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, 2016 | |
☐ | 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
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | ☐Smaller reporting company ☐ |
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, 2016 was 48,915,405.
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
Page Numbers | ||||
PART I. | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | |||
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Item 2. | - | |||
Item 3. | ||||
Item 4. | ||||
PART II. | OTHER INFORMATION | |||
Item 1A. | ||||
Item 2. | ||||
Item 6. | ||||
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS | September 30, 2016 | December 31, 2015 | ||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 27,531 | $ | 76,812 | ||||
Restricted cash | 2,167 | — | ||||||
Accounts receivable, net | 79,944 | 29,778 | ||||||
Income taxes receivable | — | 7,694 | ||||||
Inventory, net | 14,128 | 4,183 | ||||||
Prepaid expenses and other | 17,759 | 8,573 | ||||||
Deferred income taxes | — | 907 | ||||||
Total current assets | 141,529 | 127,947 | ||||||
Investments, including $2,889 and $2,654 carried at fair value | 10,113 | 10,679 | ||||||
Building held for sale | 4,950 | — | ||||||
Property, plant and equipment, net | 667,741 | 410,018 | ||||||
Other Assets | ||||||||
Intangible assets, net | 458,401 | 66,993 | ||||||
Goodwill | 145,413 | 10 | ||||||
Deferred charges and other assets, net | 5,478 | 11,504 | ||||||
Other assets, net | 609,292 | 78,507 | ||||||
Total assets | $ | 1,433,625 | $ | 627,151 | ||||
(Continued)
3
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY | September 30, 2016 | December 31, 2015 | ||||||
Current Liabilities | ||||||||
Current maturities of long-term debt, net of unamortized loan fees | $ | 25,972 | $ | 22,492 | ||||
Accounts payable | 34,974 | 13,009 | ||||||
Advanced billings and customer deposits | 21,979 | 11,674 | ||||||
Accrued compensation | 6,817 | 5,915 | ||||||
Income taxes payable | 14,189 | — | ||||||
Accrued liabilities and other | 31,533 | 7,639 | ||||||
Total current liabilities | 135,464 | 60,729 | ||||||
Long-term debt, less current maturities, net of unamortized loan fees | 783,595 | 177,169 | ||||||
Other Long-Term Liabilities | ||||||||
Deferred income taxes | 146,966 | 74,868 | ||||||
Deferred lease payable | 10,869 | 8,142 | ||||||
Asset retirement obligations | 15,828 | 7,266 | ||||||
Other liabilities | 42,597 | 9,039 | ||||||
Total other long-term liabilities | 216,260 | 99,315 | ||||||
Commitments and Contingencies | ||||||||
Shareholders’ Equity | ||||||||
Common stock | 44,427 | 32,776 | ||||||
Retained earnings | 256,037 | 256,747 | ||||||
Accumulated other comprehensive income (loss), net of taxes | (2,158 | ) | 415 | |||||
Total shareholders’ equity | 298,306 | 289,938 | ||||||
Total liabilities and shareholders’ equity | $ | 1,433,625 | $ | 627,151 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
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, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Operating revenues | $ | 156,836 | $ | 85,212 | $ | 379,716 | $ | 255,202 | ||||||||
Operating expenses: | ||||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below | 58,317 | 30,570 | 140,354 | 91,541 | ||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 40,369 | 18,306 | 96,263 | 55,024 | ||||||||||||
Integration and acquisition expenses | 15,272 | 2,129 | 35,801 | 3,153 | ||||||||||||
Depreciation and amortization | 46,807 | 19,118 | 96,961 | 53,119 | ||||||||||||
Total operating expenses | 160,765 | 70,123 | 369,379 | 202,837 | ||||||||||||
Operating income (loss) | (3,929 | ) | 15,089 | 10,337 | 52,365 | |||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (8,845 | ) | (1,808 | ) | (16,369 | ) | (5,663 | ) | ||||||||
Gain (loss) on investments, net | 127 | (211 | ) | 237 | (12 | ) | ||||||||||
Non-operating income, net | 1,400 | 391 | 2,910 | 1,265 | ||||||||||||
Income (loss) before income taxes | (11,247 | ) | 13,461 | (2,885 | ) | 47,955 | ||||||||||
Income tax expense (benefit) | (3,651 | ) | 5,465 | (2,174 | ) | 19,199 | ||||||||||
Net income (loss) | (7,596 | ) | 7,996 | (711 | ) | 28,756 | ||||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (loss) on interest rate hedge, net of tax | 1,712 | (979 | ) | (2,573 | ) | (1,560 | ) | |||||||||
Comprehensive income (loss) | $ | (5,884 | ) | $ | 7,017 | $ | (3,284 | ) | $ | 27,196 | ||||||
Earnings (loss) per share: | ||||||||||||||||
Basic | $ | (0.16 | ) | $ | 0.17 | $ | (0.01 | ) | $ | 0.59 | ||||||
Diluted | $ | (0.16 | ) | $ | 0.16 | $ | (0.01 | ) | $ | 0.59 | ||||||
Weighted average shares outstanding, basic | 48,909 | 48,406 | 48,768 | 48,364 | ||||||||||||
Weighted average shares outstanding, diluted | 48,909 | 49,071 | 48,768 | 48,967 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
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 (Loss), net of tax | Total | |||||||||||||||
Balance, December 31, 2014 | 48,265 | $ | 29,712 | $ | 227,512 | $ | 1,122 | $ | 258,346 | ||||||||||
Net income | — | — | 40,864 | — | 40,864 | ||||||||||||||
Other comprehensive loss, net of tax | — | — | — | (707 | ) | (707 | ) | ||||||||||||
Dividends declared ($0.24 per share) | — | — | (11,629 | ) | — | (11,629 | ) | ||||||||||||
Dividends reinvested in common stock | 22 | 544 | — | — | 544 | ||||||||||||||
Stock based compensation | — | 2,719 | — | — | 2,719 | ||||||||||||||
Common stock issued through exercise of incentive stock options | 87 | 996 | — | — | 996 | ||||||||||||||
Common stock issued for share awards | 212 | — | — | — | — | ||||||||||||||
Common stock issued | 1 | 11 | — | — | 11 | ||||||||||||||
Common stock repurchased | (111 | ) | (1,885 | ) | — | — | (1,885 | ) | |||||||||||
Net excess tax benefit from stock options exercised | — | 679 | — | — | 679 | ||||||||||||||
Balance, December 31, 2015 | 48,475 | $ | 32,776 | $ | 256,747 | $ | 415 | $ | 289,938 | ||||||||||
$ | — | ||||||||||||||||||
Net loss | — | — | (711 | ) | — | (711 | ) | ||||||||||||
Other comprehensive loss, net of tax | — | — | — | (2,573 | ) | (2,573 | ) | ||||||||||||
Stock based compensation | — | 2,980 | — | — | 2,980 | ||||||||||||||
Stock options exercised | 371 | 3,362 | — | — | 3,362 | ||||||||||||||
Common stock issued for share awards | 190 | — | — | — | — | ||||||||||||||
Common stock issued | 1 | 6 | — | — | 6 | ||||||||||||||
Common stock issued to acquire non-controlling interests of nTelos | 76 | 10,400 | — | — | 10,400 | ||||||||||||||
Common stock repurchased | (198 | ) | (5,097 | ) | — | — | (5,097 | ) | |||||||||||
Balance, September 30, 2016 | 48,915 | $ | 44,427 | $ | 256,037 | $ | (2,158 | ) | $ | 298,306 | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income (loss) | $ | (711 | ) | $ | 28,756 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation | 84,256 | 51,985 | ||||||
Amortization reflected as operating expense | 12,705 | 1,134 | ||||||
Amortization reflected as contra revenue | 8,883 | — | ||||||
Provision for bad debt | 1,278 | 1,335 | ||||||
Straight line adjustment to management fee revenue | 7,687 | — | ||||||
Stock based compensation expense | 2,570 | 1,893 | ||||||
Excess tax benefits on stock awards | — | (655 | ) | |||||
Deferred income taxes | (57,196 | ) | (7,463 | ) | ||||
Net (gain) loss on disposal of equipment | (144 | ) | 229 | |||||
Unrealized (gain) loss on investments | (180 | ) | 190 | |||||
Realized loss on disposal of investments | — | 20 | ||||||
Net gains from patronage and equity investments | (497 | ) | (540 | ) | ||||
Amortization of long term debt issuance costs | 2,608 | 430 | ||||||
Other | 1,634 | 323 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in: | ||||||||
Accounts receivable | 7,903 | (2,989 | ) | |||||
Inventory, net | (6,134 | ) | 286 | |||||
Income taxes receivable | 8,294 | 14,752 | ||||||
Other assets | 2,619 | (3,990 | ) | |||||
Increase (decrease) in: | ||||||||
Accounts payable | 3,551 | (4,174 | ) | |||||
Income taxes payable | 16,225 | 1,675 | ||||||
Deferred lease payable | 2,728 | 733 | ||||||
Other deferrals and accruals | 7,767 | (807 | ) | |||||
Net cash provided by operating activities | 105,846 | 83,123 | ||||||
Cash Flows From Investing Activities | ||||||||
Acquisition of property, plant and equipment | (102,850 | ) | (39,644 | ) | ||||
Proceeds from sale of equipment | 287 | 242 | ||||||
Cash distributions from investments | 2,796 | 38 | ||||||
Cash disbursed for acquisition, net of cash acquired | (665,990 | ) | — | |||||
Net cash used in investing activities | (765,757 | ) | (39,364 | ) | ||||
(Continued)
7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Cash Flows From Financing Activities | ||||||||
Principal payments on long-term debt | $ | (207,816 | ) | $ | (17,250 | ) | ||
Amounts borrowed under debt agreements | 835,000 | — | ||||||
Cash paid for debt issuance costs | (14,825 | ) | (7,820 | ) | ||||
Excess tax benefits on stock awards | — | 655 | ||||||
Repurchases of common stock | (5,097 | ) | (1,799 | ) | ||||
Proceeds from issuances of common stock | 3,368 | 826 | ||||||
Net cash provided by/(used in) financing activities | 610,630 | (25,388 | ) | |||||
Net increase (decrease) in cash and cash equivalents | (49,281 | ) | 18,371 | |||||
Cash and cash equivalents: | ||||||||
Beginning | 76,812 | 68,917 | ||||||
Ending | $ | 27,531 | $ | 87,288 | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash payments for: | ||||||||
Interest | $ | 14,671 | $ | 5,550 | ||||
Income taxes paid, net of refunds received | $ | 23,851 | $ | 10,235 | ||||
Non-cash investing and financing activities:
At September 30, 2016 and 2015, accounts payable included approximately $14.2 million and $1.0 million, respectively, associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.
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.
The Company reclassified $4.3 million of unamortized loan fees and costs included in deferred charges and other assets to long term debt in connection with the new Term loan A-1 and A-2 borrowing related to the acquisition of nTelos.
See accompanying notes to unaudited condensed consolidated financial statements.
8
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. All such adjustments were of a normal and recurring nature. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The accompanying balance sheet information at December 31, 2015 was derived from the audited December 31, 2015 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.
In connection with the nTelos acquisition and exchange transaction with Sprint (see Note 2), the Company has added the following significant accounting policies:
Revenue Recognition
Under the Company’s amended affiliate agreement, Sprint agreed to waive the management fee, which is historically presented as a contra-revenue by the Company, for a period of approximately six years. The impact of Sprint’s waiver of the management fee over the approximate six-year period is reflected as an increase in revenue, offset by the non-cash adjustment to recognize this impact on a straight-line basis over the contract term of approximately 14 years.
Goodwill
Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that impairment is more likely than not to have occurred. In conducting its annual impairment testing, the Company may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The Company conducts its annual impairment testing of goodwill as of October 1.
Pension Benefits and Retirement Benefits Other Than Pensions
Through the Company’s acquisition of nTelos, the Company assumed nTelos’ non-contributory defined benefit pension plan (“Pension Plan”) covering all employees who met eligibility requirements and were employed by nTelos prior to October 1, 2003. The Pension Plan was closed to nTelos employees hired on or after October 1, 2003. Pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65. Effective December 31, 2012, nTelos froze future benefit accruals. The Company uses updated mortality tables published by the Society of Actuaries that predict increasing life expectancies in the United States.
IRC Sections 412 and 430 and Sections 302 and 303 of the Employee Retirement Income Security Act of 1974, as amended establish minimum funding requirements for defined benefit pension plans. The minimum required contribution is generally equal to the target normal cost plus the shortfall amortization installments for the current plan year and each of the six preceding plan years less any calculated credit balance. If plan assets (less calculated credits) are equal to or exceed the funding target, the minimum required contribution is the target normal cost reduced by the excess funding, but not below zero. The Company’s policy is to make contributions to stay at or above the threshold required in order to prevent benefit restrictions and related additional notice requirements and is intended to provide not only for benefits based on service to date, but also for those expected to be earned in the future. The Company also assumed two qualified nonpension postretirement benefit plans that provide certain health care and life benefits for nTelos retired employees that meet eligibility requirements. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan also is contributory. These obligations, along with all of the pension plans and other postretirement benefit plans, are obligations assumed by the Company. Eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of January 5, 1994. Neither plan is eligible to employees hired after April 1993. The accounting for the plans anticipates that the Company will maintain a consistent level of cost sharing for the benefits with the retirees. The Company’s share of the projected costs of
9
benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees’ service periods to the dates they are fully eligible for benefits.
The Company records annual amounts relating to the Pension Plan and postretirement benefit plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, turnover rates and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income (loss) and amortized to net periodic cost over future periods using the corridor method.
2. | Acquisition of NTELOS Holdings Corp. and Exchange with Sprint |
On May 6, 2016, the Company completed its previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $665.4 million in cash, net of cash acquired. The acquisition was entered into to improve shareholder value through the expansion of the Company's Wireless service area and customer base while strengthening our relationship with Sprint. The purchase price was financed by a credit facility arranged by CoBank, ACB (see Note 14). The Company has included the operations of nTelos for financial reporting purposes for the period subsequent to the acquisition. The Company has accounted for the acquisition of nTelos under the acquisition method of accounting, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations”, and will account for any measurement period adjustments under Accounting Standards Update (“ASU”) 2015-16, “Simplifying the Accounting for Measurement Period Adjustments”. Under the acquisition method of accounting, the total purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed in connection with the acquisition based on their estimated fair values.
The preliminary allocation of the purchase price was based upon management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed of nTelos, with the excess recorded as goodwill. The following table shows the initial estimate of value and changes recorded during the third quarter of 2016 (in thousands):
10
Initial Estimate | Revisions | Revised Estimate | |||||||
Accounts receivable | $ | 48,476 | $ | 1,045 | $ | 49,521 | |||
Inventory | 3,810 | — | 3,810 | ||||||
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 | 3,571 | 227,471 | ||||||
Spectrum licenses | 198,200 | — | 198,200 | ||||||
Customer based contract rights | 198,200 | 5,162 | 203,362 | ||||||
Contract based intangible assets | 11,000 | — | 11,000 | ||||||
Goodwill | 151,627 | (6,328 | ) | 145,299 | |||||
Other long term assets | 10,288 | 555 | 10,843 | ||||||
Total assets acquired | $ | 868,954 | $ | 4,005 | $ | 872,959 | |||
Accounts payable | $ | 8,648 | $ | (116 | ) | $ | 8,532 | ||
Advanced billings and customer deposits | 12,477 | — | 12,477 | ||||||
Accrued expenses | 25,230 | — | 25,230 | ||||||
Capital lease liability | 418 | — | 418 | ||||||
Deferred tax liabilities | 124,964 | 2,758 | 127,722 | ||||||
Retirement benefits | 19,461 | (263 | ) | 19,198 | |||||
Other long-term liabilities | 14,056 | — | 14,056 | ||||||
Total liabilities assumed | 205,254 | 2,379 | 207,633 | ||||||
Net assets acquired | $ | 663,700 | $ | 1,626 | $ | 665,326 | |||
Finalization of the purchase price allocations is dependent on final review and acceptance of the independent appraiser’s valuation report, which is on-going.
Closing on the sale of the former nTelos headquarter building held for sale is expected to be completed in the fourth quarter of 2016.
Revisions to the provisional estimates shown above reflect:
• | adding $4.6 million of construction materials and inventory, less $1.0 million of software and other assets that the Company has determined have no utility to the Company post-acquisition; |
• | the increases in accounts receivable and other long term assets relating to an adjustment to the estimated fair value of nTelos' financed handset receivables, applied to the current and long-term portions of these receivables. Losses on migrations of these receivables have been less than initially estimated; |
• | the increase in net assets acquired resulting from the settlement of the appraisal rights dispute; |
• | the value assigned to certain customer based intangibles increased by $5.2 million, with an offset to goodwill; and |
• | the increase in deferred taxes payable (offset by an increase in goodwill) resulting from several of the changes shown above as well as true-ups in the net tax basis of fixed assets resulting from completion of nTelos' 2015 tax returns. |
In addition to the changes in balances reflected above, the Company revised the provisional estimated useful lives of certain assets and recorded an adjustment to depreciation expense of $4.6 million relating to the second quarter for these assets.
Immediately after acquiring nTelos, Shenandoah Personal Communications, LLC, (“PCS”) a wholly-owned subsidiary of the Company, completed its previously announced transaction with SprintCom, Inc., an affiliate of Sprint Corporation (“Sprint”). Pursuant to this transaction, among other things, the Company exchanged spectrum licenses valued at $198.2 million and customer based contract rights, valued at $203.4 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 $287.8 million, as well as additional
11
customer based contract rights, valued at $113.8 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 next approximately six years.
The value of the affiliate agreement expansion 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 of PCS if the affiliate agreement is not renewed; |
• | extension of the affiliate agreement with Sprint by 5 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 |
• | 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 6 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 (dollars in thousands):
Useful Life | Basis | ||||
Affiliate contract agreement | 14 years | $ | 287,800 | ||
Customer based contract rights | 4-10 years | 113,761 | |||
Contract based intangible assets | 3-19 years | 11,000 | |||
The affiliate contract agreement intangible asset value was increased by $29.7 million during the third quarter of 2016 and will be amortized on a straight-line basis and recorded as a contra-revenue over the remaining 14 year initial contract term. The Company recorded an adjustment of $0.4 million of amortization expense on this asset during the third quarter of 2016 that related to the second quarter of 2016. The other contract based intangible assets will be amortized on a straight-line basis and recorded through amortization expense. The customer based contract rights will be amortized over the life of the customers, gradually decreasing over the expected life of this asset, and recorded through amortization expense. The customer based contract rights value was reduced by $24.5 million during the third quarter of 2016, and amortization expense was reduced by $0.5 million during the third quarter that related to second quarter 2016. The value of these two assets changed primarily due to the effect on the initial provisional values of where certain cash flows should be reflected in those valuations.
The Company has recorded goodwill in its Wireless segment as a result of the nTelos acquisition. This goodwill is not amortizable for tax purposes, as the Company acquired the common stock of nTelos.
Prior to the acquisition, nTelos was eligible to receive up to $5.0 million in connection with its winning bid in the Connect America Fund's Mobility Fund Phase I Auction ("Auction 901"). Pursuant to the terms of Auction 901, nTelos obtained a Letter of Credit (“LOC”) in the amount of $2.2 million for the benefit of the Universal Service Administrative Company (“USAC”) to cover each disbursement plus the amount of the performance default penalty (10% of the total eligible award). In accordance with the terms of the LOC, nTelos deposited $2.2 million into a separate account at the issuing bank to serve as cash collateral and is presented as restricted cash. Such funds will be released to the Company when the LOC is terminated without being drawn upon by USAC, which is expected to occur in the fourth quarter of 2016.
At the time of the acquisition, certain third party investors held a non-controlling interest in one of nTelos’ subsidiaries. Immediately after the acquisition of nTelos, the Company acquired these interests in exchange for 380,000 shares of Company common stock, to be paid in five equal installments, with the first installment paid immediately and the remaining four to be paid over the next 4 years. This transaction was valued at $10.4 million.
In connection with the acquisition, at closing, the Company borrowed $810.0 million in term loans with a weighted average effective interest rate of approximately 3.84%. The proceeds were used to finance in part the acquisition, including the repayment of the Company’s term loan of $195.5 million, and the repayment of nTelos’ term loans at the outstanding principal amount of $519.7 million, without penalty.
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Following are the unaudited pro forma results of the Company for the three months ended September 30, 2015 and the nine months ended September 30, 2016 and 2015, as if the acquisition of nTelos had occurred at the beginning of each of the periods presented. The three months ended September 30, 2016 are not presented as those results already include nTelos' results (in thousands):
Three Months Ended September 30, | ||||||
2016 | 2015 | |||||
Operating revenues | $ N/A | $ | 166,614 | |||
Income before income taxes | $ N/A | $ | 2,588 | |||
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Operating revenues | $ | 492,114 | $ | 509,415 | ||||
Income (loss) before income taxes | $ | (4,016 | ) | $ | 39,680 | |||
The pro forma disclosures shown above are based upon estimated preliminary valuations of the assets acquired and liabilities assumed as well as preliminary estimates of depreciation and amortization charges thereon, that may differ from the final fair values of the acquired assets and assumed liabilities and the resulting depreciation and amortization charges thereon. Other 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 customer-based contract rights associated with acquired customers. |
In connection with these transactions, the Company chose to proactively migrate the former nTelos customers to devices which can interact with the Sprint billing and network systems, and expects to incur a total of between $106 million and $126 million of integration and acquisition expenses associated with this transaction, excluding approximately $24 million of debt issuance costs. These costs 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; transaction related fees; net of proceeds from the sale of the former nTelos headquarters building. We have incurred $20.2 million and $43.9 million of these costs in the three months and nine months ended September 30, 2016, respectively, including $0.7 million reflected in cost of goods and services and $4.2 million reflected in selling, general and administrative costs in the three month period ended September 30, 2016, and $1.0 million reflected in cost of goods and services and $7.1 million reflected in selling, general and administrative costs in the nine month period ended September 30, 2016.
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.
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3. | Intangible assets |
Intangible assets consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||
Non-amortizing intangibles: | ||||||||||||||||||||||||
Cable franchise rights | $ | 64,431 | $ | — | $ | 64,431 | $ | 64,098 | $ | — | $ | 64,098 | ||||||||||||
Finite-lived intangibles: | ||||||||||||||||||||||||
Affiliate contract expansion rights | $ | 287,800 | $ | (8,883 | ) | $ | 278,917 | $ | — | $ | — | $ | — | |||||||||||
Acquired subscribers – wireless | 113,761 | (11,442 | ) | 102,319 | — | — | — | |||||||||||||||||
Contract based intangibles – wireless | 11,000 | (458 | ) | 10,542 | — | — | — | |||||||||||||||||
Acquired subscribers – cable | 25,265 | (24,452 | ) | 813 | 25,326 | (23,805 | ) | 1,521 | ||||||||||||||||
Other intangibles | 2,102 | (723 | ) | 1,379 | 1,938 | (564 | ) | 1,374 | ||||||||||||||||
Total finite-lived intangibles | $ | 439,928 | $ | (45,958 | ) | $ | 393,970 | $ | 27,264 | $ | (24,369 | ) | 2,895 | |||||||||||
Total intangible assets | $ | 504,359 | $ | (45,958 | ) | $ | 458,401 | $ | 91,362 | $ | (24,369 | ) | $ | 66,993 | ||||||||||
Aggregate amortization expense for intangible assets for the periods shown is expected to be as follows:
Year Ending December 31, | Amount | ||
(in thousands) | |||
2016 Remaining | $ | 12,463 | |
2017 | 45,091 | ||
2018 | 39,372 | ||
2019 | 35,428 | ||
2020 | 32,718 | ||
2021 | 30,139 | ||
thereafter | 198,759 | ||
Total | $ | 393,970 | |
Changes in the carrying amount of goodwill during the nine months ended September 30, 2016 are shown below (in thousands):
Goodwill as of December 31, 2015, Wireline segment | $ | 10 | |
Goodwill recorded January 2016, Cable segment, Colane acquisition | 104 | ||
Goodwill recorded May 2016, Wireless segment, nTelos acquisition | 145,299 | ||
Goodwill as of September 30, 2016 | $ | 145,413 | |
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4. | Property, Plant and Equipment |
Property, plant and equipment consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | |||||||
Plant in service | $ | 1,020,014 | $ | 718,503 | ||||
Plant under construction | 75,976 | 36,600 | ||||||
1,095,990 | 755,103 | |||||||
Less accumulated amortization and depreciation | 428,249 | 345,085 | ||||||
Net property, plant and equipment | $ | 667,741 | $ | 410,018 | ||||
5. | Earnings (loss) per share |
Basic net income (loss) per share was computed on the weighted average number of shares outstanding. Diluted net income per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Of the 664 thousand shares and options outstanding at September 30, 2015, 46 thousand were anti-dilutive. These shares and options have been excluded from the computations of diluted earnings per share for the three and nine months ended September 30, 2015. Due to the net loss for the three and nine months ended September 30, 2016, no adjustment was made to basic shares, as such adjustment would have been anti-dilutive. There were no adjustments to net income (loss) for any period.
6. | Investments Carried at Fair Value |
Investments include $2.9 million and $2.7 million of investments carried at fair value as of September 30, 2016 and December 31, 2015, 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, 2016, the Company recognized $161 thousand in dividend and interest income from investments, and recorded net unrealized gains of $180 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.
7. | Equipment Installment Plan Receivables |
As part of the acquisition of nTelos, the Company acquired the accounts receivable associated with nTelos’ Equipment Installment Plan, (“EIP”). This plan allowed EIP subscribers to pay for their devices in installments over a 24-month period. At the time of an installment sale, nTelos imputed interest on the installment receivable using current market interest rate estimates ranging from approximately 5% to 10%. Additionally, the customer had the right to trade in their original device after a specified period of time for a new device and have the remaining unpaid balance satisfied. This trade-in right was measured at the estimated fair value of the device being traded in based on current trade-in values and the timing of the trade-in.
Immediately following the acquisition, the Company terminated the EIP offering but has continued to service the installment receivable and trade in obligation until such time that the customer migrates to Sprint. The accounts receivable associated with EIP and the trade-in liability were estimated at its fair value at acquisition date in accordance with ASC 805, “Business Combinations”.
There was $9.3 million of unmigrated, acquired EIP receivables as of September 30, 2016. The short term portion of $7.4 million is included in accounts receivable, net. The long term portion of $1.9 million is included in deferred charges and other assets, net. An additional $6.3 million of acquired EIP receivables have been subsequently transferred to Sprint and the resulting receivables from Sprint are also included in accounts receivable, net.
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8. | Financial Instruments |
Financial instruments on the consolidated balance sheets that approximate fair value include: cash and cash equivalents, restricted cash, receivables, investments carried at fair value, payables, accrued liabilities, interest rate swaps and variable rate long-term debt.
9. | Derivative Instruments, Hedging Activities and Accumulated Other Comprehensive Income (Loss) |
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 this objective, 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 total outstanding notional amount of the cash flow hedge was $139.7 million as of September 30, 2016. The outstanding notional amount decreases as the Company makes scheduled principal payments on the 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 total outstanding notional amount of the cash flow hedge was $287.3 million as of September 30, 2016. The outstanding notional amount increases with each expected draw on the term debt and decreases as the Company makes scheduled principal payments on the debt. In combination with the swap entered into in 2012 described above, the Company is hedging approximately 50% of the expected outstanding debt (including expected draws under the delayed draw term loan) associated with the nTelos acquisition.
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 (loss) 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 (loss) 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, 2016, the Company estimates that $2.3 million will be reclassified as an increase to interest expense during the next twelve months due to the interest rate swaps since the hedge interest rate exceeds the variable interest rate on the debt.
The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the condensed consolidated balance sheet as of September 30, 2016 and December 31, 2015 (in thousands):
Derivatives | ||||||||||
Fair Value as of | ||||||||||
Balance Sheet Location | September 30, 2016 | December 31, 2015 | ||||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest rate swap | ||||||||||
Accrued liabilities and other | $ | (2,283 | ) | $ | (682 | ) | ||||
Other liabilities | (1,355 | ) | — | |||||||
Deferred charges and other assets, net | — | 1,370 | ||||||||
Total derivatives designated as hedging instruments | $ | (3,638 | ) | $ | 688 | |||||
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).
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The table below presents change in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2016 (in thousands):
Gains and (Losses) on Cash Flow Hedges | Income Tax (Expense) Benefit | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance as of December 31, 2015 | $ | 688 | $ | (273 | ) | $ | 415 | |||||
Other comprehensive loss before reclassifications | (5,832 | ) | 2,363 | (3,469 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (to interest expense) | 1,506 | (610 | ) | 896 | ||||||||
Net current period other comprehensive loss | (4,326 | ) | 1,753 | (2,573 | ) | |||||||
Balance as of September 30, 2016 | $ | (3,638 | ) | $ | 1,480 | $ | (2,158 | ) | ||||
10. | Accrued and Other liabilities |
Accrued liabilities and other includes the following (in thousands);
September 30, 2016 | December 31, 2015 | |||||||
Sales and property taxes payable | $ | 6,835 | $ | 1,055 | ||||
Severance accrual, current portion | 5,625 | — | ||||||
Asset retirement obligations, current portion | 8,063 | — | ||||||
Other current liabilities | 11,010 | 6,584 | ||||||
Accrued liabilities and other | $ | 31,533 | $ | 7,639 | ||||
Other liabilities include the following (in thousands):
September 30, 2016 | December 31, 2015 | |||||||
Retirement plan obligations | $ | 22,156 | $ | 2,654 | ||||
Non-current portion of deferred revenues | 8,819 | 4,156 | ||||||
Straight-line management fee waiver | 7,687 | — | ||||||
Other | 3,935 | 2,229 | ||||||
Other liabilities | $ | 42,597 | $ | 9,039 | ||||
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 had provided digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate. With the recent acquisition of nTelos (see Note 2), the Company's wireless service has expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
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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, 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 | ) | |||||||||
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Three months ended September 30, 2015
(in thousands)
Wireless | Cable | Wireline | Other | Eliminations | Consolidated Totals | |||||||||||||||||||
External revenues | ||||||||||||||||||||||||
Service revenues | $ | 47,793 | $ | 22,284 | $ | 4,904 | $ | — | $ | — | $ | 74,981 | ||||||||||||
Other | 2,734 | 1,882 | 5,615 | — | 10,231 | |||||||||||||||||||
Total external revenues | 50,527 | 24,166 | 10,519 | — | — | 85,212 | ||||||||||||||||||
Internal revenues | 1,109 | 251 | 6,759 | (8,119 | ) | — | ||||||||||||||||||
Total operating revenues | 51,636 | 24,417 | 17,278 | — | (8,119 | ) | 85,212 | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Costs of goods and services, exclusive of depreciation and amortization shown separately below | 15,572 | 14,124 | 8,212 | — | (7,338 | ) | 30,570 | |||||||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 9,027 | 4,948 | 1,688 | 3,424 | (781 | ) | 18,306 | |||||||||||||||||
Integration and acquisition expenses | — | — | — | 2,129 | — | 2,129 | ||||||||||||||||||
Depreciation and amortization | 9,644 | 5,948 | 3,404 | 122 | — | 19,118 | ||||||||||||||||||
Total operating expenses | 34,243 | 25,020 | 13,304 | 5,675 | (8,119 | ) | 70,123 | |||||||||||||||||
Operating income (loss) | $ | 17,393 | $ | (603 | ) | $ | 3,974 | $ | (5,675 | ) | $ | — | $ | 15,089 | ||||||||||
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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 | |||||||||||
Nine months ended September 30, 2015
(in thousands)
Wireless | Cable | Wireline | Other | Eliminations | Consolidated Totals | |||||||||||||||||||
External revenues | ||||||||||||||||||||||||
Service revenues | $ | 144,917 | $ | 65,802 | $ | 14,543 | $ | — | $ | — | $ | 225,262 | ||||||||||||
Other | 8,611 | 5,495 | 15,834 | — | — | 29,940 | ||||||||||||||||||
Total external revenues | 153,528 | 71,297 | 30,377 | — | — | 255,202 | ||||||||||||||||||
Internal revenues | 3,319 | 585 | 18,950 | (22,854 | ) | — | ||||||||||||||||||
Total operating revenues | 156,847 | 71,882 | 49,327 | — | (22,854 | ) | 255,202 | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Costs of goods and services, exclusive of depreciation and amortization shown separately below | 47,661 | 41,378 | 23,224 | — | (20,722 | ) | 91,541 | |||||||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 26,996 | 14,924 | 4,923 | 10,313 | (2,132 | ) | 55,024 | |||||||||||||||||
Integration and acquisition expenses | — | — | — | 3,153 | — | 3,153 | ||||||||||||||||||
Depreciation and amortization | 26,089 | 17,286 | 9,411 | 333 | — | 53,119 | ||||||||||||||||||
Total operating expenses | 100,746 | 73,588 | 37,558 | 13,799 | (22,854 | ) | 202,837 | |||||||||||||||||
Operating income (loss) | $ | 56,101 | $ | (1,706 | ) | $ | 11,769 | $ | (13,799 | ) | $ | — | $ | 52,365 | ||||||||||
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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, | ||||||||
(in thousands) | 2016 | 2015 | ||||||
Total consolidated operating income (loss) | $ | (3,929 | ) | $ | 15,089 | |||
Interest expense | (8,845 | ) | (1,808 | ) | ||||
Non-operating income, net | 1,527 | 180 | ||||||
Income (loss) before income taxes | $ | (11,247 | ) | $ | 13,461 | |||
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Total consolidated operating income (loss) | $ | 10,337 | $ | 52,365 | ||||
Interest expense | (16,369 | ) | (5,663 | ) | ||||
Non-operating income, net | 3,147 | 1,253 | ||||||
Income (loss) before income taxes | $ | (2,885 | ) | $ | 47,955 | |||
The Company’s assets by segment are as follows:
(in thousands) | September 30, 2016 | December 31, 2015 | ||||||
Wireless | $ | 1,106,023 | $ | 205,718 | ||||
Cable | 213,664 | 209,132 | ||||||
Wireline | 109,647 | 105,369 | ||||||
Other | 1,052,205 | 463,390 | ||||||
Combined totals | 2,481,539 | 983,609 | ||||||
Inter-segment eliminations | (1,047,914 | ) | (356,458 | ) | ||||
Consolidated totals | $ | 1,433,625 | $ | 627,151 | ||||
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. The Company is not subject to any state or federal income tax audits as of September 30, 2016.
13. | Adoption of New Accounting Principles |
During 2016, the Company adopted four recent accounting principles: Accounting Standards Update 2015-3, “Interest – Imputation of Interest” (ASU 2015-3), ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, ASU 2016-9, “Improvements to Employee Share-based Payment Accounting,” and ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.”
ASU 2015-3 requires that premiums, discounts, and loan fees and costs associated with long term debt be reflected as a reduction of the outstanding debt balance. Previous guidance had treated such loan fees and costs as a deferred charge on the balance sheet. As a result of implementing ASU 2015-3, the Company reclassified $1.6 million of unamortized loan fees and costs included in deferred charges and other assets as of December 31, 2015 to long-term debt. Approximately $0.5 million was allocated to current maturities of long-term debt, and $1.1 million to long term debt. Total assets, as well as total liabilities and shareholders’ equity, were also reduced by the same $1.6 million. In addition, the Company reclassified $4.3 million of unamortized loan fees and costs included in deferred charges and other assets to long term debt in connection with the new Term loan A-1 and A-2 borrowing related to the acquisition of nTelos. Total assets, as well as total liabilities and shareholders’ equity, were also reduced by the same $4.3 million. There was no impact on the statements of income or cash flows.
21
ASU 2015-17 simplifies accounting for deferred taxes by eliminating the requirement to present deferred tax assets and liabilities as current and non-current in a classified balance sheet. Due to the immaterial balance of current deferred tax assets ($0.9 million as of December 31, 2015), the Company has elected to apply this guidance prospectively, and thus prior periods have not been retrospectively adjusted.
ASU 2016-9 simplifies certain provisions related to the accounting for the tax effects of stock-based compensation transactions. In particular for the Company, it eliminates the requirement to determine for each award whether the difference between book compensation and tax compensation results in an excess tax benefit or a tax deficiency, which generally speaking, result in an entry to additional paid-in-capital. Under the new guidance, all tax effects for exercised or vested awards are recognized as discrete items in income tax expense. The new guidance also allows an employer to withhold shares to cover more than the minimum statutory withholding taxes (but not more than the maximum statutory withholding requirements) without causing an equity-classified award to become a liability classified award. The other provisions of the new guidance are either not applicable or have no significant impact on the Company’s accounting for stock-based compensation transactions. The Company has elected to early adopt the new guidance and apply it prospectively to tax effects on share-based compensation transactions.
ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. See Note 2 for adjustments recorded during the third quarter of 2016.
14. | Long-term Debt and Revolving Line of Credit |
Total debt consists of the following:
(In thousands) | September 30, 2016 | December 31, 2015 | ||||||
Term loan A | $ | — | $ | 201,250 | ||||
Term loan A-1 | 478,937 | — | ||||||
Term loan A-2 | 350,000 | — | ||||||
828,937 | 201,250 | |||||||
Less: unamortized loan fees | 19,370 | 1,589 | ||||||
Total debt, net of unamortized loan fees | $ | 809,567 | $ | 199,661 | ||||
Current maturities of long term debt, net of unamortized loan fees | $ | 25,972 | $ | 22,492 | ||||
Long-term debt, less current maturities, net of unamortized loan fees | $ | 783,595 | $ | 177,169 | ||||
As previously disclosed, on December 18, 2015, the Company entered into a Credit Agreement (as amended, the “2016 credit agreement”) with various banks and other financial institutions party thereto and CoBank, ACB, as administrative agent for the lenders, providing for three facilities: (i) a five year revolving credit facility of up to $75 million; (ii) a five-year term loan facility of up to $485 million (Term Loan A-1”); and (iii) a seven-year term loan facility of up to $400 million (“Term Loan A-2”).
In connection with the closing of the nTelos acquisition, the Company borrowed (i) $485 million under Term Loan A-1 and (ii) $325 million under Term Loan A-2, which amounts were used to, among other things, fund the payment of the nTelos merger consideration, to refinance, in full, all indebtedness under the Company’s existing credit agreement, to repay existing long-term indebtedness of nTelos and to pay fees and expenses in connection with the foregoing. In connection with the consummation of the nTelos acquisition, nTelos and its subsidiaries became guarantors under the 2016 credit agreement and pledged their assets as security for the obligations under the 2016 credit agreement. The 2016 credit agreement also includes $75 million available under the Term Loan A-2 as a “delayed draw term loan,” and in June 2016, the Company drew $25 million under this portion of the agreement. Finally, the 2016 credit agreement also includes a $75 million revolver facility.
As of September 30, 2016, the Company’s indebtedness totaled $809.6 million, net of unamortized loan fees of $19.4 million, with an annualized overall weighted average interest rate of approximately 3.83%. The Term Loan A-1 bears interest at one-
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month LIBOR plus a margin of 2.75%, while the Term Loan A-2 bears interest at one-month LIBOR plus a margin of 3.00%. LIBOR resets monthly. These loans are more fully described below.
The Term Loan A-1 requires quarterly principal repayments of $6.1 million, which began on September 30, 2016, and will continue through June 30, 2017, increasing to $12.1 million quarterly from September 30, 2017 through June 30, 2020, increasing to $18.2 million quarterly from September 30, 2020 thereafter through March 31, 2021, with the remaining expected balance of approximately $260.7 million due June 30, 2021. The Term Loan A-2 requires quarterly principal repayments of $10.0 million beginning on September 30, 2018 through March 31, 2023, with the current remaining expected balance of approximately $160.0 million due June 30, 2023.
The 2016 credit agreement also required the Company to enter into one or more hedge agreements to manage its exposure to interest rate movements. The Company elected to hedge the minimum required under the 2016 credit agreement, and entered into a pay fixed, receive variable swap on 50% of the aggregate expected principal balance of the term loans outstanding. The Company will receive one month LIBOR and pay a fixed rate of 1.16%, in addition to the 2.75% initial spread on Term Loan A-1 and the 3.00% initial spread on Term Loan A-2.
The 2016 credit agreement contains affirmative and negative covenants customary to secured credit facilities, including covenants restricting the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of the Company’s and its subsidiaries’ businesses.
Indebtedness outstanding under any of the facilities may be accelerated by an Event of Default, as defined in the 2016 credit agreement.
The Facilities are secured by a pledge by the Company of its stock in its subsidiaries, a guarantee by the Company’s subsidiaries other than Shenandoah Telephone Company, and a security interest in substantially all of the assets of the Company and the guarantors.
The Company is subject to certain financial covenants to be measured on a trailing twelve month basis each calendar quarter unless otherwise specified. These covenants include:
• | a limitation on the Company’s total leverage ratio, defined as indebtedness divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than or equal to 3.75 to 1.00 from the closing date through December 30, 2018, then 3.25 to 1.00 through December 30, 2019, and 3.00 to 1.00 thereafter; |
• | a minimum debt service coverage ratio, defined as EBITDA minus certain cash taxes divided by the sum of all scheduled principal payments on the Term Loans and scheduled principal payments on other indebtedness plus cash interest expense, greater than 2.00 to 1.00; |
• | the Company must maintain a minimum liquidity balance, 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. |
These ratios are generally less restrictive than the covenant ratios the Company had been required to comply with under its previously existing debt arrangements. As of September 30, 2016, the Company was in compliance with the covenants in the 2016 credit agreement.
Future maturities of long-term debt principal are as follows (in thousands):
Remainder of 2016 | $ | 6,062 | |
2017 | 36,375 | ||
2018 | 68,500 | ||
2019 | 88,500 | ||
2020 | 100,625 | ||
Thereafter | 528,875 | ||
Total | $ | 828,937 | |
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15. | Pension Plan and Other Postretirement Benefits |
The Company assumed, through its acquisition of nTelos, a qualified pension plan and other postretirement benefit plans. The following tables provide the benefit obligations, fair value of assets and a statement of the funded status as of the acquisition date (in thousands):
Defined Benefit Pension Plan | Other Postretirement Benefit Plans | |||||||
Benefit obligations, at acquisition | $ | 37,443 | $ | 4,568 | ||||
Fair value of plan assets, at acquisition | 22,813 | — | ||||||
Funded status: | ||||||||
Total liability, at acquisition | (14,630 | ) | (4,568 | ) | ||||
Net pension income (expense) since acquisition date | 39 | (79 | ) | |||||
Total liability as of September 30, 2016 | $ | (14,591 | ) | $ | (4,647 | ) | ||
The accumulated benefit obligation for the defined benefit pension plan at May 6, 2016 was $37.4 million. The accumulated benefit obligation represents the present value of pension benefits based on service and salary earned to date. The defined benefit plan was frozen for future benefit accruals as of December 31, 2012. Accordingly, the accumulated benefit obligation is equal to the projected benefit obligation.
The following table provides the components of net periodic benefit cost (income) for the plans for the period from acquisition date to December 31, 2016 (in thousands):
Defined Benefit Pension Plan | Other Postretirement Benefit Plans | |||||||
Components of net periodic benefit cost (income): | ||||||||
Service cost | $ | — | $ | 18 | ||||
Interest cost | 956 | 108 | ||||||
Expected return on plan assets | (1,018 | ) | — | |||||
Net periodic cost (income) | $ | (62 | ) | $ | 126 | |||
The assumptions used in the measurements of the Company’s benefit obligations at May 6, 2016 for the plans are shown in the following table:
Defined Benefit Pension Plan | Other Postretirement Benefit Plans | |||||
Discount rate | 3.85 | % | 3.85 | % | ||
The assumptions used in the measurements of the Company’s net periodic benefit cost (income) for the consolidated statement of operations for the period from acquisition date through December 31, 2016 are:
Defined Benefit Pension Plan | Other Postretirement Benefit Plans | |||||
Discount rate | 3.85 | % | 3.85 | % | ||
Expected return on plan assets | 6.75 | % | — | % | ||
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The Company reviews the assumptions noted in the above tables annually or more frequently to reflect anticipated future changes in the underlying economic factors used to determine these assumptions. The discount rates assumed reflect the rate at which the Company could invest in high quality corporate bonds in order to settle future obligations.
The Company uses updated mortality tables published by the Society of Actuaries that predict increasing life expectancies in the United States.
For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2016 for the obligation as of the acquisition date. The rate was assumed to decrease one-half percent per year to a rate of 5.0% for 2022 and remain at that level thereafter.
Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. The effect of a 1% change on the medical trend rate per future year, while holding all other assumptions constant, to the service and interest cost components of net periodic postretirement health care benefit costs and accumulated postretirement benefit obligation would be a $0.1 million increase and a $0.6 million increase, respectively, for a 1% increase in medical trend rate and a $0.1 million decrease and a $0.5 million decrease, respectively, for a 1% decrease in medical trend rate.
In developing the expected long-term rate of return assumption for the assets of the Defined Benefit Pension Plan, the Company evaluated input from its third-party pension plan administrator, including its review of asset class return expectations and long-term inflation assumptions.
The average actual asset allocations by asset category and the fair value by asset category as of May 6, 2016 were as follows (in thousands):
Asset Category | Actual Allocation | Fair Value | |||||
Large Cap Value | 32 | % | $ | 7,244 | |||
Mid Cap Blend | 9 | % | 2,026 | ||||
Small Cap Blend | 5 | % | 1,151 | ||||
Foreign Stock – Large Cap | 30 | % | 6,867 | ||||
Bond | 20 | % | 4,611 | ||||
Cash and cash equivalents | 4 | % | 914 | ||||
Total | 100 | % | $ | 22,813 | |||
The actual and target allocation for plan assets is broadly defined and measured as follows:
Asset Category | Actual Allocation | Target Allocation | ||||
Equity securities | 76 | % | 65-75 | |||
Bond securities and cash equivalents | 24 | % | 25-35 | |||
Total | 100 | % | 100 | % | ||
It is the Company’s policy to invest pension plan assets in a diversified portfolio consisting of an array of asset classes. The investment risk of the assets is limited by appropriate diversification both within and between asset classes. The assets are primarily invested in investment funds that invest in a broad mix of publicly traded equities, bonds and cash equivalents (and fair value is based on quoted market prices (“Level 1” input)). The allocation between equity and bonds is reset quarterly to the target allocations. Updates to the allocation are considered in the normal course and changes may be made when appropriate. The bond holdings consist of two bond funds split relatively evenly between these funds at May 6, 2016. The maximum holdings of any one asset within these funds is under 4% of this fund and thus is well under 1% of the total portfolio. At May 6, 2016, the Company believes that there are no material concentrations of risk within the portfolio of plan assets.
The assumed long-term return noted above is the target long-term return. Overall return, risk adjusted return, and management fees are assessed against a peer group and benchmark indices. There are minimum performance standards that must be attained within the investment portfolio. Reporting on asset performance is provided quarterly and review meetings are held semi-
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annually. In addition to normal rebalancing to maintain an adequate cash reserve, projected cash flow needs of the plan are reviewed at least annually to ensure liquidity is properly managed.
The Company does not expect to contribute to the pension plan in 2016. The Company expects the net periodic benefit income for the defined benefit pension plan in 2016 to be $0.1 million and expects the periodic benefit cost for the other postretirement benefit plans in 2016 to be $0.1 million.
The following estimated future pension benefit payments and other postretirement benefit plan payments which reflect expected future service, as appropriate, are expected to be paid in the years indicated (in thousands):
Defined Benefit Pension Plan | Other Postretirement Benefit Plans | |||||||
Remainder of 2016 | $ | 186 | $ | 48 | ||||
2017 | 700 | 136 | ||||||
2018 | 720 | 131 | ||||||
2019 | 768 | 134 | ||||||
2020 | 868 | 142 | ||||||
Aggregate of next five years | 6,219 | 977 | ||||||
Note 16. Lease Commitments
The Company leases land, buildings and tower space under various non-cancelable agreements, which expire between the years 2016 and 2051 and require various minimum annual rental payments. These leases typically include renewal options and escalation clauses. In general, tower leases have five or ten year initial terms with four renewal terms of five years each. The other leases generally contain certain renewal options for periods ranging from five to twenty years.
Future minimum lease payments under non-cancelable operating leases, including renewals that are reasonably assured at the inception of the lease, with initial variable lease terms in excess of one year as of September 30, 2016, are as follows
(in thousands):
Remainder of 2016 | $ | 12,229 | |
2017 | 48,512 | ||
2018 | 48,135 | ||
2019 | 47,217 | ||
2020 | 46,130 | ||
2021 | 45,950 | ||
Thereafter | 237,024 | ||
$ | 485,197 | ||
The Company’s total rent expense was $28.6 million and $12.7 million during the nine months ended September 30, 2016 and 2015, respectively. The increase during the year resulted from leases assumed in the acquisition of nTelos.
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As lessor, the Company has leased buildings, tower space and telecommunications equipment to other entities under various non-cancelable agreements, which require various minimum annual payments. The total minimum rental receipts at September 30, 2016 are as follows (in thousands):
Remainder of 2016 | $ | 1,532 | |
2017 | 5,643 | ||
2018 | 5,235 | ||
2019 | 4,924 | ||
2020 | 4,241 | ||
2021 | 2,255 | ||
Thereafter | 2,872 | ||
$ | 26,702 | ||
The Company’s total rent income was $5.3 million and $4.7 million during the nine months ended September 30, 2016 and 2015, respectively. Total rent income includes month-to-month leases which are excluded from the table above.
17. Subsequent Events
On October 17, 2016, the Company’s Board of Directors approved a dividend of $0.25 per common share to be paid December 1, 2016 to shareholders of record as of the close of business on November 4, 2016. Before dividend reinvestments, the total payout is expected to be approximately $12.2 million.
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements. All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters are forward-looking statements. We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct. The Company’s actual results could be materially different from its expectations because of various factors, including those discussed below and under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2015. The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2015, including the financial statements and related notes included therein.
General
Overview. Shenandoah Telecommunications Company is a diversified telecommunications company providing both regulated and unregulated telecommunications services through its wholly owned subsidiaries. These subsidiaries provide wireless personal communications services (as a Sprint PCS affiliate), local exchange telephone services, video, internet and data services, long distance services, fiber optics facilities, and leased tower facilities. We have three reportable segments, which we operate and manage as strategic business units organized by lines of business: (1) Wireless, (2) Cable, and (3) Wireline.
* | The Wireless segment has historically provided digital wireless service as a Sprint PCS Affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia. Following the acquisition of nTelos, the Company’s wireless service area expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. In these areas, we are the exclusive provider of Sprint-branded wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz bands. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers. |
* | The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia. |
* | The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video and cable modem internet access services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of central and southern Pennsylvania. |
A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company, and includes corporate costs of executive management, information technology, legal, finance, and human resources. This segment also includes certain acquisition and integration costs primarily consisting of severance accruals for short-term nTelos employees to be separated as integration activities wind down and transaction related expenses such as investment advisor, legal and other professional fees.
Acquisition of nTelos and Exchange with Sprint: On May 6, 2016, we completed our previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $665.4 million in cash, net of cash acquired. The purchase price was financed by a credit facility arranged by CoBank, ACB. We have included the operations of nTelos for financial reporting purposes for periods subsequent to the acquisition.
Immediately after acquiring nTelos, we exchanged spectrum licenses valued at $198.2 million and customer based contract rights, valued at $203.4 million, acquired from nTelos with Sprint, and received an expansion of our affiliate service territory to include most of the service area served by nTelos, valued at $287.8 million, as well as additional customer based contract rights, valued at $113.8 million, relating to nTelos’ and Sprint’s legacy customers in the our affiliate service territory. The value of the affiliate agreement expansion 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 of PCS if the affiliate agreement is not renewed and an
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extension of the affiliate agreement with Sprint by five years to 2029. Also included in the value is the expanded territory in the nTelos service area and the accompanying right to serve all future Sprint customers in the expanded territory, our commitment to upgrade certain coverage and capacity in the newly acquired service area, the waiver of a portion of the management fee charged by Sprint, as well as other items defined in the amended affiliate agreement.
The Company expects to incur a total of between $106.0 million and $126.0 million of integration and acquisition expenses associated with this transaction, excluding approximately $24.0 million of debt issuance costs. In connection with the acquisition, The Company also chose to proactively migrate former nTelos customers to devices that can interact with the Sprint billing and network systems. Expected costs also include the nTelos back office staff and support functions until the nTelos legacy customers are migrated to the Sprint billing platform; cost 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 transaction related fees. We have incurred $20.2 million and $43.9 million of these costs in the three months and nine months ended September 30, 2016, respectively. These costs include $0.7 million reflected in cost of goods and services and $4.2 million reflected in selling, general and administrative costs in the three month period ended September 30, 2016, and $1.0 million reflected in cost of goods and services and $7.1 million reflected in selling, general and administrative costs in the nine month period ended September 30, 2016.
Critical Accounting Policies And Estimates
In connection with the nTelos acquisition and exchange transaction with Sprint, we have added the following critical accounting policies:
Revenue Recognition: Under our amended affiliate agreement, Sprint agreed to waive the management fee, which is historically presented as a contra-revenue by us, for a period of approximately six years. The impact of Sprint’s waiver of the management fee over the approximate six-year period is reflected as an increase in revenue, offset by the non-cash adjustment to recognize this impact on a straight-line basis over the contract term of approximately 14 years.
Goodwill: Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that impairment is more likely than not to have occurred. In conducting our annual impairment testing, we may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. We conduct our annual impairment testing as of October 1.
Pension Benefits and Retirement Benefits Other Than Pensions: Through our acquisition of nTelos, we assumed nTelos’ non-contributory defined benefit pension plan (“Pension Plan”) covering all employees who met eligibility requirements and were employed by nTelos prior to October 1, 2003. The Pension Plan was closed to nTelos employees hired on or after October 1, 2003. Pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65. Effective December 31, 2012, nTelos froze future benefit accruals. We use updated mortality tables published by the Society of Actuaries that predict increasing life expectancies in the United States.
IRC Sections 412 and 430 and Sections 302 and 303 of the Employee Retirement Income Security Act of 1974, as amended establish minimum funding requirements for defined benefit pension plans. The minimum required contribution is generally equal to the target normal cost plus the shortfall amortization installments for the current plan year and each of the six preceding plan years less any calculated credit balance. If plan assets (less calculated credits) are equal to or exceed the funding target, the minimum required contribution is the target normal cost reduced by the excess funding, but not below zero. Our policy is to make contributions to stay at or above the threshold required in order to prevent benefit restrictions and related additional notice requirements and is intended to provide not only for benefits based on service to date, but also for those expected to be earned in the future. We also assumed two qualified nonpension postretirement benefit plans that provide certain health care and life benefits for nTelos retired employees that meet eligibility requirements. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan also is contributory. These obligations, along with all of the pension plans and other postretirement benefit plans, are obligations assumed by us. Eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of January 5, 1994. Neither plan is eligible to employees hired after April 1993. The accounting for the plans anticipates that we will maintain a consistent level of cost sharing for the benefits with the retirees. Our share of the projected costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees’ service periods to the dates they are fully eligible for benefits.
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We record annual amounts relating to the Pension Plan and postretirement benefit plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, turnover rates and healthcare cost trend rates. We review our assumptions on an annual basis and make modifications to the assumptions based on current rates and trend when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprenhensive income (loss) and amortized to net periodic cost over future periods using the corridor method.
Results of Operations
Three Months Ended September 30, 2016 Compared with the Three Months Ended September 30, 2015
Our consolidated results for the third quarter of 2016 and 2015 are summarized as follows:
Three Months Ended September 30, | Change | ||||||||||||||
(in thousands) | 2016 | 2015 | $ | % | |||||||||||
Operating revenues | $ | 156,836 | $ | 85,212 | $ | 71,624 | 84.1 | ||||||||
Operating expenses | 160,765 | 70,123 | 90,642 | 129.3 | |||||||||||
Operating income (loss) | (3,929 | ) | 15,089 | (19,018 | ) | (126.0 | ) | ||||||||
Interest expense | (8,845 | ) | (1,808 | ) | (7,037 | ) | 389.2 | ||||||||
Other income, net | 1,527 | 180 | 1,347 | 748.3 | |||||||||||
Income (loss) before taxes | (11,247 | ) | 13,461 | (24,708 | ) | (183.6 | ) | ||||||||
Income tax expense (benefit) | (3,651 | ) | 5,465 | (9,116 | ) | NM | |||||||||
Net income (loss) | $ | (7,596 | ) | $ | 7,996 | $ | (15,592 | ) | (195.0 | ) | |||||
Operating revenues
For the three months ended September 30, 2016, operating revenues increased $71.6 million, or 84.1%. Wireless segment revenues increased $68.5 million compared to the third quarter of 2015; nearly all of this increase was a result of the acquisition of nTelos on May 6, 2016. Cable segment revenues grew $3.1 million primarily as a result of 6.8% growth in average subscriber counts and an increase in revenue per subscriber. Wireline segment revenues increased $0.3 million, primarily due to increases in fiber sales.
Operating expenses
Total operating expenses were $160.8 million in the third quarter of 2016 compared to $70.1 million in the prior year period. Operating expenses in the third quarter of 2016 included $15.3 million of integration and acquisition costs associated with the nTelos acquisition, including $14.5 million on the Wireless segment and $0.8 million in the Other segment. Selling, general and administrative expenses and cost of goods and services in the Wireless segment included an additional $4.9 million of nTelos-related customer care and other back office costs related to supporting the nTelos legacy customers until the migration of these customers is completed. Wireless segment operating expenses increased $71.9 million (excluding the $19.4 million of customer care, integration and acquisition expenses described above), primarily due to on-going costs associated with the acquired nTelos operations including $28.4 million of incremental depreciation and amortization expenses. All other operating expenses decreased $1.4 million, net of eliminations of intersegment activities.
Acquisition and integration costs on the Other segment primarily consisted of transaction related expenses such as legal and other professional fees. On the Wireless segment, such costs included handsets provided to nTelos subscribers who needed a new phone to transition to the Sprint billing platform, costs associated with terminating duplicative cell sites leases and backhaul circuits, and personnel costs associated with short-term nTelos employees required to migrate the former nTelos customers to the Sprint back-office.
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Income tax expense (benefit)
Our effective tax rate decreased from 40.6% for the three months ended September 30, 2015 to 32.5% for the three months ended September 30, 2016. This decrease primarily resulted from state tax effects in the 2016 period resulting from recognizing income in higher tax states and losses in lower tax states as a result of the nTelos acquisition.
Net income (loss)
For the three months ended September 30, 2016, net income decreased $15.6 million, or 195.0%, primarily reflecting acquisition and integration costs incurred, increased depreciation and amortization, straight-lining of certain Sprint fee credits, and higher interest on the increased balance of outstanding debt as a result of the nTelos acquisition, net of taxes.
Nine Months Ended September 30, 2016 Compared with the Nine Months Ended September 30, 2015
The Company’s consolidated results for the first nine months of 2016 and 2015 are summarized as follows:
Nine Months Ended September 30, | Change | ||||||||||||||
(in thousands) | 2016 | 2015 | $ | % | |||||||||||
Operating revenues | $ | 379,716 | $ | 255,202 | $ | 124,514 | 48.8 | ||||||||
Operating expenses | 369,379 | 202,837 | 166,542 | 82.1 | |||||||||||
Operating income | 10,337 | 52,365 | (42,028 | ) | (80.3 | ) | |||||||||
Interest expense | (16,369 | ) | (5,663 | ) | (10,706 | ) | 189.1 | ||||||||
Other income, net | 3,147 | 1,253 | 1,894 | 151.2 | |||||||||||
Income (loss) before taxes | (2,885 | ) | 47,955 | (50,840 | ) | (106.0 | ) | ||||||||
Income tax expense (benefit) | (2,174 | ) | 19,199 | (21,373 | ) | (111.3 | ) | ||||||||
Net income (loss) | $ | (711 | ) | $ | 28,756 | $ | (29,467 | ) | (102.5 | ) | |||||
Operating revenues
For the nine months ended September 30, 2016, operating revenues increased $124.5 million, or 48.8%. Wireless segment revenues increased $114.1 million compared to the first nine months of 2015. The new revenues associated with the nTelos customers and the Sprint customers in the nTelos footprint accounted for most of this increase. Cable segment revenues grew $8.5 million primarily as a result of 6.6% growth in average subscriber counts and an increase in revenue per subscriber, while revenues from fiber contracts increased $0.7 million. Wireline segment revenues increased $3.2 million, primarily due to increases in fiber sales.
Operating expenses
Total operating expenses increased $166.5 million in the nine months ended September 30, 2016 compared to the prior year period. Operating expenses in the nine months ended September 30, 2016 included $35.8 million of integration and acquisition costs associated with the nTelos acquisition, including $19.9 million on the Wireless segment and $15.9 million in the Other segment. Selling, general and administrative expenses and cost of goods and services in the Wireless segment included an additional $8.1 million of nTelos-related customer care and other back office costs related to supporting the nTelos legacy customers until the migration of these customers is completed. Wireless segment operating expenses increased $121.3 million (excluding the $28.0 million of customer care, integration and acquisition expenses described above), primarily due to on-going costs associated with the acquired nTelos operations and $43.9 million of incremental depreciation associated with the related acquired assets. All other operating expenses increased $1.3 million, net of eliminations of intersegment activities.
Acquisition and integration costs on the Other segment primarily consisted of severance accruals for short-term nTelos personnel to be separated as integration activities wind down, and transaction related expenses (such as investment advisor, legal and other professional fees). On the Wireless segment, such costs included handsets provided to nTelos subscribers who needed a new phone to transition to the Sprint billing platform, personnel costs associated with short-term nTelos employees required to migrate the former nTelos customers to the Sprint back-office, and costs to shutdown duplicate cell site leases and backhaul circuits.
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Income tax expense (benefit)
Our effective tax rate increased from 40.0% for the nine months ended September 30, 2015 to 75.4% for the nine months ended September 30, 2016. This increase resulted from discrete tax benefits resulting from the change in accounting for stock option exercises and share award distributions in the first nine months of 2016 in accordance with ASU 2016-09. In prior year periods, such tax benefits were recorded directly to equity. Offsetting the effect of the discrete benefits included the impact of non-deductible expenses as well as the effect of state rate effects when income recognized in higher tax states is combined with losses in states with lower rates.
Net income (loss)
For the nine months ended September 30, 2016, net income decreased $29.5 million, or 102.5%, primarily reflecting acquisition and integration costs incurred, increased depreciation and amortization, straight-lining of certain Sprint fee credits, and higher interest on the expanded outstanding debt as a result of the nTelos acquisition, net of taxes.
Wireless
Our Wireless segment historically provided digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, through Shenandoah Personal Communications, LLC (“PCS”), a Sprint PCS Affiliate. Following the recent acquisition of nTelos, our wireless service territory expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. Through Shenandoah Mobile, LLC (“Mobile”), this segment also leases land on which it builds Company-owned cell towers, which it leases to affiliates and non-affiliated wireless service providers, throughout the same four-state area described above.
PCS receives revenues from Sprint for subscribers that obtain service in PCS’s network coverage area. PCS relies on Sprint to provide timely, accurate and complete information to record the appropriate revenue for each financial period. Postpaid revenues received from Sprint are recorded net of certain fees retained by Sprint. Through December 31, 2015, these fees totaled 22% of postpaid net billed revenue (gross customer billings net of credits and adjustments to customer accounts, and write-offs of uncollectible accounts), as defined by the Affiliate Agreement with Sprint. Effective January 1, 2016, the fees charged by Sprint declined to 16.6%, and certain revenue and expense items previously included in these fees became separately settled.
We also offer prepaid wireless products and services in our PCS network coverage area. Sprint retains a Management Fee equal to 6% of prepaid customer billings. Prepaid revenues received from Sprint are reported net of the cost of this fee. Other fees charged on a per unit basis are separately recorded as expenses according to the nature of the expense. We pay handset subsidies to Sprint for the difference between the selling price of prepaid handsets and their cost, recorded as a net cost in cost of goods sold. The revenue and expense components reported to us by Sprint are based on Sprint’s national averages for prepaid services, rather than being specifically determined by customers assigned to our geographic service areas.
The following tables show selected operating statistics of the Wireless segment as of the dates shown:
September 30, 2016 | December 31, 2015 | September 30, 2015 | December 31, 2014 | |||||||||
Retail PCS Subscribers – Postpaid | 718,785 | 312,512 | 303,527 | 287,867 | ||||||||
Retail PCS Subscribers – Prepaid | 275,446 | 142,840 | 145,104 | 145,162 | ||||||||
PCS Market POPS (000) (1) | 5,536 | 2,433 | 2,421 | 2,415 | ||||||||
PCS Covered POPS (000) (1) | 4,715 | 2,224 | 2,213 | 2,207 | ||||||||
CDMA Base Stations (sites) | 1,425 | 552 | 548 | 537 | ||||||||
Towers Owned | 181 | 158 | 154 | 154 | ||||||||
Non-affiliate Cell Site Leases | 186 | 202 | 203 | 198 | ||||||||
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The changes from December 31, 2015 to September 30, 2016 shown above include the following amounts acquired in the nTelos acquisition and the exchange with Sprint on May 6, 2016:
Acquired PCS Subscribers – Postpaid | 404,444 | |
Acquired PCS Subscribers – Prepaid | 154,944 | |
Acquired PCS Market POPS (000) (1) | 3,099 | |
Acquired PCS Covered POPS (000) (1) | 2,298 | |
Acquired CDMA Base Stations (sites) (2) | 868 | |
Towers | 20 | |
Non-affiliate Cell Site Leases | 10 | |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Gross PCS Subscriber Additions – Postpaid | 41,563 | 19,638 | 85,104 | 54,477 | ||||||||
Net PCS Subscriber Additions – Postpaid | 1,222 | 7,035 | 1,829 | 15,660 | ||||||||
Gross PCS Subscriber Additions – Prepaid | 35,202 | 20,228 | 83,786 | 63,806 | ||||||||
Net PCS Subscriber Losses – Prepaid | (13,865 | ) | (327 | ) | (22,338 | ) | (58 | ) | ||||
PCS Average Monthly Retail Churn % - Postpaid (3) | 2.01 | % | 1.40 | % | 1.71 | % | 1.47 | % | ||||
PCS Average Monthly Retail Churn % - Prepaid (3) | 5.43 | % | 4.72 | % | 5.06 | % | 4.85 | % | ||||
1) | POPS refers to the estimated population of a given geographic area and is based on information purchased from third party sources. Market POPS are those within a market area which we are authorized to serve under our Sprint PCS affiliate agreements, and Covered POPS are those covered by our network. |
2) | Net of approximately 160 overlap cell sites we intend to shut down in coming months. |
3) | PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period. |
During the three and nine months ended September 30, 2016, 2,880 and 4,410 former nTelos prepaid subscribers, respectively, switched to postpaid subscribers as they migrated to the Sprint back-office platforms.
Three Months Ended September 30, 2016 Compared with the Three Months Ended September 30, 2015
(in thousands) | Three Months Ended September 30, | Change | |||||||||||||
2016 | 2015 | $ | % | ||||||||||||
Segment operating revenues | |||||||||||||||
Wireless service revenue | $ | 111,001 | $ | 47,793 | $ | 63,208 | 132.3 | ||||||||
Tower lease revenue | 2,909 | 2,610 | 299 | 11.5 | |||||||||||
Equipment revenue | 3,539 | 1,104 | 2,435 | 220.6 | |||||||||||
Other revenue | 2,670 | 129 | 2,541 | NA | |||||||||||
Total segment operating revenues | 120,119 | 51,636 | 68,483 | 132.6 | |||||||||||
Segment operating expenses | |||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below | 43,097 | 15,572 | 27,525 | 176.8 | |||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 29,892 | 9,027 | 20,865 | 231.1 | |||||||||||
Integration and acquisition expenses | 14,499 | — | 14,499 | NM | |||||||||||
Depreciation and amortization | 38,038 | 9,644 | 28,394 | 294.4 | |||||||||||
Total segment operating expenses | 125,526 | 34,243 | 91,283 | 266.6 | |||||||||||
Segment operating income (loss) | $ | (5,407 | ) | $ | 17,393 | $ | (22,800 | ) | (131.1 | ) | |||||
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Service Revenues
Wireless service revenue increased $63.2 million, or 132.3%, for the three months ended September 30, 2016, compared to the comparable 2015 period. See table below.
(in thousands) | Three Months Ended September 30, | Change | |||||||||||||
Service Revenues | 2016 | 2015 | $ | % | |||||||||||
Postpaid net billings (1) | $ | 97,470 | $ | 45,864 | $ | 51,606 | 112.5 | ||||||||
Sprint fees | |||||||||||||||
Management fee | (7,919 | ) | (3,687 | ) | (4,232 | ) | 114.8 | ||||||||
Net Service fee | (6,745 | ) | (6,453 | ) | (292 | ) | 4.5 | ||||||||
Waiver of management fee | 7,996 | — | 7,996 | NM | |||||||||||
(6,668 | ) | (10,140 | ) | 3,472 | (34.2 | ) | |||||||||
Prepaid net billings | |||||||||||||||
Gross billings | 25,156 | 12,760 | 12,396 | 97.1 | |||||||||||
Sprint management fee | (1,521 | ) | (766 | ) | (755 | ) | NM | ||||||||
Waiver of management fee | 1,521 | — | 1,521 | NM | |||||||||||
25,156 | 11,994 | 13,162 | 109.7 | ||||||||||||
Travel and other revenues | 5,276 | 75 | 5,201 | NM | |||||||||||
Accounting adjustments | |||||||||||||||
Amortization of expanded affiliate agreement | (5,593 | ) | — | (5,593 | ) | NM | |||||||||
Straight-line adjustment - management fee waiver | (4,640 | ) | — | (4,640 | ) | NM | |||||||||
(10,233 | ) | — | (10,233 | ) | NM | ||||||||||
Total Service Revenues | $ | 111,001 | $ | 47,793 | $ | 63,208 | 132.3 | ||||||||
(1) Postpaid net billings are defined under the terms of the affiliate contract with Sprint to be the gross billings to customers within our service territory less billing credits and adjustments and allocated write-offs of uncollectible accounts.
Operating revenues
The nTelos acquisition and other changes to the postpaid customer gross additions and churn, outlined in the tables above, resulted in an increase of $51.6 million or 112.5% in postpaid net billings. Effective January 1, 2016, the fees retained by Sprint, and deducted from postpaid revenues, decreased from 22% to 16.6% and they agreed to settle certain revenue and expense items separately. As a result, Sprint fees (in particular, the net service fee) dropped by $5.3 million or 43.8% compared to what it would have been had the fee not been reduced. Travel and other revenues, which are now settled separately, grew by $5.2 million. Prepaid net billings grew by $13.2 million or 109.7% as a result of the growth in the customer base related to the nTelos acquisition and other changes in gross additions and churn outlined in the tables above.
We recorded an asset related to the changes to the Sprint affiliate agreement as described in the nTelos acquisition footnote above. That asset is being amortized through the expiration of the initial term of that contract in 2029 and, as a result, we recorded $5.6 million in amortization in the third quarter of 2016. Sprint agreed to waive certain management fees that they would otherwise be entitled to under the affiliate agreement as a result of our commitment to buy nTelos, upgrade its network and support the former nTelos and Sprint customers. The fees waived will be recognized on a straight line basis over the remainder of the initial term of the contract through 2029 and, as a result, we recorded an adjustment of $4.6 million in the third quarter of 2016.
Other operating revenues
The increases in equipment revenue and other revenue also resulted primarily from the nTelos acquisition, with the increase in other revenue primarily representing regulatory recovery revenues recognized by nTelos, whereas historically Sprint has recognized such revenues billed to customers in our service area.
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Cost of goods and services
Cost of goods and services increased $27.5 million, or 176.8%, in 2016 from the third quarter of 2015. The increase results from the growth in device subsidies of $2.1 million, new national handsets settled separately under the affiliate agreement of $1.1 million, increases in cell site rent and backhaul cost for incremental 868 cell sites in the nTelos territory of $14.1 million, as well as the related growth in the cost of network technicians to service and maintain these sites of $2.3 million. Cost of goods and services also included $0.7 million of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back-office systems.
Selling, general and administrative
Selling, general and administrative costs increased $20.9 million, or 231.1%, in the third quarter of 2016 from the comparable 2015 period. This increase included $5.5 million of separately settled national channel commissions; $5.7 million from the operating costs of incremental stores acquired as a result of the nTelos acquisition; $1.0 million in incremental sales and marketing efforts to communicate with the new customers and begin efforts to migrate the nTelos legacy customers over to the Sprint platforms; and $2.3 million in other administrative costs related to the acquired operations. Costs associated with prepaid wireless offerings increased $0.9 million. Selling, general and administrative costs also included $4.3 million of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back-office systems.
Integration and acquisition
Integration and acquisition expenses of $14.5 million in the third quarter of 2016 include approximately $9.9 million for replacement handsets issued to former nTelos subscribers migrated to the Sprint billing platform, $4.1 million in costs to terminate duplicative cell site leases and backhaul contracts, and $0.5 million in other expenses.
Depreciation and amortization
Depreciation and amortization increased $28.4 million, or 294%, in the third quarter of 2016 over the comparable 2015 period, due primarily to $22.2 million in depreciation on the acquired fixed assets and $5.1 million in amortization of customer based intangibles recorded in the acquisition. The $22.2 million depreciation included $4.6 million related to the second quarter of 2016 that resulted from depreciating additional assets and shortening the useful lives of other assets as a result of reviewing the preliminary asset valuation work. The $5.1 million of amortization expense included a reduction of $0.8 million relating to the second quarter of 2016 resulting from revisions to the initial valuation of these assets. Customer based intangibles are being amortized over accelerated lives.
Nine Months Ended September 30, 2016 Compared with the Nine Months Ended September 30, 2015
(in thousands) | Nine Months Ended September 30, | Change | |||||||||||||
2016 | 2015 | $ | % | ||||||||||||
Segment operating revenues | |||||||||||||||
Wireless service revenue | $ | 250,053 | $ | 144,917 | $ | 105,136 | 72.5 | ||||||||
Tower lease revenue | 8,471 | 7,772 | 699 | 9.0 | |||||||||||
Equipment revenue | 7,771 | 3,871 | 3,900 | 100.7 | |||||||||||
Other revenue | 4,636 | 287 | 4,349 | NA | |||||||||||
Total segment operating revenues | 270,931 | 156,847 | 114,084 | 72.7 | |||||||||||
Segment operating expenses | |||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below | 94,892 | 47,661 | 47,231 | 99.1 | |||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 65,219 | 26,996 | 38,223 | 141.6 | |||||||||||
Integration and acquisition expenses | 19,889 | — | 19,889 | NM | |||||||||||
Depreciation and amortization | 70,026 | 26,089 | 43,937 | 168.4 | |||||||||||
Total segment operating expenses | 250,026 | 100,746 | 149,280 | 148.2 | |||||||||||
Segment operating income | $ | 20,905 | $ | 56,101 | $ | (35,196 | ) | (62.7 | ) | ||||||
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Service Revenues
Wireless service revenue increased $105.1 million, or 72.5%, for the nine months ended September 30, 2016, compared to the comparable 2015 period. See table below.
(in thousands) | Nine Months Ended September 30, | Change | |||||||||||||
Service Revenues | 2016 | 2015 | $ | % | |||||||||||
Postpaid net billings | $ | 218,327 | $ | 139,342 | $ | 78,985 | 56.7 | ||||||||
Sprint fees | |||||||||||||||
Management fee | (17,914 | ) | (11,124 | ) | (6,790 | ) | 61.0 | ||||||||
Net Service fee | (15,986 | ) | (19,468 | ) | 3,482 | (17.9 | ) | ||||||||
Waiver of management fee | 13,126 | — | 13,126 | NM | |||||||||||
(20,774 | ) | (30,592 | ) | 9,818 | (32.1 | ) | |||||||||
Prepaid net billings | |||||||||||||||
Gross billings | 58,744 | 38,255 | 20,489 | 53.6 | |||||||||||
Sprint management fee | (3,524 | ) | (2,305 | ) | (1,219 | ) | NM | ||||||||
Waiver of management fee | 2,486 | — | 2,486 | NM | |||||||||||
57,706 | 35,950 | 21,756 | 60.5 | ||||||||||||
Travel and other revenues | 11,364 | 217 | 11,147 | NM | |||||||||||
Accounting adjustments | |||||||||||||||
Amortization of expanded affiliate agreement | (8,883 | ) | — | (8,883 | ) | NM | |||||||||
Straight-line adjustment - management fee waiver | (7,687 | ) | — | (7,687 | ) | NM | |||||||||
(16,570 | ) | — | (16,570 | ) | NM | ||||||||||
Total Service Revenues | $ | 250,053 | $ | 144,917 | $ | 105,136 | 72.5 | ||||||||
Operating revenues
The nTelos acquisition and other changes to the postpaid customer gross additions and churn, outlined in the tables above, resulted in an increase of $79.0 million or 56.7% in postpaid net billings. Effective January 1, 2016, the fees retained by Sprint, and deducted from postpaid revenues, decreased from 22% to 16.6% and they agreed to settle certain revenue and expense items separately. As a result, Sprint fees (in particular, the net service fee) dropped by $11.8 million or 42.4% relative to what it would have been had the rate not changed. Travel revenues, which are now settled separately, and other similarly settled items grew by $11.1 million. Prepaid net billings grew by $21.8 million or 60.5% as a result of the growth in the customer base related to the nTelos acquisition and other changes in gross additions and churn outlined in the tables above.
We recorded an asset related to the changes to the Sprint affiliate agreement as described in the nTelos acquisition footnote above. That asset is being amortized through the expiration of the initial term of that contract in 2029 and, as a result, we recorded $8.9 million in amortization in the nine months ended September 30, 2016. Sprint agreed to waive certain management fees that they would otherwise be entitled to under the affiliate agreement as a result of our commitment to buy nTelos, upgrade its network and support the former nTelos and Sprint customers. The fees waived will be recognized on a straight line basis over the remainder of the initial term of the contract through 2029 and, as a result, we recorded an adjustment of $7.7 million in the nine months ended September 30, 2016.
Other operating revenues
The increases in equipment revenue and other revenue also resulted primarily from the nTelos acquisition, with the increase in other revenue primarily representing regulatory recovery revenues recognized by nTelos, whereas historically Sprint has recognized such revenues billed to customers in our service area.
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Cost of goods and services
Cost of goods and services increased $47.2 million, or 99.1%, in 2016 from the first nine months of 2015. The increase results from the growth in prepaid device subsidies of $3.7 million, postpaid handset and accessory cost of goods growth of $1.8 million, new national handsets settled separately under the affiliate agreement of $4.2 million, increases in cell site rent and backhaul cost for incremental 868 cell sites in the nTelos territory of $27.1 million, as well as the related growth in the cost of network technicians and other costs to service and maintain these sites of $8.4 million. Cost of goods and services also included $1.0 million of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back-office systems.
Selling, general and administrative
Selling, general and administrative costs increased $38.2 million, or 141.6%, in the nine months ended September 30, 2016 from the comparable 2015 period. This increase included $13.2 million of separately settled national channel commissions; $9.0 million from the operating costs of incremental stores acquired as a result of the nTelos acquisition; $2.1 million in incremental sales and marketing efforts to communicate with the new customers and begin efforts to migrate the nTelos legacy customers over to the Sprint platforms; and $4.0 million in other administrative costs related to the acquired operations. Costs associated with prepaid wireless offerings increased $2.4 million. Selling, general and administrative costs also included $7.1 million of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back-office systems.
Integration and acquisition
Integration and acquisition expenses of $19.9 million in the nine months ended September 30, 2016, include approximately $14.0 million for replacement handsets issued to former nTelos subscribers migrated to the Sprint billing platform, $4.1 million in costs to terminate duplicative cell site leases and backhaul circuits, and $1.8 million in other expenses.
Depreciation and amortization
Depreciation and amortization increased $43.9 million, or 168.4%, in the nine months ended September 30, 2016 over the comparable 2015 period, due primarily to $29.1 million in depreciation on the acquired fixed assets and $11.0 million in amortization of customer based intangibles recorded in the acquisition. Customer based intangibles are being amortized over accelerated lives.
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Cable
The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia, which are included in the Wireline segment.
On January 1, 2016, we acquired the assets of Colane Cable Company. With the acquisition, we received 3,299 video customers, 1,405 high-speed internet customers, and 302 voice customers. These customers are included in the September 30, 2016 totals shown below.
September 30, 2016 | December 31, 2015 | September 30, 2015 | December 31, 2014 | |||||||||
Homes Passed (1) | 184,698 | 172,538 | 172,388 | 171,589 | ||||||||
Customer Relationships (2) | ||||||||||||
Video customers | 48,924 | 48,184 | 48,421 | 49,247 | ||||||||
Non-video customers | 28,469 | 24,550 | 23,816 | 22,051 | ||||||||
Total customer relationships | 77,393 | 72,734 | 72,237 | 71,298 | ||||||||
Video | ||||||||||||
Customers (3) | 51,379 | 50,215 | 50,839 | 52,095 | ||||||||
Penetration (4) | 27.8 | % | 29.1 | % | 29.5 | % | 30.4 | % | ||||
Digital video penetration (5) | 76.3 | % | 77.9 | % | 75.2 | % | 65.9 | % | ||||
High-speed Internet | ||||||||||||
Available Homes (6) | 183,814 | 172,538 | 172,388 | 171,589 | ||||||||
Customers (3) | 59,852 | 55,131 | 53,960 | 50,686 | ||||||||
Penetration (4) | 32.6 | % | 32.0 | % | 31.3 | % | 29.5 | % | ||||
Voice | ||||||||||||
Available Homes (6) | 181,077 | 169,801 | 169,651 | 168,852 | ||||||||
Customers (3) | 21,199 | 20,166 | 19,723 | 18,262 | ||||||||
Penetration (4) | 11.7 | % | 11.9 | % | 11.6 | % | 10.8 | % | ||||
Total Revenue Generating Units (7) | 132,430 | 125,512 | 124,522 | 121,043 | ||||||||
Fiber Route Miles | 3,124 | 2,844 | 2,842 | 2,834 | ||||||||
Total Fiber Miles (8) | 84,945 | 76,949 | 75,021 | 72,694 | ||||||||
Average Revenue Generating Units | 131,707 | 124,054 | 123,282 | 117,744 | ||||||||
1) | Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information. |
2) | Customer relationships represent the number of customers who receive at least one of our services. |
3) | Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer. Where services are provided on a bulk basis, such as to hotels and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above. During the first quarter of 2016, we modified the way we count subscribers when a commercial customer upgrades its internet service via a fiber contract. We retroactively applied the new count methodology to prior periods, and applied similar logic to certain bulk customers; the net result was reductions in internet subscriber counts of 559, 660 and 673 subscribers to December 31, 2015, September 30, 2015 and December 31, 2014 totals, respectively. |
4) | Penetration is calculated by dividing the number of customers by the number of homes passed or available homes, as appropriate. |
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5) | Digital video penetration is calculated by dividing the number of digital video customers by total video customers. Digital video customers are video customers who receive any level of video service via digital transmission. A dwelling with one or more digital set-top boxes or digital adapters counts as one digital video customer. |
6) | Homes and businesses are considered available (“available homes”) if we can connect them to our distribution system without further extending the transmission lines and if we offer the service in that area. |
7) | Revenue generating units are the sum of video, voice and high-speed internet customers. |
8) | Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. |
Three Months Ended September 30, 2016 Compared with the Three Months Ended September 30, 2015
(in thousands) | Three Months Ended September 30, | Change | |||||||||||||
2016 | 2015 | $ | % | ||||||||||||
Segment operating revenues | |||||||||||||||
Service revenue | $ | 24,948 | $ | 22,284 | $ | 2,664 | 12.0 | ||||||||
Other revenue | 2,618 | 2,133 | 485 | 22.7 | |||||||||||
Total segment operating revenues | 27,566 | 24,417 | 3,149 | 12.9 | |||||||||||
Segment operating expenses | |||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below | 14,654 | 14,124 | 530 | 3.8 | |||||||||||
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below | 4,770 | 4,948 | (178 | ) | (3.6 | ) | |||||||||
Depreciation and amortization | 5,860 | 5,948 | (88 | ) | (1.5 | ) | |||||||||
Total segment operating expenses | 25,284 | 25,020 | 264 | 1.1 | |||||||||||
Segment operating income (loss) | $ | 2,282 | $ | (603 | ) | $ | 2,885 | (478.4 | ) | ||||||
Operating revenues
Cable segment service revenues increased $2.7 million, or 12.0%, due to a 6.8% increase in average revenue generating units, video rate increases in January 2016 to offset increases in programming costs, new and existing customers selecting higher-speed data (HSD) access packages and growth in the HSD and phone customers.
Other revenue grew $0.5 million, primarily due to new fiber contracts to towers, schools and libraries.
Operating expenses
Cable segment cost of goods and services increased $0.5 million, or 3.8%, in the third quarter of 2016 over the comparable 2015 period. Video programming costs, including retransmission fees, increased $0.3 million, due to a 1.5% increase in average RGU's and programming cost increases of 8% to 10% per affected channel. The remainder of the increase resulted from higher network and maintenance costs.
Selling, general and administrative expenses decreased $0.2 million against the prior year quarter due to lower advertising costs, down $0.2 million.
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Nine Months Ended September 30, 2016 Compared with the Nine Months Ended September 30, 2015
(in thousands) | Nine Months Ended September 30, | Change | |||||||||||||
2016 | 2015 | $ | % | ||||||||||||
Segment operating revenues | |||||||||||||||
Service revenue | $ | 73,455 | $ | 65,802 | $ | 7,653 | 11.6 | ||||||||
Other revenue | 6,958 | 6,080 | 878 | 14.4 | |||||||||||
Total segment operating revenues | 80,413 | 71,882 | 8,531 | 11.9 | |||||||||||
Segment operating expenses | |||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below | 43,864 | 41,378 | 2,486 | 6.0 | |||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 14,672 | 14,924 | (252 | ) | (1.7 | ) | |||||||||
Depreciation and amortization | 17,834 | 17,286 | 548 | 3.2 | |||||||||||
Total segment operating expenses | 76,370 | 73,588 | 2,782 | 3.8 | |||||||||||
Segment operating income (loss) | $ | 4,043 | $ | (1,706 | ) | $ | 5,749 | 337.0 | |||||||
Operating revenues
Cable segment service revenues increased $7.7 million, or 11.6%, due to a 6.6% increase in average revenue generating units, video rate increases in January 2016 to offset increases in programming costs, new and existing customers selecting higher-speed data (HSD) access packages and growth in the HSD and phone customers.
Other revenue grew $0.9 million, primarily due to new fiber contracts to towers, schools and libraries.
Operating expenses
Cable segment cost of goods and services increased $2.5 million, or 6.0%, in the nine months ended September 30, 2016 over the comparable 2015 period. Video programming costs, including retransmission fees, increased $0.8 million, primarily due to programming cost increases of 8% to 10% per affected channel. The remainder of the increase resulted from higher network and maintenance costs, up $1.1 million, and video regulatory fees, up $0.6 million.
Wireline
The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video and cable modem internet access services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of Pennsylvania.
September 30, 2016 | Dec. 31, 2015 | September 30, 2015 | Dec. 31, 2014 | |||||||||
Telephone Access Lines (1) | 18,737 | 20,252 | 21,598 | 21,612 | ||||||||
Long Distance Subscribers | 9,186 | 9,476 | 9,651 | 9,571 | ||||||||
Video Customers (2) | 5,285 | 5,356 | 5,375 | 5,692 | ||||||||
DSL and Cable Modem Subscribers (3) | 14,195 | 13,890 | 13,323 | 13,094 | ||||||||
Fiber Route Miles | 1,916 | 1,736 | 1,625 | 1,556 | ||||||||
Total Fiber Miles (4) | 133,903 | 123,891 | 107,432 | 99,387 | ||||||||
1) | Effective October 1, 2015, we launched cable modem services on our cable plant, and ceased the requirement that a customer have a telephone access line to purchase internet service. |
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2) | The Wireline segment’s video service passes approximately 16,000 homes. |
3) | September 2016 and December 2015 totals include 911 and 420 customers, respectively, served via the coaxial cable network. During first quarter 2016, we modified the way we count subscribers when a commercial customer upgrades its internet service via a fiber contract. We retroactively applied the new count methodology to prior periods and the net result was increases in internet subscriber counts of 804, 489 and 352 subscribers to December 31, 2015, September 30, 2015 and December 31, 2014 totals, respectively. |
4) | Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. Fiber counts were revised following a review of fiber records in the first quarter of 2015. |
Three Months Ended September 30, 2016 Compared with the Three Months Ended September 30, 2015
Three Months Ended September 30, | Change | ||||||||||||||
(in thousands) | 2016 | 2015 | $ | % | |||||||||||
Segment operating revenues | |||||||||||||||
Service revenue | $ | 5,516 | $ | 5,596 | $ | (80 | ) | (1.4 | ) | ||||||
Carrier access and fiber revenues | 12,365 | 10,854 | 1,511 | 13.9 | |||||||||||
Other revenue | 851 | 828 | 23 | 2.8 | |||||||||||
Total segment operating revenues | 18,732 | 17,278 | 1,454 | 8.4 | |||||||||||
Segment operating expenses | |||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below | 9,442 | 8,212 | 1,230 | 15.0 | |||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 1,676 | 1,688 | (12 | ) | (0.7 | ) | |||||||||
Depreciation and amortization | 2,822 | 3,404 | (582 | ) | (17.1 | ) | |||||||||
Total segment operating expenses | 13,940 | 13,304 | 636 | 4.8 | |||||||||||
Segment operating income | $ | 4,792 | $ | 3,974 | $ | 818 | 20.6 | ||||||||
Operating revenues
Total operating revenues in the quarter ended September 30, 2016 increased $1.5 million, or 8.4%, against the comparable 2015 period, as a result of increases in fiber and access contracts.
Operating expenses
Operating expenses overall increased $0.6 million, or 4.8%, in the quarter ended September 30, 2016, compared to the 2015 quarter. The $1.2 million increase in cost of goods and services primarily resulted from costs to support the increase in carrier access and fiber revenues shown above.
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Nine Months Ended September 30, 2016 Compared with the Nine Months Ended September 30, 2015
Nine Months Ended September 30, | Change | ||||||||||||||
(in thousands) | 2016 | 2015 | $ | % | |||||||||||
Segment operating revenues | |||||||||||||||
Service revenue | $ | 16,433 | $ | 16,420 | $ | 13 | 0.1 | ||||||||
Carrier access and fiber revenue | 36,628 | 30,532 | 6,096 | 20.0 | |||||||||||
Other revenue | 2,641 | 2,375 | 266 | 11.2 | |||||||||||
Total segment operating revenues | 55,702 | 49,327 | 6,375 | 12.9 | |||||||||||
Segment operating expenses | |||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below | 26,892 | 23,224 | 3,668 | 15.8 | |||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | 4,951 | 4,923 | 28 | 0.6 | |||||||||||
Depreciation and amortization | 8,789 | 9,411 | (622 | ) | (6.6 | ) | |||||||||
Total segment operating expenses | 40,632 | 37,558 | 3,074 | 8.2 | |||||||||||
Segment operating income | $ | 15,070 | $ | 11,769 | $ | 3,301 | 28.0 | ||||||||
Operating revenues
Total operating revenues in the nine months ended September 30, 2016 increased $6.4 million, or 12.9%, against the comparable 2015 period. Carrier access and fiber revenues increased $6.1 million due to increases in fiber and access contracts.
Operating expenses
Operating expenses overall increased $3.1 million, or 8.2%, in the nine months ended September 30, 2016, compared to the 2015 period. The $3.7 million increase in cost of goods and services primarily resulted from costs to support the increase in carrier access and fiber revenues shown above.
Non-GAAP Financial Measure
In managing our business and assessing our financial performance, management supplements the information provided by financial statement measures prepared in accordance with GAAP with adjusted OIBDA and continuing OIBDA, which are considered “non-GAAP financial measures” under SEC rules.
Adjusted OIBDA is defined by us as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of: certain non-recurring transactions; impairment of assets; gains and losses on asset sales; straight-line adjustments for the waived management fee; amortization of the affiliate agreement expansion asset; and share-based compensation expense. Adjusted OIBDA should not be construed as an alternative to operating income as determined in accordance with GAAP as a measure of operating performance. Continuing OIBDA is defined by us as adjusted OIBDA, less the benefit received from the waived management fee by Sprint over the next approximately six–year period.
In a capital-intensive industry such as telecommunications, management believes that adjusted OIBDA and continuing OIBDA and the associated percentage margin calculations are meaningful measures of our operating performance. We use adjusted OIBDA and continuing OIBDA as supplemental performance measures because management believes they facilitate comparisons of our operating performance from period to period and comparisons of our operating performance to that of other companies by excluding potential differences caused by the age and book depreciation of fixed assets (affecting relative depreciation expenses) as well as the other items described above for which additional adjustments were made. In the future, management expects that the Company may again report adjusted OIBDA and continuing OIBDA excluding these items and may incur expenses similar to these excluded items. Accordingly, the exclusion of these and other similar items from our non-GAAP presentation should not be interpreted as implying these items are non-recurring, infrequent or unusual.
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While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the current period allocation of costs associated with long-lived assets acquired or constructed in prior periods, and accordingly may obscure underlying operating trends for some purposes. By isolating the effects of these expenses and other items that vary from period to period without any correlation to our underlying performance, or that vary widely among similar companies, management believes adjusted OIBDA and continuing OIBDA facilitates internal comparisons of our historical operating performance, which are used by management for business planning purposes, and also facilitates comparisons of our performance relative to that of our competitors. In addition, we believe that adjusted OIBDA and continuing OIBDA and similar measures are widely used by investors and financial analysts as measures of our financial performance over time, and to compare our financial performance with that of other companies in our industry.
Adjusted OIBDA and continuing OIBDA have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. These limitations include the following:
• | they do not reflect capital expenditures; |
• | many of the assets being depreciated and amortized will have to be replaced in the future and adjusted OIBDA and continuing OIBDA do not reflect cash requirements for such replacements; |
• | they do not reflect costs associated with share-based awards exchanged for employee services; |
• | they do not reflect interest expense necessary to service interest or principal payments on indebtedness; |
• | they do not reflect gains, losses or dividends on investments; |
• | they do not reflect expenses incurred for the payment of income taxes; and |
• | other companies, including companies in our industry, may calculate adjusted OIBDA and continuing OIBDA differently than we do, limiting its usefulness as a comparative measure. |
In light of these limitations, management considers adjusted OIBDA and continuing OIBDA as a financial performance measure that supplements but does not replace the information reflected in our GAAP results.
The following table shows adjusted OIBDA and continuing OIBDA for the three and nine months ended September 30, 2016 and 2015.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Adjusted OIBDA | $ | 73,746 | $ | 36,804 | $ | 170,166 | $ | 110,759 | ||||||||
Continuing OIBDA | $ | 64,228 | $ | 36,804 | $ | 154,554 | $ | 110,759 | ||||||||
The following table reconciles adjusted OIBDA and continuing OIBDA to operating income (loss), which we consider to be the most directly comparable GAAP financial measure, for the three and nine months ended September 30, 2016 and 2015:
Consolidated: | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Operating income (loss) | $ | (3,929 | ) | $ | 15,089 | $ | 10,337 | $ | 52,365 | |||||||
Plus depreciation and amortization | 46,807 | 19,118 | 96,961 | 53,119 | ||||||||||||
Plus (gain) loss on asset sales | (81 | ) | (1 | ) | (144 | ) | 229 | |||||||||
Plus share based compensation expense | 496 | 469 | 2,570 | 1,893 | ||||||||||||
Plus straight line adjustment to management fee waiver | 4,640 | — | 7,687 | — | ||||||||||||
Plus amortization of intangible netted in revenue | 5,593 | — | 8,883 | — | ||||||||||||
Plus temporary backoffice costs to support the billing operations through migration (1) | 4,948 | — | 8,071 | — | ||||||||||||
Plus integration and acquisition related expenses | 15,272 | 2,129 | 35,801 | 3,153 | ||||||||||||
Adjusted OIBDA | $ | 73,746 | $ | 36,804 | $ | 170,166 | $ | 110,759 | ||||||||
Less waived management fee | (9,518 | ) | — | (15,612 | ) | — | ||||||||||
Continuing OIBDA | $ | 64,228 | $ | 36,804 | $ | 154,554 | $ | 110,759 | ||||||||
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(1) Once former nTelos customers migrate to the Sprint backoffice, the Company incurs certain postpaid fees retained by Sprint and prepaid costs passed to us by Sprint that would offset a portion of these savings. For the three and nine months ended September 30, 2016, these offsets were estimated at $1.3 million and $3.1 million, respectively.
The following tables reconcile adjusted OIBDA and continuing OIBDA to operating income by major segment for the three and nine months ended September 30, 2016 and 2015:
Wireless Segment: | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Operating income (loss) | $ | (5,407 | ) | $ | 17,393 | $ | 20,905 | $ | 56,101 | |||||||
Plus depreciation and amortization | 38,038 | 9,644 | 70,026 | 26,089 | ||||||||||||
Plus (gain) loss on asset sales | (45 | ) | 40 | (84 | ) | 73 | ||||||||||
Plus share based compensation expense | 246 | 109 | 1,058 | 441 | ||||||||||||
Plus straight line adjustment to management fee waiver | 4,640 | — | 7,687 | — | ||||||||||||
Plus amortization of intangible netted in revenue | 5,593 | — | 8,883 | — | ||||||||||||
Plus temporary backoffice costs to support the billing operations through migration | 4,945 | — | 8,067 | — | ||||||||||||
Plus integration and acquisition related expenses | 14,499 | — | 19,889 | — | ||||||||||||
Adjusted OIBDA | $ | 62,509 | $ | 27,186 | $ | 136,431 | $ | 82,704 | ||||||||
Less waived management fee | (9,518 | ) | — | (15,612 | ) | — | ||||||||||
Continuing OIBDA | $ | 52,991 | $ | 27,186 | $ | 120,819 | $ | 82,704 | ||||||||
Cable Segment: | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Operating income (loss) | $ | 2,282 | $ | (603 | ) | $ | 4,043 | $ | (1,706 | ) | ||||||
Plus depreciation and amortization | 5,860 | 5,948 | 17,834 | 17,286 | ||||||||||||
Plus (gain) loss on asset sales | (19 | ) | (39 | ) | (53 | ) | 12 | |||||||||
Plus share based compensation expense | 108 | 164 | 673 | 665 | ||||||||||||
Adjusted OIBDA and Continuing OIBDA | $ | 8,231 | $ | 5,470 | $ | 22,497 | $ | 16,257 | ||||||||
Wireline Segment: | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Operating income | $ | 4,792 | $ | 3,974 | $ | 15,070 | $ | 11,769 | ||||||||
Plus depreciation and amortization | 2,822 | 3,404 | 8,789 | 9,411 | ||||||||||||
Plus (gain) loss on asset sales | — | (2 | ) | 40 | 132 | |||||||||||
Plus share based compensation expense | 49 | 84 | 284 | 330 | ||||||||||||
Adjusted OIBDA and Continuing OIBDA | $ | 7,663 | $ | 7,460 | $ | 24,183 | $ | 21,642 | ||||||||
Liquidity and Capital Resources
We have four principal sources of funds available to meet the financing needs of its operations, capital projects, debt service, investments and potential dividends. These sources include cash flows from operations, existing balances of cash and cash equivalents, the liquidation of investments and borrowings. Management routinely considers the alternatives available to determine what mix of sources are best suited for the long-term benefit of the Company.
Sources and Uses of Cash. We generated $105.8 million of net cash from operations in the first nine months of 2016, compared to $83.1 million in the first nine months of 2015. Changes included a net loss compared to net income, increases in non-cash
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expenses including depreciation, amortization, and other items, changes in tax accounts, and by the timing of cash receipts and disbursements for taxes, inventories, and other items.
Indebtedness. As of September 30, 2016, our indebtedness totaled $809.6 million in term loans with an annualized effective interest rate of approximately 4.16% after considering the impact of the interest rate swap contract and unamortized loan costs. The balance consists of the $478.9 million Term Loan A-1 at a variable rate (3.27% as of September 30, 2016) that resets monthly based on one month LIBOR plus a margin of 2.75%, and the $350 million Term Loan A-2 at a variable rate (3.52% as of September 30, 2016) that resets monthly based on one month LIBOR plus a margin of 3.00%. The Term Loan A-1 requires quarterly principal repayments of $6.1 million, which began on September 30, 2016 and will continue through June 30, 2017, increasing to $12.1 million quarterly from September 30, 2017 through June 30, 2020, increasing to $18.2 million quarterly from September 30, 2020 thereafter through March 31, 2021, with the remaining balance of approximately $260.7 million due June 30, 2021. The Term Loan A-2 requires quarterly principal repayments of $10.0 million beginning on September 30, 2018 through March 31, 2023, with the current remaining expected balance of approximately $160.0 million due June 30, 2023.
We are bound by certain financial covenants under the 2016 credit agreement. Noncompliance with any one or more of the debt covenants may have an adverse effect on our financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. As of September 30, 2016, we were in compliance with all debt covenants, and ratios at September 30, 2016 were as follows:
Actual | Covenant Requirement at September 30, 2016 | ||||
Total Leverage Ratio | 2.78 | 3.75 or Lower | |||
Debt Service Coverage Ratio | 4.51 | 2.00 or Higher | |||
In accordance with the Credit Agreement, the total leverage and debt service coverage ratios noted above are based on consolidated EBITDA, cash taxes, scheduled principal payments and cash interest expense for the three months ended September 30, 2016, multiplied by four. In addition to the covenants above, we are required to supply the lenders with quarterly financial statements and other reports as defined by the 2016 credit agreement. We were in compliance with all reporting requirements at September 30, 2016.
We had no off-balance sheet arrangements (other than operating leases) and have not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.
Capital Commitments. Capital expenditures budgeted for 2016 totaled $218.5 million, including $120.3 million in the Wireless segment for upgrades and expansion of the nTelos wireless network. In addition, $21.2 million is budgeted for information technology upgrades, new and renovated buildings and other projects, $24.2 million for additional network capacity, and $36.4 million for network expansion including new fiber routes, new cell towers, and cable market expansion. As of September 30, 2016, expectations for 2016 total capital spending have been revised downward to $179.4 million, a decrease of $39.1 million. Of the decrease, $28.0 million is from the Wireless segment, and $19.0 million of that resulted from the additional spending undertaken by nTelos in the last few months before the closing of the acquisition. An additional $7.5 million of the overall decrease is on the Cable segment, and largely relates to a fiber build project that is carrying over into 2017.
For the first nine months of 2016, we spent $102.9 million on capital projects, compared to $39.6 million in the comparable 2015 period. Spending related to Wireless projects accounted for $65.6 million in the first nine months of 2016, primarily for additional network capacity and technology upgrades. Cable capital spending of $16.4 million related to network and cable market expansion. Wireline capital projects cost $12.1 million, driven primarily by fiber builds. Other projects totaled $8.8 million, largely related to information technology projects.
We believe that cash on hand, cash flow from operations and borrowings expected to be available under our existing credit facilities will provide sufficient cash to enable us to fund planned capital expenditures, make scheduled principal and interest payments, meet our other cash requirements and maintain compliance with the terms of our financing agreements for at least the next twelve months. Thereafter, capital expenditures will likely continue to be required to continue planned capital upgrades to the acquired wireless network and provide increased capacity to meet our expected growth in demand for our products and services. The actual amount and timing of our future capital requirements may differ materially from our estimate depending on the demand for our products and new market developments and opportunities.
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Our cash flows from operations could be adversely affected by events outside our control, including, without limitation, changes in overall economic conditions, regulatory requirements, changes in technologies, demand for our products, availability of labor resources and capital, changes in our relationship with Sprint, and other conditions. The Wireless segment’s operations are dependent upon Sprint’s ability to execute certain functions such as billing, customer care, and collections; our ability to develop and implement successful marketing programs and new products and services; and our ability to effectively and economically manage other operating activities under our agreements with Sprint. Our ability to attract and maintain a sufficient customer base, particularly in the acquired cable markets, is also critical to our ability to maintain a positive cash flow from operations. The foregoing events individually or collectively could affect our results.
Recently Issued Accounting Standards
In May 2014, the FASB issued 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, but not earlier than the original effective date beginning after December 15, 2016 We continue to evaluate the impact that the new standard and available adoption methods will have on our consolidated financial statements and related disclosures.
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. This change will result in an increase to recorded assets and liabilities on lessees’ financial statements, as well as changes in the categorization of rental costs, from rent expense to interest and depreciation expense. Other effects may occur depending on the types of leases and the specific terms of them utilized by particular lessees. The ASU is effective for us on January 1, 2019, and early application is permitted. Modified retrospective application is required. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s market risks relate primarily to changes in interest rates on instruments held for other than trading purposes. The Company’s interest rate risk generally involves two components. The first component is outstanding debt with variable rates. As of September 30, 2016, the Company had $828.9 million of variable rate debt outstanding (excluding unamortized loan fees and costs of $19.4 million), bearing interest at a weighted average rate of 3.38% as determined on a monthly basis. An increase in market interest rates of 1.00% would add approximately $8.2 million to annual interest expense, excluding the effect of the interest rate swap. In May 2016, the Company entered into a pay-fixed, receive-variable interest rate swap with three counterparties totaling $256.6 of notional principal (subject to change based upon expected draws under the delayed draw term loan and principal payments due under our debt agreements). These swaps, combined with the swap purchased in 2012, cover notional principal equal to approximately 50% of the expected outstanding variable rate debt through maturity in 2023. The Company is required to pay a combined fixed rate of approximately 1.16% and receive a variable rate based on one month LIBOR (0.52% as of September 30, 2016), to manage a portion of its interest rate risk. Changes in the net interest paid or received under the swaps would offset approximately 50% of the change in interest expense on the variable rate debt outstanding. The swap agreements currently add approximately $2.3 million to annual interest expense, based on the spread between the fixed rate and the variable rate currently in effect on our debt.
The second component of interest rate risk is marked increases in interest rates that may adversely affect the rate at which the Company may borrow funds for growth in the future. If the Company should borrow additional funds under any Incremental Term Loan Facility to fund its capital investment needs, repayment provisions would be agreed to at the time of each draw under the Incremental Term Loan Facility. If the interest rate margin on any draw exceeds by more than 0.25% the applicable interest rate margin on the Term Loan Facility, the applicable interest rate margin on the Term Loan Facility shall be increased to equal the interest rate margin on the Incremental Term Loan Facility. If interest rates increase generally, or if the rate applied under the Company’s Incremental Term Loan Facility causes the Company’s outstanding debt to be repriced, the Company’s future interest costs could increase.
Management views market risk as having a potentially significant impact on the Company's results of operations, as future results could be adversely affected if interest rates were to increase significantly for an extended period, or if the Company’s need for additional external financing resulted in increases to the interest rates applied to all of its new and existing debt. As of September 30, 2016, the Company has $402.0 million of variable rate debt with no interest rate protection. The Company’s investments in publicly traded stock and bond mutual funds under the rabbi trust, which are subject to market risks and could experience significant swings in market values, are offset by corresponding changes in the liabilities owed to participants in the Supplemental Executive Retirement Plan. General economic conditions affected by regulatory changes, competition or other external influences may pose a higher risk to the Company’s overall results.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our President and Chief Executive Officer, who is the principal executive officer, and the Vice President - Finance and Chief Financial Officer, who is the principal financial officer, conducted an evaluation of our disclosure controls and procedures, as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2016.
Changes in Internal Control Over Financial Reporting
The acquisition of nTelos was completed on May 6, 2016, and had a material impact on the financial position, results of operations and cash flows of the Company from the date of acquisition. Management is integrating the acquired operation into its business processes and control structures as quickly as possible, although it is certain that the integration of customers and back office operations will not be completed until sometime during 2017. As a result of the acquisition, and the ongoing impact to the business, management has elected to exclude the legacy systems of nTelos from our 2016 assessment of internal controls over financial reporting.
Other Matters Relating to Internal Control Over Financial Reporting
Under the Company’s agreements with Sprint, Sprint provides the Company with billing, collections, customer care, certain network operations and other back-office services for the PCS operation. As a result, Sprint remits to the Company a substantial portion of the Company’s total operating revenues, which will increase as legacy nTelos subscribers migrate to the Sprint billing platform in the future. Due to this relationship, the Company necessarily relies on Sprint to provide accurate, timely and sufficient data and information to properly record the Company’s revenues and accounts receivable, which underlie a substantial portion of the Company’s periodic financial statements and other financial disclosures.
Information provided by Sprint includes reports regarding the subscriber accounts receivable in the Company’s markets. Sprint provides the Company with monthly accounts receivable, billing and cash receipts information on a market level, rather than a subscriber level. The Company reviews these various reports to identify discrepancies or errors. Under the Company’s agreements with Sprint, the Company is entitled to only a portion of the receipts, net of items such as taxes, government surcharges, certain allocable write-offs and the 16.6% of revenue currently retained by Sprint (before the effect of fee waivers). Because of the Company’s reliance on Sprint for financial information, the Company must depend on Sprint to design adequate internal controls with respect to the processes established to provide this data and information to the Company and Sprint’s other Sprint PCS affiliate network partners. To address this issue, Sprint engages an independent registered public accounting firm to perform a periodic evaluation of these controls and to provide a “Report on Controls Placed in Operation and Tests of Operating Effectiveness” under guidance provided in Statements on Standards for Attestation Engagements No. 16 (“SSAE 16”). The report is provided to the Company on an annual basis and covers a nine-month period. The most recent report covered the period from January 1, 2015 to September 30, 2015. The most recent report indicated there were no material issues which would adversely affect the information used to support the recording of the revenues provided by Sprint related to the Company’s relationship with them.
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PART II. | OTHER INFORMATION |
ITEM 1A. | Risk Factors |
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed.
In connection with the nTelos acquisition, we incurred significant additional indebtedness, which could materially and adversely affect us, including by decreasing our business flexibility.
We have substantially increased indebtedness following completion of the nTelos acquisition in comparison to that of the Company on a recent historical basis, which has increased our interest expense and amortization requirements and could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions. The amount of cash required to pay interest on our increased indebtedness and the increased amortization requirements to pay down the loan balances following the nTelos acquisition, and thus the demands on our cash resources, could be greater than the amount of cash flows required to service our indebtedness prior to the nTelos acquisition. Our increased levels of indebtedness could also reduce funds available for working capital, capital expenditures, dividends and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the nTelos acquisition, or if the financial performance of the combined company does not meet current expectations, then our ability to service this indebtedness may be materially and adversely impacted.
It may be difficult to successfully integrate the business of nTelos and we may fail to realize the anticipated benefits expected from the nTelos acquisition, which could materially and adversely affect our operating results and the market price of our common stock.
If we experience greater than anticipated costs to integrate nTelos into our existing operations or are not able to achieve the anticipated benefits of the nTelos acquisition, our business and results of operations could be materially and negatively affected. In addition, it is possible that the ongoing integration process could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the nTelos acquisition. Integration efforts also may divert management attention and resources.
The success of the nTelos acquisition will also depend, in significant part, on our ability to successfully integrate the acquired business and realize the synergies anticipated with the nTelos acquisition. Many of these synergies are not expected to occur for a period of time and will require capital expenditures to be fully realized. If we are unable to integrate nTelos successfully, we may not realize the anticipated benefits of the nTelos acquisition, including the anticipated synergies.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The Company maintains a dividend reinvestment plan (the “DRIP”) for the benefit of its shareholders. When shareholders remove shares from the DRIP, the Company issues a certificate for whole shares, pays out cash for any fractional shares, and cancels the fractional shares purchased. In conjunction with exercises of stock options and distributions of vested share awards, the Company periodically repurchases shares from recipients to satisfy some of the exercise price of the options being exercised or taxes payable associated with the distribution of shares. The following table provides information about the Company’s repurchases of shares during the three months ended September 30, 2016:
Number of Shares Purchased | Average Price Paid per Share | ||||||
July 1 to July 31 | 21,841 | $ | 41.87 | ||||
August 1 to August 31 | — | $ | — | ||||
September 1 to September 30 | — | $ | — | ||||
Total | 21,841 | $ | 41.87 | ||||
On May 6, 2016, in connection with the closing of the nTelos acquisition, the Company issued 380,000 shares of its common stock as consideration for the acquisition of the non-controlling interests in a subsidiary of nTelos. Such shares were valued at
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$10.4 million. The sale of these securities was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, based upon representations made to us by the equity holders in purchase agreements we entered into with each equity holder.
ITEM 6. | Exhibits |
(a) | The following exhibits are filed with this Quarterly Report on Form 10-Q: |
3.3 | Amended and Restated Bylaws of Shenandoah Telecommunications Company, effective July 18, 2016, filed as Exhibit 3.1 to the Company Current Report on Form 8-K dated July 18, 2016. | |
31.1 | Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
31.2 | Certification of Vice President - Finance and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
32 | Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. | |
(101) | Formatted in XBRL (Extensible Business Reporting Language) | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY | |
(Registrant) | |
/s/Adele M. Skolits | |
Adele M. Skolits | |
Vice President - Finance and Chief Financial Officer | |
Date: November 7, 2016 | |
51
EXHIBIT INDEX
Exhibit No. | Exhibit | |
3.3 | Amended and Restated Bylaws of Shenandoah Telecommunications Company, effective July 18, 2016, filed as Exhibit 3.1 to the Company Current Report on Form 8-K dated July 18, 2016. | |
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | ||
Certification of Vice President - Finance and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | ||
Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. | ||
(101) | Formatted in XBRL (Extensible Business Reporting Language) | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
52
EXHIBIT 31.1
CERTIFICATION
I, Christopher E. French, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Shenandoah Telecommunications Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d‑15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/S/ CHRISTOPHER E. FRENCH
Christopher E. French, President and Chief Executive Officer
Date: November 7, 2016
EXHIBIT 31.2
CERTIFICATION
I, Adele M. Skolits, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Shenandoah Telecommunications Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d‑15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ADELE M. SKOLITS
Adele M. Skolits, Vice President - Finance and Chief Financial Officer
Date: November 7, 2016
EXHIBIT 32
Written Statement of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, the President and Chief Executive Officer and the Vice President - Finance and Chief Financial Officer, of Shenandoah Telecommunications Company (the “Company”), hereby certifies that, on the date hereof:
(1) The quarterly report on Form 10-Q of the Company for the three months ended September 30, 2016 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) Information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/S/CHRISTOPHER E. FRENCH | |
Christopher E. French | |
President and Chief Executive Officer | |
November 7, 2016 | |
/S/ADELE M. SKOLITS | |
Adele M. Skolits | |
Vice President - Finance and | |
Chief Financial Officer | |
November 7, 2016 | |
The foregoing certification is being furnished solely pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. This certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.