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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, 2019
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=12893680&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)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock (No Par Value)
SHEN
NASDAQ Global Select Market
49,845,597
(Title of Class)
(Trading Symbol)
(Name of Exchange on which Registered)
(The number of shares of the registrant’s common stock outstanding on April 30, 2019)
 
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 every Interactive Data File required to be submitted 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 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  ☑
 
 




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,
2019
 
December 31, 2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
69,859

 
$
85,086

Accounts receivable, net of allowance for doubtful accounts of $464 and $534, respectively
 
58,153

 
54,407

Income taxes receivable
 

 
5,282

Inventory, net of allowances of $81 and $113, respectively
 
7,240

 
5,265

Prepaid expenses and other
 
52,533

 
60,162

Total current assets
 
187,785

 
210,202

Investments
 
11,274

 
10,788

Property, plant and equipment, net
 
701,980

 
701,359

Intangible assets, net
 
339,714

 
366,029

Goodwill
 
149,070

 
146,497

Operating lease right-of-use assets
 
361,564

 

Deferred charges and other assets
 
48,325

 
49,891

Total assets
 
$
1,799,712

 
$
1,484,766

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
 
$
24,293

 
$
20,618

Accounts payable
 
25,410

 
35,987

Advanced billings and customer deposits
 
8,095

 
7,919

Accrued compensation
 
4,488

 
9,452

Income taxes payable
 
2,306

 

Current operating lease liabilities
 
39,400

 

Accrued liabilities and other
 
15,129

 
14,563

Total current liabilities
 
119,121

 
88,539

Long-term debt, less current maturities, net of unamortized loan fees
 
726,970

 
749,624

Other long-term liabilities:
 
 
 
 
Deferred income taxes
 
123,169

 
127,453

Deferred lease
 

 
22,436

Asset retirement obligations
 
29,846

 
28,584

Retirement plan obligations
 
10,323

 
11,519

Noncurrent operating lease liabilities
 
322,635

 

Other liabilities
 
15,034

 
14,364

Total other long-term liabilities
 
501,007

 
204,356

Shareholders’ equity:
 
 
 
 
Common stock, no par value, authorized 96,000; 49,844 and 49,630 issued and outstanding at March 31, 2019 and December 31, 2018, respectively
 

 

Additional paid in capital
 
46,641

 
47,456

Retained earnings
 
400,421

 
386,511

Accumulated other comprehensive income (loss), net of taxes
 
5,552

 
8,280

Total shareholders’ equity
 
452,614

 
442,247

Total liabilities and shareholders’ equity
 
$
1,799,712

 
$
1,484,766


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,
Operating revenue:
 
 
 
 
2019
 
2018
Service revenue and other
 
 
 
 
$
143,231

 
$
136,559

Equipment revenue
 
 
 
 
15,612

 
17,579

Total operating revenue
 
 
 
 
158,843

 
154,138

Operating expenses:
 
 
 
 
 
 
 
Cost of services
 
 
 
 
49,518

 
49,342

Cost of goods sold
 
 
 
 
14,637

 
15,805

Selling, general and administrative
 
 
 
 
28,722

 
28,750

Depreciation and amortization
 
 
 
 
41,179

 
43,487

Total operating expenses
 
 
 
 
134,056

 
137,384

Operating income (loss)
 
 
 
 
24,787

 
16,754

Other income (expense):
 
 
 
 
 
 
 
Interest expense
 
 
 
 
(7,954
)
 
(9,332
)
Gain (loss) on investments, net
 
 
 
 
250

 
(32
)
Non-operating income (loss), net
 
 
 
 
1,037

 
1,021

Income (loss) before income taxes
 
 
 
 
18,120

 
8,411

Income tax expense (benefit)
 
 
 
 
4,210

 
1,828

Net income (loss)
 
 
 
 
13,910

 
6,583

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate hedge, net of tax
 
 
 
 
(2,728
)
 
3,062

Comprehensive income (loss)
 
 
 
 
$
11,182

 
$
9,645

 
 
 
 
 
 
 
 
Net income (loss) per share, basic and diluted:
 
 
 
 
 
 
 
Basic net income (loss) per share
 
 
 
 
$
0.28

 
$
0.13

Diluted net income (loss) per share
 
 
 
 
$
0.28

 
$
0.13

Weighted average shares outstanding, basic
 
 
 
 
49,775

 
49,474

Weighted average shares outstanding, diluted
 
 
 
 
50,115

 
50,024

 
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 ASU 2014-09
 

 

 
56,097

 

 
56,097

Net income (loss)
 

 

 
6,583

 

 
6,583

Other comprehensive gain (loss), net of tax
 

 

 

 
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 interest in nTelos
 
76

 

 

 

 

Balance, March 31, 2018
 
49,539

 
$
45,075

 
$
359,885

 
$
11,292

 
$
416,252

 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
49,630

 
$
47,456

 
$
386,511

 
$
8,280

 
$
442,247

Change in Accounting Principle - Adoption of ASU 2016-02, Leases
 

 

 


 

 

Net income (loss)
 

 

 
13,910

 

 
13,910

Other comprehensive gain (loss), net of tax
 

 

 

 
(2,728
)
 
(2,728
)
Stock based compensation
 
167

 
1,802

 

 

 
1,802

Stock options exercised
 
28

 
175

 

 

 
175

Common stock issued
 

 
8

 

 

 
8

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(57
)
 
(2,800
)
 

 

 
(2,800
)
Common stock issued to acquire non-controlling interest in nTelos
 
76

 

 

 

 

Balance, March 31, 2019
 
49,844

 
$
46,641

 
$
400,421

 
$
5,552

 
$
452,614


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,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
13,910

 
$
6,583

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation
 
35,520

 
36,634

Amortization
 
5,659

 
6,853

Bad debt expense
 
367

 
369

Stock based compensation expense, net of amount capitalized
 
1,714

 
2,037

Waived management fee
 
9,628

 
9,048

Deferred income taxes
 
(3,378
)
 
(3,684
)
(Gain) loss on investments
 
(250
)
 
33

Net (gain) loss from patronage and equity investments
 
(890
)
 
(830
)
Amortization of long-term debt issuance costs
 
963

 
1,129

Net benefit from retirement plans
 
(38
)
 

Accrued interest and other
 
192

 
373

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(3,127
)
 
3,271

Inventory, net
 
(1,975
)
 
(2,457
)
Current income taxes
 
7,588

 
8,950

Operating lease right-of-use assets
 
7,779

 

Other assets
 
(1,460
)
 
(6,482
)
Accounts payable
 
4,641

 
216

Lease liabilities
 
(9,662
)
 

Deferred lease
 

 
736

Other deferrals and accruals
 
(5,518
)
 
(1,919
)
Net cash provided by (used in) operating activities
 
61,663

 
60,860

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(44,420
)
 
(24,382
)
Cash disbursed for acquisitions
 
(10,000
)
 
(52,000
)
Proceeds from sale of assets
 
53

 
263

Cash distributions (contributions) from investments and other
 
(8
)
 
1

Net cash provided by (used in) investing activities
 
(54,375
)
 
(76,118
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(19,889
)
 
(12,125
)
Proceeds from revolving credit facility borrowings
 

 
15,000

Principal payments on revolving credit facility
 

 
(15,000
)
Proceeds from exercises of stock options
 
72

 

Taxes paid for equity award issuances
 
(2,698
)
 
(1,754
)
Net cash provided by (used in) financing activities
 
(22,515
)
 
(13,879
)
Net increase (decrease) in cash and cash equivalents
 
(15,227
)
 
(29,137
)
Cash and cash equivalents, beginning of period
 
85,086

 
78,585

Cash and cash equivalents, end of period
 
$
69,859

 
$
49,448

 
 


 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2018.

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 2018 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:

The Company adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), as of January 1, 2019. The Company elected not to reclassify stranded income tax effects from accumulated other comprehensive income (OCI) to retained earnings and has implemented this election as its accounting policy as of January 1, 2019. The Company utilizes the portfolio approach as its policy to release the income tax effects from accumulated OCI as the entire portfolio is liquidated, sold or extinguished.

The Company adopted ASU No. 2016-02, Leases (“Topic 842” or “the new lease standard”) on January 1, 2019. Topic 842 replaces previous leasing guidance with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. Topic 842 requires lessees to recognize most leases on their balance sheet as liabilities, with corresponding right-of-use, or ROU, assets. The Company adopted the new lease standard utilizing the modified retrospective approach. As a result, comparable period information has not been retrospectively updated. The modified retrospective approach includes a package of optional practical expedients that we elected to apply. As a result, the Company did not reassess prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard. In those circumstances where the Company is the lessee, we have elected to account for non-lease components associated with our leases (e.g., maintenance costs) and lease components as a single lease component for substantially all of our asset classes under Topic 842. 

Note 2. Leases

The Company leases various cell sites, warehouses, retail stores, and office facilities for use in our business. These agreements include fixed rental payments as well as variable rental payments, such as those based on relevant inflation indices. The accounting lease term includes optional renewal periods that we are reasonably certain to exercise based on our assessment of relevant contractual and economic factors. The related lease payments are discounted at lease commencement using the Company's incremental borrowing rate in order to measure the lease liability and ROU asset.
The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the observable unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate. Under the new lease standard, leases are remeasured upon the occurrence of certain events or modifications.
Adoption of the new lease standard did not materially impact the Company's consolidated net earnings, cash flows, liquidity or loan covenants.


7

Index

The cumulative effect of the changes made to the consolidated January 1, 2019 balance sheet for the adoption of the new lease standard were as follows:
(in thousands)
 
December 31, 2018 As Previously Reported
 
Effect of the Adoption of ASC Topic 842 (Leases)
 
January 1, 2019 As Adjusted
Assets
 
 
 
 
 
 
Prepaid expenses and other
 
$
60,162

 
$
(11,580
)
 
$
48,582

Property, plant and equipment, net
 
701,359

 
1,789

 
703,148

Operating lease right-of-use assets
 

 
369,344

 
369,344

Intangible assets, net
 
366,029

 
(13,828
)
 
352,201

Liabilities
 
 
 
 
 
 
Current operating lease liabilities
 

 
38,773

 
38,773

Accrued liabilities and other
 
14,563

 
(412
)
 
14,151

Deferred Lease
 
22,436

 
(22,436
)
 

Noncurrent operating lease liabilities
 

 
328,156

 
328,156

Other liabilities
 
14,364

 
1,644

 
16,008


In addition to recognizing the operating lease liabilities and right-of-use assets, Topic 842 also reclassified prepaid and deferred rent balances, off-market leases, and lease incentives into the right-of-use assets.
The following table shows the components of lease income and costs:
(in thousands)
 
Three Months Ended March 31, 2019
Sublease income from operating leases
 
$
2,028

 
 
 
Operating lease expense
 
$
16,908

 
 
 
Amortization of lease assets
 
118

Interest on lease liabilities
 
22

Subtotal finance lease cost
 
140

 
 
 
Net lease expense
 
$
16,768

All operating lease expenses, including short-term and variable lease expenses, are split between cost of service and selling, general and administrative expense in the condensed consolidated statements of operations based on the use of the facility that the rent is being paid on. Variable lease expenses represent payments that are dependent on a rate or index, or on usage of the asset. Substantially all of the Company's sublease income from operating leases relates to fixed lease payments. Operating lease expense includes variable lease payments and short-term lease expense, both of which are immaterial.

The following table summarizes other information related to operating and finance leases:
(in thousands)
 
Three Months Ended March 31, 2019
 
 


Operating cash flows from leases
 
$
14,671

Leased assets obtained in exchange for new operating lease liabilities
 
4,588









8

Index

The following table summarizes the lease terms and discount rates:
 
 
March 31,
2019
Weighted-average remaining lease term (years)
 
 
   Operating leases
 
8

   Finance leases
 
16

Weighted-average discount rate
 
 
   Operating leases
 
4.8
%
   Finance leases
 
5.2
%

The following table summarizes the expected maturity of lease liabilities at March 31, 2019:
(in thousands)
 
Operating Leases
 
Finance Leases
 
Total
2019
 
$
41,246

 
$
107

 
$
41,353

2020
 
58,655

 
174

 
58,829

2021
 
57,202

 
174

 
57,376

2022
 
54,055

 
175

 
54,230

2023
 
50,279

 
174

 
50,453

2024 and thereafter
 
180,606

 
1,583

 
182,189

   Total lease payments
 
442,043

 
2,387

 
444,430

Less: Interest
 
80,008

 
1,075

 
81,083

   Present value of lease liabilities
 
$
362,035

 
$
1,312

 
$
363,347


The Company's finance lease liabilities are presented in the accrued liabilities and other and the other liabilities lines of the condensed consolidated balance sheet. The related finance lease assets are included in the property, plant and equipment line.

Our commitments under leases existing as of December 31, 2018 were approximately $55.1 million for the year ending December 31, 2019, $104.4 million in total for the years ending December 31, 2020 and 2021, $97.6 million in total for the years ending December 31, 2022 and 2023 and $168.5 million in total for years thereafter.

The Company is also the lessor on agreements to lease assets such as collocation space on cell towers and dedicated fiber-optic strands to third parties. These agreements were accounted for as operating leases both before and after adoption of the new lease standard. The new lease standard did not have a significant impact on the recognition of revenue associated with these agreements. The following table summarizes the total minimum rental receipts under lease agreements at March 31, 2019:
(in thousands)
 
Operating Leases
 
2019
 
$
5,241

 
2020
 
6,109

 
2021
 
4,042

 
2022
 
2,914

 
2023
 
1,345

 
2024 and thereafter
 
4,400

 
   Total sublease income
 
$
24,051

 


Note 3. 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

9

Index

earned was as follows:
 
 
Three Months Ended March 31, 2019
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Consolidated
Wireless service
 
$
97,075

 
$

 
$

 
$
97,075

Equipment
 
15,291

 
270

 
51

 
15,612

Business, residential and enterprise
 

 
30,518

 
10,562

 
41,080

Tower and other
 
3,288

 
2,921

 
8,296

 
14,505

Total revenue
 
115,654

 
33,709

 
18,909

 
168,272

Internal revenue
 
(1,270
)
 
(1,469
)
 
(6,690
)
 
(9,429
)
Total operating revenue
 
$
114,384

 
$
32,240

 
$
12,219

 
$
158,843


 
 
Three Months Ended March 31, 2018
(in thousands)
 
Wireless
 
Cable
 
Wireline
 
Consolidated
Wireless service
 
$
92,165

 
$

 
$

 
$
92,165

Equipment
 
17,374

 
159

 
46

 
17,579

Business, residential and enterprise
 

 
29,131

 
10,691

 
39,822

Tower and other
 
3,265

 
2,421

 
8,970

 
14,656

Total revenue
 
112,804

 
31,711

 
19,707

 
164,222

Internal revenue
 
(1,239
)
 
(1,031
)
 
(7,814
)
 
(10,084
)
Total operating revenue
 
$
111,565

 
$
30,680

 
$
11,893

 
$
154,138


Wireless service
The majority of the Company's revenue is earned through providing network access to Sprint under the affiliate agreement. 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 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.

On January 1, 2018, the Company recorded a wireless contract asset of approximately $51.1 million. As of December 31, 2018, the wireless contract asset balance was $65.7 million. During the three months ended March 31, 2019, payments that increased the wireless contract asset balance totaled $18.2 million and amortization reflected as a reduction of revenue totaled approximately $13.5 million. The wireless contract asset balance as of March 31, 2019 was approximately $70.4 million.

Wireless equipment
The Company owns and operates Sprint-branded retail stores within its 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. The Company is the principal in these equipment financing transactions, as it controls and bears the risk of ownership of the inventory prior to sale, and accordingly, revenue and handset costs are recorded on a gross basis, and the corresponding cost of the equipment is recorded separately to cost of goods sold.

10

Index


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 this revenue 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.

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. Additionally, the Company incurs commission and installation costs related to in-house employees and third-party vendors which are capitalized and amortized over the expected benefit period which is approximately 44 months and 72 months for Cable and Wireline, respectively.

Tower / Other
Tower revenue consists primarily of tower space leases accounted for under Topic 842, Leases, and Other revenue includes network access-related charges for service provided to customers across the segments.

Future performance obligations
On March 31, 2019, the Company had approximately $3.5 million 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 $0.6 million of this amount as revenue during the remainder of 2019, $0.7 million in 2020, an additional $0.7 million by 2021 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. Amortized and capitalized costs for Cable and Wireline contracts are as follows:
 
 
Three Months Ended
March 31,
(in thousands)
 
2019
 
2018
Prepaid expenses and other
 
$
4,721

 
$
4,580

Deferred charges and other assets
 
5,689

 
5,155

Total capitalized contract costs
 
$
10,410

 
$
9,735

 
 
 
 
 
Amortization of contract costs
 
$
1,380

 
$
1,338



Note 4. Acquisitions

Big Sandy

On February 28, 2019, the Company completed its preliminary valuation for the acquisition of the assets of Big Sandy Broadband, Inc. ("Big Sandy") for $10 million and recorded $4.6 million of property, plant and equipment; $2.8 million of subscriber relationships; and $2.6 million of goodwill which is reported in the Cable segment and was accounted for as a business combination under ASC 805, Business Combinations. The estimated useful lives of the acquired property, plant and equipment were approximately 2.5 years to 11 years and the estimated useful lives for subscriber relationships were 11 years at the time of the acquisition. Big Sandy was a provider of cable television, telephone and high speed internet services. The Company's investment will allow the Cable segment to expand its footprint into the adjacent markets of eastern Kentucky.  Our preliminary allocation of the acquisition price is based on our preliminary estimate of fair value for each of the acquired assets and liabilities. These

11

Index

estimates may be revised during the one year measurement period provided by the authoritative guidance applicable to business combinations.

Note 5. 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. 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. Effective 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.

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 by either party, 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 the Shentel owns the spectrum. Determination of EBV is made by an independent appraisal process.

Note 6. Earnings (Loss) Per Share ("EPS")

Basic EPS was computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS was computed under the treasury stock method by dividing net income (loss) 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
March 31,
(in thousands, except per share amounts)
 
2019
 
2018
Calculation of net income (loss) per share:
 
 
 
 
Net income (loss)
 
$
13,910

 
$
6,583

Basic weighted average shares outstanding
 
49,775

 
49,474

Basic net income (loss) per share
 
$
0.28

 
$
0.13

 
 
 
 
 
Effect of stock options outstanding:
 
 
 
 
Basic weighted average shares outstanding
 
49,775

 
49,474

Effect from dilutive shares and options outstanding
 
340

 
550

Diluted weighted average shares outstanding
 
50,115

 
50,024

Diluted net income (loss) per share
 
$
0.28

 
$
0.13



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
March 31,
(in thousands)
 
2019
 
2018
Awards excluded from the computation of diluted net income (loss) per share because their inclusion would have been anti-dilutive
 
123

 
141



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Index

 
Note 7Investments

Investments consist of the following:
(in thousands)
March 31,
2019
 
December 31,
2018
Domestic equity funds
$
1,628

 
$
1,409

International equity funds
409

 
370

Total investments carried at fair value
2,037

 
1,779

 
 
 
 
CoBank
7,925

 
7,705

Equity in other telecommunications partners
779

 
782

Total investments carried at cost
8,704

 
8,487

 
 
 
 
Other
533

 
522

Total equity method investments
533

 
522

 
 
 
 
Total investments
$
11,274

 
$
10,788



The classifications of debt and equity securities are determined by the Company at the date individual investments are acquired. The appropriateness of such classification is periodically reassessed. The Company monitors the fair value of all investments, and based on factors such as market conditions, financial information and industry conditions, the Company reflects impairments in values when warranted.

Note 8. Property, Plant and Equipment

Property, plant and equipment consisted of the following:
(in thousands)
 
Estimated Useful Lives
 
March 31,
2019
 
December 31, 2018
Land
 
 
 
$
6,937

 
$
6,723

Buildings and structures
 
10 - 40 years
 
222,052

 
213,657

Cable and wire
 
4 - 40 years
 
322,403

 
309,928

Equipment and software
 
2 - 17 years
 
803,661

 
791,401

Plant in service
 
 
 
1,355,053

 
1,321,709

Plant under construction
 
 
 
74,675

 
81,409

Total property, plant and equipment
 
 
 
1,429,728

 
1,403,118

Less accumulated amortization and depreciation
 
 
 
727,748

 
701,759

Property, plant and equipment, net
 
 
 
$
701,980

 
$
701,359


Note 9. Goodwill and Other Intangible Assets

Goodwill by segment consisted of the following:
(in thousands)
March 31, 2019
 
December 31, 2018
Wireless
$
146,383

 
$
146,383

Cable
2,677

 
104

Wireline
10

 
10

Total Goodwill
$
149,070

 
$
146,497






13

Index

Intangible assets consisted of the following:
 
March 31, 2019
 
December 31, 2018
(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

 
(183,076
)
 
272,229

 
455,305

 
(167,830
)
 
287,475

Favorable leases - Wireless

 

 

 
15,743

 
(1,919
)
 
13,824

Acquired subscribers - Cable
28,065

 
(25,285
)
 
2,780

 
25,265

 
(25,250
)
 
15

Other intangibles
463

 
(233
)
 
230

 
463

 
(223
)
 
240

Total finite-lived intangibles
483,833

 
(208,594
)
 
275,239

 
496,776

 
(195,222
)
 
301,554

Total intangible assets
$
548,308

 
$
(208,594
)
 
$
339,714

 
$
561,251

 
$
(195,222
)
 
$
366,029



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 was $9.6 million for the three months ended March 31, 2019. Since May 6, 2016, the date of the non-monetary exchange, waived management fees received from Sprint totaled $108.0 million.

Note 10Derivatives and Hedging

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the condensed consolidated balance sheet. The fair value of these instruments was estimated using an income approach and observable market inputs:
(in thousands)
 
March 31,
2019
 
December 31,
2018
Balance sheet location of derivative financial instruments:
 
 
 
 
Prepaid expenses and other
 
$
4,054

 
$
4,930

Deferred charges and other assets, net
 
5,565

 
8,323

Total derivatives designated as hedging instruments
 
$
9,619

 
$
13,253



The table below summarizes changes in accumulated other comprehensive income (loss) by component:
 
Three Months Ended March 31, 2019
(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, 2018
$
13,253

 
$
(4,973
)
 
$
8,280

Net change in unrealized gain (loss)
(2,386
)
 
595

 
(1,791
)
Amounts reclassified from accumulated other comprehensive income to interest expense
(1,248
)
 
311

 
(937
)
Net current period other comprehensive income (loss)
(3,634
)
 
906

 
(2,728
)
Balance as of March 31, 2019
$
9,619

 
$
(4,067
)
 
$
5,552



The outstanding notional amounts of the cash flow hedge were $372.9 million and $384.0 million as of March 31, 2019 and December 31, 2018, respectively.


14

Index

Note 11. Other Assets and Accrued Liabilities

Prepaid expenses and other, classified as current assets, included the following:
(in thousands)
 
March 31, 2019
 
December 31, 2018
Prepaid rent
 
$

 
$
11,245

Prepaid maintenance expenses
 
3,915

 
3,981

Interest rate swaps
 
4,054

 
4,930

Contract asset
 
41,195

 
37,957

Other
 
3,369

 
2,049

Prepaid expenses and other
 
$
52,533

 
$
60,162



Deferred charges and other assets, classified as long-term assets, included the following:
(in thousands)
 
March 31, 2019
 
December 31, 2018
Interest rate swaps
 
$
5,565

 
$
8,323

Contract asset
 
39,632

 
37,848

Other
 
3,128

 
3,720

Deferred charges and other assets
 
$
48,325

 
$
49,891



Accrued liabilities and other, classified as current liabilities, included the following:
<
(in thousands)
 
March 31, 2019
 
December 31, 2018
Sales and property taxes payable
 
$
4,937

 
$
4,281

Asset retirement obligations
 
524

 
582

Accrued programming costs
 
3,083

 
2,886