Document
 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 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=12533962&doc=16
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 November 2, 2018 was 49,558,663.

 




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)
 
 
 
 
 
 
September 30,
2018
 
December 31, 2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
75,207

 
$
78,585

Accounts receivable, net
 
59,968

 
54,184

Income taxes receivable
 
2,545

 
17,311

Inventory, net
 
4,962

 
5,704

Prepaid expenses and other
 
63,383

 
17,111

Total current assets
 
206,065

 
172,895

Investments
 
12,296

 
11,472

Property, plant and equipment, net
 
669,709

 
686,327

Other assets:
 
 
 
 
Intangible assets, net
 
381,537

 
380,979

Goodwill
 
146,497

 
146,497

Deferred charges and other assets, net
 
53,723

 
13,690

Total assets
 
$
1,469,827

 
$
1,411,860

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
 
$
84,743

 
$
64,397

Accounts payable
 
23,868

 
28,953

Advanced billings and customer deposits
 
7,415

 
21,153

Accrued compensation
 
6,833

 
9,167

Accrued liabilities and other
 
14,756

 
13,914

Total current liabilities
 
137,615

 
137,584

Long-term debt, less current maturities, net of unamortized loan fees
 
694,045

 
757,561

Other long-term liabilities:
 
 
 
 
Deferred income taxes
 
120,846

 
100,879

Deferred lease
 
22,162

 
15,782

Asset retirement obligations
 
22,372

 
21,211

Retirement plan obligations
 
13,235

 
13,328

Other liabilities
 
14,567

 
15,293

Total other long-term liabilities
 
193,182

 
166,493

Shareholders’ equity:
 
 
 
 
Common stock, no par value, authorized 96,000; 49,559 and 49,328 issued and outstanding at September 30, 2018 and December 31, 2017, respectively
 

 

Additional paid in capital
 
47,350

 
44,787

Retained earnings
 
385,045

 
297,205

Accumulated other comprehensive income (loss), net of taxes
 
12,590

 
8,230

Total shareholders’ equity
 
444,985

 
350,222

Total liabilities and shareholders’ equity
 
$
1,469,827

 
$
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
September 30,
 
Nine Months Ended
September 30,
Operating revenue:
2018
 
2017
 
2018
 
2017
Service revenue and other
$
142,768

 
$
149,788

 
$
419,819

 
$
450,617

Equipment revenue
15,963

 
1,994

 
49,551

 
8,303

Total operating revenue
158,731

 
151,782

 
469,370

 
458,920

Operating expenses:
 
 
 
 
 
 
 
Cost of services
47,886

 
48,552

 
146,362

 
145,744

Cost of goods sold
15,036

 
7,282

 
46,007

 
17,232

Selling, general and administrative
27,452

 
42,199

 
86,117

 
125,374

Acquisition, integration and migration expenses

 
1,706

 

 
9,873

Depreciation and amortization
40,028

 
42,568

 
124,632

 
132,297

Total operating expenses
130,402

 
142,307

 
403,118

 
430,520

Operating income (loss)
28,329

 
9,475

 
66,252

 
28,400

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(9,001
)
 
(9,823
)
 
(27,184
)
 
(28,312
)
Gain (loss) on investments, net
88

 
202

 
112

 
395

Non-operating income (loss), net
966

 
1,003

 
2,770

 
3,482

Income (loss) before income taxes
20,382

 
857

 
41,950

 
3,965

Income tax expense (benefit)
4,848

 
(2,677
)
 
10,207

 
(1,830
)
Net income (loss)
15,534

 
3,534

 
31,743

 
5,795

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate hedge, net of tax
465

 
6

 
4,360

 
(770
)
Comprehensive income (loss)
$
15,999

 
$
3,540

 
$
36,103

 
$
5,025

 
 
 
 
 
 
 
 
Net income (loss) per share, basic and diluted:
 
 
 
 
 
 
 
Basic net income (loss) per share
$
0.31

 
$
0.07

 
$
0.64

 
$
0.12

Diluted net income (loss) per share
$
0.31

 
$
0.07

 
$
0.63

 
$
0.12

Weighted average shares outstanding, basic
49,559

 
49,133

 
49,527

 
49,100

Weighted average shares outstanding, diluted
50,117

 
49,959

 
50,044

 
49,869

 
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 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)
 

 

 
56,097

 

 
56,097

Net income (loss)
 

 

 
31,743

 

 
31,743

Other comprehensive gain (loss), net of tax of $1,441
 

 

 

 
4,360

 
4,360

Stock based compensation
 
206

 
4,578

 

 

 
4,578

Stock options exercised
 
15

 
104

 

 

 
104

Common stock issued
 

 
18

 

 

 
18

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(66
)
 
(2,137
)
 

 

 
(2,137
)
Common stock issued to acquire non-controlling interest in nTelos
 
76

 

 

 

 

Balance, September 30, 2018
 
49,559

 
$
47,350

 
$
385,045

 
$
12,590

 
$
444,985


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)
 
 
 
 
 
 
Nine Months Ended
September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
31,743

 
$
5,795

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation
 
106,002

 
113,437

Amortization
 
18,630

 
18,860

Amortization reflected as rent expense in cost of services
 
372

 
2,173

Bad debt expense
 
1,362

 
1,479

Stock based compensation expense, net of amount capitalized
 
4,578

 
3,053

Waived management fee
 
28,164

 
27,068

Deferred income taxes
 
(1,989
)
 
(12,251
)
(Gain) loss on investments
 
(112
)
 
(308
)
Net (gain) loss from patronage and equity investments
 
(2,300
)
 
(2,315
)
Amortization of long-term debt issuance costs
 
3,472

 
3,572

Accrued interest and other
 
205

 
1,633

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(5,492
)
 
6,418

Inventory, net
 
741

 
31,604

Income taxes receivable
 
14,932

 
(8,704
)
Other assets
 
(13,393
)
 
(162
)
Accounts payable
 
(1,913
)
 
(30,795
)
Income taxes payable
 

 
(435
)
Deferred lease
 
4,159

 
3,729

Other deferrals and accruals
 
(361
)
 
(5,146
)
Net cash provided by (used in) operating activities
 
188,800

 
158,705

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Acquisition of property, plant and equipment
 
(92,309
)
 
(109,435
)
Proceeds from sale of assets
 
540

 
356

Cash distributions (contributions) from investments and other
 
(1
)
 
4

Sprint expansion
 
(52,000
)
 
(6,000
)
Net cash provided by (used in) investing activities
 
(143,770
)
 
(115,075
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(46,375
)
 
(24,250
)
Proceeds from revolving credit facility borrowings
 
15,000

 

Proceeds from credit facility borrowings
 

 
25,000

Principal payments on revolving credit facility
 
(15,000
)
 

Taxes paid for equity award issuances
 
(2,033
)
 
(5,106
)
Net cash provided by (used in) financing activities
 
(48,408
)
 
(4,356
)
Net increase (decrease) in cash and cash equivalents
 
(3,378
)
 
39,274

Cash and cash equivalents, beginning of period
 
78,585

 
36,193

Cash and cash equivalents, end of period
 
$
75,207

 
$
75,467

 
 

 

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash payments for:
 
 
 
 
Interest, net of capitalized interest of $1,187 and $1,266, respectively
 
$
25,067

 
$
25,934

Income tax (refunds received) payments, net
 
$
(2,736
)
 
$
19,567

Capital expenditures payable
 
$
11,919

 
$
3,800


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.

Immaterial Prior Period Adjustment.

During the three months ended September 30, 2018, the Company determined that the unaudited condensed consolidated financial statements for the three months ended March 31, 2018, and the three and six months ended June 30, 2018, contained an immaterial misstatement.  Excess amortization of deferred contract costs that are recognized as a reduction of revenue, as described in Note 2, resulted in an understatement of revenue for the three months ended March 31, 2018, and the three and six months ended June 30, 2018. Additionally, amounts recorded upon the adoption of ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606", or "the new revenue recognition standard"), on January 1, 2018 were misstated.   The Company evaluated the materiality of the prior period adjustment quantitatively and qualitatively, under the SEC’s authoritative guidance on materiality, and concluded that the prior period adjustment was not material to the financial statements of any of the impacted unaudited 2018 periods. The Company elected to correct the prior period adjustment by revising the prior period financial statements. 

The cumulative effect of the adjustment made to the consolidated January 1, 2018 balance sheet for the adoption of the new revenue recognition standard was as follows:
 
As of January 1, 2018
(in thousands)
As Reported
 
Correction of Error
 
As Adjusted
Prepaid expenses and other
$
53,688

 
$
(6,701
)
 
$
46,987

Deferred charges and other assets, net
29,797

 
14,964

 
44,761

Deferred income taxes
119,030

 
2,201

 
121,231

Retained earnings
347,240

 
6,062

 
353,302


The following table presents the effects of the immaterial prior period adjustment on the unaudited condensed consolidated balance sheet as of March 31, 2018 and June 30, 2018:
 
As of March 31, 2018
(in thousands)
As Reported
 
Correction of Error
 
As Adjusted
Prepaid expenses and other
$
64,200

 
$
(5,741
)
 
$
58,459

Deferred charges and other assets, net
33,934

 
16,410

 
50,344

Deferred income taxes
115,809

 
2,853

 
118,662

Retained earnings
352,069

 
7,816

 
359,885

 
As of June 30, 2018
(in thousands)
As Reported
 
Correction of Error
 
As Adjusted
Prepaid expenses and other
$
64,163

 
$
(4,756
)
 
$
59,407

Deferred charges and other assets, net
34,021

 
17,896

 
51,917

Deferred income taxes
111,125

 
3,522

 
114,647

Retained earnings
359,893

 
9,618

 
369,511



7

Index


The following tables present the effects of the immaterial prior period adjustment on the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2018 and the three and six months ended June 30, 2018:
 
For the Three Months Ended March 31, 2018
(in thousands)
As Reported
 
Correction of Error
 
As Adjusted
Service revenue and other
$
134,153

 
$
2,406

 
$
136,559

Income tax expense (benefit)
1,176

 
652

 
1,828

Net income (loss)
4,829

 
1,754

 
6,583

Earnings per share - basic
$
0.10

 
$
0.03

 
$
0.13

Earnings per share - diluted
$
0.10

 
$
0.03

 
$
0.13

 
For the Three Months Ended June 30, 2018
(in thousands)
As Reported
 
Correction of Error
 
As Adjusted
Service revenue and other
$
138,021

 
$
2,471

 
$
140,492

Income tax expense (benefit)
2,862

 
669

 
3,531

Net income (loss)
7,824

 
1,802

 
9,626

Earnings per share - basic
$
0.16

 
$
0.03

 
$
0.19

Earnings per share - diluted
$
0.16

 
$
0.03

 
$
0.19

 
For the Six Months Ended June 30, 2018
(in thousands)
As Reported
 
Correction of Error
 
As Adjusted
Service revenue and other
$
272,174

 
$
4,877

 
$
277,051

Income tax expense (benefit)
4,038

 
1,321

 
5,359

Net income (loss)
12,653

 
3,556

 
16,209

Earnings per share - basic
$
0.26

 
$
0.07

 
$
0.33

Earnings per share - diluted
$
0.25

 
$
0.07

 
$
0.32


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 No. 2014-09, Revenue from Contracts with Customers ("Topic 606", or "the new revenue recognition standard"), 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 recognition 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. The Company expects 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. The Company is continuing to assess potential impacts that the standard may have on our consolidated financial statements. 


8

Index

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. 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 No. 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 impact of adopting ASU No. 2018-02.

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. Revenue earned for the three months ended September 30, 2018 was as follows:
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Consolidated
Wireless service
 
$
96,299

 
$

 
$

 
$
96,299

Equipment
 
15,666

 
234

 
63

 
15,963

Business, residential and enterprise
 

 
29,334

 
10,702

 
40,036

Tower and other
 
4,134

 
2,614

 
8,857

 
15,605

Total revenue
 
116,099

 
32,182

 
19,622

 
167,903

Internal revenue
 
(1,263
)
 
(1,266
)
 
(6,643
)
 
(9,172
)
Total operating revenue
 
$
114,836

 
$
30,916

 
$
12,979

 
$
158,731


Revenue earned for the nine months ended September 30, 2018 was as follows:
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Consolidated
Wireless service
 
$
284,154

 
$

 
$

 
$
284,154

Equipment
 
48,859

 
537

 
155

 
49,551

Business, residential and enterprise
 

 
87,931

 
31,906

 
119,837

Tower and other
 
10,643

 
7,536

 
26,380

 
44,559

Total revenue
 
343,656

 
96,004

 
58,441

 
498,101

Internal revenue
 
(3,746
)
 
(3,394
)
 
(21,591
)
 
(28,731
)
Total operating revenue
 
$
339,910

 
$
92,610

 
$
36,850

 
$
469,370


Wireless service
The majority of the Company's revenue is earned through providing network access to Sprint under the affiliate agreement, which represents approximately 61% of consolidated revenues for the nine months ended September 30, 2018. Wireless service revenue is variable based on billed revenue to Sprint’s subscribers in the Company's affiliate area, less applicable fees retained by Sprint.

The Company's revenue related to Sprint’s postpaid customers is the amount that Sprint bills its postpaid subscribers, reduced by customer credits, write-offs of receivables, and 8% management and 8.6% service fees. 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 revenue related to Sprint’s prepaid customers is the amount that Sprint bills its prepaid subscribers, reduced by costs to acquire and support the customers, based on national averages for Sprint’s prepaid programs, and a 6% management fee.

The Company considers Sprint, rather than Sprint's subscribers, to be the customer under the new revenue recognition standard and the Company's performance obligation is to provide Sprint a series of continuous network access services. The reimbursement to Sprint for the costs of 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. These reimbursements are initially recorded as a contract asset and are subsequently recognized as a reduction of revenue over the expected benefit period between 21 and 53 months. Historically, under ASC 605 the customer was considered the subscriber rather than Sprint and as a result, reimbursement

9

Index

payments to Sprint for costs of 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 $51.1 million. During the three months ended September 30, 2018, payments that increased the wireless contract asset balance totaled $16.4 million and amortization reflected as a reduction of revenue totaled approximately $11.9 million. During the nine months ended September 30, 2018, payments that increased the wireless contract asset balance totaled $44.8 million and amortization reflected as a reduction of revenue totaled approximately $34.1 million. The wireless contract asset balance as of September 30, 2018 was approximately $61.8 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. The Company's equipment is predominantly sold to subscribers through Sprint's equipment financing plans. Under the equipment financing plans, Sprint purchases the equipment from the Company and resells the equipment to their subscribers. Historically, under ASC 605, the Company concluded that it 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 it is the principal in these equipment financing transactions, as the Company controls and bears the risk of ownership of the inventory prior to sale, and accordingly, revenues and handset costs are recorded on a gross basis, the corresponding cost of the equipment is recorded separately to cost of goods sold.

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 lease fiber-optic cable capacity. 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 recognizes 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 the new revenue recognition standard, 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 for service provided to customers across the segments.

The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of the new revenue recognition standard were as follows:

10

Index

(in thousands)
 
Balance at December 31, 2017
 
Adjustments due to Topic 606
 
Balance at January 1, 2018
Assets
 
 
 
 
 
 
Prepaid expenses and other
 
$
17,111

 
$
29,876

 
$
46,987

Deferred charges and other assets, net
 
13,690

 
31,071

 
44,761

Liabilities
 
 
 
 
 
 
Advanced billing and customer deposits
 
21,153

 
(14,302
)
 
6,851

Deferred income taxes
 
100,879

 
20,352

 
121,231

Other long-term liabilities
 
15,293

 
(1,200
)
 
14,093

Retained earnings
 
297,205

 
56,097

 
353,302



The impact of the adoption of the new revenue recognition standard on the condensed consolidated statements of operations and comprehensive income (loss) and condensed consolidated balance sheets was as follows:
 
 
Three Months Ended September 30, 2018
(in thousands)
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change Higher/(Lower)
Operating revenue:
 
 
 
 
 
 
Service revenue and other
 
$
142,768

 
$
161,076

 
$
(18,308
)
Equipment revenue
 
15,963

 
2,178

 
13,785

Operating expenses:
 
 
 
 
 
 
Cost of services
 
47,886

 
48,001

 
(115
)
Cost of goods sold
 
15,036

 
7,870

 
7,166

Selling, general and administrative
 
27,452

 
44,164

 
(16,712
)

 
 
Nine Months Ended September 30, 2018
(in thousands)
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change Higher/(Lower)
Operating revenue:
 
 
 
 
 
 
Service revenue and other
 
$
419,819

 
$
471,155

 
$
(51,336
)
Equipment revenue
 
49,551

 
6,036

 
43,515

Operating expenses:
 
 
 
 
 
 
Cost of services
 
146,362

 
146,199

 
163

Cost of goods sold
 
46,007

 
20,316

 
25,691

Selling, general and administrative
 
86,117

 
132,711

 
(46,594
)


11

Index

 
 
As of September 30, 2018
(in thousands)
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change Higher/(Lower)
Assets
 
 
 
 
 
 
Prepaid expenses and other
 
$
63,383

 
$
27,765

 
$
35,618

Deferred charges and other assets, net
 
53,723

 
17,496

 
36,227

Liabilities
 
 
 
 
 
 
Advanced billing and customer deposits
 
7,415

 
23,744

 
(16,329
)
Deferred income taxes
 
120,846

 
97,029

 
23,817

Other long-term liabilities
 
14,567

 
15,759

 
(1,192
)
Retained earnings
 
385,045

 
319,496

 
65,549


Future performance obligations
On September 30, 2018, the Company had approximately $3.1 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 $0.2 million of this amount as revenue during the remainder of 2018, $0.6 million in 2019, an additional $0.6 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 elected to apply 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 $10.0 million as of September 30, 2018 of which $4.6 million is presented as prepaid expenses and other and $5.4 million is presented as deferred charges and other assets, net. Amortization recognized during the nine months ended September 30, 2018 was approximately $4.1 million.

Note 3. Acquisition

Sprint Territory Expansion: Effective February 1, 2018, the Company signed an expansion agreement with Sprint to expand its wireless service coverage 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 additional payment of up to $5.0 million after acceptance of certain equipment at the Sprint cell sites in the Expansion Area. The transaction was accounted for as an asset acquisition.

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

Prepayment of tangible assets
 
0
 
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 as of the acquisition date.

The Company allocated the purchase price to the components identified in the table above based on the relative fair value of each component. The fair value of the components was determined using an income and cost approach.

12

Index


The affiliate contract expansion asset is classified as "Intangible assets, net". The prepayment of tangible assets are classified as "Prepaid expenses and other" within current assets on the Company's balance sheet. 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.

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 personal communications service (PCS) network using CDMA air interface technology.  The Agreement has been amended numerous times. Under the amended Agreement, the Company is the exclusive PCS Affiliate of Sprint providing wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz spectrum ranges 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. 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 initial term of the Agreement extends through November 2029, with two successive 10-year renewal periods, unless terminated by either party under provisions outlined in the Agreement.  Upon non-renewal, the Company may cause Sprint to buy or Sprint may cause the Company 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.

Amendment to the Affiliate agreement related to the acquisition of the Expansion Area:
Effective with the acquisition of the Expansion Area on February 1, 2018, the Company amended its Agreement with Sprint to expand its 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 the Company.

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:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands, except per share amounts)
 
2018
 
2017
 
2018
 
2017
Calculation of net income (loss) per share:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
15,534

 
$
3,534

 
$
31,743

 
$
5,795

Weighted average shares outstanding
 
49,559

 
49,133

 
49,527

 
49,100

Basic income (loss) per share
 
$
0.31

 
$
0.07

 
$
0.64

 
$
0.12

 
 
 
 
 
 
 
 
 
Effect of stock options outstanding:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
49,559

 
49,133

 
49,527

 
49,100

Effect from dilutive shares and options outstanding
 
558

 
826

 
517

 
769

Diluted weighted average shares outstanding
 
50,117

 
49,959

 
50,044

 
49,869

Diluted income (loss) per share
 
$
0.31

 
$
0.07

 
$
0.63

 
$
0.12



13

Index

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 were as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive
 
13

 

 
60

 
94

 
Note 6.  Investments

Other investments, comprised of equity securities which do not have readily determinable fair values, consist of the following:
(in thousands)
9/30/2018
 
12/31/2017
Cost method:
 
 
 
CoBank
$
7,441

 
$
6,818

Other – equity in other telecommunications partners
784

 
811

 
8,225

 
7,629

Equity method:
 
 
 
Other
575

 
564

 
575

 
564

Total other investments
$
8,800

 
$
8,193


The CoBank investment is primarily related to patronage distributions of restricted equity and is a required investment related to the Credit Facility. Refer to Note 12, Long-Term Debt, for additional information.

The Company's investments carried at fair value consisted of:
(in thousands)
9/30/2018
 
12/31/2017
Cash and Equivalents
$
1,408

 
$

Domestic equity funds
1,675

 
2,856

International equity funds
413

 
423

Total investments carried at fair value
$
3,496

 
$
3,279


Investments carried at fair value were acquired under a rabbi trust arrangement related to the Company’s Supplemental Executive Retirement Plan (SERP).  The Company purchases investments in the trust to mirror the investment elections of participants in the SERP. The Company recorded net gains of $0.1 million in both the three months ended September 30, 2018 and 2017. The Company recorded net gains of $0.1 million and $0.3 million in the nine months ended September 30, 2018 and September 30, 2017, respectively. Fair values for these investments are determined using net asset value per share and are not classified in the fair value hierarchy. Gains and losses on the investments in the trust are reflected as increases or decreases in the liability owed to the participants. The increases or decreases to the liability are recorded as pension expense included within "Non-operating income (loss), net" in the Company's consolidated statements of operations.

Note 7. Fair Value Measurements

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis:

14

Index

(in thousands)
September 30, 2018
Balance sheet location:
Level 1
 
Level 2
 
Level 3
 
Total
Prepaid expenses and other:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
5,447

 
$

 
$
5,447

Deferred charges and other assets, net:
 
 
 
 
 
 
 
Interest rate swaps

 
13,541

 

 
13,541

Total
$

 
$
18,988

 
$

 
$
18,988


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

 
$

 
$

 
$
150

Prepaid expenses and other:
 
 
 
 
 
 
 
Interest rate swaps

 
2,411

 

 
2,411

Deferred charges and other assets, net:
 
 
 
 
 
 
 
Interest rate swaps

 
10,776

 

 
10,776

Total
$
150

 
$
13,187

 
$

 
$
13,337


Level 1- Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2 - Financial assets and liabilities whose values are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Financial assets and liabilities whose values are based on unobservable inputs for the asset or liability.

Financial instruments are defined as cash, or other financial instruments to a third party. The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, investments carried at fair value, accounts payable and accrued liabilities approximate fair value due to their short-term nature. The Company's long-term debt and interest rate swaps approximate fair value because of their floating rate structure.

Derivative financial instruments are recognized as assets or liabilities in the financial statements and measured at fair value on a recurring basis. See Note 10, Derivatives and Hedging, for additional information. The Company measures its interest rate swaps at fair value and recognizes such derivative instruments as either assets or liabilities on the Company’s consolidated balance sheet.  Changes in the fair value of swaps are recognized in other comprehensive income, as the Company has designated these swaps as cash flow hedges for accounting purposes. The Company entered into these swaps to manage a portion of its exposure to interest rate movements by converting a portion of its variable rate long-term debt to fixed rate debt.

The Company determines the fair value of its security holdings based on pricing from its vendors. The valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from non-binding consensus prices that are corroborated by observable market data or quoted market prices for similar instruments. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs).

The Company has certain non-marketable long-term investments for which it is not practicable to estimate fair value, refer to Note 6, Investments, for additional information.


15

Index

Note 8. Property, Plant and Equipment

Property, plant and equipment consisted of the following:
(in thousands)
 
Estimated Useful Lives
 
September 30, 2018
 
December 31, 2017
Land
 
 
 
$
6,568

 
$
6,418

Buildings and structures
 
10 - 40 years
 
207,647

 
195,540

Cable and wire
 
4 - 40 years
 
302,592

 
286,999

Equipment and software
 
2 - 17 years
 
763,089

 
730,228

Plant in service
 
 
 
1,279,896

 
1,219,185

Plant under construction
 
 
 
74,422

 
62,202

Total property, plant and equipment
 
 
 
1,354,318

 
1,281,387

Less accumulated amortization and depreciation
 
 
 
684,609

 
595,060

Property, plant and equipment, net
 
 
 
$
669,709

 
$
686,327


Note 9. Goodwill and Other Intangible Assets

Goodwill consisted of the following:
(in thousands)
September 30, 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 consisted of the following:

16

Index

 
September 30, 2018
 
December 31, 2017
(in thousands)
Gross
Carrying
Amount
 
Accumulated Amortization and Other
 
Net
 
Gross
Carrying
Amount
 
Accumulated Amortization and Other
 
Net
Non-amortizing intangibles:
 
 
 
 
 
 
 
 
 
 
 
Cable franchise rights
$
64,334

 
$

 
$
64,334

 
$
64,334

 
$

 
$
64,334

Railroad crossing rights
141

 

 
141

 
141

 

 
141

Total non-amortizing intangibles
64,475

 

 
64,475

 
64,475

 

 
64,475

 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangibles:
Affiliate contract expansion - wireless
455,305

 
(152,603
)
 
302,702

 
410,157

 
(105,964
)
 
304,193

Favorable leases - wireless
15,816

 
(1,754
)
 
14,062

 
13,103

 
(1,222
)
 
11,881

Acquired subscribers - cable
25,265

 
(25,213
)
 
52

 
25,265

 
(25,100
)
 
165

Other intangibles
464

 
(218
)
 
246

 
463

 
(198
)
 
265

Total finite-lived intangibles
496,850

 
(179,788
)
 
317,062

 
448,988

 
(132,484
)
 
316,504

Total intangible assets
$
561,325

 
$
(179,788
)
 
$
381,537

 
$
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 were $9.6 million and $28.2 million for the three and nine months ended September 30, 2018, respectively. Since May 6, 2016, the date of the non-monetary exchange, waived management fees received from Sprint totaled $88.8 million.

The gross carrying amount of certain intangibles was affected by the expansion of the Company's wireless service coverage area with Sprint. See Note 3, Acquisition for additional information.

Note 10.  Derivatives and Hedging

The table below presents the fair value of the Company’s derivative financial instruments as well as its classification on the consolidated balance sheet:
(in thousands)
 
September 30,
2018
 
December 31,
2017
Balance sheet location of derivative financial instruments:
 
 
 
 
Prepaid expenses and other
 
$
5,447

 
$
2,411

Deferred charges and other assets, net
 
13,541

 
10,776

Total derivatives designated as hedging instruments
 
$
18,988

 
$
13,187


The table below summarizes changes in accumulated other comprehensive income (loss) by component:
 
Nine Months Ended September 30, 2018
(in thousands)
Gains (Losses) on
Cash Flow
Hedges
 
Income Tax
(Expense)
Benefit
 
Accumulated
Other
Comprehensive
Income (Loss), net of taxes
Balance as of December 31, 2017
$
13,187

 
$
(4,957
)
 
$
8,230

Net change in unrealized gain (loss)
5,801

 
(1,441
)
 
4,360

Net current period other comprehensive income (loss)
5,801

 
(1,441
)
 
4,360

Balance as of September 30, 2018
$
18,988

 
$
(6,398
)
 
$
12,590


The outstanding notional amounts of the cash flow hedge were $395.1 million and $418.3 million as of September 30, 2018 and December 31, 2017, respectively.  See Note 7, Fair Value Measurements, for additional information.


17

Index

Note 11. Other Assets and Accrued Liabilities

Prepaid expenses and other, classified as current assets, included the following:
(in thousands)
 
September 30, 2018
 
December 31, 2017
Prepaid rent
 
$
10,058

 
$
10,519

Prepaid maintenance expenses
 
3,546

 
3,062

Interest rate swaps
 
5,447

 
2,411

Deferred contract asset
 
35,617

 

Other
 
8,715

 
1,119

Prepaid expenses and other
 
$
63,383

 
$
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)
 
September 30, 2018
 
December 31, 2017
Interest rate swaps
 
$
13,541

 
$
10,776

Deferred contract asset
 
36,260

 

Other
 
3,922

 
2,914

Deferred charges and other assets, net
 
$
53,723

 
$
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)
 
September 30, 2018
 
December 31, 2017
Sales and property taxes payable
 
$
3,513

 
$
3,872

Severance accrual
 

 
1,028

Asset retirement obligations
 
582

 
492

Accrued programming costs
 
2,927

 
2,805

Other current liabilities
 
7,734

 
5,717

Accrued liabilities and other
 
$
14,756

 
$
13,914


Other liabilities, classified as long-term liabilities, included the following:
(in thousands)
 
September 30, 2018
 
December 31, 2017
Non-current portion of deferred revenues
 
$
12,659

 
$
14,030

Other
 
1,908

 
1,263

Other liabilities
 
$
14,567

 
$
15,293


The Company's asset retirement obligations are included in the balance sheet captions "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 and types of the towers.


18

Index

Note 12. Long-Term Debt

Total debt as of September 30, 2018 and December 31, 2017 consisted of the following:
(in thousands)
 
September 30, 2018
 
December 31, 2017
Term loan A-1
 
$
400,125

 
$
436,500

Term loan A-2
 
390,000

 
400,000

 
 
790,125

 
836,500

Less: unamortized loan fees
 
11,337

 
14,542

Total debt, net of unamortized loan fees
 
$
778,788

 
$
821,958

 
 
 
 
 
Current maturities of long-term debt, net of current unamortized loan fees
 
$
84,743

 
$
64,397

Long-term debt, less current maturities, net of unamortized loan fees
 
$
694,045

 
$
757,561


As of September 30, 2018, the Company's indebtedness totaled approximately $778.8 million, net of unamortized loan fees of $11.3 million, with an annualized overall weighted average interest rate of approximately 4.11%. As of September 30, 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%. For September 2018, one-month LIBOR was 2.08%. LIBOR resets monthly.

The Term Loan A-1 required quarterly principal repayments of $6.1 million, which began on September 30, 2016 and continued through June 30, 2017, increased to $12.1 million quarterly from September 30, 2017 through June 30, 2020; then increases 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 which began on September 30, 2018 and continue through March 31, 2023, with the remaining balance due June 30, 2023.

The 2016 credit agreement also requires 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; and


19

Index

maintain a minimum liquidity balance of greater than $25 million. The balance includes amounts available 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 September 30, 2018, the Company was in compliance with the covenants in its credit agreements.
 
 
 
Actual
 
Covenant Requirement
Total leverage ratio
 
2.61

 
3.75 or Lower
Debt service coverage ratio
 
3.25

 
2.00 or Higher
Minimum liquidity balance (in millions)
 
$
149.1

 
$25.0 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 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 13. Income Taxes

The Company files U.S. federal income tax returns and various state and local income tax returns. 

The net operating losses acquired in the nTelos acquisition are open to examination from 2002 forward. Income tax filings prior to 2014, excluding the acquired net operating losses, are no longer subject to examination. The Company is not subject to any state or federal income tax audits as of September 30, 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 September 30, 2018, the Company is continuing to evaluate the provisional amounts recorded related to the 2017 Tax Act at December 31, 2017, for related state and local municipality tax matters.















20

Index

Note 14. Segment Reporting
 
Three Months Ended September 30, 2018 
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
External revenue
 
 
 
 
 
 
 
 
 
 
 
 
Service revenue
 
$
96,299

 
$
28,578

 
$
5,443

 
$

 
$

 
$
130,320

Equipment revenue
 
15,666

 
234

 
63

 

 

 
15,963

Other
 
2,871

 
2,104

 
7,473

 

 

 
12,448

Total external revenue
 
114,836

 
30,916

 
12,979

 

 

 
158,731

Internal revenue
 
1,263

 
1,266

 
6,643

 

 
(9,172
)
 

Total operating revenue
 
116,099

 
32,182

 
19,622

 

 
(9,172
)
 
158,731

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 
32,253

 
14,837

 
9,266

 
(12
)
 
(8,458
)
 
47,886

Cost of goods sold
 
14,940

 
78

 
19

 
(1
)
 

 
15,036

Selling, general and administrative
 
11,191

 
5,331

 
1,780

 
9,864

 
(714
)
 
27,452

Depreciation and amortization
 
30,363

 
6,102

 
3,435

 
128

 

 
40,028

Total operating expenses
 
88,747

 
26,348

 
14,500

 
9,979

 
(9,172
)
 
130,402

Operating income (loss)
 
$
27,352

 
$
5,834

 
$
5,122

 
$
(9,979
)
 
$

 
$
28,329


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

 
$
26,934

 
$
5,126

 
$

 
$

 
$
139,455

Equipment revenue
 
1,742

 
219

 
33

 

 

 
1,994

Other
 
2,129

 
1,937

 
6,267

 

 

 
10,333

Total external revenue
 
111,266

 
29,090

 
11,426

 

 

 
151,782

Internal revenue
 
1,239

 
999

 
8,425

 

 
(10,663
)
 

Total operating revenue
 
112,505

 
30,089

 
19,851

 

 
(10,663
)
 
151,782

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 
33,825

 
14,858

 
9,796

 

 
(9,927
)
 
48,552

Cost of goods sold
 
7,216

 
55

 
11

 

 

 
7,282

Selling, general and administrative
 
30,099

 
5,358

 
1,706

 
5,772

 
(736
)
 
42,199

Acquisition, integration and migration 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












21

Index

Nine Months Ended September 30, 2018
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
External revenue
 
 
 
 
 
 
 
 
 
 
 
 
Service revenue
 
$
284,154

 
$
85,797

 
$
16,052

 
$

 
$

 
$
386,003

Equipment revenue
 
48,859

 
537

 
155

 

 

 
49,551

Other
 
6,897

 
6,276

 
20,643

 

 

 
33,816

Total external revenue
 
339,910

 
92,610

 
36,850

 

 

 
469,370

Internal revenue
 
3,746

 
3,394

 
21,591

 

 
(28,731
)
 

Total operating revenue
 
343,656

 
96,004

 
58,441

 

 
(28,731
)
 
469,370

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 
99,491

 
45,118

 
28,441

 

 
(26,688
)
 
146,362

Cost of goods sold
 
45,749

 
197

 
61

 

 

 
46,007

Selling, general and administrative
 
35,693

 
14,940

 
5,183

 
32,344

 
(2,043
)
 
86,117

Depreciation and amortization
 
95,853

 
18,305

 
10,069

 
405

 

 
124,632

Total operating expenses
 
276,786

 
78,560

 
43,754

 
32,749

 
(28,731
)