Document
 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from__________ to __________

Commission File No.: 000-09881
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12228234&doc=11
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA
 
54-1162807
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐    No  ☑
 
The number of shares of the registrant’s common stock outstanding on April 27, 2018 was 49,539,170. 
 




SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX

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



Index



SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
49,448

 
$
78,585

Accounts receivable, net
 
51,095

 
54,184

Income taxes receivable
 
8,360

 
17,311

Inventory, net
 
8,161

 
5,704

Prepaid expenses and other
 
64,200

 
17,111

Total current assets
 
181,264

 
172,895

Investments, including $3,268 and $3,279 carried at fair value
 
11,717

 
11,472

Property, plant and equipment, net
 
672,017

 
686,327

Other Assets:
 
 

 
 

Intangible assets, net
 
413,537

 
380,979

Goodwill
 
146,497

 
146,497

Deferred charges and other assets, net
 
33,934

 
13,690

Total assets
 
$
1,458,966

 
$
1,411,860

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
 
$
74,486

 
$
64,397

Accounts payable
 
27,194

 
28,953

Advanced billings and customer deposits
 
6,919

 
21,153

Accrued compensation
 
4,534

 
9,167

Accrued liabilities and other
 
17,471

 
13,914

Total current liabilities
 
130,604

 
137,584

Long-term debt, less current maturities, net of unamortized loan fees
 
736,387

 
757,561

Other Long-Term Liabilities:
 
 

 
 

Deferred income taxes
 
115,809

 
100,879

Deferred lease
 
19,543

 
15,782

Asset retirement obligations
 
21,164

 
21,211

Retirement plan obligations
 
13,236

 
13,328

Other liabilities
 
13,787

 
15,293

Total other long-term liabilities
 
183,539

 
166,493

Shareholders’ Equity:
 
 

 
 

Common stock, no par value, authorized 96,000 shares; issued and outstanding 49,539 shares in 2018 and 49,328 shares in 2017.
 
45,075

 
44,787

Retained earnings
 
352,069

 
297,205

Accumulated other comprehensive income (loss), net of taxes
 
11,292

 
8,230

Total shareholders’ equity
 
408,436

 
350,222

Total liabilities and shareholders’ equity
 
$
1,458,966

 
$
1,411,860


See accompanying notes to unaudited condensed consolidated financial statements.

3

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
 
 
 
Service revenues and other
 
$
134,153

 
$
150,521

Equipment revenues
 
17,579

 
3,359

Total operating revenues
 
151,732

 
153,880

 
 
 
 
 
Operating expenses:
 
 

 
 

Cost of services
 
49,342

 
48,776

Cost of goods sold
 
15,805

 
4,985

Selling, general and administrative
 
28,750

 
40,153

Acquisition, integration and migration expenses
 

 
4,489

Depreciation and amortization
 
43,487

 
44,804

Total operating expenses
 
137,384

 
143,207

Operating income (loss)
 
14,348

 
10,673

 
 
 
 
 
Other income (expense):
 
 

 
 

Interest expense
 
(9,332
)
 
(9,100
)
Gain (loss) on investments, net
 
(32
)
 
120

Non-operating income (loss), net
 
1,021

 
1,255

Income (loss) before income taxes
 
6,005

 
2,948

 
 
 
 
 
Income tax expense (benefit)
 
1,176

 
607

Net income (loss)
 
4,829

 
2,341

 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

Unrealized gain (loss) on interest rate hedge, net of tax
 
3,062

 
599

Comprehensive income (loss)
 
$
7,891

 
$
2,940

 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

Basic
 
$
0.10

 
$
0.05

Diluted
 
$
0.10

 
$
0.05

Weighted average shares outstanding, basic
 
49,474

 
49,050

Weighted average shares outstanding, diluted
 
50,024

 
49,834

 
See accompanying notes to unaudited condensed consolidated financial statements.


4

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
  
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance, December 31, 2017
 
49,328

 
$
44,787

 
$
297,205

 
$
8,230

 
$
350,222

 
 
 
 
 
 
 
 
 
 


Change in accounting principle - adoption of accounting standard (Note 2)
 

 

 
50,035

 

 
50,035

Net income (loss)
 

 

 
4,829

 

 
4,829

Other comprehensive gain (loss), net of tax of $1.1 million
 

 

 

 
3,062

 
3,062

Stock based compensation
 
177

 
2,037

 

 

 
2,037

Stock options exercised
 
15

 
104

 

 

 
104

Common stock issued
 

 
5

 

 

 
5

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(57
)
 
(1,858
)
 

 

 
(1,858
)
Common stock issued to acquire non-controlling interests of nTelos
 
76

 

 

 

 

Balance, March 31, 2018
 
49,539

 
$
45,075

 
$
352,069

 
$
11,292

 
$
408,436


See accompanying notes to unaudited condensed consolidated financial statements.


5

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
 
Net income (loss)
 
$
4,829

 
$
2,341

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

 
 

Depreciation
 
36,634

 
37,878

Amortization reflected as operating expense
 
6,853

 
6,926

Amortization reflected as rent expense
 
81

 
258

Bad debt expense
 
369

 
420

Stock based compensation expense, net of amount capitalized
 
2,037

 
1,566

Waived Management Fee
 
9,048

 
9,184

Deferred income taxes
 
(4,336
)
 
(2,910
)
Net (gain) loss on disposal of equipment
 
(4
)
 
(28
)
(Gain) loss on investments
 
33

 
(120
)
Net (gain) loss from patronage and equity investments
 
(830
)
 
(200
)
Amortization of long-term debt issuance costs
 
1,129

 
1,202

Accrued interest on long-term debt
 
296

 
93

Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
3,271

 
1,629

Inventory, net
 
(2,457
)
 
14,188

Income taxes receivable
 
8,950

 

Other assets
 
(4,076
)
 
(190
)
Accounts payable
 
216

 
(39,399
)
Income taxes payable
 

 
3,523

Deferred lease
 
736

 
1,331

Other deferrals and accruals
 
(1,919
)
 
(13,194
)
Net cash provided by (used in) operating activities
 
$
60,860

 
$
24,498

Cash Flows From Investing Activities
 
 

 
 

Acquisition of property, plant and equipment
 
(24,382
)
 
(38,587
)
Proceeds from sale of assets
 
263

 
117

Cash distributions (contributions) from investments
 
1

 
(11
)
Sprint expansion
 
(52,000
)
 

Net cash provided by (used in) investing activities
 
$
(76,118
)
 
$
(38,481
)
Cash Flows From Financing Activities
 
 
 
 
Principal payments on long-term debt
 
$
(12,125
)
 
$
(6,062
)
Proceeds from credit facility borrowings
 

 
25,000

Proceeds from revolving credit facility borrowings
 
15,000

 

Principal payments on revolving credit facility
 
(15,000
)
 

Taxes paid for equity award issuances
 
(1,754
)
 
(1,226
)
Proceeds from issuance of common stock
 

 
5

Net cash provided by (used in) financing activities
 
$
(13,879
)
 
$
17,717

Net increase (decrease) in cash and cash equivalents
 
$
(29,137
)
 
$
3,734

Cash and cash equivalents, beginning of period
 
78,585

 
36,193

Cash and cash equivalents, end of period
 
$
49,448

 
$
39,927

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash payments for:
 
 
 
 
Interest, net of capitalized interest of $309 and $577, respectively
 
$
8,513

 
$
8,380

Income tax refunds received, net of taxes paid
 
$
(3,439
)
 
$

Capital expenditures payable
 
$
5,279

 
$
6,366


See accompanying notes to unaudited condensed consolidated financial statements.

6

Index

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

Note 1. Basis of Presentation

The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The 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, 2017.

Adoption of New Accounting Principles

There have been no developments related to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's unaudited condensed consolidated financial statements and note disclosures, from those disclosed in the Company's 2017 Annual Report on Form 10-K, that would be expected to impact the Company except for the topics discussed below.

The Company adopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), and all related amendments, effective January 1, 2018, using the modified retrospective method as discussed in Note 2, Revenue from Contracts with Customers. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been retrospectively modified and continues to be reported under the accounting standards in effect for those periods.

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for all leases with terms greater than 12 months. The standard also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases, 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 the Company on January 1, 2019, and early application is permitted.  Modified retrospective application is required.   In September 2017 and January 2018, 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), and ASU No. 2018-01, Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842, which provided additional implementation guidance on the previously issued ASU. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements. The Company is in the early stages of implementation and currently believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and a lease liability for its real estate and equipment leases.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted. The Company is currently evaluating the timing and impact of adopting ASU 2018-02.










7

Index

Note 2. Revenue from Contracts with Customers

The Company earns revenue primarily through the sale of our wireless telecommunications services, wireless equipment, and business, residential, and enterprise cable and wireline services that include video, internet, voice, and data services as follows:
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Consolidated
Wireless service
 
$
89,760

 
$

 
$

 
$
89,760

Wireless equipment
 
17,374

 

 

 
17,374

Business, residential and enterprise
 

 
29,131

 
10,691

 
39,822

Tower
 
2,896

 
1,046

 
5,665

 
9,607

Other
 
368

 
1,534

 
3,351

 
5,253

Total revenue
 
110,398

 
31,711

 
19,707

 
161,816

Internal revenues
 
(1,239
)
 
(1,031
)
 
(7,814
)
 
(10,084
)
Total operating revenue
 
$
109,159

 
$
30,680

 
$
11,893

 
$
151,732


Wireless service
The majority of the Company's revenue is earned through providing network access to Sprint under the affiliate agreement, which represents approximately 59% of consolidated revenues. Wireless service revenue is variable based on billed revenues to Sprint’s subscribers in the Company's affiliate area, less applicable fees retained by Sprint. The Company's fee related to Sprint’s postpaid customers is the amount Sprint bills its subscribers that is reduced by customer credits, write-offs of subscriber receivables, and an 8% management and 8.6% service fee retained by Sprint. The Company is also charged for the costs of subsidized handsets sold through Sprint’s national channels as well as commissions paid by Sprint to third-party resellers in the Company's service territory. 

The Company's fee related to Sprint’s prepaid customers is the amount Sprint bills its customer less certain charges to acquire and support the customer, based on national averages for Sprint’s prepaid programs. Sprint retains a 6% management fee on prepaid wireless revenues, and costs to provide support to Sprint’s prepaid customers.

The Company considers Sprint, rather than Sprint's subscribers, to be the customer under the new revenue standard and the Company's performance obligation is to provide Sprint a series of continuous network access services. Under Topic 606, the Company's revenues are variable based on the amount Sprint bills its customer each month reduced by the retained management and service fees. The reimbursement to Sprint for the costs of subsidized handsets sold through Sprint’s national channels, as well as commissions paid by Sprint to third-party resellers in our service territory represent consideration payable to a customer that is not in exchange for a distinct service under Topic 606. Therefore, these reimbursements result in increases to our contract asset position that are subsequently recognized as a reduction of revenue over the average subscriber life of approximately two years which is the period the Company expects those payments to result in increased revenues. Historically, under ASC 605 the customer was considered the Sprint subscriber rather than Sprint and as a result, reimbursement payments to Sprint for costs of subsidized handsets and commissions were recorded as operating expenses in the period incurred. During 2017, these costs totaled $63.5 million recorded in cost of goods and services, and $16.9 million recorded in selling, general and administrative costs. On January 1, 2018, upon adoption, the Company recorded a wireless contract asset of approximately $42.8 million. During the three month period ended March 31, 2018, payments that increased the wireless contract asset balance totaled $13.8 and amortization reflected as a reduction of revenue totaled approximately $13.4 million. The wireless contract asset balance as of March 31, 2018 was approximately$43.2 million.

Wireless equipment
The Company owns and operates Sprint-branded retail stores within their geographic territory from which the Company sells equipment, primarily wireless handsets, and service to Sprint subscribers. Equipment is generally purchased from Sprint and resold to subscribers under subsidized plans or under equipment financing plans. The equipment financing plans are operated by Sprint who purchases equipment from the Company and resells the equipment to subscribers under financing plans. Historically, under ASC 605, the Company concluded that the Company was the agent in these equipment financing transactions and recorded revenues net of related handset costs which were approximately $63.8 million in 2017. Under Topic 606 the Company concluded that the Company is the principal in the transaction as the Company controls the inventory prior to sale and accordingly revenues and handset costs are recorded on a gross basis.

Business, residential and enterprise
The Company earns revenue in the cable and wireline segments from business, residential, and enterprise customers where the performance obligations are to provide cable and telephone network services, sell and lease equipment and wiring services, and

8

Index

lease fiber-optic cable strands. The Company's arrangements are generally composed of contracts that are cancellable at the customer’s discretion without penalty at any time. As there are multiple performance obligations in these arrangements, the Company recognizes revenue based on the standalone selling price of each distinct good or service. The Company generally recognized these revenues over time as customers simultaneously receive and consume the benefits of the service, with the exception of equipment sales and home wiring which are recognized as revenue at a point in time when control transfers and when installation is complete, respectively.

Under Topic 606, the Company concluded that installation services do not represent a separate performance obligation. Accordingly, installation fees are allocated to services and are recognized ratably over the longer of the contract term or the period the unrecognized portion of the fee remains material to the contract, typically 10 and 11 months for cable and wireline customers, respectively. Historically, the Company deferred these fees over the estimated customer life of 42 months. Additionally, the Company incurs commission and installation costs related to in-house and third-party vendors that were previously expensed as incurred. Under Topic 606, the Company capitalizes and amortizes these commission and installation costs over the expected benefit period which is approximately 44 months, 72 months, and 46 months, for cable, wireline, and enterprise business, respectively.

Tower / Other
Tower revenues consist primarily of tower space leases accounted for under Topic 840, Leases, and Other revenues include network access-related charges to for service provided to customers across all three operating segments.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows:
(in thousands)
 
Balance at December 31, 2017
 
Adjustments due to Topic 606
 
Balance at January 1, 2018
Assets
 
 
 
 
 
 
Prepaid expenses and other
 
$
17,111

 
$
36,577

 
$
53,688

Deferred charges and other
 
13,690

 
16,107

 
29,797

Liabilities
 
 
 
 
 
 
Advanced billing and customer deposits
 
$
21,153

 
$
(14,302
)
 
$
6,851

Deferred income taxes
 
100,879

 
18,151

 
119,030

Other long-term liabilities
 
15,293

 
(1,200
)
 
14,093

Retained earnings
 
297,205

 
50,035

 
347,240


In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet was as follows:
 
 
Three Months Ended March 31, 2018
(in thousands)
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change Higher/(Lower)
Operating revenues
 
$
151,732

 
$
155,871

 
$
(4,139
)
Operating expenses:
 
 
 
 
 
 
   Cost of services
 
49,342

 
49,199

 
143

   Cost of goods sold
 
15,805

 
6,118

 
9,687

   Selling, general and administrative
 
28,750

 
42,968

 
(14,218
)


9

Index

 
 
Three Months Ended March 31, 2018
(in thousands)
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change Higher/(Lower)
Assets
 
 
 
 
 
 
Prepaid expenses and other
 
64,200

 
27,086

 
37,114

Deferred charges and other
 
33,934

 
18,115

 
15,819

Liabilities
 
 
 
 
 
 
Deferred income taxes
 
115,809

 
97,591

 
18,218

Advanced billing and customer deposits
 
6,919

 
21,221

 
(14,302
)
Other long-term liabilities
 
13,787

 
14,987

 
(1,200
)
Retained earnings
 
352,069

 
301,852

 
50,217

Remaining performance obligations and transaction price allocated
On March 31, 2018, the Company had approximately $2.5 million of transaction price allocated to unsatisfied performance obligations, which is exclusive of contracts with original expected duration of one year or less. The Company expects to recognize approximately $0.5 million of this amount as revenue during the remaining three quarters of 2018, $0.5 million in 2019, an additional $0.4 million by 2020, and the balance thereafter.
Contract acquisition costs and costs to fulfill contracts
Capitalized contract costs represent contract fulfillment costs and contract acquisition costs which include commissions and installation costs in our cable and wireline segments. Capitalized contract costs are amortized on a straight line basis over the contract term plus expected renewals. The Company applies the practical expedient to expense contract acquisition costs when incurred if the amortization period would be twelve months or less. The amortization of these costs is included in cost of services, and selling, general and administrative expenses. Amounts capitalized were approximately $9.7 million as of March 31, 2018 of which $4.6 million is presented as prepaid expenses and other and $5.1 million is presented as deferred charges and other assets, net. Amortization recognized during the three-month period ended at March 31, 2018 was approximately $1.3 million. There was no impairment loss in relation to the costs capitalized.

Note 3. Acquisition

Sprint Territory Expansion: Effective February 1, 2018, the Company signed an expansion agreement with Sprint to expand our wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia, (the “Expansion Area”). The agreement includes certain network build out requirements in the Expansion Area, and the ability to utilize Sprint’s spectrum in the Expansion Area. Pursuant to the expansion agreement, Sprint agreed to, among other things, transition the provision of network coverage in the Expansion Area from Sprint to the Company. The Expansion Agreement required a payment of $52.0 million for the right to service the Expansion Area pursuant to the Affiliate Agreements plus an optional payment of up to $5.0 million for certain equipment at the Sprint cell sites in the Expansion Area. The option is exercisable at the Company's discretion. The acquisition was accounted for as an asset acquisition.

The Company recorded the following in the wireless segment:
($ in thousands)
 
Estimated Useful Life
 
February 1, 2018
Affiliate Contract Expansion
 
12
 
$
45,148

Option to acquire tangible assets
 
 
6,497

Off-market leases - favorable
 
16.5*
 
3,665

Off-market leases - unfavorable
 
4.2*
 
(3,310
)
Total
 
 
 
$
52,000

*Estimated useful lives are approximate and represent the average of the remaining useful lives of the underlying leases.

The options to acquire tangible assets are classified as "Prepaid expenses and other" within current assets on the Company's balance sheet. The option is exercisable at any time and expires in two years. The option was measured for fair value using a cost approach on a recurring basis and using Level 3 inputs. The off-market leases - favorable and off-market leases - unfavorable, are classified as "Intangible assets, net" and "Deferred lease", respectively, on the Company's balance sheet. Refer to Note 6, Fair Value Measurements, and Note 8, Goodwill and Other Intangible Assets, for additional information.

10

Index

 
Note 4. Customer Concentration

Significant Contractual Relationship
In 1999, the Company executed a Management Agreement (the “Agreement”) with Sprint whereby the Company committed to construct and operate a PCS network using CDMA air interface technology.  Under the Agreement, the Company was the exclusive PCS Affiliate of Sprint providing wireless mobility communications network products and services on the 1900 MHz band in its territory across a multi-state area covering large portions of central and western Virginia, south-central Pennsylvania, West Virginia, and portions of Maryland, North Carolina, Kentucky, and Ohio. Since then, the Company’s wireless service area has expanded to include new portions of south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. The Company is authorized to use the Sprint brand in its territory, and operate its network under Sprint’s radio spectrum licenses.  As an exclusive PCS Affiliate of Sprint, the Company has the exclusive right to build, own and maintain its portion of Sprint’s nationwide PCS network, in the aforementioned areas, to Sprint’s specifications.  The term of the Agreement was initially set for 20 years and was automatically renewable for three 10-year options, unless terminated by either party under provisions outlined in the Agreement.  Upon non-renewal by either party, the Company has the obligation to sell the business at 90% of “Entire Business Value” (“EBV”) as defined in the Agreement.  EBV is defined as i) the fair market value of a going concern paid by a willing buyer to a willing seller; ii) valued as if the business will continue to utilize existing brands and operate under existing agreements; and, iii) valued as if Manager (Shentel)  owns the spectrum.  Determination of EBV is made by an independent appraisal process. The Agreement has been amended numerous times.

Amendment to the Affiliate agreement related to the acquisition of Expansion Area: Effective with the acquisition of Expansion Area on February 1, 2018, the Company amended its Agreement with Sprint to expand our wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia. The agreement includes certain network build out requirements in the Expansion Area, and the ability to utilize Sprint’s spectrum in the Expansion Area along with certain other amendments to the Affiliate Agreements. Pursuant to the Expansion Agreement, Sprint agreed to, among other things, transition the provision of network coverage in the Expansion Area from Sprint to us.

Note 5. Earnings (Loss) Per Share ("EPS")

Basic EPS 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.

The following table indicates the computation of basic and diluted earnings per share for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended
March 31,
(in thousands, except per share amounts)
 
2018
 
2017
Calculation of net income (loss) per share:
 
 
 
 
Net income (loss)
 
$
4,829

 
$
2,341

Weighted average shares outstanding
 
49,474

 
49,050

Basic income (loss) per share
 
$
0.10

 
$
0.05

 
 
 
 
 
Effect of stock options outstanding:
 
 
 
 
Basic weighted average shares outstanding
 
49,474

 
49,050

Effect from dilutive shares and options outstanding
 
550

 
784

Diluted weighted average shares outstanding
 
50,024

 
49,834

Diluted income (loss) per share
 
$
0.10

 
$
0.05


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:

11

Index

 
 
Three Months Ended
March 31,
(in thousands)
 
2018
 
2017
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive
 
141

 
125

 
Note 6. Fair Value Measurements

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:
(in thousands)
 
March 31, 2018
Balance sheet location:
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash Equivalents:
 
 
 
 
 
 
 
 
    Money market funds
 
$
151

 
$

 
$

 
$
151

Prepaid expenses & other:
 
 
 
 
 
 
 
 
    Interest rate swaps
 

 
3,673

 

 
3,673

    Option to acquire tangible assets
 
 
 
 
 
6,497

 
6,497

Deferred charges & other assets, net:
 
 
 
 
 
 
 
 
    Interest rate swaps
 

 
13,692

 

 
13,692

Total
 
$
151

 
$
17,365

 
$
6,497

 
$
24,013


(in thousands)
 
December 31, 2017
Balance sheet location:
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash Equivalents:
 
 
 
 
 
 
 
 
    Money market funds
 
$
150

 
$

 
$

 
$
150

Prepaid expenses & other:
 
 
 
 
 
 
 
 
    Interest rate swaps
 

 
2,411

 

 
2,411

Deferred charges & other assets, net:
 
 
 
 
 
 
 
 
    Interest rate swaps
 

 
10,776

 

 
10,776

Total
 
$
150

 
$
13,187

 
$

 
$
13,337


 The following table presents our financial instruments measured at fair value using unobservable inputs (Level 3):
 
 
Fair Value Measurements Using Unobservable Inputs (Level 3)
 
 
 March 31, 2018
 
December 31, 2017
Balance, beginning of period
 
$

 
$

Sprint Territory Expansion (Note 3):
 
 
 
 
     Option to acquire tangible assets
 
6,497

 

Balance, end of period
 
$
6,497

 
$


The option is exercisable at any time and expires in two years. The option was measured for fair value using a cost approach on a recurring basis and using Level 3 inputs including the cost of the underlying assets to be acquired and the contractual selling price of those assets.


12

Index

Note 7. Property, Plant and Equipment

Property, plant and equipment consisted of the following:
(in thousands)
 
March 31, 2018
 
December 31, 2017
Plant in service
 
$
1,245,079

 
$
1,219,185

Plant under construction
 
57,005

 
62,202

 
 
1,302,084

 
1,281,387

Less accumulated amortization and depreciation
 
630,067

 
595,060

Net property, plant and equipment
 
$
672,017

 
$
686,327


Note 8. Goodwill and Other Intangible Assets

Goodwill consisted of the following:
(in thousands)
March 31, 2018
 
December 31, 2017
Goodwill - Wireless
$
146,383

 
$
146,383

Goodwill - Cable
104

 
104

Goodwill - Wireline
10

 
10

Goodwill
$
146,497

 
$
146,497


Intangible assets consist of the following at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Non-amortizing intangibles:
 
 
 
 
 
 
 
 
 
 
 
Cable franchise rights
$
64,334

 
$

 
$
64,334

 
$
64,334

 
$

 
$
64,334

Railroad crossing rights
141

 

 
141

 
141

 

 
141

 
64,475

 

 
64,475

 
64,475

 

 
64,475

 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangibles:
Affiliate contract expansion - wireless
455,306

 
(121,808
)
 
333,498

 
410,157

 
(105,964
)
 
304,193

Favorable leases - wireless
16,768

 
(1,589
)
 
15,179

 
13,103

 
(1,222
)
 
11,881

Acquired subscribers - cable
25,265

 
(25,138
)
 
127

 
25,265

 
(25,100
)
 
165

Other intangibles
463

 
(205
)
 
258

 
463

 
(198
)
 
265

Total finite-lived intangibles
497,802

 
(148,740
)
 
349,062

 
448,988

 
(132,484
)
 
316,504

Total intangible assets
$
562,277

 
$
(148,740
)
 
$
413,537

 
$
513,463

 
$
(132,484
)
 
$
380,979


Affiliate contract expansion is amortized over the expected benefit period and is further reduced by the amount of waived management fees received from Sprint which totaled $69.7 million since May 6, 2016, the date of the non-monetary exchange.






Note 9. Other Assets and Accrued Liabilities

Prepaid expenses and other, classified as current assets, included the following:

13

Index

(in thousands)
 
March 31, 2018
 
December 31, 2017
Prepaid rent
 
$
9,687

 
$
10,519

Prepaid maintenance expenses
 
4,282

 
3,062

Interest rate swaps
 
3,673

 
2,411

Deferred contract and other costs
 
46,558

 
1,119

Prepaid expenses and other
 
$
64,200

 
$
17,111

Deferred contract and other costs include amounts reimbursed to Sprint for commissions and device costs, and commissions and installation costs in the Company’s Cable and Wireline segments. The deferred contract and other costs increased due to the adoption of Topic 606. Refer to Note 2, Revenue from Contracts with Customers, for additional information.

Deferred charges and other assets, classified as long-term assets, included the following:
(in thousands)
 
March 31, 2018
 
December 31, 2017
Interest rate swaps
 
$
13,692

 
$
10,776

Deferred contract and other costs
 
20,242

 
2,914

Deferred charges and other assets, net
 
$
33,934

 
$
13,690

Deferred contract and other costs include amounts reimbursed to Sprint for commissions and device costs, and commissions and installation costs in the Company’s Cable and Wireline segments. The deferred contract and other costs increased due to the adoption of Topic 606. Refer to Note 2, Revenue from Contracts with Customers, for additional information.

Accrued liabilities and other, classified as current liabilities, included the following:
(in thousands)
 
March 31, 2018
 
December 31, 2017
Sales and property taxes payable
 
$
4,969

 
$
3,872

Severance accrual
 
261

 
1,028

Asset retirement obligations
 
923

 
492

Accrued programming costs
 
3,029

 
2,805

Other current liabilities
 
8,289

 
5,717

Accrued liabilities and other
 
$
17,471

 
$
13,914


Other liabilities, classified as long-term liabilities, included the following:
(in thousands)
 
March 31, 2018
 
December 31, 2017
Non-current portion of deferred revenues
 
$
12,523

 
$
14,030

Other
 
1,264

 
1,263

Other liabilities
 
$
13,787

 
$
15,293


The Company's asset retirement obligations are included in the balance sheet caption "Asset retirement obligations" and "Accrued liabilities and other". The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement and removal of leasehold improvements or equipment.  The Company also records a corresponding asset, which is depreciated over the life of the leasehold improvement or equipment.  Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.  The terms associated with its operating leases, and applicable zoning ordinances of certain jurisdictions, define the Company’s obligations which are estimated and vary based on the size of the towers.





Note 10. Long-Term Debt

Total debt at March 31, 2018 and December 31, 2017 consists of the following:

14

Index

(in thousands)
 
March 31, 2018
 
December 31, 2017
Term loan A-1
 
$
424,375

 
$
436,500

Term loan A-2
 
400,000

 
400,000

 
 
824,375

 
836,500

Less: unamortized loan fees
 
13,502

 
14,542

Total debt, net of unamortized loan fees
 
$
810,873

 
$
821,958

 
 
 
 
 
Current maturities of long term debt, net of unamortized loan fees
 
$
74,486

 
$
64,397

Long-term debt, less current maturities, net of unamortized loan fees
 
$
736,387

 
$
757,561


As of March 31, 2018, the Company's indebtedness totaled approximately $824.4 million, excluding unamortized loan fees of $13.5 million, with an annualized overall weighted average interest rate of approximately 4.02%. As of March 31, 2018, the Term Loan A-1 bears interest at one-month LIBOR plus a margin of 2.25%, while the Term Loan A-2 bears interest at one-month LIBOR plus a margin of 2.50%. At March 31, 2018, one-month LIBOR was 1.88%. LIBOR resets monthly.

The Term Loan A-1 requires quarterly principal repayments of $6.1 million, which began on September 30, 2016 and continued through June 30, 2017, increasing to $12.1 million quarterly from September 30, 2017 through June 30, 2020; then increasing to $18.2 million quarterly from September 30, 2020 through March 31, 2021, with the remaining balance 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 remaining balance 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 2.25% initial spread on Term Loan A-1 and the 2.50% 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 and membership interests 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 of greater than $25 million. The balance is 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.

As shown below, as of March 31, 2018, the Company was in compliance with the covenants in its credit agreements.

15

Index

 
 
 
Actual
 
Covenant Requirement
Total Leverage Ratio
 
2.95

 
3.75 or Lower
Debt Service Coverage Ratio
 
3.58

 
2.00 or Higher
Minimum Liquidity Balance (in thousands)
 
$
122,834

 
$25 million or Higher

Credit Facility Modification: On February 16, 2018, the Company, entered into a Second Amendment to Credit Agreement (the “Second Amendment”) with CoBank, ACB, as administrative agent of its Credit Agreement and the various financial institutions party thereto (the “Lenders”), which modifies the Credit Agreement by (i) reducing the interest rate paid by the Company by approximately 50 basis points with respect to certain loans made by the Lenders to the Company under the Credit Agreement, and (ii) allowing the Company to make charitable contributions to the Shentel Foundation, a Virginia nonstock corporation, of up to $1.5 million in any fiscal year.

Note 11. 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 2014 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 March 31, 2018.

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 share based compensation tax benefits which are recognized as incurred under the provisions of ASC 740, "Income Taxes".

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted, substantially changing the U.S. tax system. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides immediate expensing for certain qualified assets acquired and placed into service after September 27, 2017 as well as prospective changes beginning in 2018, including acceleration of tax revenue recognition, additional limitations on deductibility of executive compensation and limitations on the deductibility of interest.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 consolidated financial statements in accordance with SAB No. 118.

As of March 31, 2018, the Company is continuing to evaluate the provisional amounts recorded related to the 2017 Tax Act at December 31, 2017, and has not recognized any additional adjustments to such provisional amounts.
















Note 12. Segment Reporting
 
Three Months Ended March 31, 2018 

16

Index

(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
89,759

 
$
28,471

 
$
5,308

 
$

 
$

 
$
123,538

Equipment revenues
 
17,374

 
159

 
46

 

 

 
17,579

Other
 
2,026

 
2,050

 
6,539

 

 

 
10,615

Total external revenues
 
109,159

 
30,680

 
11,893

 

 

 
151,732

Internal revenues
 
1,239

 
1,031

 
7,814

 

 
(10,084
)
 

Total operating revenues
 
110,398

 
31,711

 
19,707

 

 
(10,084
)
 
151,732

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of services
 
33,750

 
15,156

 
9,802

 

 
(9,366
)
 
49,342

Costs of goods sold
 
15,727

 
56

 
22

 

 

 
15,805

Selling, general & administrative
 
12,135

 
4,948

 
1,717

 
10,668

 
(718
)
 
28,750

Acquisition, integration & migration expenses
 

 

 

 

 

 

Depreciation & amortization
 
33,925

 
6,024

 
3,394

 
144

 

 
43,487

Total operating expenses
 
95,537

 
26,184

 
14,935

 
10,812

 
(10,084
)
 
137,384

Operating income (loss)
 
$
14,861

 
$
5,527

 
$
4,772

 
$
(10,812
)
 
$

 
$
14,348


Three Months Ended March 31, 2017:
 (in thousands)
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
108,186

 
$
26,411

 
$
5,048

 
$

 
$

 
$
139,645

Equipment revenues
 
3,145

 
182

 
32

 

 

 
3,359

Other
 
2,897

 
1,853

 
6,126

 

 

 
10,876

Total external revenues
 
114,228

 
28,446

 
11,206

 

 

 
153,880

Internal revenues
 
1,235

 
567

 
7,948

 

 
(9,750
)
 

Total operating revenues
 
115,463

 
29,013

 
19,154

 

 
(9,750
)
 
153,880

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of services
 
33,423

 
15,178

 
9,233

 

 
(9,058
)
 
48,776

Costs of goods sold
 
4,895

 
50

 
40

 

 

 
4,985

Selling, general & administrative
 
28,464

 
4,858

 
1,676

 
5,847

 
(692
)
 
40,153

Acquisition, integration & migration expenses
 
3,792

 

 

 
697

 

 
4,489

Depreciation & amortization
 
35,752

 
5,788

 
3,132

 
132

 

 
44,804

Total operating expenses
 
106,326

 
25,874

 
14,081

 
6,676

 
(9,750
)
 
143,207

Operating income (loss)
 
$
9,137

 
$
3,139

 
$
5,073

 
$
(6,676
)
 
$

 
$
10,673



17

Index

A reconciliation of the total of the reportable segments’ operating income (loss) to consolidated income (loss) before taxes is as follows:
 
 
Three Months Ended
March 31,
(in thousands)
 
2018
 
2017
Total consolidated operating income (loss)
 
$
14,348

 
$
10,673

Interest expense
 
(9,332
)
 
(9,100
)
Non-operating income, net
 
989

 
1,375

Income (loss) before income taxes
 
$
6,005

 
$
2,948






18

Index

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, 2017.  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, 2017, including the consolidated financial statements and related notes included therein.

General
Overview. Shenandoah Telecommunications Company, (the "Company", "we", "our", or "us"), is a diversified telecommunications company providing integrated voice, video and data communication services including both regulated and unregulated telecommunications services through its wholly owned subsidiaries. These subsidiaries provide wireless personal communications services as a Sprint PCS affiliate, and local exchange telephone services, video, internet and data services, long distance services, fiber optics facilities and leased tower facilities. We organize and strategically manage our operations under the Company's reportable segments that include: Wireless, Cable, Wireline, and Other. See Note 16, Segment Reporting, included with the notes to our consolidated financial statements provided within our 2017 Annual Report on Form 10-K for further information regarding our segments.
 
Basis of Presentation
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), effective January 1, 2018, using the modified retrospective method as discussed in Note 2, Revenue from Contracts with Customers. The following table identifies the impact that the application of Topic 606 had on the Company for the three months ended March 31, 2018:
($ in thousands, except per share amounts)

Topic 606 Impact


Prior to Adoption of Topic 606
Changes in Presentation (1)
Equipment Revenue (2)
Deferred Costs (3)
3/31/2018
As reported
Service revenues and other
$
153,812

$
(20,014
)
$

$
355

$
134,153

Equipment revenues
2,059


15,520


17,579

   Total operating revenues
155,871

(20,014
)
15,520

355

151,732

Cost of services
49,199



143

49,342

Cost of goods sold
6,118

(5,833
)
15,520


15,805

Selling, general & administrative
42,967

(14,181
)

(36
)
28,750

Depreciation and amortization
43,487




43,487

   Total operating expenses
141,771

(20,014
)
15,520

107

137,384

   Operating income
14,100



248

14,348

Other income (expense)
(8,343
)



(8,343
)
Income tax expense
1,110



66

1,176

   Net income
$
4,647

$

$

$
182

$
4,829







Earnings per share





   Basic
$
0.09







$
0.10

   Diluted
$
0.09







$
0.10

Weighted average shares o/s, basic
49,474







49,474

Weighted average shares o/s, diluted
50,024







50,024

______________________________________________________
1) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, and to provide on-going support to their prepaid customers in our territory were historically recorded as expense when incurred. Under Topic 606, these amounts represent consideration payable to our customer, Sprint, and are recorded as a reduction of revenue. In 2017, these amounts were approximately $44.8 million for the national commissions, previously recorded in selling, general and administrative, $18.7 million for national

19

Index

device costs previously recorded in cost of goods and services, and $16.9 million for the on-going service to Sprint's prepaid customers, previously recorded in selling, general and administrative.

2) Costs incurred by the Company for the sale of devices under Sprint’s device financing and lease programs were previously recorded net against revenue. Under Topic 606, the revenue from device sales is recorded gross as equipment revenue and the device costs are recorded gross and reclassified to cost of goods and services. These amounts were approximately $63.8 million in 2017.

3) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, which historically have been expensed when incurred, are deferred and amortized against revenue over the expected period of benefit of approximately 21 to 24 months. In Cable and Wireline, installation revenues are recognized over a shorter period of benefit. The deferred balance as of March 31, 2018 is approximately $52.9 million and is classified on the balance sheet as current and non-current assets, as applicable.
 
Recent Developments
Credit Facility Modification: On February 16, 2018, the Company, entered into a Second Amendment to Credit Agreement (the “Second Amendment”) with CoBank, ACB, as administrative agent of its Credit Agreement, described more fully in Note 10, Long-Term Debt, and the various financial institutions party thereto (the “Lenders”), which modifies the Credit Agreement by (i) reducing the interest rate paid by the Company by approximately 50 basis points with respect to certain loans made by the Lenders to the Company under the Credit Agreement, and (ii) allowing the Company to make charitable contributions to Shentel Foundation, a Virginia nonstock corporation, of up to $1.5 million in any fiscal year.
 
Sprint Territory Expansion: Effective February 1, 2018, we signed the Expansion Agreement with Sprint to expand our wireless service area to include certain areas in Kentucky, Pennsylvania, Virginia and West Virginia, (the “Expansion Area”), effectively  adding a population (POPs) of approximately 1.1 million. The agreement includes certain network build out requirements in the Expansion Area, and the ability to utilize Sprint’s spectrum in the Expansion Area along with certain other amendments to the Affiliate Agreements. Pursuant to the Expansion Agreement, Sprint agreed to, among other things, transition the provision of network coverage in the Expansion Area from Sprint to us. The Expansion Agreement required a payment of $52.0 million to Sprint for the right to service the Expansion Area pursuant to the Affiliate Agreements plus an additional payment of up to $5.0 million for certain equipment at the Sprint cell sites in the Expansion Area. The option is exercisable at the Company's discretion. A map of our territory, reflecting the new expansion area, is provided below:

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12228234&doc=12

20

Index

Results of Operations

Three Months Ended March 31, 2018 Compared with the Three Months Ended March 31, 2017

Our consolidated results for the first quarter of 2018 and 2017 are summarized as follows:
 
 
Three Months Ended
March 31,
 
Change
(in thousands)
 
2018
 
2017
 
$
 
%
Operating revenues
 
$
151,732

 
$
153,880

 
$
(2,148
)
 
(1.4
)
Operating expenses
 
137,384

 
143,207

 
(5,823
)
 
(4.1
)
Operating income (loss)
 
14,348

 
10,673

 
3,675

 
34.4

 
 
 
 
 
 
 
 
 
Interest expense
 
(9,332
)
 
(9,100
)
 
(232
)
 
2.5

Other income (expense), net
 
989

 
1,375

 
(386
)
 
(28.1
)
Income (loss) before taxes
 
6,005

 
2,948

 
3,057

 
103.7

Income tax expense (benefit)
 
1,176

 
607

 
569

 
93.7

Net income (loss)
 
$
4,829

 
$
2,341

 
$
2,488

 
106.3


Operating revenues
For the three months ended March 31, 2018, operating revenues decreased $2.1 million, or 1.4% to $151.7 million. Excluding the impacts of adopting Topic 606 revenues would have increased $2.0 million, driven by the Cable and Wireline operations, partially offset by Wireless operations.

Operating expenses
Total operating expenses decreased $5.8 million or 4.1% to $137.4 million in the three months ended March 31, 2018 compared with $143.2 million in the prior year period.  Excluding the impacts of adopting Topic 606, operating expenses would have decreased $1.4 million, primarily due to the elimination of the 2017 acquisition, integration and migration costs related to the completion of the transformation of the nTelos network.

Additionally, our Other segment includes the Company's stock compensation expense for 2018. In prior years this expense was allocated among the Company's operating segments. Stock compensation expense for the three months ended March 31, 2018 was approximately $2.0 million compared with approximately $1.6 million for the three months ended March 31, 2017.

Interest expense
Interest expense increased primarily as a result of the incremental borrowings associated with the funding of the Company's strategic initiatives and the effect of increases in the London Interbank Offered Rate ("LIBOR"). The impact of the LIBOR rate increases have been partially offset by an amendment to the Credit Facility Agreement that reduced the base rate of the Credit Facility by 50 basis points.

Other income, net
Other income, net has decreased $0.4 million primarily as a result of lower interest income derived from our investments.

Income tax
During the three months ended March 31, 2018, income tax expense was approximately $1.2 million, compared with $0.6 million for the three months ended March 31, 2017. Our income tax expense increased consistent with the increase in income before taxes. The Company’s effective tax rate decreased from 20.6% in 2017 to 19.6% in 2018. The decrease in the effective tax rate is primarily attributable to the changes in federal tax regulations related to the 2017 Tax Act that was enacted during December 2017.

Wireless

Wireless earns revenues from Sprint for their postpaid and prepaid subscribers usage of our Wireless network in our Wireless network coverage area, net of customer credits, account write offs and other billing adjustments. 



21

Index




The following table identifies the impact of Topic 606 on the Company's Wireless operations for the three months ended March 31, 2018:
($ in thousands)

Topic 606 Impact - Wireless


Prior to Adoption of Topic 606
Changes in Presentation (1)
Equipment Revenue (2)
Deferred Costs (3)
3/31/2018
As reported
Service revenues and other
$
112,683

$
(20,014
)
$

$
355

$
93,024

Equipment revenues
1,854


15,520


17,374

   Total operating revenues
114,537

(20,014
)
15,520

355

110,398

Cost of services
33,750




33,750

Cost of goods sold
6,040

(5,833
)
15,520


15,727

Selling, general & administrative
26,316

(14,181
)


12,135

Depreciation and amortization
33,925




33,925

   Total operating expenses
100,031

(20,014
)
15,520


95,537

   Operating income
14,506



355

14,861

______________________________________________________
1) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, and to provide on-going support to their prepaid customers in our territory were historically recorded as expense when incurred. Under Topic 606, these amounts represent consideration payable to our customer, Sprint, and are recorded as a reduction of revenue. In 2017, these amounts were approximately $44.8 million for the national commissions, previously recorded in selling, general and administrative, $18.7 million for national device costs previously recorded in cost of goods and services, and $16.9 million for the on-going service to Sprint's prepaid customers, previously recorded in selling, general and administrative.

2) Costs incurred by the Company for the sale of devices under Sprint’s device financing and lease programs were previously recorded net against revenue. Under Topic 606, the revenue from device sales is recorded gross as equipment revenue and the device costs are recorded gross and reclassified to cost of goods and services. These amounts were approximately $63.8 million in 2017.

3) Amounts payable to Sprint for the reimbursement of costs incurred by Sprint in their national sales channel for commissions and device costs, which historically have been expensed when incurred, are deferred and amortized against revenue over the expected period of benefit of approximately 21 to 24 months. The deferred balance as of March 31, 2018 is approximately $43.2 million and is classified on the balance sheet as current and non-current assets, as applicable.

Under our amended affiliate agreement, Sprint agreed to waive the Management Fees charged on both postpaid and prepaid revenues, up to approximately $4.2 million per month, until the total amount waived reaches approximately $255.6 million, which is expected to occur in 2022. The cash flow savings of the waived management fee waiver has been incorporated into the fair value of the affiliate contract expansion intangible, which is reduced, in part, as credits are received from Sprint.

The following tables indicate selected operating statistics of Wireless, including Sprint subscribers, as of the dates shown:
  
 
March 31,
2018
(3)
 
December 31,
2017
(4)
 
March 31,
2017
 
December 31, 2016
Retail PCS Subscribers – Postpaid
 
774,861

 
736,597

 
717,150

 
722,562

Retail PCS Subscribers – Prepaid (1)
 
250,191

 
225,822

 
214,771

 
206,672

PCS Market POPS (000) (2)
 
7,023

 
5,942

 
5,536

 
5,536

PCS Covered POPS (000) (2)
 
5,889

 
5,272

 
4,836

 
4,807

CDMA Base Stations (sites)
 
1,742

 
1,623

 
1,476

 
1,467

Towers Owned
 
193

 
192

 
196

 
196

Non-affiliate Cell Site Leases
 
192

 
192

 
206

 
202

_______________________________________________________
1)
As of September 2017, the Company is no longer including Lifeline subscribers to be consistent with Sprint's policy. Historical customer counts have been adjusted accordingly.
2)
"POPS" refers to the estimated population of a given geographic area.  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. As of December 31, 2017, the data source for POPS is U.S. census data. Historical periods previously referred to other third party population data and have been recast to refer to U.S. census data.
3)
Beginning March 31, 2018 includes Richmond Expansion Area.

22

Index

4)
Beginning December 31, 2017 includes Parkersburg Expansion Area.

  
 
Three Months Ended
March 31,
 
 
2018
 
2017
Gross PCS Subscriber Additions – Postpaid
 
81,420

 
38,701

Net PCS Subscriber Additions (Losses) – Postpaid
 
38,264

 
(5,412
)
Gross PCS Subscriber Additions – Prepaid (1)
 
55,802

 
39,445

Net PCS Subscriber Additions (Losses) – Prepaid (1)
 
24,369

 
8,099

PCS Average Monthly Retail Churn % - Postpaid (2)
 
1.89
%
 
2.05
%
PCS Average Monthly Retail Churn % - Prepaid (1)
 
4.42
%
 
5.01
%
_______________________________________________________
1)
The Company is no longer including Lifeline subscribers to be consistent with Sprint's policy. Historical customer counts and churn % have been adjusted accordingly.
2)
PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period.

The subscriber statistics shown above include the following:
 
February 1, 2018
 
April 6, 2017
 
May 6, 2016
 
Richmond Expansion Area (3)
 
Parkersburg Expansion Area
 
nTelos Area
PCS Subscribers - Postpaid
38,343

 
19,067

 
404,965

PCS Subscribers - Prepaid
15,691

 
5,962

 
154,944

Acquired PCS Market POPS (000) (1)
1,082

 
511

 
3,099

Acquired PCS Covered POPS (000) (1)
602

 
244

 
2,298

Acquired CDMA Base Stations (sites) (2)
105

 

 
868

Towers

 

 
20

Non-affiliate Cell Site Leases

 

 
10

_______________________________________________________
1)
POPS refers to the estimated population of a given geographic area.  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)
As of March 31, 2018 we have shut down 107 overlap sites associated with the nTelos Area.
3)
Excludes Assurance subscribers.

Three Months Ended March 31, 2018 Compared with the Three Months Ended March 31, 2017
 
 
Three Months Ended
March 31,
 
Change
(in thousands)
 
 
2018
 
2017
 
$
 
%
Wireless operating revenues
 
 
 
 
 
 
 
 

Wireless service revenue
 
$
89,759

 
$
108,186

 
$
(18,427
)
 
(17.0
)
Tower lease revenue
 
2,896

 
2,882

 
14

 
0.5

Equipment revenue
 
17,374

 
3,145

 
14,229

 
452.4

Other revenue
 
369

 
1,250

 
(881
)
 
(70.5
)
Total Wireless operating revenues
 
110,398

 
115,463

 
(5,065
)
 
(4.4
)
Wireless operating expenses
 
 

 
 

 
 

 
 

Cost of goods and services
 
49,477

 
38,318

 
11,159

 
29.1

Selling, general and administrative
 
12,135

 
28,464

 
(16,329
)
 
(57.4
)
Acquisition, integration and migration expenses
 

 
3,792

 
(3,792
)
 
(100.0
)
Depreciation and amortization
 
33,925

 
35,752

 
(1,827
)
 
(5.1
)
Total Wireless operating expenses
 
95,537

 
106,326

 
(10,789
)
 
(10.1
)
Wireless operating income (loss)
 
$
14,861

 
$
9,137

 
$
5,724

 
62.6



23

Index



Operating Revenues
Wireless operating revenues decreased $5.1 million or 4.4% for the three months ended March 31, 2018, compared with the three months ended March 31, 2017, primarily due to the adoption of Topic 606. Excluding the impacts of Topic 606, wireless revenues decreased $0.9 million. This decrease was driven by a decline in average revenue per subscriber, offset by an increase in Sprint customers, including the new territory acquired from Sprint. The decline in average revenue per subscriber was driven by additional discounts and promotions.

As a result of the adoption of Topic 606 and in the three months ended March 31, 2018, wireless service revenues were reduced by approximately $20.0 million of expenses payable to Sprint, our customer, related to the reimbursement to Sprint for costs incurred in their national sales channel for commissions and device costs, and to provide ongoing support to their prepaid customers in our territory. Commissions were previously recorded as expenses within selling, general and administrative. Additionally, we recorded $15.5 million of equipment revenue and cost of goods sold for the sale of devices under Sprint’s device financing and lease programs. Equipment costs were historically netted and presented within equipment revenue.

The table below provides additional detail in the settlement with Sprint impacting service revenues.


Three Months Ended
March 31,

Change
(in thousands)
 

2018

2017

$

%
Wireless Service Revenues:












Postpaid net billings (1)

$
93,290


$
92,989


$
301


0.3

Amortization of deferred contract & other costs (3)
 
(6,871
)
 

 
(6,871
)
 
*

Management fee

(7,400
)

(7,383
)