10-K 1 cabo20181231_10k.htm FORM 10-K cabo20181231_10k.htm
 

 

Table of Contents



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2018

 

 

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

(I.R.S. Employer

incorporation)

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

 

Name of each exchange on which registered

 

 

Common Stock, par value $0.01

 

New York Stock Exchange

 

 

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

None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes    ☑     No    ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   ☐       No   ☑

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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

 

Non-accelerated filer

 

 

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 Act).  

Yes   ☐       No   ☑

 

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2018 was approximately $3.1 billion, based on the closing price for the registrant’s common stock on such date. For purposes of this computation only, all executive officers, directors and 10% beneficial owners of the registrant as of June 30, 2018 are deemed to be affiliates of the registrant. Such determination should not be deemed to be an admission that such executive officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

 

There were 5,703,322 shares of the registrant’s common stock issued and outstanding as of February 22, 2019.

 

Documents Incorporated by Reference

 

Portions of the registrant's Definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the registrant’s fiscal year ended December 31, 2018, are incorporated by reference in Part III of this Form 10-K.

 

 

 

TABLE OF CONTENTS

 

PART I
     
Item 1.

Business

3
Item 1A.

Risk Factors

19
Item 1B.

Unresolved Staff Comments

29
Item 2.

Properties

29
Item 3.

Legal Proceedings

30
Item 4.

Mine Safety Disclosures

30
     
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31
Item 6.

Selected Financial Data

33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

49
Item 8.

Financial Statements and Supplementary Data

49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49
Item 9A.

Controls and Procedures

49
Item 9B.

Other Information

50
     
PART III
     
Item 10.

Directors, Executive Officers and Corporate Governance

51
Item 11.

Executive Compensation

51
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 51
Item 13.

Certain Relationships and Related Transactions, and Director Independence

51
Item 14.

Principal Accounting Fees and Services

51
     
PART IV
     
Item 15.

Exhibits, Financial Statement Schedules

52
Item 16.

Form 10-K Summary

54
   

Signatures

S-1
   

Index to Consolidated Financial Statements

F-1

 

 

 

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, financial results and financial condition. 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:

 

 

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 by us;

 

risks that our rebranding may not produce the benefits expected;

 

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;

 

legislative or regulatory efforts to impose network neutrality (“net 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 possibility that interest rates will rise, causing our obligations to service our variable rate indebtedness to increase significantly;

 

our ability to incur future indebtedness;

 

fluctuations in our stock price;

 

our ability to continue to pay dividends;

 

dilution from equity awards and potential stock issuances in connection with acquisitions;

 

provisions in our charter, by-laws and Delaware law that could discourage takeovers; and

  the other risks and uncertainties detailed in the section entitled “Risk Factors” in this Annual Report on Form 10-K.

 

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.

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

Cable One, Inc. (“Cable One,” “us,” “our,” “we” or the “Company”) is a fully integrated provider of data, video and voice services in 21 Western, Midwestern and Southern states. We provide these broadband services to residential and business customers in more than 750 communities. The markets we serve are primarily non-metropolitan, secondary markets, with 78% of our customers located in seven states: Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma and Texas. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We provided service to 804,865 residential and business customers out of approximately 2.1 million homes passed as of December 31, 2018. Of these customers, 663,074 subscribed to data services, 326,423 subscribed to video services and 125,934 subscribed to voice services.

 

We generate substantially all of our revenues through five primary products. Ranked by share of our total revenues during 2018, they are residential data (46.0%), residential video (32.0%), business services (data, voice and video – 14.5%), residential voice (3.8%) and advertising sales (2.3%). The profit margins, growth rates and capital intensity of our five primary products vary significantly due to competition, product maturity and relative costs.

 

In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video. We define Adjusted EBITDA margin for a product line as Adjusted EBITDA attributable to that product line divided by revenue attributable to that product line (see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of OperationsUse of Adjusted EBITDA” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable measure under generally accepted accounting principles in the United States (“GAAP”)). This margin disparity is largely the result of significant programming costs and retransmission fees incurred to deliver residential video services, which in each of the last three years represented between 53% and 62% of total residential video revenues. None of our other product lines has direct costs representing as substantial a portion of revenues as programming costs and retransmission fees represent for residential video, and indirect costs are allocated equally on a per primary service unit (“PSU”) basis. Programming costs and retransmission fees have a meaningfully lower impact on business services margins than residential video because business services include data and voice in addition to video, diminishing the relative impact of programming costs and retransmission fees on that product line as a whole.

 

Prior to 2012, we were focused on growing revenues through subscriber retention and growth in overall PSUs. Accordingly, our strategies consisted of, among others, offering promotional discounts to new and existing subscribers adding new services and to subscribers purchasing more than one service offering. Since 2012, we have adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. We believe the declining profitability of residential video services is primarily due to increasing programming costs and retransmission fees and competition from other content providers, and the declining revenues from residential voice services are primarily due to the increasing use of wireless voice services instead of residential voice services. Beginning in 2013, we shifted our focus away from maximizing customer PSUs and towards growing our higher margin businesses, namely residential data and business services. Separately, we have also focused on retaining customers with a high expected lifetime value (“LTV”), who are less attracted by discounting, require less support and churn less. This strategy focuses on increasing Adjusted EBITDA, Adjusted EBITDA less capital expenditures and margins.

 

The trends described above have impacted our four largest product lines in the following ways:

 

 

Residential data. We experienced growth in the number of, and revenues from, our residential data customers every year since 2013. We expect this growth to continue due to projected increases in the number of potential customers for us to serve, as there are still a number of households in our markets that do not subscribe to data services from any provider. We expect to capture a portion of these customers and anticipate capturing additional market share from existing data subscribers due to our continued upgrades in broadband capacity, our ability to offer higher access speeds than many of our competitors and our Wi-Fi support service. 

 

 

Residential video. Residential video service is a highly competitive business. As we focus on the higher-margin businesses of residential data and business services, we have de-emphasized our residential video business and, as a result, expect residential video revenues to continue to decline in the future.

 

 

 

Residential voice. We have experienced declines in residential voice customers as a result of homes in the United States deciding to terminate their residential voice services and exclusively use wireless voice services. We believe this trend will continue because of competition from wireless voice service providers. Revenues from residential voice customers have declined over recent years, and we expect this decline will continue.

 

 

Business services. We have experienced significant growth in business data and voice customers and revenues, and we expect this growth to continue. We attribute this growth to our strategic focus on increasing sales to business customers and our efforts to attract enterprise business customers. Margins in products sold to business customers have remained attractive, and we expect this trend to continue.

 

We continue to experience increased competition, particularly from telephone companies, cable and municipal overbuilders, over-the-top (“OTT”) video providers and direct broadcast satellite (“DBS”) television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. We elevated our capital investments between 2012 and 2018 to increase our plant capacities and reliability, launch all-digital video services (which has made available approximately half of average plant bandwidth for data services) and increase data capacity by moving from four-channel bonding to 32-channel bonding (to enable our 1 Gigabit per second (“Gbps”) download speed data service, GigaONE®). We expect to continue devoting financial resources to infrastructure improvements, including in the new markets we acquired in the RBI Holding LLC (“NewWave”) and Delta Communications, L.L.C. (“Clearwave”) transactions described below, because we believe these investments are necessary to remain competitive. We expect to spend up to $35 million during 2019, in addition to the combined nearly $27 million spent for NewWave in 2018 and 2017, to enhance those acquired operations by rebuilding low capacity markets, launching all-digital video services, implementing 32-channel bonding, converting back office functions such as billing, accounting and service provisioning, migrating products to legacy Cable One platforms and expanding our high-capacity fiber network. The term “legacy Cable One” in this Annual Report on Form 10-K refers to Cable One operations excluding the impact or operations of NewWave or Clearwave.

 

Our primary goals are to continue growing residential data and business services, to increase profit margins and to deliver strong Adjusted EBITDA and Adjusted EBITDA less capital expenditures. To achieve these goals, we intend to continue our industrial engineering-driven cost management, remain focused on customers with high LTV and follow through with further planned investments in broadband plant upgrades and new data service offerings for residential and business customers.

 

Our business is subject to extensive governmental regulation. Such regulation has led to increases in our operational and administrative expenses. In addition, we could be significantly impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative or judicial rulings. In 2015, the Federal Communications Commission (the “FCC”) used its Title II authority to regulate broadband internet access services through the Open Internet Order (the “Order”), which imposed on all providers of broadband internet access service, including us, obligations that limit the ways certain types of traffic can be managed and prescribes certain additional disclosure requirements. The Order was upheld in the courts, and in November 2018 the U.S. Supreme Court declined to review the lower courts’ decisions. However, in December 2017, the FCC rescinded the majority of the open internet rules previously adopted in the Order, with the exception of the disclosure requirements. Several parties have challenged the FCC’s new rules in Federal courts, and those appeals are pending. Congress and numerous states also have proposed legislation regarding net neutrality. Several states, including Oregon and Washington (where we have subscribers), have adopted legislation that requires entities providing broadband internet access service in the state to comply with net neutrality requirements or that prohibits state and local government agencies from contracting with internet service providers that engage in certain network management activities based on paid prioritization, content blocking or other discrimination. We cannot predict whether or when future changes to the regulatory framework will occur at the FCC, in Congress, at the state level or in the courts. We also cannot predict whether or to what extent the rules as revised by the FCC, Congress, the states or the courts may affect our operations or impose costs on our business.

 

We serve our customers through a plant and network with 100% two-way capacity measuring approximately 790 megahertz on average and DOCSIS 3.0 capabilities in all of our systems. Our technically advanced infrastructure provides for delivery of a full suite of data, video and voice products. Our broadband plant consists of a fiber-to-the-premises or hybrid fiber-coaxial (“HFC”) network with ample unused capacity and standard download speeds of 100 Megabits per second (“Mbps”), which meaningfully distinguishes our offering from competitors in most of our markets. We have completed a multi-year investment program in our plant, which resulted in increased broadband capacity and reliability and which has enabled and will continue to enable us to offer even higher download speeds to our customers (at both the standard and enhanced data service levels), which we believe will reinforce our competitive strength in this area.

 

 

Corporate History

 

In 1986, The Washington Post Company (the prior name of our former corporate parent, Graham Holdings Company (“GHC”)) acquired from Capital Cities Communications, Inc. a number of other companies owning, in total, 53 cable television systems with approximately 350,000 subscribers in 15 Western, Midwestern and Southern states. Since then, we completed over 30 acquisitions and dispositions of cable systems, both through cash sales and system trades. In the process, we substantially reshaped our original geographic footprint and resized our typical system, including exiting a number of metropolitan markets and acquiring cable systems in non-metropolitan markets that fit our business model. On July 1, 2015, we became an independent company traded under the ticker symbol “CABO” on the New York Stock Exchange after completion of our spin-off from GHC (the “spin-off”).

 

On May 1, 2017, we acquired NewWave, a provider of data, video and voice services to residential and business customers throughout non-urban areas of Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas.

 

On January 8, 2019, we acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. The acquisition provides us with a premier fiber network within our existing footprint, further enables us to supply our customers with enhanced business services solutions and provides a platform to allow us to replicate Clearwave’s strategy in several of our other markets.

 

We will be rebranding our business as Sparklight™ beginning in the summer of 2019. This new brand is intended to better convey who we are and what we stand for – a company committed to providing our communities with connectivity that enriches their world. In January 2019, as part of the rebrand, we began streamlining our residential internet service plans and pricing, offering even faster speeds, further value and the ability to include unlimited data on any plan. Sparklight will also strengthen our commitment to the communities we serve through educational programs, corporate giving and donations of time and resources.

 

Industry Overview

 

We are a fully integrated provider of data, video and voice services to residential and business customers across various geographic regions. We provide services that are similar to those provided by cable companies, telephone companies and fiber providers, among others. These providers, each to a varying degree, own and/or lease a network that allows them to deliver their services and distribute their signals to the homes and businesses of subscribers. In addition to building their own network backbone and/or leasing physical access to the network backbone, companies providing video services also purchase licenses to provide their subscribers with access to television channels owned by programmers and broadcasters via distribution over the network backbone. Companies providing video services also typically sell advertising on their video channels.

 

These companies generate revenue by charging subscription fees to their residential and business customers at rates that vary according to the data, video and/or voice services for which customers subscribe and the type of internet access and video equipment furnished to them. These companies generally operate in their chosen geographic markets under either non-exclusive franchises or other telecommunications licenses granted by state or local authorities for specified periods of time. These companies generally market and sell multiple PSUs in bundles or packages in order to maximize the number of PSUs per household, as they believe it is desirable to sell multiple products as a package as the fixed costs per customer can be spread over multiple PSUs.

 

While we are smaller than the nation’s biggest providers of data, video and voice services, we have a record of consistent, long-term financial and operational success driven by our differentiated operating philosophy. We emphasize focus as opposed to scale, which is a departure from more conventional strategies in our industry, but is well suited to the markets in which we operate and enables us to take advantage of our strengths.

 

 

Our Strengths

 

We leverage a variety of strengths as a service provider, stemming from, among other things, historical and ongoing capital investments in our plant and our focus on serving customers in non-metropolitan markets. These strengths include the following:

 

Attractive markets. Our customers are located primarily in non-metropolitan, secondary markets with favorable competitive dynamics in comparison to major urban centers. In particular:

 

 

We tend to face less vigorous competition from telephone companies than similar service providers in metropolitan markets.

 

 

Advances in technology often come later to our markets — for example, few competitors in our markets offer fiber-to-the-premises.

 

 

Our subscribers tend to be value-focused, enabling us to save video services costs by not carrying expensive programming options with low subscriber demand.

 

 

We are regionally diversified, reducing the impact that an economic downturn in a specific geographic market would have on our overall business.

 

Deep customer understanding. We have operated as a non-metropolitan service provider for over 20 years. In order to understand our customers’ demands and preferences, we have conducted daily customer research for more than two decades and currently conduct thousands of customer satisfaction surveys per year. We believe we have gained valuable insight into how to serve customers in non-metropolitan markets, including with respect to providing an optimal mix of video channel options, price points and best-in-class customer service levels. In addition, the vast majority of our employees (who we refer to as associates) reside and work in our markets, providing local services through education programs and donations of time and resources that enhance our commitment to the communities we serve.

 

Superior broadband technology with ample unused capacity. We offer our residential and business data customers internet products at faster speeds than those available from competitors in most of our markets. Our broadband plant consists of a fiber-to-the-premises or HFC network with ample unused capacity. Our standard broadband offering for our residential customers is a download speed of 100 Mbps, which is at the high end of the range of standard residential offerings in our markets. Our fastest broadband offering for our residential customers is currently a download speed of up to 1 Gbps. We also offer WiFi ONE™ to residential customers across the entire legacy Cable One footprint. WiFi ONE is an advanced Wi-Fi solution that provides customers with enhanced Wi-Fi signal strength, which extends and improves the Wi-Fi signal throughout the home. WiFi ONE is offered free of charge to residential customers who rent one or more modems from us.

 

In addition, we have made significant investments in our business consistent with our strategic focus to enhance sales of residential data services and business services. We completed significant, multi-year plant and product enhancements in our legacy Cable One markets in 2017 and continued making enhancements in our NewWave markets in 2018, which increased our broadband capacity and reliability. These initiatives caused us to incur multiple years of higher than usual capital spending. However, we believe the competitive benefits will be significant, particularly for data services. We also made the following ongoing capital investments and new product introductions in 2018:

 

 

We continued to decrease the average number of data customers per unique service group by aggressively splitting service areas (fiber nodes), which substantially improves data throughput during periods of peak usage, minimizing disruptions in data access speeds to our customers.

 

 

We continued to invest in plant reinforcement projects, which have enhanced reliability, and plant extension projects, which have expanded the number of serviceable homes and businesses.

 

 

We virtually completed the roll out of GigaONE, our 1 Gbps data service, to legacy Cable One residential customers (which was available to over 98% of legacy Cable One homes passed as of December 31, 2018). We have made substantial progress in transitioning the acquired NewWave systems to 32-channel bonding, which will allow us to launch faster speeds, including GigaONE, throughout these markets in 2019.

 

 

We continued to deploy 10 Gbps Ethernet Passive Optical Network (“EPON”) fiber-to-the-premises technology across multiple markets, supporting the ongoing roll-out of Piranha Fiber®, which offers market-leading symmetrical speeds of 2 Gbps to our business customers.

 

 

We introduced a new managed Wi-Fi service for our small and medium-sized businesses. The enhanced product provides up to 10,000 square feet of Wi-Fi coverage and a variety of self-service solutions through our One Gateway mobile application.

 

 

 

We launched two new voice products for business customers — hosted voice and session initiation protocol (“SIP”) trunking. Hosted voice is an internet-delivered voice service that eliminates the need for an onsite phone system by providing cloud-based features and functionality. This removes the capital burden of an expensive infrastructure for small and medium-sized businesses. SIP trunking enables scalability and flexibility, providing customers who have modern phone systems with a more cost-effective solution compared to traditional voice services.

 

We anticipate that the projects we have invested in over the last several years will facilitate sustained increases in residential data and business services revenues and customer satisfaction.

 

Low cost structure and competitive pricing. We believe our operating costs, taken as a whole, are as low as or lower than any major service provider. We attribute our low-cost structure to a commitment to focusing on retaining our highest value customers (rather than seeking to obtain as many customers as possible) and the lower costs of operating in non-metropolitan markets compared to metropolitan markets. In addition, because we operate our residential and business data services with a competitive plant and cost structure, we are able to offer our customers both attractive pricing and compelling products.

 

Customer satisfaction. We have a customer-focused approach, influencing how we are organized, how we sell our services and how we service our customers. For example, we offer a same-day service guarantee in almost every one of our markets, which we believe none of our major competitors in our markets currently offer. We believe that our dedication to providing a differentiated customer experience is an important driver of our overall value proposition and creates loyalty, improves customer retention and drives increased demand for our services. We have always focused on customer satisfaction, with an emphasis on consistently benchmarking our customer satisfaction over time and relative to our competitors based on internally and externally generated customer satisfaction data. We received the highest score in J.D. Power’s 2018 U.S. Internet Service Provider Satisfaction Study for the western region. As part of rebranding our business as Sparklight, we will continue our focus on making the lives of our customers easier by providing value-added services, such as expanding customer self-service options through improved residential and business online portals and creating a more personalized experience in updated and refreshed local offices.

 

Employee satisfaction. We have also focused on employee satisfaction, believing our customers’ satisfaction is tightly linked to our employee satisfaction. Employee satisfaction has been consistently high throughout the past decade, based on routine internal measurements. We currently measure our employee satisfaction monthly. None of our employees have been unionized for over two decades.

 

Experienced management team. Our senior management team is comprised of senior executives who have significant experience in our industry. Our executive management team has an average industry tenure of over 20 years and an average tenure at Cable One (or its predecessors) of over 10 years, and we believe this team is deeply knowledgeable about cost and competitive conditions in our markets. They also understand and are deeply committed to our strategy, which we developed, enhanced and updated on a collaborative basis over many years.

 

Our Strategies

 

We have a multi-faceted strategy that builds upon our long track record of focusing on the right markets, the right products and the right customers, as well as controlling our operating and capital costs. More specifically, our strategy includes the following principal components:

 

Focus on larger non-metropolitan markets. We believe our decision over two decades ago to concentrate on non-metropolitan markets has served us well, and we intend to continue to focus on offering our products primarily in these markets. The economics of non-metropolitan markets, for which we have optimized our strategy and our operations, are different from operations in major cities, and have yielded positive operating results for our business. Because price points for services in non-metropolitan markets are generally lower, and customers in non-metropolitan markets tend to subscribe to fewer PSUs, our average revenue per customer and our PSUs per customer are lower than they might be in metropolitan markets. However, many of our costs are also lower than they would be in metropolitan markets. The dynamics of larger, non-metropolitan markets enable us to operate at attractive margins and earn substantial returns, while remaining consistent with our focus on meeting customer demand for low prices and simultaneously keeping costs down. In addition, we tend to face less vigorous competition than service providers in metropolitan markets.

 

 

Maximize Adjusted EBITDA less capital expenditures and drive profitable growth. We concentrate on the products and customers that maximize Adjusted EBITDA less capital expenditures and provide the best opportunity for profitable growth. We believe residential video and residential voice face inexorable long-term declines. With respect to the video product, programmers and broadcasters are charging higher rates and retransmission fees for content to distributors providing video services (often for content for which viewership is declining), and distributors have had to choose between absorbing those increases to the detriment of their margins or passing on the full cost to customers, which adversely affects customer demand. At the same time, the rapid expansion of OTT offerings via the internet has given customers new alternatives to traditional video offerings. In addition, demand for cellular and smartphone offerings have reduced residential voice starts for us and others in our industry. As a result, we have reduced our focus on these two products and prioritized higher growth, higher margin opportunities such as residential data and business services.

 

We have declined to cross-subsidize our video business with cash flow from our higher growth, higher margin products, which has resulted in our residential video customers declining at a faster rate than the industry average. Our residential video customers decreased by 10.5% in 2018 versus 2017 and legacy Cable One residential video customers decreased by 11.9% in 2017 versus 2016. While this strategy runs contrary to conventional wisdom in our industry, which puts heavy emphasis on video customer counts and maximizing the number of PSUs per customer by bundling and discounting services, we believe it best positions us for long-term success. For us, success in growing and retaining residential data and business customers is far more important than the number of triple-play package customers we have.

 

Target higher value residential customers. Since 2013, we have introduced rigorous analytics to determine the LTV of current and potential residential customers. We target marketing and customer service at customers who we believe are likely to produce relatively higher value over the life of their service relationships with us, rather than seeking to maximize the number of new customers. We analyze the net present value of every residential start and seek to identify customers with high LTV, who are more likely to buy data service, less likely to churn and more likely to pay on time. Seeking to retain and sell more or higher tier services to residential customers with a high LTV has enabled us to earn higher profits with fewer customers and PSUs per customer. We believe that optimizing the LTV of data-only customers as video and voice cord-cutting accelerates is both a necessity and an opportunity for our business.

 

Drive growth in residential data and business services. We believe our residential data and business services products provide attractive current and future growth opportunities. Our disciplined prioritization of residential data and business services is reflected in everything we do, including pricing, the allocation of sales, marketing and customer service resources, capital spending and the way we conduct negotiations with suppliers, especially video suppliers. During 2018, we continued to further diversify our revenue streams away from video as residential data and business services represented 60.5% of our total revenues versus 57.1% for 2017 and 54.4% for 2016. We believe we have demonstrated that it is possible to decouple unit growth in our residential data and residential video businesses, which historically have been marketed as a package. Our data-only connects are growing significantly faster than any other segment of our residential business as we have focused on selling data-only packages to new customers rather than cross-selling video services to these customers.

 

Our business services revenues increased 19.0% compared to 2017. We expect to generate continued growth in business services by leveraging and investing in our existing infrastructure capabilities and footprint to offer higher broadband speeds than other providers in our markets and to expand our business services to attract more small, medium-sized and enterprise business customers.

 

Continue our culture of cost leadership. We believe our total combined operating and capital costs per customer over the past decade have been among the lowest of any service provider with publicly reported numbers and that our operating margins compare very favorably with those of significantly bigger companies in our industry. This is the antithesis of normal economies-of-scale expectations, where higher volumes are expected to create lower costs per customer and increase operating margins. Rather than increasing our size and seeking cost savings through economies-of-scale, we have achieved our lower cost structure over many years by focusing on:

 

 

serving primarily non-metropolitan, secondary markets, which contain different customer dynamics from those in metropolitan markets and would require us to implement additional operational components;

 

 

the adoption of new technologies only after they have been tested by other companies in other markets, rather than incurring the level of capital expenditures and risk necessary to be an early adopter of most new technologies;

 

 

implementing a virtually centralized call center to receive inbound customer service calls and dispatch technicians across all of our markets, while keeping the majority of our call center employees in our non-metropolitan markets;

 

 

standardizing our programming offerings across legacy Cable One markets, which reduces our customer service costs, in contrast to other service providers that offer different programming packages in different markets;

 

 

 

focusing on retaining and seeking high-LTV customers rather than trying to maximize the number of customers or PSUs per customer;

 

 

aligning our resources to emphasize increased sales of residential data services and sales to business customers and continuing our industrial engineering-driven approach to cost management, rather than committing resources equally to sales of all of our products; and

 

 

investing in self-service channels to improve customer satisfaction by allowing us to meet changing customer expectations for round-the-clock service while also avoiding unnecessary wait times.

 

We believe our strategy has produced positive results, and we have begun applying this strategy in our NewWave operations. From 2011 through December 31, 2018, legacy Cable One experienced a 60% reduction in bad debt; a 54% reduction in the frequency of telephone customer service calls, resulting in a 46% headcount reduction in telephone customer service personnel; a decline of 38% in the frequency of technicians being dispatched to customer locations, resulting in a 22% headcount reduction in the staff devoted to that function; and an overall headcount reduction, primarily through attrition, of 25% of our legacy Cable One workforce. During this same period, both our customer and employee satisfaction have remained high or improved based on internal measurements and, in the case of customer satisfaction, externally generated data.

 

Balanced capital allocation. We are committed to a disciplined approach to evaluating acquisitions and internal investments, capital structure optimization and return of capital.

 

Our Products

 

Residential Data Services

 

Residential data services represented 46.0%, 43.4% and 42.2% of our total revenues for 2018, 2017 and 2016, respectively. We offer multiple tiers of data services with download speeds up to 1 Gbps to over 98% of our legacy Cable One residential customers as of December 31, 2018 and up to 200 Mbps to our remaining residential customers. To meet the increasing bandwidth needs of our customers who use a growing number of devices in the home, we launched WiFi ONE in 2017 to residential customers across the entire legacy Cable One footprint. WiFi ONE is an advanced Wi-Fi solution combining state-of-the-art technology solutions with certified Cable One technicians, who locate and configure hardware based on individual customer need. WiFi ONE provides customers with enhanced Wi-Fi signal strength, which extends and improves the Wi-Fi signal throughout the home.

 

Residential Video Services

 

Residential video services represented 32.0%, 34.6% and 36.0% of our total revenues for 2018, 2017 and 2016, respectively. We offer a broad variety of residential video services, generally ranging from a basic video service to a full digital service with access to hundreds of channels. Our basic video service generally consists of local networks, local community programming, such as governmental and public access, and certain other channels, such as weather, shopping and religious channels. Our digital video service includes national and regional cable networks, music channels and an interactive, electronic programming guide with parental controls. We also offer premium channels, which include networks such as HBO, Showtime, Starz and Cinemax, that generally offer, without commercial interruption, movies, original programming, live sporting events and concerts and other features. Our digital video customers may also subscribe to our advanced services. Our advanced video services include whole-home DVRs, which digitally record programming and pause and rewind live programming, and high-definition set-top boxes, which provide high-resolution picture quality, improved audio quality and a wide-screen format and allow our customers to access internet content on their televisions.

 

Our TV Everywhere product enables our video customers to stream many of their favorite channels and shows to mobile devices and computers, expanding the value of our video services. Our TV Everywhere product includes the most popular networks across a wide range of genres, including HBO and Cinemax.

 

Residential Voice Services

 

Residential voice services represented 3.8%, 4.6% and 5.2% of our total revenues for 2018, 2017 and 2016, respectively. Our residential voice service transmits digital voice signals over our network and is an interconnected Voice over Internet Protocol (“VoIP”) service. Our voice services include unlimited local and long-distance calling, voicemail, call waiting, three-way calling, caller ID, anonymous call rejection and other features. Our voice services also provide international calling by the minute.

 

 

Business Services

 

We consider the data, voice and video products we provide to our business customers to be a separate product from our residential versions of these services. Business services represented 14.5%, 13.7% and 12.2% of our total revenues for 2018, 2017 and 2016, respectively. We offer services for businesses ranging in size from small to mid-market, in addition to enterprise, wholesale and carrier customers.

 

Our offerings for small businesses are generally provided over our coaxial network. Our data services offer various options with download speeds ranging from 25 Mbps up to 500 Mbps, with varying upload speeds. Our small business voice solutions range from one line to multi-line options, including the availability of popular calling features like simultaneous ring, hunt groups, selective call forwarding and much more. Business video packages range from a basic service tier to a comprehensive selection including variety, news and sports programming in high-definition.

 

We offer delivery of data and voice services over EPON technology primarily for mid-market customers. This shared fiber architecture provides for a mixture of symmetrical and asymmetrical internet speeds ranging from 50 Mbps to 2 Gbps. We expect to expand EPON to additional areas and markets each year for the foreseeable future, especially in our competitive locations.

 

For enterprise and wholesale customers, we offer dedicated bandwidth in addition to multiple voice services via fiber optic technology. Our fiber optic-based products include dark fiber in addition to dedicated internet access and ethernet private line with speeds ranging from 10 Mbps to 10 Gbps in scalable increments. We also offer network to network interface connections to other carriers at multiple points of presence across the United States. In 2017, we began offering ethernet services over our coaxial network. This service offers symmetrical speeds ranging from 3 Mbps to 10 Mbps and is available directly to enterprise customers in addition to wholesale and carrier customers.

 

Advertising

 

Advertising sales represented 2.3%, 2.6% and 3.4% of our total revenues for 2018, 2017 and 2016, respectively. Our agreements with each of our programmers provide that we may sell a specified amount of time on our programmers’ channels, to both local and national advertising clients. We offer a full suite of digital advertising products, including website construction, targeted display and both short- and long-form video production.

 

Competition

 

We operate in a highly competitive, subscriber-driven and rapidly changing environment and compete with a growing number of entities that provide a broad range of communications products, services and content to subscribers. Our competitors have historically included, and we expect will continue to include, DBS providers, telephone companies that offer data and video services through digital subscriber line (“DSL”) technology or fiber-to-the-node networks, municipalities with fiber-based networks, regional fiber providers and other service providers that have been granted a franchise to operate in a geographic market in which we are already operating.

 

Although approximately 71% of our footprint currently has limited competition for residential high-speed data service at speeds comparable to our own, we anticipate a slow yet steady growth of new entrants into our markets. Currently, approximately 9% of the residential homes passed in our markets have access to fiber-to-the-premises from our competitors who typically offer only high-speed data service. However, AT&T and its subsidiary DirecTV also offers video and wireless voice services along with its high-speed data service. We also face increasing competition from wireless telephone companies for our residential voice services, as some of our customers are replacing our residential voice services with wireless voice services. New entrants with significant financial resources may compete on a larger scale with our video and data services, and as more wireless voice service providers offer unlimited data options, some customers may choose to forgo our data services altogether.

 

A small number of municipalities have also announced plans to construct their own data networks with access speeds that match or exceed those of our own through the use of fiber optic technology. In some cases, local government entities and municipal utilities may legally compete with us without obtaining a franchise from a state or local governmental franchising authority (“LFA”), reducing their barriers to entry into our markets. The entrance of municipalities as competitors in our markets would add to the competition we face and could lead to additional customer attrition.

 

 

While not an area of strategic focus for us, our video business also faces substantial and increasing competition from other forms of in-home and mobile entertainment, including Amazon Prime, Apple TV, Hulu, Netflix, Sling TV, YouTube TV and an increasing number of new entrants who offer OTT video programming, including many traditional programmers. Because of the significant size and financial resources of many of the companies behind such service offerings, we anticipate that they will continue to invest resources in increasing the availability of video content over the internet, which may result in less demand for the video services we provide.

 

Competition for dedicated fiber-optic services for enterprise business customers is also intense as both local telephone companies and regional overbuilders offer data and voice services over dedicated fiber connections. While certain of these entities are currently more widely-known for dedicated fiber services than we are, we maintain a competitive advantage through our local presence and deep customer relationships in the communities we serve.

 

Employees

 

As of December 31, 2018, we had 2,224 full-time employees, and none were represented by a union.

 

Available Information and Website

 

Our internet address is www.cableone.net. We make available free of charge through our website, http://ir.cableone.net, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such documents are electronically filed with the Securities and Exchange Commission (the “SEC”). Printed copies of these documents will be furnished without charge (except exhibits) to any stockholder upon written request addressed to our Secretary at 210 E. Earll Drive, Phoenix, Arizona 85012. The SEC maintains a website, www.sec.gov, that contains the reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The contents of these websites are not incorporated by reference into this Annual Report on Form 10-K and shall not be deemed “filed” under the Exchange Act. Further, our references to website URLs are intended to be inactive textual references only.

 

Executive Officers

 

The following table presents certain information, as of February 27, 2019, concerning our executive officers.

 

Name

  

Age

  

Position

Ms. Julia M. Laulis

  

56

  

Chair of the Board, President and Chief Executive Officer

Mr. Michael E. Bowker

  

50

  

Chief Operating Officer

Mr. Steven S. Cochran

  

47

  

Senior Vice President and Chief Financial Officer

Mr. Kenneth E. Johnson

  

55

  

Senior Vice President, Technology Services

Mr. Eric M. Lardy

 

45

 

Senior Vice President

Mr. Charles B. McDonald

  

43

  

Senior Vice President, Operations

Mr. Peter N. Witty

 

51

 

Senior Vice President, General Counsel and Secretary

 

Julia M. Laulis

 

Ms. Laulis has been Chair of the Board since January 2018, Chief Executive Officer and a member of our Board of Directors (the “Board”) since January 2017 and President of Cable One since January 2015.

 

Ms. Laulis joined Cable One in 1999 as Director of Marketing – Northwest Division. In 2001, she was named Vice President of Operations for the Southwest Division. In 2004, she accepted the additional responsibility for starting up Cable One’s Phoenix Customer Care Center. In 2008, she was named Chief Operations Officer, and in 2012, she was named Chief Operating Officer of Cable One. In January 2015, she was promoted to President and Chief Operating Officer of Cable One.

 

Prior to joining Cable One, Ms. Laulis served in various senior marketing positions with Jones Communications. Ms. Laulis began her 30-plus-year career in the cable industry with Hauser Communications.

 

 

Ms. Laulis serves on the boards of C-SPAN, CableLabs and The Cable Center and is a trustee of the C-SPAN Educational Foundation.

 

Michael E. Bowker

 

Mr. Bowker has been Chief Operating Officer of Cable One since May 2017.

 

Mr. Bowker joined Cable One in 1999 as Advertising Regional Sales Manager. Mr. Bowker has been a Vice President of Cable One since 2005. He was named Vice President of Sales in 2012 and was promoted to Senior Vice President, Chief Sales and Marketing Officer in 2014.

 

Prior to joining Cable One, Mr. Bowker was with AT&T Media Services and TCI Cable, where he served in various sales management positions.

 

Mr. Bowker serves on the board of the American Cable Association.

 

Steven S. Cochran

 

Mr. Cochran has been Senior Vice President and Chief Financial Officer of Cable One since August 2018.

 

Prior to joining Cable One, Mr. Cochran served as Chief Executive Officer and a member of the board of directors of WideOpenWest, Inc. (“WOW”) after holding various other positions at the company, including Chief Financial Officer, Chief Operating Officer and President. Prior to WOW, Mr. Cochran served in various finance and accounting roles at Millennium Digital Media, including Senior Vice President and Chief Financial Officer. Previously, Mr. Cochran was an accountant at Arthur Andersen LLP.

 

Kenneth E. Johnson

 

Mr. Johnson has been Senior Vice President, Technology Services of Cable One since May 2018.

 

Mr. Johnson joined Cable One in 2017 as Vice President, Northeast Division following Cable One’s acquisition of NewWave.

 

Prior to joining Cable One, Mr. Johnson served as Chief Operating Officer and Chief Technology Officer for NewWave. Prior to NewWave, Mr. Johnson was Chief Technology Officer for SureWest Communications and Everest Connections.

 

Mr. Johnson serves on the board of the National Cable Television Cooperative.

 

Eric M. Lardy

 

Mr. Lardy has been a Senior Vice President of Cable One since January 2017.

 

Mr. Lardy joined Cable One in 1997 as a manager in one of our systems and has held a variety of positions of increasing responsibility in marketing, operations, and system general management. Mr. Lardy was named Vice President, Strategic Planning and Finance in 2014 and was promoted to Senior Vice President in January 2017.

 

Charles B. McDonald

 

Mr. McDonald has been Senior Vice President, Operations of Cable One since January 2016.

 

Mr. McDonald joined Cable One in 2008 as an Industrial Engineer. Mr. McDonald was named Vice President, Customer Service Operations in 2014 and was promoted to Senior Vice President, Operations in January 2016.

 

Prior to joining Cable One, Mr. McDonald worked as a Senior Process Engineer for Three-Five Systems and Brillian Corp.

 

Peter N. Witty

 

Mr. Witty has been Senior Vice President, General Counsel and Secretary of Cable One since April 2018.

 

 

Prior to joining Cable One, Mr. Witty served as General Counsel and Secretary for Gas Technology Institute (“GTI”), an energy research, development and training organization. Prior to GTI, he spent 10 years with Abbott Laboratories, serving in various positions, including as Senior Counsel and Division Counsel. Mr. Witty previously practiced law as an associate at Latham & Watkins LLP and Ross & Hardies (now McGuireWoods LLP).

 

Regulation and Legislation

 

General

 

Our data, video and voice operations are subject to various requirements imposed by U.S. Federal, state and local governmental authorities. The regulation of certain cable rates pursuant to procedures established by Congress has negatively affected our revenues. Certain other legislative and regulatory matters discussed in this section also have the potential to adversely affect our data, video and voice businesses. The following discussion does not purport to be a complete summary of all the provisions of U.S. Federal and state law that may affect our operations. Proposals for additional or revised regulations and requirements are pending before Congress, state legislatures, and state and Federal regulatory agencies. We generally cannot predict whether new legislation or regulations, court action, or a change in the extent of application or enforcement of current laws and regulations would have an adverse impact on our operations.

 

Broadband Internet Access Services

 

Broadband internet access service, which we currently offer in all our cable systems, is subject to some regulation at the Federal level and is not subject to state or local government regulation at this time, except for the state net neutrality laws discussed below.

 

Regulatory Reclassification and Net Neutrality Regulation. In 2015, the FCC elected, by a 3-2 vote, to reclassify broadband internet access service as a “telecommunications service” and to subject the service to net neutrality and certain common carrier regulations under Title II of the Communications Act of 1934, as amended (the “Communications Act”). Those regulations: (1) prohibited broadband internet access service providers from (a) blocking access to lawful content, applications, services or non-harmful devices; (b) impairing or degrading lawful internet traffic on the basis of content, applications or services; or (c) favoring lawful traffic from one provider of internet content over lawful traffic of another content provider in exchange for consideration; (2) established a new “general conduct standard” that prohibited broadband internet access service providers from unreasonably interfering with or unreasonably disadvantaging the ability of consumers to select, access and use the lawful internet content, applications, services or devices of their choosing; and (3) required broadband internet access service providers to disclose information regarding network management, performance and commercial terms of the service to their customers. The Order was upheld in the courts, and in November 2018 the U.S. Supreme Court declined to review the lower courts’ decisions. However, in December 2017, the FCC rescinded the majority of the open internet rules previously adopted in the Order, with the exception of the disclosure requirements. Several parties have challenged the FCC’s new rules in Federal courts, and those appeals are pending. Congress and numerous states also have proposed legislation regarding the net neutrality rules. Several states, including Oregon and Washington (where we have subscribers), have adopted legislation that requires entities providing broadband internet access service in the state to comply with net neutrality requirements or that prohibits state and local government agencies from contracting with internet service providers that engage in certain network management activities based on paid prioritization, content blocking or other discrimination. Net neutrality obligations could cause us to incur additional compliance costs, and the enforcement or interpretation of these new obligations could adversely affect our business. We cannot predict whether or when future changes to the regulatory framework will occur at the FCC, in Congress, at the state level or in the courts. We also cannot predict whether or to what extent the rules as revised by the FCC, Congress, the states or the courts may affect our operations or impose costs on our business.

 

Privacy. Broadband internet access service is subject to many of the same U.S. Federal and state privacy laws that apply to other electronic communications. These include the Electronic Communications Privacy Act, which addresses interceptions of electronic communications that are in transit; the Stored Communications Act, which addresses acquisitions of electronic data in storage; and other Federal and state privacy laws and regulations. As the collection and use of consumer data becomes more prevalent in the communications industry, our compliance obligations may grow. In November 2016, the FCC adopted new rules for broadband internet access services to protect the privacy of certain information broadband internet access service providers obtain about their customers. However, in April 2017, the broadband privacy and data security rules adopted by the FCC in 2016 were repealed pursuant to the Congressional Review Act, which also restricts the FCC from adopting “substantially similar” rules in the future. In September 2017, the FCC reinstated its previous rules applicable to customer proprietary network information (“CPNI”) for voice services. In addition, privacy legislation has been proposed at the Federal and state level, some of which would require broadband service providers to apply heightened privacy and security protections to customer data. We cannot predict whether, when or to what extent these obligations may impose costs on our business.

 

 

In addition to FCC privacy regulations governing broadband internet access service, the Federal Trade Commission also may exercise authority over privacy by using its existing authority over unfair and deceptive acts or practices to apply greater restrictions on the collection and use of personally identifiable and other information relating to consumers. It also has undertaken numerous enforcement actions against parties that do not provide sufficient security protections against the loss or unauthorized disclosure of this type of information. We also are subject to stringent data security and data retention requirements that apply to website operators and online services directed to children under 13 years of age, or that knowingly collect or post personal information from children under 13 years of age. Other privacy-oriented laws have been extended by courts to online video providers and are increasingly being used in privacy lawsuits, including class actions, against providers of video materials online. We cannot predict whether, when, or to what extent these obligations may impose costs on our business.

 

We are also subject to Federal and state laws and regulations regarding data security that primarily apply to sensitive personal information that could be used to commit identity theft. Most states have security breach notification laws that generally require a business to give notice to consumers and government agencies when certain information has been disclosed due to a security breach, and the FCC has adopted security breach rules for voice services. Several states have also enacted general data security requirements to safeguard consumer information, including the proper disposal of consumer information. We cannot predict whether, when or to what extent these obligations may impose costs on our business.

 

Digital Millennium Copyright Act. Owners of copyrights and trademarks actively seek to prevent use of the internet to violate their rights. For example, copyright and trademark owners assert claims that a customer used an internet service or resources accessed via the internet to post, download or disseminate copyrighted music, movies, software or other content without the consent of the copyright owner. In some cases, copyright and trademark owners have sought to recover damages from the broadband internet access service provider as well as or instead of the customer. The law relating to the potential liability of broadband internet access service providers in these circumstances is unsettled. In 1998, Congress adopted the Digital Millennium Copyright Act, which grants broadband internet access service providers protection against certain claims of copyright infringement resulting from the actions of customers if the internet provider complies with certain requirements. So far, Congress has not adopted similar immunity for broadband internet access service providers for trademark infringement claims.

 

Business Data Services. In April 2017, the FCC adopted a new deregulatory framework for Business Data Services (“BDS”), formerly known as “special access” services. These services provide dedicated point-to-point transmission of data at certain guaranteed speeds and service levels using high-capacity connections. The new framework eliminates pricing regulation for certain types of BDS and establishes a competitive market test for determining whether other types of BDS should remain subject to pricing regulation. Several parties challenged the FCC’s decision in Federal court, and the court remanded a portion of the decision back to the FCC for further consideration. At this time, we cannot predict how these rule changes will affect our business.

 

Video Services

 

Title VI of the Communications Act establishes the principal Federal regulatory framework for our operation of cable systems and for the provision of our video services. The Communications Act allocates primary responsibility for enforcing the Federal policies among the FCC and state and local governmental authorities.

 

Franchising. We are required to obtain franchises from state or local governmental authorities to operate our cable systems. Those franchises typically are non-exclusive and limited in time, contain various conditions and limitations and provide for the payment of fees to the local authority, determined generally as a percentage of revenues. Failure to comply with all of the terms and conditions of a franchise may give rise to rights of termination by the franchising authority. The FCC has adopted rules designed to expedite the process of awarding competitive franchises and relieving applicants for competing franchises of some locally-imposed franchise obligations. This development, which is especially beneficial to new entrants, is expected to continue to accelerate the competition we are experiencing in the video service marketplace. In July 2017, the U.S. Court of Appeals for the Sixth Circuit vacated and remanded to the FCC its prior determination that local franchising authorities are prohibited from regulating non-telecommunications services provided by incumbent cable operators and that the term “franchise fees” under the statute includes all “in-kind” payments. The FCC is reviewing these issues as a result of the remand. We cannot predict the outcome of the remand to the FCC, and whether or to what extent the rules as revised by the FCC or the courts may affect our operations or impose costs on our business.

 

 

Rate Regulation. FCC regulations prohibit LFAs or the FCC from regulating the rates that cable systems charge for certain levels of video cable service, equipment and service calls when those cable systems are subject to “effective competition.” In 2015, the FCC revised its rate regulations to create a presumption that all cable systems are subject to the effective-competition exemption unless proven otherwise. In July 2017, the D.C. Circuit upheld the FCC’s decision on appeal.

 

“Must-Carry” and Retransmission Consent and Content Rules. U.S. Federal law provides that a television broadcast station may, subject to certain limitations, insist on carriage of its signal on cable systems located within the station’s prescribed area. As a result, certain of our cable systems must carry broadcast stations that we might not otherwise have elected to carry.

 

In other cases, we have been required to provide consideration to broadcasters to obtain retransmission consent, such as commitments to carry other program services offered by a station or an affiliated company, to purchase advertising on a station or to provide advertising availabilities on cable to a station or to provide cash compensation. This development results in increased operating costs for cable systems, which ultimately increases the rates cable systems charge subscribers. In March and November 2014, the FCC and Congress imposed new requirements in this area including restrictions on broadcasters’ ability to jointly negotiate with cable providers for carriage of their stations, and the FCC is seeking comment on possible changes to regulations in this area, which could affect our business. In July 2016, the FCC announced that it would not adopt additional rules governing good faith negotiations for retransmission consent, but it would be prepared to assist in negotiations when necessary. In September 2014, the FCC repealed its sports blackout rules, which prohibited cable and satellite operators from retransmitting any sports event that was blacked out on a local broadcast station.

 

Media Ownership Rules. In November 2017, the FCC took steps to relax its media ownership rules, which, among other things, would eliminate restrictions that limit the number of commonly owned television stations per market and restrict newspaper/broadcast and radio/television station cross-ownership. These rules are in effect, but have been challenged in Federal court. In December 2017, the FCC announced a further proceeding that could eventually lead to additional relaxation of the FCC’s media ownership rules, including the cap on the number of television stations that one entity can control nationwide. In December 2018, the FCC commenced the next quadrennial review of the media ownership rules. We cannot predict the outcome of the ongoing reviews by the FCC and the Federal court and whether or to what extent the rules as revised by the FCC or the courts may affect our operations or impose costs on our business. These changes or proposed changes could increase the negotiating leverage that broadcasters hold in retransmission consent negotiations and thereby possibly increase the amounts we pay to broadcasters for retransmission fees.

 

Independent Programming. In September 2016, the FCC initiated a rulemaking proceeding to adopt rules prohibiting certain practices that may affect the relationship between multichannel video programming distributors (“MVPDs”), such as us, and independent programmers. The proposal examines whether certain “most favored nation” and alternative distribution method provisions in program carriage agreements should be prohibited and whether program bundling practices by large programmers affect the ability of MVPDs to carry independent programmers. We cannot predict whether the FCC will pursue this proceeding, and, if so, how it will proceed.

 

Pole Attachments. U.S. Federal law requires most telephone and power utilities to charge reasonable rates to cable operators for utilizing space on utility poles or in underground conduits. In May 2010 and again in April 2011, the FCC adopted new requirements relating to pole access and construction practices that were expected to improve the ability of cable operators to attach to utility poles on a timely basis and to lower the pole attachment rate for telecommunications services. In October 2013, the U.S. Supreme Court declined to review a lower court’s decision to uphold the FCC’s pole attachment regulations. The FCC further revised its pole attachment rules in November 2015 to adjust the formula for calculating pole rental rates, which resulted in similar rates for telecommunications attachments and cable attachments and eliminated the ability of utility companies to justify higher rates for pole attachments used to provide broadband internet access service. In July 2017, the U.S. Court of Appeals for the Eighth Circuit upheld the FCC’s November 2015 pole attachment decision. In April 2018, the U.S. Supreme Court declined to review that decision. In October 2017, the FCC adopted a one-touch make-ready policy for pole attachments, which has been challenged by the utility companies. We cannot predict the outcome of this proceeding, or how this proceeding may affect our operations or impose costs on our business. In the meantime, the appropriate method for calculating pole attachment rates for cable operators that provide VoIP services remains unclear, although the FCC’s rule revisions to equalize pole attachment rates and its December 2017 reversal of its previous reclassification of broadband internet access services make this issue less significant. We cannot predict the extent to which these and other rule changes will affect our ability over time to secure timely access to poles at reasonable rates for our data, voice and video services. As a general matter, changes to our pole attachment rate structure could significantly increase our annual pole attachment costs.

 

 

U.S. Federal Copyright Issues. The Copyright Act of 1976, as amended (the “Copyright Act”), gives cable systems the ability, under certain terms and conditions and assuming that any applicable retransmission consents have been obtained, to retransmit the signals of television stations pursuant to a compulsory copyright license.

 

The U.S. Copyright Office is considering requests for clarification and revisions of certain cable compulsory copyright license reporting requirements, and from time to time, other revisions to the cable compulsory copyright rules are considered. We cannot predict the outcome of any such inquiries. However, it is possible that changes in the rules or copyright compulsory license fee computations or compliance procedures could have an adverse effect on our business by, for example, increasing copyright compulsory license fee costs or by causing us to reduce or discontinue carriage of certain broadcast signals that we currently carry on a discretionary basis.

 

Telephone Company Competition. U.S. Federal law permits telephone companies to offer video programming services. Over the past decade, telephone companies have pursued multiple strategies to enter the market for the delivery of multichannel video programming services, such as merging with DBS operators, in the case of AT&T and DirecTV, or obtaining local franchise agreements. Increased competition from telephone companies that provide competing services could have a material effect on our business.

 

Over-the-Top Video Programming. The continued proliferation of broadband services in the United States has enabled cable programmers and broadcast television stations and networks to “stream” their video content to consumers over the internet. Although we have benefited generally from the growth in broadband due to our role as a provider of broadband services, the continued and growing availability of cable programming and broadcast television content on the internet may result in less demand for our video cable service offering. Some providers of cable service are marketing their own version of OTT video programming, thus enabling their subscribers to access cable programming outside of their home or business. Some fixed and wireless broadband providers are excluding certain streamed content from metered data charges or data limits in an effort to make their broadband service more attractive to consumers. In addition, online video distributors and other OTT video distributors have begun to stream broadcast programming over the internet. In some cases, distributors streamed broadcast programming without the consent of broadcasters and copyright owners. Broadcasters challenged this practice, and in June 2014, the U.S. Supreme Court determined that such streaming requires the consent of the applicable copyright owner. However, there is a potential for other streaming services to attempt to enter the market, and in December 2014, the FCC opened a proceeding concerning how OTT providers should be classified for purposes of the FCC’s rules. We cannot predict the outcome of these proceedings, nor related litigation, nor how widespread these practices may become or the extent to which the integrated functionality and ease of use of the cable platform will continue to appeal to the majority of our subscribers.

 

Wireless Services. In 2017, the FCC completed an auction of additional spectrum, including spectrum in the television broadcast band, for use by wireless broadband providers. The FCC process provided for both the auction of spectrum and a “repacking,” whereby certain broadcast stations will move to new channel allotments so as to free up a nationwide block of spectrum for wireless broadband use. The availability of more spectrum to enable wireless video services over time will create additional competitive alternatives to cable services. The auction ended in March 2017, and in April 2017, the FCC began the process of transitioning broadcast stations to new channel assignments. MVPDs are required to submit an estimate of the costs incurred to continue carrying stations that were reassigned to new channels. We cannot predict the amount of funding, if any, that we might receive from the disbursement of these funds.

 

Set-Top Boxes. Congress, the FCC and other government agencies have for some time been developing and implementing regulations that affect the types of set-top boxes that cable operators can lease or deploy to their subscribers. Prior to 2015, FCC rules banned the integration of security and non-security function in set-top boxes and required MVPDs to allow third-party vendors to provide set-top boxes with basic converter functions. In 2015, Congress repealed the integration ban and mandated that the FCC establish a working group to identify, report on and recommend a successor technology- and platform-neutral security solution. In February 2016, the FCC opened a rulemaking to consider proposals that would require any retail video device to work on any cable operator’s system, but this item was removed from active FCC review. We cannot predict if or when new changes may be proposed, what effect such changes may have on our operations, or if they will increase our costs and impair our ability to deliver programming to our customers.

 

 

Disability Access. In September 2010, Congress passed the Twenty-First Century Communications and Video Accessibility Act (the “CVAA”). The CVAA directs the FCC to impose additional accessibility requirements on cable operators. For example, cable operators that serve 50,000 or more subscribers must provide 50 hours of video description per calendar quarter during primetime or on children’s programming on each channel on which they carry one of the top five national non-broadcast networks. In addition, cable operators of all sizes must pass through video description that is provided for each broadcast station or non-broadcast network that they carry. Compliance imposes certain costs on us. The CVAA also directs the FCC to adopt rules to help ensure that persons with disabilities have access to video programming and related information. The FCC has adopted a requirement that equipment used by consumers to access video programming and other services offered by cable operators make on-screen text menus and guides for the display or selection of video programming audibly accessible to individuals who are blind or visually impaired. In October 2013, the FCC also initiated a proceeding to consider additional rules. In February 2014, the FCC issued an order adopting closed captioning quality standards for video programming distributors (“VPDs”) and, in February 2016, the FCC amended its rules to allocate responsibility for the quality of closed captioning between video programmers and VPDs. The FCC also revised its procedures for the handling of complaints regarding closed captioning quality. We cannot predict any further actions the FCC will take in this proceeding or the extent to which any such requirements may impose new costs on us.

 

In 2017, the FCC increased the amount of video-described programming for covered broadcast and cable channels from 50 hours to 87.5 hours and the number of cable networks that are required to provide video-described programming. We cannot predict how these new obligations could impose costs on our business.

 

ATSC 3.0. In November 2017, the FCC adopted new rules to authorize television stations to use the “Next Generation TV” broadcast television standard, ATSC 3.0. Should use of the new standard become widespread, we could be required to deploy new equipment and our carriage obligations may be impacted. We cannot predict the effect that use of the new standard could have on our equipment costs, carriage obligations or retransmission fees.

 

Other Requirements. The FCC regulates various other aspects of cable operations, including certain terms for commercial leased access, signal leakage, distant broadcast station signals and technical standards. We cannot predict whether, when or to what extent changes to these and other regulations may affect our operations or costs.

 

Voice Services

 

Voice Over Internet Protocol. Service providers, including us and others, offer VoIP service, which permits users to make voice calls over broadband communications networks, including the internet, to recipients on the public switched telephone network (“PSTN”) and other broadband communications networks. U.S. Federal law preempts state and local regulatory barriers to the offering of voice service by service providers, and the FCC and U.S. Federal courts generally have preempted state laws that seek to regulate or classify VoIP.

 

The FCC has held that VoIP services are IP-enabled services, which are interstate in nature and thus subject exclusively to the FCC’s U.S. Federal jurisdiction and not to state regulation. This decision was upheld on appeal, although the FCC has an ongoing proceeding to consider whether VoIP services provided by service providers are properly classified as an “information service,” “telecommunications service” or some other new category of service. This determination, once made, could have numerous regulatory implications for service providers that provide interconnected VoIP services, including us. Although the FCC has yet to ascribe a regulatory definition to VoIP services, the FCC nevertheless has imposed a number of obligations on interconnected VoIP service providers, some of which are discussed more fully below.

 

The Minnesota Public Utilities Commission (“PUC”) has ruled that the VoIP service of another cable operator should be classified and regulated as a telecommunications service in the state, subject to entry and rate regulation. In May 2017, the U.S. District Court for the District of Minnesota held that such operator’s VoIP service is an “information service” rather than a “telecommunications service,” which prevents the Minnesota PUC from regulating VoIP as a telecommunications service in Minnesota. The Minnesota PUC appealed the decision to the U.S. Court of Appeals for the Eighth Circuit. The FCC supported the cable operator in its appeal. In September 2018, the Eighth Circuit upheld the district court decision and denied the Minnesota PUC’s petition for rehearing in December 2018. We cannot predict whether the Minnesota PUC will ask the U.S. Supreme Court to review the Eighth Circuit decision, the outcome of the proceeding or how the proceeding may affect our operations or impose costs on our business.

 

Emergency 911 Services. The FCC has ruled that an interconnected VoIP service provider that enables its customers to make calls to and receive calls from persons who use the PSTN must provide its customers with the same enhanced 911 (“E911”) features that traditional telephone and wireless companies are obligated to provide. This requirement was upheld on appeal. In January 2015, the FCC established indoor location requirements when E911 calls are made by interconnected VoIP subscribers. The FCC also requires certain providers of facilities-based fixed, residential voice services, which includes interconnected VoIP service providers, to offer backup power options to consumers and to inform consumers of the availability of such options.

 

 

CALEA. FCC regulations require providers of interconnected VoIP service to comply with the requirements of the Communications Assistance for Law Enforcement Act, which requires covered entities and their equipment suppliers to deploy equipment that law enforcement officials can access readily for lawful wiretap purposes.

 

Universal Service. The FCC has determined that interconnected VoIP service providers must contribute to the Federal Universal Service Fund (the “USF”). The amount of a company’s USF contribution is based on a percentage of revenues earned from end-user interstate and international interconnected VoIP services. We are permitted to recover these contributions from our customers. In October 2011, the FCC adopted an order and new rules intended to transition the USF so that it supports the build out of broadband, rather than telecommunications facilities. The order principally addressed the manner in which universal service funds will be distributed to network operators for broadband build out. In April 2012, the FCC initiated a proceeding that focused on reforming the nature and manner in which entities should contribute to the USF and at what levels. We cannot predict whether and how such reform will occur and the extent to which it may affect providers of VoIP services, including us and our competitors. The FCC’s 2011 universal service reform order was subject to both reconsideration requests and appeals, and in May 2014, the U.S. Court of Appeals for the Tenth Circuit upheld the order in its entirety, and the U.S. Supreme Court declined to review the case. In November 2010, the FCC determined that states may impose state USF fees on interconnected VoIP service providers subject to certain limitations and requirements. State USF contributions are based on a percentage of revenues earned from end-user intrastate interconnected VoIP services, and we are typically permitted to recover these contributions from our customers. We cannot predict whether or how the imposition of such state-based universal service fees will affect our operations and business. In addition, the FCC has focused on subsidizing broadband deployment and this shift could help some of our competitors. For example, the FCC substantially revised the program that provides universal service support for services to schools and libraries to shift support from voice services to broadband services and the deployment of Wi-Fi networks. Similarly, the FCC has expanded its Lifeline subsidy program for low-income consumers to include broadband services in addition to voice services and is considering further changes that may affect the Lifeline program. We cannot predict whether or how these programs will be changed.

 

Intercarrier Compensation. The order and new rules adopted by the FCC in October 2011 in connection with universal service reform also addressed intercarrier compensation and specified that “VoIP-PSTN traffic,” that is, traffic exchanged over public switched telephone network facilities that originates and/or terminates in IP format, which includes interconnected VoIP traffic, is subject to intercarrier compensation obligations either on the basis of specified default charges or through negotiated rates. The FCC’s order was subject to both reconsideration requests and appeals. The U.S. Court of Appeals for the Tenth Circuit upheld the order in its entirety, and the U.S. Supreme Court declined to review the case. Future FCC determinations regarding the rates, terms and conditions for transporting and terminating such traffic could have a profound and material effect on the profitability of providing voice and data services.

 

Customer Proprietary Network Information. In 2007, the FCC adopted rules expanding the protection of CPNI and extending CPNI protection requirements to providers of interconnected VoIP service. CPNI is information about the quantity, technical configuration, type, location and amount of a voice customer’s use. These requirements generally have increased the cost of providing interconnected VoIP service, as providers now must implement various safeguards to protect CPNI from unauthorized disclosure.

 

Access for Persons with Disabilities. FCC regulations require providers of interconnected VoIP services to comply with all disability access requirements that apply to telecommunications carriers, including the provision of telecommunications relay services for persons with speech or hearing impairments. The FCC also has adopted reporting requirements associated with disability access obligations. We and other interconnected VoIP service providers must also contribute to the interstate Telecommunications Relay Service Fund to support such access. These requirements generally have had the effect of increasing the cost of providing VoIP services.

 

Service Discontinuance and Outage Obligations. In 2009, the FCC adopted rules subjecting providers of interconnected VoIP services to the same service discontinuance requirements applicable to providers of wireline telecommunication services. In 2012, the FCC adopted mandatory outage reporting requirements for interconnected VoIP service providers, which apply when customers of interconnected VoIP service lose service or connectivity and, as a result, are unable to access 911 service. Along with other FCC actions described in this section, which impose legacy telecom obligations on interconnected VoIP providers, this development will subject our interconnected VoIP services to greater regulation and, therefore, greater burdens and costs.

 

Regulatory Fees. The FCC requires interconnected VoIP service providers to contribute to shared costs of FCC regulation through an annual regulatory fee assessment. These fees have increased our cost of providing VoIP services. The FCC from time to time revises its regulatory fees and sometimes creates new fees. We cannot predict when or the extent to which the FCC will adopt new rules or regulatory fees affecting VoIP service providers, which could affect our cost of doing business.

 

 

Local Number Portability. Providers of interconnected VoIP services and their “numbering partners” must ensure that their subscribers have the ability to port their telephone numbers when changing service providers. We, along with other providers of interconnected VoIP service, must contribute funds to cover the shared costs of local number portability and the costs of North American Numbering Plan Administration. In June 2015, the FCC adopted rules requiring additional numbering requirements, such as allowing consumers access to abbreviated dialing codes like 211 and 311 in certain circumstances, to be applied to interconnected VoIP service providers. Although consumers’ ability to port their existing telephone numbers to interconnected VoIP service has created additional opportunities for us to gain voice customers, the local number portability and associated rules overall have had the effect of increasing the cost of providing VoIP service.

 

Rural Calling Issues. In October 2013, the FCC adopted new rules to combat problems with the completion of long-distance calls to rural areas. The new rules applied detailed record keeping, record retention and reporting requirements on all voice providers, including VoIP service providers, subject to certain exceptions. The rules also prohibit VoIP service providers (and other voice providers) from using false audible ringing when originating calls. The FCC further revised its rules in April 2018, but we cannot predict how these rule changes may affect our operations or impose costs on our business.

 

State and Local Taxes

 

The Internet Tax Freedom Act prohibits most states and localities from imposing taxes on internet access service charges. Legislative and administrative proceedings in some states and localities have imposed or are considering adopting changes to general business taxes, central assessments for property tax and new taxes and fees applicable to our services. Often, DBS and other competitors that deliver their services over the internet do not face similar state tax and fee burdens. In addition, the FCC’s 2015 reclassification of broadband internet access services as Title II telecommunications services may cause or allow, directly or indirectly, some states and localities to seek to impose additional taxes and fees on our data services. However, such state and local actions may be hindered by the FCC’s decision to rescind the majority of the rules adopted in the Order.

 

 

ITEM 1A. RISK FACTORS

 

You should carefully consider all of the information in this Annual Report on Form 10-K and each of the risks described below, which we believe are the principal risks that we face. Some risks relate principally to the securities markets and ownership of our common stock.

 

Any of the following risks could materially and adversely affect our business, financial results, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.

 

Risks Relating to Our Business

 

We face significant competition from other service providers, as well as other well-capitalized entrants in the video and data services industry, which could reduce our market share and lower our profits.

 

We operate in a highly competitive, subscriber-driven and rapidly changing environment and compete with a growing number of entities that provide a broad range of communications products, services and content to subscribers. Our competitors have historically included, and we expect will continue to include, DBS providers; telephone companies that offer data and video services through DSL or fiber-to-the-node networks; municipalities with fiber-based networks; regional fiber providers and other service providers that have been granted a franchise to operate in a geographic market in which we are already operating.

 

 

Our cable systems generally operate pursuant to franchises, permits and similar authorizations issued by LFAs, and these franchises are typically non-exclusive. Accordingly, LFAs can grant additional franchises to our competitors and create competition in our markets where none existed previously, resulting in overbuilds. In some cases, the FCC has adopted rules that streamline entry for new competitors (particularly those affiliated with telephone companies) and reduce franchising burdens for these new entrants. Although as a general matter internet service providers have upgraded their data networks to enable faster upload and download speeds for their customers in metropolitan markets before upgrading their data networks in our markets, approximately 29% of our footprint has been overbuilt and currently faces competition for residential high-speed data service at speeds comparable to our own, and we anticipate a slow yet steady growth of new entrants into our markets. Currently, approximately 9% of the residential homes passed in our markets have access to fiber-to-the-premises from our competitors who typically offer only high-speed data service. Further overbuilding could cause more of our customers to purchase data and video services from our competitors instead of from us. In certain of our markets, some of our telephone company competitors have entered into strategic partnerships or other arrangements with DBS operators that permit these telephone companies to package the video services of DBS operators with their own data, residential voice and wireless voice services. An example of such arrangement is AT&T’s ownership of DirecTV. We also face increasing competition from wireless telephone companies for residential voice services, as some of our customers are replacing our residential voice services completely with wireless voice services. In addition, new entrants with significant financial resources may compete on a larger scale with our video and data services, and as more wireless voice service providers offer unlimited data options, some customers may choose to forgo our data services altogether. We may also face increasing competition from various providers of wireless internet offerings, including wireless telephone carriers that are developing high-speed “5G” wireless networks and public locations or commercial establishments offering Wi-Fi at no cost.

 

A small number of municipalities have also announced plans to construct their own data networks with access speeds that match or exceed those of our own through the use of fiber optic technology. In some cases, local government entities and municipal utilities may legally compete with us without obtaining a franchise from an LFA, reducing their barriers to entry into our markets. The entrance of municipalities as competitors in our markets would add to the competition we face and could lead to additional customer attrition.

 

Our video business also faces substantial and increasing competition from other forms of in-home and mobile entertainment, including Amazon Prime, Apple TV, Hulu, Netflix, Sling TV, YouTube TV and an increasing number of new entrants who offer OTT video programming, including many traditional programmers. Because of the significant size and financial resources of many of the companies behind such service offerings, we anticipate that they will continue to invest resources in increasing the availability of video content on the internet, which may result in less demand for the video services we provide. In addition, companies that offer OTT content in certain markets also provide data services, such as Alphabet, and they may seek to increase sales of their streaming content by lowering the cost of data services for their customers, which would further increase price competition for the data services we offer. In addition to creating competition for our video services business, OTT content also significantly increases the volume of traffic on our data networks, which can lead to decreases in access speeds for all users if data networks are not upgraded so that their broadband capacity can keep pace with increased traffic.

 

Competition for dedicated fiber-optic services for enterprise business customers is also intense as both local telephone companies and regional overbuilders offer data and voice services over dedicated fiber connections.

 

Any of these events could have a material negative impact on our operations, business, financial results and financial condition.

 

Our business is characterized by rapid technological change, and if we do not adapt to technological changes and respond appropriately to changes in consumer demand, our competitive position may be harmed.

 

Our success is, to a large extent, dependent on our ability to acquire, develop, adopt, upgrade and exploit new and existing technologies to address consumers’ changing demands and distinguish our services from those of our competitors. We may not be able to accurately predict technological trends or the success of new products and services. If we choose technologies or equipment that are less effective, cost-efficient or attractive to our customers than those chosen by our competitors, or if we offer services that fail to appeal to consumers, that are not available at competitive prices or that do not function as expected, our competitive position could deteriorate and our business and financial results could suffer.

 

The ability of some of our competitors to introduce new technologies, products and services more quickly than we can may adversely affect our competitive position. Furthermore, advances in technology, decreases in the cost of existing technologies or changes in competitors’ product and service offerings may require us in the future to make additional research and development expenditures or to offer at no additional charge or at a lower price certain products and services that we currently offer to customers separately or at a premium.

 

In addition, we seek to leverage overall industry experience before rolling out new technology in order to avoid investing in technology that has not been proven successful in other markets. We implement this approach to avoid costly mistakes made by early adopters of new technology that does not provide expected returns, and it exposes us to the risk that one of our competitors will adopt successful new technology before us and leverage this new technology to attract our customers, increasing the level of customer attrition we experience and adversely affecting our business.

 

 

Business services sales increasingly contribute to our results of operations, and we face risks as we attempt to further focus on sales to our business customers.

 

Growth in revenue from sales to our business customers in legacy Cable One markets has exceeded 11% for each year since we started focusing on business services sales in 2011, and we may encounter challenges as we continue our initiative to expand sales of data, voice and video services to our business customers. To accommodate this expansion, we expect to commit a greater proportion of our expenditures on technology, equipment and personnel toward our business customers. If we are unable to sufficiently maintain the necessary infrastructure and internal support functions necessary to service these customers, potential future growth of our business services revenues would be limited. In many cases, business customers have service level agreements that require us to provide higher standards of service and reliability. If we are unable to meet these service level requirements, or more broadly, the expectations of our business customers, we would no longer expect business sales to increase and our results of operations may be materially negatively affected.

 

The increase in programming costs and retransmission fees may continue in the future, resulting in lower margins than we anticipate.

 

Over the past few years, the sales margins on our residential video services, which accounted for 32.0%, 34.6% and 36.0% of our total revenues in 2018, 2017 and 2016, respectively, have decreased as a result of increased programming costs and retransmission fees and customer cord-cutting. Programming costs and retransmission fees paid to major programmers and broadcasters may continue to increase as content providers are expected to ask for higher fees. Moreover, programming cost and retransmission fee increases have caused us, and may in the future cause us, to cease carrying channels offered by certain programmers and broadcasters, which may result in attrition of video subscribers as well as customers who subscribe to double-play or triple-play packages that include video service. These customer losses and increased costs could result in further decreases in our residential video margins and adversely impact our business.

 

We may not be able to obtain necessary hardware, software and operational support.

 

We depend on a limited number of third-party suppliers and licensors to supply some of the hardware and software necessary to provide some of our services, including our access to the network backbone and the set-top boxes and modems that we lease to our customers. Some of these vendors represent our sole source of supply or have, either through contract or as a result of intellectual property rights, a position of some exclusivity. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform its obligations in a timely manner; demand exceeds these vendors’ capacity; they experience operating or financial difficulties; they significantly increase the amount we pay for necessary products or services or they cease production of any necessary product due to lack of demand, profitability, a change in their ownership or otherwise, then our ability to provide some services may be materially adversely affected. Any of these events could adversely affect our ability to retain and attract subscribers and have a material negative impact on our operations, business, financial results and financial condition.

 

We recently made several acquisitions, and may make other acquisitions, which exposes us to risks and uncertainties associated with acquisitions.

 

We completed the NewWave acquisition on May 1, 2017 and the Clearwave acquisition on January 8, 2019. In addition, we may make other acquisitions. Such acquisitions could involve a number of risks and uncertainties, including:

 

 

the difficulty in integrating newly acquired businesses and operations in an efficient and effective manner;

 

 

the challenge in achieving strategic objectives, cost savings and other anticipated benefits;

 

 

the potential loss of key employees of the acquired businesses;

 

 

the potential diversion of senior management’s attention from our ongoing operations;

 

 

the difficulty of maintaining relationships with the customers, suppliers and other business partners of the acquired business;

 

 

 

the difficulty and amount of time necessary to realize expected synergies and other benefits of the acquisitions;

 

 

the risks associated with integrating financial reporting and internal control systems;

 

 

the difficulty in adapting and expanding information technology systems and other business processes to incorporate the acquired businesses;

 

 

potential future impairments of goodwill associated with the acquired businesses; and

 

 

in some cases, the potential for increased regulation.

 

If an acquired business fails to operate as anticipated, cannot be successfully integrated with our existing business or one or more of the other risks and uncertainties identified above occur in connection with our acquisitions, our operations, business, results of operations and financial condition could be materially negatively affected.

 

Our rebranding may not produce the benefits expected.

 

In December 2018, we announced that we will be rebranding our business as Sparklight beginning in the summer of 2019. The rebranding will result in significant investment by us and may result in the diversion of senior management’s attention from our ongoing operations. Furthermore, we have registered and applied for registration of certain trademarks associated with the rebranding and we will continue to evaluate the registration and maintenance of additional trademarks associated with the rebranding. A failure to obtain or maintain trademark registrations could limit our ability to protect and enforce our trademarks and impede our rebranding and marketing efforts. Our rebranding could also result in the loss of brand recognition, customer loyalty or reputation and could require us to devote additional resources to advertising and marketing our new brand. Our rebranding initiative may not produce the benefits expected and could adversely affect our ability to retain and attract subscribers and have a material negative impact on our operations, business, financial results and financial condition.

 

Adverse conditions in the U.S. economy could impact our results of operations.

 

Unfavorable general economic conditions, such as a recession or economic slowdown in the United States, could negatively affect the affordability of and demand for some of our products and services. In difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing purchases of our products, electing to use fewer higher margin services or obtaining lower cost products and services offered by other companies. Similarly, under these conditions the business customers that we serve in the United States may delay purchasing decisions, delay full implementation of service offerings or reduce their use of services. In addition, adverse economic conditions may lead to an increased number of our residential and business customers that are unable to pay for services. Such conditions could also inhibit or prevent our third-party suppliers and licensors from supplying some of the hardware and software necessary to provide some of our services. If any of these events were to occur, it could have a material negative effect on our operations, business, financial condition and results of operations.

 

We rely on network and information systems and other technology, and a disruption or failure of such networks, systems or technology as a result of cybersecurity incidents, as well as outages, natural disasters (including extreme weather), terrorist attacks, accidental releases of information or similar events, may disrupt our business.

 

Network and information systems and other technologies are critical to our operating activities, both to internal uses and in supplying data, video and voice services to customers. Network or information system shutdowns or other service disruptions caused by cyber-attacks, such as distributed denial of service attacks, dissemination of malware and other malicious activity, pose increasing risks. Both unsuccessful and successful cyber-attacks on companies have continued to increase in frequency, scope and potential harm in recent years and, because the techniques used in such attacks have become more sophisticated and change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. From time to time third parties make malicious attempts to access our network. Any successful attempts could result in an unauthorized release of information, degradation to our network and information systems or disruption to our data, video and voice services, all of which could adversely affect our reputation and results of operations.

 

 

Our network and information systems are also vulnerable to damage or interruption from power outages, natural disasters (including extreme weather arising from short-term weather patterns or any long-term changes), terrorist attacks and similar events. For example, the damage to our network infrastructure caused by Hurricanes Harvey and Katrina and the Joplin, Missouri tornado each created a significant disruption in our ability to provide services in affected areas. Any similar events could have an adverse impact on us and our customers in the future, including degradation of service, service disruption, excessive call volume to call centers and damage to our plant, equipment, data and reputation. Such an event also could result in large expenditures necessary to repair or replace such networks or information systems or to protect them from similar events or damage in the future. Further, the impacts associated with extreme weather or any long-term changes, such as intensified storm activity, may cause increased business interruptions.

 

Security breaches and other disruptions, including cyber-attacks, and our actual or perceived failure to adequately protect business and consumer data could give rise to liability or reputational harm.

 

In the ordinary course of our business, we electronically maintain confidential, proprietary and personal information in our information technology systems and networks and those of third-party vendors, including customer, personnel and vendor data. These systems may be targets of attack by cyber criminals or other wrongdoers seeking to steal such information for financial gain or to harm our business operations or reputation. The loss, misuse, compromise, leakage, falsification or accidental release of such information may result in costly investigations, remediation efforts and notification to affected consumers, personnel or vendors. Cyber-attacks could also adversely affect our operating results; consume internal resources and result in government investigations, fines and penalties, litigation or potential liability for us and otherwise harm our business.

 

Various U.S. Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data and sensitive personal information that could be used to commit identity theft. This area of the law is evolving, and interpretations of applicable laws and regulations differ. Legislative and regulatory activity in the privacy area may result in new laws that are relevant to our operations, for example, use of consumer data for marketing or advertising. Claims of failure to comply with our privacy policies or applicable laws or regulations could form the basis of governmental or private-party actions against us. Such claims and actions may cause damage to our reputation and could have an adverse effect on our business.

 

We also are subject to stringent data security and data retention requirements that apply to website operators and online services directed to children under 13 years of age, or that knowingly collect or post personal information from children under 13 years of age. Other privacy-oriented laws have been extended by courts to online video providers and are increasingly being used in privacy lawsuits, including class actions, against providers of video materials online. Most states have security breach notification laws that generally require a business to give notice to consumers and government agencies when certain information has been disclosed due to a security breach, and the FCC has adopted security breach rules for voice services. Several states have also enacted general data security requirements to safeguard consumer information, including the proper disposal of consumer information. We cannot predict whether, when or to what extent these obligations may impose costs on or otherwise adversely affect our business.

 

Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide our services or subject us to expensive intellectual property litigation.

 

We periodically receive claims from third parties alleging that our network and information technology infrastructure infringes the intellectual property rights of others. We are generally named as joint defendants in these suits together with other providers of data, video and voice services. Typically these claims allege that aspects of our cable system architecture, electronic program guides, cable modem technology and VoIP services infringe on process patents held by third parties. It is likely that we will continue to be subject to similar claims as they relate to our cable business. Addressing these claims is a time-consuming and expensive endeavor, regardless of the merits of the claims. In order to resolve such a claim, we could determine the need to change our method of doing business, enter into a licensing agreement or incur substantial monetary liability. It is also possible that our business could be enjoined from using the intellectual property at issue, causing us to significantly alter our operations. If any such claims are successful, then the outcome would likely affect our services utilizing the intellectual property at issue and could have a material adverse effect on our operating results.

 

If we are unable to retain key employees, our ability to manage our business could be adversely affected.

 

Our operational results have depended, and our future results will depend, upon the retention and continued performance of our management team. The competitive environment for management talent in the broadband communications industry could adversely impact our ability to retain and hire new key employees for management positions. The loss of the services of key members of management and the inability or delay in hiring new key employees could adversely affect our ability to manage our business and our future operational and financial results.

 

 

Risks Relating to Regulation and Legislation

 

The profitability of our data service offerings may be impacted by legislative or regulatory efforts to impose net neutrality and other new requirements on cable operators.

 

The majority of our Adjusted EBITDA less capital expenditures comes from residential data services, and we expect that a majority of our residential customers will be data-only in the future. We have aligned our resources to emphasize increased sales of data services as well as sales to business customers. In order to continue to generate Adjusted EBITDA less capital expenditures at our desired level from data services, we need the continued flexibility to develop and refine business models that respond to changing consumer uses and demands and to manage data usage efficiently, including by charging our data subscribers higher rates based on the overall bandwidth capacity available to, or used by, them, referred to as “usage-based billing.” Our ability to implement usage-based billing or other network management initiatives in the future may be restricted by any new net neutrality requirements on cable operators.

 

To the extent the FCC in the future limits our ability to price our data services, we may not be able to generate the margins on our data services that we anticipated in shifting our focus from video to data services, and our business could be materially negatively impacted. While the FCC has eliminated most net neutrality requirements, the FCC, Congress, states or the courts may revisit this determination in the future. For example, Congress and numerous states have proposed legislation regarding the net neutrality rules. Several states, including Oregon and Washington (where we have subscribers), have adopted legislation that requires entities providing broadband internet access service in the state to comply with net neutrality requirements or that prohibits state and local government agencies from contracting with internet service providers that engage in certain network management activities based on paid prioritization, content blocking or other discrimination. Further, current rules only require that a portion of revenues from VoIP services be contributed to the USF and USF is not applied to broadband services. The changes brought about by how USF monies are distributed may provide funding and subsidies to those who either compete with us or seek to compete with us and therefore put us at a competitive disadvantage. Moreover, if the FCC imposes USF fees on broadband services, bundled services or a larger portion of VoIP services, it would increase the cost of our services and harm our ability to compete.

 

The regulation of broadband activities, including net neutrality obligations, and any related court decisions could cause us to incur additional compliance costs, restrict our ability to profit from our existing broadband network, limit the return we can expect to achieve on past and future investments in our broadband networks and adversely affect our business. We cannot predict what, if any, proposals might be adopted or what effect they might have on our business.

 

Our video and voice services are subject to additional regulation by U.S. Federal, state and local authorities, which may impose additional costs and restrictions on our businesses.

 

Our video services business operates in a highly regulated environment. Our cable systems generally operate pursuant to franchises, permits and similar authorizations issued by LFAs controlling the public rights-of-way, which typically are non-exclusive and limited in time, contain various conditions and limitations and provide for the payment of fees to the local authority, determined generally as a percentage of revenues. Failure to comply with all of the terms and conditions of a franchise may give rise to rights of termination by the franchising authority.

 

We have the ability, pursuant to the Copyright Act, under certain terms and conditions, to retransmit the signals of television stations pursuant to a compulsory copyright license. From time to time, revisions to the cable compulsory copyright rules are considered. It is possible that changes in the rules or copyright compulsory license fee computations or compliance procedures could have an adverse effect on our business by, for example, increasing copyright compulsory license fee costs or by causing us to reduce or discontinue carriage of certain broadcast signals that we currently carry on a discretionary basis.

 

In addition, Congress, the FCC and other government agencies have implemented regulations that affect the types of set-top boxes that we can lease or deploy to our subscribers, and we expect these regulations to change in the future. Most recently, in January 2013, the U.S. Department of Energy tentatively designated set-top boxes and network equipment as covered consumer products and proposed to adopt a new test procedure for set-top boxes as part of its Energy Conservation Program for Consumer Products and Certain Commercial and Industry Equipment. In December 2013, the Department of Energy withdrew its proposed rules to designate set-top boxes and network equipment as a covered product and to establish a test procedure for set-top boxes, but stated that it would consider reinitiating the rulemaking. Imposing energy conservation regulations on the hardware products we provide to our customers could impede innovation and require mandatory upgrades in our set-top boxes and be costly to us. In February 2016, the FCC opened a rulemaking to consider proposals that would require any retail video device to work on any cable operator’s system, but this item was removed from active FCC review. We cannot predict when, whether or to what extent any of these proposals will be resolved or how they will affect our operations.

 

 

Our voice services business is also subject to a growing degree of regulation. Complying with these regulations may increase the costs we incur and decrease the revenues we derive from our voice business. While the compliance costs associated with the current regulatory structure applicable to our voice services business are manageable, changes in this regulatory structure are unpredictable and have the potential to further negatively impact our voice services business by increasing compliance costs and/or taxes.

 

Our cable system franchises are subject to non-renewal or termination. The failure to renew a franchise in one or more markets could adversely affect our business.

 

Many of the LFAs from whom we have obtained franchises, permits and similar authorizations required to operate our video services business have established comprehensive facilities and service requirements as well as specific customer service standards and monetary penalties for non-compliance. In many cases, our franchises are terminable if we fail to comply with significant provisions set forth in the applicable franchise agreement governing our video operations. Franchises are generally granted for fixed terms and must be periodically renewed. LFAs may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. LFAs often demand concessions or other commitments as a condition to renewal. The traditional cable franchising regime has recently undergone significant change as a result of various Federal and state actions. Some state franchising laws do not allow us to immediately opt into favorable statewide franchising. In many cases, state franchising laws will result in fewer franchise-imposed requirements for our competitors who are new entrants than for us, until we are able to opt into the applicable state franchise. We cannot assure that we will be able to comply with all significant provisions of our franchise agreements and certain of our franchisers have from time to time alleged that we have not complied with these agreements. Additionally, although historically we have renewed our franchises without incurring significant costs, we cannot assure that we will be able to renew, or to renew as favorably, our franchises in the future. A termination of or a sustained failure to renew a franchise in one or more markets could materially negatively affect our business in the affected geographic area.

 

In addition, certain of our franchise agreements require that the applicable LFA approve a transfer of control of our Company. Although FCC rules provide that a transfer application shall be deemed granted if it is not acted upon within 120 days after submission, as a practical matter, cable operators often waive the deadline if the LFA has not completed its review to facilitate discussions and thereby avoid an LFA denying the transfer of control. Failure to obtain such consents on commercially reasonable and satisfactory terms may impair our entitlement to the benefit of these franchise agreements in the event of a potential transfer of control of our Company.

 

We may encounter increased pole attachment costs.

 

Under U.S. Federal law, we have the right to attach cables carrying video and other services to telephone and similar poles and underground conduits owned by utility companies. In addition, U.S. Federal law requires most telephone and power utilities to charge reasonable rates to cable operators for utilizing space on utility poles or in underground conduits in order to transmit video services to customers. However, because these cables may carry services other than video services, such as voice services, some utility pole owners have sought to impose on cable companies a telecommunications rate for utilizing pole space for voice services, which is higher than the statutory rate charged to cable operators for video services. In May 2010 and again in April 2011, the FCC adopted new requirements relating to pole access and construction practices that were expected to improve the ability of cable operators to attach to utility poles on a timely basis and to lower the pole attachment rate for voice services. In October 2013, the U.S. Supreme Court declined to review a lower court’s decision to uphold the FCC’s pole attachment regulations. The FCC further revised its pole attachment rules in November 2015 to adjust the formula for calculating pole rental rates, which resulted in similar rates for telecommunications attachments and cable attachments and eliminated the ability of utility companies to justify higher rates for pole attachments used to provide broadband internet access service. In July 2017, the U.S. Court of Appeals for the Eighth Circuit upheld the FCC’s November 2015 pole attachment decision. In April 2018, the U.S. Supreme Court declined to review that decision. In October 2017, the FCC adopted a one-touch make-ready policy for pole attachments, which has been challenged by the utility companies. We cannot predict the outcome of this proceeding, or how this proceeding may affect our operations or impose costs on our business. In the meantime, the appropriate method for calculating pole attachment rates for cable operators that provide VoIP services remains unclear, although the FCC’s rule revisions to equalize pole attachment rates and its December 2017 reversal of its previous reclassification of broadband internet access services make this issue less significant. We cannot predict the extent to which regulatory changes may affect our ability over time to secure timely access to poles at reasonable rates for our data, voice and video services. As a general matter, changes to our pole attachment rate structure could significantly increase our annual pole attachment costs and materially negatively impact our operations, business, financial condition and results of operations.

 

 

LFAs have the ability to impose additional regulatory constraints on our business, which could further increase our expenses.

 

In addition to the franchise agreement, LFAs in some jurisdictions have adopted cable regulatory ordinances that further regulate the operation of cable systems, and the services we provide in the jurisdiction. This additional regulation increases the cost of operating our business. LFAs may impose new and more restrictive requirements. LFAs who are certified to regulate rates in their communities generally have the power to reduce rates and order refunds on the rates charged for basic video service and equipment.

 

Changes in broadcast carriage regulations could impose significant additional costs.

 

Although we would likely choose to carry all primary video feeds of local broadcast stations in the markets in which we operate voluntarily, so-called “must carry” rules could, in the future, require us to carry some local broadcast television signals on some of our cable systems that we might not otherwise carry. If the FCC seeks to revise or expand the “must carry” rules, such as to require carriage of multicast streams, we would be forced to carry video programming that we would not otherwise carry and potentially drop other, more popular programming in order to free capacity for the required programming, which could make us less competitive. Moreover, if the FCC adopts rules that are not competitively neutral, cable operators could be placed at a disadvantage versus other video providers.

 

The FCC has taken steps and proceedings to relax its media ownership rules, which, among other things, would eliminate restrictions that limit the number of commonly owned television stations per market and restrict newspaper/broadcast and radio/television station cross-ownership and could eventually lead to increasing the cap on the number of television stations that one entity can control nationwide. However, these rule changes have been challenged in Federal court. The FCC also has commenced a new proceeding to review its media ownership rules. These changes or proposed changes could increase the negotiating leverage that broadcasters hold in retransmission consent negotiations and thereby possibly increase the amounts we pay to broadcasters to retransmit their television stations on its cable systems.

 

In November 2017, the FCC adopted new rules to authorize television stations to use the “Next Generation TV” broadcast television standard, ATSC 3.0. Should use of the new standard become widespread, we could be required to deploy new equipment and our carriage obligations may be impacted. We cannot predict the effect that use of the new standard could have on our equipment costs, carriage obligations, or retransmission fees. Any of these events could adversely affect our business.

 

Risks Relating to Our Indebtedness

 

We incurred indebtedness in connection with the spin-off and the NewWave and Clearwave acquisitions, and the degree to which we are now leveraged may have a material adverse effect on our business, financial condition or results of operations and cash flows.

 

In connection with the spin-off in July 2015, we incurred indebtedness in an aggregate principal amount of $550.0 million. In connection with the NewWave acquisition in May 2017, we incurred $250.0 million and $500.0 million of senior secured loans maturing in May 2022 and May 2024, respectively, to finance the acquisition and related fees and expenses and to pay off $93.8 million of our then-existing term loan indebtedness. In connection with the Clearwave acquisition in January 2019, we incurred $250.0 million of senior secured loans maturing in January 2026.

 

Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the spin-off and the NewWave and Clearwave acquisitions, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control.

 

 

The terms of our indebtedness restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.

 

The terms of our indebtedness include a number of restrictive covenants that impose significant operating and financial restrictions on us and limit our ability to engage in actions that may be in our long-term best interests. These may restrict our ability to take some or all of the following actions:

 

 

incur or guarantee additional indebtedness or sell disqualified or preferred stock;

 

 

pay dividends on, make distributions in respect of, repurchase or redeem, capital stock;

 

 

make investments or acquisitions;

 

 

sell, transfer or otherwise dispose of certain assets;

 

 

create or allow to exist liens;

 

 

enter into sale/leaseback transactions;

 

 

enter into agreements restricting the ability to pay dividends or make other intercompany transfers;

 

 

consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;

 

 

enter into transactions with affiliates;

 

 

prepay, repurchase or redeem certain kinds of indebtedness;

 

 

issue or sell stock of our subsidiaries; and/or

 

 

significantly change the nature of our business.

 

As a result of all of these restrictions, we may be:

 

 

limited in how we conduct our business and pursue our strategy;

 

 

unable to raise additional debt financing to operate during general economic or business downturns; or

 

 

unable to compete effectively or to take advantage of new business opportunities.

 

A breach of any of these covenants, if applicable, could result in an event of default under the terms of our indebtedness. If an event of default occurs, the lenders would have the right to accelerate the repayment of such debt and the event of default or acceleration may result in the acceleration of the repayment of any other of our debt to which a cross-default or cross-acceleration provision applies. Furthermore, the lenders of this indebtedness may require that we pledge our assets as collateral as security for our repayment obligations. If we were unable to repay any amount of this indebtedness when due and payable, the lenders could proceed against the collateral that secures this indebtedness. In the event our creditors accelerate the repayment of our borrowings, we may not have sufficient assets to repay such indebtedness and our financial condition will be materially negatively affected.

 

We have variable rate indebtedness that subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

 

As of the end of 2018, we had $730.0 million of outstanding term loans and an additional $195.9 million of undrawn revolving credit commitments with variable rates of interest that expose us to interest rate risks. Additionally, in January 2019, we incurred an additional $250.0 million of term loan indebtedness with a variable rate of interest in connection with the Clearwave acquisition. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remains the same, and our net income and cash flows will correspondingly decrease. In addition, we will be exposed to the risk of rising interest rates to the extent that we fund our operations with short-term or variable-rate borrowings. Even if we enter into interest rate swaps in the future in order to reduce future interest rate volatility, we may not elect to maintain such interest rate swaps with respect to our variable rate indebtedness, if any, and any swaps we enter into may not fully mitigate our interest rate risk. As a result, our financial condition could be materially negatively affected.

 

 

Our ability to incur future indebtedness, whether for general corporate purposes or for acquisitions and strategic investments, may not be available on favorable terms, or at all.

 

We may need to seek additional financing for our general corporate purposes or for acquisitions and strategic investments in the future. We may be unable to obtain additional indebtedness on terms favorable to us, or at all, including because of the terms of our current indebtedness. If adequate funds are not available on acceptable terms, we may be unable to fund our future activities, which could negatively affect our business. If we raise additional funds through the issuance of equity securities, our stockholders could experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to limitations on our operations due to restrictive covenants.

 

Risks Relating to Our Common Stock and the Securities Market

 

Our stock price may fluctuate significantly, depending on many factors, some of which may be beyond our control.

 

The market price of our common stock may fluctuate significantly, depending on many factors, some of which may be beyond our control, including:

 

 

actual or anticipated fluctuations in our operating results due to factors related to our business;

 

 

success or failure of our business strategies;

 

 

our quarterly or annual earnings, or those of other companies in our industry;

 

 

our ability to obtain financing as needed;

 

 

announcements by us or our competitors of significant acquisitions or dispositions;

 

 

changes in accounting standards, policies, guidance, interpretations or principles;

 

 

the failure of securities analysts to cover, or maintain coverage of, our common stock;

 

 

changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

 

the operating and stock price performance of other comparable companies;

 

 

investor perception of our Company and our industry;

 

 

overall market fluctuations;

 

 

results from any material litigation or government investigation;

 

 

changes in laws and regulations (including tax laws and regulations) affecting our business;

 

 

changes in capital gains taxes and taxes on dividends affecting stockholders; and

 

 

general economic conditions and other external factors.

 

Low trading volume for our stock, which may occur if an active trading market is not sustained, among other reasons, would amplify the effect of the above factors on our stock price volatility.

 

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.

 

 

We cannot assure you that we will continue to pay dividends on our common stock, and our indebtedness limits our ability to pay dividends on our common stock.

 

The timing, declaration, amount and payment of future dividends to stockholders falls within the discretion of our Board. Our Board’s decisions regarding the amount and payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements of our business and covenants associated with debt obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. There can be no assurance that we will continue to pay any dividend in the future.

 

Your percentage ownership in our Company may be diluted in the future.

 

Your percentage ownership in our Company may be diluted in the future because of equity awards granted, and that we expect to grant in the future, to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments that we may make in the future or as necessary to finance our ongoing operations.

 

Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and Delaware law may discourage takeovers and the concentration of ownership of our common stock will affect the voting results of matters submitted for stockholder approval.

 

Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may discourage, delay or prevent a merger or acquisition that is opposed by our Board or certain stockholders holding a significant percentage of the voting power of our outstanding voting stock. These include provisions that:

 

 

divide our Board into three classes of directors, standing for election on a staggered basis, such that only approximately one-third of the directors constituting our Board may change each year;

 

 

do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of our stockholders;

 

 

provide that only our Chief Executive Officer and a majority of our directors, and not our stockholders, may call a special meeting of our stockholders;

 

 

require the approval of our Board or the affirmative vote of stockholders holding at least 66 2/3% of the voting power of our capital stock to amend our Amended and Restated By-laws; and

 

 

limit our ability to enter into business combination transactions with certain stockholders.

 

These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of our Company, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

 

ITEM 2. PROPERTIES

 

Our headquarters is located in Phoenix, Arizona. The majority of the offices and headend facilities of our individual cable systems are located in buildings owned by us.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

In the ordinary course of business, we periodically receive claims from third parties alleging that our network and information technology infrastructure infringes the intellectual property rights of others. We have generally been named as joint defendants in these suits together with other providers of data, video and voice services. Typically these claims allege that aspects of our cable system architecture, electronic program guides, cable modem technology or VoIP services infringe on process patents held by third parties. In addition, we have been subject to various civil lawsuits in the ordinary course of business, including contract disputes, actions alleging negligence, invasion of privacy, violations of applicable wage and hour laws and statutory and common law claims involving various other matters. We do not view any of these proceedings as material to our business and are currently not subject to any other material legal proceedings.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is publicly traded under the ticker symbol “CABO” on the New York Stock Exchange.

 

Holders

 

As of February 22, 2019, there were 339 holders of record of our common stock and 5,703,322 shares of our common stock outstanding.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

For equity compensation plan information, refer to Item 12 in Part III of this Annual Report on Form 10-K.

 

Performance Graph

 

The following graph compares the cumulative total stockholder return of our common stock between July 1, 2015 (the date our stock began trading on the New York Stock Exchange) and December 31, 2018 with the cumulative total returns of the Standard & Poor’s 500 Stock Index, a new custom peer group index (the “New Peer Group”), which was created because of the purchase of one of our peer companies by another entity, and our prior peer group index (the “Prior Peer Group”). For purposes of this graph, it assumes a hypothetical $100 investment on July 1, 2015 and that dividends, if any, were reinvested. The New Peer Group of data, video and voice services companies includes Altice USA, Inc. (beginning June 22, 2017, when it first became a publicly-traded company); Charter Communications, Inc.; Comcast Corporation; and WideOpenWest, Inc. (beginning May 25, 2017, when it first became a publicly-traded company). The Prior Peer Group of data, video and voice services companies includes Altice USA, Inc. (beginning June 22, 2017, when it first became a publicly-traded company); Charter Communications, Inc.; Comcast Corporation; General Communication, Inc.; and WideOpenWest, Inc. (beginning May 25, 2017, when it first became a publicly-traded company).

 

 

 

The stock price performance shown on this graph is based on historical results and is not necessarily indicative of future stock price performance. The graph is furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act.

 

 

Purchases of Equity Securities by the Issuer

 

The following table sets forth certain information relating to the purchases of our common stock by us and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) under the Exchange Act during the three months ended December 31, 2018 (dollars in thousands, except per share data):

 

Period

 

Total Number

of Shares

Purchased

   

Average Price

Paid Per Share

   

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs (1)

   

Maximum Dollar

Value of Shares

that May Yet Be

Purchased

Under the Plans

or Programs

 

October 1 to 31, 2018 (2)

    36     $ 877.77       -     $ 154,171  

November 1 to 30, 2018 (3)

    1,125     $ 863.38       825     $ 153,462  

December 1 to 31, 2018

    3,961     $ 837.53       3,961     $ 150,144  

Total

    5,122     $ 843.49       4,786          

 


(1)

On July 1, 2015, the Board authorized up to $250.0 million of share repurchases (subject to a total cap of 600,000 shares of common stock), which was announced on August 7, 2015. The authorization does not have an expiration date. 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.

(2)

Consists of shares withheld from employees to satisfy estimated tax withholding obligations in connection with vesting of restricted stock under the Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “2015 Plan”). The average price paid per share for the common stock withheld was based on the closing price of our common stock on the vesting date.

(3)

Includes 300 shares purchased by an executive officer of the Company that were not under the publicly announced share repurchase program (which should not be deemed to be an admission that such executive officer is, in fact, an affiliated purchaser of the Company).

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following table presents selected historical financial information. We derived the selected consolidated balance sheet information as of December 31, 2018 and 2017, and the selected consolidated statement of operations information for the years ended December 31, 2018, 2017 and 2016 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We derived the selected consolidated balance sheet information as of December 31, 2016, 2015 and 2014, and the selected consolidated statement of operations information for the years ended December 31, 2015 and 2014 from prior consolidated financial statements not included in this Annual Report on Form 10-K.

 

The selected historical financial data presented below should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report on Form 10-K. Further, the following factors may impact the cross-period comparability of the information provided in the table below:

 

 

For each of the periods presented prior to July 1, 2015, we were a separate wholly owned subsidiary of GHC. The financial information for the periods prior to July 1, 2015 may not necessarily reflect what our financial position and results of operations would have been had we been a stand-alone entity during the periods presented, as such historical financial information includes allocations of certain GHC corporate expenses. We believe the assumptions and methodologies underlying the allocation of those expenses were reasonable. However, such expenses may not be indicative of the actual level of expense that we would have incurred if we had operated as a stand-alone entity.

 

 

The 2018 financial information includes NewWave operations and the 2017 financial information includes eight months of NewWave operations following the completion of our acquisition of NewWave on May 1, 2017.

 

 

The 2018 and 2017 financial information reflects the prospective adoption of a change in estimate and change in accounting principle for capitalized labor costs effective in the first quarter of 2017.

 

 

The 2018, 2017 and 2016 financial information reflects the adoption of the new revenue recognition accounting standard. We have elected not to recast our financial information for 2015 or 2014 to reflect the retrospective adoption of the new revenue recognition accounting standard, as allowed by GAAP.

 

 

   

As of, and for the Year Ended December 31,

 

(in thousands, except per share data)

 

2018

   

2017

   

2016

   

2015

   

2014

 
           

(As Recasted)

   

(As Recasted)

                 
Consolidated Balance Sheet Information                                        

Cash and cash equivalents

  $ 264,113     $ 161,752     $ 138,040     $ 119,199     $ 6,410  

Total assets

  $ 2,303,234     $ 2,204,632     $ 1,428,361     $ 1,422,466     $ 1,283,866  

Total debt, including capital lease obligations and excluding unamortized debt issuance costs

  $ 1,180,251     $ 1,194,642     $ 545,284     $ 549,051     $ -  

Total liabilities

  $ 1,527,876     $ 1,528,185     $ 955,195     $ 974,517     $ 420,764  

Total stockholders’ equity

  $ 775,358     $ 676,447     $ 473,166     $ 447,949     $ 863,102  
                                         

Consolidated Statement of Operations Information

 

Revenues

  $ 1,072,295     $ 959,956     $ 819,348     $ 807,266     $ 814,812  

Net income

  $ 164,760     $ 235,171     $ 100,317     $ 91,822     $ 147,907  

Net income per common share:

                                       

Basic

  $ 28.98     $ 41.40     $ 17.47     $ 15.69     $ 25.31  

Diluted

  $ 28.77     $ 40.92     $ 17.38     $ 15.67     $ 25.31  
                                         

Consolidated Statement of Stockholders’ Equity Information

 

Dividends declared per common share

  $ 7.50     $ 6.50     $ 6.00     $ 1.50     $ -  

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with our accompanying audited consolidated financial statements and related notes included in this Annual Report on Form 10-K, as well as the discussion in the section of this Annual Report on Form 10-K entitled “Business.” This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may vary materially from those expressed or implied by these forward-looking statements due to a number of factors, including those discussed in the sections of this Annual Report on Form 10-K entitled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.”

 

Overview

 

Our Business

 

We are a fully integrated provider of data, video and voice services in 21 Western, Midwestern and Southern states. We provide these broadband services to residential and business customers in more than 750 communities. The markets we serve are primarily non-metropolitan, secondary markets, with 78% of our customers located in seven states: Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma and Texas. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We provided service to 804,865 residential and business customers out of approximately 2.1 million homes passed as of December 31, 2018. Of these customers, 663,074 subscribed to data services, 326,423 subscribed to video services and 125,934 subscribed to voice services.

 

We generate substantially all our revenues through five primary products. Ranked by share of our total revenues during 2018, they are residential data (46.0%), residential video (32.0%), business services (data, voice and video – 14.5%), residential voice (3.8%) and advertising sales (2.3%). The profit margins, growth rates and capital intensity of our five primary products vary significantly due to competition, product maturity and relative costs.

 

In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video. We define Adjusted EBITDA margin for a product line as Adjusted EBITDA attributable to that product line divided by revenue attributable to that product line (see “Use of Adjusted EBITDA” below for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure). This margin disparity is largely the result of significant programming costs and retransmission fees incurred to deliver residential video services, which in each of the last three years represented between 53% and 62% of total residential video revenues. None of our other product lines has direct costs representing as substantial a portion of revenues as programming costs and retransmission fees represent for residential video, and indirect costs are allocated equally on a per PSU basis. Programming costs and retransmission fees have a meaningfully lower impact on business services margins than residential video because business services include data and voice, in addition to video, diminishing the relative impact of programming costs and retransmission fees on that product line as a whole.

 

 

Prior to 2012, we were focused on growing revenues through subscriber retention and growth in overall PSUs. Accordingly, our strategies consisted of, among others, offering promotional discounts to new and existing subscribers adding new services and to subscribers purchasing more than one service offering. Since 2012, we have adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. We believe the declining profitability of residential video services is primarily due to increasing programming costs and retransmission fees and competition from other content providers, and the declining revenues from residential voice services is primarily due to the increasing use of wireless voice services instead of residential voice services. Beginning in 2013, we shifted our focus away from maximizing customer PSUs and towards growing our higher margin businesses, namely residential data and business services. Separately, we have also focused on retaining customers with a high expected LTV, who are less attracted by discounting, require less support and churn less. This strategy focuses on increasing Adjusted EBITDA, Adjusted EBITDA less capital expenditures and margins.

 

The trends described above have impacted our four largest product lines in the following ways:

 

 

Residential data. We experienced growth in the number of, and revenues from, our residential data customers every year since 2013. We expect this growth to continue due to projected increases in the number of potential customers for us to serve, as there are still a number of households in our markets that do not subscribe to data services from any provider. We expect to capture a portion of these customers and anticipate capturing additional market share from existing data subscribers due to our continued upgrades in broadband capacity, our ability to offer higher access speeds than many of our competitors and our Wi-Fi support service.

 

 

Residential video. Residential video service is a highly competitive business. As we focus on the higher-margin businesses of residential data and business services, we have de-emphasized our residential video business and, as a result, expect residential video revenues to continue to decline in the future.

 

 

Residential voice. We have experienced declines in residential voice customers as a result of homes in the United States deciding to terminate their residential voice services and exclusively use wireless voice services. We believe this trend will continue because of competition from wireless voice service providers. Revenues from residential voice customers have declined over recent years, and we expect this decline will continue.

 

 

Business services. We have experienced significant growth in business data and voice customers and revenues, and we expect this growth to continue. We attribute this growth to our strategic focus on increasing sales to business customers and our efforts to attract enterprise business customers. Margins in products sold to business customers have remained attractive, and we expect this trend to continue.

 

We continue to experience increased competition, particularly from telephone companies, cable and municipal overbuilders, OTT video providers and DBS television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. We elevated our capital investments between 2012 and 2018 to increase our plant capacities and reliability, launch all-digital video services (which has made available approximately half of average plant bandwidth for data services) and increase data capacity by moving from four-channel bonding to 32-channel bonding (to enable our GigaONE data service). We expect to continue devoting financial resources to infrastructure improvements, including in the new markets we acquired in the NewWave and Clearwave transactions, because we believe these investments are necessary to remain competitive. We expect to spend up to $35 million during 2019, in addition to the combined nearly $27 million spent for NewWave in 2018 and 2017, to enhance those acquired operations by rebuilding low capacity markets, launching all-digital video services, implementing 32-channel bonding, converting back office functions such as billing, accounting and service provisioning, migrating products to legacy Cable One platforms and expanding our high-capacity fiber network.

 

Our primary business goals are to continue growing residential data and business services, to increase profit margins and to deliver strong Adjusted EBITDA and Adjusted EBITDA less capital expenditures. To achieve these goals, we intend to continue our industrial engineering-driven cost management, remain focused on customers with high LTV and follow through with further planned investments in broadband plant upgrades and new data service offerings for residential and business customers.

 

On May 1, 2017, we acquired NewWave, a provider of data, video and voice services to residential and business customers throughout non-urban areas of Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas. We paid a purchase price of $740.2 million in cash on a debt-free basis. In connection with the transaction, we amended our existing credit agreement and incurred $750.0 million of senior secured loans which were used to finance the acquisition, repay in full our then-existing term loan and pay related fees and expenses. Refer to notes 4 and 9 of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for details on these transactions.

 

 

On January 8, 2019, we acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. We paid a purchase price of $357.0 million in cash on a debt-free basis, subject to customary post-closing adjustments. The acquisition provides us with a premier fiber network within our existing footprint, further enables us to supply our customers with enhanced business services solutions and provides a platform to allow us to replicate Clearwave’s strategy in several of our other markets.

 

Results of Operations

 

PSU and Customer Counts

 

During 2018, our total PSUs decreased 26,491, or 2.3%, compared to our total PSUs as of December 31, 2017. Residential data PSUs and business PSUs increased 15,862 and 4,827, respectively, while residential video PSUs and residential voice PSUs decreased 36,237 and 10,943, respectively. Our total customer relationships increased 7,328, or 0.9%, year-over-year, with increases of 4,089 and 3,239 in business and residential customer relationships, respectively.

 

During 2017, our total PSUs increased 191,957, or 20.2%, compared to our total PSUs as of December 31, 2016, with increases in residential data, video and voice PSUs of 115,801, 40,149 and 12,289, respectively, and an increase in business PSUs of 23,718. Our total customer relationships increased 140,315, or 21.3%, year-over-year. The year-over-year increases were primarily attributable to new customers acquired as a result of the NewWave acquisition.

 

The following table provides an overview of selected customer data for the time periods specified:

 

   

As of December 31,

 
   

2018

   

2017

   

2016

 

Residential data PSUs

    600,716       584,854       469,053  

Residential video PSUs (1)

    310,475       346,712       306,563  

Residential voice PSUs

    99,070       110,013       97,724  

Total residential PSUs

    1,010,261       1,041,579       873,340  
                         

Business data PSUs (2)

    62,358       58,299       44,855  

Business video PSUs

    15,948       17,176       13,683  

Business voice PSUs (3)

    26,864       24,868       18,087  

Total business PSUs

    105,170       100,343       76,625  
                         

Total data PSUs

    663,074       643,153       513,908  

Total video PSUs

    326,423       363,888       320,246  

Total voice PSUs

    125,934       134,881       115,811  

Total PSUs

    1,115,431       1,141,922       949,965  
                         

Total residential customer relationships

    734,250       731,011       605,699  

Total business customer relationships

    70,615       66,526       51,523  

Total customer relationships

    804,865       797,537       657,222  

 


(1)

Residential video PSUs include all basic residential customers who receive video services and may have one or more digital set-top boxes or cable cards deployed. Residential bulk multi-dwelling accounts are included in our video PSUs at the individual unit level.

(2)

Business data PSUs include commercial accounts that receive data service via a cable modem and commercial accounts that receive data service optically via fiber connections.

(3)

Business voice customers who have multiple voice lines are only counted once in the PSU total.

 

In recent years, our customer mix has shifted, causing subscribers to move from triple-play packages combining data, video and voice services to single and double-play packages. This is largely because some residential video customers have defected to DBS services and OTT offerings and more households have discontinued residential voice service. In addition, we have focused on selling data-only packages to new customers rather than cross-selling video to these customers.

 

 

2018 Compared to 2017

 

Revenues

 

Revenues increased $112.3 million, or 11.7%, due primarily to increases in residential data, business services and residential video revenues of $76.5 million, $24.9 million and $10.8 million, respectively. The increase was the result of four additional months of NewWave operations and organic growth in our higher margin product lines of residential data and business services.

 

Revenues by service offering were as follows for 2018 and 2017, together with the percentages of total revenues that each item represented for the years presented (dollars in thousands):

 

   

Year Ended December 31,

                 
   

2018

   

2017

   

2018 vs. 2017

 
   

Revenues

   

% of Total

   

Revenues

   

% of Total

   

$ Change

   

% Change

 

Residential data

  $ 492,816       46.0     $ 416,355       43.4     $ 76,461       18.4  

Residential video

    343,344       32.0       332,536       34.6       10,808       3.3  

Residential voice

    41,278       3.8       43,733       4.6       (2,455 )     (5.6 )

Business services

    155,993       14.5       131,082       13.7       24,911       19.0  

Advertising sales

    24,919       2.3       24,824       2.6       95       0.4  

Other

    13,945       1.4       11,426       1.1       2,519       22.0  

Total revenues

  $ 1,072,295       100.0     $ 959,956       100.0     $ 112,339       11.7  

 

Average monthly revenue per unit for the indicated service offerings were as follows for 2018 and 2017:

 

   

Year Ended December 31,

   

2018 vs. 2017

 
   

2018

   

2017

   

$ Change

   

% Change

 

Residential data (1)

  $ 68.70     $ 63.28     $ 5.42       8.6  

Residential video (1)

  $ 86.96     $ 81.07     $ 5.89       7.3  

Residential voice (1)

  $ 32.86     $ 33.80     $ (0.94 )     (2.8 )

Business services (2)

  $ 187.32     $ 177.73     $ 9.59       5.4  

 


(1)

Average monthly revenue per unit values represent the applicable annual residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each year, divided by 12, except that for any new PSUs added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent the applicable residential service revenues (excluding installation and activation fees) divided by the pro-rated number of PSUs during such period.

(2)

Average monthly revenue per unit values represent annual business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each year, divided by 12, except that for any new business customer relationships added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent business services revenues (excluding installation and activation fees) divided by the pro-rated number of business customer relationships during such period.

 

Revenues by service offering, excluding the impact of revenues related to legacy NewWave systems, were as follows for 2018 and 2017, together with the percentages of total revenues that each item represented for the years presented (dollars in thousands):

 

   

Year Ended December 31,

                 
   

2018

   

2017

   

2018 vs. 2017

 
   

Revenues

   

% of Total

   

Revenues

   

% of Total

   

$ Change

   

% Change

 

Residential data

  $ 415,503       47.2     $ 372,876       44.8     $ 42,627       11.4  

Residential video

    270,170       30.7       278,445       33.4       (8,275 )     (3.0 )

Residential voice

    34,690       3.9       37,460       4.5       (2,770 )     (7.4 )

Business services

    126,032       14.3       112,110       13.5       13,922       12.4  

Advertising sales

    23,484       2.7       23,799       2.9       (315 )     (1.3 )

Other

    9,753       1.2       8,007       0.9       1,746       21.8  

Total revenues

  $ 879,632       100.0     $ 832,697       100.0     $ 46,935       5.6  

 

 

Average monthly revenue per unit, excluding the impact of revenues and customers related to legacy NewWave systems, were as follows for 2018 and 2017:

 

   

Year Ended December 31,

   

2018 vs. 2017

 
   

2018

   

2017

   

$ Change

   

% Change

 

Residential data (1)

  $ 70.86     $ 65.49     $ 5.37       8.2  

Residential video (1)

  $ 87.72     $ 80.49     $ 7.23       9.0  

Residential voice (1)

  $ 34.31     $ 33.54     $ 0.77       2.3  

Business services (2)

  $ 181.65     $ 172.62     $ 9.03       5.2  

 


(1)

Average monthly revenue per unit values represent the applicable annual residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each year, divided by 12.

(2)

Average monthly revenue per unit values represent annual business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each year, divided by 12.

 

Residential data service revenues increased $76.5 million, or 18.4%, as a result of organic subscriber growth, an additional four months of NewWave operations, a modem rental rate adjustment in the first quarter of 2018, a reduction in package discounting and increased customer subscriptions to premium tiers.

 

Residential video service revenues increased $10.8 million, or 3.3%, due primarily to an additional four months of NewWave operations and a broadcast television surcharge increase implemented in the first quarter of 2018, partially offset by a 10.5% year-over-year decrease in residential video subscribers.

 

Residential voice service revenues decreased $2.5 million, or 5.6%, due primarily to a 9.9% year-over-year decrease in residential voice subscribers, partially offset by an additional four months of NewWave operations.

 

Business services revenues increased $24.9 million, or 19.0%, due primarily to growth in our business data and voice services to small and medium-sized businesses and enterprise customers, an additional four months of NewWave operations and a rate adjustment for business video customers in the first quarter of 2018. Total business customer relationships increased 6.1% year-over-year.

 

Operating Costs and Expenses

 

Operating expenses (excluding depreciation and amortization) were $370.3 million for 2018 and increased $33.2 million, or 9.9%, compared to 2017. Operating expenses as a percentage of revenues were 34.5% for 2018 compared to 35.1% for 2017. The increase in operating expenses attributable to the NewWave operations was $30.5 million. Excluding the expenses associated with the NewWave operations, operating expenses would have been $276.6 million for 2018, an increase of $2.7 million, or 1.0%, compared to 2017. The increase was due primarily to higher repairs and maintenance costs of $1.5 million and programming costs of $1.3 million. Operating expenses as a percentage of revenues, excluding the impact of the NewWave operations, would have been 31.4% for 2018 compared to 32.9% for 2017.

 

Selling, general and administrative expenses increased $17.8 million, or 8.7%, to $222.2 million. Selling, general and administrative expenses as a percentage of revenues were 20.7% and 21.3% for 2018 and 2017, respectively. The increase in selling, general and administrative expenses attributable to the NewWave operations was $12.8 million, including $4.6 million for system conversion costs. Excluding the expenses associated with the NewWave operations, selling, general and administrative expenses would have increased $5.0 million, or 2.7%, to $192.8 million due primarily to higher insurance expense of $4.4 million, marketing costs of $2.1 million, rebranding costs of $1.0 million and compensation expense of $0.8 million, partially offset by lower acquisition-related costs of $4.1 million. Selling, general and administrative expenses as a percentage of revenues, excluding the impact of the NewWave operations, would have been 21.9% for 2018 compared to 22.5% for 2017.

 

Depreciation and amortization expense increased $16.1 million, or 8.9%, including an $18.2 million increase attributable to the NewWave operations. As a percentage of revenues, depreciation and amortization expense was 18.4% for 2018 compared to 18.9% for 2017.

 

We recognized a net loss on asset disposals of $14.2 million in 2018 compared to $0.6 million in 2017. The prior year amount consisted of a $7.2 million net loss on asset disposals and a gain on the sale of a portion of our previous headquarters property of $6.6 million. The year-over-year increase in the net loss on asset disposals was primarily attributable to a write-off of excess equipment and a higher amount of assets retired as new assets replaced them.

 

 

Interest Expense

 

Interest expense increased $13.6 million, or 28.9%, to $60.4 million due primarily to additional outstanding debt incurred on May 1, 2017 to finance the NewWave acquisition and an increase in interest rates year-over-year.

 

Other Income

 

Other income for 2018 primarily consisted of interest income of $4.6 million. Other income for 2017 primarily consisted of interest income of $1.2 million, partially offset by a $0.6 million write-off of debt issuance costs related to the additional debt incurred to finance the NewWave acquisition.

 

Income Tax Provision (Benefit)

 

The income tax provision was $47.2 million in 2018 compared to an income tax benefit of $45.0 million in 2017. The year-over-year change was due primarily to a one-time reduction of our 2017 net deferred income tax liability as a result of the Federal tax reform legislation passed in the fourth quarter of 2017. Our effective tax rate was 22.3% and (23.7)% for 2018 and 2017, respectively.

 

2017 Compared to 2016

 

Revenues

 

Revenues increased $140.6 million, or 17.2%, due primarily to increases in residential data, residential video and business services revenues of $70.8 million, $37.8 million and $31.0 million, respectively. The increase was the result of the NewWave operations since May 1, 2017 and organic growth in our higher margin product lines of residential data and business services, partially offset by a decrease in advertising sales revenues.

 

Revenues by service offering were as follows for 2017 and 2016, together with the percentages of total revenues that each item represented for the years presented (dollars in thousands):

 

   

Year Ended December 31,

                 
   

2017

   

2016

   

2017 vs. 2016

 
   

Revenues

   

% of Total

   

Revenues

   

% of Total

   

$ Change

   

% Change

 

Residential data

  $ 416,355       43.4     $ 345,563       42.2     $ 70,792       20.5  

Residential video

    332,536       34.6       294,781       36.0       37,755       12.8  

Residential voice

    43,733       4.6       42,949       5.2       784       1.8  

Business services

    131,082       13.7       100,034       12.2       31,048       31.0  

Advertising sales

    24,824       2.6       27,496       3.4       (2,672 )     (9.7 )

Other

    11,426       1.1       8,525       1.0       2,901       34.0  

Total revenues

  $ 959,956       100.0     $ 819,348       100.0     $ 140,608       17.2  

 

Average monthly revenue per unit for the indicated service offerings were as follows for 2017 and 2016:

 

   

Year Ended December 31,

   

2017 vs. 2016

 
   

2017

   

2016

   

$ Change

   

% Change

 

Residential data (1)

  $ 63.28     $ 61.68     $ 1.60       2.6  

Residential video (1)

  $ 81.07     $ 74.84     $ 6.23       8.3  

Residential voice (1)

  $ 33.80     $ 34.29     $ (0.49 )     (1.4 )

Business services (2)

  $ 177.73     $ 165.92     $ 11.81       7.1  

 


(1)

Average monthly revenue per unit values represent the applicable annual residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each year, divided by 12, except that for any new PSUs added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent the applicable residential service revenues (excluding installation and activation fees) divided by the pro-rated number of PSUs during such period.

(2)

Average monthly revenue per unit values represent annual business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each year, divided by 12, except that for any new business customer relationships added as a result of an acquisition occurring during the reporting period, the associated average monthly revenue per unit values represent business services revenues (excluding installation and activation fees) divided by the pro-rated number of business customer relationships during such period.

 

 

Revenues by service offering, excluding the impact of revenues related to legacy NewWave systems, were as follows for 2017 and 2016, together with the percentages of total revenues that each item represented for the years presented (dollars in thousands):

 

   

Year Ended December 31,

                 
   

2017

   

2016

   

2017 vs. 2016

 
   

Revenues

   

% of Total

   

Revenues

   

% of Total

   

$ Change

   

% Change

 

Residential data

  $ 372,876       44.8     $ 345,563       42.2     $ 27,313       7.9  

Residential video

    278,445       33.4       294,781       36.0       (16,336 )     (5.5 )

Residential voice

    37,460       4.5       42,949       5.2       (5,489 )     (12.8 )

Business services

    112,110       13.5       100,034       12.2       12,076       12.1  

Advertising sales

    23,799       2.9       27,496       3.4       (3,697 )     (13.4 )

Other

    8,007       0.9       8,525       1.0       (518 )     (6.1 )

Total revenues

  $ 832,697       100.0     $ 819,348       100.0     $ 13,349       1.6  

 

Average monthly revenue per unit for the indicated service offerings, excluding the impact of revenues and customers related to legacy NewWave systems, were as follows for 2017 and 2016:

 

   

Year Ended December 31,

   

2017 vs. 2016

 
   

2017

   

2016

   

$ Change

   

% Change

 

Residential data (1)

  $ 65.49     $ 61.68     $ 3.81       6.2  

Residential video (1)

  $ 80.49     $ 74.84     $ 5.65       7.5  

Residential voice (1)

  $ 33.54     $ 34.29     $ (0.75 )     (2.2 )

Business services (2)

  $ 172.62     $ 165.92     $ 6.70       4.0  

 


(1)

Average monthly revenue per unit values represent the applicable annual residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each year, divided by 12.

(2)

Average monthly revenue per unit values represent annual business services revenues (excluding installation and activation fees) divided by the average of the number of business customer relationships at the beginning and end of each year, divided by 12.

 

Residential data service revenues increased $70.8 million, or 20.5%, due primarily to an increase in residential data customers of 24.7% year-over-year as a result of the NewWave operations and organic subscriber growth, a reduction in package discounting and increased subscriptions to premium tiers by residential customers.

 

Residential video service revenues increased $37.8 million, or 12.8%, due primarily to an increase in residential video customers of 13.1% as a result of the NewWave operations and a rate adjustment in the first quarter of 2017.

 

Residential voice service revenues increased $0.8 million, or 1.8%, due primarily to an increase in residential voice customers of 12.6% as a result of the NewWave operations, partially offset by a decrease in average monthly revenue per unit.

 

Business services revenues increased $31.0 million, or 31.0%, due primarily to the NewWave operations, growth in our business data and voice services to small and medium-sized businesses and enterprise customers and a rate adjustment for business video customers in the first quarter of 2017. Total business customer relationships increased 29.1% year-over-year.

 

Advertising sales revenues decreased $2.7 million, or 9.7%, due primarily to a decrease in political advertising and fewer video customers to be reached by advertising spots.

 

Other revenues increased $2.9 million, or 34.0%, due primarily to the NewWave operations.

 

Operating Costs and Expenses

 

Operating expenses (excluding depreciation and amortization) were $337.0 million in 2017 and increased $40.5 million, or 13.6%, compared to 2016. Operating expenses as a percentage of revenues were 35.1% for 2017 compared to 36.2% for 2016. Additional operating expenses attributable to the NewWave operations were $63.1 million for 2017. This increase was partially offset by a $12.7 million decrease in labor costs associated with our change in accounting for capitalized labor, a $3.8 million decrease in programming costs resulting from fewer video subscribers, a $3.1 million decrease in backbone and internet connectivity fees, a $1.3 million decrease in insurance costs and a $1.0 million decrease in repair and maintenance costs. Excluding the impact of the NewWave operations, operating expenses would have been $273.9 million in 2017, a decrease of $22.7 million, or 7.6%. Operating expenses as a percentage of revenues, excluding the impact of the NewWave operations, would have been 32.9% in 2017 compared to 36.2% in 2016.

 

 

Selling, general and administrative expenses increased $19.4 million, or 10.5%, to $204.4 million for 2017. Selling, general and administrative expenses as a percentage of revenues were 21.3% and 22.6% for 2017 and 2016, respectively. Additional selling, general and administrative expenses attributable to the NewWave operations were $16.6 million for 2017. Increases in severance costs of $4.4 million, deferred compensation expenses of $2.4 million and software maintenance costs of $2.1 million were partially offset by a $3.6 million decrease in labor costs associated with the capitalized labor change and a $1.8 million decrease in employee incentive costs. Excluding the incremental expenses associated with the NewWave operations, selling, general and administrative expenses would have increased $2.8 million, or 1.5%, to $187.8 million for 2017. Selling, general and administrative expenses as a percentage of revenues, excluding the impact of the NewWave operations, would have been 22.5% in 2017 compared to 22.6% in 2016.

 

Depreciation and amortization increased $33.8 million, or 22.8%, to $181.6 million for 2017 including $32.2 million attributable to the NewWave operations. The increase was due primarily to new assets placed in service in 2017 and 2016, including property, plant and equipment and amortizable intangible assets acquired as part of the NewWave acquisition, partially offset by assets that became fully depreciated during those years. As a percentage of revenues, depreciation and amortization expense was 18.9% for 2017 compared to 18.0% for 2016.

 

We recognized a $0.6 million net loss on asset disposals in 2017 compared to $2.8 million in 2016. The net loss in 2017 consisted of a $7.2 million loss on disposals of property, plant and equipment, including $2.1 million associated with damage caused by Hurricane Harvey, partially offset by a $6.6 million gain on the sale of a portion of our previous headquarters property.

 

Interest Expense

 

Interest expense was $46.9 million and $30.2 million for 2017 and 2016, respectively. The increase was due primarily to additional debt incurred to finance the NewWave acquisition.

 

Other Income

 

Other income for 2017 primarily consisted of interest income of $1.2 million, partially offset by a $0.6 million write-off of debt issuance costs related to the additional debt incurred to finance the NewWave acquisition. Other income of $5.1 million in 2016 primarily consisted of a $4.1 million net gain on the sale of a cable system and interest income.

 

Income Tax Provision (Benefit)

 

The income tax provision (benefit) decreased $106.7 million, or 173.0%, to a benefit of $45.0 million. The decrease primarily related to a net income tax benefit of $114.0 million associated with a reduction of our net deferred income tax liability as a result of the Federal tax reform legislation passed in the fourth quarter of 2017 and $3.4 million of income tax benefits attributable to equity-based awards recorded throughout 2017. Our effective tax rate was (23.7)% for 2017 and 38.1% for 2016.

 

Use of Adjusted EBITDA

 

We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income reported in accordance with GAAP. Adjusted EBITDA is reconciled to net income below.

 

Adjusted EBITDA is defined as net income plus interest expense, income tax provision (benefit), depreciation and amortization, equity-based compensation, severance expense, (gain) loss on deferred compensation, acquisition-related costs, (gain) loss on asset disposals, system conversion costs, rebranding costs, other (income) expense and other unusual operating expenses, as provided in the table below. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our business as well as other non-cash or special items and is unaffected by our capital structure or investment activities. This measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of debt financing. These costs are evaluated through other financial measures.

 

 

We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the measure used in the leverage ratio calculation under our outstanding Senior Credit Facilities and Notes (each as defined under “Financial Condition: Liquidity and Capital Resources – Financing Activity” below) to determine compliance with the covenants contained in the Senior Credit Facilities and ability to take certain actions under the Indenture (as defined under “Financial Condition: Liquidity and Capital Resources – Financing Activity” below) governing the Notes. Adjusted EBITDA is also a significant performance measure used by us in our annual incentive compensation program. Adjusted EBITDA does not take into account cash used for mandatory debt service requirements or other non-discretionary expenditures, and thus does not represent residual funds available for discretionary uses.

 

     

Year Ended December 31,

 

(in thousands)

 

2018

   

2017

   

2016

 

Net income (1)

  $ 164,760     $ 235,171     $ 100,317  
                           

Plus:

Interest expense     60,415       46,864       30,221  

 

Income tax provision (benefit)     47,224       (45,028 )     61,681  

 

Depreciation and amortization     197,731       181,619       147,839  

 

Equity-based compensation     10,486       10,743       12,298  

 

Severance expense     2,347       5,652       1,012  

 

Loss on deferred compensation     425       2,753       312  

 

Acquisition-related costs     1,773       5,942       4,719  

 

Loss on asset disposals, net     14,167       574       2,821  

 

System conversion costs (2)     5,037       -       -  

 

Rebranding costs     968       -       -  

 

Other income, net     (4,487 )     (668 )     (5,121 )
                           

Adjusted EBITDA (1)

  $ 500,846     $ 443,622     $ 356,099  

 


(1) Net income and Adjusted EBITDA for 2018 include the full impact of NewWave operations, while net income and Adjusted EBITDA for 2017 include only eight months of NewWave operations, as NewWave was not acquired until May 1, 2017.

(2)

Comprised of $4.6 million of billing system conversion costs related to NewWave and $0.4 million of enterprise resource planning system implementation costs.

 

We believe Adjusted EBITDA is useful to investors in evaluating our operating performance. Adjusted EBITDA and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of Adjusted EBITDA may not be directly comparable to similarly titled measures reported by other companies.

 

Financial Condition: Liquidity and Capital Resources

 

Liquidity

 

Our primary funding requirements are for our ongoing operations, planned capital expenditures, payments of quarterly dividends and share repurchases. We believe that existing cash balances, our Senior Credit Facilities and operating cash flows will provide adequate support for these funding requirements over the next 12 months. However, our ability to fund operations, make planned capital expenditures, pay quarterly dividends and make share repurchases depends on future operating performance and cash flows, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

 

 

The following table shows a summary of our cash flows for the years indicated (in thousands):

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Net cash provided by operating activities

  $ 407,769     $ 324,486     $ 257,121  

Net cash used in investing activities

    (214,295 )     (891,167 )     (141,607 )

Net cash provided by (used in) financing activities

    (91,113 )     590,393       (96,673 )

Increase in cash and cash equivalents

    102,361       23,712       18,841  

Cash and cash equivalents, beginning of period

    161,752       138,040       119,199  

Cash and cash equivalents, end of period

  $ 264,113     $ 161,752     $ 138,040  

 

During 2018 and 2017, our cash and cash equivalents increased $102.4 million and $23.7 million, respectively. At December 31, 2018 and 2017, we had $264.1 million and $161.8 million of cash on hand and working capital of $184.2 million and $76.7 million, respectively.

 

Cash provided by operating activities increased $83.3 million in 2018 compared to 2017, which was primarily attributable to an increase in Adjusted EBITDA of $57.2 million and a decrease in cash tax payments of $57.8 million, partially offset by a $13.7 million increase in cash paid for interest and a $1.6 million difference in changes to net operating assets and liabilities. The change in operating cash flows in 2017 compared to 2016 was primarily attributable to an increase in Adjusted EBITDA of $87.5 million and a decrease in cash income tax payments of $13.4 million, partially offset by an $18.8 million difference in changes to net operating assets and liabilities and a $15.4 million increase in cash paid for interest.

 

Cash used in investing activities during 2018 decreased $676.9 compared to 2017 due primarily to the $727.9 million used to purchase NewWave in 2017, partially offset by the receipt of $10.1 million of proceeds in 2017 from the sale of a non-operating property and a $40.6 million year-over-year increase in capital spending during 2018. The higher use of cash in 2017 compared to 2016 was due primarily to $727.9 million in net cash paid for the NewWave acquisition and a $28.2 million increase in cash paid for capital expenditures.

 

Cash used in financing activities was $91.1 million and $96.7 million in 2018 and 2016, respectively, and cash provided by financing activities was $590.4 million in 2017. Cash outflows in 2018 primarily related to $42.9 million of dividends paid to stockholders, $26.6 million of common stock repurchases, $14.4 million of long-term debt repayments and $7.2 million of withholding tax payments associated with equity award vesting and exercise activities. Cash inflows in 2017 were primarily attributable to $750.0 million of new debt incurred in connection with the NewWave acquisition, partially offset by long term debt payments, including a $93.8 million term loan repayment, $37.2 million of dividends paid to stockholders, a $15.2 million payment of debt issuance costs and $5.0 million of withholding tax payments associated with equity award vesting and exercise activities. Cash outflows in 2016 primarily consisted of $56.4 million for common stock repurchases, $34.4 million of dividends paid to stockholders, $3.8 million of long-term debt repayments and $2.2 million of withholding tax payments for vested restricted stock awards.

 

On July 1, 2015, the Board authorized up to $250.0 million of share repurchases (subject to a total cap of 600,000 shares of our 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 the end of 2018, we have repurchased 204,647 shares of our common stock at an aggregate cost of $99.8 million. During 2018, we repurchased 38,814 shares at an aggregate cost of $26.6 million.

 

We currently expect to continue to pay quarterly cash dividends on shares of our common stock, subject to approval of the Board. During the fourth quarter of 2018, the Board approved a quarterly dividend of $2.00 per share of common stock, which was paid on December 7, 2018. On February 5, 2019, the Board approved a quarterly dividend of $2.00 per share of common stock to be paid on March 8, 2019 to holders of record as of February 19, 2019.

 

Financing Activity

 

On June 17, 2015, we issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022 (the “Notes”) pursuant to an indenture (the “Indenture”) dated as of June 17, 2015. The Notes mature on June 15, 2022 and interest is payable on June 15th and December 15th of each year. The Notes are jointly and severally guaranteed on a senior unsecured basis (the “Guarantees”) by each of our subsidiaries that guaranteed the Senior Credit Facilities (the “Guarantors”). In addition, if a subsidiary of the Company becomes a guarantor in respect of the Senior Credit Facilities or certain other indebtedness, it is required to provide (subject to customary exceptions) a Guarantee in respect of the Notes. The Notes are unsecured and senior obligations of the Company. The Guarantees are unsecured and senior obligations of the Guarantors. At our option, we may redeem the Notes, in whole or in part, at any time at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the redemption date. The Indenture includes certain covenants relating to debt incurrence, liens, restricted payments, asset sales, transactions with affiliates, changes in control and mergers or sales of all or substantially all of our assets. The Indenture also provides for customary events of default (subject, in certain cases, to customary grace periods), which include nonpayment on the Notes, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness over a specified threshold, failure to pay certain judgments over a specified threshold and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee under the Indenture or holders of at least 25% of the aggregate principal amount of the then outstanding Notes may declare the principal of, and accrued but unpaid interest, if any, on the then outstanding Notes to be due and payable immediately.

 

 

On June 30, 2015, we entered into a Credit Agreement among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the other agents party thereto. The Credit Agreement provided for a five-year revolving credit facility in an aggregate principal amount of $200 million (the “Revolving Credit Facility”) and a five-year term loan facility in an aggregate principal amount of $100 million (the “Original Term Loan Facility” and, together with the Revolving Credit Facility, the “Original Credit Facilities”). Concurrently with our entry into the Credit Agreement, we borrowed the full amount of the Original Term Loan Facility (the “Original Term Loan”).

 

Borrowings under the Original Credit Facilities bore interest, at our option, at a rate per annum determined by reference to either the London Interbank Offered Rate (“LIBOR”) or an adjusted base rate, in each case plus an applicable interest rate margin. The applicable interest rate margin with respect to LIBOR borrowings was a rate per annum between 1.50% and 2.25% and the applicable interest rate margin with respect to adjusted base rate borrowings was a rate per annum between 0.50% and 1.25%, in each case determined on a quarterly basis by reference to a pricing grid based upon our total net leverage ratio. In addition, we are required to pay commitment fees on any unused portion of the Revolving Credit Facility at a rate between 0.25% per annum and 0.40% per annum, determined by reference to the pricing grid.

 

The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility of $4.1 million at December 31, 2018 were held for the benefit of certain general and liability insurance matters and bore interest at a rate of 1.88% per annum at December 31, 2018. We had $195.9 million available for borrowing under the Revolving Credit Facility at December 31, 2018.

 

On May 1, 2017, we entered into a Restatement Agreement (the “Restatement Agreement”) with JPMorgan, as administrative agent, and the lenders party thereto, pursuant to which we amended and restated the Credit Agreement (as so amended and restated, the “Amended and Restated Credit Agreement”) and incurred $750.0 million of senior secured loans (the “2017 New Loans”), which were used, together with cash on hand, to (i) finance the NewWave acquisition, (ii) repay in full the Original Term Loan and (iii) pay related fees and expenses.

 

The 2017 New Loans consist of (a) a five-year incremental term “A” loan in an aggregate principal amount of $250.0 million (the “Term Loan A”) and (b) a seven-year incremental term “B” loan in an aggregate principal amount of $500.0 million (the “Term Loan B” and, together with the Term Loan A and the Revolving Credit Facility, the “Senior Credit Facilities”). The obligations under the Amended and Restated Credit Agreement are guaranteed by our wholly owned subsidiaries and are secured, subject to certain exceptions, by substantially all assets of the Company and the Guarantors.

 

On April 23, 2018, we entered into Amendment No. 1 (the “Repricing Amendment”) to the Amended and Restated Credit Agreement to, among other things, decrease the applicable margin for the Term Loan B to 1.75% for LIBOR borrowings and 0.75% for base rate borrowings.

 

The interest margins applicable to the 2017 New Loans under the Amended and Restated Credit Agreement are, at our option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (i) with respect to the Term Loan A and the Revolving Credit Facility, 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% for base rate loans, determined on a quarterly basis by reference to a pricing grid based on our total net leverage ratio and (ii) with respect to the Term Loan B, (x) for any date on or prior to April 22, 2018, 2.25% for LIBOR loans and 1.25% for base rate loans and (y) for any day thereafter, 1.75% for LIBOR loans and 0.75% for base rate loans. The Term Loan A may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions) and amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% per annum for the third year after funding and 10.0% per annum for the fourth and fifth years after funding (subject to customary adjustments in the event of any prepayment), with the outstanding balance due upon maturity. The Term Loan B amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum (subject to customary adjustments in the event of repayment), with the outstanding balance due upon maturity. The Term Loan B may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions), benefits from certain “most favored nation” pricing protections and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement.

 

 

We were in compliance with all debt covenants as of December 31, 2018.

 

As of December 31, 2018, outstanding borrowings under the Term Loan A and Term Loan B were $237.5 million and $492.5 million, respectively, and each bore interest at a rate of 4.28% per annum.

 

In connection with the Repricing Amendment, we incurred debt issuance costs of $2.1 million, of which $0.1 million was expensed immediately. We recorded $4.2 million, $3.2 million and $1.6 million of debt issuance cost amortization expense for the years ended December 31, 2018, 2017 and 2016, respectively. Unamortized debt issuance costs totaled $17.6 million and $19.6 million at December 31, 2018 and 2017, respectively.

 

On January 7, 2019, we entered into Amendment No. 2 to the Amended and Restated Credit Agreement with CoBank, ACB, as lender, and JPMorgan, as administrative agent, to provide for a new seven-year incremental term “B” loan in an aggregate principal amount of $250.0 million (the “Term B-2 Loan”). The net proceeds from the Term B-2 Loan were used to finance, in part, our acquisition of Clearwave.

 

The Term B-2 Loan is an obligation of ours and is guaranteed by our wholly owned subsidiaries that guarantee our other obligations under the Amended and Restated Credit Agreement. The Term B-2 Loan is secured, subject to certain exceptions, by substantially all of the assets of the Company and the Guarantors.

 

The interest margin applicable to the Term B-2 Loan is, at our option, equal to either LIBOR or a base rate, plus an applicable margin equal to 2.0% for LIBOR loans and 1.0% for base rate loans. The Term B-2 Loan may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions) and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement. The Term B-2 Loan amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum (subject to customary adjustments in the event of any prepayment), with the outstanding balance due upon maturity. The final maturity of the Term B-2 Loan may be accelerated following an event of default under the Amended and Restated Credit Agreement. Other than with respect to maturity, amortization, prepayment premiums and pricing, the Term B-2 Loan contains terms that are substantially similar to our existing Term Loan B.

 

Capital Expenditures

 

We have significant ongoing capital expenditure requirements. In addition, we expect to spend up to $35 million during 2019, in addition to the combined nearly $27 million spent for NewWave in 2018 and 2017, to enhance acquired operations by rebuilding low capacity markets, launching all-digital video services, implementing 32-channel bonding, converting back office functions such as billing, accounting and service provisioning, migrating products to legacy Cable One platforms and expanding our high-capacity fiber network. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.

 

We have adopted capital expenditure disclosure guidance as supported by the NCTA – The Internet & Television Association (“NCTA”). These disclosures are not required under GAAP, nor do they impact our accounting for capital expenditures under GAAP. The amounts of capital expenditures reported in this Annual Report on Form 10-K are calculated in accordance with NCTA disclosure guidelines.

 

The following table presents our capital expenditures by category in accordance with NCTA disclosure guidelines for the years ended December 31, 2018, 2017 and 2016 (in thousands):

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Customer premise equipment

  $ 56,500     $ 37,071     $ 22,248  

Commercial

    9,832       9,595       8,257  

Scalable infrastructure

    46,176       40,122       41,017  

Line extensions

    16,381       15,947       10,470  

Upgrade/rebuild

    30,081       19,186       17,575  

Support capital

    58,796       57,442       31,257  

Total

  $ 217,766     $ 179,363     $ 130,824  

 

 

Contractual Obligations and Contingent Commitments

 

The following table summarizes our outstanding contractual obligations as of December 31, 2018 (in thousands):

 

Year Ending December 31,

 

Programming

Purchase

Commitments (1)

   

Operating

Lease

Payments

   

Debt

Payments (2)

   

Other

Purchase

Obligations (3)

   

Total

 

2019

  $ 201,894     $ 1,767     $ 20,625     $ 24,385     $ 248,671  

2020

    160,489       1,219       26,892       17,095       205,695  

2021

    88,872       911       30,017       9,560       129,360  

2022

    8,910       398       630,017       2,760       642,085  

2023

    6,162       204       5,017       1,581       12,964  

Thereafter

    3,726       299       467,683       3,648       475,356  

Total

  $ 470,053     $ 4,798     $ 1,180,251     $ 59,029     $ 1,714,131  

 


(1)

Programming purchase commitments represent contracts that we have with cable television networks and broadcast stations to provide programming services to our subscribers. The amounts reported represent estimates of the future programming costs for these purchase commitments based on tier placement as of December 31, 2018 and the estimated subscriber numbers applied to the per-subscriber rates contained in these contracts. Actual amounts due under such contracts may differ from the amounts above based on the actual subscriber numbers and tier placements at the time. In addition, programming purchases sometimes occur pursuant to non-binding commitments, which are not reflected in the amounts shown.

(2)

Debt payments include principal repayment obligations as defined by the agreements described in the “Financing Activity” section and capital lease payment obligations.

(3)

Other purchase obligations include purchase obligations related to capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded from the amounts shown. Any amounts for which we are liable under purchase orders are included within accounts payable and accrued liabilities in our consolidated balance sheet.

 

We incur the following costs as part of our operations, however, they are not included within the contractual obligations table above for the reasons discussed below:

 

 

We rent space on utility poles in order to provide our services to certain subscribers. Generally, pole rentals are cancellable on short notice. However, we anticipate that such rentals will recur. Rent expense for pole attachments was $8.9 million, $7.8 million and $5.7 million for 2018, 2017 and 2016, respectively.

 

 

We pay fees to franchise authorities under multi-year franchise agreements based on a percentage of revenues generated from video service each year. Franchise fees and other franchise-related costs are included in both revenues and operating expenses within the consolidated statements of operations and comprehensive income. Such amounts totaled $16.1 million, $15.7 million and $14.2 million for 2018, 2017 and 2016, respectively.

 

 

We have franchise agreements requiring plant construction and the provision of services to customers within the franchise areas. In connection with these obligations under existing franchise agreements, we obtain surety bonds or letters of credit guaranteeing performance to municipalities and public utilities and payment of insurance premiums. Such surety bonds and letters of credit totaled $13.3 million and $12.0 million as of December 31, 2018 and 2017, respectively. Payments under these arrangements are required only in the remote event of nonperformance. We do not expect that these contingent commitments will result in any amounts being paid.

 

Off-Balance Sheet Arrangements

 

With the exception of the items discussed within the preceding “Contractual Obligations and Contingent Commitments” section, we do not have any off-balance sheet arrangements or financing arrangements with special-purpose entities.

 

Critical Accounting Policies and Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

 

 

An accounting policy is considered to be critical if it is important to our results of operations and financial condition and if it requires management’s most difficult, subjective and complex judgments in its application. For a summary of all our significant accounting policies, see note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

Long-lived Assets

 

A long-lived asset or asset group is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indicators of impairment may include:

 

 

a significant decrease in the market value of the asset;

 

 

a significant change in the extent or manner in which an asset is used or a significant change in the physical condition of the asset;

 

 

a significant adverse change in legal factors or in the business climate that could affect the value of an asset, including an adverse action or assessment by a regulator;

 

 

an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset;

 

 

a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset; and

 

 

a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its estimated useful life.

 

When an indicator of impairment is determined, the first step is to identify the future intent of the asset or asset group: hold for continued use, hold for sale, or dispose by a means other than sale. If the asset is held for continued use and the carrying amount exceeds the undiscounted sum of cash flows expected from the use and eventual disposition of the property, the impairment loss is recognized as the difference between the carrying amount and the estimated fair value of the asset or asset group, and the new cost basis is depreciated over the remaining useful life of the asset. If the intent is to hold the asset for sale and certain other criteria are met (e.g., the asset can be disposed of currently, appropriate levels of authority have approved the sale, and there is an active program to locate a buyer), the impairment test involves comparing the asset’s carrying value to its estimated fair value less disposal costs. To the extent the carrying value is greater than the asset’s estimated fair value less disposal costs, an impairment charge is recognized for the difference. If the asset is to be disposed by a means other than sale, the depreciation estimates are revised to reflect the use of the asset over its shortened useful life.

 

Significant judgments in this area involve determining whether an event has occurred, determining the future cash flows for the assets involved and selecting the appropriate discount rate to be applied in determining estimated fair value.

 

Goodwill and Indefinite-Lived Intangible Assets

 

We have a significant amount of goodwill and indefinite-lived intangible assets that are reviewed at least annually for impairment. These balances were as follows (dollars in thousands):

 

   

As of December 31,

 
   

2018

   

2017

 

Goodwill and indefinite-lived intangible assets

  $ 984,500     $ 984,266  

Total assets

  $ 2,303,234     $ 2,204,632  

Goodwill and indefinite-lived intangible assets as a percentage of total assets

    42.7 %     44.6 %

 

Goodwill. Goodwill is calculated as the excess of the consideration transferred over the fair value of identifiable net assets acquired in a business combination and represents the future economic benefits expected to arise from anticipated synergies and intangible assets acquired that do not qualify for separate recognition, including assembled workforce, noncontractual relationships and other agreements. We assess the recoverability of our goodwill as of November 30th of each year, or more frequently whenever events or substantive changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value. We test goodwill for impairment at the reporting unit level. To determine our reporting units, we evaluate the components one level below the segment level and we aggregate the components if they have similar economic characteristics. As a result of this assessment, our reporting units are established at the geographic division level. We evaluate the determination of our reporting units used to test for impairment periodically or whenever events or substantive changes in circumstances occur. The assessment of recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value. Any excess amount is recorded as an impairment charge in the current period (limited to the amount of goodwill recorded). We elected to perform a quantitative assessment for our goodwill in 2018, for which the fair value of each geographic reporting unit was determined by applying a calculated multiple from our peer group companies to each reporting unit’s forecasted cash flow. Based on the assessment, we concluded that the fair value of goodwill for each geographic reporting unit exceeded its carrying value. We did not record any impairment of goodwill in any of the periods presented.

 

 

Indefinite-Lived Intangible Assets. Intangible assets with an indefinite life are from franchise agreements that we have with state and local governments allowing us to contract and operate our business within a specified geographic area. We expect our franchise agreements to provide us with substantial benefit for a period that extends beyond the foreseeable horizon, and we have historically obtained renewals and extensions of such agreements without material modifications to the agreements for nominal costs, and these costs are expensed as incurred. We group the recorded values of our various franchise agreements into geographic divisions or units of account.

 

We assess the recoverability of our indefinite-lived intangible assets as of November 30th of each year, or more frequently whenever events or substantive changes in circumstances indicate that the assets might be impaired. We evaluate the unit of account used to test for impairment of our indefinite-lived intangible assets periodically or whenever events or substantive changes in circumstances occur to ensure impairment testing is performed at an appropriate level. The assessment of recoverability may first consider qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. When performing a quantitative assessment, we estimate the fair value of our indefinite-lived intangible assets primarily based on a multi-period excess earnings method (“MPEEM”) analysis that involves significant judgment. When analyzing the fair values indicated under the MPEEM analysis, we also consider multiples of Adjusted EBITDA generated by the underlying assets, current market transactions, and profitability information. If the fair value of our indefinite-lived intangible assets were less than the carrying amount, we would recognize an impairment charge for the difference between the estimated fair value and the carrying value of the assets. We performed a qualitative assessment of our franchise assets in 2018. Based on the assessment, we concluded that it is more likely than not that the fair value of franchise assets in each unit of account exceeded the carrying value of such assets and, therefore, we did not perform a quantitative analysis. We did not recognize any impairment charges in any of the periods presented.

 

Property, Plant and Equipment

 

Our industry is capital intensive, and a significant portion of our resources is spent on capital activities associated with extending, rebuilding and upgrading our network. The following tables present certain information regarding our net property, plant and equipment and our cash paid for property, plant and equipment for the periods indicated (dollars in thousands):

 

   

As of December 31,

 
   

2018

   

2017

 

Property, plant and equipment, net

  $ 847,979     $ 831,892  

Total assets

  $ 2,303,234     $ 2,204,632  

Property, plant and equipment, net as a percentage of total assets

    36.8 %     37.7 %

 

Year Ended December 31,

 

Cash Paid for

Property, Plant

and Equipment

 

2018

  $ 215,761  

2017

  $ 175,196  

2016

  $ 147,014  

 

 

Property, plant and equipment represents the costs incurred in the design, construction and implementation of plant, infrastructure and capacity improvements and upgrades. Costs associated with the installation and upgrade of services and the acquiring and deploying of customer premise equipment, including materials, internal and external labor costs and related indirect and overhead costs, are also capitalized. Indirect and overhead costs include payroll taxes, insurance and other benefits and vehicle, tool and supply expense related to installation activities. Capitalized labor costs include the direct costs of engineers and technical managers involved in the design and implementation of plant and infrastructure, the costs of technicians involved in the installation and upgrades of services and customer premise equipment, and the costs of support personnel directly involved in capitalizable activities, such as project managers and supervisors. Internal labor costs capitalized for engineering and technical personnel are based on standards developed by position for the percentage of time spent on capitalized projects while internal labor costs associated with installation and other plant activities are based on standards developed from operational data. Overhead costs are capitalized based on standards developed from historical information. Costs for repairs and maintenance, disconnecting service or reconnecting service are expensed as incurred.

 

The estimated useful lives assigned to our property, plant and equipment are reviewed on an annual basis or more frequently if circumstances warrant and such lives are revised to the extent necessary due to changing facts and circumstances. Any changes in estimated useful lives are reflected prospectively.

 

Recently Adopted and Issued Accounting Pronouncements

 

Recent accounting pronouncements which may be applicable to us are described in note 2 to our consolidated financial statements.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the potential loss arising from changes in market rates and prices, such as interest rates. As described within the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition: Liquidity and Capital Resources—Financing Activity,” our long-term debt at December 31, 2018 consisted of $730.0 million of borrowings under the Senior Credit Facilities, which bear interest, at our option, at a rate per annum determined by reference to either LIBOR or an adjusted base rate, in each case plus an applicable interest rate margin and $450.0 million of the Notes. Based on the principal outstanding under our Senior Credit Facilities as of December 31, 2018, assuming, hypothetically, that the LIBOR applicable to the Senior Credit Facilities was 100 basis points higher, our annual interest expense would have increased $7.3 million. An increase in the market rate of interest applicable to the Notes would not increase our interest expense with respect to the Notes since the rate of interest we are required to pay on the Notes is fixed.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements, the related notes thereto and the report of the independent registered public accounting firm are included in this Annual Report on Form 10-K beginning on page F-1.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2018, the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

Remediation of Previously Disclosed Material Weakness

 

During the second quarter of 2018, the Company identified a material weakness in the Company’s internal controls over the NewWave billing system inherited as a result of the NewWave acquisition (the “NewWave billing system”). Specifically, the Company did not maintain effective access and change management controls to ensure that only authorized users had access to the NewWave billing system and underlying financial data and all changes to the system were authorized.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The identified deficiencies did not result in a misstatement to the Company’s consolidated financial statements or disclosures; however, the deficiencies, when aggregated, could result in misstatements of certain account balances (such as NewWave revenues, accounts receivables and deferred revenues) or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

 

During the fourth quarter of 2018, the Company successfully completed the conversion of the NewWave billing system to the Company’s legacy billing system and the testing necessary to conclude that the material weakness described above has been remediated.

 

Changes in Internal Control Over Financial Reporting

 

Except for the conversion of the NewWave billing system to the Company’s legacy billing system described above, there has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this assessment, management has concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was effective based on these criteria.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report beginning on page F-2 of this Annual Report on Form 10-K.

 

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this item will be included in our Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after our year ended December 31, 2018 in connection with our 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”), or in amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by this item will be included in the 2019 Proxy Statement, or in amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this item will be included in the 2019 Proxy Statement, or in amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item will be included in the 2019 Proxy Statement, or in amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.

 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this item will be included in the 2019 Proxy Statement, or in amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a) Documents filed as part of this report:

 

 

(1)

Financial Statements. The consolidated financial statements listed on the index set forth on page F-1 of this Annual Report on Form 10-K are filed as a part of this Annual Report on Form 10-K.

 

 

(2)

Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required or is included in the financial statements or notes thereof.

 

(b) Exhibits.

 

Exhibit Number

Description

 

 

2.1

Separation and Distribution Agreement, dated as of June 16, 2015, by and between Graham Holdings Company and Cable One, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K of Cable One, Inc. filed on June 18, 2015).

   

2.2

Agreement and Plan of Merger, dated as of January 17, 2017, by and among Cable One, Inc., RBI Holding LLC, Frequency Merger Sub, LLC, RBI Blocker Corp., RBI Blocker Holdings LLC, and GTCR-RBI, LLC, solely in its capacity as the equityholder representative (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K/A of Cable One, Inc. filed on January 20, 2017).

   

3.1

Amended and Restated Certificate of Incorporation of Cable One, Inc. (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K of Cable One, Inc. filed on July 1, 2015).

 

 

3.2

Amended and Restated By-laws of Cable One, Inc. (incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K of Cable One, Inc. filed on July 1, 2015).

 

 

4.1

Indenture, dated as of June 17, 2015, among Cable One, Inc., the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K of Cable One, Inc. filed on June 18, 2015).

   

4.2

First Supplemental Indenture, dated as of May 1, 2017, among Cable One, Inc., Avenue Broadband Communications LLC, Telecommunications Management, LLC, Ultra Communications Group, LLC, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K of Cable One, Inc. filed on May 4, 2017).

 

 

4.3

Second Supplemental Indenture, dated as of January 31, 2019, among Cable One, Inc., Delta Communications, L.L.C. and The Bank of New York Mellon Trust Company, N.A., as trustee.*

   

10.1

Tax Matters Agreement, dated as of June 16, 2015, by and between Graham Holdings Company and Cable One, Inc. (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Cable One, Inc. filed on June 18, 2015).

 

  

10.2

Employee Matters Agreement, dated as of June 16, 2015, by and between Graham Holdings Company and Cable One, Inc. (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Cable One, Inc. filed on June 18, 2015).+

   

10.3

Cable One, Inc. Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.5 to the Current Report on Form 8-K of Cable One, Inc. filed on June 11, 2015).+

   

10.4

Cable One, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.6 to the Current Report on Form 8-K of Cable One, Inc. filed on June 11, 2015).+

 

 

Exhibit Number

Description

 

 

10.5

Form of Stock Appreciation Right Agreement for grants during 2015 and 2016 (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Cable One, Inc. filed on August 10, 2015).+

   

10.6

Form of Stock Appreciation Right Agreement for grants during 2017 (incorporated herein by reference to Exhibit 10.12 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2017).+

 

  

10.7

Form of Restricted Stock Award Agreement for performance-based restricted stock grants during 2017 (incorporated herein by reference to Exhibit 10.13 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2017).+

 

  

10.8

Form of Restricted Stock Award Agreement for time-based restricted stock grants during 2017 (incorporated herein by reference to Exhibit 10.14 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2017).+

   

10.9

Restatement Agreement, dated as of May 1, 2017, among Cable One, Inc., Cable One VoIP, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cable One, Inc. filed on May 4, 2017).

   

10.10

Amendment No. 1, dated as of April 23, 2018, to the Amended and Restated Credit Agreement among Cable One, Inc., the lenders or other financial institutions party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cable One, Inc. filed on April 23, 2018).

   

10.11

Amendment No. 2, dated as of January 7, 2019, to the Amended and Restated Credit Agreement among Cable One, Inc., the lenders or other financial institutions party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cable One, Inc. filed on January 8, 2019).

   

10.12

Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.15 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2018).+

   

10.13

Form of Non-Employee Director Restricted Stock Unit Agreement for grants beginning in 2017 (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Cable One, Inc. filed on May 4, 2017).+

   

10.14

Form of Stock Appreciation Right Agreement for grants during 2018 (incorporated herein by reference to Exhibit 10.17 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2018).+

   

10.15

Form of Restricted Stock Award Agreement for performance-based restricted stock grants during 2018 (incorporated herein by reference to Exhibit 10.18 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2018).+

   

10.16

Form of Restricted Stock Award Agreement for time-based proportional-vest restricted stock grants during 2018 (incorporated herein by reference to Exhibit 10.19 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2018).+

   

10.17

Form of Restricted Stock Award Agreement for time-based cliff-vest restricted stock grants during 2018.*+

 

 

Exhibit Number

Description

 

 

10.18

Form of Non-Employee Director Restricted Stock Unit Award Agreement for grants in lieu of annual cash fees beginning in 2018 (incorporated herein by reference to Exhibit 10.20 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2018).+

   

10.19

Alan H. Silverman Separation Agreement dated November 17, 2017 (incorporated herein by reference to Exhibit 10.21 to the Annual Report on Form 10-K of Cable One, Inc. filed on March 1, 2018).+

   

10.20

Steven S. Cochran Offer Letter dated July 2, 2018 (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Cable One, Inc. filed on November 8, 2018).+

   

10.21

Kevin P. Coyle Separation Agreement dated July 2, 2018 (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Cable One, Inc. filed on November 8, 2018).+

   

10.22

Form of Stock Appreciation Right Agreement for grants beginning in 2019.*+

   

10.23

Form of Restricted Stock Award Agreement for performance-based restricted stock grants beginning in 2019.*+

   

10.24

Form of Restricted Stock Award Agreement for time-based proportional-vest restricted stock grants beginning in 2019.*+

   

21.1

List of subsidiaries of Cable One, Inc.*

   

23.1

Consent of PricewaterhouseCoopers LLP.*

   

24.1

Power of Attorney (included on Signatures page of this Annual Report on Form 10-K).*

   

31.1

Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

31.2

Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

32

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

101.INS

XBRL Instance Document.*

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.*

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.*

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.*

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.*

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.*

 


*

Filed herewith.

**

Furnished herewith.

+

Management contract or compensatory arrangement.

 

ITEM 16. FORM 10-K SUMMARY

 

None.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CABLE ONE, INC.

(Registrant)

 

 

 

Date: February 27, 2019

By:

/s/ Julia M. Laulis

 

  

Julia M. Laulis

 

 

Chair of the Board, President and Chief Executive Officer

 

POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Julia M. Laulis and Steven S. Cochran, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

         

/s/ Julia M. Laulis 

  

Chair of the Board, President and Chief Executive Officer

  

February 27, 2019

Julia M. Laulis

 

(Principal Executive Officer)

 

  

 

 

 

 

 

/s/ Steven S. Cochran

 

Senior Vice President and Chief Financial Officer

 

February 27, 2019

Steven S. Cochran

 

(Principal Financial Officer and Principal Accounting Officer)

   
         

/s/ Brad D. Brian

 

Director

 

February 27, 2019

Brad D. Brian

       

 

 

 

 

 

/s/ Thomas S. Gayner

 

Director

 

February 27, 2019

Thomas S. Gayner

       

 

 

 

 

 

/s/ Deborah J. Kissire

 

Director

 

February 27, 2019

Deborah J. Kissire

       
         

/s/ Thomas O. Might

 

Director

 

February 27, 2019

Thomas O. Might

       

 

 

 

 

 

/s/ Alan G. Spoon

 

Director

 

February 27, 2019

Alan G. Spoon

       

 

 

 

 

 

/s/ Wallace R. Weitz

 

Director

 

February 27, 2019

Wallace R. Weitz

       

 

 

 

 

 

/s/ Katharine B. Weymouth

 

Director

 

February 27, 2019

Katharine B. Weymouth

       

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Page

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 2018 and 2017

F-3

Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016

F-4

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016

F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016

F-6

Notes to the Consolidated Financial Statements

F-7

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of Cable One, Inc.

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Cable One, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Change in Accounting Principle

 

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018.

 

Basis for Opinions

 

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ PricewaterhouseCoopers LLP

 

Phoenix, Arizona

February 27, 2019

 

We have served as the Company’s auditor since 2014.

 

 

 

CABLE ONE, INC.

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except par value and share data)

 

December 31, 2018

   

December 31, 2017

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 264,113     $ 161,752  

Accounts receivable, net

    29,947       29,930  

Income taxes receivable

    10,713       21,331  

Prepaid and other current assets

    13,090       10,898  

Total Current Assets

    317,863       223,911  

Property, plant and equipment, net

    847,979       831,892  

Intangible assets, net

    953,851       965,745  

Goodwill

    172,129       172,129  

Other noncurrent assets

    11,412       10,955  

Total Assets

  $ 2,303,234     $ 2,204,632  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Accounts payable and accrued liabilities

  $ 94,134     $ 117,855  

Deferred revenue

    18,954       15,008  

Current portion of long-term debt

    20,625       14,375  

Total Current Liabilities

    133,713       147,238  

Long-term debt

    1,142,056       1,160,682  

Deferred income taxes

    242,127       207,154  

Other noncurrent liabilities

    9,980       13,111  

Total Liabilities

    1,527,876       1,528,185  
                 

Commitments and contingencies (see note 16)

               
                 

Stockholders' Equity

               

Preferred stock ($0.01 par value; 4,000,000 shares authorized; none issued or outstanding)

    -       -  

Common stock ($0.01 par value; 40,000,000 shares authorized; 5,887,899 shares issued, and 5,703,402 and 5,731,442 shares outstanding as of December 31, 2018 and 2017, respectively)

    59       59  

Additional paid-in capital

    38,898       28,412  

Retained earnings

    850,292       728,386  

Accumulated other comprehensive loss

    (96 )     (352 )

Treasury stock, at cost (184,497 and 156,457 shares held as of December 31, 2018 and 2017, respectively)

    (113,795 )     (80,058 )

Total Stockholders' Equity

    775,358       676,447  

Total Liabilities and Stockholders' Equity

  $ 2,303,234     $ 2,204,632  

 

See accompanying notes to the consolidated financial statements.

 

 

 

CABLE ONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

   

Year Ended December 31,

 

(in thousands, except per share and share data)

 

2018

   

2017

   

2016

 

Revenues

  $ 1,072,295     $ 959,956     $ 819,348  

Costs and Expenses:

                       

Operating (excluding depreciation and amortization)

    370,269       337,040       296,577  

Selling, general and administrative

    222,216       204,384       185,013  

Depreciation and amortization

    197,731       181,619       147,839  

Loss on asset disposals, net

    14,167       574       2,821  

Total Costs and Expenses

    804,383       723,617       632,250  

Income from operations

    267,912       236,339       187,098  

Interest expense

    (60,415 )     (46,864 )     (30,221 )

Other income, net

    4,487       668       5,121  

Income before income taxes

    211,984       190,143       161,998  

Income tax provision (benefit)

    47,224       (45,028 )     61,681  

Net income

  $ 164,760     $ 235,171     $ 100,317  
                         

Net income per common share:

                       

Basic

  $ 28.98     $ 41.40     $ 17.47  

Diluted

  $ 28.77     $ 40.92     $ 17.38  

Weighted average common shares outstanding:

                       

Basic

    5,684,375       5,680,073       5,743,568  

Diluted

    5,725,963       5,747,037       5,770,960  
                         

Other comprehensive income, net of tax

    256       94       111  

Comprehensive income

  $ 165,016     $ 235,265     $ 100,428  

 

See accompanying notes to the consolidated financial statements.

 

 

 

CABLE ONE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(dollars in thousands, except per

 

Common Stock

   

Additional Paid-In

   

Retained

   

Treasury

Stock,

   

Accumulated Other Comprehensive

   

Total Stockholders’

 

share and share data)

 

Shares

   

Amount

   

Capital

   

Earnings

   

at cost

   

Loss

   

Equity

 

Balance at December 31, 2015

    5,833,442     $ 59     $ 4,929     $ 464,559     $ (16,367 )   $ (557 )   $ 452,623  

Net income

    -       -       -       100,317       -       -       100,317  

Changes in pension, net of tax

    -       -       -       -       -       111       111  

Equity-based compensation

    -       -       12,298       -       -       -       12,298  

Issuance of common stock under restricted stock unit awards

    947       -       (380 )     -       380       -       -  

Issuance of equity awards, net of forfeitures

    4,247       -       -       -       -       -       -  

Repurchase of common stock

    (126,797 )     -       -       -       (56,370 )     -       (56,370 )

Withholding tax for equity awards

    (3,616 )     -       -       -       (2,190 )     -       (2,190 )

Excess income tax benefits for equity-based compensation activities

            -       822       -       -       -       822  

Dividends paid to stockholders ($6.00 per common share)

    -       -       -       (34,445 )     -       -       (34,445 )

Balance at December 31, 2016

    5,708,223       59       17,669       530,431       (74,547 )     (446 )     473,166  

Net income

    -       -       -       235,171       -       -       235,171  

Changes in pension, net of tax

    -       -       -       -       -       94       94  

Equity-based compensation

    -       -       10,743       -       -       -       10,743  

Issuance of equity awards, net of forfeitures

    31,129       -       -       -       -       -       -  

Repurchases of common stock

    (900 )     -       -       -       (528 )     -       (528 )

Withholding tax for equity awards

    (7,010 )     -       -       -       (4,983 )     -       (4,983 )

Dividends paid to stockholders ($6.50 per common share)

    -       -       -       (37,216 )     -       -       (37,216 )

Balance at December 31, 2017

    5,731,442       59       28,412       728,386       (80,058 )     (352 )     676,447  

Net income

    -       -       -       164,760       -       -       164,760  

Changes in pension, net of tax

    -       -       -       -       -       256       256  

Equity-based compensation

    -       -       10,486       -       -       -       10,486  

Issuance of equity awards, net of forfeitures

    20,800       -       -       -       -       -       -  

Repurchases of common stock

    (38,814 )     -       -       -       (26,582 )     -       (26,582 )

Withholding tax for equity awards

    (10,026 )     -       -       -       (7,155 )     -       (7,155 )

Dividends paid to stockholders ($7.50 per common share)

    -       -       -       (42,854 )     -       -       (42,854 )

Balance at December 31, 2018

    5,703,402     $ 59     $ 38,898     $ 850,292     $ (113,795 )   $ (96 )   $ 775,358  

 

See accompanying notes to the consolidated financial statements.

 

 

 

CABLE ONE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Year Ended December 31,

 

(in thousands)

 

2018

   

2017

   

2016

 

Cash flows from operating activities:

                       

Net income

  $ 164,760     $ 235,171     $ 100,317  

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

                       

Depreciation and amortization

    197,731       181,619       147,839  

Amortization of debt issuance cost

    4,163       3,174       1,642  

Equity-based compensation

    10,486       10,743       12,298  

Write-off of debt issuance costs

    110       613       -  

Excess income tax benefits for equity-based compensation activities

    -       -       (822 )

Gain on sale of cable system

    -       -       (4,096 )

Increase (decrease) in deferred income taxes

    34,973       (87,223 )     (1,497 )

Loss on asset disposals, net

    14,167       574       2,821  

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

                       

(Increase) decrease in accounts receivable, net

    (17 )     18,146       1,773  

(Increase) decrease in income taxes receivable

    10,618       (16,784 )     (4,547 )

(Increase) decrease in prepaid and other current assets

    (2,192 )     5,073       (2,618 )

Increase (decrease) in accounts payable and accrued liabilities

    (27,853 )     6,874       4,052  

Increase (decrease) in deferred revenue

    3,946       (20,547 )     (1,324 )

Decrease in income taxes payable

    -       -       (5,928 )

Change in other noncurrent assets and liabilities, net

    (3,123 )     (12,947 )     7,211  

Net cash provided by operating activities

    407,769       324,486       257,121  
                         

Cash flows from investing activities:

                       

Purchase of business, net of cash acquired

    -       (727,947 )     -  

Capital expenditures

    (217,766 )     (179,363 )     (130,824 )

Increase (decrease) in accrued expenses related to capital expenditures

    2,005       4,167       (16,190 )

Proceeds from sale of cable system, net

    -       -       6,752  

Acquisition of cable system

    -       -       (2,672 )

Proceeds from sales of property, plant and equipment and other

    1,466       11,976       1,327  

Net cash used in investing activities

    (214,295 )     (891,167 )     (141,607 )
                         

Cash flows from financing activities:

                       

Proceeds from issuance of long-term debt

    -       750,000       -  

Payment of debt issuance costs

    (2,131 )     (15,224 )     -  

Payments on long-term debt

    (14,391 )     (100,642 )     (3,767 )

Repurchases of common stock

    (26,582 )     (528 )     (56,370 )

Payment of withholding tax for equity awards

    (7,155 )     (4,983 )     (2,190 )

Dividends paid to stockholders

    (42,854 )     (37,216 )     (34,445 )

Excess income tax benefits for equity-based compensation activities

    -       -       822  

Deposits received for asset construction

    2,000       -       -  

Increase in cash overdraft

    -       (1,014 )     (723 )

Net cash provided by (used in) financing activities

    (91,113 )     590,393       (96,673 )
                         

Increase in cash and cash equivalents

    102,361       23,712       18,841  

Cash and cash equivalents, beginning of period

    161,752       138,040       119,199  

Cash and cash equivalents, end of period

  $ 264,113     $ 161,752     $ 138,040  
                         

Supplemental cash flow disclosures:

                       

Cash paid for interest, net of capitalized interest

  $ 56,412     $ 43,327     $ 28,628  

Cash paid for income taxes, net of refunds received

  $ 1,811     $ 59,622     $ 73,007  

 

See accompanying notes to the consolidated financial statements.

 

 

CABLE ONE, INC.

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 
1. DESCRIPTION OF BUSINESS

 

Cable One, Inc., together with its wholly owned subsidiaries, (collectively, “Cable One,” “us,” “our,” “we” or the “Company”), is a fully integrated provider of data, video and voice services to residential and business subscribers in 21 Western, Midwestern and Southern U.S. states. At the end of 2018, Cable One provided service to 804,865 residential and business customers, of which 663,074 subscribed to data services, 326,423 subscribed to video services and 125,934 subscribed to voice services.

 

On May 1, 2017, the Company acquired RBI Holding LLC (“NewWave”) for a purchase price of $740.2 million in cash on a debt-free basis. Refer to note 4 for details on this transaction.

 

On January 8, 2019, the Company acquired Delta Communications, L.L.C. (“Clearwave”) for a purchase price of $357.0 million in cash on a debt-free basis, subject to customary post-closing adjustments. Refer to note 17 for details on this transaction.

 

 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company’s results of operations for the years ended December 31, 2018, 2017 and 2016 may not be indicative of the Company’s future results.

 

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

 

Segment Reporting. Accounting Standard Codification (“ASC”) 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. The Company’s operations are organized and managed on the basis of operating systems within its geographic divisions. Each operating system derives revenues from the delivery of similar products and services to a customer base that is also similar. Each operating system deploys similar technology to deliver the Company’s products and services, operates within a similar regulatory environment, has similar economic characteristics and is managed by the Company’s chief operating decision maker as part of an aggregate of all operating systems. Management evaluated the criteria for aggregation under ASC 280 and has concluded that the Company meets each of the respective criteria set forth therein. Accordingly, management has identified one reportable segment.

 

Use of Estimates. The preparation of the consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates and underlying assumptions.

 

Revenue Recognition. The Company recognizes revenue in accordance with ASC 606 - Revenue from Contracts with Customers. Residential revenues are generated through individual and bundled subscriptions for data, video and voice services on month to month terms, without penalty for cancellation. As bundled subscriptions are typically offered at discounted rates, the sales price is allocated amongst the respective product lines based on the relative selling price at which each service is sold under standalone service agreements. Business revenues are generated through individual and bundled subscriptions for data, video and voice services under contracts with terms ranging from one month to several years.

 

The Company also generally receives an allocation of scheduled advertising time as part of its distribution agreements with cable and broadcast networks, which the Company sells to local, regional and national advertisers under contracts with terms that are typically less than one year. In most instances, the available advertising time is sold directly by the Company’s internal sales force. As the Company is acting as principal in these arrangements, the advertising that is sold is reported as revenue on a gross basis. In instances where advertising time is sold by contracted third-party agencies, the Company is not acting as principal and the advertising sold is therefore reported net of agency fees. Advertising revenues are recognized when the related advertisements are aired.

 

 

The unit of account for revenue recognition is a performance obligation, which is a requirement to transfer a distinct good or service to a customer. Customers are billed for the services to which they subscribe based upon published or contracted rates, with the sales price being allocated to each performance obligation. For arrangements with multiple performance obligations, the sales price is allocated based on the relative standalone selling price for each subscribed service. Generally performance obligations are satisfied, and revenue is recognized, over the period of time in which customers simultaneously receive and consume the Company’s defined performance obligations, which are delivered in a similar pattern of transfer. Advertising revenue is recognized at the point in time when the underlying performance obligation is complete.

 

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

 

Under the terms of the Company’s franchise agreements, the Company is generally required to pay to the franchising authority an amount based on the gross amount billed to the customer. The Company normally passes these fees to its customers and reports the fees on a gross basis as a component of revenue with the corresponding costs included in operating expense. The franchise authority assesses the Company directly for these fees and it is the Company’s obligation to pay the fees. The amount of such fees recorded on a gross basis was $16.1 million, $15.7 million and $14.2 million in 2018, 2017 and 2016, respectively.

 

Concentrations of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and accounts receivable. Concentration of credit risk with respect to the Company’s cash balance is limited. The Company maintains or invests its cash with highly qualified financial institutions. With respect to the Company’s receivables, credit risk is limited due to the large number of customers, individually small balances and short payment terms.

 

Programming Costs. The Company’s programming costs are fees paid to license the programming that is distributed to video customers and are recorded in the period the services are provided. Programming costs are recorded based on the Company’s contractual agreements with its programming vendors, which are generally multi-year agreements that provide for the Company to make payments to the programming vendors at agreed upon rates based on the number of subscribers to which the Company provides the programming service. From time to time, these agreements expire, and programming continues to be distributed, often pursuant to an extension, to customers while the parties negotiate new contractual terms. While payments are typically made under the prior agreement’s terms, the amount of programming costs recorded during these interim periods is based on the Company’s estimates of the ultimate contractual terms expected to be negotiated. Differences between actual amounts determined upon resolution of negotiations and amounts recorded during these interim periods are recorded in the period of resolution.

 

Advertising Costs. The Company expenses advertising costs as incurred. The total amount of such advertising expense recorded was $28.6 million, $25.3 million and $25.9 million in 2018, 2017 and 2016, respectively.

 

Cash and Cash Equivalents. For financial reporting purposes, the Company considers all highly liquid investments with original maturities at purchase of three months or less to be cash equivalents. These investments are carried at cost, which approximates market value.

 

Allowance for Doubtful Accounts. Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based primarily on the aging category, historical collection experience and management’s evaluation of the financial condition of the customer. The Company generally considers an account past due or delinquent when a customer misses a scheduled payment. The Company writes off accounts receivable balances deemed uncollectible against the allowance for doubtful accounts generally when the account is turned over for collection to an outside collection agency.

 

Fair Value Measurements. Fair value measurements are determined based on the assumptions that a market participant would use in pricing an asset or liability based on a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs, such as quoted prices in active markets (level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

 

For assets and liabilities that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability.

 

 

The Company measures certain assets including goodwill, intangible assets and property, plant and equipment at fair value on a nonrecurring basis when they are deemed to be impaired. The fair value of these assets is determined with valuation techniques using the best information available and may include quoted market prices, market comparables and discounted cash flow models.

 

Fair Value of Financial Instruments. The carrying amounts reported in the Company’s consolidated financial statements for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short-term nature of these financial instruments.

 

Property, Plant and Equipment. Property, plant and equipment is recorded at cost. Replacements and major improvements are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method for all assets, with the exception of capitalized internal labor, which is depreciated using an accelerated method. The estimated useful lives of each category of property, plant and equipment is as follows (in years):

 

Cable distribution systems

  10 12  

Customer premise equipment

  3 5  

Other equipment, vehicles and fixtures

  3 10  

Capitalized software

  3 7  

Buildings and improvements

  10 20  

 

The costs of leasehold improvements are amortized over the lesser of their useful lives or the remaining terms of the respective leases.

 

Costs associated with the installation and upgrade of services and acquiring and deploying customer premise equipment, including materials, internal and external labor costs and related indirect and overhead costs, are capitalized. Indirect and overhead costs include payroll taxes, insurance and other benefits and vehicle, tool and supply expense related to installation activities. Capitalized labor costs include the direct costs of engineers and technical managers involved in the design and implementation of plant and infrastructure, the costs of technicians involved in the installation and upgrades of services and customer premise equipment, and the costs of support personnel directly involved in capitalizable activities, such as project managers and supervisors. Internal labor costs capitalized for engineering and technical personnel are based on standards developed by position for the percentage of time spent on capitalized projects while internal labor costs associated with installation and other plant activities are based on standards developed from operational data. Overhead costs are capitalized based on standards developed from historical information. Costs for repairs and maintenance, disconnecting service or reconnecting service are expensed as incurred.

 

The Company capitalizes certain internal and external costs incurred to acquire or develop internal-use software, including costs associated with coding, software configuration, upgrades and enhancements.

 

Evaluation of Long-Lived Assets. The recoverability of property, plant and equipment and amortized intangible assets is assessed whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. A long-lived asset is considered to not be recoverable when the undiscounted estimated future cash flows are less than the asset’s recorded value. An impairment charge is measured based on estimated fair market value, determined primarily using estimated future cash flows on a discounted basis. Losses on long-lived assets to be disposed of are determined in a similar manner, but the fair market value is reduced for estimated disposal costs.

 

Finite-Lived Intangible Assets. Finite-lived intangible assets consist of franchise renewals, customer relationships and trademarks and trade names, and are amortized on a straight-line basis over the respective estimated periods for which the assets will provide economic benefit to the Company.

 

Indefinite-Lived Intangible Assets. The Company’s intangible assets with an indefinite life are franchise agreements that it has with state and local governments allowing the Company to operate our business within a specified geographic area. The Company expects its franchise agreements to provide it with substantial benefit for a period that extends beyond the foreseeable horizon, and the Company has historically obtained renewals and extensions of such agreements without material modifications to the agreements for nominal costs, and these costs are expensed as incurred. The Company groups the recorded values of its various franchise agreements into geographic divisions or units of account.

 

 

The Company assesses the recoverability of its indefinite-lived intangible assets as of November 30th of each year, or more frequently whenever events or substantive changes in circumstances indicate that the assets might be impaired. The Company evaluates the unit of account used to test for impairment of its indefinite-lived intangible assets periodically or whenever events or substantive changes in circumstances occur to ensure impairment testing is performed at an appropriate level. The assessment of recoverability may first consider qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. When performing a quantitative assessment, the Company estimates the fair value of its indefinite-lived intangible assets primarily based on a multi-period excess earnings method (“MPEEM”) analysis that involves significant judgment. When analyzing the fair values indicated under the MPEEM analysis, the Company also considers multiples of Adjusted EBITDA generated by the underlying assets, current market transactions, and profitability information. If the fair value of the Company’s indefinite-lived intangible assets were less than the carrying amount, the Company would recognize an impairment charge for the difference between the estimated fair value and the carrying value of the assets.

 

Goodwill. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired in a business combination and represents the future economic benefits expected to arise from anticipated synergies and intangible assets acquired that do not qualify for separate recognition, including assembled workforce, noncontractual relationships and other agreements. The Company assesses the recoverability of its goodwill as of November 30th of each year, or more frequently whenever events or substantive changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value. The Company tests goodwill for impairment at the reporting unit level. To determine its reporting units, the Company evaluates the components one level below the segment level and it aggregates the components if they have similar economic characteristics. As a result of this assessment, the Company’s reporting units are established at the geographic division level. The Company evaluates the determination of its reporting units used to test for impairment periodically or whenever events or substantive changes in circumstances occur. The assessment of recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value. Any excess amount is recorded as an impairment charge in the current period (limited to the amount of goodwill recorded).

 

Pension and Other Postretirement Benefits. The Company maintains various pension and incentive savings plans. The Company recognizes the overfunded or underfunded status of the defined benefit SERP (as defined in note 14) as an asset or liability in its consolidated balance sheets and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. The Company measures changes in the funded status of its plans using the projected unit credit cost method and several actuarial assumptions, the most significant of which is the discount rate. The Company uses a measurement date of December 31st for its pension and other postretirement benefit plans.

 

Self-Insurance. The Company uses a combination of insurance and self-insurance for a number of risks, including claims related to employee medical and dental care, disability benefits, workers’ compensation, general liability, property damage and business interruption. Liabilities associated with these plans are estimated based on, among other things, the Company’s historical claims experience, severity factors and other actuarial assumptions. Accruals for expected loss are based on estimates, and, while the Company believes that the amounts accrued are adequate, the ultimate loss may differ from the amounts provided.

 

Equity-Based Compensation. The Company measures compensation expense for awards settled in shares based on the grant date fair value of the award. The Company measures compensation expense for awards settled in cash, or that may be settled in cash, based on the fair value at each reporting date. The Company recognizes the expense over the requisite service period, which is generally the vesting period of the award.

 

Income Taxes. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. This evaluation is made on an ongoing basis. In the event the Company were to determine that it was not able to realize all or a portion of its net deferred income tax assets in the future, the Company would record a valuation allowance, which would impact the provision for income taxes.

 

 

The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The Company records a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on the tax return. Changes in the estimate are recorded in the period in which such determination is made.

 

Asset Retirement Obligations. Certain of the Company’s franchise agreements and lease agreements contain provisions requiring the Company to restore facilities or remove property in the event that the franchise or lease agreement is not renewed. The Company expects to continually renew its franchise agreements and therefore cannot reasonably estimate any liabilities associated with such agreements. A remote possibility exists that franchise agreements could be terminated unexpectedly, which could result in the Company incurring significant expense in complying with restoration or removal provisions. Retirement obligations related to the Company’s lease agreements are de minimis. The Company does not have any significant liabilities related to asset retirement obligations recorded in the consolidated financial statements.

 

Recently Adopted Accounting Pronouncements. In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with ASC 718. The ASU was effective January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact in the future.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step two of the previous goodwill impairment test under ASC 350 and replaces it with a simplified model. Under the simplified model, goodwill impairment will be calculated as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. The amount of any impairment under the simplified model may differ from what would have been recognized under the previous two-step test. The ASU is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019, with early adoption permitted. The Company elected to early adopt the standard on January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but may have an impact in the future.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of the amendment is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU was effective January 1, 2018. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements, but may have an impact in the future.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies the way in which certain cash receipts and cash payments should be classified within the consolidated statements of cash flows and also how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 was effective January 1, 2018. The adoption of this guidance did not have a material impact on the classification of any cash flows within the Company’s consolidated statements of cash flows, but may have an impact in the future.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides new guidance related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard provides a single principles-based, five step model to be applied to all contracts with customers: (i) identify the contract(s) with the customer, (ii) identify the performance obligation(s) in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligation(s) in the contract and (v) recognize revenue when each performance obligation is satisfied. The updated guidance also requires additional disclosures regarding the nature and timing of revenue recognition as well as any uncertainty surrounding potential revenue recognition. The Company adopted the updated guidance on January 1, 2018 on a full retrospective basis, which required all periods presented to reflect the impact of the updated guidance. Upon adoption, the Company also implemented changes in the presentation of certain revenues and expenses, which resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time instead of immediately. Refer to note 3 for further details of the impact on the Company’s 2017 and 2016 consolidated financial statements and the requisite disclosures pertaining to the transition to the new standard.

 

 

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

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The update is effective for the first quarter of 2019, with early adoption permitted. The Company does not expect ASU 2018-07 to have a material impact on the Company’s consolidated financial statements upon adoption, but it may have an impact in the future.

 

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

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to record substantially all of their leases on the balance sheet as a right-of-use asset and a corresponding lease liability, with the exception of short-term leases. The Company will be required to classify each separate lease component as either an operating lease or a finance lease at the lease commencement date. Initial measurement of the right-of-use asset and lease liability is the same for both operating and finance leases, however, expense recognition and amortization of the right-of-use asset differs. Operating leases will reflect lease expense on a straight-line basis similar to current operating leases while finance leases will reflect a front-loaded expense pattern similar to current capital leases. The Company will adopt this guidance beginning in the first quarter of 2019 and anticipates utilizing the modified retrospective transition method by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjusting prior period reported amounts. The Company expects to elect certain practical expedients permitted under the transition guidance. The adoption of this guidance will result in the Company implementing new systems, processes and internal controls and will require additional quantitative and qualitative disclosures around the amount, timing and uncertainty of lease-related cash flows and significant judgments utilized. The Company’s lease portfolio primarily consists of building, land, tower, fiber, equipment and colocation site leases, among others. The Company is currently in the process of determining the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

 

 

 
3. ADOPTION OF NEW REVENUE RECOGNITION STANDARD

 

The Company adopted ASC 606 on January 1, 2018 using the full retrospective method, resulting in a recasting of prior period consolidated financial statements. The adoption resulted in the deferral of all business installation revenues and residential and business customer acquisition costs, to be recognized over a period of time, instead of immediately. The impact of the ASC 606 adoption on the comparative 2017 and 2016 consolidated financial statements was as follows (in thousands, except per share data):

 

   

December 31, 2017

 
   

As Reported

   

ASC 606

Adjustment

   

As Recasted

 

Consolidated Balance Sheet Information

                       

Assets

                       

Current Assets:

                       

Accounts receivable, net

  $ 51,141     $ (21,211 )   $ 29,930  

Prepaid and other current assets

    8,160       2,738       10,898  

Total Current Assets

    242,384       (18,473 )     223,911  

Other noncurrent assets

    6,179       4,776       10,955  

Total Assets

  $ 2,218,329     $ (13,697 )   $ 2,204,632  
                         

Liabilities and Stockholders' Equity

                       

Current Liabilities:

                       

Accounts payable and accrued liabilities

  $ 117,963     $ (108 )   $ 117,855  

Deferred revenue

    38,266       (23,258 )     15,008  

Total Current Liabilities

    170,604       (23,366 )     147,238  

Deferred income taxes

    205,636       1,518       207,154  

Other noncurrent liabilities

    9,991       3,120       13,111  

Total Liabilities

    1,546,913       (18,728 )     1,528,185  
                         

Stockholders' Equity

                       

Retained earnings

    723,354       5,032       728,386  

Total Stockholders' Equity

    671,416       5,031       676,447  

Total Liabilities and Stockholders' Equity

  $ 2,218,329     $ (13,697 )   $ 2,204,632  

 

   

Year Ended December 31, 2017

 
   

As Reported

   

ASC 606

Adjustment

   

As Recasted

 

Consolidated Statement of Operations and Comprehensive Income Information

 

Revenues

  $ 960,029     $ (73 )   $ 959,956  

Costs and Expenses:

                       

Selling, general and administrative

    204,799       (415 )     204,384  

Total Costs and Expenses

    724,032       (415 )     723,617  

Income from operations

    235,997       342       236,339  

Income before income taxes

    189,801       342       190,143  

Income tax benefit

    (44,227 )     (801 )     (45,028 )

Net income

  $ 234,028     $ 1,143     $ 235,171  
                         

Net income per common share:

                       

Basic

  $ 41.20     $ 0.20     $ 41.40  

Diluted

  $ 40.72     $ 0.20     $ 40.92  
                         

Comprehensive income

  $ 234,122     $ 1,143     $ 235,265  
                         

Consolidated Statement of Cash Flows Information

                       

Net income

  $ 234,028     $ 1,143     $ 235,171  

Decrease in deferred income taxes

    (86,357 )     (866 )     (87,223 )

(Increase) decrease in accounts receivable, net

    (3,065 )     21,211       18,146  

Decrease in prepaid and other current assets

    4,950       123       5,073  

Increase (decrease) in accounts payable and accrued liabilities

    6,982       (108 )     6,874  

Increase (decrease) in deferred revenue

    1,560       (22,107 )     (20,547 )

Change in other noncurrent assets and liabilities, net

    (13,551 )     604       (12,947 )

Net cash provided by operating activities

  $ 324,486     $ -     $ 324,486  

 

 

   

Year Ended December 31, 2016

 
   

As Reported

   

ASC 606

Adjustment

   

As Recasted

 

Consolidated Statement of Operations and Comprehensive Income Information

 

Revenues

  $ 819,625     $ (277 )   $ 819,348  

Costs and Expenses:

                       

Selling, general and administrative

    184,024       989       185,013  

Total Costs and Expenses

    631,261       989       632,250  

Income from operations

    188,364       (1,266 )     187,098  

Income before income taxes

    163,264       (1,266 )     161,998  

Income tax provision

    62,162       (481 )     61,681  

Net income

  $ 101,102     $ (785 )   $ 100,317  
                         

Net income per common share:

                       

Basic

  $ 17.60     $ (0.13 )   $ 17.47  

Diluted

  $ 17.52     $ (0.14 )   $ 17.38  
                         

Comprehensive income

  $ 101,213     $ (785 )   $ 100,428  
                         

Consolidated Statement of Cash Flows Information

                       

Net income

  $ 101,102     $ (785 )   $ 100,317  

Increase (decrease) in deferred income taxes

    (1,090 )     (407 )     (1,497 )

(Increase) decrease in prepaid and other current assets

    243       (2,861 )     (2,618 )

Decrease in deferred revenue

    (173 )     (1,151 )     (1,324 )

Change in other noncurrent assets and liabilities, net

    2,007       5,204       7,211  

Net cash provided by operating activities

  $ 257,121     $ -     $ 257,121  

 

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

 

A summary of changes in timing and presentation to the Company’s historical consolidated financial statements is presented below:

 

 

The net decrease in total assets reflects a decrease in accounts receivable to remove amounts billed to customers for which the associated performance obligations have not yet been satisfied, partially offset by the deferral of incremental costs incurred to obtain customers, which were historically expensed immediately.

 

 

The net decrease in total liabilities reflects a decrease in deferred revenue to remove amounts billed to customers for which the associated performance obligations have not yet been satisfied, partially offset by the recognition of deferred revenue related to certain up-front and installation fees collected from business customers, which were historically recognized when billed and the net tax effect of these adjustments on deferred assets and liabilities.

 

 

The changes in revenues and expenses are a result of the deferred recognition of incremental customer acquisition costs and up-front and installation business services fees over a period of time, compared to the historical treatment of immediate recognition.

 

 
4. NEWWAVE ACQUISITION

 

On May 1, 2017, the Company acquired all the outstanding equity interests in NewWave for $740.2 million in cash on a debt-free basis. Refer to note 9 for details regarding the financing of the transaction. NewWave provides data, video and voice services to residential and business customers throughout non-urban areas of Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas. Cable One and NewWave shared similar strategies, customer demographics, and products. Accordingly, the acquisition of NewWave offers the Company opportunities for revenue growth and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margin expansion as well as the potential to realize cost synergies.

 

 

The following table summarizes the allocation of the purchase price consideration as of the acquisition date, reflecting all measurement period adjustments recorded in 2017 (in thousands):

 

   

Purchase Price Allocation

 

Assets Acquired

       

Cash and cash equivalents

  $ 12,220  

Accounts receivable

    15,027  

Prepaid and other current assets

    2,286  

Property, plant and equipment

    192,234  

Intangible assets

    476,300  

Other noncurrent assets

    1,184  

Total Assets Acquired

    699,251  
         

Liabilities Assumed

       

Accounts payable and accrued liabilities

    25,125  

Deferred revenue

    14,516  

Deferred income taxes

    6,644  

Total Liabilities Assumed

    46,285  
         

Net Assets Acquired

    652,966  

Purchase price consideration

    740,166  

Goodwill Recognized

  $ 87,200  

 

The measurement period ended on April 30, 2018 and no measurement period adjustments were recorded during 2018.

 

The following unaudited pro forma combined results of operations for the years ended December 31, 2017 and 2016 have been prepared as if the acquisition of NewWave had occurred on January 1, 2016 and include adjustments for depreciation and amortization expense of $0.6 million and $0.4 million, interest expense from financing of $2.2 million and $6.0 million, non-recurring acquisition-related costs of $13.6 million and zero and the related aggregate impact on the income tax provision (benefit) of $1.2 million and $7.5 million for 2017 and 2016, respectively (in thousands, except per share data):

 

   

(Unaudited)

Year Ended December 31,

 
   

2017

   

2016

 

Revenues

  $ 1,023,945     $ 1,001,246  

Net income

  $ 235,809     $ 89,121  

Net income per common share:

               

Basic

  $ 41.52     $ 15.52  

Diluted

  $ 41.03     $ 15.44  

 

The pro forma combined results of operations is provided for informational purposes only and is not necessarily indicative of or intended to represent the results that would have been achieved had the NewWave acquisition been consummated as of January 1, 2016 or the results that may be achieved in the future.

 

 
5. REVENUES

 

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

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Residential

                       

Data

  $ 492,816     $ 416,355     $ 345,563  

Video

    343,344       332,536       294,781  

Voice

    41,278       43,733       42,949  

Business services

    155,993       131,082       100,034  

Advertising sales

    24,919       24,824       27,496  

Other

    13,945       11,426       8,525  

Total revenues

  $ 1,072,295     $ 959,956     $ 819,348  

 

Fees imposed on the Company by various governmental authorities are passed through monthly to the Company’s customers and are periodically remitted to authorities. These fees were $16.1 million, $15.7 million and $14.2 million for 2018, 2017 and 2016, respectively. Further, as the Company acts as principal, these fees are reported in video revenues on a gross basis with corresponding expenses included within operating expenses in the consolidated statements of operations and comprehensive income.

 

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

 

 

A significant portion of the Company’s revenues are derived from customers who may cancel their subscriptions at any time without penalty. As such, the amount of deferred revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from the Company’s existing customers. Revenues from customers with contractually specified terms and non-cancelable service periods are recognized over the terms of the underlying contracts, which generally range from one to five years.

 

Contract Costs. The Company capitalizes the incremental costs incurred in obtaining customers, such as commission costs and certain third-party costs. Commission expense is recognized using a portfolio approach over the calculated average residential and business customer tenure. Deferred commissions totaled $7.8 million and $7.5 million as of December 31, 2018 and 2017, respectively, and were included within prepaid and other current assets and other noncurrent assets in the consolidated balance sheets. Commission amortization expense was $3.6 million, $3.1 million and $3.7 million for 2018, 2017 and 2016, respectively, and was included within selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. Deferred commissions of $2.9 million included within prepaid and other current assets in the consolidated balance sheet as of December 31, 2018 are expected to be amortized over the next 12 months.

 

Contract Liabilities. As residential and business customers are billed for subscription services in advance of the service period, the timing of revenue recognition differs from the timing of billing. Deferred revenue liabilities are recorded when the Company collects payments in advance of providing the associated services. Current deferred revenue liabilities, consisting of refundable customer prepayments, up-front charges and installation fees, were $19.0 million and $15.0 million as of December 31, 2018 and 2017, respectively. Nearly all the deferred revenue liabilities existing at December 31, 2017 were recognized within revenues in the consolidated statement of operations and comprehensive income during 2018. Noncurrent deferred revenue liabilities, consisting of up-front charges and installation fees from business customers, were $2.8 million and $3.1 million as of December 31, 2018 and 2017, respectively, and were included within other noncurrent liabilities in the consolidated balance sheets.

 

Significant Judgments. The Company often provides multiple services to a single customer. The provision of customer premise equipment, installation services and service upgrades may be highly integrated and interdependent with the data, video or voice services provided. Judgment is required to determine whether the provision of such customer premise equipment, installation services and service upgrades is considered distinct and accounted for separately, or not distinct and accounted for together with the related subscription service.

 

The transaction price for a bundle of services is frequently less than the sum of the standalone selling prices of each individual service. The Company allocates the sales price for such bundles to each individual service provided based on the relative standalone selling price for each subscribed service. Standalone selling prices of the Company’s residential data and video services are directly observable, while standalone selling prices for the Company’s residential voice services are estimated using the adjusted market assessment approach, which relies upon information from peer companies who sell residential voice services individually.

 

The Company also uses significant judgment to determine the appropriate period over which to amortize deferred residential and business commission costs, which was determined to be the average customer tenure. Based on historical data and current expectations, the Company determined the average customer tenure for both residential and business customers to be approximately five years.

 

 
6. ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts receivable consisted of the following (in thousands):

 

   

As of December 31,

 
   

2018

   

2017

 

Trade receivables, net

  $ 28,128     $ 25,014  

Other receivables

    1,819       4,916  

Accounts receivable, net

  $ 29,947     $ 29,930  

 

 

The changes in the allowance for doubtful accounts were as follows (in thousands):

 

   

Balance at

Beginning of

Period

   

Additions –

Charged to

Costs and

Expenses(1)

   

Deductions

   

Balance at

End of

Period

 

2018

  $ 1,876     $ 5,101     $ (4,932 )   $ 2,045  

2017

  $ 505     $ 4,925     $ (3,554 )   $ 1,876  

2016

  $ 864     $ 2,316     $ (2,675 )   $ 505  

 


(1)

Additions for 2017 include a $1.1 million allowance for doubtful accounts assumed as part of the NewWave acquisition.

 

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

 

   

As of December 31,

 
   

2018

   

2017

 

Accounts payable

  $ 20,790     $ 21,670  

Programming costs

    17,092       19,500  

Accrued compensation and related benefits

    21,314       35,189  

Accrued sales and other operating taxes

    8,149       6,113  

Cash overdrafts

    4,689       8,994  

Franchise fees

    3,870       4,457  

Subscriber deposits

    5,180       6,540  

Customer refunds

    1,863       3,498  

Accrued insurance costs

    3,976       3,312  

Other accrued expenses

    7,211       8,582  

Total accounts payable and accrued liabilities

  $ 94,134     $ 117,855  

 

 
7. PROPERTY, PLANT AND EQUIPMENT

 

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

 

   

As of December 31,

 
   

2018

   

2017

 

Cable distribution systems

  $ 1,421,820     $ 1,329,451  

Customer premise equipment

    220,571       200,175  

Other equipment and fixtures

    406,011       378,968  

Buildings and leasehold improvements

    100,625       95,314  

Capitalized software

    94,801       89,773  

Construction in progress

    69,163       67,564  

Land

    11,946       11,585  

Property, plant and equipment, gross

    2,324,937       2,172,830  

Less accumulated depreciation

    (1,476,958 )     (1,340,938 )

Property, plant and equipment, net

  $ 847,979     $ 831,892  

 

The Company’s industry is capital intensive, and a significant portion of the Company’s resources are spent on capital activities associated with extending, rebuilding and upgrading its network. For the years ended December 31, 2018, 2017 and 2016, cash paid for property, plant and equipment was $215.8 million, $175.2 million and $147.0 million, respectively.

 

Depreciation expense was $186.0 million, $173.6 million and $147.7 million in 2018, 2017 and 2016, respectively.

 

In 2017, the Company sold a portion of its previous headquarters property for $10.1 million in gross proceeds and recognized a related gain of $6.6 million. The remaining portion of the property’s carrying value of $4.6 million is included within other noncurrent assets in the consolidated balance sheets as assets held for sale at both December 31, 2018 and 2017.

 

As previously disclosed in note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the "2017 Form 10-K"), the Company changed its accounting for the capitalization of certain internal labor and related costs associated with construction and customer installation activities commencing in the first quarter of 2017. The Company initially classified the entire change as a change in accounting estimate. During the fourth quarter of 2017, the Company determined that a portion of what had previously been reflected as a change in estimate should have been categorized as a change in accounting principle, a portion was determined to be a correction of an error and a portion remained a change in estimate. The changes determined to be a change in estimate or change in accounting principle were applied prospectively for all of 2017. The Company revised its historical consolidated financial statements to properly reflect the impact of the labor capitalization, including the related impact to depreciation expense and income taxes, and corrected for other previously identified immaterial errors, as disclosed in the 2017 Form 10-K.

 

 

The Company estimates that the change in principle resulted in a decrease in operating expenses (excluding depreciation and amortization) of approximately $11.3 million and $11.5 million, a decrease in selling, general and administrative expenses of approximately $0.2 million and $0.2 million and an increase in depreciation and amortization expense of $2.9 million and $1.0 million for the years ended December 31, 2018 and 2017, respectively, compared to the results under the prior principle.

 

 
8. GOODWILL AND INTANGIBLE ASSETS

 

The carrying amount of goodwill at both December 31, 2018 and 2017 was $172.1 million. The Company elected to perform a quantitative assessment for its goodwill in 2018, for which the fair value of each geographic reporting unit was determined by applying a calculated multiple from the Company’s peer group companies to each reporting unit’s forecasted cash flow. Based on the assessment, the Company concluded that the fair value of goodwill for each geographic reporting unit exceeded its carrying value. The Company did not record any impairment of goodwill in any of the periods presented.

 

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

 

             

December 31, 2018

   

December 31, 2017

 
   

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

  1 25     $ 2,927     $ 2,887     $ 40     $ 4,138     $ 3,886     $ 252  

Customer relationships

    14         160,000       19,047       140,953       160,000       7,619       152,381  

Trademarks and trade names

    2.7         1,300       813       487       1,300       325       975  

Total Finite-Lived Intangible Assets

            $ 164,227     $ 22,747     $ 141,480     $ 165,438     $ 11,830     $ 153,608  
                                                           

Indefinite-Lived Intangible Assets

                                                         

Franchise agreements

            $ 812,371                     $ 812,137                  

 

Intangible asset amortization expense was $11.7 million, $8.0 million and less than $0.1 million in 2018, 2017 and 2016, respectively.

 

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

 

Year Ending December 31,

 

Amount

 

2019

  $ 11,925  

2020

    11,437  

2021

    11,436  

2022

    11,433  

2023

    11,431  

Thereafter

    83,818  

Total

  $ 141,480  

 

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

 

The Company performed a qualitative assessment of its franchise assets in 2018. Based on the assessment, the Company concluded that it is more likely than not that the fair value of franchise assets in each unit of account exceeded the carrying value of such assets and, therefore, the Company did not perform a quantitative analysis. The Company did not recognize any impairment charges in any of the periods presented.

 

 

 
9. LONG-TERM DEBT

 

Notes. On June 17, 2015, the Company issued $450 million aggregate principal amount of 5.75% senior unsecured notes due 2022 (the “Notes”) pursuant to an indenture (the “Indenture”) dated as of June 17, 2015. The Notes mature on June 15, 2022 and interest is payable on June 15th and December 15th of each year.

 

The Notes are jointly and severally guaranteed on a senior unsecured basis (the “Guarantees”) by each of the Company’s subsidiaries that guaranteed the Senior Credit Facilities (as defined below) (the “Guarantors”). In addition, if a subsidiary of the Company becomes a guarantor in respect of the Senior Credit Facilities or certain other indebtedness, it is required to provide (subject to customary exceptions) a Guarantee in respect of the Notes. The Notes are unsecured and senior obligations of the Company. The Guarantees are unsecured and senior obligations of the Guarantors.

 

At the option of the Company, the Notes are redeemable, in whole or in part, at any time at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the redemption date.

 

The Indenture includes certain covenants relating to debt incurrence, liens, restricted payments, asset sales, transactions with affiliates, changes in control and mergers or sales of all or substantially all of the Company’s assets. The Indenture also provides for customary events of default (subject, in certain cases, to customary grace periods), which include nonpayment on the Notes, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness over a specified threshold, failure to pay certain judgments over a specified threshold and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee under the Indenture or holders of at least 25% of the aggregate principal amount of the then outstanding Notes may declare the principal of, and accrued but unpaid interest, if any, on the then outstanding Notes to be due and payable immediately.

 

Senior Credit Facilities. On June 30, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the other agents party thereto. The Credit Agreement provided for a five-year revolving credit facility in an aggregate principal amount of $200 million (the “Revolving Credit Facility”) and a five-year term loan facility in an aggregate principal amount of $100 million (the “Original Term Loan Facility” and, together with the Revolving Credit Facility, the “Original Credit Facilities”). Concurrently with its entry into the Credit Agreement, the Company borrowed the full amount of the Original Term Loan Facility (the “Original Term Loan”).

 

Borrowings under the Original Credit Facilities bore interest, at the Company’s option, at a rate per annum determined by reference to either the London Interbank Offered Rate (“LIBOR”) or an adjusted base rate, in each case plus an applicable interest rate margin. The applicable interest rate margin with respect to LIBOR borrowings was a rate per annum between 1.50% and 2.25% and the applicable interest rate margin with respect to adjusted base rate borrowings was a rate per annum between 0.50% and 1.25%, in each case determined on a quarterly basis by reference to a pricing grid based upon the Company’s total net leverage ratio. In addition, the Company is required to pay commitment fees on any unused portion of the Revolving Credit Facility at a rate between 0.25% per annum and 0.40% per annum, determined by reference to the pricing grid.

 

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. Letter of credit issuances under the Revolving Credit Facility of $4.1 million at December 31, 2018 were held for the benefit of certain general and liability insurance matters and bore interest at a rate of 1.88% per annum at December 31, 2018. The Company had $195.9 million available for borrowing under the Revolving Credit Facility at December 31, 2018.

 

On May 1, 2017, the Company entered into a Restatement Agreement (the “Restatement Agreement”) with JPMorgan, as administrative agent, and the lenders party thereto, pursuant to which the Company amended and restated the Credit Agreement (as so amended and restated, the “Amended and Restated Credit Agreement”) and incurred $750.0 million of senior secured loans (the “2017 New Loans”) which were used, together with cash on hand, to (i) finance the NewWave acquisition, (ii) repay in full the Original Term Loan and (iii) pay related fees and expenses.

 

The 2017 New Loans consist of (a) a five-year incremental term “A” loan in an aggregate principal amount of $250.0 million (the “Term Loan A”) and (b) a seven-year incremental term “B” loan in an aggregate principal amount of $500.0 million (the “Term Loan B” and, together with the Term Loan A and the Revolving Credit Facility, the “Senior Credit Facilities”). The obligations under the Amended and Restated Credit Agreement are guaranteed by the Company’s wholly owned subsidiaries and are secured, subject to certain exceptions, by substantially all assets of the Company and the Guarantors.

 

On April 23, 2018, the Company entered into Amendment No. 1 (the “Repricing Amendment”) to the Amended and Restated Credit Agreement to, among other things, decrease the applicable margin for the Term Loan B to 1.75% for LIBOR borrowings and 0.75% for base rate borrowings.

 

 

The interest margins applicable to the 2017 New Loans under the Amended and Restated Credit Agreement are, at the Company’s option, equal to either LIBOR or a base rate, plus an applicable margin equal to, (i) with respect to the Term Loan A and the Revolving Credit Facility, 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% for base rate loans, determined on a quarterly basis by reference to a pricing grid based on the Company’s total net leverage ratio and (ii) with respect to the Term Loan B, (x) for any date on or prior to April 22, 2018, 2.25% for LIBOR loans and 1.25% for base rate loans and (y) for any day thereafter, 1.75% for LIBOR loans and 0.75% for base rate loans. The Term Loan A may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions) and amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 2.5% per annum for the first year after funding, 5.0% per annum for the second year after funding, 7.5% per annum for the third year after funding and 10.0% per annum for the fourth and fifth years after funding (subject to customary adjustments in the event of any prepayment), with the outstanding balance due upon maturity. The Term Loan B amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum (subject to customary adjustments in the event of repayment), with the outstanding balance due upon maturity. The Term Loan B may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions), benefits from certain “most favored nation” pricing protections and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement.

 

The Company may, subject to the terms and conditions of the Amended and Restated Credit Agreement, obtain additional credit facilities of up to $425 million under the Amended and Restated Credit Agreement plus an unlimited amount so long as, on a pro forma basis, the Company’s First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is no greater than 1.80 to 1.00. The Amended and Restated Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including limitations on indebtedness, liens, restricted payments, prepayments of certain indebtedness, investments, dispositions of assets, restrictions on subsidiary distributions and negative pledge clauses, fundamental changes, transactions with affiliates and amendments to organizational documents. The Amended and Restated Credit Agreement also requires the Company to maintain specified ratios of total net indebtedness and first lien net indebtedness to consolidated operating cash flow. The Amended and Restated Credit Agreement also contains customary events of default, including non-payment of principal, interest, fees or other amounts, material inaccuracy of any representation or warranty, failure to observe or perform any covenant, default in respect of other material debt of the Company and of its restricted subsidiaries, bankruptcy or insolvency, the entry against the Company or any of its restricted subsidiaries of a material judgment, the occurrence of certain ERISA events, impairment of the loan documentation and the occurrence of a change of control.

 

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

 

As of December 31, 2018, outstanding borrowings under the Term Loan A and Term Loan B were $237.5 million and $492.5 million, respectively, and each bore interest at a rate of 4.28% per annum.

 

In connection with the Repricing Amendment, the Company incurred debt issuance costs of $2.1 million, of which $0.1 million was expensed immediately. The Company recorded $4.2 million, $3.2 million and $1.6 million of debt issuance cost amortization for the years ended December 31, 2018, 2017 and 2016, respectively. These amounts are reflected within interest expense in the consolidated statements of operations and comprehensive income. Unamortized debt issuance costs totaled $17.6 million and $19.6 million at December 31, 2018 and 2017, respectively. These balances are reflected within long-term debt in the consolidated balance sheets.

 

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

 

   

As of December 31,

 
   

2018

   

2017

 

Notes

  $ 450,000     $ 450,000  

Senior Credit Facilities

    730,000       744,375  

Capital lease obligation

    251       267  

Total debt

    1,180,251       1,194,642  

Less unamortized debt issuance costs

    (17,570 )     (19,585 )

Less current portion

    (20,625 )     (14,375 )

Total long-term debt

  $ 1,142,056     $ 1,160,682  

 

 

As of December 31, 2018, the future maturities of outstanding debt, including capital lease payment obligations, were as follows (in thousands):

 

Year Ending December 31,

 

Amount

 

2019

  $ 20,625  

2020

    26,892  

2021

    30,017  

2022

    630,017  

2023

    5,017  

Thereafter

    467,683  

Total

  $ 1,180,251  

 

 
10. INCOME TAXES

 

The Company recognized the income tax effects of the 2017 Federal tax reform legislation (the “2017 Tax Act”) in its consolidated financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC 740 – Income Taxes. As such, the Company’s consolidated financial statements for 2017 reflected the income tax effects of the 2017 Tax Act for which the accounting under ASC 740 was complete as well as provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC 740 was incomplete but a reasonable estimate could be determined. The Company recognized the provisional tax impacts related to acceleration of depreciation and the revaluation of deferred tax assets and liabilities in its 2017 consolidated financial statements. The accounting was completed when the Company’s 2017 Federal corporate income tax return was filed in 2018.

 

The income tax provision (benefit) consisted of the following (in thousands):

 

   

Current

   

Deferred

   

Total

 

Year Ended December 31, 2018

                       

U.S. Federal

  $ 10,214     $ 32,176     $ 42,390  

State and local

    2,284       2,550       4,834  

Total

  $ 12,498     $ 34,726     $ 47,224  
                         

Year Ended December 31, 2017

                       

U.S. Federal

  $ 38,033     $ (91,271 )   $ (53,238 )

State and local

    4,164       4,046       8,210  

Total

  $ 42,197     $ (87,225 )   $ (45,028 )
                         

Year Ended December 31, 2016

                       

U.S. Federal

  $ 56,564     $ (2,172 )   $ 54,392  

State and local

    6,688       601       7,289  

Total

  $ 63,252     $ (1,571 )   $ 61,681  

 

The income tax provision (benefit) is different than the amount of income tax determined by applying the U.S. Federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to income before income taxes as a result of the following (in thousands):

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

U.S. Federal taxes at statutory rate

  $ 44,517     $ 66,550     $ 56,699  

State and local taxes, net of U.S. Federal tax

    3,816       5,487       3,994  

Benefit from remeasurement of deferred taxes due to the 2017 Tax Act

    -       (113,976 )     -  

Equity-based compensation

    (3,690 )     (3,089 )     -  

Other

    2,581       -       988  

Income tax provision (benefit)

  $ 47,224     $ (45,028 )   $ 61,681  

 

 

The net deferred income tax liability consisted of the following (in thousands):

 

   

As of December 31,

 
   

2018

   

2017

 

Other benefit obligations

  $ 1,940     $ 5,779  

Equity-based compensation

    4,080       4,711  

Net operating losses

    1,983       2,992  

Accrued bonus

    1,826       -  

Reserves

    365       760  

Other

    1,204       542  

Deferred tax assets

    11,398       14,784  

Property, plant and equipment

    119,851       95,345  

Goodwill and other intangible assets

    131,765       123,745  

Prepaid commissions

    1,909       1,793  

Accrued bonus

    -       1,055  

Deferred tax liabilities

    253,525       221,938  

Net deferred income tax liability

  $ 242,127     $ 207,154  

 

The Company has not established valuation allowances against any U.S. Federal or state deferred tax assets.

 

There were $1.8 million of tax-effected U.S. Federal tax net operating losses available for carryforward at December 31, 2018, which were generated by NewWave prior to the acquisition and have expiration dates through 2036. The use of pre-acquisition operating losses is subject to limitations imposed by the Internal Revenue Code of 1986, as amended. The Company does not anticipate that these limitations will affect utilization of the carryforwards prior to their expiration. The Company had $0.2 million of tax-effected state tax net operating loss carryforwards at December 31, 2018 with varying expiration dates through 2036.

 

The Company endeavors to comply with tax laws and regulations where it does business, but cannot guarantee that, if challenged, the Company’s interpretation of all relevant tax laws and regulations will prevail and that all tax benefits recorded in the consolidated financial statements will ultimately be recognized in full. The Company has taken reasonable efforts to address uncertain tax positions and has determined that there are no material transactions and no material tax positions taken by the Company that would fail to meet the more-likely-than-not threshold for recognizing transactions or tax positions in the consolidated financial statements. Accordingly, the Company has not recorded a reserve for uncertain tax positions in the consolidated financial statements, and the Company does not expect any significant tax increase or decrease to occur within the next 12 months with respect to any transactions or tax positions taken and reflected in the consolidated financial statements. In making these determinations, the Company presumes that taxing authorities pursuing examinations of the Company’s compliance with tax law filing requirements will have full knowledge of all relevant information, and, if necessary, the Company will pursue resolution of disputed tax positions by appeals or litigation. The Company classifies penalties, if applicable, associated with any uncertain tax positions as a component of selling, general and administrative expenses in the consolidated statements of operations and comprehensive income.

 

 
11. FAIR VALUE MEASUREMENTS

 

The carrying amounts, fair values and related fair value hierarchies of the Company’s financial assets and liabilities as of December 31, 2018 were as follows (in thousands):

 

   

December 31, 2018

 
   

Carrying

Amount

   

Fair

Value

 

Fair Value

Hierarchy

 

Assets:

                   

Cash and cash equivalents:

                   

Money market investments

  $ 238,222     $ 238,222  

Level 1

 

Liabilities:

                   

Long-term debt, including current portion:

                   

Notes

  $ 450,000     $ 452,250  

Level 2

 

Senior Credit Facilities

  $ 730,000     $ 698,975  

Level 2

 

 

Money market investments are primarily held in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (level 1). Money market investments with original maturities of three months or less are included within cash and cash equivalents in the consolidated balance sheets. The fair values of the Notes and Senior Credit Facilities are estimated based on market prices for similar instruments in active markets (level 2).

 

The Company’s deferred compensation liability represents the market value of participant balances in a notional investment account that is comprised primarily of mutual funds, whose value is based on observable market prices. However, since the deferred compensation liability is not exchanged in an active market, it is classified as level 2 in the fair value hierarchy.

 

 

 
12. TREASURY STOCK

 

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

 

Share Repurchase Program. On July 1, 2015, the Company’s board of directors (the “Board”) authorized up to $250.0 million of share repurchases (subject to a total cap of 600,000 shares of common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through December 31, 2018, the Company had repurchased 204,647 shares of its common stock at an aggregate cost of $99.8 million. During 2018, the Company repurchased 38,814 shares at an aggregate cost of $26.6 million.

 

Tax Withholding for Equity Awards. At the employee’s option, shares of common stock are withheld by the Company upon vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to pay the applicable statutory minimum amount of employee withholding taxes. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The amounts remitted during 2018 and 2017 were $7.2 million and $5.0 million, for which the Company withheld 10,026 and 7,010 shares of common stock, respectively. Treasury shares of 184,497 held at December 31, 2018 include such shares withheld for withholding tax.

 

 
13. EQUITY-BASED COMPENSATION

 

On June 5, 2015, the Board adopted the Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “Original 2015 Plan”), which became effective July 1, 2015. On May 2, 2017, the Company’s stockholders approved the Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan (the “2015 Plan”), which automatically terminated, replaced and superseded the Original 2015 Plan, except that any outstanding awards granted under the Original 2015 Plan will remain in effect pursuant to their terms. The 2015 Plan is designed to promote the interests of the Company and its stockholders by providing the employees and directors of the Company with incentives and rewards to encourage them to continue in the service of the Company and with a proprietary interest in pursuing the long-term growth, profitability and financial success of the Company. Any of the directors, officers and employees of the Company and its affiliates are eligible to be granted one or more of the following types of awards under the 2015 Plan: (1) incentive stock options, (2) non-qualified stock options, (3) restricted stock awards, (4) SARs, (5) restricted stock units (“RSUs”), (6) cash-based awards, (7) performance-based awards, (8) dividend equivalents and (9) other stock-based awards, including, without limitation, performance stock units and deferred stock units. Unless the 2015 Plan is sooner terminated by the Board, no awards may be granted under the 2015 Plan after May 2, 2027.

 

The 2015 Plan provides that, subject to certain adjustments for specified corporate events, the maximum number of shares of Company common stock that may be issued under the 2015 Plan is 334,870, which is equal to the number of remaining shares of Company common stock available for future issuance under the Original 2015 Plan as of May 2, 2017, regardless of whether such shares were subject to outstanding awards as of such date, and no more than 329,962 shares may be issued pursuant to incentive stock options. At December 31, 2018, 236,547 shares were available for issuance under the 2015 Plan.

 

Total equity-based compensation expense recognized was $10.5 million, $10.7 million and $12.3 million for 2018, 2017 and 2016, respectively, and was included within selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. The Company recognized an income tax benefit of $3.7 million related to equity-based awards during 2018. The deferred tax asset related to all outstanding equity-based awards was $4.1 million as of December 31, 2018.

 

Restricted Stock Awards. The Company has granted restricted shares of Company common stock subject to service-based and performance-based vesting conditions to employees of the Company. Restricted share awards generally cliff-vest on the three-year anniversary of the grant date or in four equal ratable installments beginning on the first anniversary of the grant date (generally subject to the holder’s continued employment with the Company through the applicable vesting date), except in the case of awards made to individuals (i) whose equity awards issued by GHC were forfeited in connection with the Company’s spin-off from GHC (the “Replacement Shares”), which Replacement Shares vested on December 12, 2016 (with certain exceptions as provided in the applicable award agreement), or (ii) who did not receive an equity award from GHC in 2015 in anticipation of the spin-off (the “Staking Shares”), which Staking Shares cliff-vested on January 2, 2018. Performance-based restricted shares are or were subject to performance metrics related primarily to year-over-year or three-year cumulative growth in Adjusted EBITDA less capital expenditures or year-over-year growth in Adjusted EBITDA and capital expenditures as a percentage of total revenues. Restricted shares are subject to the terms and conditions of the Original 2015 Plan or the 2015 Plan (in the case of awards made on or following May 2, 2017) and are otherwise subject to the terms and conditions of the applicable award agreement.

 

 

The current compensation arrangements for the Company’s non-employee directors provide that each non-employee director is entitled to an annual retainer of $75,000 in cash, plus an additional annual cash retainer for each non-employee director who serves as a committee chair or as lead independent director and approximately $125,000 in RSUs. Such RSUs will generally be granted on the date of the Company’s annual stockholders’ meeting and will vest on the earlier of the first anniversary of the grant date or the annual stockholders’ meeting date immediately following the grant date, subject to the director’s continued service through such vesting date. Settlement of such RSUs will be in the form of one share of the Company’s common stock and will follow vesting, unless the director has previously elected to defer such settlement until his or her separation from service from the Board. Non-employee directors may elect to defer their annual retainer and receive RSUs in lieu of annual cash fees. Such RSU awards granted on January 3, 2018 vested in full on the date immediately preceding the date of the 2018 annual stockholders’ meeting date and future awards will vest on the date immediately preceding the date of the annual stockholders’ meeting immediately following the grant date, subject to the director’s continued service through such vesting date. Any dividends associated with RSUs granted prior to the 2017 annual grant of RSUs will be converted into dividend equivalent units (“DEUs”), which will be delivered at the time of settlement of the associated RSUs. Commencing with the 2017 annual grant of RSUs, dividends associated with RSUs will be paid out in cash at the time of settlement. As of December 31, 2018, 4,144 RSUs, including DEUs, were vested and deferred.

 

Restricted shares, RSUs and DEUs are collectively referred to as “restricted stock.” A summary of restricted stock activity is as follows:

 

           

Weighted Average

 
           

Grant Date

 
   

Restricted

   

Fair Value

 
   

Stock

   

Per Share

 

Outstanding as of December 31, 2015

    39,744     $ 383.18  

Granted

    10,369     $ 454.75  

Forfeited

    (1,343 )   $ 389.33  

Vested and issued

    (10,345 )   $ 383.61  

Outstanding as of December 31, 2016

    38,425     $ 402.13  

Granted

    17,245     $ 633.34  

Granted due to performance achievement

    5,006     $ 433.66  

Forfeited

    (6,223 )   $ 469.23  

Vested and issued

    (3,163 )   $ 415.39  

Outstanding as of December 31, 2017

    51,290     $ 472.89  

Granted

    17,098     $ 715.74  

Forfeited

    (2,455 )   $ 636.64  

Vested and issued

    (25,057 )   $ 397.53  

Outstanding as of December 31, 2018

    40,876     $ 610.88  
                 

Vested and unissued as of December 31, 2018

    4,144     $ 493.96  

 

Compensation expense associated with restricted stock is recognized on a straight-line basis over the vesting period, with forfeitures recognized as incurred. Equity-based compensation expense for restricted stock was $6.8 million, $7.5 million and $9.4 million for 2018, 2017 and 2016, respectively. At December 31, 2018, there was $9.7 million of unrecognized compensation expense related to restricted stock, which is expected to be recognized over a weighted average period of 1.1 years.

 

Stock Appreciation Rights. The Company has granted SARs to certain executives and other employees of the Company. The SARs are scheduled to vest in four equal ratable installments beginning on the first anniversary of the grant date (generally subject to the holder’s continued employment with the Company through the applicable vesting date). The SARs are subject to the terms and conditions of the Original 2015 Plan or the 2015 Plan (in the case of awards made on or following May 2, 2017) and will otherwise be subject to the terms and conditions of the applicable award agreement.

 

 

A summary of SAR activity is as follows:

 

   

Stock

Appreciation

Rights

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Fair

Value

   

Aggregate

Intrinsic

Value

(in thousands)

   

Weighted

Average

Remaining

Contractual

Term

(in years)

 

Outstanding as of December 31, 2015

    135,600     $ 422.31     $ 87.22     $ 1,539          

Granted

    6,100     $ 522.50     $ 106.15     $ -          

Forfeited

    (5,700 )   $ 422.31     $ 87.22                  

Outstanding as of December 31, 2016

    136,000     $ 426.80     $ 88.07     $ 26,510       8.7  

Granted

    24,432     $ 632.15     $ 140.44     $ -       9.1  

Exercised

    (41,603 )   $ 424.02     $ 87.54                  

Forfeited

    (16,371 )   $ 422.31     $ 87.22                  

Outstanding as of December 31, 2017

    102,458     $ 477.62     $ 100.91     $ 23,173       8.1  

Granted

    21,000     $ 744.47     $ 181.21     $ -       8.7  

Exercised

    (27,060 )   $ 435.11     $ 90.06                  

Forfeited

    (5,793 )   $ 502.08     $ 108.22                  

Outstanding as of December 31, 2018

    90,605     $ 550.60     $ 122.29     $ 24,673       7.2  
                                         

Vested and exercisable as of December 31, 2018

    26,935     $ 465.74     $ 98.09     $ 9,545       6.4  

 

The grant date fair value of the Company’s SARs is measured using the Black-Scholes valuation model. The weighted average inputs used in the model for grants awarded during 2018, 2017 and 2016 were as follows:

 

   

2018

   

2017

   

2016

 

Expected volatility

  22.22%

 

  20.83%

 

  21.63%

 

Risk-free interest rate

  2.53%

 

  2.13%

 

  1.39%

 

Expected term (in years)

  6.25     6.25     6.25  

Expected dividend yield

  0.97%

 

  0.95%

 

  1.16%

 

 

Compensation expense associated with SARs is recognized on a straight-line basis over the vesting period, with forfeitures recognized as incurred. Equity-based compensation expense for SARs was $3.7 million, $3.3 million and $2.9 million for 2018, 2017 and 2016, respectively. At December 31, 2018, there was $6.3 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.1 years.

 

The Black-Scholes model used to estimate the fair value of the Company’s SARs requires the input of highly subjective assumptions, including the expected volatility of the price of the Company’s common stock, the risk-free interest rate, the expected term of the SARs and the expected dividend yield of the Company’s common stock. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the Company’s equity-based compensation expense could be materially different in the future. These assumptions for 2018 were determined as follows:

 

 

Fair Value of Common Stock — Valued by reference to the closing price of the Company’s publicly traded common stock on the date of grant.

 

 

Expected Volatility — Prior to the spin-off the Company did not have a history of market prices for its common stock, and through 2018 it did not have what the Company considered a sufficient trading history for its common stock to exclusively use historical market prices for its common stock to estimate future volatility. Accordingly, the Company estimated the expected stock price volatility for its common stock by using a combination weighting between its life-to-date historical daily volatility and a leverage-adjusted average volatility of industry peers based on daily price observations over a period equivalent to the expected term of the SAR grants. Industry peers consist of public companies in the cable, satellite and integrated telecommunication services industry similar in size, stage of life cycle and financial leverage.

 

 

Risk-Free Interest Rate — The risk-free interest rate assumption was based on the yields of U.S. Treasury securities with maturities similar to the expected term of the SARs.

 

 

Expected Term — The expected term represents the period that the Company’s stock-based awards were expected to be outstanding. Prior to the spin-off, the Company did not have stock-based awards specific to Cable One and therefore did not have a history of the period that its stock-based awards were expected to be outstanding. Accordingly, the expected terms of the awards were based on the “simplified method” which defines the expected term as the average of the contractual term of the SARs and the weighted-average vesting period for all tranches.

 

 

 

Expected Dividend Yield — The Company expects to continue to pay quarterly dividends in the future and, as such, the expected dividend yield was calculated as the expected future annual dividend divided by the Company’s closing stock price on the grant date.

 

 
14. POSTEMPLOYMENT BENEFIT PLANS

 

Pension Plans. The Company’s Supplemental Executive Retirement Plan (the “SERP”) includes a defined benefit portion (the “DB SERP”) and a defined contribution portion (the “DC SERP”). As the DB SERP is unfunded, the Company makes contributions to the DB SERP based on actual benefit payments. No participant or Company contributions to the DC SERP occurred during any of the periods presented in the consolidated financial statements.

 

The following table sets forth obligation information for the DB SERP (in thousands):

 

   

As of December 31,

 
   

2018

   

2017

 

Benefit obligation at beginning of period

  $ 5,187     $ 5,125  

Interest cost

    179       196  

Actuarial gain

    (437 )     (123 )

Benefits paid

    (289 )     (11 )

Benefit obligation at end of period

  $ 4,640     $ 5,187  

 

The accumulated benefit obligation for the DB SERP at December 31, 2018 and 2017 was $4.6 million and $5.2 million, respectively. The amounts recorded in the consolidated balance sheets for the DB SERP were as follows (in thousands):

 

   

As of December 31,

 
   

2018

   

2017

 

Accounts payable and accrued liabilities

  $ 282     $ 323  

Other noncurrent liabilities

    4,358       4,864  

Total liabilities

  $ 4,640     $ 5,187  

 

Key assumptions utilized for determining the benefit obligation included the use of a discount rate of 4.27% and 3.56% for 2018 and 2017, respectively.

 

The Company recognized $0.2 million in DB SERP expense for each of 2018, 2017 and 2016, which was recorded within selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. Company contributions to the DB SERP were $0.3 million for the year ended December 31, 2018 and were not material for the years ended December 31, 2017 and 2016.

 

At December 31, 2018, future estimated benefit payments for the next 10 years were as follows (in thousands):

 

Year Ending December 31,

   

Estimated Benefit Payments

 

2019

    $ 288  

2020

      288  

2021

      287  

2022

      287  

2023

      286  
2024 - 2028       1,459  

Total

    $ 2,895  

 

The actuarial loss expected to be recognized during 2019 as a component of net periodic cost for the DB SERP is immaterial.

 

 

401(k) Plans. The Company sponsors a 401(k) savings plan (the “401(k) Plan”), which allows eligible employees to contribute a portion of their compensation to the 401(k) Plan, and in some cases, a matching contribution to the 401(k) Plan is made by the Company. The Company recorded matching contributions to the 401(k) Plan of $3.6 million, $3.1 million and $2.8 million for 2018, 2017 and 2016, respectively.

 

Deferred Compensation. The Company has and may continue to enter into arrangements under the Cable One, Inc. Deferred Compensation Plan with certain current and former executives and officers of the Company who desire to defer all or a portion of their annual cash-based incentives. Upon execution of the agreements, the Company transfers the deferred incentive to a long-term liability. Realized and unrealized market-based gains and losses are applied to the respective outstanding balances at each reporting period such that market-based period gains represent additional compensation expense to the Company and market-based losses represent a reduction of compensation expense.

 

The Company’s deferred compensation expense was $0.4 million, $2.8 million and $0.3 million for 2018, 2017 and 2016, respectively, and was included within selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. The deferred compensation liability as of December 31, 2018 and 2017 was $3.0 million and $20.2 million, respectively. The current portion of this liability is included within accounts payable and accrued liabilities and the noncurrent portion is included within other noncurrent liabilities in the consolidated balance sheets. The Company distributed $17.1 million of deferred compensation payments in 2018.

 

 
15. NET INCOME PER COMMON SHARE

 

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

 

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

 

   

Year Ended December 31,

 
   

2018

   

2017

   

2016

 

Numerator:

                       

Net income

  $ 164,760     $ 235,171     $ 100,317  

Denominator:

                       

Weighted average common shares outstanding - basic

    5,684,375       5,680,073       5,743,568  

Effect of dilutive equity-based awards (1)

    41,588       66,964       27,392  

Weighted average common shares outstanding - diluted

    5,725,963       5,747,037       5,770,960  
                         

Net income per common share:

                       

Basic

  $ 28.98     $ 41.40     $ 17.47  

Diluted

  $ 28.77     $ 40.92     $ 17.38  

 


(1)

Equity-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per common share calculation. The excluded number of anti-dilutive equity-based awards totaled 1,811, 2,600 and 438 for 2018, 2017 and 2016, respectively.

 

 
16. COMMITMENTS AND CONTINGENCIES

 

Contractual Obligations. The Company has obligations to make future payments for goods and services under certain contractual arrangements. These contractual obligations secure the future rights to various assets and services to be used in the normal course of the Company’s operations. For example, the Company is contractually committed to make certain minimum lease payments for the use of property under operating lease agreements. In accordance with applicable accounting rules, the future rights and obligations pertaining to firm commitments, such as operating lease obligations and certain purchase obligations under contracts, are not reflected as assets or liabilities in the consolidated balance sheets.

 

The Company’s rent expense, which primarily includes facility and pole rental expense, was $13.1 million, $11.1 million and $8.1 million for 2018, 2017 and 2016, respectively. The Company has lease obligations under various operating leases, including minimum lease obligations for real estate.

 

 

The following table summarizes the Company’s outstanding contractual obligations as of December 31, 2018 (including amounts associated with data processing services, high-speed data connectivity and fiber-related obligations) and the estimated timing and effect that such obligations are expected to have on the Company’s liquidity and cash flows in future periods (in thousands):

 

Year Ending December 31,

 

Programming

Purchase

Commitments (1)

   

Operating

Lease

Payments

   

Debt

Payments (2)

   

Other

Purchase

Obligations (3)

   

Total

 

2019

  $ 201,894     $ 1,767     $ 20,625     $ 24,385     $ 248,671  

2020

    160,489       1,219       26,892       17,095       205,695  

2021

    88,872       911       30,017       9,560       129,360  

2022

    8,910       398       630,017       2,760       642,085  

2023

    6,162       204       5,017       1,581       12,964  

Thereafter

    3,726       299       467,683       3,648       475,356  

Total

  $ 470,053     $ 4,798     $ 1,180,251     $ 59,029     $ 1,714,131  

 


(1)

Programming purchase commitments represent contracts that the Company has with cable television networks and broadcast stations to provide programming services to subscribers. The amounts reported represent estimates of the future programming costs for these purchase commitments based on tier placement as of December 31, 2018 and the estimated subscriber numbers applied to the per-subscriber rates contained in these contracts. Actual amounts due under such contracts may differ from the amounts above based on the actual subscriber numbers and tier placements at the time. In addition, programming purchases sometimes occur pursuant to non-binding commitments, which are not reflected in the amounts shown.

(2)

Debt payments include principal repayment obligations as defined by the agreements described in note 9 and capital lease payment obligations.

(3)

Other purchase obligations include purchase obligations related to capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded from the amounts shown. Any amounts for which the Company is liable under purchase orders are included within accounts payable and accrued liabilities in the consolidated balance sheet.

 

The Company incurs the following costs as part of its operations, however, they are not included within the contractual obligations table above for the reasons discussed below:

 

 

The Company rents space on utility poles in order to provide services to subscribers. Generally, pole rentals are cancellable on short notice. However, the Company anticipates that such rentals will recur. Rent expense for pole attachments was $8.9 million, $7.8 million and $5.7 million for 2018, 2017 and 2016, respectively.

 

 

The Company pays fees to franchise authorities under multi-year franchise agreements based on a percentage of revenues generated from video service each year. Franchise fees and other franchise-related costs are included in both revenues and operating expenses within the consolidated statements of operations and comprehensive income. Such amounts totaled $16.1 million, $15.7 million and $14.2 million for 2018, 2017 and 2016, respectively.

 

 

The Company has franchise agreements requiring plant construction and the provision of services to customers within the franchise areas. In connection with these obligations under existing franchise agreements, the Company obtains surety bonds or letters of credit guaranteeing performance to municipalities and public utilities and payment of insurance premiums. Such surety bonds and letters of credit totaled $13.3 million and $12.0 million as of December 31, 2018 and 2017, respectively. Payments under these arrangements are required only in the remote event of nonperformance. The Company does not expect that these contingent commitments will result in any amounts being paid.

 

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

 

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

 

 

GHC Agreements. On June 16, 2015, Cable One entered into several agreements with GHC that set forth the principal actions taken in connection with the spin-off and that govern the relationship of the parties following the spin-off, including a Separation and Distribution Agreement, a Tax Matters Agreement and an Employee Matters Agreement. The aggregate costs and reimbursements paid to GHC totaled $0.4 million, $0.4 million and $5.5 million in 2018, 2017 and 2016, respectively.

 

 
17. SUBSEQUENT EVENTS

 

On November 9, 2018, the Company entered into an agreement to acquire Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. The acquisition provides the Company with a premier fiber network within its existing footprint, further enables the Company to supply its customers with enhanced business services solutions and provides a platform to allow the Company to replicate Clearwave’s strategy in several of its other markets. The transaction closed on January 8, 2019 and was funded with cash on hand and the additional term loan borrowings described below. The Company paid a purchase price of $357.0 million in cash on a debt-free basis, subject to customary post-closing adjustments.

 

On January 7, 2019, the Company entered into Amendment No. 2 to the Amended and Restated Credit Agreement with CoBank, ACB, as lender, and JPMorgan, as administrative agent, to provide for a new seven-year incremental term “B” loan in an aggregate principal amount of $250 million (the “Term B-2 Loan”).

 

The Term B-2 Loan is an obligation of the Company and is guaranteed by the wholly owned subsidiaries that guarantee the other obligations under the Amended and Restated Credit Agreement. The Term B-2 Loan is secured, subject to certain exceptions, by substantially all of the assets of the Company and the Guarantors.

 

The interest margin applicable to the Term B-2 Loan is, at the Company’s option, equal to either LIBOR or a base rate, plus an applicable margin equal to 2.0% for LIBOR loans and 1.0% for base rate loans. The Term B-2 Loan may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions) and is not subject to the financial maintenance covenants under the Amended and Restated Credit Agreement. The Term B-2 Loan amortizes in equal quarterly installments at a rate (expressed as a percentage of the original principal amount) of 1.0% per annum (subject to customary adjustments in the event of any prepayment), with the outstanding balance due upon maturity. The final maturity of the Term B-2 Loan may be accelerated following an event of default under the Amended and Restated Credit Agreement. Other than with respect to maturity, amortization, prepayment premiums and pricing, the Term B-2 Loan contains terms that are substantially similar to the existing Term Loan B.

 

The Company is currently in the process of finalizing the accounting for the acquisition of Clearwave and expects to complete the preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed by the end of the first quarter 2019.

 

 
18. SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)

 

   

Year Ended December 31, 2018

(Unaudited)

 

(in thousands, except per share and share data)

 

First

Quarter

   

Second

Quarter

   

Third

Quarter

   

Fourth

Quarter

 

Revenues

  $ 265,761     $ 268,414     $ 268,268     $ 269,852  

Total costs and expenses

  $ 201,100     $ 197,746     $ 204,949     $ 200,588  

Income from operations

  $ 64,661     $ 70,668     $ 63,319     $ 69,264  

Net income

  $ 40,653     $ 43,785     $ 38,314     $ 42,008  
                                 

Net income per common share:

                               

Basic

  $ 7.13     $ 7.70     $ 6.75     $ 7.40  

Diluted

  $ 7.08     $ 7.65     $ 6.70     $ 7.34  
                                 

Weighted average common shares outstanding:

                               

Basic

    5,702,539       5,687,095       5,674,224       5,674,067  

Diluted

    5,742,648       5,722,869       5,717,575       5,723,528  

 

 

   

Year Ended December 31, 2017

(Unaudited)

 

(in thousands, except per share and share data)

 

First

Quarter (1)

   

Second

Quarter (2)

   

Third

Quarter

   

Fourth

Quarter

 

Revenues

  $ 207,434     $ 240,991     $ 253,833     $ 257,698  

Total costs and expenses

  $ 148,858     $ 183,497     $ 192,918     $ 198,344  

Income from operations

  $ 58,576     $ 57,494     $ 60,915     $ 59,354  

Net income

  $ 32,113     $ 27,860     $ 30,905     $ 144,293  
                                 

Net income per common share:

                               

Basic

  $ 5.66     $ 4.91     $ 5.44     $ 25.38  

Diluted

  $ 5.60     $ 4.85     $ 5.37     $ 25.09  
                                 

Weighted average common shares outstanding:

                               

Basic

    5,671,838       5,678,394       5,680,600       5,684,785  

Diluted

    5,730,901       5,745,617       5,753,910       5,750,420  

 


(1)

Does not include NewWave operations.

(2)

Includes two months of NewWave operations.

 

F-30