0001632127 CABLE ONE, INC. false --12-31 Q3 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 6,024,029 5,715,377 151,370 172,522 2.50 2.25 7.00 6.25 1 0 0 0 1.1 0 22.0 0 2.5 Balance at September 30, 2020 relates to a receivable due from Wisper for wireless spectrum auction purchases, which was received in full in October 2020. Balance at September 30, 2020 related primarily to the $27.2 million equity investment in Nextlink. Refer to note 1 for details on this transaction. Balance at September 30, 2020 related to the Anniston System assets contributed to Hargray on October 1, 2020. Refer to notes 1 and 15 for details on this transaction. 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. Consists of the unfunded portion of the Company’s equity investment in Wisper at September 30, 2020. Refer to note 1 for details on this transaction. Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). 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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 September 30, 2020

 

or

 

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

 

Commission File Number: 001-36863

 


 

a1.jpg

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 ClassShares Outstanding as of October 30, 2020
Common stock, par value $0.016,024,666
 

 

 

 

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

32

 

 

Item 4.     Controls and Procedures

32

 

 

PART II: OTHER INFORMATION

33

 

 

Item 1.     Legal Proceedings

33

 

 

Item 1A.  Risk Factors

33

 

 

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

37

 

 

Item 3.     Defaults Upon Senior Securities

37

 

 

Item 4.     Mine Safety Disclosures

37

 

 

Item 5.     Other Information

37

 

 

Item 6.     Exhibits

38

 

 

SIGNATURES

39

 

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, acquisitions and strategic investments, 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 our 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, including the expected timing for closing the Notes Offering (as defined below);

 

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)

 

September 30, 2020

  

December 31, 2019

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $625,332  $125,271 

Accounts receivable, net

  50,176   38,452 

Income taxes receivable

  43,024   2,146 

Prepaid and other current assets

  21,263   15,619 

Total Current Assets

  739,795   181,488 

Equity method investment

  25,250   - 

Property, plant and equipment, net

  1,244,264   1,201,271 

Intangible assets, net

  1,298,226   1,312,381 

Goodwill

  434,876   429,597 

Other noncurrent assets

  84,397   27,094 

Total Assets

 $3,826,808  $3,151,831 
         

Liabilities and Stockholders' Equity

        

Current Liabilities:

        

Accounts payable and accrued liabilities

 $167,754  $136,993 

Deferred revenue

  25,439   23,640 

Current portion of long-term debt

  33,350   28,909 

Total Current Liabilities

  226,543   189,542 

Long-term debt

  1,688,973   1,711,937 

Deferred income taxes

  322,155   303,314 

Interest rate swap liability

  176,409   78,612 

Other noncurrent liabilities

  28,329   26,857 

Total Liabilities

  2,442,409   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 6,024,029 and 5,715,377 shares outstanding as of September 30, 2020 and December 31, 2019, respectively)

  62   59 

Additional paid-in capital

  531,508   51,198 

Retained earnings

  1,137,010   980,355 

Accumulated other comprehensive loss

  (156,435)  (68,158)

Treasury stock, at cost (151,370 and 172,522 shares held as of September 30, 2020 and December 31, 2019, respectively)

  (127,746)  (121,885)

Total Stockholders' Equity

  1,384,399   841,569 

Total Liabilities and Stockholders' Equity

 $3,826,808  $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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(dollars in thousands, except per share data)

 

2020

  

2019

  

2020

  

2019

 

Revenues

 $338,962  $284,991  $988,461  $849,246 

Costs and Expenses:

                

Operating (excluding depreciation and amortization)

  107,303   94,898   319,259   285,104 

Selling, general and administrative

  62,596   58,861   190,474   180,407 

Depreciation and amortization

  71,421   48,737   202,284   157,416 

(Gain) loss on asset sales and disposals, net

  1,511   2,362   (3,122)  4,375 

Total Costs and Expenses

  242,831   204,858   708,895   627,302 

Income from operations

  96,131   80,133   279,566   221,944 

Interest expense

  (17,560)  (16,079)  (52,849)  (52,691)

Other income (expense), net

  3,231   1,582   6,620   (6,248)

Income before income taxes

  81,802   65,636   233,337   163,005 

Income tax provision

  15,515   15,801   35,184   38,036 

Net income

 $66,287  $49,835  $198,153  $124,969 
                 

Net Income per Common Share:

                

Basic

 $11.04  $8.77  $33.91  $22.01 

Diluted

 $10.96  $8.68  $33.60  $21.81 

Weighted Average Common Shares Outstanding:

                

Basic

  6,001,561   5,682,167   5,844,330   5,676,681 

Diluted

  6,050,415   5,741,666   5,897,445   5,730,798 
                 

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

 $5,807  $(28,066) $(88,277) $(91,105)

Comprehensive income

 $72,094  $21,769  $109,876  $33,864 

 

See accompanying notes to the condensed consolidated financial statements.

 

2

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

                  

Accumulated

         
          

Additional

      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 June 30, 2020

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

Net income

  -   -   -   66,287   -   -   66,287 

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

  -   -   -   -   5,807   -   5,807 

Equity-based compensation

  -   -   3,867   -   -   -   3,867 

Issuance of equity awards, net of forfeitures

  4,216   -   -   -   -   -   - 

Withholding tax for equity awards

  (21)  -   -   -   -   (38)  (38)

Dividends paid to stockholders ($2.50 per common share)

  -   -   -   (15,070)  -   -   (15,070)

Balance at September 30, 2020

  6,024,029  $62  $531,508  $1,137,010  $(156,435) $(127,746) $1,384,399 

 

                  Accumulated         
          

Additional

      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 June 30, 2019

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

Net income

  -   -   -   49,835   -   -   49,835 

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

  -   -   -   -   (28,066)  -   (28,066)

Equity-based compensation

  -   -   3,058   -   -   -   3,058 

Issuance of equity awards, net of forfeitures

  2,882   -   -   -   -   -   - 

Withholding tax for equity awards

  (101)  -   -   -   -   (128)  (128)

Dividends paid to stockholders ($2.25 per common share)

  -   -   -   (12,848)  -   -   (12,848)

Balance at September 30, 2019

  5,709,593  $59  $48,059  $939,602  $(91,201) $(121,760) $774,759 

 

                  

Accumulated

         
          

Additional

      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

  -   -   -   198,153   -   -   198,153 

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

  -   -   -   -   (88,277)  -   (88,277)

Equity-based compensation

  -   -   10,514   -   -   -   10,514 

Issuance of common stock

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

Issuance of equity awards, net of forfeitures

  24,962   -   -   -   -   -   - 

Withholding tax for equity awards

  (3,810)  -   -   -   -   (5,861)  (5,861)

Dividends paid to stockholders ($7.00 per common share)

  -   -   -   (41,498)  -   -   (41,498)

Balance at September 30, 2020

  6,024,029  $62  $531,508  $1,137,010  $(156,435) $(127,746) $1,384,399 

 

                  

Accumulated

         
          

Additional

      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

  -   -   -   124,969   -   -   124,969 

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

  -   -   -   -   (91,105)  -   (91,105)

Equity-based compensation

  -   -   9,161   -   -   -   9,161 

Issuance of equity awards, net of forfeitures

  15,599   -   -   -   -   -   - 

Repurchases of common stock

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

Withholding tax for equity awards

  (3,424)  -   -   -   -   (2,892)  (2,892)

Dividends paid to stockholders ($6.25 per common share)

  -   -   -   (35,667)  -   -   (35,667)

Balance at September 30, 2019

  5,709,593  $59  $48,059  $939,602  $(91,201) $(121,760) $774,759 

 

See accompanying notes to the condensed consolidated financial statements.

 

3

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Nine Months Ended September 30,

 

(in thousands)

 

2020

  

2019

 

Cash flows from operating activities:

        

Net income

 $198,153  $124,969 

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

 

Depreciation and amortization

  202,284   157,416 

Amortization of debt issuance costs

  3,330   3,527 

Equity-based compensation

  10,514   9,161 

Write-off of debt issuance costs

  -   4,207 

Increase in deferred income taxes

  47,826   22,712 

(Gain) loss on asset sales and disposals, net

  (3,122)  4,375 

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

        

(Increase) decrease in accounts receivable, net

  (11,269)  310 

(Increase) decrease in income taxes receivable

  (40,878)  8,952 

Increase in prepaid and other current assets

  (5,561)  (4,177)

Increase in accounts payable and accrued liabilities

  1,882   8,723 

Increase (decrease) in deferred revenue

  1,427   (709)

Other, net

  (5,606)  (4,281)

Net cash provided by operating activities

  398,980   335,185 
         

Cash flows from investing activities:

        

Purchase of business, net of cash acquired

  (38,296)  (356,917)

Purchases of equity investments

  (37,245)  - 

Capital expenditures

  (217,994)  (176,324)

Decrease in accrued expenses related to capital expenditures

  (5,638)  (1,431)

Proceeds from sales of property, plant and equipment

  617   7,050 

Issuance of note and other receivables

  (7,288)  - 

Settlement of note and other receivables

  6,000   - 

Net cash used in investing activities

  (299,844)  (527,622)
         

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

  -   (11,756)

Payments on long-term debt

  (121,515)  (695,440)

Repurchases of common stock

  -   (5,073)

Payment of withholding tax for equity awards

  (5,861)  (2,892)

Dividends paid to stockholders

  (41,498)  (35,667)

Net cash provided by financing activities

  400,925   74,172 
         

Increase (decrease) in cash and cash equivalents

  500,061   (118,265)

Cash and cash equivalents, beginning of period

  125,271   264,113 

Cash and cash equivalents, end of period

 $625,332  $145,848 
         

Supplemental cash flow disclosures:

        

Cash paid for interest, net of capitalized interest

 $49,017  $49,740 

Cash paid for income taxes, net of refunds received

 $28,245  $3,823 

 

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 September 30, 2020, Cable One provided service to approximately 984,000 residential and business customers, of which approximately 866,000 subscribed to data services, 277,000 subscribed to video services and 132,000 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. On July 1, 2020, the Company acquired Valu-Net LLC, an all-fiber internet service provider headquartered in Kansas (“Valu-Net”), for a purchase price of $38.9 million in cash on a debt-free basis. Refer to note 2 for details on these transactions.

 

On May 4, 2020, we made a $27.2 million minority equity investment (less than 10%) in AMG Technology Investment Group, LLC, a wireless internet service provider (“Nextlink”). On July 10, 2020, the Company acquired a minority equity interest (approximately 40%) in Wisper ISP, LLC, a wireless internet service provider (“Wisper”), for total consideration of $25.3 million. The Company funded $11.9 million of the total consideration for Wisper in July 2020 and expects to fund the remainder within the next twelve months. As permitted by generally accepted accounting principles in the United States (“GAAP”), the Company has elected to recognize its proportionate share of Wisper’s net income within its consolidated financial statements on a one quarter lag. In July 2020, the Company entered into an agreement with Hargray Communications, a data, video and voice services provider (“Hargray”), to contribute the assets of the Company’s Anniston, Alabama system (the “Anniston System”) in exchange for a minority equity interest (less than 20%) in Hargray. Refer to note 15 for details on this transaction. On September 28, 2020, the Company entered into a definitive agreement to acquire a minority equity interest (approximately 45%) in Mega Broadband Investments Holdings LLC, a data, video and voice services provider (“MBI”), for approximately $574 million in cash, subject to adjustment for transaction expenses (the “MBI Investment”). The MBI Investment is expected to close during the fourth quarter of 2020.

 

Basis of Presentation. The condensed consolidated financial statements and accompanying notes thereto have been prepared in accordance with: (i) 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 for recent acquisitions 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.

 

5

 

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 for recent acquisitions 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.

 

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 for recent acquisitions 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 $5.2 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.

 

6

 

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 plans to adopt ASU 2019-12 in the first quarter of 2021 on a prospective basis and does not expect the updated guidance to have a material impact on its consolidated financial statements upon adoption, but it may have an impact in the future.

 

 

2.

ACQUISITIONS

 

The change in carrying value of goodwill as a result of the Clearwave and Fidelity acquisitions during 2019 and the Valu-Net acquisition during 2020 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 

Valu-Net acquisition goodwill recognized

  5,279 

Balance at September 30, 2020

 $434,876 

 

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.

 

7

 

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 (“EBITDA,” and as adjusted, “Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies.

 

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):

 

  

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 

 

The measurement period ended on September 30, 2020, and no measurement period adjustments were recorded during 2020.

 

Valu-Net. On July 1, 2020, the Company acquired Valu-Net, an all-fiber internet service provider headquartered in Kansas, for a purchase price of $38.9 million.

 

Acquired identifiable intangible assets associated with the Valu-Net acquisition consisted of the following (dollars in thousands):

 

  

Fair Value

  

Useful Life (in years)

 

Customer relationships

 $7,700   14 

Trademark and trade name

 $800  

Indefinite

 

Franchise agreements

 $11,200  

Indefinite

 

 

Customer relationships and franchise agreements were valued using the multi-period excess earnings method of the income approach. Significant assumptions used in the valuations include projected revenue growth rates, future EBITDA margins, future capital expenditures and an appropriate discount rate. No residual value was assigned to the acquired customer relationships.

 

8

 
 

3.

REVENUES

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Residential

                

Data

 $174,527  $134,320  $493,532  $396,955 

Video

  83,553   80,999   256,203   248,834 

Voice

  11,490   10,254   36,038   30,584 

Business services

  59,441   50,662   175,771   147,564 

Other

  9,951   8,756   26,917   25,309 

Total revenues

 $338,962  $284,991  $988,461  $849,246 
                 

Franchise and other regulatory fees

 $6,298  $5,999  $19,261  $16,336 

Deferred commission amortization

 $1,343  $901  $4,042  $2,843 

 

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 September 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 nine months ended September 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):

 

  

September 30, 2020

  

December 31, 2019

 

Trade receivables

 $41,423  $33,467 

Related party receivable(1)

  6,796   - 

Other receivables

  5,180   6,186 

Less: Allowance for credit losses

  (3,223)  (1,201)

Total accounts receivable, net

 $50,176  $38,452 

 


(1)

Balance at September 30, 2020 relates to a receivable due from Wisper for wireless spectrum auction purchases, which was received in full in October 2020.

 

Net accounts receivable from contracts with customers totaled $38.2 million and $32.3 million at September 30, 2020 and December 31, 2019, respectively.

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Beginning balance

 $9,399  $1,166  $1,201  $2,045 

Additions - charged to costs and expenses

  (796)  1,890   7,278   4,584 

Deductions - write-offs

  (6,482)  (3,419)  (9,720)  (10,423)

Recoveries of amounts previously written off

  1,102   1,412   4,464   4,843 

Ending balance

 $3,223  $1,049  $3,223  $1,049 

 

9

 

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

 

  

September 30, 2020

  

December 31, 2019

 

Prepaid repairs and maintenance

 $3,740  $551 

Prepaid insurance

  3,199   1,548 

Prepaid rent

  2,962   1,499 

Prepaid software

  3,874   4,672 

Deferred commissions

  4,036   3,586 

All other current assets

  3,452   3,763 

Total prepaid and other current assets

 $21,263  $15,619 

 

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

 

  

September 30, 2020

  

December 31, 2019

 

Operating lease right-of-use assets

 $14,354  $16,924 

Cost method equity investments(1)

  36,837   206 

Assets held for sale(2)

  16,412   - 

Deferred commissions

  5,633   5,042 

Software implementation costs

  5,237   - 

Debt issuance costs

  2,008   2,427 

All other noncurrent assets

  3,916   2,495 

Total other noncurrent assets

 $84,397  $27,094 

 


(1)

Balance at September 30, 2020 related primarily to the $27.2 million equity investment in Nextlink. Refer to note 1 for details on this transaction.

(2)

Balance at September 30, 2020 related to the Anniston System assets contributed to Hargray on October 1, 2020. Refer to notes 1 and 15 for details on this transaction.

 

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

 

  

September 30, 2020

  

December 31, 2019

 

Accounts payable

 $31,330  $36,351 

Accrued programming costs

  19,306   19,620 

Accrued compensation and related benefits

  24,401   23,189 

Accrued sales and other operating taxes

  14,105   9,501 

Accrued franchise fees

  3,759   4,201 

Deposits

  6,987   6,550 

Operating lease liabilities

  4,029   4,601 

Interest rate swap liability

  30,510   11,045 

Accrued insurance costs

  7,747   6,174 

Cash overdrafts

  3,199   5,801 

Equity investment payable(1)

  13,387   - 

All other accrued liabilities

  8,994   9,960 

Total accounts payable and accrued liabilities

 $167,754  $136,993 

 


(1)

Consists of the unfunded portion of the Company’s equity investment in Wisper at September 30, 2020. Refer to note 1 for details on this transaction.

 

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

 

  

September 30, 2020

  

December 31, 2019

 

Operating lease liabilities

 $9,379  $11,146 

Accrued compensation and related benefits

  6,578   7,154 

Deferred revenue

  5,109   5,514 

All other noncurrent liabilities

  7,263   3,043 

Total other noncurrent liabilities

 $28,329  $26,857 

 

10

 
 

5.

PROPERTY, PLANT AND EQUIPMENT

 

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

 

  

September 30, 2020

  

December 31, 2019

 

Cable distribution systems

 $1,863,535  $1,779,964 

Customer premise equipment

  277,014   266,190 

Other equipment and fixtures

  457,886   444,799 

Buildings and improvements

  115,880   113,331 

Capitalized software

  105,012   99,988 

Construction in progress

  95,872   93,352 

Land

  13,268   13,361 

Right-of-use assets

  10,268   10,187 

Property, plant and equipment, gross

  2,938,735   2,821,172 

Less: Accumulated depreciation and amortization

  (1,694,471)  (1,619,901)

Property, plant and equipment, net

 $1,244,264  $1,201,271 

 

The balance at September 30, 2020 included $13.9 million of property, plant and equipment acquired in the Valu-Net acquisition on July 1, 2020 and excluded $16.4 million of property, plant and equipment from the Anniston System contributed to Hargray in exchange for a minority equity interest on October 1, 2020. The Anniston System’s carrying value of $16.4 million was classified as assets held for sale at September 30, 2020 and is included within other noncurrent assets in the condensed consolidated balance sheet.

 

Depreciation and amortization expense for property, plant and equipment was $59.8 million and $44.5 million for the three months ended September 30, 2020 and 2019, respectively, and $168.4 million and $144.9 million for the nine months ended September 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 $434.9 million and $429.6 million at September 30, 2020 and December 31, 2019, respectively, with the increase pertaining to goodwill recognized in the Valu-Net acquisition on July 1, 2020. The Company has not historically recorded any impairment of goodwill.

 

 

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

 

       

September 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   369,700   70,543   299,157   362,000   37,470   324,530 

Trademarks and trade names

 2.73   4,300   2,302   1,998   4,300   1,552   2,748 

Total finite-lived intangible assets

  $376,927  $75,772  $301,155  $369,227  $41,917  $327,310 
                              

Indefinite-Lived Intangible Assets

                         

Franchise agreements

              $989,571          $978,371 

Trade name

               7,500           6,700 

Total indefinite-lived intangible assets

      $997,071          $985,071 
                              

Total intangible assets, net

          $1,298,226          $1,312,381 

 

The increase in intangible assets from December 31, 2019 related to customer relationships, trade name and franchise assets associated with the Valu-Net acquisition on July 1, 2020.

 

Intangible asset amortization expense was $11.6 million and $4.2 million for the three months ended September 30, 2020 and 2019, respectively, and $33.9 million and $12.6 million for the nine months ended September 30, 2020 and 2019, respectively.

 

11

 

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

 

Year Ending December 31,

 

Amount

 

2020 (remaining three months)

 $11,495 

2021

  40,363 

2022

  35,415 

2023

  28,702 

2024

  23,773 

Thereafter

  161,407 

Total

 $301,155 

 

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):

 

  

September 30, 2020

  

December 31, 2019

 

Senior Credit Facilities (as defined below)

 $1,731,804  $1,753,045 

Finance lease liabilities

  5,749   5,943 

Total debt

  1,737,553   1,758,988 

Less: Unamortized debt issuance costs

  (15,230)  (18,142)

Less: Current portion of long-term debt

  (33,350)  (28,909)

Total long-term debt

 $1,688,973  $1,711,937 

 

As of September 30, 2020, the second amended and restated credit agreement among the Company and its lenders (the “Credit Agreement”) provided 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 were scheduled to 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 as of September 30, 2020, 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 and note 15 for further details on the Third Restatement Agreement (as defined below).

 

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 guaranteed and indemnified the Company in connection with such letters of credit. As of September 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 $29.6 million at September 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 September 30, 2020, the Company had $1.7 billion of aggregate outstanding term loans and $320.4 million available for borrowing under the Revolving Credit Facility.

 

12

 

A summary of the Company’s outstanding term loans as of September 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