0001632127 CABLE ONE, INC. false --12-31 Q1 2021 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 6,175,399 6,034,609 6,027,704 140,790 147,695 2.50 2.25 1 82.6 15 10 10 430.5 0 1.1 0 7 2.2 Consists of amounts due to Hargray in connection with transition services provided as part of the Anniston Exchange (as defined in note 5). Refer to note 5 for details on this transaction. 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. Based on a conversion rate of 0.4394 shares of common stock per weighted $1,000 principal amount of Convertible Notes outstanding during the three months ended March 31, 2021. The Company holds a call option to purchase all but not less than all of the remaining equity interests in MBI that the Company does not already own between January 1, 2023 and June 30, 2024. If the call option is not exercised, certain investors in MBI hold a put option to sell (and to cause all members of MBI other than the Company to sell) to the Company all but not less than all of the remaining equity interests in MBI that the Company does not already own between July 1, 2025 and September 30, 2025. The call and put options (collectively referred to as the "MBI Net Option") are measured at fair value using Monte Carlo simulations that rely on assumptions around MBI's equity value, MBI’s and the Company's equity volatility, MBI's and the Company's EBITDA volatility, risk adjusted discount rates and the Company's cost of debt, among others. The final MBI purchase price allocation resulted in $630.7 million being allocated to the MBI equity investment and $19.7 million and $75.5 million being allocated to the call and put options, respectively. The MBI Net Option is remeasured at fair value on a quarterly basis. The carrying value of the MBI Net Option liability was $67.8 million and $73.3 million as of March 31, 2021 and December 31, 2020, respectively, and was included within other noncurrent liabilities in the condensed consolidated balance sheets. Refer to note 10 for further information on the MBI Net Option. Payable in equal quarterly installments (expressed as a percentage of the original principal amount and subject to customary adjustments in the event of any prepayment). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions). The Company calculated the fair value of Hargray's total enterprise value using a hybrid of both the discounted cash flow method of the income approach and the guideline public company method of the market approach. Significant assumptions used in the valuation include projected revenue growth rates, future EBITDA margins, future capital expenditures and an appropriate discount rate. The enterprise value less Hargray’s debt and unamortized debt issuance costs was multiplied by Cable One's minority equity interest percentage to determine the Hargray investment's carrying value. The resulting non-cash gain was calculated as the difference between this carrying value and the book value of the Anniston System's net assets, including its proportionate share of the Company's franchise agreement and goodwill assets. The approximately 15% equity interest in Hargray is on a fully diluted basis. 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 Third Amended and Restated Credit Agreement). All other applicable margins are fixed. Consists of the net value of the Company’s call and put options associated with the remaining equity interests in MBI, valued at $7.4 million and $75.2 million, respectively, as of March 31, 2021 and $0.7 million and $74.0 million, respectively, as of December 31, 2020. Refer to notes 5 and 10 for further information on the MBI Net Option. Consists of the unfunded portion of the Company’s equity investment in Wisper ISP, LLC (“Wisper”). 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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 March 31, 2021

 

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

(Registrants Telephone Number, Including Area Code)

 

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

 

Title of Each Class

 

Trading Symbol(s)

 

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 April 30, 2021
Common stock, par value $0.016,035,204

 

 

 

 

 
 

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 21
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 31
     
Item 4. Controls and Procedures  32
     
PART II: OTHER INFORMATION  32
     
Item 1.  Legal Proceedings 32
     
Item 1A. Risk Factors 32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3.  Defaults Upon Senior Securities 34
     
Item 4. Mine Safety Disclosures 34
     
Item 5. Other Information  34
     
Item 6.  Exhibits 34
     
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, acquisitions and strategic investments, dividend policy, financial results and financial condition as well as anticipated impacts from, and our responses to, the COVID-19 pandemic. 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, 2020 (the “2020 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;

 

risks that we may fail to realize the benefits anticipated as a result of our purchase of the remaining interests in Hargray Acquisition Holdings, LLC (“Hargray”) that we did not already own (the “Hargray Acquisition”);

 

risks relating to existing or future acquisitions and strategic investments by us;

 

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

 

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;

 

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;

 

risks associated with our convertible indebtedness;

 

our ability to continue to pay dividends;

 

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

 

adverse economic conditions;

 

fluctuations in our stock price;

 

dilution from equity awards, convertible indebtedness and potential future convertible debt and stock issuances;

 

damage to our reputation or brand image;

 

ii

 

 

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

 

our ability to incur future indebtedness;

 

provisions in our charter that could limit 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 2020 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.

 

iii

 

 
 
 

PART I:  FINANCIAL INFORMATION

 

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(dollars in thousands, except par values)

 

March 31, 2021

  

December 31, 2020

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $1,537,298  $574,909 

Accounts receivable, net

  30,352   38,768 

Income taxes receivable

  15,113   41,245 

Prepaid and other current assets

  30,239   17,891 

Total Current Assets

  1,613,002   672,813 

Equity investments

  807,093   807,781 

Property, plant and equipment, net

  1,278,972   1,265,460 

Intangible assets, net

  1,267,702   1,278,198 

Goodwill

  430,543   430,543 

Other noncurrent assets

  34,953   33,543 

Total Assets

 $5,432,265  $4,488,338 
         

Liabilities and Stockholders' Equity

        

Current Liabilities:

        

Accounts payable and accrued liabilities

 $175,281  $174,139 

Deferred revenue

  23,619   21,051 

Current portion of long-term debt

  26,500   26,392 

Total Current Liabilities

  225,400   221,582 

Long-term debt

  3,038,754   2,148,798 

Deferred income taxes

  391,921   366,675 

Interest rate swap liability

  81,917   155,357 

Other noncurrent liabilities

  93,626   100,627 

Total Liabilities

  3,831,618   2,993,039 
         

Commitments and contingencies (refer to note 15)

          
         

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 shares issued; and 6,034,609 and 6,027,704 shares outstanding as of March 31, 2021 and December 31, 2020, respectively)

  62   62 

Additional paid-in capital

  539,713   535,586 

Retained earnings

  1,281,667   1,228,172 

Accumulated other comprehensive loss

  (85,216)  (140,683)

Treasury stock, at cost (140,790 and 147,695 shares held as of March 31, 2021 and December 31, 2020, respectively)

  (135,579)  (127,838)

Total Stockholders' Equity

  1,600,647   1,495,299 

Total Liabilities and Stockholders' Equity

 $5,432,265  $4,488,338 

 

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

 
   

March 31,

 

(dollars in thousands, except per share data)

 

2021

   

2020

 

Revenues

  $ 341,262     $ 321,196  

Costs and Expenses:

               

Operating (excluding depreciation and amortization)

    101,464       105,928  

Selling, general and administrative

    69,042       62,884  

Depreciation and amortization

    68,530       65,279  

(Gain) loss on asset sales and disposals, net

    (120 )     (5,621 )

Total Costs and Expenses

    238,916       228,470  

Income from operations

    102,346       92,726  

Interest expense

    (23,581 )     (18,674 )

Other income (expense), net

    8,100       1,734  

Income before income taxes and equity method investment income (loss), net

    86,865       75,786  

Income tax provision

    17,715       6,460  

Income before equity method investment income (loss), net

    69,150       69,326  

Equity method investment income (loss), net

    (568 )     -  

Net income

  $ 68,582     $ 69,326  
                 

Net Income per Common Share:

               

Basic

  $ 11.41     $ 12.17  

Diluted

  $ 11.19     $ 12.05  

Weighted Average Common Shares Outstanding:

               

Basic

    6,012,402       5,697,904  

Diluted

    6,168,261       5,755,059  
                 

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

  $ 55,467     $ (84,625 )

Comprehensive income (loss)

  $ 124,049     $ (15,299 )

 

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 December 31, 2020

  6,027,704  $62  $535,586  $1,228,172  $(140,683) $(127,838) $1,495,299 

Net income

  -   -   -   68,582   -   -   68,582 

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

  -   -   -   -   55,467   -   55,467 

Equity-based compensation

  -   -   4,127   -   -   -   4,127 

Issuance of equity awards, net of forfeitures

  10,398   -   -   -   -   -   - 

Withholding tax for equity awards

  (3,493)  -   -   -   -   (7,741)  (7,741)

Dividends paid to stockholders ($2.50 per common share)

  -   -   -   (15,087)  -   -   (15,087)

Balance at March 31, 2021

  6,034,609  $62  $539,713  $1,281,667  $(85,216) $(135,579) $1,600,647 

 

                  

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

  -   -   -   69,326   -   -   69,326 

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

  -   -   -   -   (84,625)  -   (84,625)

Equity-based compensation

  -   -   3,221   -   -   -   3,221 

Issuance of equity awards, net of forfeitures

  13,252   -   -   -   -   -   - 

Withholding tax for equity awards

  (3,772)  -   -   -   -   (5,796)  (5,796)

Dividends paid to stockholders ($2.25 per common share)

  -   -   -   (12,804)  -   -   (12,804)

Balance at March 31, 2020

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

 

See accompanying notes to the condensed consolidated financial statements.

 

3

 

 

CABLE ONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three Months Ended March 31,

 

(in thousands)

 

2021

   

2020

 

Cash flows from operating activities:

               

Net income

  $ 68,582     $ 69,326  

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

 

Depreciation and amortization

    68,530       65,279  

Non-cash interest expense

    1,432       1,106  

Equity-based compensation

    4,127       3,221  

Write-off of debt issuance costs

    487       -  

Change in deferred income taxes

    7,131       20,108  

(Gain) loss on asset sales and disposals, net

    (120 )     (5,621 )

Equity method investment (income) loss, net

    568       -  

Fair value adjustment

    (5,560 )     -  

Changes in operating assets and liabilities:

               

Accounts receivable, net

    8,416       3,066  

Income taxes receivable

    26,132       (13,882 )

Prepaid and other current assets

    (12,348 )     (8,857 )

Accounts payable and accrued liabilities

    (3,042 )     (13,789 )

Deferred revenue

    2,568       1,246  

Other

    (2,910 )     (2,703 )

Net cash provided by operating activities

    163,993       118,500  
                 

Cash flows from investing activities:

               

Capital expenditures

    (71,853 )     (64,757 )

Change in accrued expenses related to capital expenditures

    5,004       (8,238 )

Proceeds from sales of property, plant and equipment

    151       518  

Issuance of note receivable

    -       (3,540 )

Net cash used in investing activities

    (66,698 )     (76,017 )
                 

Cash flows from financing activities:

               

Proceeds from long-term debt borrowings

    895,850       100,000  

Payment of debt issuance costs

    (1,291 )     -  

Payments on long-term debt

    (6,637 )     (7,260 )

Payment of withholding tax for equity awards

    (7,741 )     (5,796 )

Dividends paid to stockholders

    (15,087 )     (12,804 )

Net cash provided by financing activities

    865,094       74,140  
                 

Change in cash and cash equivalents

    962,389       116,623  

Cash and cash equivalents, beginning of period

    574,909       125,271  

Cash and cash equivalents, end of period

  $ 1,537,298     $ 241,894  
                 

Supplemental cash flow disclosures:

               

Cash paid for interest, net of capitalized interest

  $ 15,118     $ 17,152  

Cash paid for income taxes, net of refunds received

  $ (15,586 )   $ (930 )

 

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 March 31, 2021. Cable One provided service to approximately 988,000 residential and business customers, of which approximately 880,000 subscribed to data services, 252,000 subscribed to video services and 122,000 subscribed to voice services as of March 31, 2021.

 

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 this transaction. Refer to note 5 for information on the Company’s equity investments completed during 2020.

 

On February 12, 2021, the Company and one of its indirect wholly owned subsidiaries entered into an Agreement and Plan of Merger, dated as of February 12, 2021, with Hargray and TPO-Hargray, LLC, as equityholders' representative, pursuant to which the Company agreed to acquire the remaining equity interests in Hargray that it did not already own. The equity interests to be acquired represented approximately 85% of Hargray on a fully diluted basis. On May 3, 2021, the Company completed the Hargray Acquisition. The all-cash transaction was funded through a combination of cash on hand and proceeds from new indebtedness. Refer to note 16 for further details on this transaction.

 

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 2020 Form 10-K.

 

The December 31, 2020 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 2020 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.

 

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 Standards Codification 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. Based on the Company’s 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. 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.

 

5

 

Recently Adopted Accounting Pronouncements. In August 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entitys Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entitys Own Equity. ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of both liabilities and equity by reducing the number of applicable accounting models, improving the decision usefulness and relevance of the information provided to financial statement users. As it relates to convertible instruments, this update amends existing guidance to reduce certain form-over-substance-based accounting conclusions, provides additional earnings per share guidance and improves disclosure effectiveness. The Company early adopted ASU 2020-06 on January 1, 2021 and accounted for the Convertible Notes (as defined and described in note 8) issued during the first quarter of 2021 under the updated guidance.

 

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. 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 adopted ASU 2019-12 on January 1, 2021 on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements upon adoption.

 

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. The Company is currently evaluating the expected impact of the adoption of this guidance on its consolidated financial statements.

 

 

2.

VALU-NET ACQUISITION

 

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       13.5  

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 earnings before interest, taxes, depreciation and amortization (“EBITDA” and as adjusted, “Adjusted EBITDA”) margins, future capital expenditures and an appropriate discount rate. No residual value was assigned to the acquired customer relationships.

 

6

 

 

3.

REVENUES

 

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

 

   

Three Months Ended

March 31,

 
   

2021

   

2020

 

Residential

               

Data

  $ 183,605     $ 154,990  

Video

    76,017       85,322  

Voice

    10,477       12,427  

Business services

    60,362       57,862  

Other

    10,801       10,595  

Total revenues

  $ 341,262     $ 321,196  
                 

Franchise and other regulatory fees

  $ 6,152     $ 6,348  

Deferred commission amortization

  $ 1,468     $ 1,355  

 

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 March 31, 2021, 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 $21.1 million of current deferred revenue at December 31, 2020, $16.9 million was recognized during the three months ended March 31, 2021. 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):

 

   

March 31, 2021

   

December 31, 2020

 

Trade receivables

  $ 27,342     $ 32,795  

Other receivables

    4,384       7,225  

Less: Allowance for credit losses

    (1,374 )     (1,252 )

Total accounts receivable, net

  $ 30,352     $ 38,768  

 

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

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Beginning balance

  $ 1,252     $ 1,201  

Additions - charged to costs and expenses

    643       2,118  

Deductions - write-offs

    (2,451 )     (2,271 )

Recoveries collected

    1,930       1,949  

Ending balance

  $ 1,374     $ 2,997  

 

7

 

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

 

   

March 31, 2021

   

December 31, 2020

 

Prepaid repairs and maintenance

  $ 9,517     $ 1,013  

Software implementation costs

    1,199       1,035  

Prepaid insurance

    1,350       2,200  

Prepaid rent

    2,830       1,471  

Prepaid software

    5,921       4,544  

Deferred commissions

    3,997       4,026  

All other current assets

    5,425       3,602  

Total prepaid and other current assets

  $ 30,239     $ 17,891  

 

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

 

   

March 31, 2021

   

December 31, 2020

 

Operating lease right-of-use assets

  $ 14,890     $ 13,408  

Deferred commissions

    5,958       5,798  

Software implementation costs

    7,785       6,879  

Debt issuance costs

    3,083       3,249  

All other noncurrent assets

    3,237       4,209  

Total other noncurrent assets

  $ 34,953     $ 33,543  

 

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

 

   

March 31, 2021

   

December 31, 2020

 

Accounts payable

  $ 26,588     $ 22,686  

Accrued programming costs

    21,330       20,279  

Accrued compensation and related benefits

    18,698       26,467  

Accrued sales and other operating taxes

    6,767       7,425  

Accrued franchise fees

    3,243       4,021  

Deposits

    6,441       6,300  

Operating lease liabilities

    4,473       3,772  

Interest rate swap liability

    30,504       30,646  

Accrued insurance costs

    7,148       7,292  

Cash overdrafts

    6,279       8,847  

Equity investment payable(1)

    13,387       13,387  

Interest payable

    11,096       4,128  

Amount due to Hargray(2)

    3,454       6,822  

All other accrued liabilities

    15,873       12,067  

Total accounts payable and accrued liabilities

  $ 175,281     $ 174,139  

 


(1)

Consists of the unfunded portion of the Company’s equity investment in Wisper ISP, LLC (“Wisper”). Refer to note 5 for details on this transaction.

(2)

Consists of amounts due to Hargray in connection with transition services provided as part of the Anniston Exchange (as defined in note 5). Refer to note 5 for details on this transaction.

 

8

 

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

 

   

March 31, 2021

   

December 31, 2020

 

Operating lease liabilities

  $ 9,541     $ 8,701  

Accrued compensation and related benefits

    8,715       10,086  

Deferred revenue

    4,654       4,981  

MBI Net Option (as defined in note 5)(1)

    67,750       73,310  

All other noncurrent liabilities

    2,966       3,549  

Total other noncurrent liabilities

  $ 93,626     $ 100,627  

 


(1)

Consists of the net value of the Company’s call and put options associated with the remaining equity interests in MBI, valued at $7.4 million and $75.2 million, respectively, as of March 31, 2021 and $0.7 million and $74.0 million, respectively, as of December 31, 2020. Refer to notes 5 and 10 for further information on the MBI Net Option.

 

 

5.

EQUITY INVESTMENTS

 

On May 4, 2020, the Company made a minority equity investment for a less than 10% ownership interest in AMG Technology Investment Group, LLC, a wireless internet service provider (“Nextlink”), for $27.2 million. On July 10, 2020, the Company acquired a 40.4% minority equity interest in Wisper, a wireless internet service provider, for total consideration of $25.3 million. The Company funded $11.9 million of the total consideration for Wisper in 2020 and expects to fund the remainder in 2021. On October 1, 2020, the Company contributed its Anniston, Alabama system (the “Anniston System”) to Hargray, a data, video and voice services provider, in exchange for an approximately 15% equity interest in Hargray on a fully diluted basis (the “Anniston Exchange”) and recognized an $82.6 million non-cash gain. On November 12, 2020, the Company acquired a 45.0% minority equity interest in Mega Broadband Investments Holdings LLC, a data, video and voice services provider (“MBI”), for $574.9 million in cash.

 

The carrying value of the Company’s equity investments without readily determinable fair values were determined based on fair valuations as of their respective acquisition dates, and consisted of the following (dollars in thousands):

 

  

Ownership

Percentage

  

March 31,

2021

  

December 31,

2020

 

Cost Method Investments

           

Hargray(1)

 

~15%

  $113,165  $113,165 

Nextlink

 

<10%

   27,245   27,245 

Others

 

<10%

   9,947   10,066 

Total cost method investments

    $150,357  $150,476 
            

Equity Method Investments

           

MBI(2)

 45.0%  $629,464  $630,679 

Wisper

 40.4%   27,272   26,626 

Total equity method investments

    $656,736  $657,305 
            

Total equity investments

    $807,093  $807,781 

 


(1)

The Company calculated the fair value of Hargray’s total enterprise value using a hybrid of both the discounted cash flow method of the income approach and the guideline public company method of the market approach. Significant assumptions used in the valuation include projected revenue growth rates, future EBITDA margins, future capital expenditures and an appropriate discount rate. The enterprise value less Hargray’s debt and unamortized debt issuance costs was multiplied by Cable One’s minority equity interest percentage to determine the Hargray investment’s carrying value. The resulting non-cash gain was calculated as the difference between this carrying value and the book value of the Anniston System’s net assets, including its proportionate share of the Company’s franchise agreement and goodwill assets. The approximately 15% equity interest in Hargray is on a fully diluted basis.

(2)

The Company holds a call option to purchase all but not less than all of the remaining equity interests in MBI that the Company does not already own between January 1, 2023 and June 30, 2024. If the call option is not exercised, certain investors in MBI hold a put option to sell (and to cause all members of MBI other than the Company to sell) to the Company all but not less than all of the remaining equity interests in MBI that the Company does not already own between July 1, 2025 and September 30, 2025. The call and put options (collectively referred to as the “MBI Net Option”) are measured at fair value using Monte Carlo simulations that rely on assumptions around MBI’s equity value, MBI’s and the Company’s equity volatility, MBI’s and the Company’s EBITDA volatility, risk adjusted discount rates and the Company’s cost of debt, among others. The final MBI purchase price allocation resulted in $630.7 million being allocated to the MBI equity investment and $19.7 million and $75.5 million being allocated to the call and put options, respectively. The MBI Net Option is remeasured at fair value on a quarterly basis. The carrying value of the MBI Net Option liability was $67.8 million and $73.3 million as of March 31, 2021 and December 31, 2020, respectively, and was included within other noncurrent liabilities in the condensed consolidated balance sheets. Refer to note 10 for further information on the MBI Net Option.

 

9

 

The carrying value of MBI exceeded the Company’s underlying equity in MBI’s net assets by approximately $526.8 million and $529.7 million as of March 31, 2021 and December 31, 2020, respectively.

 

Equity method investment income (losses), which increase (decrease) the carrying value of the respective investment, and the change in fair value of the MBI Net Option were as follows (in thousands):

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Equity Method Investment Income (Loss)

        

MBI(1)

 $(1,214) $- 

Wisper

  646   - 

Total

 $(568) $- 
         

Other Income (Expense), Net

        

MBI Net Option change in fair value

 $5,560  $- 

 


(1)

The Company identified a $186.6 million difference between the fair values of certain of MBI’s finite-lived intangible assets and the respective carrying values recorded by MBI, of which $84.0 million was attributable to the Company’s 45% pro rata portion. The Company is amortizing its share on an accelerated basis over the lives of the respective assets. For the three months ended March 31, 2021, the Company recognized $1.4 million of its pro rata share of MBI’s net income, which was more than offset by the Company’s $2.7 million pro rata share of basis difference amortization.

 

The Company assesses each equity investment for indicators of impairment on a quarterly basis. No impairments were recorded for any of the periods presented.

 

 

6.

PROPERTY, PLANT AND EQUIPMENT

 

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

 

   

March 31, 2021

   

December 31, 2020

 

Cable distribution systems

  $ 1,955,364     $ 1,916,048  

Customer premise equipment

    288,966       283,831  

Other equipment and fixtures

    467,685       463,469  

Buildings and improvements

    118,896       117,367  

Capitalized software

    112,635       107,107  

Construction in progress

    98,663       89,488  

Land

    13,411       13,293  

Right-of-use assets

    10,703       10,314  

Property, plant and equipment, gross

    3,066,323       3,000,917  

Less: Accumulated depreciation and amortization

    (1,787,351 )     (1,735,457 )

Property, plant and equipment, net

  $ 1,278,972     $ 1,265,460  

 

Depreciation and amortization expense for property, plant and equipment was $58.0 million and $54.1 million for the three months ended March 31, 2021 and 2020, respectively.

 

 

7.

GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill was $430.5 million at both March 31, 2021 and December 31, 2020. The Company has not historically recorded any impairment of goodwill.

 

10

 

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

 

       

March 31, 2021

  

December 31, 2020

 
  

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

                         

Customer relationships

 13.517  $369,700  $92,096  $277,604  $369,700  $81,865  $287,835 

Trademarks and trade names

 2.73   4,300   2,802   1,498   4,300   2,552   1,748 

Wireless licenses

 1015   1,418   30   1,388   1,418   15   1,403 

Total finite-lived intangible assets

  $375,418  $94,928  $280,490  $375,418  $84,432  $290,986 
                              

Indefinite-Lived Intangible Assets

                         

Franchise agreements

              $979,712          $979,712 

Trade names

               7,500           7,500 

Total indefinite-lived intangible assets

      $987,212          $987,212 
                              

Total intangible assets, net

          $1,267,702          $1,278,198 

 

Intangible asset amortization expense was $10.5 million and $11.2 million for the three months ended March 31, 2021 and 2020, respectively.

 

The future amortization of existing finite-lived intangible assets as of March 31, 2021 was as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2021 (remaining nine months)

 $29,999 

2022

  35,528 

2023

  28,816 

2024

  23,886 

2025

  21,962 

Thereafter

  140,299 

Total

 $280,490 

 

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.

 

 

8.

DEBT

 

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

 

  

March 31, 2021

  

December 31, 2020

 

Senior Credit Facilities (as defined below)

 $1,535,189  $1,541,621 

Senior Notes (as defined below)

  650,000   650,000 

Convertible Notes (as defined below)

  920,000   - 

Finance lease liabilities

  5,651   5,466 

Total debt

  3,110,840   2,197,087 

Less: Unamortized debt discount

  (23,833)  - 

Less: Unamortized debt issuance costs

  (21,753)  (21,897)

Less: Current portion of long-term debt

  (26,500)  (26,392)

Total long-term debt

 $3,038,754  $2,148,798 

 

Senior Credit Facilities. The third amended and restated credit agreement among the Company and its lenders, dated as of October 30, 2020 (as amended, the “Third Amended and Restated Credit Agreement”) provides for senior secured term loans in original aggregate principal amounts of $700.0 million maturing in 2025 (the “Term Loan A-2”), $250.0 million maturing in 2027 (the “Term Loan B-2”) and $625.0 million maturing in 2027 (the “Term Loan B-3”) as well as a $500.0 million revolving credit facility maturing in 2025 (the “Revolving Credit Facility” and, together with the Term Loan A-2, 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 March 31, 2021, note 10 to the Company’s audited consolidated financial statements included in the 2020 Form 10-K and note 16 in this Quarterly Report on Form 10-Q for further details on the Senior Credit Facilities.

 

11

 

The Company has issued letters of credit totaling $33.0 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 the total amount outstanding under the letters of credit 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 March 31, 2021, 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. Total letter of credit issuances under the Revolving Credit Facility totaled $41.0 million at March 31, 2021 and bore interest at a rate of 1.63% per annum.

 

As of March 31, 2021, the Company had $1.5 billion of aggregate outstanding term loans and $459.0 million available for borrowing under the Revolving Credit Facility. A summary of the Company’s outstanding term loans as of March 31, 2021 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(3)

 $700,000 

Varies(4)

  $672,356 

10/30/2025

 $476,607 

LIBOR

  1.50%  1.61%
  10/1/2019(3)                        

Term Loan B-2

 

1/7/2019

  250,000  1.0%  245,000 

10/30/2027

  228,750 

LIBOR

  2.00%  2.11%

Term Loan B-3

 

6/14/2019(5)

  625,000  1.0%  617,833 

10/30/2027

  577,472 

LIBOR

  2.00%  2.11%
  10/30/2020(5)                         

Total

 $1,575,000     $1,535,189   $1,282,829          

 


(1)

Payable in equal quarterly installments (expressed as a percentage of the original principal amount and subject to customary adjustments in the event of any prepayment). 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 Third Amended and Restated Credit Agreement). All other applicable margins are fixed.

(3)

On May 8, 2019, $250.0 million was drawn. On October 1, 2019, an additional $450.0 million was drawn. On October 30, 2020, the amortization schedule was reset.

(4)

Per annum amortization rates for years one through five following the October 30, 2020 refinancing date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively.

(5)

On June 14, 2019, $325.0 million was drawn. On October 30, 2020, an additional $300.0 million was drawn.

 

Senior Notes. In November 2020, the Company issued $650.0 million aggregate principal amount of 4.00% senior notes due 2030 (the “Senior Notes”). The Senior Notes bear interest at a rate of 4.00% per annum payable semi-annually in arrears on May 15th and November 15th of each year, beginning on May 15, 2021. The terms of the Senior Notes are governed by an indenture dated as of November 9, 2020 (the “Senior Notes Indenture”), among the Company, the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A. (“BNY”), as trustee.

 

At any time and from time to time prior to November 15, 2025, the Company may redeem some or all of the Senior Notes for cash at a redemption price equal to 100% of their principal amount, plus the “make-whole” premium described in the Senior Notes Indenture and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Beginning on November 15, 2025, the Company may redeem some or all of the Senior Notes at any time and from time to time at the applicable redemption prices listed in the Senior Notes Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time and from time to time prior to November 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of Senior Notes with funds in an aggregate amount not exceeding the net cash proceeds from one or more equity offerings at a redemption price equal to 104% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

 

12

 

Upon the occurrence of a Change of Control and a Below Investment Grade Rating Event (each as defined in the Senior Notes Indenture), the Company is required to offer to repurchase the Senior Notes at 101% of the principal amount of such Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.

 

Convertible Notes. In March 2021, the Company issued $575.0 million aggregate principal amount of 0.000% convertible senior notes due 2026 (the “2026 Notes”) and $345.0 million aggregate principal amount of 1.125% convertible senior notes due 2028 (the “2028 Notes” and, together with the 2026 Notes, the “Convertible Notes,” and the Convertible Notes collectively with the Senior Notes, the “Notes”). The terms of the 2026 Notes and the 2028 Notes are each governed by a separate indenture dated as of March 5, 2021 (collectively, the “Convertible Notes Indentures” and together with the Senior Notes Indenture, the “Indentures”), in each case, among the Company, the guarantors party thereto and BNY, as trustee.

 

The 2026 Notes do not bear regular interest, and the principal amount of the 2026 Notes does not accrete. The 2028 Notes bear interest at a rate of 1.125% per annum. Interest on the 2028 Notes is payable semiannually in arrears on March 15th and September 15th of each year, beginning on September 15, 2021, unless earlier repurchased, converted or redeemed. The 2026 Notes are scheduled to mature on March 15, 2026, and the 2028 Notes are scheduled to mature on March 15, 2028. The initial conversion rate for each of the 2026 Notes and the 2028 Notes is 0.4394 shares of the Company’s common stock per $1,000 principal amount of 2026 Notes and 2028 Notes, as applicable (equivalent to an initial conversion price of $2,275.83 per share of common stock).

 

The Convertible Notes are convertible at the option of the holders. The method of conversion into cash, shares of the Company’s common stock or a combination thereof is at the election of the Company. Prior to the close of business on the business day immediately preceding December 15, 2025, the 2026 Notes will be convertible at the option of the holders only upon the satisfaction of specified conditions and during certain periods. On or after December 15, 2025, holders may convert their 2026 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the relevant maturity date. Prior to the close of business on the business day immediately preceding December 15, 2027, the 2028 Notes will be convertible at the option of the holders only upon the satisfaction of specified conditions and during certain periods. On or after December 15, 2027, holders may convert their 2028 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the relevant maturity date. If the Company undergoes a “fundamental change” (as defined in the applicable Convertible Notes Indenture), holders of the applicable series of Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes of such series at a purchase price equal to 100% of the principal amount of the Convertible Notes of such series to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.

 

The Company may not redeem the 2026 Notes prior to March 20, 2024 and it may not redeem the 2028 Notes prior to March 20, 2025. No “sinking fund” is provided for the Convertible Notes. On or after March 20, 2024 and prior to December 15, 2025, the Company may redeem for cash all or any portion of the 2026 Notes, at its option, and on or after March 20, 2025 and prior to December 15, 2027, the Company may redeem for cash all or any portion of the 2028 Notes, at its option, in each case, if the last reported sale price per share of common stock has been at least 130% of the conversion price for such series of Convertible Notes then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes of such series to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date.

 

In addition, following a “make-whole fundamental change” (as defined in the applicable Convertible Notes Indenture) or if the Company delivers a notice of redemption in respect of any Convertible Notes of a series, in certain circumstances, the conversion rate applicable to such series of Convertible Notes will be increased for a holder who elects to convert any of such Convertible Notes in connection with such a make-whole fundamental change or convert any of such Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be.

 

The carrying amounts of the Convertible Notes consisted of the following (in thousands):

 

  

March 31, 2021

 
  

2026 Notes

  

2028 Notes

  

Total

 

Gross carrying amount

 $575,000  $345,000  $920,000 

Less: Unamortized discount

  (14,872)  (8,961)  (23,833)

Less: Unamortized debt issuance costs

  (385)  (232)  (617)

Net carrying amount

 $559,743  $335,807  $895,550 

 

13

 

Interest expense on the Convertible Notes consisted of the following (dollars in thousands):

 

  

Three Months Ended March 31, 2021

 
  

2026 Notes

  

2028 Notes

  

Total

 

Contractual interest expense

 $-  $291  $291 

Amortization of discount

  222   95   317 

Amortization of debt issuance costs

  6   2   8 

Total interest expense

 $228  $388  $616 
             

Effective interest rate

  0.5%  1.5%   

 

General. The Notes are senior unsecured obligations of the Company and are guaranteed by the Company’s wholly owned domestic subsidiaries that guarantee the Senior Credit Facilities or that guarantee certain capital market debt of the Company in an aggregate principal amount in excess of $250.0 million.

 

Each Indenture contains covenants that, among other things and subject to certain exceptions, limit (i) the Company’s ability to consolidate or merge with or into another person or sell or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries (taken as a whole) and (ii) the ability of the guarantors to consolidate with or merge with or into another person. The Senior Notes Indenture also contains a covenant that, subject to certain exceptions, limits the Company’s ability and the ability of its subsidiaries to incur any liens securing indebtedness for borrowed money.

 

Each Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, default in payment of principal or interest, breach of other agreements or covenants in respect of the relevant Notes by the Company or any guarantors, failure to pay certain other indebtedness at final maturity, acceleration of certain indebtedness prior to final maturity, failure to pay certain final judgments, failure of certain guarantees to be enforceable and certain events of bankruptcy, insolvency or reorganization; and, in the case of each Convertible Notes Indenture, failure to comply with the Company’s obligation to convert the relevant Convertible Notes under the applicable Convertible Notes Indenture and failure to give a fundamental change notice or a notice of a make-whole fundamental change under the applicable Convertible Notes Indenture.

 

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

 

  

March 31, 2021

  

December 31, 2020

 

Revolving Credit Facility portion:

        

Other noncurrent assets

 $3,083  $3,249 

Term loans and Notes portion:

        

Long-term debt (contra account)

  21,753   21,897 

Total

 $24,836  $25,146 

 

The Company recorded debt issuance cost amortization of $1.1 million for both the three months ended March 31, 2021 and 2020 within interest expense in the condensed consolidated statements of operations and comprehensive income.

 

The future maturities of outstanding borrowings as of March 31, 2021 were as follows (in thousands): 

 

Year Ending December 31,

 

Amount

 

2021 (remaining nine months)

 $19,298 

2022

  29,986 

2023

  47,008 

2024

  68,285 

2025

  549,147 

Thereafter

  2,391,465 

Total

 $3,105,189 

 

The Company was in compliance with all debt covenants as of March 31, 2021. 

 

14

 

In March 2021, the Company terminated the $900.0 million of definitive bridge loan commitments that were originally received to finance a portion of the Hargray Acquisition purchase price.

 

 

9.

INTEREST RATE SWAPS

 

The Company is party to two interest rate swap agreements, designated as cash flow hedges, to manage the risk of fluctuations in interest rates on its variable rate LIBOR debt. Changes in the fair values of the interest rate swaps are reported through other comprehensive income until the underlying hedged debt’s interest expense impacts net income, at which point the corresponding change in fair value is reclassified from accumulated other comprehensive income to interest expense.

 

A summary of the significant terms of the Company’s interest rate swap agreements is as follows (dollars in thousands):

 

   

Entry

Date

 

Effective

Date

 

Maturity

Date(1)

 

Notional

Amount

 

Settlement Type

 

Settlement

Frequency

 

Fixed

Base Rate

 

Swap A

 

3/7/2019

 

3/11/2019

 

3/11/2029

  $ 850,000  

Receive one-month LIBOR, pay fixed

 

Monthly

    2.653 %

Swap B

 

3/6/2019

 

6/15/2020

 

2/28/2029

    350,000  

Receive one-month LIBOR, pay fixed

 

Monthly

    2.739 %

Total

  $ 1,200,000                

 


(1)

Each swap may be terminated prior to the scheduled maturity at the election of the Company or the financial institution counterparty under the terms provided in each swap agreement.

 

The combined fair values of the Company’s interest rate swaps are reflected within the condensed consolidated balance sheets as follows (in thousands):

 

   

March 31, 2021

   

December 31, 2020

 

Liabilities:

               

Current portion:

               

Accounts payable and accrued liabilities

  $ 30,504     $ 30,646  

Noncurrent portion:

               

Interest rate swap liability

  $ 81,917     $ 155,357  

Total

  $ 112,421     $ 186,003  
                 

Stockholders Equity:

               

Accumulated other comprehensive loss

  $ 84,626     $ 140,090  

 

The combined effect of the Company’s interest rate swaps on the condensed consolidated statements of operations and comprehensive income was as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Interest expense

  $ 7,649     $ 2,084  
                 

Unrealized (gain) loss on cash flow hedges, gross

  $ (73,582 )   $ 112,314  

Less: Tax effect

    18,118       (27,686 )

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

  $ (55,464 )   $ 84,628  

 

The Company does not hold any derivative instruments for speculative trading purposes.

 

 

10.

FAIR VALUE MEASUREMENTS

 

Financial Assets and Liabilities. The Company has estimated the fair values of its financial instruments as of March 31, 2021 using available market information or other appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the following fair value estimates are not necessarily indicative of the amounts the Company would realize in an actual market exchange.

 

15

 

The carrying amounts, fair values and related fair value hierarchy levels of the Company’s financial assets and liabilities as of March 31, 2021 were as follows (in thousands):

 

   

March 31, 2021

   

Carrying

   

Fair

 

Fair Value

   

Amount

   

Value

 

Hierarchy

Assets:

                 

Cash and cash equivalents:

                 

Money market investments

  $ 1,489,709     $ 1,489,709  

Level 1

Liabilities:

                 

Long-term debt (including current portion):

           

Term loans

  $ 1,535,189     $ 1,527,513  

Level 2

Senior Notes

  $ 650,000     $ 640,835  

Level 2

Convertible Notes

  $ 920,000     $ 922,162  

Level 2

Interest rate swap liability (including current portion):

                 

Interest rate swaps

  $ 112,421     $ 112,421  

Level 2

Other noncurrent liabilities:

                 

MBI Net Option

  $ 67,750     $ 67,750  

Level 3

 

Money market investments are held primarily in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (level 1). Money market investments with original maturities of three months or less are included within cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the term loans, Senior Notes and Convertible Notes are estimated based on market prices for similar instruments in active markets (level 2). Interest rate swaps are measured at fair value within the condensed consolidated balance sheets on a recurring basis, with fair value determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (level 2). The fair value of the MBI Net Option is measured using Monte Carlo simulations that use inputs considered unobservable and significant to the fair value measurement (level 3).

 

The assumptions used to determine the fair value of the MBI Net Option consisted of the following:

 

   

March 31, 2021

   

December 31, 2020

 
   

Cable One

   

MBI

   

Cable One

   

MBI

 

Equity volatility

    29.0

%

    30.0

%

    28.0

%

    30.0

%

EBITDA volatility

    10.0

%

    10.0

%

    10.0

%

    10.0

%

EBITDA risk-adjusted discount rate

    5.5

%

    7.0

%

    5.0

%

    6.5

%

Cost of debt

    4.0

%

          4.0

%

     

 

The Company regularly evaluates each of the assumptions used in establishing the fair value of the MBI Net Option. Significant changes in any of these assumptions could result in a significantly lower or higher fair value measurement. A change in one of these assumptions is not necessarily accompanied by a change in another assumption. Refer to note 5 for further information on the MBI Net Option.

 

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

 

Nonfinancial Assets and Liabilities. The Company’s nonfinancial assets, such as property, plant and equipment, intangible assets and goodwill, are not measured at fair value on a recurring basis. Assets acquired, including identifiable intangible assets and goodwill, and liabilities assumed in acquisitions are recorded at fair value on the respective acquisition dates, subject to potential future measurement period adjustments. Nonfinancial assets are subject to fair value adjustments when there is evidence that impairment may exist. No material impairments were recorded during the three months ended March 31, 2021 or 2020.

 

 

11.

STOCKHOLDERS EQUITY

 

Equity Offering. In May 2020, the Company completed a public offering of 287,500 shares of its common stock for total net proceeds of $469.8 million, after deducting underwriting discounts and offering expenses. The Company used a portion of the net proceeds to repay in full its outstanding borrowings of $100.0 million under the Revolving Credit Facility in May 2020 and it used the remainder for general corporate purposes, including for acquisitions and strategic investments.

 

16

 

Treasury Stock. Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements. Treasury shares of 140,790 held at March 31, 2021 include shares repurchased under the Company’s share repurchase program and shares withheld for withholding tax, as described below.

 

Share Repurchase Program. On July 1, 2015, the Company’s board of directors (the “Board”) authorized up to $250.0 million of share repurchases (subject to a total cap of 600,000 shares of common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through March 31, 2021, the Company had repurchased 210,631 shares of its common stock at an aggregate cost of $104.9 million. No shares were repurchased during the three months ended March 31, 2021.

 

Tax Withholding for Equity Awards. At the employee’s option, shares of common stock are withheld by the Company upon the vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to cover the applicable statutory minimum amount of employee withholding taxes, which the Company then pays to the taxing authorities in cash. The amounts remitted during the three months ended March 31, 2021 and 2020 were $7.7 million and $5.8 million, for which the Company withheld 3,493 and 3,772 shares of common stock, respectively.

 

 

12.

EQUITY-BASED COMPENSATION

 

The Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “2015 Plan”) provides for grants of incentive stock options, non-qualified stock options, restricted stock awards, SARs, restricted stock units (“RSUs”), cash-based awards, performance-based awards, dividend equivalent units (“DEUs” and, together with restricted stock awards and RSUs, “Restricted Stock”) and other stock-based awards, including performance stock units and deferred stock units. Directors, officers, employees and consultants of the Company are eligible for grants under the 2015 Plan as part of the Company’s approach to long-term incentive compensation. At March 31, 2021, 106,986 shares were available for issuance under the 2015 Plan.

 

Compensation expense associated with equity-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the award, with forfeitures recognized as incurred. The Company’s equity-based compensation expense, included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income, was as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Restricted Stock

  $ 3,424     $ 2,506  

SARs

    703       715  

Total

  $ 4,127     $ 3,221  

 

The Company recognized income tax benefits of $3.6 million and $5.2 million during the three months ended March 31, 2021 and 2020, respectively. The deferred tax asset related to all outstanding equity-based awards was $3.2 million as of March 31, 2021.

 

17

 

Restricted Stock. A summary of Restricted Stock activity during the three months ended March 31, 2021 is as follows:

 

   

Restricted

Stock

   

Weighted

Average Grant

Date Fair Value

Per Share

 

Outstanding as of December 31, 2020

    34,944     $ 1,037.83  

Granted

    9,763     $ 2,227.72  

Forfeited

    (780 )   $ 1,268.13  

Vested and issued

    (10,561 )   $ 829.79  

Outstanding as of March 31, 2021

    33,366     $ 1,446.46  
                 

Vested and deferred as of March 31, 2021

    5,338     $ 626.73  

 

At March 31, 2021, there was $28.9 million of unrecognized compensation expense related to Restricted Stock, which is expected to be recognized over a weighted average period of 1.7 years.

 

Stock Appreciation Rights. A summary of SARs activity during the three months ended March 31, 2021 is as follows:

 

   

Stock

Appreciation

Rights

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Grant

Date Fair
Value

   

Aggregate

Intrinsic

Value

(in thousands)

   

Weighted

Average

Remaining

Contractual

Term

(in years)

 

Outstanding as of December 31, 2020

    58,365     $ 866.54     $ 204.29     $ 79,446       7.3  

Granted

    1,500     $ 2,227.72     $ 584.38     $ -       9.8  

Exercised

    -     $ -     $ -     $ -       -  

Forfeited

    (1,601 )   $ 834.92     $ 201.50                  

Outstanding as of March 31, 2021

    58,264     $ 902.45     $ 214.15     $ 54,615       7.1  
                                         

Exercisable as of March 31, 2021

    32,187     $ 650.86     $ 148.65     $ 37,900       6.2  

 

At March 31, 2021, there was $6.3 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.4 years.

 

The grant date fair value of the SARs is measured using the Black-Scholes valuation model. The weighted average inputs used in the model for grants awarded during the three months ended March 31, 2021 were as follows:  

 

   

Inputs

 

Expected volatility

    27.37

%

Risk-free interest rate

    0.54

%

Expected term (in years)

    6.25  

Expected dividend yield

    0.45

%

 

 

13.

INCOME TAXES

 

The Company’s effective tax rate was 20.4% and 8.5% for the three months ended March 31, 2021 and 2020, respectively. The increase in the effective tax rate for the three months ended March 31, 2021 compared to the prior year period was related primarily to $7.0 million of income tax benefits attributable to the net operating loss (“NOL”) carryback provision of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) from the first quarter of 2020 that did not recur. That provision permitted NOL carrybacks to offset up to 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

 

18

 

 

14.

NET INCOME PER COMMON SHARE

 

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The denominator used in calculating diluted net income per common share further includes any common shares available to be issued upon vesting or exercise of outstanding equity-based compensation awards if such inclusion would be dilutive, calculated using the treasury stock method, and any common shares to be issued upon conversion of the Convertible Notes, calculated using the if-converted method.

 

The computation of basic and diluted net income per common share was as follows (dollars in thousands, except per share amounts):

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Numerator:

        

Net income - basic

 $68,582  $69,326 

Add: Convertible Notes interest expense, net of tax

  462   - 

Net income - diluted

 $69,044  $69,326 
         

Denominator:

        

Wei