Document
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended September 30, 2017 |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from__________ to __________ |
Commission File No.: 000-09881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
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VIRGINIA | | 54-1162807 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
500 Shentel Way, Edinburg, Virginia 22824
(Address of principal executive offices) (Zip Code)
(540) 984-4141
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ |
Smaller reporting company☐ | Emerging growth company☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares of the registrant’s common stock outstanding on October 27, 2017 was 49,264,693.
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
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PART I. | FINANCIAL INFORMATION | | | |
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Item 1. | Financial Statements | | | |
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Item 2. | | | - | |
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Item 3. | | |
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Item 4. | | |
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PART II. | OTHER INFORMATION | | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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ASSETS | | September 30, 2017 | | December 31, 2016 |
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Current Assets | | | | |
Cash and cash equivalents | | $ | 75,467 |
| | $ | 36,193 |
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Accounts receivable, net of allowance of $479 and $449, respectively | | 64,396 |
| | 69,789 |
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Income taxes receivable | | 7,689 |
| | — |
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Inventory, net | | 7,439 |
| | 39,043 |
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Prepaid expenses and other | | 18,226 |
| | 16,440 |
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Total current assets | | 173,217 |
| | 161,465 |
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Investments, including $3,271 and $2,907 carried at fair value | | 11,319 |
| | 10,276 |
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Property, plant and equipment, net | | 683,355 |
| | 698,122 |
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Other Assets | | |
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Intangible assets, net | | 421,672 |
| | 454,532 |
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Goodwill | | 146,497 |
| | 145,256 |
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Deferred charges and other assets, net | | 11,012 |
| | 14,756 |
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Total assets | | $ | 1,447,072 |
| | $ | 1,484,407 |
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(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | September 30, 2017 | | December 31, 2016 |
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Current Liabilities | | | | |
Current maturities of long-term debt, net of unamortized loan fees | | $ | 54,316 |
| | $ | 32,041 |
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Accounts payable | | 31,462 |
| | 72,810 |
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Advanced billings and customer deposits | | 21,109 |
| | 20,427 |
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Accrued compensation | | 7,373 |
| | 9,465 |
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Income taxes payable | | — |
| | 435 |
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Accrued liabilities and other | | 15,277 |
| | 29,085 |
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Total current liabilities | | 129,537 |
| | 164,263 |
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Long-term debt, less current maturities, net of unamortized loan fees | | 778,686 |
| | 797,224 |
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Other Long-Term Liabilities | | |
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Deferred income taxes | | 142,056 |
| | 151,837 |
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Deferred lease payable | | 21,089 |
| | 18,042 |
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Asset retirement obligations | | 19,240 |
| | 15,666 |
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Retirement plan obligations | | 16,939 |
| | 17,738 |
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Other liabilities | | 40,180 |
| | 23,743 |
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Total other long-term liabilities | | 239,504 |
| | 227,026 |
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Commitments and Contingencies | |
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Shareholders’ Equity | | |
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Common stock | | 43,908 |
| | 45,482 |
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Retained earnings | | 249,419 |
| | 243,624 |
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Accumulated other comprehensive income (loss), net of taxes | | 6,018 |
| | 6,788 |
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Total shareholders’ equity | | 299,345 |
| | 295,894 |
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Total liabilities and shareholders’ equity | | $ | 1,447,072 |
| | $ | 1,484,407 |
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See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
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Operating revenues | | $ | 151,782 |
| | $ | 156,836 |
| | $ | 458,920 |
| | $ | 379,716 |
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Operating expenses: | | |
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Cost of goods and services, exclusive of depreciation and amortization shown separately below | | 55,834 |
| | 58,317 |
| | 162,976 |
| | 140,354 |
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Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 42,199 |
| | 40,369 |
| | 125,374 |
| | 96,263 |
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Integration and acquisition expenses | | 1,706 |
| | 15,272 |
| | 9,873 |
| | 35,801 |
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Depreciation and amortization | | 42,568 |
| | 46,807 |
| | 132,297 |
| | 96,961 |
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Total operating expenses | | 142,307 |
| | 160,765 |
| | 430,520 |
| | 369,379 |
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Operating income (loss) | | 9,475 |
| | (3,929 | ) | | 28,400 |
| | 10,337 |
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Other income (expense): | | |
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Interest expense | | (9,823 | ) | | (8,845 | ) | | (28,312 | ) | | (16,369 | ) |
Gain (loss) on investments, net | | 202 |
| | 127 |
| | 395 |
| | 237 |
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Non-operating income (loss), net | | 1,003 |
| | 1,400 |
| | 3,482 |
| | 2,910 |
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Income (loss) before income taxes | | 857 |
| | (11,247 | ) | | 3,965 |
| | (2,885 | ) |
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Income tax expense (benefit) | | (2,677 | ) | | (3,651 | ) | | (1,830 | ) | | (2,174 | ) |
Net income (loss) | | 3,534 |
| | (7,596 | ) | | 5,795 |
| | (711 | ) |
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Other comprehensive income (loss): | | |
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Unrealized gain (loss) on interest rate hedge, net of tax | | 6 |
| | 1,712 |
| | (770 | ) | | (2,573 | ) |
Comprehensive income (loss) | | $ | 3,540 |
| | $ | (5,884 | ) | | $ | 5,025 |
| | $ | (3,284 | ) |
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Earnings (loss) per share: | | |
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Basic | | $ | 0.07 |
| | $ | (0.16 | ) | | $ | 0.12 |
| | $ | (0.01 | ) |
Diluted | | $ | 0.07 |
| | $ | (0.16 | ) | | $ | 0.12 |
| | $ | (0.01 | ) |
Weighted average shares outstanding, basic | | 49,133 |
| | 48,909 |
| | 49,100 |
| | 48,768 |
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Weighted average shares outstanding, diluted | | 49,959 |
| | 48,909 |
| | 49,869 |
| | 48,768 |
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See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
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| | Shares | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income, net of tax | | Total |
Balance, December 31, 2015 | | 48,475 |
| | $ | 32,776 |
| | $ | 256,747 |
| | $ | 415 |
| | $ | 289,938 |
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Net income (loss) | | — |
| | — |
| | (895 | ) | | — |
| | (895 | ) |
Other comprehensive gain (loss), net of tax | | — |
| | — |
| | — |
| | 6,373 |
| | 6,373 |
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Dividends declared ($0.25 per share) | | — |
| | — |
| | (12,228 | ) | | — |
| | (12,228 | ) |
Dividends reinvested in common stock | | 19 |
| | 524 |
| | — |
| | — |
| | 524 |
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Stock based compensation | | — |
| | 3,506 |
| | — |
| | — |
| | 3,506 |
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Stock options exercised | | 371 |
| | 3,359 |
| | — |
| | — |
| | 3,359 |
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Common stock issued for share awards | | 190 |
| | — |
| | — |
| | — |
| | — |
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Common stock issued | | 2 |
| | 14 |
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| | — |
| | 14 |
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Common stock issued to acquire non-controlling interests of nTelos | | 76 |
| | 10,400 |
| | — |
| | — |
| | 10,400 |
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Common stock repurchased | | (198 | ) | | (5,097 | ) | | — |
| | — |
| | (5,097 | ) |
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Balance, December 31, 2016 | | 48,935 |
| | $ | 45,482 |
| | $ | 243,624 |
| | $ | 6,788 |
| | $ | 295,894 |
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Net income (loss) | | — |
| | — |
| | 5,795 |
| | — |
| | 5,795 |
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Unrealized gain (loss) on interest rate hedge, net of tax | | — |
| | — |
| | — |
| | (770 | ) | | (770 | ) |
Stock based compensation | | — |
| | 3,557 |
| | — |
| | — |
| | 3,557 |
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Stock options exercised | | 295 |
| | 1,944 |
| | — |
| | — |
| | 1,944 |
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Common stock issued for share awards | | 153 |
| | — |
| | — |
| | — |
| | — |
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Common stock issued | | 1 |
| | 16 |
| | — |
| | — |
| | 16 |
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Common stock issued to acquire non-controlling interests of nTelos | | 76 |
| | — |
| | — |
| | — |
| | — |
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Common stock repurchased | | (195 | ) | | (7,091 | ) | | — |
| | — |
| | (7,091 | ) |
Balance, September 30, 2017 | | 49,265 |
| | $ | 43,908 |
| | $ | 249,419 |
| | $ | 6,018 |
| | $ | 299,345 |
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See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash Flows From Operating Activities | | | | |
Net income (loss) | | $ | 5,795 |
| | $ | (711 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
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Depreciation | | 113,437 |
| | 84,256 |
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Amortization reflected as operating expense | | 18,860 |
| | 12,705 |
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Amortization reflected as contra revenue | | 15,563 |
| | 8,883 |
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Amortization reflected as rent expense | | 2,173 |
| | — |
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Provision for bad debt | | 1,479 |
| | 1,278 |
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Straight line adjustment to management fee revenue | | 12,960 |
| | 7,687 |
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Stock based compensation expense | | 3,053 |
| | 2,570 |
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Deferred income taxes | | (12,251 | ) | | (57,196 | ) |
Net (gain) loss on disposal of equipment | | 80 |
| | (144 | ) |
Unrealized (gain) loss on investments | | (308 | ) | | (180 | ) |
Net (gains) loss from patronage and equity investments | | (2,315 | ) | | (497 | ) |
Amortization of debt issuance costs | | 3,572 |
| | 2,608 |
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Other | | — |
| | 1,634 |
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Changes in assets and liabilities: | | |
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(Increase) decrease in: | | |
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Accounts receivable | | 6,418 |
| | 7,903 |
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Inventory, net | | 31,604 |
| | (6,134 | ) |
Income taxes receivable | | (8,704 | ) | | 8,294 |
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Other assets | | (162 | ) | | 2,619 |
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Increase (decrease) in: | | |
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Accounts payable | | (30,795 | ) | | 3,551 |
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Income taxes payable | | (435 | ) | | 16,225 |
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Deferred lease payable | | 3,729 |
| | 2,728 |
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Other deferrals and accruals | | (5,048 | ) | | (2,633 | ) |
Net cash provided by (used in) operating activities | | $ | 158,705 |
| | $ | 95,446 |
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Cash Flows From Investing Activities | | |
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Acquisition of property, plant and equipment | | (109,435 | ) | | (102,850 | ) |
Proceeds from sale of assets | | 356 |
| | 287 |
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Cash distributions from investments | | 27 |
| | 2,796 |
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Additional contributions to investments | | (23 | ) | | — |
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Cash disbursed for acquisition, net of cash acquired | | (6,000 | ) | | (655,590 | ) |
Net cash provided by (used in) investing activities | | $ | (115,075 | ) | | $ | (755,357 | ) |
(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash Flows From Financing Activities | | | | |
Principal payments on long-term debt | | $ | (24,250 | ) | | $ | (207,816 | ) |
Amounts borrowed under debt agreements | | 25,000 |
| | 835,000 |
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Cash paid for debt issuance costs | | — |
| | (14,825 | ) |
Repurchases of common stock | | (5,106 | ) | | (5,097 | ) |
Proceeds from issuance of common stock | | — |
| | 3,368 |
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Net cash provided by (used in) financing activities | | $ | (4,356 | ) | | $ | 610,630 |
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Net increase (decrease) in cash and cash equivalents | | $ | 39,274 |
| | $ | (49,281 | ) |
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Cash and cash equivalents: | | |
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Beginning | | 36,193 |
| | 76,812 |
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Ending | | $ | 75,467 |
| | $ | 27,531 |
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Supplemental Disclosures of Cash Flow Information | | |
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Cash payments for: | | |
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Interest, net of capitalized interest of $1,266 and $909, respectively | | $ | 25,934 |
| | $ | 14,671 |
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Income taxes paid, net of refunds received | | $ | 19,567 |
| | $ | 23,851 |
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Non-cash investing and financing activities:
At September 30, 2017 and 2016, accounts payable included approximately $3.8 million and $14.2 million, respectively, associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.
During the nine months ended September 30, 2016, in conjunction with the acquisition of nTelos, the Company issued common stock to acquire non-controlling interests held by third parties in a subsidiary of nTelos. The transaction was valued at $10.4 million.
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, and related disclosures, as of the date of the financial statements, and the amounts of revenue and expenses reported during the period. Actual results could differ from estimates. The information contained herein should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The accompanying balance sheet information at December 31, 2016 was derived from the audited December 31, 2016 consolidated balance sheet. Operating revenues and income (loss) from operations for any interim period are not necessarily indicative of results that may be expected for the entire year.
Management has made an immaterial error correction to the accompanying prior period unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016 to decrease both the amount of net cash provided by operating activities and the amount of net cash used in investing activities by approximately 10.4 million to properly reflect the common stock issued (non-cash) by the Company to acquire non-controlling interests in a subsidiary of nTelos held by third parties in conjunction with the nTelos acquisition. This immaterial error correction had no effect on the net increase (decrease) in cash and cash equivalents for the period or the beginning or ending balance of cash and cash equivalents for the period.
Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's consolidated financial statements and note disclosures, from those disclosed in the Company's 2016 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, delaying the effective date of ASU 2014-09. Three other amendments have been issued during 2016 modifying the original ASU. As amended, the new standard is effective for the Company on January 1, 2018, using either a retrospective basis or a modified retrospective basis with early adoption permitted. The Company plans to adopt the standard effective January 1, 2018 using the modified retrospective transition approach; under this approach prior periods will not be retrospectively adjusted.
The Company is continuing to assess all potential impacts of the standard, including the impact to the pattern with which revenue and direct and contract fulfillment costs are recognized, the impact of the standard on current accounting policies, practices and system of internal controls, in order to identify material differences, if any that would result from applying the new requirements.
The Company is in the process of establishing new policies and processes, and is implementing necessary changes to data and procedures necessary to comply with the new requirements.
While continuing to assess all potential impacts of the standard, the Company believes the adoption will not have a significant effect on earnings however, the presentation of certain costs may change and disclosures will be impacted. The Company is still in the process of evaluating the impacts and the initial assessment may change.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. In addition to the presentation and disclosure requirements for financial instruments, ASU 2016-01 requires entities to measure equity investments, other than those accounted for under the equity method, at fair value and recognize changes in fair value in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values that do not qualify for the practical expedient to estimate fair value using net asset value per share, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Entities must record
a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted, except for equity investments without readily determinable fair values, for which the guidance will be applied prospectively. The guidance under ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017. The Company has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous generally accepted accounting principles. The ASU is effective for us on January 1, 2019, and early application is permitted. Modified retrospective application is required. The Company plans to adopt this standard when it becomes effective for the Company beginning January 1, 2019, and expects the adoption of this standard will result in the recognition of right of use assets and lease liabilities that have not previously been recorded, which will have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. The Company intends to adopt the standard retrospectively on the effective date of January 1, 2018 and does not expect the adoption of the ASU to have a material effect on cash flows.
In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements, nor does the Company expect to early adopt ASU 2017-07.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". This update is intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities. The ASU also simplifies the application of the hedge accounting guidance. ASU 2017-12 is effective on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the Consolidated Balance Sheet as of the beginning of the year of adoption, to the extent any ineffectiveness was previously recognized. The amendments to presentation guidance and disclosure requirements under this update are required to be adopted prospectively. The Company has not yet determined the effect of the ASU on our results of operations, financial condition or cash flows, nor has transition date been determined.
In September 2017, the FASB issued ASU No. 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)", which provided additional implementation guidance on the previously issued topics. The Company has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements.
Acquisition of NTELOS Holdings Corp. and Exchange with Sprint
On May 6, 2016, (the "acquisition date"), the Company completed its acquisition of NTELOS Holdings Corp. (nTelos). nTelos, was a regional provider of wireless telecommunications solutions and was acquired to expand the Company's wireless service area and subscriber base, thus strengthening the Company's relationship with Sprint Corporation (Sprint).
Pursuant to the terms of the Agreement and Plan of Merger between the Company and nTelos (the "Merger Agreement"), nTelos became a direct wholly owned subsidiary of the Company. Pursuant to the terms of the Merger Agreement, the Company acquired all of the issued and outstanding capital stock of nTelos for an aggregate purchase price of $667.8 million. The purchase price was financed by a credit facility arranged by CoBank, ACB, Royal Bank of Canada, Fifth Third Bank, Bank of America, N.A., Capital One, National Association, Citizens Bank N.A., and Toronto Dominion (Texas) LLC.
Transaction costs in connection with the acquisition were expensed as incurred and are included in integration and acquisition expenses in the condensed consolidated statement of operations. The results of operations related to nTelos are included in our consolidated statements of operations beginning from the date of acquisition.
The Company accounted for the acquisition of nTelos under the acquisition method of accounting, in accordance with FASB's Accounting Standards Codification (“ASC”) 805, “Business Combinations”, and has accounted for measurement period adjustments under ASU 2015-16, “Simplifying the Accounting for Measurement Period Adjustments”. Estimates of fair value included in the consolidated financial statements, in conformity with ASC 820, "Fair Value Measurements and Disclosures", represent the Company's best estimates and valuations. In accordance with ASC 805, "Business Combinations", the allocation of the consideration value was subject to adjustment until the Company completed its analysis, in a period of time, but not to exceed one year after the date of acquisition, or May 6, 2017, in order to provide the Company with the time to complete the valuation of its assets and liabilities. The Company has completed and finalized its analysis and allocation of the consideration value to assets acquired and liabilities assumed.
The following table summarizes the final purchase price allocation to assets acquired and liabilities assumed, including measurement period adjustments:
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| | | | | | | | | | | |
| Initial Estimate | | Measurement Period Adjustments | | Purchase Price Allocation |
Accounts receivable | $ | 48,476 |
| | $ | (1,242 | ) | | 47,234 |
|
Inventory | 3,810 |
| | 762 |
| | 4,572 |
|
Restricted cash | 2,167 |
| | — |
| | 2,167 |
|
Investments | 1,501 |
| | — |
| | 1,501 |
|
Prepaid expenses and other assets | 14,835 |
| | — |
| | 14,835 |
|
Building held for sale | 4,950 |
| | — |
| | 4,950 |
|
Property, plant and equipment | 223,900 |
| | 3,347 |
| | 227,247 |
|
Spectrum licenses (1), (2) | 198,200 |
| | — |
| | 198,200 |
|
Acquired subscribers - wireless (1), (2) | 198,200 |
| | 7,746 |
| | 205,946 |
|
Favorable lease intangible assets (2) | 11,000 |
| | 6,029 |
| | 17,029 |
|
Goodwill (3) | 151,627 |
| | (5,244 | ) | | 146,383 |
|
Other long term assets | 10,288 |
| | 555 |
| | 10,843 |
|
Total assets acquired | $ | 868,954 |
| | $ | 11,953 |
| | $ | 880,907 |
|
| |
| | |
| | |
|
Accounts payable | 8,648 |
| | (105 | ) | | 8,543 |
|
Advanced billings and customer deposits | 12,477 |
| | — |
| | 12,477 |
|
Accrued expenses | 25,230 |
| | (2,089 | ) | | 23,141 |
|
Capital lease liability | 418 |
| | — |
| | 418 |
|
Deferred tax liabilities | 124,964 |
| | 4,327 |
| | 129,291 |
|
Retirement benefits | 19,461 |
| | (263 | ) | | 19,198 |
|
Other long-term liabilities | 14,056 |
| | 6,029 |
| | 20,085 |
|
Total liabilities assumed | $ | 205,254 |
| | $ | 7,899 |
| | $ | 213,153 |
|
| |
| | |
| | |
|
Net assets acquired | $ | 663,700 |
| | $ | 4,054 |
| | $ | 667,754 |
|
| |
(1) | Concurrently with acquiring nTelos, the Company completed its previously announced transaction with SprintCom, Inc., a subsidiary of Sprint. Pursuant to this transaction, among other things, the Company exchanged spectrum licenses, valued at $198.2 million and acquired subscribers - wireless, valued at $206.0 million, acquired from nTelos with Sprint, and received an expansion of its affiliate service territory to include most of the service area served by nTelos, valued at $283.3 million, as well as additional acquired subscribers - wireless, valued at $120.9 million, relating to nTelos’ and Sprint’s legacy customers in the Company’s affiliate service territory. These exchanges were accounted for in accordance with ASC 845, “Nonmonetary Transactions”. The transfer of spectrum to Sprint resulted in a taxable gain to the Company which will be recognized as the Company recognizes the cash benefit of the waived management fees over the remaining approximately five years. |
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(2) | Identifiable intangible assets were measured using a combination of an income approach and a market approach. |
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(3) | Goodwill is the excess of the consideration transferred over the net assets recognized and represents the future economic benefits, primarily as a result of other assets acquired that could not be individually identified and separately recognized. The Company has recorded goodwill in its Wireless segment as a result of the nTelos acquisition. Goodwill is not amortized. The goodwill that arose from the acquisition of nTelos is not deductible for tax purposes. |
In addition to the changes in the balances reflected above, the Company revised provisional estimated useful lives of certain assets and recorded an adjustment to amortization expense of $0.1 million during the three months ended June 30, 2017, and recorded an adjustment during 2016 of $4.6 million to depreciation expense relating to the three months ended June 30, 2016.
Acquisition-related costs primarily related to legal services, professional services, and severance accruals, were expensed as incurred. For the three and nine months ended September 30, 2016, the Company incurred acquisition-related costs of $0.8 million and $15.9 million, respectively.
The amounts of operating revenue and income or loss before income taxes related to the former nTelos entity are not readily determinable due to intercompany transactions, allocations and integration activities that have occurred in connection with the operations of the combined company.
The following table presents pro forma information, based on estimates and assumptions that the Company believes to be reasonable, for the Company as if the acquisition of nTelos had occurred at the beginning of 2016: (in millions)
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| | | | | | | |
| Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
Operating revenues | $ | 157.8 |
| | $ | 492.1 |
|
Income (loss) before income taxes | $ | (13.4 | ) | | $ | (4.0 | ) |
The pro forma information provided in the table above is not necessarily indicative of the consolidated results of operations for future periods or the results that actually would have been realized had the acquisition been completed at the beginning of the periods presented.
The pro forma information provided in the table above is based upon estimated valuations of the assets acquired and liabilities assumed as well as estimates of depreciation and amortization charges thereon. Other estimated pro forma adjustments include the following:
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• | changes in nTelos' reported revenues from cancelling nTelos' wholesale contract with Sprint; |
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• | 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; |
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• | 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; |
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• | 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; |
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• | 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 |
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• | incremental amortization due to the Acquired subscribers - wireless intangible asset. |
In connection with the acquisition of nTelos, the Company incurs costs which include the nTelos back office staff and support functions until the nTelos legacy customers are migrated to the Sprint billing platform; costs of the handsets to be provided to nTelos legacy customers as they migrate to the Sprint billing platform; severance costs for back office and other former nTelos employees who will not be retained permanently; and costs to shut down certain cell sites and related backhaul contracts. The Company has incurred these costs as follows:
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| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Statement of Operations location: | 2017 | | 2016 | | 2017 | | 2016 |
Cost of goods and services | 0.1 |
| | 0.7 |
| | 0.3 |
| | 1.0 |
|
Selling, general and administrative | 1.1 |
| | 4.2 |
| | 5.2 |
| | 7.1 |
|
Integration and acquisition | 1.7 |
| | 15.3 |
| | 9.9 |
| | 35.8 |
|
Total | 2.9 |
| | 20.2 |
| | 15.4 |
| | 43.9 |
|
The value of the affiliate agreement expansion discussed above is based on changes to the amended affiliate agreement that include:
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• | an increase in the price to be paid by Sprint from 80% to 90% of the entire business value if the affiliate agreement is not renewed; |
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• | extension of the affiliate agreement with Sprint by five years to 2029; |
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• | expanded territory in the nTelos service area; |
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• | rights to serve all future Sprint customers in the affiliate service territory; |
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• | the Company's commitment to upgrade certain coverage and capacity in its newly acquired service area; and |
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• | a reduction of the management fee charged by Sprint under the amended affiliate agreement; not to exceed $4.2 million in an individual month until the total waived fee equals $251.8 million, as well as an additional waiver of the management fee charged with respect to the former nTelos customers until the earlier of migration to the Sprint back-office billing and related systems or six months following the acquisition; not to exceed $5.0 million. |
Intangible assets resulting from the acquisition of nTelos and the Sprint exchange, both described above, are noted below (in thousands):
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| | | | | |
| Useful Life | | Basis |
Affiliate contract expansion | 14 years | | $ | 283,302 |
|
Acquired subscribers - wireless | 4-10 years | | $ | 120,855 |
|
Favorable lease intangible assets | 10 years | | $ | 17,029 |
|
The affiliate contract expansion intangible asset is amortized on a straight-line basis and recorded as a contra-revenue over the remaining 14 year initial contract term. The Acquired subscribers rights - wireless intangible is amortized over the life of the customers, gradually decreasing over the expected life of this asset, and recorded through amortization expense. The favorable lease intangible assets are amortized on a straight-line basis and recorded through rent expense. The value of these intangible assets includes measurement period adjustments.
Acquisition of Expansion Area
On April 6, 2017, the Company expanded its affiliate service territory, under its agreements with Sprint, to include certain areas in North Carolina, Kentucky, Maryland, Ohio and West Virginia. The expanded territory includes the Parkersburg, WV, Huntington, WV, and Cumberland, MD, basic trading areas. Approximately 25,000 Sprint retail and former nTelos postpaid and prepaid subscribers in the new basic trading areas became Sprint-branded affiliate customers managed by the Company.
3. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
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| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Plant in service | | $ | 1,187,799 |
| | $ | 1,085,318 |
|
Plant under construction | | 67,099 |
| | 73,759 |
|
| | 1,254,898 |
| | 1,159,077 |
|
Less accumulated amortization and depreciation | | 571,543 |
| | 460,955 |
|
Net property, plant and equipment | | $ | 683,355 |
| | $ | 698,122 |
|
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4. | Earnings (loss) per share ("EPS") |
Basic net income (loss) per share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Diluted EPS was computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include stock options and restricted stock units and shares that the Company is contractually obligated to issue in the future.
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | | 2017 | | 2016 | | 2017 | | 2016 |
Basic income (loss) per share | | | | | | | | |
Net income (loss) | | $ | 3,534 |
| | $ | (7,596 | ) | | $ | 5,795 |
| | $ | (711 | ) |
Basic weighted average shares outstanding | | 49,133 |
| | 48,909 |
| | 49,100 |
| | 48,768 |
|
Basic income (loss) per share | | $ | 0.07 |
| | $ | (0.16 | ) | | $ | 0.12 |
| | $ | (0.01 | ) |
| | | | | | | | |
Effect of stock options and awards outstanding: | | | | | | | | |
Basic weighted average shares outstanding | | 49,133 |
| | 48,909 |
| | 49,100 |
| | 48,768 |
|
Effect from dilutive shares and options outstanding | | 826 |
| | — |
| | 769 |
| | — |
|
Diluted weighted average shares | | 49,959 |
| | 48,909 |
| | 49,869 |
| | 48,768 |
|
Diluted income (loss) per share | | $ | 0.07 |
| | $ | (0.16 | ) | | $ | 0.12 |
| | $ | (0.01 | ) |
Due to the net loss for the three and nine months ended September 30, 2016, no adjustment was made to basic shares, as such an adjustment would have been anti-dilutive.
The computation of diluted EPS does not include certain unvested awards, on a weighted average basis, because their inclusion would have an anti-dilutive effect on EPS. The awards excluded because of their anti-dilutive effect are as follows:
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| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive | | — |
| | 893 |
| | 94 |
| | 778 |
|
Investments include $3.3 million and $2.9 million of investments carried at fair value as of September 30, 2017 and December 31, 2016, respectively, consisting of equity, bond and money market mutual funds. Investments carried at fair value were acquired under a rabbi trust arrangement related to the Company’s nonqualified Supplemental Executive Retirement Plan (the “SERP”). The Company purchases investments in the trust to mirror the investment elections of participants in the SERP; gains and losses on the investments in the trust are reflected as increases or decreases in the liability owed to the participants. During the nine months ended September 30, 2017, the Company recognized $59 thousand in dividend and interest income from investments, and recorded net unrealized gains of $308 thousand on these investments. Fair values for these investments held under the rabbi trust were determined by Level 1 quoted market prices for the underlying mutual funds. Changes in carrying value of investments are recorded within gain on investments, net on the Statements of Operations and Comprehensive Income (Loss).
At September 30, 2017 and December 31, 2016, other investments, comprised of equity securities which do not have readily determinable fair values, consist of the following (in thousands):
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| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Cost method: | |
CoBank | $ | 6,644 |
| | $ | 6,177 |
|
Other – Equity in other telecommunications partners | 812 |
| | 742 |
|
| 7,456 |
| | 6,919 |
|
Equity method: | | | |
Other | 592 |
| | 450 |
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Total other investments | $ | 8,048 |
| | $ | 7,369 |
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Financial instruments on the condensed consolidated balance sheets that approximate fair value include: cash and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, interest rate swaps and variable rate long-term debt.
The Company has certain non-marketable long-term investments for which it is not practicable to estimate fair value with a total carrying value of $8.0 million and $7.4 million as of September 30, 2017 and December 31, 2016, respectively, of which $6.6 million and $6.2 million, respectively, represents the Company’s investment in CoBank. This investment is primarily related to patronage distributions of restricted equity and is a required investment related to the portion of the Credit Facility held by CoBank. This investment is carried under the cost method.
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7. | Derivative Instruments, Hedging Activities and Accumulated Other Comprehensive Income |
The Company’s objectives in using interest rate derivatives are to add stability to cash flows and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps (both those designated as cash flow hedges as well as those not designated as cash flow hedges) involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The Company entered into a pay-fixed, receive-variable interest rate swap of $174.6 million of notional principal in September 2012. This interest rate swap was designated as a cash flow hedge. The outstanding notional amount of this cash flow hedge was $122.2 million as of September 30, 2017. The outstanding notional amount decreases based upon scheduled principal payments on the 2012 debt.
In May 2016, the Company entered into a pay-fixed, receive-variable interest rate swap of $256.6 million of notional principal with three counterparties. This interest rate swap was designated as a cash flow hedge. The outstanding notional amount of this cash flow hedge was $303.8 million as of September 30, 2017. The outstanding notional amount increases based upon draws expected to be made under a portion of the Company's Term Loan A-2 debt and as the 2012 interest rate swap's notional principal decreases, and the outstanding notional amount will decrease as the Company makes scheduled principal payments on the 2016 debt. In combination with the swap entered into in 2012 described above, the Company is hedging approximately 50% of the outstanding debt.
The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings through interest expense. No hedge ineffectiveness was recognized during any of the periods presented.
Amounts reported in accumulated other comprehensive income related to the interest rate swaps designated and qualified as a cash flow hedge, are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 30, 2017, the Company estimates that $1.1 million will be reclassified as a reduction of interest expense during the next twelve months.
The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the condensed consolidated balance sheet (in thousands):
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| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Balance Sheet Location: | | |
| | |
|
Prepaid expenses and other | | $ | 1,124 |
| | $ | — |
|
Deferred charges and other assets, net | | 8,848 |
| | 12,118 |
|
Accrued liabilities and other | | — |
| | (895 | ) |
Total derivatives designated as hedging instruments | | $ | 9,972 |
| | $ | 11,223 |
|
The fair value of interest rate swaps is determined using a pricing model with inputs that are observable in the market (level 2 fair value inputs).
The table below presents change in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2017 (in thousands):
|
| | | | | | | | | | | | |
| | Gains (Losses) on Cash Flow Hedges | | Income Tax Expense | | Accumulated Other Comprehensive Income (Loss), net of taxes |
Balance as of December 31, 2016 | | $ | 11,223 |
| | $ | (4,435 | ) | | $ | 6,788 |
|
Net change in unrealized gain (loss) | | (1,789 | ) | | 698 |
| | (1,091 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) to interest expense | | 538 |
| | (217 | ) | | 321 |
|
Net current period accumulated other comprehensive income (loss) | | (1,251 | ) | | 481 |
| | (770 | ) |
Balance as of September 30, 2017 | | $ | 9,972 |
| | $ | (3,954 | ) | | $ | 6,018 |
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8. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill during the nine months ended September 30, 2017 are shown below (in thousands):
|
| | | | | | | | | | | |
| December 31, 2016 | | Measurement Period Adjustments | | September 30, 2017 |
Goodwill - Wireline segment | $ | 10 |
| | $ | — |
| | $ | 10 |
|
Goodwill - Cable segment | 104 |
| | — |
| | 104 |
|
Goodwill - Wireless segment | 145,142 |
| | 1,241 |
| | 146,383 |
|
Goodwill as of September 30, 2017 | $ | 145,256 |
| | $ | 1,241 |
| | $ | 146,497 |
|
Intangible assets consist of the following at September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Non-amortizing intangibles: | | | | | | | | | | | |
Cable franchise rights | $ | 64,335 |
| | $ | — |
| | $ | 64,335 |
| | $ | 64,334 |
| | $ | — |
| | $ | 64,334 |
|
Railroad crossing rights | 140 |
| | — |
| | 140 |
| | 97 |
| | — |
| | 97 |
|
| 64,475 |
| | — |
| | 64,475 |
| | 64,431 |
| | — |
| | 64,431 |
|
| | | | | | | | | | | |
Finite-lived intangibles: |
Affiliate contract expansion | 287,052 |
| | (29,593 | ) | | 257,459 |
| | 284,102 |
| | (14,030 | ) | | 270,072 |
|
Acquired subscribers – wireless | 123,105 |
| | (36,871 | ) | | 86,234 |
| | 120,855 |
| | (18,738 | ) | | 102,117 |
|
Favorable leases - wireless | 16,950 |
| | (3,985 | ) | | 12,965 |
| | 16,950 |
| | (1,130 | ) | | 15,820 |
|
Acquired subscribers – cable | 25,265 |
| | (25,059 | ) | | 206 |
| | 25,265 |
| | (24,631 | ) | | 634 |
|
Other intangibles | 563 |
| | (230 | ) | | 333 |
| | 2,212 |
| | (754 | ) | | 1,458 |
|
Total finite-lived intangibles | 452,935 |
| | (95,738 | ) | | 357,197 |
| | 449,384 |
| | (59,283 | ) | | 390,101 |
|
Total intangible assets | $ | 517,410 |
| | $ | (95,738 | ) | | $ | 421,672 |
| | $ | 513,815 |
| | $ | (59,283 | ) | | $ | 454,532 |
|
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9. | Accrued and Other liabilities |
Accrued liabilities and other include the following (in thousands):
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Sales and property taxes payable | | $ | 4,409 |
| | $ | 6,628 |
|
Severance accrual | | 1,889 |
| | 4,267 |
|
Asset retirement obligations, current portion | | 823 |
| | 5,841 |
|
Accrued programming costs | | 2,856 |
| | 2,939 |
|
Other current liabilities | | 5,300 |
| | 9,410 |
|
Accrued liabilities and other | | $ | 15,277 |
| | $ | 29,085 |
|
Other liabilities include the following (in thousands):
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Non-current portion of deferred revenues | | $ | 14,111 |
| | $ | 8,933 |
|
Straight-line management fee waiver | | 24,934 |
| | 11,974 |
|
Other | | 1,135 |
| | 2,836 |
|
Other liabilities | | $ | 40,180 |
| | $ | 23,743 |
|
10. Long-Term Debt and Revolving Lines of Credit
Total debt at September 30, 2017 and December 31, 2016 consists of the following:
|
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Term loan A-1 | | $ | 448,625 |
| | $ | 472,875 |
|
Term loan A-2 | | 400,000 |
| | 375,000 |
|
| | 848,625 |
| | 847,875 |
|
Less: unamortized loan fees | | 15,623 |
| | 18,610 |
|
Total debt, net of unamortized loan fees | | $ | 833,002 |
| | $ | 829,265 |
|
| | | | |
Current maturities of long term debt, net of unamortized loan fees | | $ | 54,316 |
| | $ | 32,041 |
|
Long-term debt, less current maturities, net of unamortized loan fees | | $ | 778,686 |
| | $ | 797,224 |
|
As of September 30, 2017, our indebtedness totaled $848.6 million in term loans with an annualized effective interest rate of approximately 4.07% after considering the impact of the interest rate swap contract and unamortized loan costs. The balance consists of the $448.6 million Term Loan A-1 at a variable rate (3.99% as of September 30, 2017) that resets monthly based on one month LIBOR plus a margin of 2.75%, and the $400.0 million Term Loan A-2 at a variable rate (4.24% as of September 30, 2017) that resets monthly based on one month LIBOR plus a margin of 3.00%. The Term Loan A-1 requires quarterly principal repayments of $12.1 million through June 30, 2020, with further increases at that time through maturity in June 30, 2021. The Term Loan A-2 requires quarterly principal repayments of $10.0 million beginning on September 30, 2018 through March 31, 2023, with the remaining balance due June 30, 2023.
The Company is subject to certain covenants to be measured on a trailing twelve month basis each calendar quarter unless otherwise specified. These covenants include:
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• | 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; |
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• | 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; |
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• | the Company must maintain a minimum liquidity balance, defined as availability under the revolver facility plus unrestricted cash and cash equivalents on deposit in a deposit account for which a control agreement has been delivered to the administrative agent under the 2016 credit agreement, of greater than $25 million at all times. |
As shown below, as of September 30, 2017, the Company was in compliance with the covenants in its credit agreements.
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| | | | | |
| Actual | | Covenant Requirement |
Total Leverage Ratio | 2.93 |
| | 3.75 or Lower |
Debt Service Coverage Ratio | 3.88 |
| | 2.00 or Higher |
Minimum Liquidity Balance | $ | 149,228 |
| | $25 million or Higher |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker. The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Cable, and (3) Wireline. A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.
The Wireless segment provides digital wireless service as a PCS affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, along Interstate 81 to Harrisonburg, Virginia, south-central and western Virginia, West Virginia, and small portions of North Carolina, Kentucky, Maryland and Ohio. The Wireless segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
The Cable segment provides video, internet and voice services in Virginia, West Virginia and Maryland, and leases fiber optic facilities throughout southern Virginia and West Virginia. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.
The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video and cable modem services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of central and southern Pennsylvania.
Three Months Ended September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 107,395 |
| | $ | 26,934 |
| | $ | 5,126 |
| | $ | — |
| | $ | — |
| | $ | 139,455 |
|
Other | | 3,871 |
| | 2,156 |
| | 6,300 |
| | — |
| | — |
| | 12,327 |
|
Total external revenues | | 111,266 |
| | 29,090 |
| | 11,426 |
| | — |
| | — |
| | 151,782 |
|
Internal revenues | | 1,239 |
| | 999 |
| | 8,425 |
| | — |
| | (10,663 | ) | | — |
|
Total operating revenues | | 112,505 |
| | 30,089 |
| | 19,851 |
| | — |
| | (10,663 | ) | | 151,782 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of goods and services, exclusive of depreciation and amortization shown separately below | | 41,041 |
| | 14,913 |
| | 9,807 |
| | — |
| | (9,927 | ) | | 55,834 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 30,099 |
| | 5,358 |
| | 1,706 |
| | 5,772 |
| | (736 | ) | | 42,199 |
|
Integration and acquisition expenses | | 1,691 |
| | — |
| | — |
| | 15 |
| | — |
| | 1,706 |
|
Depreciation and amortization | | 32,929 |
| | 6,192 |
| | 3,249 |
| | 198 |
| | — |
| | 42,568 |
|
Total operating expenses | | 105,760 |
| | 26,463 |
| | 14,762 |
| | 5,985 |
| | (10,663 | ) | | 142,307 |
|
Operating income (loss) | | $ | 6,745 |
| | $ | 3,626 |
| | $ | 5,089 |
| | $ | (5,985 | ) | | $ | — |
| | $ | 9,475 |
|
Three Months Ended September 30, 2016
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 111,001 |
| | $ | 24,948 |
| | $ | 4,948 |
| | $ | — |
| | $ | — |
| | $ | 140,897 |
|
Other | | 7,978 |
| | 2,031 |
| | 5,930 |
| | — |
| | — |
| | 15,939 |
|
Total external revenues | | 118,979 |
| | 26,979 |
| | 10,878 |
| | — |
| | — |
| | 156,836 |
|
Internal revenues | | 1,140 |
| | 587 |
| | 7,854 |
| | — |
| | (9,581 | ) | | — |
|
Total operating revenues | | 120,119 |
| | 27,566 |
| | 18,732 |
| | — |
| | (9,581 | ) | | 156,836 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of goods and services, exclusive of depreciation and amortization shown separately below | | 43,097 |
| | 14,654 |
| | 9,442 |
| | — |
| | (8,876 | ) | | 58,317 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 29,892 |
| | 4,770 |
| | 1,676 |
| | 4,736 |
| | (705 | ) | | 40,369 |
|
Integration and acquisition expenses | | 14,499 |
| | — |
| | — |
| | 773 |
| | — |
| | 15,272 |
|
Depreciation and amortization | | 38,038 |
| | 5,860 |
| | 2,822 |
| | 87 |
| | — |
| | 46,807 |
|
Total operating expenses | | 125,526 |
| | 25,284 |
| | 13,940 |
| | 5,596 |
| | (9,581 | ) | | 160,765 |
|
Operating income (loss) | | $ | (5,407 | ) | | $ | 2,282 |
| | $ | 4,792 |
| | $ | (5,596 | ) | | $ | — |
| | $ | (3,929 | ) |
Nine Months Ended September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 323,262 |
| | $ | 80,229 |
| | $ | 15,301 |
| | $ | — |
| | $ | — |
| | $ | 418,792 |
|
Other | | 15,133 |
| | 6,283 |
| | 18,712 |
| | — |
| | — |
| | 40,128 |
|
Total external revenues | | 338,395 |
| | 86,512 |
| | 34,013 |
| | — |
| | — |
| | 458,920 |
|
Internal revenues | | 3,707 |
| | 2,153 |
| | 24,568 |
| | | | (30,428 | ) | | — |
|
Total operating revenues | | 342,102 |
| | 88,665 |
| | 58,581 |
| | — |
| | (30,428 | ) | | 458,920 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of goods and services, exclusive of depreciation and amortization shown separately below | | 117,829 |
| | 45,052 |
| | 28,409 |
| | — |
| | (28,314 | ) | | 162,976 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 88,201 |
| | 15,083 |
| | 5,065 |
| | 19,139 |
| | (2,114 | ) | | 125,374 |
|
Integration and acquisition expenses | | 9,607 |
| | — |
| | — |
| | 266 |
| | — |
| | 9,873 |
|
Depreciation and amortization | | 104,231 |
| | 18,070 |
| | 9,536 |
| | 460 |
| | — |
| | 132,297 |
|
Total operating expenses | | 319,868 |
| | 78,205 |
| | 43,010 |
| | 19,865 |
| | (30,428 | ) | | 430,520 |
|
Operating income (loss) | | $ | 22,234 |
| | $ | 10,460 |
| | $ | 15,571 |
| | $ | (19,865 | ) | | $ | — |
| | $ | 28,400 |
|
Nine Months Ended September 30, 2016
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Wireless | | Cable | | Wireline | | Other | | Eliminations | | Consolidated Totals |
External revenues | | | | | | | | | | | | |
Service revenues | | $ | 250,053 |
| | $ | 73,455 |
| | $ | 14,727 |
| | $ | — |
| | $ | — |
| | $ | 338,235 |
|
Other | | 17,461 |
| | 5,799 |
| | 18,221 |
| | — |
| | — |
| | 41,481 |
|
Total external revenues | | 267,514 |
| | 79,254 |
| | 32,948 |
| | — |
| | — |
| | 379,716 |
|
Internal revenues | | 3,417 |
| | 1,159 |
| | 22,754 |
| | — |
| | (27,330 | ) | | — |
|
Total operating revenues | | 270,931 |
| | 80,413 |
| | 55,702 |
| | — |
| | (27,330 | ) | | 379,716 |
|
| | | | | | | | | | | | |
Operating expenses | | |
| | |
| | |
| | |
| | |
| | |
|
Costs of goods and services, exclusive of depreciation and amortization shown separately below | | 94,892 |
| | 43,864 |
| | 26,892 |
| | — |
| | (25,294 | ) | | 140,354 |
|
Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | 65,219 |
| | 14,672 |
| | 4,951 |
| | 13,457 |
| | (2,036 | ) | | 96,263 |
|
Integration and acquisition expenses | | 19,889 |
| | — |
| | — |
| | 15,912 |
| | — |
| | 35,801 |
|
Depreciation and amortization | | 70,026 |
| | 17,834 |
| | 8,789 |
| | 312 |
| | — |
| | 96,961 |
|
Total operating expenses | | 250,026 |
| | 76,370 |
| | 40,632 |
| | 29,681 |
| | (27,330 | ) | | 369,379 |
|
Operating income (loss) | | $ | 20,905 |
| | $ | 4,043 |
| | $ | 15,070 |
| | $ | (29,681 | ) | | $ | — |
| | $ | 10,337 |
|
A reconciliation of the total of the reportable segments’ operating income (loss) to consolidated income (loss) before taxes is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Total consolidated operating income (loss) | | $ | 9,475 |
| | $ | (3,929 | ) | | $ | 28,400 |
| | $ | 10,337 |
|
Interest expense | | (9,823 | ) | | (8,845 | ) | | (28,312 | ) | | (16,369 | ) |
Non-operating income, net | | 1,205 |
| | 1,527 |
| | 3,877 |
| | 3,147 |
|
Income (loss) before income taxes | | $ | 857 |
| | $ | (11,247 | ) | | $ | 3,965 |
| | $ | (2,885 | ) |
The Company files U.S. federal income tax returns and various state and local income tax returns. With few exceptions, years prior to 2013 are no longer subject to examination; net operating losses acquired in the nTelos acquisition are open to examination from 2002 forward. The Company is not subject to any state or federal income tax audits as of September 30, 2017.
The effective tax rate has fluctuated in recent periods due to the minimal base of pre-tax earnings or losses and has been further impacted by the impact of share based compensation tax benefits which are recognized as incurred under the provisions of ASC 740, "Income Taxes".
13. Related Party Transactions
ValleyNet, an equity method investee of the Company, resells capacity on the Company’s fiber network under an operating lease agreement. Additionally, the Company's PCS operating subsidiary leases capacity through ValleyNet.
The following tables summarize the financial statement impact from related party transactions with ValleyNet (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Statement of Operations and Comprehensive Income (Loss) | | 2017 | | 2016 | | 2017 | | 2016 |
Facility Lease Revenue | | $ | 506 |
| | $ | 560 |
| | $ | 1,664 |
| | $ | 1,809 |
|
Costs of Goods and Services | | 951 |
| | 858 |
| | 2,699 |
| | 2,162 |
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | | | |
Consolidated Balance Sheet | | | | | | | | |
Accounts Receivable related to ValleyNet | | $ | 181 |
| | |