Document
 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from__________ to __________

Commission File No.: 000-09881
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11867844&doc=11
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA
 
54-1162807
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

500 Shentel Way, Edinburg, Virginia    22824
(Address of principal executive offices)  (Zip Code)

(540) 984-4141
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑   No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☑   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company☐
Emerging growth company☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐    No  ☑
 
The number of shares of the registrant’s common stock outstanding on October 27, 2017 was 49,264,693. 
 




SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX

 
 
Page
Numbers
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-
 
 
 
 
 
 
-
 
 
 
 
 
Item 2.
-
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 



Index



SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS
 
September 30,
2017
 
December 31,
2016
 
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
75,467

 
$
36,193

Accounts receivable, net of allowance of $479 and $449, respectively
 
64,396

 
69,789

Income taxes receivable
 
7,689

 

Inventory, net
 
7,439

 
39,043

Prepaid expenses and other
 
18,226

 
16,440

Total current assets
 
173,217

 
161,465

 
 
 
 
 
Investments, including $3,271 and $2,907 carried at fair value
 
11,319

 
10,276

 
 
 
 
 
Property, plant and equipment, net
 
683,355

 
698,122

 
 
 
 
 
Other Assets
 
 

 
 

Intangible assets, net
 
421,672

 
454,532

Goodwill
 
146,497

 
145,256

Deferred charges and other assets, net
 
11,012

 
14,756

Total assets
 
$
1,447,072

 
$
1,484,407




(Continued)



3

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
September 30,
2017
 
December 31,
2016
 
 
 
 
 
Current Liabilities
 
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
 
$
54,316

 
$
32,041

Accounts payable
 
31,462

 
72,810

Advanced billings and customer deposits
 
21,109

 
20,427

Accrued compensation
 
7,373

 
9,465

Income taxes payable
 

 
435

Accrued liabilities and other
 
15,277

 
29,085

Total current liabilities
 
129,537

 
164,263

 
 
 
 
 
Long-term debt, less current maturities, net of unamortized loan fees
 
778,686

 
797,224

 
 
 
 
 
Other Long-Term Liabilities
 
 

 
 

Deferred income taxes
 
142,056

 
151,837

Deferred lease payable
 
21,089

 
18,042

Asset retirement obligations
 
19,240

 
15,666

Retirement plan obligations
 
16,939

 
17,738

Other liabilities
 
40,180

 
23,743

Total other long-term liabilities
 
239,504

 
227,026

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Shareholders’ Equity
 
 

 
 

Common stock
 
43,908

 
45,482

Retained earnings
 
249,419

 
243,624

Accumulated other comprehensive income (loss), net of taxes
 
6,018

 
6,788

Total shareholders’ equity
 
299,345

 
295,894

 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
1,447,072

 
$
1,484,407


See accompanying notes to unaudited condensed consolidated financial statements.


4

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
151,782

 
$
156,836

 
$
458,920

 
$
379,716

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

Cost of goods and services, exclusive of depreciation and amortization shown separately below
 
55,834

 
58,317

 
162,976

 
140,354

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
42,199

 
40,369

 
125,374

 
96,263

Integration and acquisition expenses
 
1,706

 
15,272

 
9,873

 
35,801

Depreciation and amortization
 
42,568

 
46,807

 
132,297

 
96,961

Total operating expenses
 
142,307

 
160,765

 
430,520

 
369,379

Operating income (loss)
 
9,475

 
(3,929
)
 
28,400

 
10,337

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 

 
 

 
 

 
 

Interest expense
 
(9,823
)
 
(8,845
)
 
(28,312
)
 
(16,369
)
Gain (loss) on investments, net
 
202

 
127

 
395

 
237

Non-operating income (loss), net
 
1,003

 
1,400

 
3,482

 
2,910

Income (loss) before income taxes
 
857

 
(11,247
)
 
3,965

 
(2,885
)
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
 
(2,677
)
 
(3,651
)
 
(1,830
)
 
(2,174
)
Net income (loss)
 
3,534

 
(7,596
)
 
5,795

 
(711
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Unrealized gain (loss) on interest rate hedge, net of tax
 
6

 
1,712

 
(770
)
 
(2,573
)
Comprehensive income (loss)
 
$
3,540

 
$
(5,884
)
 
$
5,025

 
$
(3,284
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.07

 
$
(0.16
)
 
$
0.12

 
$
(0.01
)
Diluted
 
$
0.07

 
$
(0.16
)
 
$
0.12

 
$
(0.01
)
Weighted average shares outstanding, basic
 
49,133

 
48,909

 
49,100

 
48,768

Weighted average shares outstanding, diluted
 
49,959

 
48,909

 
49,869

 
48,768

 
See accompanying notes to unaudited condensed consolidated financial statements.


5

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)

  
 
 
Shares
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income,
net of tax
 
Total
Balance, December 31, 2015
 
48,475

 
$
32,776

 
$
256,747

 
$
415

 
$
289,938

 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 

 

 
(895
)
 

 
(895
)
Other comprehensive gain (loss), net of tax
 

 

 

 
6,373

 
6,373

Dividends declared ($0.25 per share)
 

 

 
(12,228
)
 

 
(12,228
)
Dividends reinvested in common stock
 
19

 
524

 

 

 
524

Stock based compensation
 

 
3,506

 

 

 
3,506

Stock options exercised
 
371

 
3,359

 

 

 
3,359

Common stock issued for share awards
 
190

 

 

 

 

Common stock issued
 
2

 
14

 

 

 
14

Common stock issued to acquire non-controlling interests of nTelos
 
76

 
10,400

 

 

 
10,400

Common stock repurchased
 
(198
)
 
(5,097
)
 

 

 
(5,097
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
48,935

 
$
45,482

 
$
243,624

 
$
6,788

 
$
295,894

 
 
 
 
 
 
 
 
 
 


Net income (loss)
 

 

 
5,795

 

 
5,795

Unrealized gain (loss) on interest rate hedge, net of tax
 

 

 

 
(770
)
 
(770
)
Stock based compensation
 

 
3,557

 

 

 
3,557

Stock options exercised
 
295

 
1,944

 

 

 
1,944

Common stock issued for share awards
 
153

 

 

 

 

Common stock issued
 
1

 
16

 

 

 
16

Common stock issued to acquire non-controlling interests of nTelos
 
76

 

 

 

 

Common stock repurchased
 
(195
)
 
(7,091
)
 

 

 
(7,091
)
Balance, September 30, 2017
 
49,265

 
$
43,908

 
$
249,419

 
$
6,018

 
$
299,345


See accompanying notes to unaudited condensed consolidated financial statements.


6

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
Cash Flows From Operating Activities
 
 
 
 
Net income (loss)
 
$
5,795

 
$
(711
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Depreciation
 
113,437

 
84,256

Amortization reflected as operating expense
 
18,860

 
12,705

Amortization reflected as contra revenue
 
15,563

 
8,883

Amortization reflected as rent expense
 
2,173

 

Provision for bad debt
 
1,479

 
1,278

Straight line adjustment to management fee revenue
 
12,960

 
7,687

Stock based compensation expense
 
3,053

 
2,570

Deferred income taxes
 
(12,251
)
 
(57,196
)
Net (gain) loss on disposal of equipment
 
80

 
(144
)
Unrealized (gain) loss on investments
 
(308
)
 
(180
)
Net (gains) loss from patronage and equity investments
 
(2,315
)
 
(497
)
Amortization of debt issuance costs
 
3,572

 
2,608

Other
 

 
1,634

Changes in assets and liabilities:
 
 

 
 

(Increase) decrease in:
 
 

 
 

Accounts receivable
 
6,418

 
7,903

Inventory, net
 
31,604

 
(6,134
)
Income taxes receivable
 
(8,704
)
 
8,294

Other assets
 
(162
)
 
2,619

Increase (decrease) in:
 
 

 
 

Accounts payable
 
(30,795
)
 
3,551

Income taxes payable
 
(435
)
 
16,225

Deferred lease payable
 
3,729

 
2,728

Other deferrals and accruals
 
(5,048
)
 
(2,633
)
Net cash provided by (used in) operating activities
 
$
158,705

 
$
95,446

 
 
 
 
 
Cash Flows From Investing Activities
 
 

 
 

Acquisition of property, plant and equipment
 
(109,435
)
 
(102,850
)
Proceeds from sale of assets
 
356

 
287

Cash distributions from investments
 
27

 
2,796

Additional contributions to investments
 
(23
)
 

Cash disbursed for acquisition, net of cash acquired
 
(6,000
)
 
(655,590
)
Net cash provided by (used in) investing activities
 
$
(115,075
)
 
$
(755,357
)

(Continued)


7

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
Cash Flows From Financing Activities
 
 
 
 
Principal payments on long-term debt
 
$
(24,250
)
 
$
(207,816
)
Amounts borrowed under debt agreements
 
25,000

 
835,000

Cash paid for debt issuance costs
 

 
(14,825
)
Repurchases of common stock
 
(5,106
)
 
(5,097
)
Proceeds from issuance of common stock
 

 
3,368

Net cash provided by (used in) financing activities
 
$
(4,356
)
 
$
610,630

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
$
39,274

 
$
(49,281
)
 
 
 
 
 
Cash and cash equivalents:
 
 

 
 

Beginning
 
36,193

 
76,812

Ending
 
$
75,467

 
$
27,531

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 

 
 

Cash payments for:
 
 

 
 

Interest, net of capitalized interest of $1,266 and $909, respectively
 
$
25,934

 
$
14,671

 
 
 
 
 
Income taxes paid, net of refunds received
 
$
19,567

 
$
23,851


Non-cash investing and financing activities:
 
At September 30, 2017 and 2016, accounts payable included approximately $3.8 million and $14.2 million, respectively, associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.

During the nine months ended September 30, 2016, in conjunction with the acquisition of nTelos, the Company issued common stock to acquire non-controlling interests held by third parties in a subsidiary of nTelos. The transaction was valued at $10.4 million.

See accompanying notes to unaudited condensed consolidated financial statements.


8

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Basis of Presentation

The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and as required by Rule 10-01 of Regulation S-X.  Accordingly, the unaudited condensed consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, and related disclosures, as of the date of the financial statements, and the amounts of revenue and expenses reported during the period. Actual results could differ from estimates. The information contained herein should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The accompanying balance sheet information at December 31, 2016 was derived from the audited December 31, 2016 consolidated balance sheet. Operating revenues and income (loss) from operations for any interim period are not necessarily indicative of results that may be expected for the entire year.

Management has made an immaterial error correction to the accompanying prior period unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016 to decrease both the amount of net cash provided by operating activities and the amount of net cash used in investing activities by approximately 10.4 million to properly reflect the common stock issued (non-cash) by the Company to acquire non-controlling interests in a subsidiary of nTelos held by third parties in conjunction with the nTelos acquisition. This immaterial error correction had no effect on the net increase (decrease) in cash and cash equivalents for the period or the beginning or ending balance of cash and cash equivalents for the period.

Recently Issued Accounting Standards

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's consolidated financial statements and note disclosures, from those disclosed in the Company's 2016 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, delaying the effective date of ASU 2014-09. Three other amendments have been issued during 2016 modifying the original ASU. As amended, the new standard is effective for the Company on January 1, 2018, using either a retrospective basis or a modified retrospective basis with early adoption permitted. The Company plans to adopt the standard effective January 1, 2018 using the modified retrospective transition approach; under this approach prior periods will not be retrospectively adjusted.
The Company is continuing to assess all potential impacts of the standard, including the impact to the pattern with which revenue and direct and contract fulfillment costs are recognized, the impact of the standard on current accounting policies, practices and system of internal controls, in order to identify material differences, if any that would result from applying the new requirements. 
The Company is in the process of establishing new policies and processes, and is implementing necessary changes to data and procedures necessary to comply with the new requirements.
While continuing to assess all potential impacts of the standard, the Company believes the adoption will not have a significant effect on earnings however, the presentation of certain costs may change and disclosures will be impacted. The Company is still in the process of evaluating the impacts and the initial assessment may change.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”In addition to the presentation and disclosure requirements for financial instruments, ASU 2016-01 requires entities to measure equity investments, other than those accounted for under the equity method, at fair value and recognize changes in fair value in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using net asset value per share, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Entities must record

9

Index

a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted, except for equity investments without readily determinable fair values, for which the guidance will be applied prospectively. The guidance under ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017.  The Company has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous generally accepted accounting principles.  The ASU is effective for us on January 1, 2019, and early application is permitted.  Modified retrospective application is required.  The Company plans to adopt this standard when it becomes effective for the Company beginning January 1, 2019, and expects the adoption of this standard will result in the recognition of right of use assets and lease liabilities that have not previously been recorded, which will have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. The Company intends to adopt the standard retrospectively on the effective date of January 1, 2018 and does not expect the adoption of the ASU to have a material effect on cash flows.

In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statementASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements, nor does the Company expect to early adopt ASU 2017-07.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". This update is intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities. The ASU also simplifies the application of the hedge accounting guidance. ASU 2017-12 is effective on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the Consolidated Balance Sheet as of the beginning of the year of adoption, to the extent any ineffectiveness was previously recognized. The amendments to presentation guidance and disclosure requirements under this update are required to be adopted prospectively. The Company has not yet determined the effect of the ASU on our results of operations, financial condition or cash flows, nor has transition date been determined.

In September 2017, the FASB issued ASU No. 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)", which provided additional implementation guidance on the previously issued topics. The Company has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements.















10

Index

2.
Acquisitions

Acquisition of NTELOS Holdings Corp. and Exchange with Sprint

On May 6, 2016, (the "acquisition date"), the Company completed its acquisition of NTELOS Holdings Corp. (nTelos).  nTelos, was a regional provider of wireless telecommunications solutions and was acquired to expand the Company's wireless service area and subscriber base, thus strengthening the Company's relationship with Sprint Corporation (Sprint).

Pursuant to the terms of the Agreement and Plan of Merger between the Company and nTelos (the "Merger Agreement"), nTelos became a direct wholly owned subsidiary of the Company. Pursuant to the terms of the Merger Agreement, the Company acquired all of the issued and outstanding capital stock of nTelos for an aggregate purchase price of $667.8 million. The purchase price was financed by a credit facility arranged by CoBank, ACB, Royal Bank of Canada, Fifth Third Bank, Bank of America, N.A., Capital One, National Association, Citizens Bank N.A., and Toronto Dominion (Texas) LLC. 

Transaction costs in connection with the acquisition were expensed as incurred and are included in integration and acquisition expenses in the condensed consolidated statement of operations. The results of operations related to nTelos are included in our consolidated statements of operations beginning from the date of acquisition.

The Company accounted for the acquisition of nTelos under the acquisition method of accounting, in accordance with FASB's Accounting Standards Codification (“ASC”) 805, “Business Combinations”, and has accounted for measurement period adjustments under ASU 2015-16, “Simplifying the Accounting for Measurement Period Adjustments”.  Estimates of fair value included in the consolidated financial statements, in conformity with ASC 820, "Fair Value Measurements and Disclosures", represent the Company's best estimates and valuations. In accordance with ASC 805, "Business Combinations", the allocation of the consideration value was subject to adjustment until the Company completed its analysis, in a period of time, but not to exceed one year after the date of acquisition, or May 6, 2017, in order to provide the Company with the time to complete the valuation of its assets and liabilities. The Company has completed and finalized its analysis and allocation of the consideration value to assets acquired and liabilities assumed.
































11

Index

The following table summarizes the final purchase price allocation to assets acquired and liabilities assumed, including measurement period adjustments:
 
Initial Estimate
 
Measurement Period Adjustments
 
Purchase Price Allocation
Accounts receivable
$
48,476

 
$
(1,242
)
 
47,234

Inventory
3,810

 
762

 
4,572

Restricted cash
2,167

 

 
2,167

Investments
1,501

 

 
1,501

Prepaid expenses and other assets
14,835

 

 
14,835

Building held for sale
4,950

 

 
4,950

Property, plant and equipment
223,900

 
3,347

 
227,247

Spectrum licenses (1), (2)
198,200

 

 
198,200

Acquired subscribers - wireless (1), (2)
198,200

 
7,746

 
205,946

Favorable lease intangible assets (2)
11,000

 
6,029

 
17,029

Goodwill (3)
151,627

 
(5,244
)
 
146,383

Other long term assets
10,288

 
555

 
10,843

Total assets acquired
$
868,954

 
$
11,953

 
$
880,907

 
 

 
 

 
 

Accounts payable
8,648

 
(105
)
 
8,543

Advanced billings and customer deposits
12,477

 

 
12,477

Accrued expenses
25,230

 
(2,089
)
 
23,141

Capital lease liability
418

 

 
418

Deferred tax liabilities
124,964

 
4,327

 
129,291

Retirement benefits
19,461

 
(263
)
 
19,198

Other long-term liabilities
14,056

 
6,029

 
20,085

Total liabilities assumed
$
205,254

 
$
7,899

 
$
213,153

 
 

 
 

 
 

Net assets acquired
$
663,700

 
$
4,054

 
$
667,754



(1)
Concurrently with acquiring nTelos, the Company completed its previously announced transaction with SprintCom, Inc., a subsidiary of Sprint.  Pursuant to this transaction, among other things,  the Company exchanged spectrum licenses, valued at $198.2 million and acquired subscribers - wireless, valued at $206.0 million, acquired from nTelos with Sprint, and received an expansion of its affiliate service territory to include most of the service area served by nTelos, valued at $283.3 million, as well as additional acquired subscribers - wireless, valued at $120.9 million, relating to nTelos’ and Sprint’s legacy customers in the Company’s affiliate service territory. These exchanges were accounted for in accordance with ASC 845, “Nonmonetary Transactions”. The transfer of spectrum to Sprint resulted in a taxable gain to the Company which will be recognized as the Company recognizes the cash benefit of the waived management fees over the remaining approximately five years.
(2)
Identifiable intangible assets were measured using a combination of an income approach and a market approach. 
(3)
Goodwill is the excess of the consideration transferred over the net assets recognized and represents the future economic benefits, primarily as a result of other assets acquired that could not be individually identified and separately recognized. The Company has recorded goodwill in its Wireless segment as a result of the nTelos acquisition.  Goodwill is not amortized. The goodwill that arose from the acquisition of nTelos is not deductible for tax purposes.

In addition to the changes in the balances reflected above, the Company revised provisional estimated useful lives of certain assets and recorded an adjustment to amortization expense of $0.1 million during the three months ended June 30, 2017, and recorded an adjustment during 2016 of $4.6 million to depreciation expense relating to the three months ended June 30, 2016.
Acquisition-related costs primarily related to legal services, professional services, and severance accruals, were expensed as incurred. For the three and nine months ended September 30, 2016, the Company incurred acquisition-related costs of $0.8 million and $15.9 million, respectively.

12

Index

The amounts of operating revenue and income or loss before income taxes related to the former nTelos entity are not readily determinable due to intercompany transactions, allocations and integration activities that have occurred in connection with the operations of the combined company.
The following table presents pro forma information, based on estimates and assumptions that the Company believes to be reasonable, for the Company as if the acquisition of nTelos had occurred at the beginning of 2016: (in millions)
 
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2016
Operating revenues
$
157.8

 
$
492.1

Income (loss) before income taxes
$
(13.4
)
 
$
(4.0
)

The pro forma information provided in the table above is not necessarily indicative of the consolidated results of operations for future periods or the results that actually would have been realized had the acquisition been completed at the beginning of the periods presented.

The pro forma information provided in the table above is based upon estimated valuations of the assets acquired and liabilities assumed as well as estimates of depreciation and amortization charges thereon. Other estimated pro forma adjustments include the following:
changes in nTelos' reported revenues from cancelling nTelos' wholesale contract with Sprint;
the incorporation of the Sprint-homed customers formerly serviced under the wholesale agreement into the Company’s affiliate service territory under the Company’s affiliate agreement with Sprint;
the effect of other changes to revenues and expenses due to various provisions of the affiliate agreement, including fees charged under the affiliate agreement on revenues from former nTelos customers, a reduction of the net service fee charged by Sprint, the straight-line impact of the waived management fee, and the amortization of the affiliate agreement expansion intangible asset; and the elimination of non-recurring transaction related expenses incurred by the Company and nTelos;
the elimination of certain nTelos operating costs associated with billing and care that are covered under the fees charged by Sprint under the affiliate agreement;
historical depreciation expense was reduced for the fair value adjustment decreasing the basis of property, plant and equipment; this decrease was offset by a shorter estimated useful life to conform to the Company’s standard policy and the acceleration of depreciation on certain equipment; and
incremental amortization due to the Acquired subscribers - wireless intangible asset.

In connection with the acquisition of nTelos, the Company incurs costs which include the nTelos back office staff and support functions until the nTelos legacy customers are migrated to the Sprint billing platform; costs of the handsets to be provided to nTelos legacy customers as they migrate to the Sprint billing platform; severance costs for back office and other former nTelos employees who will not be retained permanently; and costs to shut down certain cell sites and related backhaul contracts. The Company has incurred these costs as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Statement of Operations location:
2017
 
2016
 
2017
 
2016
Cost of goods and services
0.1

 
0.7

 
0.3

 
1.0

Selling, general and administrative
1.1

 
4.2

 
5.2

 
7.1

Integration and acquisition
1.7

 
15.3

 
9.9

 
35.8

Total
2.9

 
20.2

 
15.4

 
43.9


The value of the affiliate agreement expansion discussed above is based on changes to the amended affiliate agreement that include:
an increase in the price to be paid by Sprint from 80% to 90% of the entire business value if the affiliate agreement is not renewed;
extension of the affiliate agreement with Sprint by five years to 2029;
expanded territory in the nTelos service area;
rights to serve all future Sprint customers in the affiliate service territory;
the Company's commitment to upgrade certain coverage and capacity in its newly acquired service area; and

13

Index

a reduction of the management fee charged by Sprint under the amended affiliate agreement; not to exceed $4.2 million in an individual month until the total waived fee equals $251.8 million, as well as an additional waiver of the management fee charged with respect to the former nTelos customers until the earlier of migration to the Sprint back-office billing and related systems or six months following the acquisition; not to exceed $5.0 million.

Intangible assets resulting from the acquisition of nTelos and the Sprint exchange, both described above, are noted below (in thousands):
 
Useful Life
 
Basis
Affiliate contract expansion
14 years
 
$
283,302

Acquired subscribers - wireless
4-10 years
 
$
120,855

Favorable lease intangible assets
10 years
 
$
17,029


The affiliate contract expansion intangible asset is amortized on a straight-line basis and recorded as a contra-revenue over the remaining 14 year initial contract term.  The Acquired subscribers rights - wireless intangible is amortized over the life of the customers, gradually decreasing over the expected life of this asset, and recorded through amortization expense. The favorable lease intangible assets are amortized on a straight-line basis and recorded through rent expense.  The value of these intangible assets includes measurement period adjustments.

Acquisition of Expansion Area

On April 6, 2017, the Company expanded its affiliate service territory, under its agreements with Sprint, to include certain areas in North Carolina, Kentucky, Maryland, Ohio and West Virginia.  The expanded territory includes the Parkersburg, WV, Huntington, WV, and Cumberland, MD, basic trading areas. Approximately 25,000 Sprint retail and former nTelos postpaid and prepaid subscribers in the new basic trading areas became Sprint-branded affiliate customers managed by the Company.

3.    Property, Plant and Equipment

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

 
 
September 30,
2017
 
December 31,
2016
Plant in service
 
$
1,187,799

 
$
1,085,318

Plant under construction
 
67,099

 
73,759

 
 
1,254,898

 
1,159,077

Less accumulated amortization and depreciation
 
571,543

 
460,955

Net property, plant and equipment
 
$
683,355

 
$
698,122


4.
Earnings (loss) per share ("EPS")

Basic net income (loss) per share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period.  Diluted net income (loss) per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Diluted EPS was computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include stock options and restricted stock units and shares that the Company is contractually obligated to issue in the future.


14

Index

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Basic income (loss) per share
 
 
 
 
 
 
 
 
Net income (loss)
 
$
3,534

 
$
(7,596
)
 
$
5,795

 
$
(711
)
Basic weighted average shares outstanding
 
49,133

 
48,909

 
49,100

 
48,768

Basic income (loss) per share
 
$
0.07

 
$
(0.16
)
 
$
0.12

 
$
(0.01
)
 
 
 
 
 
 
 
 
 
Effect of stock options and awards outstanding:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
49,133

 
48,909

 
49,100

 
48,768

Effect from dilutive shares and options outstanding
 
826

 

 
769

 

Diluted weighted average shares
 
49,959

 
48,909

 
49,869

 
48,768

Diluted income (loss) per share
 
$
0.07

 
$
(0.16
)
 
$
0.12

 
$
(0.01
)

Due to the net loss for the three and nine months ended September 30, 2016, no adjustment was made to basic shares, as such an adjustment would have been anti-dilutive.

The computation of diluted EPS does not include certain unvested awards, on a weighted average basis, because their inclusion would have an anti-dilutive effect on EPS. The awards excluded because of their anti-dilutive effect are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive
 

 
893

 
94

 
778

 
5.
Investments

Investments include $3.3 million and $2.9 million of investments carried at fair value as of September 30, 2017 and December 31, 2016, respectively, consisting of equity, bond and money market mutual funds.  Investments carried at fair value were acquired under a rabbi trust arrangement related to the Company’s nonqualified Supplemental Executive Retirement Plan (the “SERP”). The Company purchases investments in the trust to mirror the investment elections of participants in the SERP; gains and losses on the investments in the trust are reflected as increases or decreases in the liability owed to the participants. During the nine months ended September 30, 2017, the Company recognized $59 thousand in dividend and interest income from investments, and recorded net unrealized gains of $308 thousand on these investments. Fair values for these investments held under the rabbi trust were determined by Level 1 quoted market prices for the underlying mutual funds. Changes in carrying value of investments are recorded within gain on investments, net on the Statements of Operations and Comprehensive Income (Loss).







At September 30, 2017 and December 31, 2016, other investments, comprised of equity securities which do not have readily determinable fair values, consist of the following (in thousands):

15

Index

 
September 30,
2017
 
December 31,
2016
Cost method:
 
CoBank
$
6,644

 
$
6,177

Other – Equity in other telecommunications partners
812

 
742

 
7,456

 
6,919

Equity method:
 
 
 
Other
592

 
450

Total other investments
$
8,048

 
$
7,369


6.
Financial Instruments

Financial instruments on the condensed consolidated balance sheets that approximate fair value include:  cash and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, interest rate swaps and variable rate long-term debt.

The Company has certain non-marketable long-term investments for which it is not practicable to estimate fair value with a total carrying value of $8.0 million and $7.4 million as of September 30, 2017 and December 31, 2016, respectively, of which $6.6 million and $6.2 million, respectively, represents the Company’s investment in CoBank. This investment is primarily related to patronage distributions of restricted equity and is a required investment related to the portion of the Credit Facility held by CoBank. This investment is carried under the cost method.

7.
Derivative Instruments, Hedging Activities and Accumulated Other Comprehensive Income

The Company’s objectives in using interest rate derivatives are to add stability to cash flows and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps (both those designated as cash flow hedges as well as those not designated as cash flow hedges) involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The Company entered into a pay-fixed, receive-variable interest rate swap of $174.6 million of notional principal in September 2012.  This interest rate swap was designated as a cash flow hedge. The outstanding notional amount of this cash flow hedge was $122.2 million as of September 30, 2017. The outstanding notional amount decreases based upon scheduled principal payments on the 2012 debt.

In May 2016, the Company entered into a pay-fixed, receive-variable interest rate swap of $256.6 million of notional principal with three counterparties. This interest rate swap was designated as a cash flow hedge. The outstanding notional amount of this cash flow hedge was $303.8 million as of September 30, 2017. The outstanding notional amount increases based upon draws expected to be made under a portion of the Company's Term Loan A-2 debt and as the 2012 interest rate swap's notional principal decreases, and the outstanding notional amount will decrease as the Company makes scheduled principal payments on the 2016 debt.  In combination with the swap entered into in 2012 described above, the Company is hedging approximately 50% of the outstanding debt.

The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings through interest expense. No hedge ineffectiveness was recognized during any of the periods presented.

Amounts reported in accumulated other comprehensive income related to the interest rate swaps designated and qualified as a cash flow hedge, are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 30, 2017, the Company estimates that $1.1 million will be reclassified as a reduction of interest expense during the next twelve months.


16

Index

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the condensed consolidated balance sheet (in thousands): 
 
 
September 30,
2017
 
December 31,
2016
Balance Sheet Location:
 
 

 
 

Prepaid expenses and other
 
$
1,124

 
$

Deferred charges and other assets, net
 
8,848

 
12,118

Accrued liabilities and other
 

 
(895
)
Total derivatives designated as hedging instruments
 
$
9,972

 
$
11,223


The fair value of interest rate swaps is determined using a pricing model with inputs that are observable in the market (level 2 fair value inputs).

The table below presents change in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2017 (in thousands):
 
 
Gains (Losses) on Cash Flow Hedges
 
Income
Tax
 Expense
 
Accumulated
Other
Comprehensive
Income (Loss), net of taxes
Balance as of December 31, 2016
 
$
11,223

 
$
(4,435
)
 
$
6,788

Net change in unrealized gain (loss)
 
(1,789
)
 
698

 
(1,091
)
Amounts reclassified from accumulated other comprehensive income (loss) to interest expense
 
538

 
(217
)
 
321

Net current period accumulated other comprehensive income (loss)
 
(1,251
)
 
481

 
(770
)
Balance as of September 30, 2017
 
$
9,972

 
$
(3,954
)
 
$
6,018


8. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill during the nine months ended September 30, 2017 are shown below (in thousands):
 
December 31,
2016
 
Measurement Period Adjustments
 
September 30,
2017
Goodwill - Wireline segment
$
10

 
$

 
$
10

Goodwill - Cable segment
104

 

 
104

Goodwill - Wireless segment
145,142

 
1,241

 
146,383

Goodwill as of September 30, 2017
$
145,256

 
$
1,241

 
$
146,497



17

Index


Intangible assets consist of the following at September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Non-amortizing intangibles:
 
 
 
 
 
 
 
 
 
 
 
Cable franchise rights
$
64,335

 
$

 
$
64,335

 
$
64,334

 
$

 
$
64,334

Railroad crossing rights
140

 

 
140

 
97

 

 
97

 
64,475

 

 
64,475

 
64,431

 

 
64,431

 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangibles:
Affiliate contract expansion
287,052

 
(29,593
)
 
257,459

 
284,102

 
(14,030
)
 
270,072

Acquired subscribers – wireless
123,105

 
(36,871
)
 
86,234

 
120,855

 
(18,738
)
 
102,117

Favorable leases - wireless
16,950

 
(3,985
)
 
12,965

 
16,950

 
(1,130
)
 
15,820

Acquired subscribers – cable
25,265

 
(25,059
)
 
206

 
25,265

 
(24,631
)
 
634

Other intangibles
563

 
(230
)
 
333

 
2,212

 
(754
)
 
1,458

Total finite-lived intangibles
452,935

 
(95,738
)
 
357,197

 
449,384

 
(59,283
)
 
390,101

Total intangible assets
$
517,410

 
$
(95,738
)
 
$
421,672

 
$
513,815

 
$
(59,283
)
 
$
454,532


9.
Accrued and Other liabilities

Accrued liabilities and other include the following (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Sales and property taxes payable
 
$
4,409

 
$
6,628

Severance accrual
 
1,889

 
4,267

Asset retirement obligations, current portion
 
823

 
5,841

Accrued programming costs
 
2,856

 
2,939

Other current liabilities
 
5,300

 
9,410

Accrued liabilities and other
 
$
15,277

 
$
29,085



Other liabilities include the following (in thousands):
  
 
September 30, 2017
 
December 31, 2016
Non-current portion of deferred revenues
 
$
14,111

 
$
8,933

Straight-line management fee waiver
 
24,934

 
11,974

Other
 
1,135

 
2,836

Other liabilities
 
$
40,180

 
$
23,743



18

Index

10. Long-Term Debt and Revolving Lines of Credit

Total debt at September 30, 2017 and December 31, 2016 consists of the following:
(In thousands)
 
September 30, 2017
 
December 31, 2016
Term loan A-1
 
$
448,625

 
$
472,875

Term loan A-2
 
400,000

 
375,000

 
 
848,625

 
847,875

Less: unamortized loan fees
 
15,623

 
18,610

Total debt, net of unamortized loan fees
 
$
833,002

 
$
829,265

 
 
 
 
 
Current maturities of long term debt, net of unamortized loan fees
 
$
54,316

 
$
32,041

Long-term debt, less current maturities, net of unamortized loan fees
 
$
778,686

 
$
797,224


As of September 30, 2017, our indebtedness totaled $848.6 million in term loans with an annualized effective interest rate of approximately 4.07% after considering the impact of the interest rate swap contract and unamortized loan costs.  The balance consists of the $448.6 million Term Loan A-1 at a variable rate (3.99% as of September 30, 2017) that resets monthly based on one month LIBOR plus a margin of 2.75%, and the $400.0 million Term Loan A-2 at a variable rate (4.24% as of September 30, 2017) that resets monthly based on one month LIBOR plus a margin of 3.00%.  The Term Loan A-1 requires quarterly principal repayments of $12.1 million through June 30, 2020, with further increases at that time through maturity in June 30, 2021.  The Term Loan A-2 requires quarterly principal repayments of $10.0 million beginning on September 30, 2018 through March 31, 2023, with the remaining balance due June 30, 2023.

The Company is subject to certain covenants to be measured on a trailing twelve month basis each calendar quarter unless otherwise specified.  These covenants include:

a limitation on the Company’s total leverage ratio, defined as indebtedness divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than or equal to 3.75 to 1.00 from the closing date through December 30, 2018, then 3.25 to 1.00 through December 30, 2019, and 3.00 to 1.00 thereafter;
a minimum debt service coverage ratio, defined as EBITDA minus certain cash taxes divided by the sum of all scheduled principal payments on the Term Loans and scheduled principal payments on other indebtedness plus cash interest expense, greater than 2.00 to 1.00;
the Company must maintain a minimum liquidity balance, defined as availability under the revolver facility plus unrestricted cash and cash equivalents on deposit in a deposit account for which a control agreement has been delivered to the administrative agent under the 2016 credit agreement, of greater than $25 million at all times.

As shown below, as of September 30, 2017, the Company was in compliance with the covenants in its credit agreements.
     
 
Actual
 
Covenant Requirement
Total Leverage Ratio
2.93

 
3.75 or Lower
Debt Service Coverage Ratio
3.88

 
2.00 or Higher
Minimum Liquidity Balance
$
149,228

 
$25 million or Higher

11.
Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker.  The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Cable, and (3) Wireline.   A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.

The Wireless segment provides digital wireless service as a PCS affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, along Interstate 81 to Harrisonburg, Virginia, south-central and western Virginia, West Virginia, and small portions of North Carolina, Kentucky, Maryland and Ohio. The Wireless segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.


19

Index

The Cable segment provides video, internet and voice services in Virginia, West Virginia and Maryland, and leases fiber optic facilities throughout southern Virginia and West Virginia. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.

The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video and cable modem services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of central and southern Pennsylvania.

Three Months Ended September 30, 2017 
(in thousands)
 
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
107,395

 
$
26,934

 
$
5,126

 
$

 
$

 
$
139,455

Other
 
3,871

 
2,156

 
6,300

 

 

 
12,327

Total external revenues
 
111,266

 
29,090

 
11,426

 

 

 
151,782

Internal revenues
 
1,239

 
999

 
8,425

 

 
(10,663
)
 

Total operating revenues
 
112,505

 
30,089

 
19,851

 

 
(10,663
)
 
151,782

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of goods and services, exclusive of depreciation and amortization shown separately below
 
41,041

 
14,913

 
9,807

 

 
(9,927
)
 
55,834

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
30,099

 
5,358

 
1,706

 
5,772

 
(736
)
 
42,199

Integration and acquisition expenses
 
1,691

 

 

 
15

 

 
1,706

Depreciation and amortization
 
32,929

 
6,192

 
3,249

 
198

 

 
42,568

Total operating expenses
 
105,760

 
26,463

 
14,762

 
5,985

 
(10,663
)
 
142,307

Operating income (loss)
 
$
6,745

 
$
3,626

 
$
5,089

 
$
(5,985
)
 
$

 
$
9,475



20

Index

Three Months Ended September 30, 2016
 (in thousands)
 
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
111,001

 
$
24,948

 
$
4,948

 
$

 
$

 
$
140,897

Other
 
7,978

 
2,031

 
5,930

 

 

 
15,939

Total external revenues
 
118,979

 
26,979

 
10,878

 

 

 
156,836

Internal revenues
 
1,140

 
587

 
7,854

 

 
(9,581
)
 

Total operating revenues
 
120,119

 
27,566

 
18,732

 

 
(9,581
)
 
156,836

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of goods and services, exclusive of depreciation and amortization shown separately below
 
43,097

 
14,654

 
9,442

 

 
(8,876
)
 
58,317

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
29,892

 
4,770

 
1,676

 
4,736

 
(705
)
 
40,369

Integration and acquisition expenses
 
14,499

 

 

 
773

 

 
15,272

Depreciation and amortization
 
38,038

 
5,860

 
2,822

 
87

 

 
46,807

Total operating expenses
 
125,526

 
25,284

 
13,940

 
5,596

 
(9,581
)
 
160,765

Operating income (loss)
 
$
(5,407
)
 
$
2,282

 
$
4,792

 
$
(5,596
)
 
$

 
$
(3,929
)


Nine Months Ended September 30, 2017
(in thousands)
 
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
323,262

 
$
80,229

 
$
15,301

 
$

 
$

 
$
418,792

Other
 
15,133

 
6,283

 
18,712

 

 

 
40,128

Total external revenues
 
338,395

 
86,512

 
34,013

 

 

 
458,920

Internal revenues
 
3,707

 
2,153

 
24,568

 
 
 
(30,428
)
 

Total operating revenues
 
342,102

 
88,665

 
58,581

 

 
(30,428
)
 
458,920

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of goods and services, exclusive of depreciation and amortization shown separately below
 
117,829

 
45,052

 
28,409

 

 
(28,314
)
 
162,976

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
88,201

 
15,083

 
5,065

 
19,139

 
(2,114
)
 
125,374

Integration and acquisition expenses
 
9,607

 

 

 
266

 

 
9,873

Depreciation and amortization
 
104,231

 
18,070

 
9,536

 
460

 

 
132,297

Total operating expenses
 
319,868

 
78,205

 
43,010

 
19,865

 
(30,428
)
 
430,520

Operating income (loss)
 
$
22,234

 
$
10,460

 
$
15,571

 
$
(19,865
)
 
$

 
$
28,400



21

Index


Nine Months Ended September 30, 2016
(in thousands)
 
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
250,053

 
$
73,455

 
$
14,727

 
$

 
$

 
$
338,235

Other
 
17,461

 
5,799

 
18,221

 

 

 
41,481

Total external revenues
 
267,514

 
79,254

 
32,948

 

 

 
379,716

Internal revenues
 
3,417

 
1,159

 
22,754

 

 
(27,330
)
 

Total operating revenues
 
270,931

 
80,413

 
55,702

 

 
(27,330
)
 
379,716

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of goods and services, exclusive of depreciation and amortization shown separately below
 
94,892

 
43,864

 
26,892

 

 
(25,294
)
 
140,354

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
65,219

 
14,672

 
4,951

 
13,457

 
(2,036
)
 
96,263

Integration and acquisition expenses
 
19,889

 

 

 
15,912

 

 
35,801

Depreciation and amortization
 
70,026

 
17,834

 
8,789

 
312

 

 
96,961

Total operating expenses
 
250,026

 
76,370

 
40,632

 
29,681

 
(27,330
)
 
369,379

Operating income (loss)
 
$
20,905

 
$
4,043

 
$
15,070

 
$
(29,681
)
 
$

 
$
10,337


A reconciliation of the total of the reportable segments’ operating income (loss) to consolidated income (loss) before taxes is as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Total consolidated operating income (loss)
 
$
9,475

 
$
(3,929
)
 
$
28,400

 
$
10,337

Interest expense
 
(9,823
)
 
(8,845
)
 
(28,312
)
 
(16,369
)
Non-operating income, net
 
1,205

 
1,527

 
3,877

 
3,147

Income (loss) before income taxes
 
$
857

 
$
(11,247
)
 
$
3,965

 
$
(2,885
)


12.
Income Taxes

The Company files U.S. federal income tax returns and various state and local income tax returns.  With few exceptions, years prior to 2013 are no longer subject to examination; net operating losses acquired in the nTelos acquisition are open to examination from 2002 forward. The Company is not subject to any state or federal income tax audits as of September 30, 2017.

The effective tax rate has fluctuated in recent periods due to the minimal base of pre-tax earnings or losses and has been further impacted by the impact of share based compensation tax benefits which are recognized as incurred under the provisions of ASC 740, "Income Taxes".


22

Index

13.  Related Party Transactions

ValleyNet, an equity method investee of the Company, resells capacity on the Company’s fiber network under an operating lease agreement.  Additionally, the Company's PCS operating subsidiary leases capacity through ValleyNet.
The following tables summarize the financial statement impact from related party transactions with ValleyNet (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Statement of Operations and Comprehensive Income (Loss)
 
2017
 
2016
 
2017
 
2016
   Facility Lease Revenue
 
$
506

 
$
560

 
$
1,664

 
$
1,809

   Costs of Goods and Services
 
951

 
858

 
2,699

 
2,162

 
 
 
 
 
 
 
 
 
 
 
September 30,
2017
 
December 31,
2016
 
 
 
 
Consolidated Balance Sheet
 
 
 
 
 
 
 
 
   Accounts Receivable related to ValleyNet
 
$
181

 
$
191

 
 
 
 
   Accounts Payable related to ValleyNet
 
301

 
448

 
 
 
 
14.  Subsequent Events

On October 24. 2017, the Company’s Board of Directors approved a dividend of $0.26 per common share to be paid December 1, 2017 to shareholders of record as of the close of business on November 3, 2017. Before dividend reinvestments, the total payout is expected to be approximately $12.8 million.