CABLE ONE, INC. 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 endedDecember 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. Any discussion of consolidated results or performance for the three and six months endedJune 30, 2020 is inclusive of Fidelity operations. 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 as ofJune 30, 2020 . The markets we serve are primarily non-metropolitan, secondary and tertiary markets, with approximately 79% of our customers located in seven states as ofJune 30, 2020 :Arizona ,Idaho ,Illinois ,Mississippi ,Missouri ,Oklahoma andTexas . Our biggest customer concentrations are in theMississippi Gulf Coast region and in the greaterBoise, Idaho region. We provided service to approximately 962,000 residential and business customers out of approximately 2.3 million homes passed as ofJune 30, 2020 . Of these customers, approximately 838,000 subscribed to data services, 290,000 subscribed to video services and 133,000 subscribed to voice services as ofJune 30, 2020 . We generate substantially all of our revenues through four primary products. Ranked by share of our total revenues through the first six months of 2020, they are residential data (49.1%), residential video (26.6%), business services (data, voice and video - 17.9%) and residential voice (3.8%). The profit margins, growth rates and capital intensity of our four primary products vary significantly due to competition, product maturity and relative costs. OnJanuary 8, 2019 , we acquired Clearwave, a facilities-based service provider that owns and operates a high-capacity fiber network offering dense regional coverage inSouthern Illinois . We paid a purchase price of$358.8 million in cash on a debt-free basis. OnOctober 1, 2019 , we acquired Fidelity, a provider of connectivity services to residential and business customers throughoutArkansas ,Illinois ,Louisiana, Missouri ,Oklahoma andTexas . We paid a purchase price of$531.4 million in cash on a debt-free basis. InMay 2020 , we made a$27.2 million minority equity investment inAMG Technology Investment Group, LLC , a fixed wireless provider ("Nextlink"). InJuly 2020 , we acquiredValu-Net LLC , an all-fiber internet service provider headquartered inKansas ("Valu-Net"), for a base purchase price of$38.4 million , subject to customary post-closing adjustments. We also closed a minority equity investment in Wisper for total consideration of$25.3 million inJuly 2020 . During the third quarter of 2020, we also entered into an agreement withHargray Communications ("Hargray") whereby we will contribute ourAnniston, Alabama system in exchange for a minority equity interest inHargray . TheHargray transaction is expected to be completed in the fall of 2020, subject to certain regulatory approvals and other customary closing conditions. 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 recently completed and possible future acquisitions and divestitures, the trends described above and the COVID-19 pandemic have impacted, and are expected to further impact, 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, and that growth accelerated during the three
months ended
our associated responses discussed below, including suspending the
disconnection of data services. We expect growth for this product line to
continue over the long-term as upgrades in our broadband capacity, our ability
to offer higher access speeds than many of our competitors, the reliability and
the flexibility of our data service offerings and our 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.
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? 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.
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. We experienced a slightly accelerated decline in organic
residential video customers and revenues during the three months ended
2020 as a result of our response to the COVID-19 pandemic. As a result of our
video strategy, we expect that residential video customers and revenues will
decline further in the future.
? Residential voice. We have experienced declines in residential voice customers
as a result of consumers in
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 for products sold to business customers have remained attractive, which
we expect will continue. During the three months ended
COVID-19 pandemic and our associated responses, including business sales
associates working from home, resulted in suppressed sales growth from small
business customers while at the same time the pandemic presented additional
subscriber acquisition and upgrade opportunities primarily for larger and
enterprise businesses in need of faster and more reliable data and voice
services.
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 our last three fiscal years, more than 50% of
our total capital expenditures were 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. As of June 30, 2020 , we offer Gigabit data service to approximately
97% of our homes passed. We are also 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 legacy 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 while at the same time balancing the impact of the COVID-19 pandemic
on our business, associates, customers and other stakeholders. 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 COVID19 pandemic. 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 and providing
personal protective equipment to protect our associates, customers and others.
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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 inMarch 2020 , we initially committed to do the following for 60 days under theFCC '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 public Wi-Fi hotspots in local office parking lots and other public areas across our footprint, which are in place at nearly 140 locations. These commitments were scheduled to conclude onJune 30, 2020 ; however, we continued to waive late charges for residential and small business data and voice customers throughJuly 31, 2020 and have extended access to our free public Wi-Fi hotspots through the end of 2020. Other actions taken by us beginning inMarch 2020 to assist customers and the communities we serve during the COVID-19 pandemic included discontinuing charging data overage fees, which was later extended through the end ofJune 2020 ; offering a low-cost 15 Megabit per second residential data plan for$10 per month for the first three months of service to help low-income families and those most impacted by the pandemic, which is available throughDecember 31, 2020 ; donating more than$300,000 for community relief efforts and supporting various other local relief efforts; and partnering with communities, hospitals, medical centers and other essential institutions to address their broadband connection needs and challenges. We also revised a majority of our residential data plans to provide 50 to 300 Gigabits of additional data based on the plan as ofJuly 1, 2020 , and we continue to work with residential and small business data and voice customers who have been harmed financially by the COVID-19 pandemic to keep them connected by offering flexible payment plans. Meanwhile, to meet the increased demand from new residential data customers, we focused on data-only connects for most of the second quarter. In addition to the effects to our primary product lines noted above, the COVID-19 pandemic and our associated responses negatively impacted Adjusted EBITDA by$14.9 million and$16.5 million during the three and six months endedJune 30, 2020 , respectively, primarily driven by a decrease in revenues from the suspension of data overage fees, late charges and reconnect fees, reduced advertising revenues and diminished growth in business services revenues, coupled with higher labor costs and bad debt expense. These negative Adjusted EBITDA impacts were mostly offset during the three months endedJune 30, 2020 by a greater-than-usual quarterly gain in residential data customers and the associated increase in residential data revenues as well as a largely unexpected reduction of certain expenses that resulted from shelter-in-place orders and our expanded work-from-home program.
We also delayed the planned implementation of our new ERP system because of resource challenges and inefficiencies that resulted from the COVID-19 pandemic. We are now planning to implement our new ERP system by the summer of 2021.
We expect the negative impacts associated with the actions we took in response to the pandemic to continue into the third quarter of 2020, due primarily to reduced data overage fees, late charges and reconnect fees during the early part of the third quarter and elevated labor costs throughout the third quarter. However, the increase in residential data revenues associated with the significant number of residential data customers acquired during the second quarter of 2020 is anticipated to partially offset these reduced revenues and additional costs. In addition, we face various uncertainties related to the impact of the COVID-19 pandemic on the overall economy and our business, including whether we are able to sustain continued customer growth, our level of bad debt expense, and if some of the unexpected expense reductions realized during the second quarter of 2020 will continue or if those expenses will return to more normal levels as certain areas of the country ease pandemic-related restrictions. We continue to monitor the 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.
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Results of Operations
PSU and Customer Counts
Selected subscriber data for the periods presented was as follows (in thousands,
except percentages):
As of June 30, Annual Net Gain/(Loss)
2020 2019 Change % Change
Residential data PSUs(1) 758 613 145 23.7
Residential video PSUs 276 293 (17 ) (5.9 )
Residential voice PSUs 98 94 4 4.6
Total residential PSUs(1) 1,132 1,000 132 13.2
Business data PSUs 80 69 11 15.9
Business video PSUs 14 15 (1 ) (8.2 )
Business voice PSUs 35 30 5 17.0
Total business services PSUs 129 114 15 13.0
Total data PSUs(1) 838 682 156 22.9
Total video PSUs 290 308 (18 ) (6.0 )
Total voice PSUs 133 124 9 7.6
Total PSUs(1) 1,261 1,114 147 13.2
Residential customer relationships(1) 876 742 134 18.0
Business customer relationships 86 76 9 12.1
Total customer relationships(1) 962 819 143 17.5
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(1) The amount as of
customers or PSUs, as applicable, considered to be high risk for
disconnection because payments have not been made since activation.
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. Meanwhile, the COVID-19 pandemic and our responses to it have
accelerated this customer mix shift.
Use of Nonfinancial Metrics and Average Monthly Revenue per Unit ("ARPU")
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.
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 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 the number of months in the
period, 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 business services revenues divided by the average
of the number of business customer relationships at the beginning and end of
each period, divided by the number of months in the period, 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.
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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.
Comparison of Three Months Ended
Revenues Revenues increased$42.7 million , or 14.9%, due primarily to increases in residential data and business services revenues of$31.2 million and$8.7 million , respectively. The increase was primarily the result of the acquired Fidelity operations, which contributed$33.1 million , and organic growth in our higher margin product lines of residential data and business services, partially offset by decreases in organic residential video, residential voice and other revenues. Certain actions we took in response to the COVID-19 pandemic, including temporarily discontinuing charging data overage fees, waiving late charges and suspending collection activities, which reduced reconnect fees, negatively impacted consolidated revenues by$7.9 million during the three months endedJune 30, 2020 . This negative impact on consolidated revenues, of which$5.0 million was associated with other revenues, was mostly offset by a larger-than-usual quarterly gain in residential data customers and the associated increase in residential data revenues related to the COVID-19 pandemic. Revenues by service offering for the three months endedJune 30, 2020 and 2019, together with the percentages of total revenues that each item represented for the periods presented, were as follows (dollars in thousands): Three Months Ended June 30, 2020 2019 2020 vs. 2019 Revenues % of Total Revenues % of Total $ Change % Change Residential data$ 164,015 50.0$ 132,824 46.5$ 31,191 23.5 Residential video 87,328 26.6 84,033 29.4 3,295 3.9 Residential voice 12,120 3.7 10,705 3.7 1,415 13.2 Business services 58,469 17.8 49,759 17.4 8,710 17.5 Other 6,371 1.9 8,329 3.0 (1,958 ) (23.5 ) Total revenues$ 328,303 100.0$ 285,650 100.0$ 42,653 14.9
Residential data service revenues increased
Residential video service revenues increased
Residential voice service revenues increased
Business services revenues increased$8.7 million , or 17.5%, 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 12.1% year-over-year. Other revenues decreased$2.0 million , or 23.5%, due to actions we took in response to the COVID-19 pandemic, including temporarily discontinuing charging data overage fees, waiving late charges and suspending collection activities, which reduced reconnect fees, partially offset by other revenues from the acquired Fidelity operations. 22
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ARPU for the indicated service offerings for the three months ended
Three Months Ended June 30, 2020 vs. 2019
2020 2019 $ Change % Change
Residential data $ 73.80 $ 71.80 $ 2.00 2.8
Residential video $ 102.95 $ 93.43 $ 9.52 10.2
Residential voice $ 40.35 $ 37.32 $ 3.03 8.1
Business services $ 228.11 $ 218.77 $ 9.34 4.3
Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $106.0 million
for the three months ended June 30, 2020 and increased $10.3 million , or 10.8%,
compared to the three months ended June 30, 2019 . Operating expenses as a
percentage of revenues were 32.3% and 33.5% for the three months ended June 30,
2020 and 2019, respectively. The increase in operating expenses was due
primarily to $10.3 million of additional expenses related to Fidelity operations
and a $3.6 million increase in labor costs, partially offset by a $2.9 million
decrease in programming expenses. On a consolidated basis, operating expenses
for the three months ended June 30, 2020 reflect $3.9 million of increased labor
costs and other operating expenses as a result of the COVID-19 pandemic.
Selling, general and administrative expenses were $65.0 million for the three
months ended June 30, 2020 and increased $4.9 million , or 8.1%, compared to the
three months ended June 30, 2019 . Selling, general and administrative expenses
as a percentage of revenues were 19.8% and 21.0% for the three months ended June
30, 2020 and 2019, respectively. The increase in selling, general and
administrative expenses was primarily attributable to $6.1 million of additional
expenses related to Fidelity operations and a $4.3 million increase in bad debt
expense, partially offset by decreases of $3.1 million in health insurance costs
and $2.6 million in rebranding expenses. The lower health insurance costs were
due to reduced claims activity in connection with stay-at-home orders issued
during the pandemic. On a consolidated basis, selling, general and
administrative expenses for the three months ended June 30, 2020 reflect $3.0
million of additional expenses primarily attributable to higher bad debt expense
estimates resulting from the COVID-19 pandemic.
Depreciation and amortization expense was $65.6 million for the three months
ended June 30, 2020 , including $11.0 million attributable to Fidelity
operations, and increased $10.7 million , or 19.6%, compared to the three months
ended June 30, 2019 . As a percentage of revenues, depreciation and amortization
expense was 20.0% and 19.2% for the three months ended June 30, 2020 and 2019,
respectively.
Interest Expense
Interest expense was $16.6 million for the three months ended June 30, 2020 and
decreased $1.9 million , or 10.3%, compared to the three months ended June 30,
2019 . The decrease was driven primarily by lower interest rates, partially
offset by additional outstanding debt and higher interest rate swap settlement
expense.
Other Income (Expense), Net
Other income of $1.7 million for the three months ended June 30, 2020 consisted
of interest and investment income. Other expense of $9.6 million for the three
months ended June 30, 2019 consisted of a $6.5 million call premium related to
the redemption of our previously outstanding senior notes and $4.9 million of
debt issuance cost write-offs, partially offset by interest and investment
income.
Income Tax Provision
Income tax provision was $13.2 million for the three months ended June 30, 2020
and increased $3.6 million , or 38.0%, compared to the three months ended June
30, 2019 . Our effective tax rate was 17.4% and 20.8% for the three months ended
June 30, 2020 and 2019, respectively. The decrease in the effective tax rate was
due primarily to a $2.8 million increase in income tax benefits attributable to
the NOL carryback provision of the CARES Act and a $1.0 million increase in
income tax benefits attributable to equity-based compensation awards.
Net Income
Net income was $62.5 million for the three months ended June 30, 2020 compared
to $36.4 million for the three months ended June 30, 2019 , an increase of $26.1
million .
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Unrealized Loss on Cash Flow Hedges and Other, Net of Tax
Unrealized loss on cash flow hedges and other, net of tax was
Comparison of Six Months Ended
Revenues Revenues increased$85.2 million , or 15.1%, due primarily to increases in residential data and business services revenues of$56.4 million and$19.4 million , respectively. The increase was primarily the result of the acquired Fidelity operations, which contributed$65.3 million , and organic growth in our higher margin product lines of residential data and business services, partially offset by decreases in organic residential video and other revenues. Certain actions we took in response to the COVID-19 pandemic, including temporarily discontinuing charging data overage fees, waiving late charges and suspending collection activities, which reduced reconnect fees, negatively impacted consolidated revenues by$8.6 million during the six months endedJune 30, 2020 . This negative impact on consolidated revenues, of which$5.4 million was associated with other revenues, was mostly offset by a larger-than-usual gain in residential data customers and the associated increase in residential data revenues related to the COVID-19 pandemic. Revenues by service offering for the six months endedJune 30, 2020 and 2019, together with the percentages of total revenues that each item represented for the periods presented, were as follows (dollars in thousands): Six Months Ended June 30, 2020 2019 2020 vs. 2019 Revenues % of Total Revenues % of Total $ Change % Change Residential data$ 319,005 49.1$ 262,635 46.5$ 56,370 21.5 Residential video 172,650 26.6 167,836 29.7 4,814 2.9 Residential voice 24,547 3.8 20,329 3.6 4,218 20.7 Business services 116,331 17.9 96,903 17.2 19,428 20.0 Other 16,966 2.6 16,552 3.0 414 2.5 Total revenues$ 649,499 100.0$ 564,255 100.0$ 85,244 15.1
Residential data service revenues increased
Residential video service revenues increased
Residential voice service revenues increased
Business services revenues increased$19.4 million , or 20.0%, 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 12.1% year-over-year. ARPU for the indicated service offerings for the six months endedJune 30, 2020 and 2019 were as follows: Six Months Ended June 30, 2020 vs. 2019 2020 2019 $ Change % Change Residential data$ 72.68 $ 71.58 $ 1.10 1.5 Residential video$ 99.97 $ 92.44 $ 7.53 8.1 Residential voice(1)$ 40.22 $ 34.91 $ 5.31 15.2 Business services(1)$ 227.39 $ 217.11 $ 10.28 4.7
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(1) The increases in residential voice and business services ARPU from the prior
year were partially a result of certain passthrough fees that were reported
on a net basis prior to the second quarter of 2019. Residential voice and
business services ARPU for the six months ended
would have been
basis.
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Table of Contents Costs and Expenses Operating expenses (excluding depreciation and amortization) were$212.0 million for the six months endedJune 30, 2020 and increased$21.8 million , or 11.4%, compared to the six months endedJune 30, 2019 . Operating expenses as a percentage of revenues were 32.6% and 33.7% for the six months endedJune 30, 2020 and 2019, respectively. The increase in operating expenses was due primarily to$21.3 million of additional expenses related to Fidelity operations, a$5.2 million increase in labor costs and$2.4 million of higher repairs and maintenance costs, partially offset by a$7.8 million decrease in programming expenses. On a consolidated basis, operating expenses for the six months endedJune 30, 2020 reflect$4.1 million of increased labor costs and other operating expenses as a result of the COVID-19 pandemic. Selling, general and administrative expenses were$127.9 million for the six months endedJune 30, 2020 and increased$6.3 million , or 5.2%, compared to the six months endedJune 30, 2019 . Selling, general and administrative expenses as a percentage of revenues were 19.7% and 21.5% for the six months endedJune 30, 2020 and 2019, respectively. The increase in selling, general and administrative expenses was primarily attributable to$12.4 million of additional expenses related to Fidelity operations, a$5.7 million increase in labor costs and a$4.4 million increase in bad debt expense, partially offset by decreases of$4.7 million in health insurance costs,$2.8 million in rebranding expenses,$2.8 million in acquisition-related costs,$1.7 million in repairs and maintenance costs,$1.5 million in system conversion costs and$1.4 million in professional services costs. As discussed above, the lower health insurance costs were due to reduced claims activity in connection with stay-at-home orders issued during the pandemic. On a consolidated basis, selling, general and administrative expenses for six months endedJune 30, 2020 reflect$3.8 million of additional expenses primarily attributable to higher bad debt expense estimates resulting from the COVID-19 pandemic. Depreciation and amortization expense was$130.9 million for the six months endedJune 30, 2020 , including$21.8 million attributable to Fidelity operations, and increased$22.2 million , or 20.4%, compared to the six months endedJune 30, 2019 . As a percentage of revenues, depreciation and amortization expense was 20.1% and 19.3% for the six months endedJune 30, 2020 and 2019, respectively. We recognized a net gain on asset sales and disposals of$4.6 million during the six months endedJune 30, 2020 compared to a net loss on asset sales and disposals of$2.0 million during the six months endedJune 30, 2019 . The six months endedJune 30, 2020 included a$6.6 million non-cash gain on the sale of certain tower properties. The six months endedJune 30, 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$35.3 million for the six months endedJune 30, 2020 and decreased$1.3 million , or 3.6%, compared to the six months endedJune 30, 2019 . The decrease was driven primarily by lower interest rates, partially offset by additional outstanding debt and higher interest rate swap settlement expense. Other Income (Expense) Other income of$3.4 million for the six months endedJune 30, 2020 consisted of interest and investment income. Other expense of$7.8 million for the six months endedJune 30, 2019 consisted of a$6.5 million call premium related to the redemption of our previously outstanding senior notes and$4.9 million of debt issuance cost write-offs, partially offset by interest and investment income. Income Tax Provision Income tax provision was$19.7 million for the six months endedJune 30, 2020 and decreased$2.6 million , or 11.5%, compared to the six months endedJune 30, 2019 . Our effective tax rate was 13.0% and 22.8% for the six months endedJune 30, 2020 and 2019, respectively. The decrease in the effective tax rate was due primarily to a$9.8 million increase in income tax benefits attributable to the NOL carryback provision of the CARES Act, a$5.2 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. 25
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Table of Contents Net Income
Net income was
Unrealized Loss on Cash Flow Hedges and Other, Net of Tax
Unrealized loss on cash flow hedges and other, net of tax was
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 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 June 30, 2020 vs. 2019
(dollars in thousands) 2020 2019 $ Change % Change
Net income $ 62,540 $ 36,395 $ 26,145 71.8
Plus: Interest expense 16,615 18,516 (1,901 ) (10.3 )
Income tax provision 13,209 9,571 3,638 38.0
Depreciation and amortization 65,584 54,835 10,749 19.6
Equity-based compensation 3,426 3,082 344 11.2
Severance expense - 15 (15 ) (100.0 )
Loss on deferred compensation 206 78 128 164.1
Acquisition-related costs 1,293 871 422 48.5
Loss on asset sales and disposals, net 988 910 78 8.6
System conversion costs 647 777 (130 ) (16.7 )
Rebranding costs 311 2,902 (2,591 ) (89.3 )
Other (income) expense, net (1,655 ) 9,632 (11,287 ) (117.2 )
Adjusted EBITDA $ 163,164 $ 137,584 $ 25,580 18.6
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Six Months Ended June 30, 2020 vs. 2019
(dollars in thousands) 2020 2019 $ Change % Change
Net income $ 131,866 $ 75,134 $ 56,732 75.5
Plus: Interest expense 35,289 36,612 (1,323 ) (3.6 )
Income tax provision 19,669 22,235 (2,566 ) (11.5 )
Depreciation and amortization 130,863 108,679 22,184 20.4
Equity-based compensation 6,647 6,103 544 8.9
Severance expense - 178 (178 ) (100.0 )
(Gain) loss on deferred compensation (21 ) 253 (274 ) (108.3 )
Acquisition-related costs 3,310 6,094 (2,784 ) (45.7 )
(Gain) loss on asset sales and disposals, net (4,633 ) 2,013 (6,646 ) NM
System conversion costs 696 2,173 (1,477 ) (68.0 )
Rebranding costs 578 3,412 (2,834 ) (83.1 )
Other (income) expense, net (3,389 ) 7,830 (11,219 ) (143.3 )
Adjusted EBITDA $ 320,875 $ 270,716 $ 50,159 18.5
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NM = Not meaningful. We believe that 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, including the impact of the COVID-19 pandemic, some of which are beyond our control. In light of the volatility in the debt markets resulting from the COVID-19 pandemic as well as our desire to enhance our flexibility in pursuing acquisitions and strategic investments, inMay 2020 , we completed the Public Offering and raised$469.8 million , after deducting underwriting discounts and offering expenses. See below for further details on the Public Offering. A summary of our net cash flows for the periods indicated was as follows (dollars in thousands): Six Months Ended June 30, 2020 vs. 2019 2020 2019 $ Change % Change Net cash provided by operating activities$ 272,195 $ 212,494 $ 59,701 28.1 Net cash used in investing activities (178,072 ) (465,817 ) 287,745 (61.8 ) Net cash provided by financing activities 423,158 91,493 331,665 NM Increase (decrease) in cash and cash equivalents 517,281 (161,830 ) 679,111 NM Cash and cash equivalents, beginning of period 125,271 264,113 (138,842 ) (52.6 ) Cash and cash equivalents, end of period$ 642,552 $ 102,283 $ 540,269 NM
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NM = Not meaningful. The$59.7 million year-over-year increase in net cash provided by operating activities was primarily attributable to an increase in Adjusted EBITDA of$50.2 million and lower cash paid for acquisition costs, rebranding costs, taxes and interest and a notes redemption call premium paid in the second quarter of 2019, partially offset by an unfavorable change in accounts payable and accrued liabilities. The$287.7 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 a$28.3 million increase in cash paid for capital expenditures, the$27.2 million equity investment in Nextlink, the$7.3 million issuance of a note and other receivables to Wisper that did not occur in the prior year period and lower proceeds from sales of property, plant and equipment during the first six months of 2020. 27
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The$331.7 million increase in net cash provided by financing activities from the prior year period was due primarily to$469.8 million of net proceeds from the Public Offering in the second quarter of 2020, partially offset by a$148.3 million reduction in net debt borrowings compared to the prior year quarter. OnJuly 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 second 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 six months endedJune 30, 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 second quarter of 2020, the Board approved a quarterly dividend of$2.25 per share of common stock, which was paid onJune 12, 2020 . OnAugust 4, 2020 , the Board approved a$0.25 per share increase in the Company's quarterly dividend to$2.50 per share of common stock to be paid onSeptember 4, 2020 to holders of record as ofAugust 18, 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. InJanuary 2020 , we issued letters of credit totaling$22.0 million under the Revolving Credit Facility on behalf of Wisper to guarantee its performance obligations under anFCC broadband funding program. The fair value of the letters of credit approximates face value based on the short-term nature of the agreements. We would be liable for up to$22.0 million if Wisper were to fail to satisfy all or some of its performance obligations under theFCC program. Wisper pledged certain assets in favor of us as collateral for issuing the letters of credit, which pledge was terminated in the third quarter of 2020 at the same time that we closed an equity investment in Wisper, and Wisper has agreed to guarantee and indemnify us in connection with such letters of credit. As ofJune 30, 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. InMarch 2020 , we borrowed$100 million under the Revolving Credit Facility for general corporate purposes, including for small acquisitions and investments. The outstanding balance was repaid in full inMay 2020 using a portion of the net proceeds from the Public Offering. 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 ofJune 30, 2020 , we had$1.7 billion of aggregate outstanding term loans and$321.3 million available for borrowing under the Revolving Credit Facility. A summary of our outstanding term loans as ofJune 30, 2020 is as follows (dollars in thousands): Final Balance Original Amortization Outstanding Maturity Due Upon Benchmark Applicable Interest Instrument Draw Date Principal Per Annum(1) Principal Date Maturity Rate Margin(2) Rate Term Loan A-2 5/8/2019$ 700,000 Varies(4)$ 685,259 5/8/2024$ 513,945 LIBOR 1.50% 1.68% 10/1/2019(3) Term Loan B-1 5/1/2017 500,000 1.0% 485,000 5/1/2024 466,250 LIBOR 1.75% 1.93% Term Loan B-2 1/7/2019 250,000 1.0% 246,875 1/7/2026 233,125 LIBOR 2.00% 2.18% Term Loan B-3 6/14/2019 325,000 1.0% 321,750 1/7/2026 303,875 LIBOR 2.00% 2.18% Total$ 1,775,000 $ 1,738,884 $ 1,517,195
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(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
date are 2.5%, 2.5%, 5.0%, 7.5% and 12.5%, respectively.
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Unamortized debt issuance costs consisted of the following (in thousands):
June 30, 2020 December 31, 2019
Revolving Credit Facility portion:
Other noncurrent assets $ 2,149 $ 2,427
Term loans portion: Long-term debt (contra account) 16,208 18,142 Total$ 18,357 $ 20,569 We recorded debt issuance cost amortization of$1.1 million and$1.3 million for the three months endedJune 30, 2020 and 2019, respectively, and$2.2 million and$2.4 million for the six months endedJune 30, 2020 and 2019, respectively, within interest expense in the condensed consolidated statements of operations and comprehensive income.
We were in compliance with all debt covenants as of
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 effective inMarch 2019 , 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 effective inJune 2020 , with respect to a notional amount of$350 million , our monthly payment 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$5.0 million and$0.4 million on interest rate swaps during the three months endedJune 30, 2020 and 2019, respectively, and$7.0 million and$0.5 million during the six months endedJune 30, 2020 and 2019, respectively, which were reflected in interest expense within the condensed consolidated statements of operations and comprehensive income. InMay 2020 , we completed the Public Offering of 287,500 shares of our common stock for total net proceeds of$469.8 million , after deducting underwriting discounts and offering expenses. We used a portion of the net proceeds to repay in full our outstanding borrowings of$100 million under the Revolving Credit Facility inMay 2020 and for the Valu-Net and Wisper transactions. We expect to use the remainder of the proceeds for general corporate purposes, including for acquisitions and strategic investments. 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 this 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 legacyCable One platforms; and expanding our high-capacity fiber network. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.
Our capital expenditures by category for the six months ended
Six Months Ended June 30,
2020 2019
Customer premise equipment $ 34,227 $ 24,854
Commercial 22,457 11,519
Scalable infrastructure 23,093 21,715
Line extensions 9,522 11,964
Upgrade/rebuild 27,789 13,394
Support capital 26,328 27,042
Total $ 143,416 $ 110,488
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Contractual Obligations and Contingent Commitments
As ofJune 30, 2020 , except for the letters of credit totaling$22.0 million issued on behalf of Wisper to guarantee its performance obligations under anFCC 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.
Changes in Critical Accounting Policies and Estimates
Goodwill . We test goodwill for impairment at the reporting unit level, which was historically established at the geographic division level. We reevaluate the determination of our reporting units used to test for impairment periodically or whenever events or substantive changes in circumstances occur. Effective in the second quarter of 2020, as a result of progress made in our staged rebranding initiative and the further alignment of service offerings and product pricing of recently acquired operations with our legacy business, we reevaluated the basis of our goodwill reporting units and identified a single goodwill reporting unit based on the chief operating decision maker's current performance monitoring and resource allocation process and the similarity of our geographic divisions. Indefinite-Lived Intangible Assets. The unit of account for our franchise agreements was historically established at the geographic division level. We reevaluate the unit of account used to test for impairment periodically or whenever events or substantive changes in circumstances occur to ensure impairment testing is performed at an appropriate level. Effective in the second quarter of 2020, as a result of progress made in our staged rebranding initiative and the further alignment of service offerings and product pricing of recently acquired operations with our legacy business, we reevaluated the basis of our franchise agreements unit of account for use in impairment assessments and identified a single unit of account for franchise agreements based on a reevaluation of our current operations and the use of our assets.
Except as disclosed above, there have been no material changes to our critical accounting policy and estimate disclosures described in our 2019 Form 10-K.
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