UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 20172018 |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from__________ to __________ |
Commission File No.: 000-09881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
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| | |
VIRGINIA | | 54-1162807 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
500 Shentel Way, Edinburg, Virginia 22824
(Address of principal executive offices) (Zip Code)
(540) 984-4141
(Registrant's telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ |
Smaller reporting company☐ | Emerging growth company☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares of the registrant’s common stock outstanding on April 26, 201727, 2018 was 49,109,626.49,539,170.
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
| | | | Page Numbers | | Page Numbers |
PART I. | FINANCIAL INFORMATION | | | FINANCIAL INFORMATION | | |
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Item 1. | Financial Statements | | | Financial Statements | | |
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Item 2. | | | - | | | | - | |
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Item 3. | | | | |
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Item 4. | | | | |
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PART II. | OTHER INFORMATION | | OTHER INFORMATION | |
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Item 1A. | | | | |
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Item 2. | | | | |
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Item 6. | | | | |
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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| | | | | | | | |
ASSETS | | March 31, 2017 | | December 31, 2016 |
| | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 39,927 |
| | $ | 36,193 |
|
Accounts receivable, net | | 68,709 |
| | 69,789 |
|
Inventory, net | | 24,855 |
| | 39,043 |
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Prepaid expenses and other | | 16,989 |
| | 16,440 |
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Total current assets | | 150,480 |
| | 161,465 |
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| | | | |
Investments, including $3,058 and $2,907 carried at fair value | | 10,607 |
| | 10,276 |
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| | | | |
Property, plant and equipment, net | | 689,948 |
| | 698,122 |
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| | | | |
Other Assets | | |
| | |
|
Intangible assets, net | | 443,308 |
| | 454,532 |
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Goodwill | | 144,001 |
| | 145,256 |
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Deferred charges and other assets, net | | 14,645 |
| | 14,756 |
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Total assets | | $ | 1,452,989 |
| | $ | 1,484,407 |
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(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| | | | | March 31, 2018 | | December 31, 2017 |
ASSETS | | | | | |
Current Assets: | | | | | |
Cash and cash equivalents | | | $ | 49,448 |
| | $ | 78,585 |
|
Accounts receivable, net | | | 51,095 |
| | 54,184 |
|
Income taxes receivable | | | 8,360 |
| | 17,311 |
|
Inventory, net | | | 8,161 |
| | 5,704 |
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Prepaid expenses and other | | | 64,200 |
| | 17,111 |
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Total current assets | | | 181,264 |
| | 172,895 |
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Investments, including $3,268 and $3,279 carried at fair value | | | 11,717 |
| | 11,472 |
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Property, plant and equipment, net | | | 672,017 |
| | 686,327 |
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Other Assets: | | | |
| | |
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Intangible assets, net | | | 413,537 |
| | 380,979 |
|
Goodwill | | | 146,497 |
| | 146,497 |
|
Deferred charges and other assets, net | | | 33,934 |
| | 13,690 |
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Total assets | | | $ | 1,458,966 |
| | $ | 1,411,860 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | March 31, 2017 | | December 31, 2016 | | | | |
| | | | | |
Current Liabilities | | | | | |
Current Liabilities: | | | | | |
Current maturities of long-term debt, net of unamortized loan fees | | $ | 38,124 |
| | $ | 32,041 |
| | $ | 74,486 |
| | $ | 64,397 |
|
Accounts payable | | 25,390 |
| | 72,810 |
| | 27,194 |
| | 28,953 |
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Advanced billings and customer deposits | | 21,029 |
| | 20,427 |
| | 6,919 |
| | 21,153 |
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Accrued compensation | | 3,678 |
| | 9,465 |
| | 4,534 |
| | 9,167 |
|
Income taxes payable | | 3,958 |
| | 435 |
| |
Accrued liabilities and other | | 18,174 |
| | 29,085 |
| | 17,471 |
| | 13,914 |
|
Total current liabilities | | 110,353 |
| | 164,263 |
| | 130,604 |
| | 137,584 |
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| | | | | |
Long-term debt, less current maturities, net of unamortized loan fees | | 810,873 |
| | 797,224 |
| | 736,387 |
| | 757,561 |
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| | | | | |
Other Long-Term Liabilities | | |
| | |
| |
Other Long-Term Liabilities: | | | |
| | |
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Deferred income taxes | | 149,763 |
| | 151,837 |
| | 115,809 |
| | 100,879 |
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Deferred lease payable | | 19,230 |
| | 18,042 |
| |
Deferred lease | | | 19,543 |
| | 15,782 |
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Asset retirement obligations | | 19,386 |
| | 15,666 |
| | 21,164 |
| | 21,211 |
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Retirement plan obligations | | 17,892 |
| | 17,738 |
| | 13,236 |
| | 13,328 |
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Other liabilities | | 26,057 |
| | 23,743 |
| | 13,787 |
| | 15,293 |
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Total other long-term liabilities | | 232,328 |
| | 227,026 |
| | 183,539 |
| | 166,493 |
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| | | | | |
Commitments and Contingencies | |
|
| |
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| |
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Shareholders’ Equity | | |
| | |
| |
Common stock | | 46,083 |
| | 45,482 |
| |
Shareholders’ Equity: | | | |
| | |
|
Common stock, no par value, authorized 96,000 shares; issued and outstanding 49,539 shares in 2018 and 49,328 shares in 2017. | | | 45,075 |
| | 44,787 |
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Retained earnings | | 245,965 |
| | 243,624 |
| | 352,069 |
| | 297,205 |
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Accumulated other comprehensive income, net of taxes | | 7,387 |
| | 6,788 |
| |
Accumulated other comprehensive income (loss), net of taxes | | | 11,292 |
| | 8,230 |
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Total shareholders’ equity | | 299,435 |
| | 295,894 |
| | 408,436 |
| | 350,222 |
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| | | | | |
Total liabilities and shareholders’ equity | | $ | 1,452,989 |
| | $ | 1,484,407 |
| | $ | 1,458,966 |
| | $ | 1,411,860 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
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| | | | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | | |
Operating revenues | | $ | 153,880 |
| | $ | 92,571 |
|
| | | | |
Operating expenses: | | |
| | |
|
Cost of goods and services, exclusive of depreciation and amortization shown separately below | | 53,761 |
| | 31,762 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 40,153 |
| | 21,426 |
|
Integration and acquisition expenses | | 4,489 |
| | 332 |
|
Depreciation and amortization | | 44,804 |
| | 17,739 |
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Total operating expenses | | 143,207 |
| | 71,259 |
|
Operating income | | 10,673 |
| | 21,312 |
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| | | | |
Other income (expense): | | |
| | |
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Interest expense | | (9,100 | ) | | (1,619 | ) |
Gain on investments, net | | 120 |
| | 88 |
|
Non-operating income, net | | 1,255 |
| | 468 |
|
Income before income taxes | | 2,948 |
| | 20,249 |
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| | | | |
Income tax expense | | 607 |
| | 6,368 |
|
Net income | | 2,341 |
| | 13,881 |
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| | | | |
Other comprehensive income (loss): | | |
| | |
|
Unrealized gain (loss) on interest rate hedge, net of tax | | 599 |
| | (1,048 | ) |
Comprehensive income | | $ | 2,940 |
| | $ | 12,833 |
|
| | | | |
Earnings per share: | | |
| | |
|
Basic | | $ | 0.05 |
| | $ | 0.29 |
|
Diluted | | $ | 0.05 |
| | $ | 0.28 |
|
Weighted average shares outstanding, basic | | 49,050 |
| | 48,563 |
|
Weighted average shares outstanding, diluted | | 49,834 |
| | 49,249 |
|
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
| | | | |
Service revenues and other | | $ | 134,153 |
| | $ | 150,521 |
|
Equipment revenues | | 17,579 |
| | 3,359 |
|
Total operating revenues | | 151,732 |
| | 153,880 |
|
| | | | |
Operating expenses: | | |
| | |
|
Cost of services | | 49,342 |
| | 48,776 |
|
Cost of goods sold | | 15,805 |
| | 4,985 |
|
Selling, general and administrative | | 28,750 |
| | 40,153 |
|
Acquisition, integration and migration expenses | | — |
| | 4,489 |
|
Depreciation and amortization | | 43,487 |
| | 44,804 |
|
Total operating expenses | | 137,384 |
| | 143,207 |
|
Operating income (loss) | | 14,348 |
| | 10,673 |
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| | | | |
Other income (expense): | | |
| | |
|
Interest expense | | (9,332 | ) | | (9,100 | ) |
Gain (loss) on investments, net | | (32 | ) | | 120 |
|
Non-operating income (loss), net | | 1,021 |
| | 1,255 |
|
Income (loss) before income taxes | | 6,005 |
| | 2,948 |
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| | | | |
Income tax expense (benefit) | | 1,176 |
| | 607 |
|
Net income (loss) | | 4,829 |
| | 2,341 |
|
| | | | |
Other comprehensive income (loss): | | |
| | |
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Unrealized gain (loss) on interest rate hedge, net of tax | | 3,062 |
| | 599 |
|
Comprehensive income (loss) | | $ | 7,891 |
| | $ | 2,940 |
|
| | | | |
Earnings (loss) per share: | | |
| | |
|
Basic | | $ | 0.10 |
| | $ | 0.05 |
|
Diluted | | $ | 0.10 |
| | $ | 0.05 |
|
Weighted average shares outstanding, basic | | 49,474 |
| | 49,050 |
|
Weighted average shares outstanding, diluted | | 50,024 |
| | 49,834 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| | Shares | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income, net of tax | | Total |
Balance, December 31, 2015 | | 48,475 |
| | $ | 32,776 |
| | $ | 256,747 |
| | $ | 415 |
| | $ | 289,938 |
|
| | | | | | | | | | |
Net loss | | — |
| | — |
| | (895 | ) | | — |
| | (895 | ) |
Other comprehensive gain, net of tax | | — |
| | — |
| | — |
| | 6,373 |
| | 6,373 |
|
Dividends declared ($0.25 per share) | | — |
| | — |
| | (12,228 | ) | | — |
| | (12,228 | ) |
Dividends reinvested in common stock | | 19 |
| | 524 |
| | — |
| | — |
| | 524 |
|
Stock based compensation | | — |
| | 3,506 |
| | — |
| | — |
| | 3,506 |
|
Stock options exercised | | 371 |
| | 3,359 |
| | — |
| | — |
| | 3,359 |
|
Common stock issued for share awards | | 190 |
| | — |
| | — |
| | — |
| | — |
|
Common stock issued | | 2 |
| | 14 |
| | — |
| | — |
| | 14 |
|
Common stock issued to acquire non-controlling interests of nTelos | | 76 |
| | 10,400 |
| | — |
| | — |
| | 10,400 |
|
Common stock repurchased | | (198 | ) | | (5,097 | ) | | — |
| | — |
| | (5,097 | ) |
| | | | | | | | | | |
Balance, December 31, 2016 | | 48,935 |
| | $ | 45,482 |
| | $ | 243,624 |
| | $ | 6,788 |
| | $ | 295,894 |
|
Net income | | — |
| | — |
| | 2,341 |
| | — |
| | 2,341 |
|
Other comprehensive gain, net of tax | | — |
| | — |
| | — |
| | 599 |
| | 599 |
|
Stock based compensation | | — |
| | 1,822 |
| | — |
| | — |
| | 1,822 |
|
Common stock issued for share awards | | 129 |
| | — |
| | — |
| | — |
| | — |
|
Common stock issued | | 1 |
| | 5 |
| | — |
| | — |
| | 5 |
|
Common stock issued to acquire non-controlling interests of nTelos | | 76 |
| | — |
| | — |
| | — |
| | — |
|
Common stock repurchased | | (43 | ) | | (1,226 | ) | | — |
| | — |
| | (1,226 | ) |
Balance, March 31, 2017 | | 49,098 |
| | $ | 46,083 |
| | $ | 245,965 |
| | $ | 7,387 |
| | $ | 299,435 |
|
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| | | | | | | | | | | | | | | | | | | |
| | Shares of Common Stock (no par value) | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance, December 31, 2017 | | 49,328 |
| | $ | 44,787 |
| | $ | 297,205 |
| | $ | 8,230 |
| | $ | 350,222 |
|
| | | | | | | | | |
|
|
Change in accounting principle - adoption of accounting standard (Note 2) | | — |
| | — |
| | 50,035 |
| | — |
| | 50,035 |
|
Net income (loss) | | — |
| | — |
| | 4,829 |
| | — |
| | 4,829 |
|
Other comprehensive gain (loss), net of tax of $1.1 million | | — |
| | — |
| | — |
| | 3,062 |
| | 3,062 |
|
Stock based compensation | | 177 |
| | 2,037 |
| | — |
| | — |
| | 2,037 |
|
Stock options exercised | | 15 |
| | 104 |
| | — |
| | — |
| | 104 |
|
Common stock issued | | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Shares retired for settlement of employee taxes upon issuance of vested equity awards | | (57 | ) | | (1,858 | ) | | — |
| | — |
| | (1,858 | ) |
Common stock issued to acquire non-controlling interests of nTelos | | 76 |
| | — |
| | — |
| | — |
| | — |
|
Balance, March 31, 2018 | | 49,539 |
| | $ | 45,075 |
| | $ | 352,069 |
| | $ | 11,292 |
| | $ | 408,436 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
Cash Flows From Operating Activities | | | | |
Net income | | $ | 2,341 |
| | $ | 13,881 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
Depreciation | | 37,878 |
| | 17,454 |
|
Amortization reflected as operating expense | | 6,926 |
| | 285 |
|
Amortization reflected as contra revenue | | 4,978 |
| | — |
|
Amortization reflected as rent expense | | 258 |
| | — |
|
Provision for bad debt | | 420 |
| | 345 |
|
Straight line adjustment to management fee revenue | | 4,206 |
| | — |
|
Stock based compensation expense | | 1,566 |
| | 1,048 |
|
Deferred income taxes | | (2,910 | ) | | (1,489 | ) |
Net gain on disposal of equipment | | (28 | ) | | (15 | ) |
Unrealized gain on investments | | (120 | ) | | (16 | ) |
Net gains from patronage and equity investments | | (200 | ) | | (210 | ) |
Amortization of long term debt issuance costs | | 1,202 |
| | 132 |
|
Other | | — |
| | 3,039 |
|
Changes in assets and liabilities: | | |
| | |
|
(Increase) decrease in: | | |
| | |
|
Accounts receivable | | 1,629 |
| | 2,470 |
|
Inventory, net | | 14,188 |
| | (267 | ) |
Other assets | | (190 | ) | | 988 |
|
Increase (decrease) in: | | |
| | |
|
Accounts payable | | (39,399 | ) | | 1,895 |
|
Income taxes payable | | 3,523 |
| | 6,981 |
|
Deferred lease payable | | 1,331 |
| | 208 |
|
Other deferrals and accruals | | (13,101 | ) | | (3,559 | ) |
Net cash provided by operating activities | | 24,498 |
| | 43,170 |
|
| | | | |
Cash Flows From Investing Activities | | |
| | |
|
Acquisition of property, plant and equipment | | (38,587 | ) | | (20,537 | ) |
Proceeds from sale of equipment | | 117 |
| | 145 |
|
Cash distributions from investments | | 3 |
| | 45 |
|
Additional contributions to investments | | (14 | ) | | — |
|
Cash disbursed for acquisition | | — |
| | (2,480 | ) |
Net cash used in investing activities | | (38,481 | ) | | (22,827 | ) |
(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
Cash Flows From Financing Activities | | | | |
Principal payments on long-term debt | | $ | (6,062 | ) | | $ | (5,750 | ) |
Amounts borrowed under debt agreements | | 25,000 |
| | — |
|
Cash paid for debt issuance costs | | — |
| | (1,528 | ) |
Repurchases of common stock | | (1,226 | ) | | (3,526 | ) |
Proceeds from issuances of common stock | | 5 |
| | 2,809 |
|
Net cash provided by/(used in) financing activities | | 17,717 |
| | (7,995 | ) |
| | | | |
Net increase in cash and cash equivalents | | 3,734 |
| | 12,348 |
|
| | | | |
Cash and cash equivalents: | | |
| | |
|
Beginning | | 36,193 |
| | 76,812 |
|
Ending | | $ | 39,927 |
| | $ | 89,160 |
|
| | | | |
Supplemental Disclosures of Cash Flow Information | | |
| | |
|
Cash payments for: | | |
| | |
|
Interest, net of capitalized interest of $577 and $146, respectively | | $ | 8,380 |
| | $ | 1,632 |
|
| | | | |
Income taxes paid, net of refunds received | | $ | — |
| | $ | 876 |
|
Non-cash investing and financing activities:
At March 31, 2017 and 2016, accounts payable included approximately $6.4 million and $1.2 million, respectively, associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.
During the quarter ended March 31, 2017, the Company recorded an increase in the fair value of interest rate swaps of $972 thousand, an increase in deferred tax liabilities of $373 thousand, and an increase to accumulated other comprehensive income of $599 thousand. |
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Cash Flows From Operating Activities | | | | |
Net income (loss) | | $ | 4,829 |
| | $ | 2,341 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| | |
|
Depreciation | | 36,634 |
| | 37,878 |
|
Amortization reflected as operating expense | | 6,853 |
| | 6,926 |
|
Amortization reflected as rent expense | | 81 |
| | 258 |
|
Bad debt expense | | 369 |
| | 420 |
|
Stock based compensation expense, net of amount capitalized | | 2,037 |
| | 1,566 |
|
Waived Management Fee | | 9,048 |
| | 9,184 |
|
Deferred income taxes | | (4,336 | ) | | (2,910 | ) |
Net (gain) loss on disposal of equipment | | (4 | ) | | (28 | ) |
(Gain) loss on investments | | 33 |
| | (120 | ) |
Net (gain) loss from patronage and equity investments | | (830 | ) | | (200 | ) |
Amortization of long-term debt issuance costs | | 1,129 |
| | 1,202 |
|
Accrued interest on long-term debt | | 296 |
| | 93 |
|
Changes in assets and liabilities: | | |
| | |
|
Accounts receivable | | 3,271 |
| | 1,629 |
|
Inventory, net | | (2,457 | ) | | 14,188 |
|
Income taxes receivable | | 8,950 |
| | — |
|
Other assets | | (4,076 | ) | | (190 | ) |
Accounts payable | | 216 |
| | (39,399 | ) |
Income taxes payable | | — |
| | 3,523 |
|
Deferred lease | | 736 |
| | 1,331 |
|
Other deferrals and accruals | | (1,919 | ) | | (13,194 | ) |
Net cash provided by (used in) operating activities | | $ | 60,860 |
| | $ | 24,498 |
|
Cash Flows From Investing Activities | | |
| | |
|
Acquisition of property, plant and equipment | | (24,382 | ) | | (38,587 | ) |
Proceeds from sale of assets | | 263 |
| | 117 |
|
Cash distributions (contributions) from investments | | 1 |
| | (11 | ) |
Sprint expansion | | (52,000 | ) | | — |
|
Net cash provided by (used in) investing activities | | $ | (76,118 | ) | | $ | (38,481 | ) |
Cash Flows From Financing Activities | | | | |
Principal payments on long-term debt | | $ | (12,125 | ) | | $ | (6,062 | ) |
Proceeds from credit facility borrowings | | — |
| | 25,000 |
|
Proceeds from revolving credit facility borrowings | | 15,000 |
| | — |
|
Principal payments on revolving credit facility | | (15,000 | ) | | — |
|
Taxes paid for equity award issuances | | (1,754 | ) | | (1,226 | ) |
Proceeds from issuance of common stock | | — |
| | 5 |
|
Net cash provided by (used in) financing activities | | $ | (13,879 | ) | | $ | 17,717 |
|
Net increase (decrease) in cash and cash equivalents | | $ | (29,137 | ) | | $ | 3,734 |
|
Cash and cash equivalents, beginning of period | | 78,585 |
| | 36,193 |
|
Cash and cash equivalents, end of period | | $ | 49,448 |
| | $ | 39,927 |
|
Supplemental Disclosures of Cash Flow Information | | | | |
Cash payments for: | | | | |
Interest, net of capitalized interest of $309 and $577, respectively | | $ | 8,513 |
| | $ | 8,380 |
|
Income tax refunds received, net of taxes paid | | $ | (3,439 | ) | | $ | — |
|
Capital expenditures payable | | $ | 5,279 |
| | $ | 6,366 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein. All such adjustments weretherein in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and as required by Rule 10-01 of a normalRegulation S-X. Accordingly, the unaudited condensed consolidated financial statements may not include all of the information and recurring nature. Prior year amounts have been reclassified in some cases to conform to the current year presentation. Thesenotes required by GAAP for audited financial statementsstatements. The information contained herein should be read in conjunction with the audited consolidated financial statements and related notesincluded in the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2016. 2017.
Adoption of New Accounting Principles
There have been no developments related to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's unaudited condensed consolidated financial statements and note disclosures, from those disclosed in the Company's 2017 Annual Report on Form 10-K, that would be expected to impact the Company except for the topics discussed below.
The accompanyingCompany adopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), and all related amendments, effective January 1, 2018, using the modified retrospective method as discussed in Note 2, Revenue from Contracts with Customers. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance sheetof retained earnings. The comparative information at December 31,has not been retrospectively modified and continues to be reported under the accounting standards in effect for those periods.
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for all leases with terms greater than 12 months. The standard also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases, as well as changes in the categorization of rental costs, from rent expense to interest and depreciation expense. Other effects may occur depending on the types of leases and the specific terms of them utilized by particular lessees. The ASU is effective for the Company on January 1, 2019, and early application is permitted. Modified retrospective application is required. In September 2017 and January 2018, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), and ASU No. 2018-01, Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842, which provided additional implementation guidance on the previously issued ASU. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements. The Company is in the early stages of implementation and currently believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and a lease liability for its real estate and equipment leases.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was derivedenacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the audited2017 Tax Cuts and Jobs Act. The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 31, 2016 consolidated balance sheet. Operating revenues15, 2018, and income (loss) from operations forinterim periods within those fiscal years. Early adoption in any interim period are not necessarily indicativeis permitted. The Company is currently evaluating the timing and impact of results that may be expected for the entire year.adopting ASU 2018-02.
| |
2. | Acquisition of NTELOS Holdings Corp. and Exchange with Sprint |
On May 6, 2016, the Company completed its previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $667.8 million, net of cash acquired. The acquisition was entered into to improve shareholder value through the expansion of the Company's Wireless service area and customer base while strengthening our relationship with Sprint Corporation ("Sprint"). The purchase price was financed by a credit facility arranged by CoBank, ACB, Royal Bank of Canada, Fifth Third Bank, Bank of America, N.A., Capital One, National Association, Citizens Bank N.A., and Toronto Dominion (Texas) LLC. The Company has accounted for the acquisition of nTelos under the acquisition method of accounting, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations”, and has accounted for measurement period adjustments under Accounting Standards Update (“ASU”) 2015-16, “Simplifying the Accounting for Measurement Period Adjustments”. Under the acquisition method of accounting, the total purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed in connection with the acquisition based on their estimated fair values.
The preliminary allocation of the purchase price was based upon management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed of nTelos, with the excess recorded as goodwill. During the first quarter of 2017, the Company made adjustments to the preliminary estimates of fair value resulting in immaterial changes to previously estimated fair values of fixed assets, asset retirement obligation liabilities, accounts receivable and deferred taxes. These adjustments resulted in a $1.3 million reduction to goodwill as shown in the table below. The Company continues to review certain tax positions acquired in the nTelos acquisition.
Changes in the carrying amount of goodwill during the three months ended March 31, 2017 are shown below (in thousands):
|
| | | | | | | | | |
| December 31, 2016 | Purchase Accounting Adjustments | March 31, 2017 |
Goodwill - Wireline segment | $ | 10 |
| $ | — |
| $ | 10 |
|
Goodwill - Cable segment | 104 |
| — |
| 104 |
|
Goodwill - Wireless segment | 145,142 |
| (1,255 | ) | 143,887 |
|
Goodwill as of March 31, 2017 | $ | 145,256 |
| $ | (1,255 | ) | $ | 144,001 |
|
Following are the unaudited pro forma results of the Company for the period ended March 31, 2016, as if the acquisition of nTelos had occurred at the beginning of the period. (in thousands)
|
| | | | |
| | March 31, 2016 |
Operating revenues | | $ | 173,248 |
|
Income before income taxes | | $ | 16,905 |
|
In connection with these transactions, the Company incurs costs which include the nTelos back office staff and support functions until the nTelos legacy customers are migrated to the Sprint billing platform; costs of the handsets to be provided to
nTelos legacyNote 2. Revenue from Contracts with Customers
The Company earns revenue primarily through the sale of our wireless telecommunications services, wireless equipment, and business, residential, and enterprise cable and wireline services that include video, internet, voice, and data services as follows: |
| | | | | | | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Consolidated |
Wireless service | | $ | 89,760 |
| | $ | — |
| | $ | — |
| | $ | 89,760 |
|
Wireless equipment | | 17,374 |
| | — |
| | — |
| | 17,374 |
|
Business, residential and enterprise | | — |
| | 29,131 |
| | 10,691 |
| | 39,822 |
|
Tower | | 2,896 |
| | 1,046 |
| | 5,665 |
| | 9,607 |
|
Other | | 368 |
| | 1,534 |
| | 3,351 |
| | 5,253 |
|
Total revenue | | 110,398 |
| | 31,711 |
| | 19,707 |
| | 161,816 |
|
Internal revenues | | (1,239 | ) | | (1,031 | ) | | (7,814 | ) | | (10,084 | ) |
Total operating revenue | | $ | 109,159 |
| | $ | 30,680 |
| | $ | 11,893 |
| | $ | 151,732 |
|
Wireless service
The majority of the Company's revenue is earned through providing network access to Sprint under the affiliate agreement, which represents approximately 59% of consolidated revenues. Wireless service revenue is variable based on billed revenues to Sprint’s subscribers in the Company's affiliate area, less applicable fees retained by Sprint. The Company's fee related to Sprint’s postpaid customers is the amount Sprint bills its subscribers that is reduced by customer credits, write-offs of subscriber receivables, and an 8% management and 8.6% service fee retained by Sprint. The Company is also charged for the costs of subsidized handsets sold through Sprint’s national channels as they migratewell as commissions paid by Sprint to third-party resellers in the Company's service territory.
The Company's fee related to Sprint’s prepaid customers is the amount Sprint billing platform; severance costsbills its customer less certain charges to acquire and support the customer, based on national averages for back office and other former nTelos employees who will not be retained permanently;Sprint’s prepaid programs. Sprint retains a 6% management fee on prepaid wireless revenues, and costs to shut down certain cell sitesprovide support to Sprint’s prepaid customers.
The Company considers Sprint, rather than Sprint's subscribers, to be the customer under the new revenue standard and related backhaul contracts. We have incurred $7.1 millionthe Company's performance obligation is to provide Sprint a series of continuous network access services. Under Topic 606, the Company's revenues are variable based on the amount Sprint bills its customer each month reduced by the retained management and service fees. The reimbursement to Sprint for the costs of subsidized handsets sold through Sprint’s national channels, as well as commissions paid by Sprint to third-party resellers in our service territory represent consideration payable to a customer that is not in exchange for a distinct service under Topic 606. Therefore, these reimbursements result in increases to our contract asset position that are subsequently recognized as a reduction of revenue over the average subscriber life of approximately two years which is the period the Company expects those payments to result in increased revenues. Historically, under ASC 605 the customer was considered the Sprint subscriber rather than Sprint and as a result, reimbursement payments to Sprint for costs of subsidized handsets and commissions were recorded as operating expenses in the period incurred. During 2017, these costs in the three months ended March 31, 2017, including $0.1totaled $63.5 million reflectedrecorded in cost of goods and services, and $2.5$16.9 million reflectedrecorded in selling, general and administrative costs incosts. On January 1, 2018, upon adoption, the Company recorded a wireless contract asset of approximately $42.8 million. During the three monthsmonth period ended March 31, 2017.
2018, payments that increased the wireless contract asset balance totaled $13.8 and amortization reflected as a reduction of revenue totaled approximately $13.4 million. The wireless contract asset balance as of March 31, 2018 was approximately$43.2 million.
| |
3. | Property, Plant and Equipment |
Wireless equipment
The Company owns and operates Sprint-branded retail stores within their geographic territory from which the Company sells equipment, primarily wireless handsets, and service to Sprint subscribers. Equipment is generally purchased from Sprint and resold to subscribers under subsidized plans or under equipment financing plans. The equipment financing plans are operated by Sprint who purchases equipment from the Company and resells the equipment to subscribers under financing plans. Historically, under ASC 605, the Company concluded that the Company was the agent in these equipment financing transactions and recorded revenues net of related handset costs which were approximately $63.8 million in 2017. Under Topic 606 the Company concluded that the Company is the principal in the transaction as the Company controls the inventory prior to sale and accordingly revenues and handset costs are recorded on a gross basis.
Property, plantBusiness, residential and enterprise
The Company earns revenue in the cable and wireline segments from business, residential, and enterprise customers where the performance obligations are to provide cable and telephone network services, sell and lease equipment consistedand wiring services, and
lease fiber-optic cable strands. The Company's arrangements are generally composed of contracts that are cancellable at the customer’s discretion without penalty at any time. As there are multiple performance obligations in these arrangements, the Company recognizes revenue based on the standalone selling price of each distinct good or service. The Company generally recognized these revenues over time as customers simultaneously receive and consume the benefits of the following (in thousands):service, with the exception of equipment sales and home wiring which are recognized as revenue at a point in time when control transfers and when installation is complete, respectively.
Under Topic 606, the Company concluded that installation services do not represent a separate performance obligation. Accordingly, installation fees are allocated to services and are recognized ratably over the longer of the contract term or the period the unrecognized portion of the fee remains material to the contract, typically 10 and 11 months for cable and wireline customers, respectively. Historically, the Company deferred these fees over the estimated customer life of 42 months. Additionally, the Company incurs commission and installation costs related to in-house and third-party vendors that were previously expensed as incurred. Under Topic 606, the Company capitalizes and amortizes these commission and installation costs over the expected benefit period which is approximately 44 months, 72 months, and 46 months, for cable, wireline, and enterprise business, respectively.
Tower / Other
Tower revenues consist primarily of tower space leases accounted for under Topic 840, Leases, and Other revenues include network access-related charges to for service provided to customers across all three operating segments.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows:
|
| | | | | | | | | | | | |
(in thousands) | | Balance at December 31, 2017 | | Adjustments due to Topic 606 | | Balance at January 1, 2018 |
Assets | | | | | | |
Prepaid expenses and other | | $ | 17,111 |
| | $ | 36,577 |
| | $ | 53,688 |
|
Deferred charges and other | | 13,690 |
| | 16,107 |
| | 29,797 |
|
Liabilities | | | | | | |
Advanced billing and customer deposits | | $ | 21,153 |
| | $ | (14,302 | ) | | $ | 6,851 |
|
Deferred income taxes | | 100,879 |
| | 18,151 |
| | 119,030 |
|
Other long-term liabilities | | 15,293 |
| | (1,200 | ) | | 14,093 |
|
Retained earnings | | 297,205 |
| | 50,035 |
| | 347,240 |
|
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet was as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
(in thousands) | | As Reported | | Balances without Adoption of Topic 606 | | Effect of Change Higher/(Lower) |
Operating revenues | | $ | 151,732 |
| | $ | 155,871 |
| | $ | (4,139 | ) |
Operating expenses: | | | | | | |
Cost of services | | 49,342 |
| | 49,199 |
| | 143 |
|
Cost of goods sold | | 15,805 |
| | 6,118 |
| | 9,687 |
|
Selling, general and administrative | | 28,750 |
| | 42,968 |
| | (14,218 | ) |
|
| | | | | | | | |
| | March 31, 2017 | | December 31, 2016 |
Plant in service | | $ | 1,124,446 |
| | $ | 1,085,318 |
|
Plant under construction | | 61,980 |
| | 73,759 |
|
| | 1,186,426 |
| | 1,159,077 |
|
Less accumulated amortization and depreciation | | 496,478 |
| | 460,955 |
|
Net property, plant and equipment | | $ | 689,948 |
| | $ | 698,122 |
|
|
| | | | | | | | | |
| | Three Months Ended March 31, 2018 |
(in thousands) | | As Reported | | Balances without Adoption of Topic 606 | | Effect of Change Higher/(Lower) |
Assets | | | | | | |
Prepaid expenses and other | | 64,200 |
| | 27,086 |
| | 37,114 |
|
Deferred charges and other | | 33,934 |
| | 18,115 |
| | 15,819 |
|
Liabilities | | | | | | |
Deferred income taxes | | 115,809 |
| | 97,591 |
| | 18,218 |
|
Advanced billing and customer deposits | | 6,919 |
| | 21,221 |
| | (14,302 | ) |
Other long-term liabilities | | 13,787 |
| | 14,987 |
| | (1,200 | ) |
Retained earnings | | 352,069 |
| | 301,852 |
| | 50,217 |
|
Remaining performance obligations and transaction price allocated
On March 31, 2018, the Company had approximately $2.5 million of transaction price allocated to unsatisfied performance obligations, which is exclusive of contracts with original expected duration of one year or less. The Company expects to recognize approximately $0.5 million of this amount as revenue during the remaining three quarters of 2018, $0.5 million in 2019, an additional $0.4 million by 2020, and the balance thereafter.
Contract acquisition costs and costs to fulfill contracts
Capitalized contract costs represent contract fulfillment costs and contract acquisition costs which include commissions and installation costs in our cable and wireline segments. Capitalized contract costs are amortized on a straight line basis over the contract term plus expected renewals. The Company applies the practical expedient to expense contract acquisition costs when incurred if the amortization period would be twelve months or less. The amortization of these costs is included in cost of services, and selling, general and administrative expenses. Amounts capitalized were approximately $9.7 million as of March 31, 2018 of which $4.6 million is presented as prepaid expenses and other and $5.1 million is presented as deferred charges and other assets, net. Amortization recognized during the three-month period ended at March 31, 2018 was approximately $1.3 million. There was no impairment loss in relation to the costs capitalized.
Note 3. Acquisition
Sprint Territory Expansion: Effective February 1, 2018, the Company signed an expansion agreement with Sprint to expand our wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia, (the “Expansion Area”). The agreement includes certain network build out requirements in the Expansion Area, and the ability to utilize Sprint’s spectrum in the Expansion Area. Pursuant to the expansion agreement, Sprint agreed to, among other things, transition the provision of network coverage in the Expansion Area from Sprint to the Company. The Expansion Agreement required a payment of $52.0 million for the right to service the Expansion Area pursuant to the Affiliate Agreements plus an optional payment of up to $5.0 million for certain equipment at the Sprint cell sites in the Expansion Area. The option is exercisable at the Company's discretion. The acquisition was accounted for as an asset acquisition.
The Company recorded the following in the wireless segment:
|
| | | | | | |
($ in thousands) | | Estimated Useful Life | | February 1, 2018 |
Affiliate Contract Expansion | | 12 | | $ | 45,148 |
|
Option to acquire tangible assets | | — | | 6,497 |
|
Off-market leases - favorable | | 16.5* | | 3,665 |
|
Off-market leases - unfavorable | | 4.2* | | (3,310 | ) |
Total | | | | $ | 52,000 |
|
*Estimated useful lives are approximate and represent the average of the remaining useful lives of the underlying leases.
The options to acquire tangible assets are classified as "Prepaid expenses and other" within current assets on the Company's balance sheet. The option is exercisable at any time and expires in two years. The option was measured for fair value using a cost approach on a recurring basis and using Level 3 inputs. The off-market leases - favorable and off-market leases - unfavorable, are classified as "Intangible assets, net" and "Deferred lease", respectively, on the Company's balance sheet. Refer to Note 6, Fair Value Measurements, and Note 8, Goodwill and Other Intangible Assets, for additional information.
Note 4. Customer Concentration
Significant Contractual Relationship
In 1999, the Company executed a Management Agreement (the “Agreement”) with Sprint whereby the Company committed to construct and operate a PCS network using CDMA air interface technology. Under the Agreement, the Company was the exclusive PCS Affiliate of Sprint providing wireless mobility communications network products and services on the 1900 MHz band in its territory across a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio. Since then, the Company’s wireless service area has expanded to include new portions of south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. The Company is authorized to use the Sprint brand in its territory, and operate its network under Sprint’s radio spectrum licenses. As an exclusive PCS Affiliate of Sprint, the Company has the exclusive right to build, own and maintain its portion of Sprint’s nationwide PCS network, in the aforementioned areas, to Sprint’s specifications. The term of the Agreement was initially set for 20 years and was automatically renewable for three 10-year options, unless terminated by either party under provisions outlined in the Agreement. Upon non-renewal by either party, the Company has the obligation to sell the business at 90% of “Entire Business Value” (“EBV”) as defined in the Agreement. EBV is defined as i) the fair market value of a going concern paid by a willing buyer to a willing seller; ii) valued as if the business will continue to utilize existing brands and operate under existing agreements; and, iii) valued as if Manager (Shentel) owns the spectrum. Determination of EBV is made by an independent appraisal process. The Agreement has been amended numerous times.
Amendment to the Affiliate agreement related to the acquisition of Expansion Area: Effective with the acquisition of Expansion Area on February 1, 2018, the Company amended its Agreement with Sprint to expand our wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia. The agreement includes certain network build out requirements in the Expansion Area, and the ability to utilize Sprint’s spectrum in the Expansion Area along with certain other amendments to the Affiliate Agreements. Pursuant to the Expansion Agreement, Sprint agreed to, among other things, transition the provision of network coverage in the Expansion Area from Sprint to us.
Note 5. Earnings (Loss) Per Share ("EPS")
Basic EPS was computed by dividing net income per share was computed onor loss by the weighted average number of shares outstanding.of common stock outstanding during the period. Diluted net income (loss) per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Of 913 thousandDiluted EPS was computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and 991 thousandpotentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include stock options and restricted stock units and shares and options outstanding at March 31, 2017 and 2016, respectively, 125 thousand and 136 thousand were anti-dilutive, respectively. These shares and options have been excluded fromthat the computationsCompany is contractually obligated to issue in the future.
The following table indicates the computation of basic and diluted earnings per share for their respective period. There were no adjustments to net income for either period.
Investments include $3.1 million and $2.9 million of investments carried at fair value as of March 31, 2017 and December 31, 2016, respectively, consisting of equity, bond and money market mutual funds. Investments carried at fair value were acquired under a rabbi trust arrangement related to the Company’s nonqualified Supplemental Executive Retirement Plan (the “SERP”). The Company purchases investments in the trust to mirror the investment elections of participants in the SERP; gains and losses on the investments in the trust are reflected as increases or decreases in the liability owed to the participants. During the three months ended March 31, 2017, the Company recognized $32 thousand in dividend2018 and interest income from investments, and recorded net unrealized gains of $120 thousand on these investments. Fair values for these investments held under the rabbi trust were determined by Level 1 quoted market prices for the underlying mutual funds.2017:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands, except per share amounts) | | 2018 | | 2017 |
Calculation of net income (loss) per share: | | | | |
Net income (loss) | | $ | 4,829 |
| | $ | 2,341 |
|
Weighted average shares outstanding | | 49,474 |
| | 49,050 |
|
Basic income (loss) per share | | $ | 0.10 |
| | $ | 0.05 |
|
| | | | |
Effect of stock options outstanding: | | | | |
Basic weighted average shares outstanding | | 49,474 |
| | 49,050 |
|
Effect from dilutive shares and options outstanding | | 550 |
| | 784 |
|
Diluted weighted average shares outstanding | | 50,024 |
| | 49,834 |
|
Diluted income (loss) per share | | $ | 0.10 |
| | $ | 0.05 |
|
At March 31, 2017 and December 31, 2016, other investments, comprisedThe computation of equity securities which dodiluted EPS does not include certain unvested awards, on a weighted average basis, because their inclusion would have readily determinable fair values, consistan anti-dilutive effect on EPS. The awards excluded because of the following:their anti-dilutive effect are as follows:
|
| | | | | | | |
| 3/31/2017 | | 12/31/2016 |
Cost method: | (in thousands) |
CoBank | $ | 6,296 |
| | $ | 6,177 |
|
Other – Equity in other telecommunications partners | 740 |
| | 742 |
|
| 7,036 |
| | 6,919 |
|
Equity method: | | | |
Other | 513 |
| | 450 |
|
Total other investments | $ | 7,549 |
| | $ | 7,369 |
|
|
| | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2018 | | 2017 |
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive | | 141 |
| | 125 |
|
Note 6. Fair Value Measurements
The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | March 31, 2018 |
Balance sheet location: | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash Equivalents: | | | | | | | | |
Money market funds | | $ | 151 |
| | $ | — |
| | $ | — |
| | $ | 151 |
|
Prepaid expenses & other: | | | | | | | | |
Interest rate swaps | | — |
| | 3,673 |
| | — |
| | 3,673 |
|
Option to acquire tangible assets | | | | | | 6,497 |
| | 6,497 |
|
Deferred charges & other assets, net: | | | | | | | | |
Interest rate swaps | | — |
| | 13,692 |
| | — |
| | 13,692 |
|
Total | | $ | 151 |
| | $ | 17,365 |
| | $ | 6,497 |
| | $ | 24,013 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2017 |
Balance sheet location: | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash Equivalents: | | | | | | | | |
Money market funds | | $ | 150 |
| | $ | — |
| | $ | — |
| | $ | 150 |
|
Prepaid expenses & other: | | | | | | | | |
Interest rate swaps | | — |
| | 2,411 |
| | — |
| | 2,411 |
|
Deferred charges & other assets, net: | | | | | | | | |
Interest rate swaps | | — |
| | 10,776 |
| | — |
| | 10,776 |
|
Total | | $ | 150 |
| | $ | 13,187 |
| | $ | — |
| | $ | 13,337 |
|
The following table presents our financial instruments measured at fair value using unobservable inputs (Level 3):
|
| | | | | | | | |
| | Fair Value Measurements Using Unobservable Inputs (Level 3) |
| | March 31, 2018 | | December 31, 2017 |
Balance, beginning of period | | $ | — |
| | $ | — |
|
Sprint Territory Expansion (Note 3): | | | | |
Option to acquire tangible assets | | 6,497 |
| | — |
|
Balance, end of period | | $ | 6,497 |
| | $ | — |
|
The option is exercisable at any time and expires in two years. The option was measured for fair value using a cost approach on a recurring basis and using Level 3 inputs including the cost of the underlying assets to be acquired and the contractual selling price of those assets.
Financial instruments on the condensed consolidated balance sheets that approximate fair value include: cashNote 7. Property, Plant and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, interest rate swaps and variable rate long-term debt.Equipment
| |
7. | Derivative Instruments, Hedging Activitiesand Accumulated Other Comprehensive Income
|
The Company’s objectives in using interest rate derivatives are to add stability to cash flowsProperty, plant and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps (both those designated as cash flow hedges as well as those not designated as cash flow hedges) involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the lifeequipment consisted of the agreements without exchange of the underlying notional amount.
The Company entered into a pay-fixed, receive-variable interest rate swap of $174.6 million of notional principal in September 2012. This interest rate swap was designated as a cash flow hedge. The outstanding notional amount of this cash flow hedge was $131.0 million as of March 31, 2017. The outstanding notional amount decreases based upon scheduled principal payments on the 2012 debt.
In May 2016, the Company entered into a pay-fixed, receive-variable interest rate swap of $256.6 million of notional principal with three counterparties. This interest rate swap was designated as a cash flow hedge. The outstanding notional amount of this cash flow hedge was $302.4 million as of March 31, 2017. The outstanding notional amount increases based upon draws expected to be made under a portion of the Company's Term Loan A-2 debt and as the 2012 interest rate swap's notional principal decreases, and will decrease as the Company makes scheduled principal payments on the 2016 debt. In combination with the swap entered into in 2012 described above, the Company is hedging approximately 50% of the expected outstanding debt.
The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings through interest expense. No hedge ineffectiveness was recognized during any of the periods presented.
Amounts reported in accumulated other comprehensive income related to the interest rate swaps designated and qualified as a cash flow hedge, are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of March 31, 2017, the Company estimates that $237 thousand will be reclassified as a reduction of interest expense during the next twelve months.
The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the condensed consolidated balance sheet as of March 31, 2017 and December 31, 2016 (in thousands): following:
|
| | | | | | | | | | |
| | Derivatives |
| | Fair Value as of |
| | Balance Sheet Location | | March 31, 2017 | | December 31, 2016 |
Derivatives designated as hedging instruments: | | | | | | |
Interest rate swap | | | | |
| | |
|
| | Prepaid expenses and other | | $ | 237 |
| | $ | — |
|
| | Deferred charges and other assets, net | | 11,958 |
| | 12,118 |
|
| | Accrued liabilities and other | | — |
| | (895 | ) |
Total derivatives designated as hedging instruments | | | | $ | 12,195 |
| | $ | 11,223 |
|
The fair value of interest rate swaps is determined using a pricing model with inputs that are observable in the market (level 2 fair value inputs).
The table below presents change in accumulated other comprehensive income by component for the three months ended March 31, 2017 (in thousands):
|
| | | | | | | | | | | | |
| | Gains on Cash Flow Hedges | | Income Tax Expense | | Accumulated Other Comprehensive Income |
Balance as of December 31, 2016 | | $ | 11,223 |
| | $ | (4,435 | ) | | $ | 6,788 |
|
Other comprehensive income before reclassifications | | 541 |
| | (208 | ) | | 333 |
|
Amounts reclassified from accumulated other comprehensive income (to interest expense) | | 431 |
| | (165 | ) | | 266 |
|
Net current period other comprehensive income | | 972 |
| | (373 | ) | | 599 |
|
Balance as of March 31, 2017 | | $ | 12,195 |
| | $ | (4,808 | ) | | $ | 7,387 |
|
|
| | | | | | | | |
(in thousands) | | March 31, 2018 | | December 31, 2017 |
Plant in service | | $ | 1,245,079 |
| | $ | 1,219,185 |
|
Plant under construction | | 57,005 |
| | 62,202 |
|
| | 1,302,084 |
| | 1,281,387 |
|
Less accumulated amortization and depreciation | | 630,067 |
| | 595,060 |
|
Net property, plant and equipment | | $ | 672,017 |
| | $ | 686,327 |
|
Note 8. Goodwill and Other Intangible Assets
8. Intangible Assets, NetGoodwill consisted of the following:
|
| | | | | | | |
(in thousands) | March 31, 2018 | | December 31, 2017 |
Goodwill - Wireless | $ | 146,383 |
| | $ | 146,383 |
|
Goodwill - Cable | 104 |
| | 104 |
|
Goodwill - Wireline | 10 |
| | 10 |
|
Goodwill | $ | 146,497 |
| | $ | 146,497 |
|
Intangible assets consist of the following at March 31, 20172018 and December 31, 2016:2017:
| | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net | |
(in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Non-amortizing intangibles: | Non-amortizing intangibles: | | | | | | | | | | | | | | | | | |
Cable franchise rights | $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
| | $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
| $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
| | $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
|
Railroad crossing rights | 97 |
| | — |
| | 97 |
| | 97 |
| | — |
| | 97 |
| 141 |
| | — |
| | 141 |
| | 141 |
| | — |
| | 141 |
|
| 64,431 |
| | — |
| | 64,431 |
| | 64,431 |
| | — |
| | 64,431 |
| 64,475 |
| | — |
| | 64,475 |
| | 64,475 |
| | — |
| | 64,475 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Finite-lived intangibles: | Affiliate contract expansion | 284,102 |
| | (19,008 | ) | | 265,094 |
| | 284,102 |
| | (14,030 | ) | | 270,072 |
| |
Acquired subscribers – wireless | 120,855 |
| | (25,387 | ) | | 95,468 |
| | 120,855 |
| | (18,738 | ) | | 102,117 |
| |
Affiliate contract expansion - wireless | | 455,306 |
| | (121,808 | ) | | 333,498 |
| | 410,157 |
| | (105,964 | ) | | 304,193 |
|
Favorable leases - wireless | 16,950 |
| | (1,531 | ) | | 15,419 |
| | 16,950 |
| | (1,130 | ) | | 15,820 |
| 16,768 |
| | (1,589 | ) | | 15,179 |
| | 13,103 |
| | (1,222 | ) | | 11,881 |
|
Acquired subscribers – cable | 25,265 |
| | (24,802 | ) | | 463 |
| | 25,265 |
| | (24,631 | ) | | 634 |
| |
Acquired subscribers - cable | | 25,265 |
| | (25,138 | ) | | 127 |
| | 25,265 |
| | (25,100 | ) | | 165 |
|
Other intangibles | 3,230 |
| | (797 | ) | | 2,433 |
| | 2,212 |
| | (754 | ) | | 1,458 |
| 463 |
| | (205 | ) | | 258 |
| | 463 |
| | (198 | ) | | 265 |
|
Total finite-lived intangibles | 450,402 |
| | (71,525 | ) | | 378,877 |
| | 449,384 |
| | (59,283 | ) | | 390,101 |
| 497,802 |
| | (148,740 | ) | | 349,062 |
| | 448,988 |
| | (132,484 | ) | | 316,504 |
|
Total intangible assets | $ | 514,833 |
| | $ | (71,525 | ) | | $ | 443,308 |
| | $ | 513,815 |
| | $ | (59,283 | ) | | $ | 454,532 |
| $ | 562,277 |
| | $ | (148,740 | ) | | $ | 413,537 |
| | $ | 513,463 |
| | $ | (132,484 | ) | | $ | 380,979 |
|
Affiliate contract expansion is amortized over the expected benefit period and is further reduced by the amount of waived management fees received from Sprint which totaled $69.7 million since May 6, 2016, the date of the non-monetary exchange.
Note 9. Other Assets and Accrued Liabilities
Prepaid expenses and other, classified as current assets, included the following:
| |
9. | Accrued and Other liabilities |
|
| | | | | | | | |
(in thousands) | | March 31, 2018 | | December 31, 2017 |
Prepaid rent | | $ | 9,687 |
| | $ | 10,519 |
|
Prepaid maintenance expenses | | 4,282 |
| | 3,062 |
|
Interest rate swaps | | 3,673 |
| | 2,411 |
|
Deferred contract and other costs | | 46,558 |
| | 1,119 |
|
Prepaid expenses and other | | $ | 64,200 |
| | $ | 17,111 |
|
Deferred contract and other costs include amounts reimbursed to Sprint for commissions and device costs, and commissions and installation costs in the Company’s Cable and Wireline segments. The deferred contract and other costs increased due to the adoption of Topic 606. Refer to Note 2, Revenue from Contracts with Customers, for additional information.
Deferred charges and other assets, classified as long-term assets, included the following:
|
| | | | | | | | |
(in thousands) | | March 31, 2018 | | December 31, 2017 |
Interest rate swaps | | $ | 13,692 |
| | $ | 10,776 |
|
Deferred contract and other costs | | 20,242 |
| | 2,914 |
|
Deferred charges and other assets, net | | $ | 33,934 |
| | $ | 13,690 |
|
Deferred contract and other costs include amounts reimbursed to Sprint for commissions and device costs, and commissions and installation costs in the Company’s Cable and Wireline segments. The deferred contract and other costs increased due to the adoption of Topic 606. Refer to Note 2, Revenue from Contracts with Customers, for additional information.
Accrued liabilities and other, includesclassified as current liabilities, included the following (in thousands):
following:
| | | | March 31, 2017 | | December 31, 2016 | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
Sales and property taxes payable | | $ | 4,742 |
| | $ | 6,628 |
| | $ | 4,969 |
| | $ | 3,872 |
|
Severance accrual, current portion | | 3,553 |
| | 4,267 |
| |
Asset retirement obligations, current portion | | 884 |
| | 5,841 |
| |
Severance accrual | | | 261 |
| | 1,028 |
|
Asset retirement obligations | | | 923 |
| | 492 |
|
Accrued programming costs | | | 3,029 |
| | 2,805 |
|
Other current liabilities | | 8,995 |
| | 12,349 |
| | 8,289 |
| | 5,717 |
|
Accrued liabilities and other | | $ | 18,174 |
| | $ | 29,085 |
| | $ | 17,471 |
| | $ | 13,914 |
|
Other liabilities, includeclassified as long-term liabilities, included the following (in thousands):
following:
| | | | March 31, 2017 | | December 31, 2016 | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
Non-current portion of deferred revenues | | $ | 7,735 |
| | $ | 8,933 |
| | $ | 12,523 |
| | $ | 14,030 |
|
Straight-line management fee waiver | | 16,180 |
| | 11,974 |
| |
Other | | 2,142 |
| | 2,836 |
| | 1,264 |
| | 1,263 |
|
Other liabilities | | $ | 26,057 |
| | $ | 23,743 |
| | $ | 13,787 |
| | $ | 15,293 |
|
The Company's asset retirement obligations are included in the balance sheet caption "Asset retirement obligations" and "Accrued liabilities and other". The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement and removal of leasehold improvements or equipment. The Company also records a corresponding asset, which is depreciated over the life of the leasehold improvement or equipment. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The terms associated with its operating leases, and applicable zoning ordinances of certain jurisdictions, define the Company’s obligations which are estimated and vary based on the size of the towers.
Note 10. Long-Term Debt and Revolving Lines of Credit
Total debt at March 31, 20172018 and December 31, 20162017 consists of the following:
|
| | | | | | | | |
(In thousands) | | March 31, 2017 | | December 31, 2016 |
Term loan A-1 | | $ | 466,813 |
| | $ | 472,875 |
|
Term loan A-2 | | 400,000 |
| | 375,000 |
|
| | 866,813 |
| | 847,875 |
|
Less: unamortized loan fees | | 17,816 |
| | 18,610 |
|
Total debt, net of unamortized loan fees | | $ | 848,997 |
| | $ | 829,265 |
|
| | | | |
Current maturities of long term debt, net of unamortized loan fees | | $ | 38,124 |
| | $ | 32,041 |
|
Long-term debt, less current maturities, net of unamortized loan fees | | $ | 810,873 |
| | $ | 797,224 |
|
|
| | | | | | | | |
(in thousands) | | March 31, 2018 | | December 31, 2017 |
Term loan A-1 | | $ | 424,375 |
| | $ | 436,500 |
|
Term loan A-2 | | 400,000 |
| | 400,000 |
|
| | 824,375 |
| | 836,500 |
|
Less: unamortized loan fees | | 13,502 |
| | 14,542 |
|
Total debt, net of unamortized loan fees | | $ | 810,873 |
| | $ | 821,958 |
|
| | | | |
Current maturities of long term debt, net of unamortized loan fees | | $ | 74,486 |
| | $ | 64,397 |
|
Long-term debt, less current maturities, net of unamortized loan fees | | $ | 736,387 |
| | $ | 757,561 |
|
As of March 31, 2017, our2018, the Company's indebtedness totaled $866.8approximately $824.4 million, in term loansexcluding unamortized loan fees of $13.5 million, with an annualized effectiveoverall weighted average interest rate of approximately 3.91% after considering4.02%. As of March 31, 2018, the impact of the interest rate swap contract and unamortized loan costs. The balance consists of the $466.8 million Term Loan A-1 bears interest at a variable rate (3.73% as of March 31, 2017) that resets monthly based on one monthone-month LIBOR plus a margin of 2.75%2.25%, andwhile the $400 million Term Loan A-2 bears interest at a variable rate (3.98% as of March 31, 2017) that resets monthly based on one monthone-month LIBOR plus a margin of 3.00%2.50%. At March 31, 2018, one-month LIBOR was 1.88%. LIBOR resets monthly.
The Term Loan A-1 requires quarterly principal repayments of $6.1 million, which began on September 30, 2016 and continued through June 30, 2017, then increasing to $12.1 million quarterly from September 30, 2017 through June 30, 2020; then increasing to $18.2 million quarterly from September 30, 2020 through March 31, 2021, with further increases at that time through maturity inthe remaining balance due June 30, 2021. The Term Loan A-2 requires quarterly principal repayments of $10.0 million beginning on September 30, 2018 through March 31, 2023, with the remaining balance due June 30, 2023.
The 2016 credit agreement also required the Company to enter into one or more hedge agreements to manage its exposure to interest rate movements. The Company elected to hedge the minimum required under the 2016 credit agreement, and entered into a pay-fixed, receive-variable swap on 50% of the aggregate expected principal balance of the term loans outstanding. The Company will receive one month LIBOR and pay a fixed rate of 1.16%, in addition to the 2.25% initial spread on Term Loan A-1 and the 2.50% initial spread on Term Loan A-2.
The 2016 credit agreement contains affirmative and negative covenants customary to secured credit facilities, including covenants restricting the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of the Company’s and its subsidiaries’ businesses.
Indebtedness outstanding under any of the facilities may be accelerated by an Event of Default, as defined in the 2016 credit agreement.
The Facilities are secured by a pledge by the Company of its stock and membership interests in its subsidiaries, a guarantee by the Company’s subsidiaries other than Shenandoah Telephone Company, and a security interest in substantially all of the assets of the Company and the guarantors.
The Company is subject to certain financial covenants to be measured on a trailing twelve month basis each calendar quarter unless otherwise specified. These covenants include:
a limitation on the Company’s total leverage ratio, defined as indebtedness divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than or equal to 3.75 to 1.00 from the closing date through December 30, 2018, then 3.25 to 1.00 through December 30, 2019, and 3.00 to 1.00 thereafter;
a minimum debt service coverage ratio, defined as EBITDA minus certain cash taxes divided by the sum of all scheduled principal payments on the Term Loans and scheduled principal payments on other indebtedness plus cash interest expense, greater than 2.00 to 1.00;
the Company must maintain a minimum liquidity balance of greater than $25 million. The balance is defined as availability under the revolver facility plus unrestricted cash and cash equivalents on deposit in a deposit account for which a control agreement has been delivered to the administrative agent under the 2016 credit agreement, of greater than $25 million at all times.agreement.
These ratios are generally less restrictive than the covenant ratios the Company had been required to comply with under its previously existing debt arrangements. As shown below, as of March 31, 2017,2018, the Company was in compliance with the financial covenants in its credit agreements.
|
| | | |
| Actual | | Covenant Requirement |
Total Leverage Ratio | 2.88 | | 3.75 or Lower |
Debt Service Coverage Ratio | 4.56 | | 2.00 or Higher |
Minimum Liquidity Balance | $113 million | | $25 million or Higher |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker. The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Cable, and (3) Wireline. A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.
Prior to the recent acquisition of nTelos, the Wireless segment had provided digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate. With the recent acquisition, the Company's wireless service has expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
The Cable segment provides video, internet and voice services in Virginia, West Virginia and Maryland, and leases fiber optic facilities throughout southern Virginia and West Virginia. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.
The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video and cable modem services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of central and southern Pennsylvania.
Three months ended March 31, 2017
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 108,186 |
| | $ | 26,411 |
| | $ | 5,048 |
| | $ | — |
| | $ | — |
| | $ | 139,645 |
|
Other | | 6,042 |
| | 2,035 |
| | 6,158 |
| | — |
| | — |
| | 14,235 |
|
Total external revenues | | 114,228 |
| | 28,446 |
| | 11,206 |
| | — |
| | — |
| | 153,880 |
|
Internal revenues | | 1,235 |
| | 567 |
| | 7,948 |
| | — |
| | (9,750 | ) | | — |
|
Total operating revenues | | 115,463 |
| | 29,013 |
| | 19,154 |
| | — |
| | (9,750 | ) | | 153,880 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of goods and services, exclusive of depreciation and amortization shown separately below | | 38,318 |
| | 15,228 |
| | 9,273 |
| | — |
| | (9,058 | ) | | 53,761 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 28,464 |
| | 4,858 |
| | 1,676 |
| | 5,847 |
| | (692 | ) | | 40,153 |
|
Integration and acquisition expenses | | 3,792 |
| | — |
| | — |
| | 697 |
| | — |
| | 4,489 |
|
Depreciation and amortization | | 35,752 |
| | 5,788 |
| | 3,132 |
| | 132 |
| | — |
| | 44,804 |
|
Total operating expenses | | 106,326 |
| | 25,874 |
| | 14,081 |
| | 6,676 |
| | (9,750 | ) | | 143,207 |
|
Operating income (loss) | | $ | 9,137 |
| | $ | 3,139 |
| | $ | 5,073 |
| | $ | (6,676 | ) | | $ | — |
| | $ | 10,673 |
|
|
| | | | | | |
| | Actual | | Covenant Requirement |
Total Leverage Ratio | | 2.95 |
| | 3.75 or Lower |
Debt Service Coverage Ratio | | 3.58 |
| | 2.00 or Higher |
Minimum Liquidity Balance (in thousands) | | $ | 122,834 |
| | $25 million or Higher |
Three months ended March 31, 2016Credit Facility Modification:
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 52,179 |
| | $ | 24,340 |
| | $ | 4,960 |
| | $ | — |
| | $ | — |
| | $ | 81,479 |
|
Other | | 3,203 |
| | 1,846 |
| | 6,043 |
| | — |
| |
|
| | 11,092 |
|
Total external revenues | | 55,382 |
| | 26,186 |
| | 11,003 |
| | — |
| | — |
| | 92,571 |
|
Internal revenues | | 1,136 |
| | 260 |
| | 7,376 |
| |
|
| | (8,772 | ) | | — |
|
Total operating revenues | | 56,518 |
| | 26,446 |
| | 18,379 |
| | — |
| | (8,772 | ) | | 92,571 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of goods and services, exclusive of depreciation and amortization shown separately below | | 16,578 |
| | 14,647 |
| | 8,643 |
| | — |
| | (8,106 | ) | | 31,762 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 11,514 |
| | 5,108 |
| | 1,605 |
| | 3,865 |
| | (666 | ) | | 21,426 |
|
Integration and acquisition expenses | | — |
| | — |
| | — |
| | 332 |
| | — |
| | 332 |
|
Depreciation and amortization | | 8,494 |
| | 6,095 |
| | 3,033 |
| | 117 |
| | — |
| | 17,739 |
|
Total operating expenses | | 36,586 |
| | 25,850 |
| | 13,281 |
| | 4,314 |
| | (8,772 | ) | | 71,259 |
|
Operating income (loss) | | $ | 19,932 |
| | $ | 596 |
| | $ | 5,098 |
| | $ | (4,314 | ) | | $ | — |
| | $ | 21,312 |
|
A reconciliation On February 16, 2018, the Company, entered into a Second Amendment to Credit Agreement (the “Second Amendment”) with CoBank, ACB, as administrative agent of its Credit Agreement and the totalvarious financial institutions party thereto (the “Lenders”), which modifies the Credit Agreement by (i) reducing the interest rate paid by the Company by approximately 50 basis points with respect to certain loans made by the Lenders to the Company under the Credit Agreement, and (ii) allowing the Company to make charitable contributions to the Shentel Foundation, a Virginia nonstock corporation, of the reportable segments’ operating income (loss)up to consolidated income (loss) before taxes is as follows:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2017 | | 2016 |
Total consolidated operating income | | $ | 10,673 |
| | $ | 21,312 |
|
Interest expense | | (9,100 | ) | | (1,619 | ) |
Non-operating income, net | | 1,375 |
| | 556 |
|
Income before income taxes | | $ | 2,948 |
| | $ | 20,249 |
|
The Company’s assets by segment are as follows:
|
| | | | | | | | |
(in thousands) | | March 31, 2017 | | December 31, 2016 |
Wireless | | $ | 1,039,211 |
| | $ | 1,101,716 |
|
Cable | | 220,519 |
| | 218,471 |
|
Wireline | | 116,390 |
| | 115,282 |
|
Other | | 1,070,204 |
| | 1,059,898 |
|
Combined totals | | 2,446,324 |
| | 2,495,367 |
|
Inter-segment eliminations | | (993,335 | ) | | (1,010,960 | ) |
Consolidated totals | | $ | 1,452,989 |
| | $ | 1,484,407 |
|
$1.5 million in any fiscal year.
Note 11. Income Taxes
The Company files U.S. federal income tax returns and various state and local income tax returns. With few exceptions, years prior to 20132014 are no longer subject to examination; net operating losses acquired in the nTelos acquisition are open to examination from 2002 forward. The Company is not subject to any state or federal income tax audits as of March 31, 2017.2018.
The effective tax rate has fluctuated in recent periods due to the minimal base of pre-tax earnings or losses and has been further impacted by share based compensation tax benefits which are recognized as incurred under the provisions of ASC 740, "Income Taxes". | |
13. | Adoption of New Accounting Principles |
During the first quarter ofOn December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted, substantially changing the U.S. tax system. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, adopted one new accounting principle:most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides immediate expensing for certain qualified assets acquired and placed into service after September 27, 2017 as well as prospective changes beginning in 2018, including acceleration of tax revenue recognition, additional limitations on deductibility of executive compensation and limitations on the deductibility of interest.
On December 22, 2017, the SEC staff issued Staff Accounting Standards Update ("ASU")Bulletin No. 2015-11, "Inventory: Simplifying118 (SAB 118) to address the Measurementapplication of Inventory". This ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The ASU also eliminates the requirement for entities to consider replacement cost or net realizable value less an approximately normal profit marginU.S. GAAP in situations when measuring inventory. The adoption of this ASU dida registrant does not have a significant impact on ourthe necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 consolidated financial statements.statements in accordance with SAB No. 118.
As of March 31, 2018, the Company is continuing to evaluate the provisional amounts recorded related to the 2017 Tax Act at December 31, 2017, and has not recognized any additional adjustments to such provisional amounts.
14. Subsequent Events
On
Note 12. Segment Reporting
Three Months Ended March 9, 2017, the Company and Sprint entered into Addendum XX to the Sprint PCS Management Agreement. Addendum XX provides for (i) an expansion31, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 89,759 |
| | $ | 28,471 |
| | $ | 5,308 |
| | $ | — |
| | $ | — |
| | $ | 123,538 |
|
Equipment revenues | | 17,374 |
| | 159 |
| | 46 |
| | — |
| | — |
| | 17,579 |
|
Other | | 2,026 |
| | 2,050 |
| | 6,539 |
| | — |
| | — |
| | 10,615 |
|
Total external revenues | | 109,159 |
| | 30,680 |
| | 11,893 |
| | — |
| | — |
| | 151,732 |
|
Internal revenues | | 1,239 |
| | 1,031 |
| | 7,814 |
| | — |
| | (10,084 | ) | | — |
|
Total operating revenues | | 110,398 |
| | 31,711 |
| | 19,707 |
| | — |
| | (10,084 | ) | | 151,732 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of services | | 33,750 |
| | 15,156 |
| | 9,802 |
| | — |
| | (9,366 | ) | | 49,342 |
|
Costs of goods sold | | 15,727 |
| | 56 |
| | 22 |
| | — |
| | — |
| | 15,805 |
|
Selling, general & administrative | | 12,135 |
| | 4,948 |
| | 1,717 |
| | 10,668 |
| | (718 | ) | | 28,750 |
|
Acquisition, integration & migration expenses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Depreciation & amortization | | 33,925 |
| | 6,024 |
| | 3,394 |
| | 144 |
| | — |
| | 43,487 |
|
Total operating expenses | | 95,537 |
| | 26,184 |
| | 14,935 |
| | 10,812 |
| | (10,084 | ) | | 137,384 |
|
Operating income (loss) | | $ | 14,861 |
| | $ | 5,527 |
| | $ | 4,772 |
| | $ | (10,812 | ) | | $ | — |
| | $ | 14,348 |
|
Three Months Ended March 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 108,186 |
| | $ | 26,411 |
| | $ | 5,048 |
| | $ | — |
| | $ | — |
| | $ | 139,645 |
|
Equipment revenues | | 3,145 |
| | 182 |
| | 32 |
| | — |
| | — |
| | 3,359 |
|
Other | | 2,897 |
| | 1,853 |
| | 6,126 |
| | — |
| | — |
| | 10,876 |
|
Total external revenues | | 114,228 |
| | 28,446 |
| | 11,206 |
| | — |
| | — |
| | 153,880 |
|
Internal revenues | | 1,235 |
| | 567 |
| | 7,948 |
| | — |
| | (9,750 | ) | | — |
|
Total operating revenues | | 115,463 |
| | 29,013 |
| | 19,154 |
| | — |
| | (9,750 | ) | | 153,880 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of services | | 33,423 |
| | 15,178 |
| | 9,233 |
| | — |
| | (9,058 | ) | | 48,776 |
|
Costs of goods sold | | 4,895 |
| | 50 |
| | 40 |
| | — |
| | — |
| | 4,985 |
|
Selling, general & administrative | | 28,464 |
| | 4,858 |
| | 1,676 |
| | 5,847 |
| | (692 | ) | | 40,153 |
|
Acquisition, integration & migration expenses | | 3,792 |
| | — |
| | — |
| | 697 |
| | — |
| | 4,489 |
|
Depreciation & amortization | | 35,752 |
| | 5,788 |
| | 3,132 |
| | 132 |
| | — |
| | 44,804 |
|
Total operating expenses | | 106,326 |
| | 25,874 |
| | 14,081 |
| | 6,676 |
| | (9,750 | ) | | 143,207 |
|
Operating income (loss) | | $ | 9,137 |
| | $ | 3,139 |
| | $ | 5,073 |
| | $ | (6,676 | ) | | $ | — |
| | $ | 10,673 |
|
A reconciliation of the Company’s “Service Area” (as defined intotal of the Sprint PCS Management Agreement)reportable segments’ operating income (loss) to include certain areas in Kentucky, Maryland, Ohio and West Virginia (the “Expansion Area”), (ii) certain network build out requirements in the Expansion Area over the next three years, (iii) the Company’s provision of prepaid field sales support to Sprint and its affiliates in the Service Area, (iv) Sprint’s provision of spectrum use to the Company in the Expansion Area, (v) the addition of Horizon Personal Communications, LLC,consolidated income (loss) before taxes is as a party to the Sprint PCS Management Agreement and the Sprint PCS Services Agreement (collectively, the “Affiliate Agreements”) and (vi) certain other amendments to the Affiliate Agreements.follows:
In connection with the execution of Addendum XX, on March 9, 2017, the Company and certain affiliates of Sprint entered into an agreement to, among other things, transfer to Sprint certain customers in the Expansion Area and the underlying customer agreements, and to transition the provision of network coverage in the Expansion Area from Sprint to the Company. The expanded territory includes approximately 500 thousand market POPs and approximately 21 thousand Sprint customers.The Company and Sprint closed on this transaction on April 6, 2017. |
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2018 | | 2017 |
Total consolidated operating income (loss) | | $ | 14,348 |
| | $ | 10,673 |
|
Interest expense | | (9,332 | ) | | (9,100 | ) |
Non-operating income, net | | 989 |
| | 1,375 |
|
Income (loss) before income taxes | | $ | 6,005 |
| | $ | 2,948 |
|
| |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements. All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters are forward-looking statements. We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct. The Company’s actual results could be materially different from its expectations because of various factors, including those discussed below and under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2016.2017. The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2016,2017, including the consolidated financial statements and related notes included therein.
General
Overview:Overview. Shenandoah Telecommunications Company, (the "Company", "we", "our", or "us"), is a diversified telecommunications company providing integrated voice, video and data communication services including both regulated and unregulated telecommunications services through its wholly owned subsidiaries. These subsidiaries provide wireless personal communications services (asas a Sprint PCS affiliate),affiliate, and local exchange telephone services, video, internet and data services, long distance services, fiber optics facilities and leased tower facilities. We have threeorganize and strategically manage our operations under the Company's reportable segments which we operatethat include: Wireless, Cable, Wireline, and manage as strategic business units organized by linesOther. See Note 16, Segment Reporting, included with the notes to our consolidated financial statements provided within our 2017 Annual Report on Form 10-K for further information regarding our segments.
Basis of business: (1) Wireless, (2) Cable, and (3) Wireline.
| |
* | The Wireless segment has historically provided digital wireless service as a Sprint PCS Affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia. Following the acquisition of nTelos on May 6, 2016, the Company’s wireless service area expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. In these areas, we are the exclusive provider of Sprint-branded wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz bands. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers. |
| |
* | The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia. |
| |
* | The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video and cable modem internet access services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of central and southern Pennsylvania. |
A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company, and includes corporate costs of executive management, information technology, legal, finance, and human resources. This segment also includes certain acquisition and integration costs primarily consisting of severance accruals for short-term nTelos employees to be separated as integration activities wind down and transaction related expenses such as investment advisor, legal and other professional fees.
Presentation
Acquisition of nTelos and Exchange with Sprint: On May 6, 2016, we completed our previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $667.8 million, net of cash acquired. The purchase price was financed by a credit facility arranged by CoBank, ACB. We have included the operations of nTelos for financial reporting purposes for periods subsequent to the acquisition.
The Company expects to incur approximately $23 millionadopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), effective January 1, 2018, using the modified retrospective method as discussed in Note 2, Revenue from Contracts with Customers. The following table identifies the impact that the application of integration and acquisition expenses associated with this transaction in 2017, in addition toTopic 606 had on the $54.7 million of such costs incurred during 2016. We have incurred $7.1 million of these costs inCompany for the three months ended March 31, 2017. These2018:
|
| | | | | | | | | | | | | | | |
($ in thousands, except per share amounts) |
| Topic 606 Impact |
|
| Prior to Adoption of Topic 606 | Changes in Presentation (1) | Equipment Revenue (2) | Deferred Costs (3) | 3/31/2018 As reported |
Service revenues and other | $ | 153,812 |
| $ | (20,014 | ) | $ | — |
| $ | 355 |
| $ | 134,153 |
|
Equipment revenues | 2,059 |
| — |
| 15,520 |
| — |
| 17,579 |
|
Total operating revenues | 155,871 |
| (20,014 | ) | 15,520 |
| 355 |
| 151,732 |
|
Cost of services | 49,199 |
| — |
| — |
| 143 |
| 49,342 |
|
Cost of goods sold | 6,118 |
| (5,833 | ) | 15,520 |
| — |
| 15,805 |
|
Selling, general & administrative | 42,967 |
| (14,181 | ) | — |
| (36 | ) | 28,750 |
|
Depreciation and amortization | 43,487 |
| — |
| — |
| — |
| 43,487 |
|
Total operating expenses | 141,771 |
| (20,014 | ) | 15,520 |
| 107 |
| 137,384 |
|
Operating income | 14,100 |
| — |
| — |
| 248 |
| 14,348 |
|
Other income (expense) | (8,343 | ) | — |
| — |
| — |
| (8,343 | ) |
Income tax expense | 1,110 |
| — |
| — |
| 66 |
| 1,176 |
|
Net income | $ | 4,647 |
| $ | — |
| $ | — |
| $ | 182 |
| $ | 4,829 |
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
Basic | $ | 0.09 |
|
|
|
|
|
|
| $ | 0.10 |
|
Diluted | $ | 0.09 |
|
|
|
|
|
|
| $ | 0.10 |
|
Weighted average shares o/s, basic | 49,474 |
|
|
|
|
|
|
| 49,474 |
|
Weighted average shares o/s, diluted | 50,024 |
|
|
|
|
|
|
| 50,024 |
|
1) Amounts payable to Sprint for the reimbursement of costs include $0.1incurred by Sprint in their national sales channel for commissions and device costs, and to provide on-going support to their prepaid customers in our territory were historically recorded as expense when incurred. Under Topic 606, these amounts represent consideration payable to our customer, Sprint, and are recorded as a reduction of revenue. In 2017, these amounts were approximately $44.8 million reflectedfor the national commissions, previously recorded in selling, general and administrative, $18.7 million for national
device costs previously recorded in cost of goods and services, and $2.5$16.9 million reflectedfor the on-going service to Sprint's prepaid customers, previously recorded in selling, general and administrative.
2) Costs incurred by the Company for the sale of devices under Sprint’s device financing and lease programs were previously recorded net against revenue. Under Topic 606, the revenue from device sales is recorded gross as equipment revenue and the device costs are recorded gross and reclassified to cost of goods and services. These amounts were approximately $63.8 million in 2017.
3) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, which historically have been expensed when incurred, are deferred and amortized against revenue over the expected period of benefit of approximately 21 to 24 months. In Cable and Wireline, installation revenues are recognized over a shorter period of benefit. The deferred balance as of March 31, 2018 is approximately $52.9 million and is classified on the balance sheet as current and non-current assets, as applicable.
Recent Developments
Credit Facility Modification: On February 16, 2018, the Company, entered into a Second Amendment to Credit Agreement (the “Second Amendment”) with CoBank, ACB, as administrative costsagent of its Credit Agreement, described more fully in Note 10, Long-Term Debt, and the various financial institutions party thereto (the “Lenders”), which modifies the Credit Agreement by (i) reducing the interest rate paid by the Company by approximately 50 basis points with respect to certain loans made by the Lenders to the Company under the Credit Agreement, and (ii) allowing the Company to make charitable contributions to Shentel Foundation, a Virginia nonstock corporation, of up to $1.5 million in any fiscal year.
Sprint Territory Expansion: Effective February 1, 2018, we signed the Expansion Agreement with Sprint to expand our wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia, (the “Expansion Area”), effectively adding a population (POPs) of approximately 1.1 million. The agreement includes certain network build out requirements in the three month period ended March 31, 2017. In additionExpansion Area, and the ability to utilize Sprint’s spectrum in the Expansion Area along with certain other amendments to the approximately $78Affiliate Agreements. Pursuant to the Expansion Agreement, Sprint agreed to, among other things, transition the provision of network coverage in the Expansion Area from Sprint to us. The Expansion Agreement required a payment of $52.0 million to Sprint for the right to service the Expansion Area pursuant to the Affiliate Agreements plus an additional payment of incurred and expected expenses described above,up to $5.0 million for certain equipment at the Company also incurredSprint cell sites in the Expansion Area. The option is exercisable at the Company's discretion. A map of our territory, reflecting the new expansion area, is provided below:
approximately $23 million of debt issuance costs in 2015 and 2016 relating to this transaction, for a total expected cost of $101 million.
Results of Operations
Three Months Ended March 31, 20172018 Compared with the Three Months Ended March 31, 20162017
Our consolidated results for the first quarter of 20172018 and 20162017 are summarized as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands) | | 2017 | | 2016 | | $ | | % |
Operating revenues | | $ | 153,880 |
| | $ | 92,571 |
| | $ | 61,309 |
| | 66.2 |
|
Operating expenses | | 143,207 |
| | 71,259 |
| | 71,948 |
| | 101.0 |
|
Operating income | | 10,673 |
| | 21,312 |
| | (10,639 | ) | | (49.9 | ) |
| | | | | | | | |
Interest expense | | (9,100 | ) | | (1,619 | ) | | (7,481 | ) | | 462.1 |
|
Other income, net | | 1,375 |
| | 556 |
| | 819 |
| | 147.3 |
|
Income before taxes | | 2,948 |
| | 20,249 |
| | (17,301 | ) | | (85.4 | ) |
Income tax expense | | 607 |
| | 6,368 |
| | (5,761 | ) | | (90.5 | ) |
Net income | | $ | 2,341 |
| | $ | 13,881 |
| | $ | (11,540 | ) | | (83.1 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands) | | 2018 | | 2017 | | $ | | % |
Operating revenues | | $ | 151,732 |
| | $ | 153,880 |
| | $ | (2,148 | ) | | (1.4 | ) |
Operating expenses | | 137,384 |
| | 143,207 |
| | (5,823 | ) | | (4.1 | ) |
Operating income (loss) | | 14,348 |
| | 10,673 |
| | 3,675 |
| | 34.4 |
|
| | | | | | | | |
Interest expense | | (9,332 | ) | | (9,100 | ) | | (232 | ) | | 2.5 |
|
Other income (expense), net | | 989 |
| | 1,375 |
| | (386 | ) | | (28.1 | ) |
Income (loss) before taxes | | 6,005 |
| | 2,948 |
| | 3,057 |
| | 103.7 |
|
Income tax expense (benefit) | | 1,176 |
| | 607 |
| | 569 |
| | 93.7 |
|
Net income (loss) | | $ | 4,829 |
| | $ | 2,341 |
| | $ | 2,488 |
| | 106.3 |
|
Operating revenues
For the three months ended March 31, 2017,2018, operating revenues increased $61.3decreased $2.1 million, or 66.2%.1.4% to $151.7 million. Excluding the impacts of adopting Topic 606 revenues would have increased $2.0 million, driven by the Cable and Wireline operations, partially offset by Wireless segment revenues increased $58.9 million compared to the first quarter of 2016; nearly all of this increase was a result of the acquisition of nTelos on May 6, 2016. Cable segment revenues grew $2.6 million primarily as a result of 2.2% growth in average subscriber counts and an increase in revenue per subscriber. Wireline segment revenues increased $0.8 million, primarily due to increases in fiber sales.operations.
Operating expenses
Total operating expenses were $143.2decreased $5.8 million or 4.1% to $137.4 million in the first quarter of 2017three months ended March 31, 2018 compared to $71.3with $143.2 million in the prior year period. OperatingExcluding the impacts of adopting Topic 606, operating expenses inwould have decreased $1.4 million, primarily due to the first quarterelimination of the 2017 included $4.5 million ofacquisition, integration and acquisition costs associated with the nTelos acquisition, including $3.8 million on the Wireless segment and $0.7 million in the Other segment. Selling, general and administrative expenses and cost of goods and services in the Wireless segment included an additional $2.6 million of nTelos-related customer care and other back officemigration costs related to supportingthe completion of the transformation of the nTelos legacy customers until the migration of these customers is completed. Wireless segment operating expenses increased $63.3 million (excluding the $6.4 million of customer care, integration and acquisition expenses described above), primarily due to on-going costs associated with the acquired nTelos operations including $27.3 million of incremental depreciation and amortization expenses. All other operating expenses increased $2.2 million, net of eliminations of intersegment activities.network.
Acquisition and integration costs on theAdditionally, our Other segment primarily consisted of transaction related expenses such as legal and other professional fees. Onincludes the Wireless segment, such costs included handsets provided to nTelos subscribers who needed a new phone to transition toCompany's stock compensation expense for 2018. In prior years this expense was allocated among the Sprint billing platform, costs associatedCompany's operating segments. Stock compensation expense for the three months ended March 31, 2018 was approximately $2.0 million compared with terminating duplicative cell site leases and backhaul circuits, and personnel costs associated with short-term nTelos employees required to migrate former nTelos customers toapproximately $1.6 million for the Sprint back-office.three months ended March 31, 2017.
Interest expense
Interest expense has increased primarily as a result of the incremental borrowings associated with closing the nTelos acquisitionfunding of the Company's strategic initiatives and the effect of two interest rate increases implemented byin the Federal Reserve in late 2016 and early 2017.London Interbank Offered Rate ("LIBOR"). The impact of the interestLIBOR rate increases hashave been offset by a swap that covers 50% of the outstanding principal under the new debt. Other changes include increased debt cost amortization reflecting the incremental costs of entering into the new debt, partially offset by increased capitalizationan amendment to the Credit Facility Agreement that reduced the base rate of interest to capital projects.the Credit Facility by 50 basis points.
Other income, net
Other income, net has decreased $0.4 million primarily as a result of lower interest income derived from our investments.
Income tax expense
The Company's actual effective income tax rate decreased from 31.4% forDuring the three months ended March 31, 2016 to 20.6%2018, income tax expense was approximately $1.2 million, compared with $0.6 million for the three months ended March 31, 2017. The difference for both periods between the actual effectiveOur income tax rate andexpense increased consistent with the statutoryincrease in income before taxes. The Company’s effective tax rate results primarilydecreased from excess tax deductions on share grant vestings and certain stock option exercises, which are recognized as incurred.20.6% in 2017 to 19.6% in 2018. The Company recognized $1.7 million in excess deductionsdecrease in the three months ended Marcheffective tax rate is primarily attributable to the changes in federal tax regulations related to the 2017 compared to $4.5 million in excess deductions in the same period of 2016; however, the March 31, 2017 excess deductions represented a larger share of pre-tax income, reducing the effective rate more in in the three months ended March 31, 2017 than the three months ended March 31, 2016.
Net income
For the three months ended March 31, 2017, net income decreased $11.5 million, or 83.1% over March 31, 2016, primarily reflecting increased depreciation and amortization, straight-lining of certain Sprint fee credits, and higher interest on the increased balance of outstanding debt as a result of the nTelos acquisition, net of taxes.
Tax Act that was enacted during December 2017.
Wireless
Our Wireless segment historically provided digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, through Shenandoah Personal Communications, LLC (“PCS”), a Sprint PCS Affiliate. Following the acquisition of nTelos in May 2016, our wireless service territory expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. Through Shenandoah Mobile, LLC (“Mobile”), this segment also leases land on which it builds Company-owned cell towers, which it leases to affiliates and non-affiliated wireless service providers, throughout the same multi-state area described above.
PCS receivesearns revenues from Sprint for their postpaid and prepaid subscribers that obtain serviceusage of our Wireless network in PCS’sour Wireless network coverage area. PCS relies on Sprint to provide timely, accurate and complete information to record the appropriate revenue for each financial period. Postpaid revenues received from Sprint are recordedarea, net of certain fees retained by Sprint. Since January 1, 2016, the fees retained by Sprint are 16.6%,customer credits, account write offs and certain revenue and expense items previously included in these fees became separately settled.other billing adjustments.
We also offer prepaid wireless products and services in our PCS network coverage area. Sprint retains a Management Fee equal to 6% of prepaid customer billings. Prepaid revenues received from Sprint are reported net of the cost of this fee. Other fees charged on a per unit basis are separately recorded as expenses according to the nature of the expense. We pay handset subsidies to Sprint for the difference between the selling price of prepaid handsets and their cost, recorded as a net cost in cost of goods sold. The revenue and expense components reported to us by Sprint are based on Sprint’s national averages for prepaid services, rather than being specifically determined by customers assigned to our geographic service areas.
The following tables show selected operating statistics of the Wireless segment as of the dates shown:
|
| | | | | | | | | | | | |
| | March 31, 2017 | | December 31, 2016 | | March 31, 2016 | | December 31, 2015 |
Retail PCS Subscribers – Postpaid | | 717,150 |
| | 722,562 |
| | 315,231 |
| | 312,512 |
|
Retail PCS Subscribers – Prepaid | | 243,557 |
| | 236,138 |
| | 142,539 |
| | 142,840 |
|
PCS Market POPS (000) (1) | | 5,536 |
| | 5,536 |
| | 2,437 |
| | 2,433 |
|
PCS Covered POPS (000) (1) | | 4,836 |
| | 4,807 |
| | 2,230 |
| | 2,224 |
|
CDMA Base Stations (sites) | | 1,476 |
| | 1,467 |
| | 556 |
| | 552 |
|
Towers Owned | | 196 |
| | 196 |
| | 157 |
| | 158 |
|
Non-affiliate Cell Site Leases | | 206 |
| | 202 |
| | 202 |
| | 202 |
|
The changes from March 31, 2016 to December 31, 2016 shown above include the effects of the nTelos acquisition and the exchange with Sprint on May 6, 2016.
The following table identifies the impact of Topic 606 on the Company's Wireless operations for the three months ended March 31, 2018:
|
| | | | | | | |
| | Three Months Ended March 31, | |
| | 2017 | | 2016 | |
Gross PCS Subscriber Additions – Postpaid | | 38,701 |
| | 17,356 |
| |
Net PCS Subscriber Additions (Losses) – Postpaid | | (5,412 | ) | | 2,719 |
| |
Gross PCS Subscriber Additions – Prepaid | | 42,168 |
| | 21,231 |
| |
Net PCS Subscriber Additions (Losses) – Prepaid | | 7,419 |
| | (301 | ) | |
PCS Average Monthly Retail Churn % - Postpaid (2) | | 2.05 | % | | 1.56 | % | |
PCS Average Monthly Retail Churn % - Prepaid (2) | | 4.86 | % | | 5.05 | % | |
|
| | | | | | | | | | | | | | | |
($ in thousands) |
| Topic 606 Impact - Wireless |
|
| Prior to Adoption of Topic 606 | Changes in Presentation (1) | Equipment Revenue (2) | Deferred Costs (3) | 3/31/2018 As reported |
Service revenues and other | $ | 112,683 |
| $ | (20,014 | ) | $ | — |
| $ | 355 |
| $ | 93,024 |
|
Equipment revenues | 1,854 |
| — |
| 15,520 |
| — |
| 17,374 |
|
Total operating revenues | 114,537 |
| (20,014 | ) | 15,520 |
| 355 |
| 110,398 |
|
Cost of services | 33,750 |
| — |
| — |
| — |
| 33,750 |
|
Cost of goods sold | 6,040 |
| (5,833 | ) | 15,520 |
| — |
| 15,727 |
|
Selling, general & administrative | 26,316 |
| (14,181 | ) | — |
| — |
| 12,135 |
|
Depreciation and amortization | 33,925 |
| — |
| — |
| — |
| 33,925 |
|
Total operating expenses | 100,031 |
| (20,014 | ) | 15,520 |
| — |
| 95,537 |
|
Operating income | 14,506 |
| — |
| — |
| 355 |
| 14,861 |
|
1) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, and to provide on-going support to their prepaid customers in our territory were historically recorded as expense when incurred. Under Topic 606, these amounts represent consideration payable to our customer, Sprint, and are recorded as a reduction of revenue. In 2017, these amounts were approximately $44.8 million for the national commissions, previously recorded in selling, general and administrative, $18.7 million for national device costs previously recorded in cost of goods and services, and $16.9 million for the on-going service to Sprint's prepaid customers, previously recorded in selling, general and administrative.
2) Costs incurred by the Company for the sale of devices under Sprint’s device financing and lease programs were previously recorded net against revenue. Under Topic 606, the revenue from device sales is recorded gross as equipment revenue and the device costs are recorded gross and reclassified to cost of goods and services. These amounts were approximately $63.8 million in 2017.
3) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, which historically have been expensed when incurred, are deferred and amortized against revenue over the expected period of benefit of approximately 21 to 24 months. The deferred balance as of March 31, 2018 is approximately $43.2 million and is classified on the balance sheet as current and non-current assets, as applicable.
Under our amended affiliate agreement, Sprint agreed to waive the Management Fees charged on both postpaid and prepaid revenues, up to approximately $4.2 million per month, until the total amount waived reaches approximately $255.6 million, which is expected to occur in 2022. The cash flow savings of the waived management fee waiver has been incorporated into the fair value of the affiliate contract expansion intangible, which is reduced, in part, as credits are received from Sprint.
The following tables indicate selected operating statistics of Wireless, including Sprint subscribers, as of the dates shown:
|
| | | | | | | | | | | | |
| | March 31, 2018 (3) | | December 31, 2017 (4) | | March 31, 2017 | | December 31, 2016 |
Retail PCS Subscribers – Postpaid | | 774,861 |
| | 736,597 |
| | 717,150 |
| | 722,562 |
|
Retail PCS Subscribers – Prepaid (1) | | 250,191 |
| | 225,822 |
| | 214,771 |
| | 206,672 |
|
PCS Market POPS (000) (2) | | 7,023 |
| | 5,942 |
| | 5,536 |
| | 5,536 |
|
PCS Covered POPS (000) (2) | | 5,889 |
| | 5,272 |
| | 4,836 |
| | 4,807 |
|
CDMA Base Stations (sites) | | 1,742 |
| | 1,623 |
| | 1,476 |
| | 1,467 |
|
Towers Owned | | 193 |
| | 192 |
| | 196 |
| | 196 |
|
Non-affiliate Cell Site Leases | | 192 |
| | 192 |
| | 206 |
| | 202 |
|
| |
1) | As of September 2017, the Company is no longer including Lifeline subscribers to be consistent with Sprint's policy. Historical customer counts have been adjusted accordingly. |
| |
2) | "POPS" refers to the estimated population of a given geographic area. Market POPS are those within a market area which we are authorized to serve under our Sprint PCS affiliate agreements, and Covered POPS are those covered by our network. As of December 31, 2017, the data source for POPS is U.S. census data. Historical periods previously referred to other third party population data and have been recast to refer to U.S. census data. |
| |
3) | Beginning March 31, 2018 includes Richmond Expansion Area. |
| |
4) | Beginning December 31, 2017 includes Parkersburg Expansion Area. |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Gross PCS Subscriber Additions – Postpaid | | 81,420 |
| | 38,701 |
|
Net PCS Subscriber Additions (Losses) – Postpaid | | 38,264 |
| | (5,412 | ) |
Gross PCS Subscriber Additions – Prepaid (1) | | 55,802 |
| | 39,445 |
|
Net PCS Subscriber Additions (Losses) – Prepaid (1) | | 24,369 |
| | 8,099 |
|
PCS Average Monthly Retail Churn % - Postpaid (2) | | 1.89 | % | | 2.05 | % |
PCS Average Monthly Retail Churn % - Prepaid (1) | | 4.42 | % | | 5.01 | % |
| |
1) | The Company is no longer including Lifeline subscribers to be consistent with Sprint's policy. Historical customer counts and churn % have been adjusted accordingly. |
| |
2) | PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period. |
The subscriber statistics shown above include the following:
|
| | | | | | | | |
| February 1, 2018 | | April 6, 2017 | | May 6, 2016 |
| Richmond Expansion Area (3) | | Parkersburg Expansion Area | | nTelos Area |
PCS Subscribers - Postpaid | 38,343 |
| | 19,067 |
| | 404,965 |
|
PCS Subscribers - Prepaid | 15,691 |
| | 5,962 |
| | 154,944 |
|
Acquired PCS Market POPS (000) (1) | 1,082 |
| | 511 |
| | 3,099 |
|
Acquired PCS Covered POPS (000) (1) | 602 |
| | 244 |
| | 2,298 |
|
Acquired CDMA Base Stations (sites) (2) | 105 |
| | — |
| | 868 |
|
Towers | — |
| | — |
| | 20 |
|
Non-affiliate Cell Site Leases | — |
| | — |
| | 10 |
|
| |
1) | POPS refers to the estimated population of a given geographic area and is based on information purchased from third party sources.area. Market POPS are those within a market area which we are authorized to serve under our Sprint PCS affiliate agreements, and Covered POPS are those covered by our network. |
| |
2) | PCS Average Monthly Retail Churn isAs of March 31, 2018 we have shut down 107 overlap sites associated with the average of the monthly subscriber turnover, or churn, calculations for the period.nTelos Area. |
| |
3) | Excludes Assurance subscribers. |
Three Months Ended March 31, 20172018 Compared with the Three Months Ended March 31, 20162017
|
| | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended March 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
Segment operating revenues | | | | | | | | |
|
Wireless service revenue | | $ | 108,186 |
| | $ | 52,179 |
| | $ | 56,007 |
| | 107.3 |
|
Tower lease revenue | | 2,882 |
| | 2,750 |
| | 132 |
| | 4.8 |
|
Equipment revenue | | 3,145 |
| | 1,454 |
| | 1,691 |
| | 116.3 |
|
Other revenue | | 1,250 |
| | 135 |
| | 1,115 |
| | NM |
|
Total segment operating revenues | | 115,463 |
| | 56,518 |
| | 58,945 |
| | 104.3 |
|
Segment operating expenses | | |
| | |
| | |
| | |
|
Cost of goods and services, exclusive of depreciation and amortization shown separately below | | 38,318 |
| | 16,578 |
| | 21,740 |
| | 131.1 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 28,464 |
| | 11,514 |
| | 16,950 |
| | 147.2 |
|
Integration and acquisition expenses | | 3,792 |
| | — |
| | 3,792 |
| | NM |
|
Depreciation and amortization | | 35,752 |
| | 8,494 |
| | 27,258 |
| | 320.9 |
|
Total segment operating expenses | | 106,326 |
| | 36,586 |
| | 69,740 |
| | 190.6 |
|
Segment operating income | | $ | 9,137 |
| | $ | 19,932 |
| | $ | (10,795 | ) | | (54.2 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands) | | 2018 | | 2017 | | $ | | % |
Wireless operating revenues | | | | | | | | |
|
Wireless service revenue | | $ | 89,759 |
| | $ | 108,186 |
| | $ | (18,427 | ) | | (17.0 | ) |
Tower lease revenue | | 2,896 |
| | 2,882 |
| | 14 |
| | 0.5 |
|
Equipment revenue | | 17,374 |
| | 3,145 |
| | 14,229 |
| | 452.4 |
|
Other revenue | | 369 |
| | 1,250 |
| | (881 | ) | | (70.5 | ) |
Total Wireless operating revenues | | 110,398 |
| | 115,463 |
| | (5,065 | ) | | (4.4 | ) |
Wireless operating expenses | | |
| | |
| | |
| | |
|
Cost of goods and services | | 49,477 |
| | 38,318 |
| | 11,159 |
| | 29.1 |
|
Selling, general and administrative | | 12,135 |
| | 28,464 |
| | (16,329 | ) | | (57.4 | ) |
Acquisition, integration and migration expenses | | — |
| | 3,792 |
| | (3,792 | ) | | (100.0 | ) |
Depreciation and amortization | | 33,925 |
| | 35,752 |
| | (1,827 | ) | | (5.1 | ) |
Total Wireless operating expenses | | 95,537 |
| | 106,326 |
| | (10,789 | ) | | (10.1 | ) |
Wireless operating income (loss) | | $ | 14,861 |
| | $ | 9,137 |
| | $ | 5,724 |
| | 62.6 |
|
Service Revenues
Operating Revenues
Wireless service revenue increased $56.0operating revenues decreased $5.1 million or 107.3%,4.4% for the three months ended March 31, 2018, compared with the three months ended March 31, 2017, comparedprimarily due to the adoption of Topic 606. Excluding the impacts of Topic 606, wireless revenues decreased $0.9 million. This decrease was driven by a decline in average revenue per subscriber, offset by an increase in Sprint customers, including the new territory acquired from Sprint. The decline in average revenue per subscriber was driven by additional discounts and promotions.
As a result of the adoption of Topic 606 and in the three months ended March 31, 2016, period. See2018, wireless service revenues were reduced by approximately $20.0 million of expenses payable to Sprint, our customer, related to the reimbursement to Sprint for costs incurred in their national sales channel for commissions and device costs, and to provide ongoing support to their prepaid customers in our territory. Commissions were previously recorded as expenses within selling, general and administrative. Additionally, we recorded $15.5 million of equipment revenue and cost of goods sold for the sale of devices under Sprint’s device financing and lease programs. Equipment costs were historically netted and presented within equipment revenue.
The table below.
below provides additional detail in the settlement with Sprint impacting service revenues.
|
| | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended March 31, | | Change |
Service Revenues | | 2017 | | 2016 | | $ | | % |
Postpaid net billings (1) | | $ | 92,989 |
| | $ | 45,638 |
| | $ | 47,351 |
| | 103.8 |
|
Sprint fees | | | | | | |
| | |
|
Management fee | | (7,383 | ) | | (3,651 | ) | | (3,732 | ) | | 102.2 |
|
Net service fee | | (7,200 | ) | | (3,934 | ) | | (3,266 | ) | | 83.0 |
|
Waiver of management fee | | 7,383 |
| | — |
| | 7,383 |
| | NM |
|
| | (7,200 | ) | | (7,585 | ) | | 385 |
| | (5.1 | ) |
Prepaid net billings | | |
| | |
| | |
| | |
|
Gross billings | | 25,945 |
| | 13,083 |
| | 12,862 |
| | 98.3 |
|
Sprint management fee | | (1,557 | ) | | (785 | ) | | (772 | ) | | 98.3 |
|
Waiver of management fee | | 1,557 |
| | — |
| | 1,557 |
| | NM |
|
| | 25,945 |
| | 12,298 |
| | 13,647 |
| | 111.0 |
|
Travel and other revenues | | 5,636 |
| | 1,828 |
| | 3,808 |
| | 208.3 |
|
Accounting adjustments | | | | | | |
| | |
|
Amortization of expanded affiliate agreement | | (4,978 | ) | | — |
| | (4,978 | ) | | NM |
|
Straight-line adjustment - management fee waiver | | (4,206 | ) | | — |
| | (4,206 | ) | | NM |
|
| | (9,184 | ) | | — |
| | (9,184 | ) | | NM |
|
Total Service Revenues | | $ | 108,186 |
| | $ | 52,179 |
| | $ | 56,007 |
| | 107.3 |
|
|
| | | | | | | | | | | | | | | |
|
| Three Months Ended March 31, |
| Change |
(in thousands) |
| 2018 |
| 2017 |
| $ |
| % |
Wireless Service Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid net billings (1) |
| $ | 93,290 |
|
| $ | 92,989 |
|
| $ | 301 |
|
| 0.3 |
|
Amortization of deferred contract & other costs (3) | | (6,871 | ) | | — |
| | (6,871 | ) | | * |
|
Management fee |
| (7,400 | ) |
| (7,383 | ) |
| (17 | ) |
| 0.2 |
|
Net service fee |
| (7,955 | ) |
| (7,200 | ) |
| (755 | ) |
| 10.5 |
|
Total Postpaid Service Revenue |
| 71,064 |
|
| 78,406 |
|
| (7,342 | ) |
| (9.4 | ) |
|
| |
|
| |
|
| |
|
| |
|
Prepaid net billings (2) |
| 26,341 |
|
| 25,202 |
|
| 1,139 |
|
| 4.5 |
|
Amortization of deferred contract & other costs (3) | | (12,788 | ) | | — |
| | (12,788 | ) | | * |
|
Sprint management fee |
| (1,649 | ) |
| (1,557 | ) |
| (92 | ) |
| 5.9 |
|
Total Prepaid Service Revenue |
| 11,904 |
|
| 23,645 |
|
| (11,741 | ) |
| (49.7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel and other revenues |
| 6,791 |
|
| 6,135 |
|
| 656 |
|
| 10.7 |
|
Total Service Revenues |
| $ | 89,759 |
|
| $ | 108,186 |
|
| $ | (18,427 | ) |
| (17.0 | ) |
(1)1) Postpaid net billings are defined under the terms of the affiliate contract with Sprint to be the gross billings to customers within our service territorywireless network coverage area less billing credits and adjustments and allocated write-offs of uncollectible accounts.
2) The Company includes Lifeline subscribers revenue within travel and other revenues to be consistent with Sprint. The above table reflects the reclassification of the related Assurance Wireless prepaid revenue from prepaid gross billings to travel and other revenues for the three months ended March 31, 2017.
Operating revenues3) Due to the adoption of Topic 606, costs reimbursed to Sprint for commission and acquisition cost incurred in their national sales channel are recorded as reduction of revenue and amortized over the period of benefit. Additionally, costs reimbursed to Sprint for the support of their prepaid customer base are recorded as a reduction of revenue. These costs were previously recorded in cost of goods sold, and selling, general and administrative.
The changesdecline in Wireless segmentpostpaid service revenues shown inrevenue was primarily the table above are almost exclusively a result of the reclassification of approximately $6.9 million of costs reimbursed to Sprint for commissions and acquisition costs incurred in their national sales channel which were previously classified as operating expenses, driven by the adoption of Topic 606. Excluding the impact of Topic 606, postpaid service revenues would have decreased $0.5 million. The decrease in postpaid service revenue was due to a decline in postpaid in Sprint’s average revenue per postpaid customer that was driven by discounts and promotions. Postpaid service revenue was further reduced by approximately $0.8 million due to an increase in net service fee as nTelos acquisition in May 2016. Postpaid subscribers have increased by 402 thousand from March 31, 2016were migrated to March 31, 2017 with 387 thousandSprint’s billing and back-office systems. The migration of themthese subscribers resulted in the formerelimination of costs to run the nTelos service area asback office system which were recorded in selling, general and administrative. Partially offsetting these impacts was an increase in subscribers of March 31, 2017. Prepaid57 thousand subscribers have increased by 101 thousand over the same time period. There were 110 thousand prepaid subscribers in the former nTelos service area as of March 31, 2017.
In addition to the subscribers acquired as a result of the acquisition, we recorded an asset related to the changes to the Sprint affiliate agreement, including the right to serve new subscribers in the nTelos footprint, as previously described. That asset is being amortized through the expiration of the current initial term of that contract in 2029 and, as a result, we recorded $5.0 million in amortization in the first quarter of 2017. Sprint agreed to waive certain management fees that they would otherwise be entitled to under the affiliate agreement in exchange for our commitment to buy nTelos, upgrade its network and support the former nTelos and Sprint customers. The fees waived are being recognized on a straight-line basis over the remainder of the initial term of the contract through 2029 and, as a result, we recorded an adjustment of $4.2 million in the first quarter of 2017.
Other operating revenues
The increases in equipment revenue and other revenue also resulted primarily from the nTelos acquisition, with the increase in other revenue primarily representing regulatory recovery revenues related to billings to customers before migration to the Sprint billing system, whereas Sprint retains the billing and related expenses and liabilities under our affiliate agreement.acquired territories
The decline in prepaid service revenues was primarily the result of the reclassification of approximately $12.8 million of costs reimbursed to Sprint for expenses commissions and acquisition costs incurred in their national sales channel and costs to support their subscriber base, which were previously classified as operating expenses, driven to the adoption of Topic 606. Excluding the impact of Topic 606, prepaid service revenues would have increased $1.0 million. This increase in service revenue was driven by an increase in subscribers of 35 thousand, including 21 thousand in the acquired territories.
Cost of goods and services
Cost of goods and services increased $21.7$11.2 million, or 131.1%29.1%, in 2017 from the first quarter of 2016.2018 compared with the first quarter of 2017. Excluding the impact of the adoption of Topic 606, the increase would have been $1.5 million. The increase results primarily from increases in cell site rent, power, maintenanceadditional network costs related to the completion of our 4G roll-out and backhaul costs for the incremental 868 cell sites in the nTelos territoryexpansion of $19.3 million, as well as the related growth in the cost ofour wireless network technicians to service and maintain these sites of $1.1 million. Cost of goods and services also included $0.1 million of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back office systems.coverage area.
Selling, general and administrative
Selling, general and administrative costs increased $16.9decreased $16.3 million, or 147.2%57.4%, in the first quarter of 20172018 from the comparable 20162017 period again primarily due to the reclassification of approximately $14.2 million of commissions and subscriber acquisition costs to reductions of revenue as required by the adoption of Topic 606. Excluding the impact of Topic 606, the decrease would have been $2.1 million and was primarily due to a reduction of back office expenses required to support former nTelos subscribers that migrated to the Sprint back office during 2017.
Acquisition, integration and migration
Acquisition and integration costs were not incurred during the three months ended March 31, 2018, as the completion of integration and migration activities related to the acquisition of nTelos in May 2016. Increases include $3.2 million of incremental separately settled national channel commissions, $4.7 million related to incremental stores acquired as a result of the nTelos acquisition, $0.9 million in incremental saleswas completed during 2017. Acquisition, integration and marketing efforts to communicate with and migrate the remaining nTelos legacy customers over to the Sprint platforms, and $1.3 million in other administrativemigration costs related to the acquired operations. Costs associated with prepaid wireless offerings increased $4.3 million. Selling, general and administrative costs also included $2.5 millionprimarily consisted of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back office systems.
Integration and acquisition
Integration and acquisition expenses of $3.8 million in the first quarter of 2017 include approximately $3.7 million for replacement handsets issuedprovided to former nTelos subscribers migratedwho required a new phone to transition to the Sprint billing platform, and $0.7personnel costs associated with nTelos employees retained on a short-term basis who were necessary in the efforts required to migrate former nTelos customers to the Sprint back-office billing platform. Acquisition, integration and migration costs for the three months ended March 31, 2017 were approximately $6.3 million, in other expenses, partially offset by $0.6and were comprised of $2.6 million in reductionsclassified as cost of previously estimated costs to terminate duplicative cell site leasesgoods and backhaul contracts.services and selling, general and administrative and approximately $3.7 million classified as acquisition, integration and migration.
Depreciation and amortization
Depreciation and amortization increased $27.3decreased $1.8 million, or 321%5.1%, in the first quarter of 20172018 over the comparable 20162017 period, due primarily to $20.0 million in incremental depreciation largely on theas assets acquired fixed assets, and $6.7 million in amortization of customer based intangibles recorded in the acquisition.
nTelos acquisition were retired.
Cable
The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia, which are included in the Wireline segment. Increases in homes passed, available homes and video customers between December 31, 2015 and March 31, 2016, resulted from the Colane acquisition on January 1, 2016.
|
| | | | | | | | | | | | |
| | March 31, 2017 | | December 31, 2016 | | March 31, 2016 | | December 31, 2015 |
Homes Passed (1) | | 184,819 |
| | 184,710 |
| | 181,375 |
| | 172,538 |
|
Customer Relationships (2) | | | | | | | | |
|
Video customers | | 47,160 |
| | 48,512 |
| | 50,195 |
| | 48,184 |
|
Non-video customers | | 30,765 |
| | 28,854 |
| | 26,895 |
| | 24,550 |
|
Total customer relationships | | 77,925 |
| | 77,366 |
| | 77,090 |
| | 72,734 |
|
Video | | | | | | | | |
|
Customers (3) | | 49,384 |
| | 50,618 |
| | 52,468 |
| | 50,215 |
|
Penetration (4) | | 26.7 | % | | 27.4 | % | | 28.9 | % | | 29.1 | % |
Digital video penetration (5) | | 77.1 | % | | 77.4 | % | | 74.8 | % | | 77.9 | % |
High-speed Internet | | | | | | | | |
|
Available Homes (6) | | 183,935 |
| | 183,826 |
| | 180,814 |
| | 172,538 |
|
Customers (3) | | 61,815 |
| | 60,495 |
| | 58,273 |
| | 55,131 |
|
Penetration (4) | | 33.6 | % | | 32.9 | % | | 32.2 | % | | 32.0 | % |
Voice | | | | | | | | |
|
Available Homes (6) | | 181,198 |
| | 181,089 |
| | 178,077 |
| | 169,801 |
|
Customers (3) | | 21,647 |
| | 21,352 |
| | 20,786 |
| | 20,166 |
|
Penetration (4) | | 11.9 | % | | 11.8 | % | | 11.7 | % | | 11.9 | % |
Total Revenue Generating Units (7) | | 132,846 |
| | 132,465 |
| | 131,527 |
| | 125,512 |
|
Fiber Route Miles | | 3,233 |
| | 3,137 |
| | 2,955 |
| | 2,844 |
|
Total Fiber Miles (8) | | 100,799 |
| | 92,615 |
| | 80,727 |
| | 76,949 |
|
Average Revenue Generating Units | | 132,419 |
| | 131,218 |
| | 129,604 |
| | 124,054 |
|
| |
1) | Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information. |
| |
2) | Customer relationships represent the number of customers who receive at least one of our services. |
| |
3) | Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer. Where services are provided on a bulk basis, such as to hotels and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above. |
| |
4) | Penetration is calculated by dividing the number of customers by the number of homes passed or available homes, as appropriate. |
| |
5) | Digital video penetration is calculated by dividing the number of digital video customers by total video customers. Digital video customers are video customers who receive any level of video service via digital transmission. A dwelling with one or more digital set-top boxes or digital adapters counts as one digital video customer. |
| |
6) | Homes and businesses are considered available (“available homes”) if we can connect them to our distribution system without further extending the transmission lines and if we offer the service in that area. |
| |
7) | Revenue generating units are the sum of video, voice and high-speed internet customers. |
| |
8) | Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. |
Three Months Ended March 31, 2017 Compared with the Three Months Ended March 31, 2016
|
| | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended March 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
Segment operating revenues | | | | | | | | |
Service revenue | | $ | 26,411 |
| | $ | 24,340 |
| | $ | 2,071 |
| | 8.5 |
|
Other revenue | | 2,602 |
| | 2,106 |
| | 496 |
| | 23.6 |
|
Total segment operating revenues | | 29,013 |
| | 26,446 |
| | 2,567 |
| | 9.7 |
|
Segment operating expenses | | |
| | |
| | |
| | |
|
Cost of goods and services, exclusive of depreciation and amortization shown separately below | | 15,228 |
| | 14,647 |
| | 581 |
| | 4.0 |
|
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below | | 4,858 |
| | 5,108 |
| | (250 | ) | | (4.9 | ) |
Depreciation and amortization | | 5,788 |
| | 6,095 |
| | (307 | ) | | (5.0 | ) |
Total segment operating expenses | | 25,874 |
| | 25,850 |
| | 24 |
| | 0.1 |
|
Segment operating income | | $ | 3,139 |
| | $ | 596 |
| | $ | 2,543 |
| | 426.7 |
|
Operating revenues
Cable segment service revenues increased $2.1 million, or 8.5%, due to a 2.2% increase in average revenue generating units, video rate increases in January 2017 to offset increases in programming costs, and new and existing customers selecting higher-speed data (HSD) access packages.
Other revenue grew $0.5 million, primarily due to new fiber contracts to towers, schools and libraries.
Operating expenses
Cable segment cost of goods and services increased $0.6 million, or 4.0%, in the first quarter of 2017 over the comparable 2016 period. The increase resulted from higher network and maintenance costs.
Selling, general and administrative expenses decreased $0.3 million against the prior year quarter due to lower advertising costs.
Wireline.
Wireline
The following tables indicate selected operating statistics of Cable, as of the dates shown:
|
| | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | | March 31, 2017 | | December 31, 2016 |
Homes Passed (1) | | 184,975 |
| | 184,910 |
| | 184,819 |
| | 184,710 |
|
Customer Relationships (2) | | | | | | | | |
|
Video users | | 43,264 |
| | 44,269 |
| | 47,160 |
| | 48,512 |
|
Non-video customers | | 35,133 |
| | 33,559 |
| | 30,765 |
| | 28,854 |
|
Total customer relationships | | 78,397 |
| | 77,828 |
| | 77,925 |
| | 77,366 |
|
Video | | | | | | | | |
|
Users (3) | | 45,555 |
| | 46,613 |
| | 49,384 |
| | 50,618 |
|
Penetration (4) | | 24.6 | % | | 25.2 | % | | 26.7 | % | | 27.4 | % |
Digital video penetration (5) | | 75.8 | % | | 76.2 | % | | 77.1 | % | | 77.4 | % |
High-speed Internet | | | | | | | | |
|
Available Homes (6) | | 184,975 |
| | 184,910 |
| | 183,935 |
| | 183,826 |
|
Users (3) | | 65,141 |
| | 63,918 |
| | 61,815 |
| | 60,495 |
|
Penetration (4) | | 35.2 | % | | 34.6 | % | | 33.6 | % | | 32.9 | % |
Voice | | | | | | | | |
|
Available Homes (6) | | 184,975 |
| | 182,379 |
| | 181,198 |
| | 181,089 |
|
Users (3) | | 22,743 |
| | 22,555 |
| | 21,647 |
| | 21,352 |
|
Penetration (4) | | 12.3 | % | | 12.4 | % | | 11.9 | % | | 11.8 | % |
Total Revenue Generating Units (7) | | 133,439 |
| | 133,086 |
| | 132,846 |
| | 132,465 |
|
Fiber Route Miles | | 3,371 |
| | 3,356 |
| | 3,233 |
| | 3,137 |
|
Total Fiber Miles (8) | | 124,701 |
| | 122,011 |
| | 100,799 |
| | 92,615 |
|
Average Revenue Generating Units | | 132,865 |
| | 132,759 |
| | 132,419 |
| | 131,218 |
|
1) Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information.
2) Customer relationships represent the number of billed customers who receive at least one of our services.
3) Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer. Where services are provided on a bulk basis, such as to hotels and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above.
4) Penetration is calculated by dividing the number of users by the number of homes passed or available homes, as appropriate.
5) Digital video penetration is calculated by dividing the number of digital video users by total video users. Digital video users are video customers who receive any level of video service via digital transmission. A dwelling with one or more digital set-top boxes or digital adapters counts as one digital video user.
6) Homes and businesses are considered available (“available homes”) if we can connect them to our distribution system without further extending the transmission lines and if we offer the service in that area.
7) Revenue generating units are the sum of video, voice and high-speed internet users.
8) Total Fiber Miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.
Three Months Ended March 31, 2018 Compared with the Three Months Ended March 31, 2017
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands) | | 2018 | | 2017 | | $ | | % |
Cable operating revenues | | | | | | | | |
Service revenue | | $ | 28,471 |
| | $ | 26,411 |
| | $ | 2,060 |
| | 7.8 |
|
Other revenue | | 3,240 |
| | 2,602 |
| | 638 |
| | 24.5 |
|
Total Cable operating revenues | | 31,711 |
| | 29,013 |
| | 2,698 |
| | 9.3 |
|
Cable operating expenses | | |
| | |
| | |
| | |
|
Cost of goods and services | | 15,212 |
| | 15,228 |
| | (16 | ) | | (0.1 | ) |
Selling, general, and administrative | | 4,948 |
| | 4,858 |
| | 90 |
| | 1.9 |
|
Depreciation and amortization | | 6,024 |
| | 5,788 |
| | 236 |
| | 4.1 |
|
Total Cable operating expenses | | 26,184 |
| | 25,874 |
| | 310 |
| | 1.2 |
|
Cable operating income (loss) | | $ | 5,527 |
| | $ | 3,139 |
| | $ | 2,388 |
| | 76.1 |
|
Operating revenues
Cable service revenues increased approximately $2.1 million, or 7.8%, for the three months ended March 31, 2018, compared with the three months ended March 31, 2017, primarily due to increases in high speed data and voice subscribers, video rate increases, and customers selecting or upgrading to higher-speed data access packages.
Other revenue grew approximately $0.6 million, primarily due to new fiber contracts.
Operating expenses
Cable cost of goods and services for the three months ended March 31, 2018, remained consistent with the comparable 2017 period.
Selling, general and administrative expenses for the three months ended March 31, 2018, remained consistent with the comparable 2017 period.
The impact of the adoption of Topic 606, which deferred incremental commission and installation costs over the life of the customer, did not have a significant impact on operating expenses.
Wireline segment
Wireline provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment alsoAlso, Wireline provides video and cable modem internet access services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of Pennsylvania.
| | | | March 31, 2017 | | Dec. 31, 2016 | | March 31, 2016 | | Dec. 31, 2015 | | March 31, 2018 | | December 31, 2017 | | March 31, 2017 | | December 31, 2016 |
Telephone Access Lines (1) | | 18,160 |
| | 18,443 |
| | 19,682 |
| | 20,252 |
| | 17,765 |
| | 17,933 |
| | 18,160 |
| | 18,443 |
|
Long Distance Subscribers | | 9,134 |
| | 9,149 |
| | 9,377 |
| | 9,476 |
| | 8,980 |
| | 9,078 |
| | 9,134 |
| | 9,149 |
|
Video Customers (2)(1) | | 5,201 |
| | 5,264 |
| | 5,232 |
| | 5,356 |
| | 4,912 |
| | 5,019 |
| | 5,201 |
| | 5,264 |
|
DSL and Cable Modem Subscribers (1)(2) | | 14,527 |
| | 14,314 |
| | 14,200 |
| | 13,890 |
| | 14,695 |
| | 14,665 |
| | 14,527 |
| | 14,314 |
|
Fiber Route Miles | | 1,997 |
| | 1,971 |
| | 1,744 |
| | 1,736 |
| | 2,078 |
| | 2,073 |
| | 1,997 |
| | 1,971 |
|
Total Fiber Miles (3) | | 145,060 |
| | 142,230 |
| | 125,559 |
| | 123,891 |
| | 155,188 |
| | 154,165 |
| | 145,060 |
| | 142,230 |
|
| |
1) | Effective October 1, 2015, we launched cable modem services on our cable plant, and ceased the requirement that a customer have a telephone access line to purchase internet service. As of March 31, 2017, 1,226 customers have purchased cable modemWireline’s video service received via the coaxial cable network.passes approximately 16,500 homes. |
| |
2) | The Wireline segment’s videoDecember 2017 and December 2016 totals include 2,105 and 1,072 customers, respectively, served via the coaxial cable network. During 2016, we modified the way we count subscribers when a commercial customer upgrades its internet service passes approximately 16,500 homes.via a fiber contract. |
| |
3) | Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. |
Three Months Ended March 31, 20172018 Compared with the Three Months Ended March 31, 2016
2017
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands) | | 2017 | | 2016 | | $ | | % |
Segment operating revenues | | | | | | | | |
|
Service revenue | | $ | 5,602 |
| | $ | 5,537 |
| | $ | 65 |
| | 1.2 |
|
Carrier access and fiber revenues | | 12,665 |
| | 11,969 |
| | 696 |
| | 5.8 |
|
Other revenue | | 887 |
| | 873 |
| | 14 |
| | 1.6 |
|
Total segment operating revenues | | 19,154 |
| | 18,379 |
| | 775 |
| | 4.2 |
|
| | | | | | | | |
Segment operating expenses | | |
| | |
| | |
| | |
|
Cost of goods and services, exclusive of depreciation and amortization shown separately below | | 9,273 |
| | 8,643 |
| | 630 |
| | 7.3 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 1,676 |
| | 1,605 |
| | 71 |
| | 4.4 |
|
Depreciation and amortization | | 3,132 |
| | 3,033 |
| | 99 |
| | 3.3 |
|
Total segment operating expenses | | 14,081 |
| | 13,281 |
| | 800 |
| | 6.0 |
|
Segment operating income | | $ | 5,073 |
| | $ | 5,098 |
| | $ | (25 | ) | | (0.5 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands) | | 2018 | | 2017 | | $ | | % |
Wireline operating revenues | | | | | | | | |
|
Service revenue | | $ | 5,890 |
| | $ | 5,602 |
| | $ | 288 |
| | 5.1 |
|
Carrier access and fiber revenues | | 12,854 |
| | 12,665 |
| | 189 |
| | 1.5 |
|
Other revenue | | 963 |
| | 887 |
| | 76 |
| | 8.6 |
|
Total Wireline operating revenues | | 19,707 |
| | 19,154 |
| | 553 |
| | 2.9 |
|
| | | | | | | | |
Wireline operating expenses | | |
| | |
| | |
| | |
|
Cost of goods and services | | 9,824 |
| | 9,273 |
| | 551 |
| | 5.9 |
|
Selling, general and administrative | | 1,717 |
| | 1,676 |
| | 41 |
| | 2.4 |
|
Depreciation and amortization | | 3,394 |
| | 3,132 |
| | 262 |
| | 8.4 |
|
Total Wireline operating expenses | | 14,935 |
| | 14,081 |
| | 854 |
| | 6.1 |
|
Wireline operating income (loss) | | $ | 4,772 |
| | $ | 5,073 |
| | $ | (301 | ) | | (5.9 | ) |
Operating revenues
Total operating revenues in the quarter ended March 31, 20172018 increased $0.8$0.6 million, or 4.2%2.9%, against the comparable 20162017 period, primarily as a result of increases in fiber and access contracts.
Operating expenses
Operating expenses overall increased $0.8$0.9 million, or 6.0%6.1%, in the quarter ended March 31, 2017,2018, compared to the 20162017 quarter. The $0.6 million increase in cost of goods and services primarily resulted from costs to support the increase in carrier access and fiber revenues shown above.
contracts. The $0.3 million increase in depreciation and amortization primarily resulted from the expansion of the underlying network assets necessary to support the growth in fiber revenue. The impact of the adoption of Topic 606, which deferred incremental commission and installation costs over the life of the customer, did not have a significant impact on operating expenses.
Non-GAAP Financial Measures
In managing our business and assessing our financial performance, management supplements the information provided by the financial statement measures prepared in accordance with GAAP with Adjusted OIBDA and Continuing OIBDA, which are considered “non-GAAP financial measures” under SEC rules.
Adjusted OIBDA is defined by us as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of: certain non-recurring transactions,transactions; impairment of assets,assets; gains and losses on asset sales, straight-line adjustments for the waived management fee by Sprint, amortization of the affiliate contract expansion intangible reflected as a contra revenue,sales; actuarial gains and losses on pension and other post-retirement benefit plans,plans; and share-based compensation expense.expense, amortization of deferred costs related to the adoption of Topic 606, and adjusted to include the benefit received from the waived management fee by Sprint. Continuing OIBDA is defined as Adjusted OIBDA, less the benefit received from the waived management fee by Sprint. Adjusted OIBDA and Continuing OIBDA should not be construed as an alternative to operating income as determined in accordance with GAAP as a measure of operating performance. Continuing OIBDA is defined by us as Adjusted OIBDA, less the benefit received from the waived management fee by Sprint over the next approximately six-year period, showing Sprint's support for our acquisition and our commitments to enhance the network.
In a capital-intensive industry such as telecommunications, management believes that Adjusted OIBDA and Continuing OIBDA and the associated percentage margin calculations are meaningful measures of our operating performance. We use Adjusted OIBDA and Continuing OIBDA as supplemental performance measures because management believes theythese measures facilitate comparisons of our operating performance from period to period and comparisons of our operating performance to that of our peers and other companies by excluding potential differences caused by the age and book depreciation of fixed assets (affecting relative depreciation expenses) as well as the other items described above for which additional adjustments were made. In the future, management expects that the Company may again report Adjusted OIBDA and Continuing OIBDA excluding these items and may incur expenses similar to these excluded items. Accordingly, the exclusion of these and other similar items from our non-GAAP presentation should not be interpreted as implying these items are non-recurring, infrequent or unusual.
While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the current period allocation of costs associated with long-lived assets acquired or constructed in prior periods, and accordingly may obscure underlying operating trends for some purposes. By isolating the effects of these expenses and other items that vary from period to period without any correlation to our underlying performance, or that vary widely among similar companies, management believes Adjusted OIBDA and Continuing OIBDA facilitates internal comparisons of our historical operating performance, which are used by management for business planning purposes, and also facilitates comparisons of our performance relative to that of our competitors. In addition, we believe that Adjusted OIBDA and Continuing OIBDA and similar measures are widely used by investors and financial analysts as measures of our financial performance over time, and to compare our financial performance with that of other companies in our industry.
Adjusted OIBDA and Continuing OIBDA have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. These limitations include the following:
they do not reflect capital expenditures;
many of the assets being depreciated and amortized will have to be replaced in the future and Adjusted and Continuing OIBDA do not reflect cash requirements for such replacements;
they do not reflect costs associated with share-based awards exchanged for employee services;
they do not reflect interest expense necessary to service interest or principal payments on indebtedness;
they do not reflect gains, losses or dividends on investments;
they do not reflect expenses incurred for the payment of income taxes; and
other companies, including companies in our industry, may calculate Adjusted and Continuing OIBDA differently than we do, limiting its usefulness as a comparative measure.
In light of these limitations, management considers Adjusted OIBDA and Continuing OIBDA as a financial performance measure that supplements but does not replace the information reflected in our GAAP results.
The following table showsadoption of the new revenue recognition standard did not impact Adjusted OIBDA and Continuing OIBDA for the three months ended March 31, 2017 and 2016.
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2017 | | 2016 |
Adjusted OIBDA | | $ | 73,541 |
| | $ | 40,416 |
|
Continuing OIBDA | | $ | 64,601 |
| | $ | 40,416 |
|
OIBDA.
The following table reconcilestables reconcile Adjusted OIBDA and Continuing OIBDA to operating income, which we consider to be the most directly comparable GAAP financial measure, for the three months ended March 31, 2017 and 2016:measure:
|
| | | | | | | | |
Consolidated: | | Three Months Ended March 31, |
(in thousands) | | 2017 | | 2016 |
Operating income | | $ | 10,673 |
| | $ | 21,312 |
|
Plus depreciation and amortization | | 44,804 |
| | 17,739 |
|
Plus (gain) loss on asset sales | | (28 | ) | | (15 | ) |
Plus share based compensation expense | | 1,566 |
| | 1,048 |
|
Plus straight line adjustment to management fee waiver | | 4,206 |
| | — |
|
Plus amortization of intangible netted in revenue | | 4,978 |
| | — |
|
Plus amortization of intangible netted in rent expense | | 258 |
| | — |
|
Plus temporary back office costs to support the billing operations through migration (1) | | 2,595 |
| | — |
|
Plus integration and acquisition related expenses | | 4,489 |
| | 332 |
|
Adjusted OIBDA | | $ | 73,541 |
| | $ | 40,416 |
|
Less waived management fee | | (8,940 | ) | | — |
|
Continuing OIBDA | | $ | 64,601 |
| | $ | 40,416 |
|
(1) Once former nTelos customers migrate to the Sprint back office, the Company incurs certain postpaid fees retained by Sprint that would offset a portion of these savings. For the three months ended March 31, 2017, these offsets were estimated at $0.8 million.
The following tables reconcile adjusted OIBDA and Continuing OIBDA to operating income by major segment for the three months ended March 31, 2017 and 2016:
|
| | | | | | | | |
Wireless Segment: | | Three Months Ended March 31, |
(in thousands) | | 2017 | | 2016 |
Operating income | | $ | 9,137 |
| | $ | 19,932 |
|
Plus depreciation and amortization | | 35,752 |
| | 8,494 |
|
Plus (gain) loss on asset sales | | (24 | ) | | 13 |
|
Plus share based compensation expense | | 725 |
| | 271 |
|
Plus straight line adjustment to management fee waiver | | 4,206 |
| | — |
|
Plus amortization of intangible netted in revenue | | 4,978 |
| | — |
|
Plus amortization of intangible netted in rent expense | | 258 |
| | — |
|
Plus temporary back office costs to support the billing operations through migration | | 2,593 |
| | — |
|
Plus integration and acquisition related expenses | | 3,792 |
| | — |
|
Adjusted OIBDA | | $ | 61,417 |
| | $ | 28,710 |
|
Less waived management fee | | (8,940 | ) | | — |
|
Continuing OIBDA | | $ | 52,477 |
| | $ | 28,710 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 (in thousands) |
| Wireless |
| Cable |
| Wireline |
| Other |
| Consolidated |
Operating income |
| $ | 14,861 |
|
| $ | 5,527 |
|
| $ | 4,772 |
|
| $ | (10,812 | ) |
| $ | 14,348 |
|
Deferral of costs due to Topic 606 | | (354 | ) |
| 141 |
|
| (35 | ) |
| — |
|
| (248 | ) |
Plus depreciation and amortization |
| 33,925 |
|
| 6,024 |
|
| 3,394 |
|
| 144 |
|
| 43,487 |
|
Plus share based compensation expense |
| — |
|
| — |
|
| — |
|
| 2,037 |
|
| 2,037 |
|
Plus the benefit received from the waived management fee (1) |
| 9,048 |
|
| — |
|
| — |
|
| — |
|
| 9,048 |
|
Plus amortization of intangibles netted in rent expense |
| 81 |
|
| — |
|
| — |
|
| — |
|
| 81 |
|
Less actuarial (gains) losses on pension plans |
| — |
|
| — |
|
| — |
|
| (82 | ) |
| (82 | ) |
Adjusted OIBDA |
| 57,561 |
|
| 11,692 |
|
| 8,131 |
|
| (8,713 | ) |
| 68,671 |
|
Less waived management fee |
| (9,048 | ) |
| — |
|
| — |
|
| — |
|
| (9,048 | ) |
Continuing OIBDA |
| $ | 48,513 |
|
| $ | 11,692 |
|
| $ | 8,131 |
|
| $ | (8,713 | ) |
| $ | 59,623 |
|
|
| | | | | | | | |
Cable Segment: | | Three Months Ended March 31, |
(in thousands) | | 2017 | | 2016 |
Operating income | | $ | 3,139 |
| | $ | 597 |
|
Plus depreciation and amortization | | 5,788 |
| | 6,095 |
|
Less gain on asset sales | | (23 | ) | | (13 | ) |
Plus share based compensation expense | | 364 |
| | 358 |
|
Adjusted OIBDA and Continuing OIBDA | | $ | 9,268 |
| | $ | 7,037 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2017 (in thousands) |
| Wireless |
| Cable |
| Wireline |
| Other |
| Consolidated |
Operating income |
| $ | 9,137 |
|
| $ | 3,139 |
|
| $ | 5,073 |
|
| $ | (6,676 | ) |
| $ | 10,673 |
|
Plus depreciation and amortization |
| 35,752 |
|
| 5,788 |
|
| 3,132 |
|
| 132 |
|
| 44,804 |
|
Plus (gain) loss on asset sales |
| (24 | ) |
| (23 | ) |
| 30 |
|
| (11 | ) |
| (28 | ) |
Plus share based compensation expense |
| 725 |
|
| 364 |
|
| 146 |
|
| 331 |
|
| 1,566 |
|
Plus the benefit received from the waived management fee (1) | | 9,184 |
| | — |
| | — |
| | — |
| | 9,184 |
|
Plus amortization of intangibles netted in rent expense |
| 258 |
|
| — |
|
| — |
|
| — |
|
| 258 |
|
Plus temporary back office costs to support the billing operations through migration (2) |
| 2,593 |
|
| — |
|
| — |
|
| 2 |
|
| 2,595 |
|
Plus acquisition, integration and migration related expenses |
| 3,792 |
|
| — |
|
| — |
|
| 697 |
|
| 4,489 |
|
Adjusted OIBDA |
| 61,417 |
|
| 9,268 |
|
| 8,381 |
|
| (5,525 | ) |
| 73,541 |
|
Less waived management fee |
| (8,940 | ) |
| — |
|
| — |
|
| — |
|
| (8,940 | ) |
Continuing OIBDA |
| $ | 52,477 |
|
| $ | 9,268 |
|
| $ | 8,381 |
|
| $ | (5,525 | ) |
| $ | 64,601 |
|
1) Under our amended affiliate agreement, Sprint agreed to waive the Management Fees charged on both postpaid and prepaid revenues, up to $4.2 million per month, until the total amount waived reaches approximately $255.6 million, which is expected to occur in 2022.
|
| | | | | | | | |
Wireline Segment: | | Three Months Ended March 31, |
(in thousands) | | 2017 | | 2016 |
Operating income | | $ | 5,073 |
| | $ | 5,098 |
|
Plus depreciation and amortization | | 3,132 |
| | 3,033 |
|
Plus loss on asset sales | | 30 |
| | — |
|
Plus share based compensation expense | | 146 |
| | 169 |
|
Adjusted OIBDA and Continuing OIBDA | | $ | 8,381 |
| | $ | 8,300 |
|
2) Represents back office expenses required to support former nTelos subscribers that migrated to the Sprint back office.
Liquidity and Capital Resources
We have three principal sources of funds available to meet the financing needs of our operations, capital projects, debt service, and potential dividends. These sources include cash flows from operations, existing balances of cash and cash equivalents, the liquidation of investments and borrowings. Management routinely considers the alternatives available to determine what mix of sources are best suited for the long-term benefit of the Company.
Sources and Uses of Cash. WeThe Company generated $24.5approximately $60.9 million of net cash from operations in the first three months of 2017, compared to $43.22018, an increase from approximately $24.5 million in the first three months of 2016. The primary change included the timing of cash disbursements in early 2017 for inventories acquired in late 2016.2017.
Indebtedness. As of March 31, 2017, our2018, the Company’s gross indebtedness totaled $866.8$824.4 million, in term loans with an estimated annualized effective interest rate of approximately 3.91%4.02% after considering the impact of the interest rate swap contractcontracts and unamortized loan costs.costs, and is inclusive of the Credit Facility Modification that (a) was effective February 16, 2018 and (b) reduced the base rate of each term loan and the revolving facility by 50 basis points. The balance consistsconsisted of the $466.8$424.4 million Term Loan A-1 at a variable rate (3.73%(3.88% as of March 31, 2017)2018) that resets monthly based on one month LIBOR plus a margin of 2.75%2.25%, and the $400$400.0 million Term Loan A-2 at a variable rate (3.98%(4.13% as of March 31, 2017)2018) that resets monthly based on one month LIBOR plus a margin of 3.00%2.50%. The Term Loan A-1 requires quarterly principal repayments of $6.1 million through June 30, 2017, then increasing to $12.1 million quarterly through June 30, 2020, with further increases at that time through maturity in June 30, 2021. The Term Loan A-2 requires quarterly principal repayments of $10.0 million beginning on September 30, 2018 through March 31, 2023, with the remaining balance due June 30, 2023.
We are bound byThe Company is subject to certain financial covenants measured on a trailing twelve month basis each calendar quarter unless otherwise specified. These covenants include:
a limitation on the Company’s total leverage ratio, defined as indebtedness divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than or equal to 3.75 to 1.00 from the closing date through December 30, 2018, then 3.25 to 1.00 through December 30, 2019, and 3.00 to 1.00 thereafter;
a minimum debt service coverage ratio, defined as EBITDA minus certain cash taxes divided by the sum of all scheduled principal payments on the Term Loans and other indebtedness plus cash interest expense, greater than 2.00 to 1.00;
the Company must maintain a minimum liquidity balance, defined as availability under the revolver facility plus unrestricted cash and cash equivalents on deposit in a deposit account for which a control agreement has been delivered to the administrative agent under the 2016 credit agreement. Noncompliance with any one or moreagreement, of the debt covenants may have an adverse effect on our financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. greater than $25 million at all times.
As of March 31, 2017, we were2018, the Company was in compliance with all debtthe financial covenants in its credit agreements, and ratios at March 31, 20172018 were as follows:
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| | | | | |
| | Actual | | Covenant Requirement at March 31, 2017 31,2018 |
Total Leverage Ratio | | 2.882.95 |
| | 3.75 or Lower |
Debt Service Coverage Ratio | | 4.563.58 |
| | 2.00 or Higher |
Minimum Liquidity Balance (in thousands) | | $113 million | 122,834 | | $25 million or Higher |
In accordance with the Credit Agreement, the total leverage and debt service coverage ratios noted above are based on consolidated EBITDA, cash taxes, scheduled principal payments and cash interest expense for the nine month period ending
March 31, 2017, divided by three and multiplied by four, all as defined under the Credit Agreement. In addition to the covenants above, we are required to supply the lenders with quarterly financial statements and other reports as defined by the 2016 credit agreement. We were in compliance with all reporting requirements at March 31, 2017.
We had no off-balance sheet arrangements (other than operating leases) and have not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.
Capital Commitments. The CompanyCapital expenditures budgeted $152.3for 2018 are approximately $163 million, in capital expenditures for 2017, including $86.4$103 million in the Wireless segment primarily for upgrades and expansion of the nTelos wireless network; $28.1network. In addition, $29 million is budgeted primarily for cable network expansion including new fiber routes new cell towers, and cable market expansion; $27.0expansion, $22 million for additional network capacity; and $10.8 million for information technology upgrades, new and renovated buildingsin Wireline projects including fiber builds in Pennsylvania and other areas, and $9 million primarily for IT projects.
ForThe Company spent $24.4 million on capital projects in the first three months of 2017, we spent $38.6 million on capital projects,2018, compared to $20.5$38.6 million in the comparable 20162017 period. Spending related to Wireless projects accounted for $25.3$14.8 million in the first three months of 2017,2018, primarily for upgrades of former nTelos sitesto the recently acquired expansion areas and additional cell sites to expandcontinued expansion of coverage in the former nTelos territory. Cable capital spending of $5.2$5.0 million related to network and cable market expansion. Wireline capital projects cost $7.6$3.6 million, driven primarily by fiber builds. Other projects totaled $0.5builds and increased capacity projects. The remaining $1.0 million of capital expenditures is largely related to information technology projects.projects and fleet vehicles.
We believe that cash on hand, cash flow from operations and borrowings expected to be available under our existing credit facilities will provide sufficient cash to enable us to fund planned capital expenditures, make scheduled principal and interest payments, meet our other cash requirements and maintain compliance with the terms of our financing agreements for at least the next twelve months. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our credit facilities. Thereafter, capital expenditures will likely continue to be required to continue planned capital upgrades to the acquired wireless network and provide increased capacity to meet our expected growth in demand for our products and services. The actual amount and timing of our future capital requirements may differ materially from our estimate depending on the demand for our products, and new market developments and expansion opportunities.
Our cash flows from operations could be adversely affected by events outside our control, including, without limitation, changes in overall economic conditions, regulatory requirements, changes in technologies, demand for our products, availability of labor resources and capital, changes in our relationship with Sprint, and other conditions. The Wireless segment’s operations are dependent upon Sprint’s ability to execute certain functions such as billing, customer care, and collections; our ability to develop and implement successful marketing programs and new products and services; and our ability to effectively and economically manage other operating activities under our agreements with Sprint. Our ability to attract and maintain a sufficient customer base, particularly in the acquired cable markets, is also critical to our ability to maintain a positive cash flow from operations. The foregoing events individually or collectively could affect our results.
Critical Accounting Policies
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. For a more detailed discussion of our critical accounting policies, please refer to our 2017 Form 10-K.
Recently Issued Accounting Standards
In May 2014, the FASBRecently issued ASU No. 2014-09, “Revenue from Contracts with Customers”, also known as Topic 606, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, delaying the effective date of ASU 2014-09. Three other amendments have been issued during 2016 modifying the original ASU. As amended, the new standard is effective for the Company on January 1, 2018, using either a retrospective basis or a modified retrospective basis with early adoption permitted, but not earlier than the original effective date beginning after December 15, 2016. We have formed a project team to evaluateaccounting standards and implement the new standard. As part of our work to date, we have begun documentation and are nearing completion of contract review. We currently plan to adopt this guidance using the modified retrospective transition approach, which would result in an adjustment to retained earnings for the cumulative effect,their expected impact, if any, are discussed in Note 1, Basis of applying this standard. Additionally, this guidance requires us to provide additional disclosures Presentation, of the amount by which each financial statement line item is affected in the current reporting period during 2018 as comparednotes to the guidance that was in effect before the change. We continue to assess the impact this new standard will have on our financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, also known as Topic 842, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous generally accepted accounting principles. This change will result in an increase to recorded assets and liabilities on lessees’ financial statements, as well as changes in the categorization of rental costs, from rent expense to interest and depreciation expense. Other effects may occur depending on the types of leases and the specific terms of them utilized by particular lessees. The ASU is effective for us on January 1, 2019, and early application is permitted. Modified retrospective application is required. We are currently evaluating the ASU, but expect that it will have a material impact on ourunaudited condensed consolidated financial statements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s market risks relate primarily to changes in interest rates on instruments held for other than trading purposes. The Company’s interest rate risk generally involves threetwo components. The first component is outstanding debt with variable rates. As of March 31, 2017,2018, the Company had $866.8$824.4 million of variable rate debt outstanding, (excludingexcluding unamortized loan fees and costs of $17.8 million),$13.5 million, bearing interest at a weighted average rate of 3.85%4.02% as determined on a monthly basis. An increase in market interest rates of 1.00% would add approximately $8.7$8.0 million to annual interest expense, excluding the effect of the interest rate swap. In May 2016, the Company entered into a pay-fixed, receive-variable interest rate swap with three counterparties totaling $256.6 of notional principal (subject to change based upon expected draws under the delayed draw term loan and principal payments due under our debt agreements). This swap,These swaps, combined with the swap purchased in 2012, cover notional principal equal to approximately 50% of the expected outstanding variable rate debt through maturity in 2023. The Company is required to pay a combined fixed rate of approximately 1.16% and receive a variable rate based on one month LIBOR (0.98%(1.88% as of March 31, 2017)2018), to manage a portion of its interest rate risk. Changes in the net interest paid or received under the swaps would offset approximately 50% of the change in interest expense on the variable rate debt outstanding. The swap agreements currently add approximately $0.8 million toreduce annual interest expense by approximately $3.7 million, based on the spread between the fixed rate and the variable rate currently in effect on our debt.
The second component of interest rate risk consists of temporary excess cash, which can be invested in various short-term investment vehicles such as overnight repurchase agreements and Treasury bills with a maturity of less than 90 days. As of March 31, 2017, the cash is invested in a commercial checking account that has limited interest rate risk. Management continually evaluates the most beneficial use of these funds.
The third component of interest rate risk is marked increases in interest rates that may adversely affect the rate at which the Company may borrow funds for growth in the future. If the Company should borrow additional funds under any Incremental Term Loan Facility to fund its capital investment needs, repayment provisions would be agreed to at the time of each draw under the Incremental Term Loan Facility. If the interest rate margin on any draw exceeds by more than 0.25% the applicable interest rate margin on the Term Loan Facility, the applicable interest rate margin on the Term Loan Facility shall be increased to equal the interest rate margin on the Incremental Term Loan Facility. If interest rates increase generally, or if the rate applied under the Company’s Incremental Term Loan Facility causes the Company’s outstanding debt to be repriced, the Company’s future interest costs could increase.
Management views market risk as having a potentially significant impact on the Company's results of operations, as future results could be adversely affected if interest rates were to increase significantly for an extended period, or if the Company’s need for additional external financing resulted in increases to the interest rates applied to all of its new and existing debt. As of March 31, 2017,2018, the Company has $433.4$412.2 million of variable rate debt with no interest rate protection. The Company’s investments in publicly traded stock and bond mutual funds under the rabbi trust, which are subject to market risks and could experience significant swings in market values, are offset by corresponding changes in the liabilities owed to participants in the Supplemental Executive Retirement Plan. General economic conditions affected by regulatory changes, competition or other external influences may pose a higher risk to the Company’s overall results.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our President and Chief Executive Officer, who is the principal executive officer, and the Senior Vice President - Finance and Chief Financial Officer, who is the principal financial officer, conducted an evaluation of our disclosure controls and procedures, as(as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934.1934), as of the end of the period covered by this Quarterly report on Form 10-Q.
As disclosed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016,2017, we identified material weaknesses in internal control over financial reporting. The material weaknesses will not be considered remediated until the applicable remedialenhanced controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As remediation has not yet been completed, our President and Chief Executive Officer and our Senior Vice President - Finance and Chief Financial Officer have concluded that our disclosure controls and procedures continued to be ineffective as of March 31, 2017.2018.
Notwithstanding the material weaknesses, management has concluded that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) as of March 31, 2018, that have materially affected or are reasonably likely to material affect, the Company’s internal control over financial reporting.
Remediation Efforts
In responseManagement is continuing to implement the material weaknesses identifiedremediation plans as disclosed in theour Annual Report on Form 10-K for our fiscal year ended December 31, 2016,2017. We believe that these actions and the improvements we expect to:
Seek, trainto achieve will effectively remediate the material weaknesses. However, these material weaknesses will not be considered remediated until the enhanced controls operate for a sufficient period of time and retain individuals that have the appropriate skills and experience related to financial reporting and internal control related to (i) complex, significant non-routine transactions; (ii) the preparation of the consolidated statements of cash flows; and (iii) the Company’s internal audit function.
Evaluate and develop where necessary policies and procedures to ensure our personnel are sufficiently knowledgeable about the design, operation and documentation of internal controls over financial reporting related to (i) complex, significant non-routine transactions; (ii) accounting for income taxes; and (iii) the preparation of the consolidated statements of cash flows.
Enhance the design of existing control activities and implement additional control activities to ensure management review controls and other controls (including controls that validate the completeness and accuracy of information, data and assumptions) related to complex, significant non-routine transactions and accounting for income taxes, are properly designed and documented.
Evaluate and enhance the Company’s policies, procedures and control activities over communicating with the Company’s third party experts to ensure complete and accurate information is communicated.
Evaluate and enhance the Company’s monitoring activities to ensure the components of internal control are present and functioning related to (i) complex, significant non-routine transactions; (ii) accounting for income taxes; and (iii) the preparation of the consolidated statements of cash flows.
Changes in Internal Control Over Financial Reporting
The acquisition of nTelos was completed on May 6, 2016. Our Company’s management has extended its oversight and monitoring processesconcluded that support internal control over financial reporting to include the operations of nTelos. Our management is continuing to integrate the acquired operations into our overall internal control financial reporting process, expected to be complete in 2017.
Except as noted above, there has been no change in the Company’s internal control over financial reporting as of March 31, 2017, that has materially affected or is reasonably likely to material affect, the Company’s internal control over financial reporting.
Other Matters Relating to Internal Control Over Financial Reporting
Under the Company’s agreements with Sprint, Sprint provides the Company with billing, collections, customer care, certain network operations and other back-office services for the PCS operation. As a result, Sprint remits to the Company a substantial portion of the Company’s total operating revenues, which will increase as legacy nTelos subscribers migrate to the Sprint billing platform in the future. Due to this relationship, the Company necessarily relies on Sprint to provide accurate, timely and sufficient data and information to properly record the Company’s revenues and accounts receivable, which underlie a substantial portion of the Company’s periodic financial statements and other financial disclosures.
Information provided by Sprint includes reports regarding the subscriber accounts receivable in the Company’s markets. Sprint provides the Company with monthly accounts receivable, billing and cash receipts, average national costs to acquire and support a prepaid customer, certain national channel commission and handset subsidy costs, and travel revenue information on a market level, rather than a subscriber level. The Company reviews these various reports to identify discrepancies or errors. Under the Company’s agreements with Sprint, the Company is entitled to only a portion of the receipts, net of items such as taxes, government surcharges, certain allocable write-offs and the 16.6% of postpaid and 6% of prepaid revenue currently retained by Sprint (before the effect of fee waivers). Sprint reports directly billed costs and revenues to the Company. Because of the Company’s reliance on Sprint for financial information, the Company must depend on Sprint to design adequate internal controls with respect to the processes established to provide this data and information to the Company and Sprint’s other Sprint PCS affiliate network partners. To address this issue, Sprint engages an independent registered public accounting firm to perform a periodic evaluation of these controls and to provide a “Report on Controls Placed in Operation and Tests of Operating Effectiveness” under guidance provided in Statements on Standards for Attestation Engagements No. 16 (“SSAE 16”). The report is provided to the Company on an annual basis and covers a nine-month period. The most recent report covered the period from January 1, 2016 to September 30, 2016. The most recent report indicated there were no material issues which would adversely affect the information used to support the recording of the revenues provided by Sprint related to the Company’s relationship with them.
are operating effectively.
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PART II. | OTHER INFORMATION |
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. As of March 31, 2017,2018, the Company has not identified any needed updates to the risk factors included in our most recent Form 10-K.
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The Company maintains a dividend reinvestment plan (the “DRIP”) forUnregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
None.
Purchases of Equity Securities by the benefit of its shareholders. When shareholders remove shares from the DRIP, the Company issues a certificate for whole shares, pays out cash for any fractional shares, and cancels the fractional shares purchased. In conjunction with exercises of stock options and distributions of vested share awards, the Company periodically repurchases shares from recipients to satisfy some of the exercise price of the options being exercisedIssuer or taxes payable associated with the distribution of shares. Affiliated Purchasers
The following table provides information about the Company’s repurchasesshares surrendered for the settlement of sharespayroll taxes and exercise prices for options as related to equity award vesting and exercise events, during the three months ended March 31, 2017:
2018:
| | | | Number of Shares Purchased | | Average Price Paid per Share | | Number of Shares Purchased | | Average Price Paid per Share |
January 1 to January 31 | | 43,044 |
| | $ | 28.48 |
| | 23,057 |
| | $ | 32.80 |
|
February 1 to February 28 | | — |
| | $ | — |
| | 31,318 |
| | $ | 31.69 |
|
March 1 to March 31 | | — |
| | $ | — |
| | 2,950 |
| | $ | 36.85 |
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| | | | | | | |
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Total | | 43,044 |
| | $ | 28.48 |
| | 57,325 |
| | $ | 32.40 |
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(a) | The following exhibits are filed with this Quarterly Report on Form 10-Q: |
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10.5410.50 | Addendum XX
| Second Amendment to Sprint PCS ManagementCredit Agreement, dated as of March 9, 2017,February 16, 2018, by and among Shenandoah Personal Communications, LLC, Sprint Spectrum L.P., Sprint CommunicationsTelecommunications Company, L.P., SprintCom, Inc.as Borrower, CoBank, ACB, ACB, as Administrative Agent, and Horizon Personal Communications, LLC, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filedMarch 15, 2017. various other lenders named therein. |
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31.131.1* |
| Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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31.231.2* |
| Certification of Vice President - Finance and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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3232** |
| Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. |
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(101)(101 | ) | Formatted in XBRL (Extensible Business Reporting Language) |
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| 101.INS101.INS* | XBRL Instance Document |
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| 101.SCH101.SCH* | XBRL Taxonomy Extension Schema Document |
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| 101.CAL101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
SIGNATURES
Pursuant to the requirements 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.
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** | SHENANDOAH TELECOMMUNICATIONS COMPANY |
| (Registrant)This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act. |
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| /s/Adele M. Skolits |
| Adele M. Skolits |
| Vice President - Finance and Chief Financial Officer |
| Date: May 4, 2017 |
EXHIBIT INDEX
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Exhibit No. | Exhibit |
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10.54 | Addendum XXSecond Amendment to Sprint PCS ManagementCredit Agreement, dated as of March 9, 2017,February 16, 2018, by and among Shenandoah Personal Communications, LLC, Sprint Spectrum L.P., Sprint CommunicationsTelecommunications Company, L.P., SprintCom, Inc.as Borrower, CoBank, ACB, ACB, as Administrative Agent, and Horizon Personal Communications, LLC, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 15, 2017.various other lenders named therein. |
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| Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| Certification of Vice President - Finance and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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| Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. |
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(101) | Formatted in XBRL (Extensible Business Reporting Language) |
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| 101.INS | XBRL Instance Document |
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| 101.SCH | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
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** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act. |
SIGNATURES
Pursuant to the requirements 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.
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| SHENANDOAH TELECOMMUNICATIONS COMPANY |
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| /s/JAMES F. WOODWARD |
| James F. Woodward |
| Senior Vice President – Finance and Chief Financial Officer |
| Date: May 3, 2018 |