,799 

Buildings and improvements

  116,265   113,331 

Capitalized software

  103,096   99,988 

Construction in progress

  98,472   93,352 

Land

  13,371   13,361 

Right-of-use assets

  10,268   10,187 

Property, plant and equipment, gross

  2,934,514   2,821,172 

Less: Accumulated depreciation and amortization

  (1,701,095)  (1,619,901)

Property, plant and equipment, net

 $1,233,419  $1,201,271 

 

Depreciation and amortization expense for property, plant and equipment was $54.5 million and $50.6 million for the three months ended June 30, 2020 and 2019, respectively, and $108.6 million and $100.3 million for the six months ended June 30, 2020 and 2019, respectively.

 

In January 2019, a 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.

 

 

6.

GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill was $429.6 million at both June 30, 2020 and December 31, 2019. The Company has not historically recorded any impairment of goodwill.

 

 

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

 

       

June 30, 2020

  

December 31, 2019

 
  

Useful Life

Range

(in years)

  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net

Carrying

Amount

  

Gross Carrying Amount

  

Accumulated

Amortization

  

Net

Carrying

Amount

 

Finite-Lived Intangible Assets

                             

Franchise renewals

 125  $2,927  $2,927  $-  $2,927  $2,895  $32 

Customer relationships

 1417   362,000   59,213   302,787   362,000   37,470   324,530 

Trademarks and trade names

 2.73   4,300   2,052   2,248   4,300   1,552   2,748 

Total finite-lived intangible assets

      $369,227  $64,192  $305,035  $369,227  $41,917  $327,310 
                              

Indefinite-Lived Intangible Assets

                             

Franchise agreements

              $978,371          $978,371 

Trade name

               6,700           6,700 

Total indefinite-lived intangible assets

              $985,071          $985,071 
                              

Total intangible assets, net

              $1,290,106          $1,312,381 

 

10

 

Intangible asset amortization expense was $11.1 million and $4.2 million for the three months ended June 30, 2020 and 2019, respectively, and $22.3 million and $8.3 million for the six months ended June 30, 2020 and 2019, respectively.

 

The future amortization of existing finite-lived intangible assets as of June 30, 2020 was as follows (in thousands):

 

Year Ending December 31,

  

Amount

 

2020 (remaining six months)

 $22,159 

2021

  39,059 

2022

  34,314 

2023

  27,845 

2024

  23,083 

Thereafter

  158,575 

Total

 $305,035 

 

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

 

 

7.

DEBT

 

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

 

  

June 30, 2020

  

December 31, 2019

 

Senior Credit Facilities (as defined below)

 $1,738,884  $1,753,045 

Finance lease liabilities

  5,794   5,943 

Total debt

  1,744,678   1,758,988 

Less: Unamortized debt issuance costs

  (16,208)  (18,142)

Less: Current portion of long-term debt

  (28,945)  (28,909)

Total long-term debt

 $1,699,525  $1,711,937 

 

The second amended and restated credit agreement among the Company and its lenders (the “Credit Agreement”) provides for senior secured term loans in original aggregate principal amounts of $700 million (the “Term Loan A-2”), $500 million (the “Term Loan B-1”), $250 million (the “Term Loan B-2”) and $325 million (the “Term Loan B-3”) as well as a $350 million revolving credit facility that will mature on May 8, 2024 (the “Revolving Credit Facility” and, together with the Term Loan A-2, the Term Loan B-1, the Term Loan B-2 and the Term Loan B-3, the “Senior Credit Facilities”). 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. Refer to the table below summarizing the Company’s outstanding term loans and note 9 to the Company’s audited consolidated financial statements included in the 2019 Form 10-K for further details on the Company’s Senior Credit Facilities.

 

In January 2020, the Company issued letters of credit totaling $22.0 million under the Revolving Credit Facility on behalf of Wisper to guarantee its performance obligations under a Federal Communications Commission (“FCC”) broadband funding program. The fair value of the letters of credit approximates face value based on the short-term nature of the agreements. The Company would be liable for up to $22.0 million if Wisper were to fail to satisfy all or some of its performance obligations under the FCC program. Wisper pledged certain assets in favor of the Company as collateral for issuing the letters of credit, which pledge was terminated in the third quarter of 2020 at the same time that the Company closed an equity investment in Wisper, and Wisper has agreed to guarantee and indemnify the Company in connection with such letters of credit. As of June 30, 2020, the Company has assessed the likelihood of non-performance associated with the guarantee to be remote, and therefore, no liability has been accrued within the condensed consolidated balance sheet.

 

In March 2020, the Company borrowed $100 million under the Revolving Credit Facility for general corporate purposes, including for small acquisitions and strategic investments. The outstanding balance was repaid in full in May 2020 using a portion of the net proceeds from the Company’s public offering of common stock (the “Public Offering”). Refer to note 10 for information on the Public Offering. Letter of credit issuances under the Revolving Credit Facility totaled $28.7 million at June 30, 2020 and were held for the benefit of performance obligations under government grant programs and certain general and liability insurance matters and bore interest at a rate of 1.63% per annum. As of June 30, 2020, the Company had $1.7 billion of aggregate outstanding term loans and $321.3 million available for borrowing under the Revolving Credit Facility.

 

11

 

A summary of the Company’s outstanding term loans as of June 30, 2020 is as follows (dollars in thousands):

 

Instrument

 

Draw Date

 

Original

Principal

  

Amortization

Per Annum(1)

  

Outstanding

Principal

 

Final

Maturity

Date

 

Balance

Due Upon

Maturity

 

Benchmark

Rate

 

Applicable

Margin(2)

  

Interest

Rate

 

Term Loan A-2

 

5/8/2019

 $700,000  

 

Varies(4)  $685,259 

5/8/2024

 $513,945 

LIBOR

  1.50%   1.68% 
  10/1/2019(3)                          

Term Loan B-1

 

5/1/2017

  500,000   1.0%   485,000 

5/1/2024

  466,250 

LIBOR

  1.75%   1.93% 

Term Loan B-2

 

1/7/2019

  250,000   1.0%   246,875 

1/7/2026

  233,125 

LIBOR

  2.00%   2.18% 

Term Loan B-3

 

6/14/2019

  325,000   1.0%   321,750 

1/7/2026

  303,875 

LIBOR

  2.00%   2.18% 

Total

 $1,775,000      $1,738,884   $1,517,195          

 


(1)

Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions).

(2)

The Term Loan A-2 interest rate spread can vary between 1.25% and 1.75%, determined on a quarterly basis by reference to a pricing grid based on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement). All other applicable margins are fixed.

(3)

On May 8, 2019, $250 million was drawn. On October 1, 2019, an additional $450 million was drawn.

(4)

Per annum amortization rates for years one through five following the closing date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively.

 

Unamortized debt issuance costs consisted of the following (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Revolving Credit Facility portion:

        

Other noncurrent assets

 $2,149  $2,427 

Term loans portion:

        

Long-term debt (contra account)

  16,208   18,142 

Total

 $18,357  $20,569 

 

The Company recorded debt issuance cost amortization of $1.1 million and $1.3 million for the three months ended June 30, 2020 and 2019, respectively, and $2.2 million and $2.4 million for the six months ended June 30, 2020 and 2019, respectively, within interest expense in the condensed consolidated statements of operations and comprehensive income.

 

The future maturities of outstanding borrowings as of June 30, 2020 were as follows (in thousands): 

 

Year Ending December 31,

  

Amount

 

2020 (remaining six months)

 $14,160