ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2019 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our 2019 Form 10-K. Our results of operations and financial condition discussed herein may not be indicative of our future results and trends.
Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all totals, percentages and year-over-year changes are calculated using exact numbers. Minor differences may exist due to rounding.
Overview
We are a fully integrated provider of data, video and voice services in 21 Western, Midwestern and Southern states. We provide these broadband services to residential and business customers in more than 950 communities. The markets we serve are primarily non-metropolitan, secondary and tertiary markets, with 79% of our customers located in seven states: Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma and Texas. Our biggest customer concentrations are in the Mississippi Gulf Coast region and in the greater Boise, Idaho region. We provided service to approximately 921,000 residential and business customers out of approximately 2.3 million homes passed as of March 31, 2020. Of these customers, approximately 793,000 subscribed to data services, 303,000 subscribed to video services and 136,000 subscribed to voice services.
We generate substantially all of our revenues through four primary products. Ranked by share of our total revenues through the first three months of 2020, they are residential data (48.3%), residential video (26.6%), business services (data, voice and video – 18.0%) and residential voice (3.9%). The profit margins, growth rates and capital intensity of our four primary products vary significantly due to competition, product maturity and relative costs.
On January 8, 2019, we acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage in Southern Illinois. We paid a purchase price of $358.8 million in cash on a debt-free basis. On October 1, 2019, we acquired Fidelity, a provider of connectivity services to residential and business customers throughout Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas. We paid a purchase price of $531.4 million in cash on a debt-free basis.
Beginning in 2013, we shifted our focus towards growing our higher margin businesses, namely residential data and business services, rather than our prior concentration on growing revenues through subscriber retention and maximizing customer primary service units (“PSUs”). We adapted our strategy to face the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. The declining profitability of residential video services is primarily due to increasing programming costs and retransmission fees and competition from other content providers, and the declining revenues from residential voice services are primarily due to the increasing use of wireless voice services instead of residential voice services. Separately, we have also focused on retaining customers who are likely to produce higher relative value over the life of their service relationships with us, are less attracted by discounting, require less support and churn less. This strategy focuses on increasing Adjusted EBITDA, Adjusted EBITDA less capital expenditures and margins (refer to the section entitled “Use of Adjusted EBITDA” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable GAAP measure).
Excluding the effects of our recent acquisitions and the COVID-19 pandemic, the trends described above have impacted our four primary product lines in the following ways:
●
|
Residential data. We have experienced growth in residential data customers and revenues every year since 2013. We expect this growth to continue as our upgrades in broadband capacity, ability to offer higher access speeds than many of our competitors and Wi-Fi support service will enable us to capture additional market share from both data subscribers who use other providers as well as households in our footprint that do not yet subscribe to data services from any provider.
|
●
|
Residential video. Residential video service is an increasingly costly and fragmenting business, with programming costs and retransmission fees continuing to escalate in the face of a proliferation of streaming content alternatives. For example, we are currently evaluating whether to renew our programming agreement with Turner Broadcasting, which expired on April 30, 2020. We intend to continue our strategy of focusing on the higher-margin businesses of residential data and business services while de-emphasizing our residential video business. As a result, we expect that residential video revenues from our existing customer base will decline further in the future.
|
●
|
Residential voice. We have experienced declines in residential voice customers as a result of consumers in the United States deciding to terminate their residential voice services and exclusively use wireless voice services. We believe this trend will continue because of competition from wireless voice service providers. Revenues from residential voice customers have declined over recent years, and we expect this decline will continue.
|
●
|
Business services. We have experienced significant growth in business data customers and revenues, and we expect this growth to continue over the long-term. We attribute this growth to our strategic focus on increasing sales to business customers and our efforts to attract enterprise business customers. Margins of products sold to business customers have remained attractive, which we expect will continue.
|
We continue to experience increased competition, particularly from telephone companies, cable and municipal overbuilders, over-the-top (“OTT”) video providers and direct broadcast satellite (“DBS”) television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. In addition, a key objective of our capital allocation process is to invest in initiatives designed to drive revenue and Adjusted EBITDA expansion. Over the last three years, more than 50% of our total capital expenditures have been focused on infrastructure improvements that were intended to grow these measures. We continue to invest capital to, among other things, increase our plant and data capacities as well as network reliability. We offer Gigabit data service to over 97% of our homes passed, and we have begun deploying DOCSIS 3.1 to further increase our network capacity and enable future growth in our residential data and business services product lines.
We expect to continue to devote financial resources to infrastructure improvements, including in certain of the new markets we have acquired, because we believe these investments are necessary to continually meet our customers’ needs and to remain competitive. The capital enhancements associated with acquired operations include rebuilding low capacity markets; reclaiming bandwidth from analog video services; implementing 32-channel bonding; deploying DOCSIS 3.1; converting back office functions such as billing, accounting and service provisioning; migrating products to Cable One platforms; and expanding our high-capacity fiber network.
Our primary goals are to continue growing residential data and business services revenues, to increase profit margins and to deliver strong Adjusted EBITDA and Adjusted EBITDA less capital expenditures. To achieve these goals, we intend to continue our disciplined cost management approach, remain focused on customers with expected higher relative value and follow through with further planned investments in broadband plant upgrades, including the deployment of DOCSIS 3.1 capabilities and new data service offerings for residential and business customers. We also plan to continue seeking broadband-related acquisition and strategic investment opportunities in rural markets.
COVID-19 Update
We represent a part of the United States’ critical infrastructure, and our continued operation is essential to connectivity services that are vital during the COVID‐19 national emergency. At the same time, the spread of the COVID-19 pandemic has caused us to modify our operations, including restricting our technicians from entering customer homes and businesses; closing or limiting access to local offices and our corporate headquarters for associates, customers and others; limiting non-essential travel for associates; instituting an expanded work-from-home program, including enhancing our technological capabilities to support such efforts; implementing “purpose pay” to provide a 25% premium to base pay for certain associates who are required to leave their homes to perform their essential job functions; and establishing health protocols to protect our associates, customers and others.
In addition, in an effort to help ease the financial burden and provide continued connectivity for our customers and communities impacted by the COVID-19 pandemic, beginning in March 2020, we initially committed to do the following for 60 days under the FCC’s Keep Americans Connected Pledge: waive late charges and suspend disconnection of data services for residential and business customers who are unable to pay their bill due to disruptions caused by the pandemic and open free Wi-Fi hotspots in local office parking lots and other public areas across our footprint for public use, which are now in place at more than 140 locations. These commitments are currently scheduled to continue through June 30, 2020.
Other actions taken by us beginning in March 2020 to assist customers and the communities we serve during the COVID-19 pandemic included discontinuing charging data overage fees; offering a low-cost 15 Megabit per second (“Mbps”) residential data plan for $10 per month through June 30, 2020 to help low-income families and those impacted by the pandemic, such as seniors and college students; donating $300,000 to support community relief efforts; and supporting various other local relief efforts.
For the three months ended March 31, 2020, the COVID-19 pandemic did not materially impact our results of operations.
We anticipate a larger-than-usual quarterly increase in new residential data customers and resulting revenues in the second quarter of 2020 stemming from the COVID-19 pandemic, offset by lower data overage fees, late charges and reconnect fees resulting from our actions in response to the pandemic as well as a negative impact on advertising and business services revenues resulting from the pandemic. In addition, we expect to incur higher labor, bad debt and other expenses for the second quarter of 2020 as a result of the pandemic and our associated response efforts.
We continue to monitor the rapidly evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our associates, customers, suppliers, business partners and others. The degree to which the COVID-19 pandemic impacts our operations, business, financial results and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, potential legislative or regulatory efforts to impose new requirements on our data services and how quickly and to what extent normal economic and operating conditions can resume.
Refer to the section entitled “Risks Factors” in this Quarterly Report on Form 10-Q for additional risks we face due to the COVID-19 pandemic.
Results of Operations
PSU and Customer Counts
The following table provides an overview of selected subscriber data for the time periods specified (in thousands, except percentages):
|
|
As of March 31,
|
|
|
Annual Net Gain/(Loss)
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
% Change
|
|
Residential data PSUs
|
|
|
713
|
|
|
|
611
|
|
|
|
102
|
|
|
|
16.7
|
|
Residential video PSUs
|
|
|
288
|
|
|
|
305
|
|
|
|
(17
|
)
|
|
|
(5.5
|
)
|
Residential voice PSUs
|
|
|
102
|
|
|
|
97
|
|
|
|
5
|
|
|
|
4.8
|
|
Total residential PSUs
|
|
|
1,103
|
|
|
|
1,013
|
|
|
|
90
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business data PSUs
|
|
|
79
|
|
|
|
67
|
|
|
|
12
|
|
|
|
18.4
|
|
Business video PSUs
|
|
|
15
|
|
|
|
16
|
|
|
|
(1
|
)
|
|
|
(4.0
|
)
|
Business voice PSUs
|
|
|
35
|
|
|
|
29
|
|
|
|
6
|
|
|
|
21.5
|
|
Total business services PSUs
|
|
|
129
|
|
|
|
111
|
|
|
|
18
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total data PSUs
|
|
|
793
|
|
|
|
678
|
|
|
|
114
|
|
|
|
16.9
|
|
Total video PSUs
|
|
|
303
|
|
|
|
321
|
|
|
|
(17
|
)
|
|
|
(5.4
|
)
|
Total voice PSUs
|
|
|
136
|
|
|
|
125
|
|
|
|
11
|
|
|
|
8.6
|
|
Total PSUs
|
|
|
1,232
|
|
|
|
1,124
|
|
|
|
108
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential customer relationships
|
|
|
836
|
|
|
|
743
|
|
|
|
93
|
|
|
|
12.5
|
|
Business customer relationships
|
|
|
85
|
|
|
|
75
|
|
|
|
10
|
|
|
|
13.3
|
|
Total customer relationships
|
|
|
921
|
|
|
|
818
|
|
|
|
103
|
|
|
|
12.6
|
|
In recent years, our customer mix has shifted, causing subscribers to move from triple-play packages combining data, video and voice services to single and double-play packages. This is largely because some residential video customers have defected to DBS services and OTT offerings and households continue to terminate residential voice service. In addition, we have focused on selling data-only packages to new customers rather than cross-selling video to these customers.
We use various nonfinancial metrics to measure, manage and monitor our operating performance on an ongoing basis. Such metrics include homes passed, PSUs and customer relationships. Homes passed represents the number of serviceable and marketable homes and businesses passed by our active plant. A PSU represents a single subscription to a particular service offering. Residential bulk multi-dwelling PSUs are classified as residential and are counted at the individual unit level. Business voice customers who have multiple voice lines are counted as a single PSU. A customer relationship represents a single customer who subscribes to one or more PSUs.
We believe homes passed, PSU and customer relationship counts are useful to investors in evaluating our operating performance. Similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measures of homes passed, PSUs and customer relationships may not be directly comparable to similarly titled measures reported by other companies.
Comparison of Three Months Ended March 31, 2020 to Three Months Ended March 31, 2019
Revenues
Revenues increased $42.6 million, or 15.3%, due primarily to increases in residential data and business services revenues of $25.2 million and $10.7 million, respectively. The increase was primarily the result of the acquired Fidelity operations, organic growth in our higher margin product lines of residential data and business services and a residential video rate adjustment, partially offset by a decrease in organic residential video revenues. The impact of certain actions we took in response to the COVID-19 pandemic, including the discontinuation of data overage fees, waiving of late charges and offering of a low-cost 15 Mbps residential data plan, on residential and business services revenues was immaterial during the three months ended March 31, 2020.
Revenues by service offering were as follows for the three months ended March 31, 2020 and 2019, together with the percentages of total revenues that each item represented for the periods presented (dollars in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020 vs. 2019
|
|
|
|
Revenues
|
|
|
% of Total
|
|
|
Revenues
|
|
|
% of Total
|
|
|
$ Change
|
|
|
% Change
|
|
Residential data
|
|
$
|
154,990
|
|
|
|
48.3
|
|
|
$
|
129,812
|
|
|
|
46.6
|
|
|
$
|
25,178
|
|
|
|
19.4
|
|
Residential video
|
|
|
85,322
|
|
|
|
26.6
|
|
|
|
83,802
|
|
|
|
30.1
|
|
|
|
1,520
|
|
|
|
1.8
|
|
Residential voice
|
|
|
12,427
|
|
|
|
3.9
|
|
|
|
9,624
|
|
|
|
3.5
|
|
|
|
2,803
|
|
|
|
29.1
|
|
Business services
|
|
|
57,862
|
|
|
|
18.0
|
|
|
|
47,143
|
|
|
|
16.9
|
|
|
|
10,719
|
|
|
|
22.7
|
|
Other
|
|
|
10,595
|
|
|
|
3.2
|
|
|
|
8,224
|
|
|
|
2.9
|
|
|
|
2,371
|
|
|
|
28.8
|
|
Total revenues
|
|
$
|
321,196
|
|
|
|
100.0
|
|
|
$
|
278,605
|
|
|
|
100.0
|
|
|
$
|
42,591
|
|
|
|
15.3
|
|
Residential data service revenues increased $25.2 million, or 19.4%, due primarily to the acquired Fidelity operations, organic subscriber growth, a reduction in package discounting and increased customer subscriptions to premium tiers.
Residential video service revenues increased $1.5 million, or 1.8%, due primarily to the acquired Fidelity operations and a rate adjustment implemented in March 2020, whereas the prior year rate adjustment was implemented in February 2019, partially offset by a 13.9% year-over-year decrease in residential video subscribers, excluding Fidelity.
Residential voice service revenues increased $2.8 million, or 29.1%, due primarily to the acquired Fidelity operations and the recognition of certain passthrough fees that were historically reported on a net basis, partially offset by a 12.0% year-over-year decrease in residential voice subscribers, excluding Fidelity.
Business services revenues increased $10.7 million, or 22.7%, due primarily to the acquired Fidelity operations and organic growth in our business data and voice services to small and medium-sized businesses and enterprise customers. Total business customer relationships increased 13.3% year-over-year.
The impact of COVID-19 and our responses on residential and business services revenues was immaterial for the three months ended March 31, 2020.
Average monthly revenue per unit (“ARPU”) for the indicated service offerings were as follows for the three months ended March 31, 2020 and 2019:
|
|
Three Months Ended March 31,
|
|
|
2020 vs. 2019
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
Residential data
|
|
$
|
72.86
|
|
|
$
|
70.80
|
|
|
$
|
2.06
|
|
|
|
2.9
|
|
Residential video
|
|
$
|
96.75
|
|
|
$
|
90.54
|
|
|
$
|
6.21
|
|
|
|
6.9
|
|
Residential voice (1)
|
|
$
|
40.07
|
|
|
$
|
32.54
|
|
|
$
|
7.53
|
|
|
|
23.1
|
|
Business services (1)
|
|
$
|
226.78
|
|
|
$
|
213.04
|
|
|
$
|
13.74
|
|
|
|
6.4
|
|
__________
(1)
|
The increases in residential voice and business services ARPU from the prior year were partially a result of certain passthrough fees that were historically reported on a net basis. Residential voice and business services ARPU for the three months ended March 31, 2020 would have been $35.24 and $223.03, respectively, if reported on a comparable basis.
|
We use ARPU to evaluate and monitor the amount of revenue generated by each type of service subscribed to by customers and the contribution to total revenues as well as to analyze and compare growth patterns. Residential ARPU values represent the applicable quarterly residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by three, except that for any new PSUs added as a result of an acquisition occurring during the period, the associated ARPU values represent the applicable residential service revenues (excluding installation and activation fees) divided by the pro-rated average number of PSUs during such period. Business services ARPU values represent quarterly business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period, divided by three, except that for any new business customer relationships added as a result of an acquisition occurring during the period, the associated ARPU values represent business services revenues divided by the pro-rated average number of business customer relationships during such period.
We believe ARPU is useful to investors in evaluating our operating performance. ARPU and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of ARPU may not be directly comparable to similarly titled measures reported by other companies.
Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $105.9 million for the three months ended March 31, 2020 and increased $11.4 million, or 12.1%, compared to the three months ended March 31, 2019. Operating expenses as a percentage of revenues were 33.0% and 33.9% for the three months ended March 31, 2020 and 2019, respectively. The increase in operating expenses was due primarily to $11.0 million of additional expenses related to Fidelity operations. Operating expenses for the first quarter of 2020 reflect immaterial increases in labor costs and other operating expenses as a result of the COVID-19 pandemic.
Selling, general and administrative expenses were $62.9 million for the three months ended March 31, 2020 and increased $1.4 million, or 2.3%, compared to the three months ended March 31, 2019. Selling, general and administrative expenses as a percentage of revenues were 19.6% and 22.1% for the three months ended March 31, 2020 and 2019, respectively. The increase in selling, general and administrative expenses was primarily attributable to $6.3 million of additional expenses related to Fidelity operations, partially offset by decreases of $3.2 million in acquisition-related costs and $1.5 million in health insurance costs. Selling, general and administrative expenses for the first quarter of 2020 reflect $0.8 million of additional expenses primarily attributable to increases in bad debt expense estimates, labor costs and community relief donations resulting from the COVID-19 pandemic.
Depreciation and amortization expense was $65.3 million for the three months ended March 31, 2020, including $10.8 million attributable to Fidelity operations, and increased $11.4 million, or 21.2%, compared to the three months ended March 31, 2019. As a percentage of revenues, depreciation and amortization expense was 20.3% and 19.3% for the three months ended March 31, 2020 and 2019, respectively.
We recognized a net gain on asset sales and disposals of $5.6 million during the three months ended March 31, 2020 compared to a net loss on asset sales and disposals of $1.1 million during the three months ended March 31, 2019. The three months ended March 31, 2020 included a $6.6 million non-cash gain on the sale of certain tower properties. The three months ended March 31, 2019 included a $1.6 million gain on the sale of a non-operating property that housed our former headquarters.
Interest Expense
Interest expense was $18.7 million for the three months ended March 31, 2020 and increased $0.6 million, or 3.2%, compared to the three months ended March 31, 2019. The increase was driven primarily by additional outstanding debt and interest rate swap settlements, partially offset by lower interest rates.
Other Income
Other income of $1.7 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively, consisted primarily of interest and investment income.
Income Tax Provision
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carrybacks to offset up to 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.
Income tax provision was $6.5 million for the three months ended March 31, 2020 and decreased $6.2 million, or 49.0%, compared to the three months ended March 31, 2019. Our effective tax rate was 8.5% and 24.6% for the three months ended March 31, 2020 and 2019, respectively. The decrease in the effective tax rate was due primarily to a $7.0 million income tax benefit attributable to the NOL carryback provision of the CARES Act, a $4.2 million increase in income tax benefits attributable to equity-based compensation awards and a $1.1 million decrease in income tax expenses attributable to state effective tax rate changes.
Unrealized loss on cash flow hedges and other, net of tax
Unrealized loss on cash flow hedges and other, net of tax was $84.6 million for the three months ended March 31, 2020 and increased $55.6 million, or 191.1%, compared to the three months ended March 31, 2019 primarily due to higher unrealized losses on our interest rate swaps.
Use of Adjusted EBITDA
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income reported in accordance with GAAP. Adjusted EBITDA is reconciled to net income below.
Adjusted EBITDA is defined as net income plus interest expense, income tax provision, depreciation and amortization, equity-based compensation, severance expense, (gain) loss on deferred compensation, acquisition-related costs, (gain) loss on asset sales and disposals, system conversion costs, rebranding costs, other (income) expense and other unusual expenses, as provided in the following table. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our business as well as other non-cash or special items and is unaffected by our capital structure or investment activities. This measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of debt financing. These costs are evaluated through other financial measures.
We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the measure used in the leverage ratio calculations under our outstanding Senior Credit Facilities to determine compliance with the covenants contained in the Credit Agreement. Adjusted EBITDA is also a significant performance measure used by us in our annual incentive compensation program. Adjusted EBITDA does not take into account cash used for mandatory debt service requirements or other non-discretionary expenditures, and thus does not represent residual funds available for discretionary uses.
|
|
Three Months Ended March 31,
|
|
|
2020 vs. 2019
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
Net income
|
|
$
|
69,326
|
|
|
$
|
38,739
|
|
|
$
|
30,587
|
|
|
|
79.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Interest expense
|
|
|
18,674
|
|
|
|
18,096
|
|
|
|
578
|
|
|
|
3.2
|
|
Income tax provision
|
|
|
6,460
|
|
|
|
12,664
|
|
|
|
(6,204
|
)
|
|
|
(49.0
|
)
|
Depreciation and amortization
|
|
|
65,279
|
|
|
|
53,844
|
|
|
|
11,435
|
|
|
|
21.2
|
|
Equity-based compensation
|
|
|
3,221
|
|
|
|
3,021
|
|
|
|
200
|
|
|
|
6.6
|
|
Severance expense
|
|
|
-
|
|
|
|
163
|
|
|
|
(163
|
)
|
|
|
(100.0
|
)
|
(Gain) loss on deferred compensation
|
|
|
(227
|
)
|
|
|
175
|
|
|
|
(402
|
)
|
|
|
(229.7
|
)
|
Acquisition-related costs
|
|
|
2,017
|
|
|
|
5,223
|
|
|
|
(3,206
|
)
|
|
|
(61.4
|
)
|
(Gain) loss on asset sales and disposals, net
|
|
|
(5,621
|
)
|
|
|
1,103
|
|
|
|
(6,724
|
)
|
|
|
NM
|
|
System conversion costs
|
|
|
48
|
|
|
|
1,396
|
|
|
|
(1,348
|
)
|
|
|
(96.6
|
)
|
Rebranding costs
|
|
|
268
|
|
|
|
510
|
|
|
|
(242
|
)
|
|
|
(47.5
|
)%
|
Other income, net
|
|
|
(1,734
|
)
|
|
|
(1,802
|
)
|
|
|
68
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
157,711
|
|
|
$
|
133,132
|
|
|
$
|
24,579
|
|
|
|
18.5
|
|
NM = Not meaningful.
Adjusted EBITDA and Adjusted EBITDA margin were negatively impacted to a small extent in the three months ended March 31, 2020 as a result of our responses to the COVID-19 pandemic, primarily resulting from the increased expenses discussed previously.
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance. Adjusted EBITDA and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of Adjusted EBITDA may not be directly comparable to similarly titled measures reported by other companies.
Financial Condition: Liquidity and Capital Resources
Liquidity
Our primary funding requirements are for our ongoing operations, planned capital expenditures, potential acquisitions and strategic investments, payments of quarterly dividends and share repurchases. We believe that existing cash balances, our Senior Credit Facilities and operating cash flows will provide adequate support for these funding requirements over the next 12 months. However, our ability to fund operations, make planned capital expenditures, make future acquisitions and strategic investments, pay quarterly dividends and make share repurchases depends on future operating performance and cash flows, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
The following table shows a summary of our net cash flows for the periods indicated (dollars in thousands):
|
|
Three Months Ended March 31,
|
|
|
2020 vs. 2019
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
Net cash provided by operating activities
|
|
$
|
118,500
|
|
|
$
|
104,378
|
|
|
$
|
14,122
|
|
|
|
13.5
|
|
Net cash used in investing activities
|
|
|
(76,017
|
)
|
|
|
(404,969
|
)
|
|
|
328,952
|
|
|
|
(81.2
|
)
|
Net cash provided by financing activities
|
|
|
74,140
|
|
|
|
224,037
|
|
|
|
(149,897
|
)
|
|
|
(66.9
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
116,623
|
|
|
|
(76,554
|
)
|
|
|
193,177
|
|
|
|
NM
|
|
Cash and cash equivalents, beginning of period
|
|
|
125,271
|
|
|
|
264,113
|
|
|
|
(138,842
|
)
|
|
|
(52.6
|
)
|
Cash and cash equivalents, end of period
|
|
$
|
241,894
|
|
|
$
|
187,559
|
|
|
$
|
54,335
|
|
|
|
29.0
|
|
NM = Not meaningful.
The $14.1 million year-over-year increase in net cash provided by operating activities was primarily attributable to an increase in Adjusted EBITDA of $24.6 million and lower cash paid for acquisition costs, partially offset by an unfavorable change in accounts payable and accrued liabilities and an increase in cash paid for interest.
The $329.0 million decrease in net cash used in investing activities from the prior year period was due primarily to $356.9 million of cash outflows related to the Clearwave acquisition in the first quarter of 2019, partially offset by an $18.6 million increase in cash paid for capital expenditures during the first quarter of 2020.
The $149.9 million decrease in net cash provided by financing activities from the prior year period was due primarily to the issuance of $250 million in new debt during the first quarter of 2019, partially offset by a $100 million borrowing under our Revolving Credit Facility during the first quarter of 2020.
On July 1, 2015, the Board authorized up to $250 million of share repurchases (subject to a total cap of 600,000 shares of our common stock). Purchases under the share repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the inception of the share repurchase program through the end of the first quarter of 2020, we have repurchased 210,631 shares of our common stock at an aggregate cost of $104.9 million. No shares were repurchased during the three months ended March 31, 2020.
We currently expect to continue to pay quarterly cash dividends on shares of our common stock, subject to approval of the Board. During the first quarter of 2020, the Board approved a quarterly dividend of $2.25 per share of common stock, which was paid on March 6, 2020.
Financing Activity
The Credit Agreement provides for the Term Loan A-2, the Term Loan B-1, the Term Loan B-2, the Term Loan B-3 and the Revolving Credit Facility. The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility.
In January 2020, we issued letters of credit totaling $22.0 million under the Revolving Credit Facility on behalf of a third-party entity to guarantee such entity’s performance obligations under an FCC broadband funding program. The fair value of the letters of credit approximates face value based on the short-term nature of the agreements. The third party has pledged certain assets in favor of us as collateral for issuing the letters of credit. We would be liable for up to $22.0 million if the third party were to fail to satisfy all or some of its performance obligations under the FCC program. As of March 31, 2020, we have assessed the likelihood of non-performance associated with the guarantee to be remote, and therefore, no liability has been accrued within the condensed consolidated balance sheet.
In March 2020, we borrowed $100 million under the Revolving Credit Facility for general corporate purposes, including for potential and completed small acquisitions and investments. The entire balance was outstanding and bore interest at a rate of 2.43% per annum as of March 31, 2020. Letter of credit issuances under the Revolving Credit Facility totaled $28.7 million and were held for the benefit of performance obligations under government grant programs and certain general and liability insurance matters and bore interest at a rate of 1.63% per annum. As of March 31, 2020, we had $1.8 billion of aggregate outstanding term loans and Revolving Credit Facility borrowings and $221.3 million available for additional borrowing under the Revolving Credit Facility.
A summary of our outstanding term loans as of March 31, 2020 is as follows (dollars in thousands):
Instrument
|
|
Draw Date
|
|
Original Principal
|
|
|
Amortization Per Annum(1)
|
|
|
Outstanding Principal
|
|
Final Maturity Date
|
|
Balance Due Upon Maturity
|
|
Benchmark Rate
|
|
Applicable
Margin(2)
|
|
|
Interest
Rate
|
|
Term Loan A-2
|
5/8/2019
|
|
$
|
700,000
|
|
|
|
Varies(4)
|
|
|
$
|
689,652
|
|
5/8/2024
|
|
$
|
513,945
|
|
LIBOR
|
|
|
1.50%
|
|
|
|
2.49%
|
|
|
10/1/2019(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan B-1
|
5/1/2017
|
|
|
500,000
|
|
|
|
1.0%
|
|
|
|
486,250
|
|
5/1/2024
|
|
|
466,250
|
|
LIBOR
|
|
|
1.75%
|
|
|
|
2.74%
|
|
Term Loan B-2
|
1/7/2019
|
|
|
250,000
|
|
|
|
1.0%
|
|
|
|
247,500
|
|
1/7/2026
|
|
|
233,125
|
|
LIBOR
|
|
|
2.00%
|
|
|
|
2.99%
|
|
Term Loan B-3
|
6/14/2019
|
|
|
325,000
|
|
|
|
1.0%
|
|
|
|
322,563
|
|
1/7/2026
|
|
|
303,875
|
|
LIBOR
|
|
|
2.00%
|
|
|
|
2.99%
|
|
Total
|
|
$
|
1,775,000
|
|
|
|
|
|
|
$
|
1,745,965
|
|
|
|
$
|
1,517,195
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Payable in equal quarterly installments (expressed as a percentage of the original aggregate principal amount). All loans may be prepaid at any time without penalty or premium (subject to customary LIBOR breakage provisions).
|
(2)
|
The Term Loan A-2 interest rate spread can vary between 1.25% and 1.75%, determined on a quarterly basis by reference to a pricing grid based on our Total Net Leverage Ratio. All other applicable margins are fixed.
|
(3)
|
On May 8, 2019, $250 million was drawn. On October 1, 2019, an additional $450 million was drawn.
|
(4)
|
Per annum amortization rates for years one through five following the closing date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively.
|
We recorded debt issuance cost amortization of $1.1 million for both the three months ended March 31, 2020 and 2019 within interest expense in the condensed consolidated statements of operations and comprehensive income. Unamortized debt issuance costs totaled $19.5 million and $20.6 million at March 31, 2020 and December 31, 2019, respectively, of which $2.3 million and $2.4 million are reflected within other noncurrent assets, respectively, and $17.2 million and $18.1 million are reflected as reductions to long-term debt, respectively, in the condensed consolidated balance sheets.
We were in compliance with all debt covenants as of March 31, 2020.
During the first quarter of 2019, we entered into two interest rate swap agreements in order to convert our interest payment obligations with respect to an aggregate of $1.2 billion of our variable rate LIBOR indebtedness to a fixed rate. Under the first swap agreement, with respect to a notional amount of $850 million, our monthly payment obligation is determined at a fixed base rate of 2.653%. Under the second swap agreement, which is a forward-starting swap with respect to a notional amount of $350 million, our monthly payment obligation beginning in June 2020 is determined at a fixed base rate of 2.739%. Both interest rate swap agreements are scheduled to mature in the first quarter of 2029 but each may be terminated prior to the scheduled maturity at our election or that of the financial institution counterparty under the terms provided in each swap agreement. We recognized losses of $2.1 million and $0.1 million on interest rate swaps during the three months ended March 31, 2020 and 2019, respectively, which were reflected in interest expense within the condensed consolidated statements of operations and comprehensive income. Refer to note 8 to the condensed consolidated financial statements for additional details regarding our interest rate swaps.
Refer to notes 9 and 11 to our audited consolidated financial statements included in the 2019 Form 10-K and notes 7 and 8 to the condensed consolidated financial statements in the Quarterly Report on Form 10-Q for further details regarding our financing activity, outstanding debt and interest rate swaps.
Capital Expenditures
We have significant ongoing capital expenditure requirements as well as capital enhancements associated with acquired operations, including rebuilding low capacity markets; reclaiming bandwidth from analog video services; implementing 32-channel bonding; deploying DOCSIS 3.1; converting back office functions such as billing, accounting and service provisioning; migrating products to Cable One platforms; and expanding our high-capacity fiber network. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.
The following table presents our capital expenditures by category for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer premise equipment
|
|
$
|
15,671
|
|
|
$
|
10,811
|
|
Commercial
|
|
|
10,828
|
|
|
|
6,134
|
|
Scalable infrastructure
|
|
|
9,279
|
|
|
|
10,975
|
|
Line extensions
|
|
|
4,476
|
|
|
|
3,163
|
|
Upgrade/rebuild
|
|
|
12,345
|
|
|
|
5,177
|
|
Support capital
|
|
|
12,158
|
|
|
|
10,367
|
|
Total
|
|
$
|
64,757
|
|
|
$
|
46,627
|
|
Contractual Obligations and Contingent Commitments
As of March 31, 2020, except for the letters of credit totaling $22.0 million issued on behalf of a third party entity to guarantee such entity’s performance obligations under an FCC broadband funding program, there have been no material changes to the contractual obligations and contingent commitments previously disclosed in the 2019 Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or financing arrangements with special-purpose entities.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
An accounting policy is considered to be critical if it is important to our results of operations and financial condition and if it requires management’s most difficult, subjective and complex judgments in its application.
There have been no material changes to our critical accounting policy and estimate disclosures described in our 2019 Form 10-K.