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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
September 30, 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=13172203&doc=12
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
49,857,142
(Title of Class)
(Trading Symbol)
(Name of Exchange on which Registered)
(The number of shares of the registrant's common stock outstanding on October 25, 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)
 
 
 
 
 
 
September 30,
2019
 
December 31, 2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
97,415

 
$
85,086

Accounts receivable, net of allowance for doubtful accounts of $563 and $534, respectively
 
60,084

 
54,407

Income taxes receivable
 
2,983

 
5,282

Inventory, net of allowances of $196 and $113, respectively
 
4,561

 
5,265

Prepaid expenses and other
 
56,597

 
60,162

Total current assets
 
221,640

 
210,202

Investments
 
11,851

 
10,788

Property, plant and equipment, net
 
688,516

 
701,359

Intangible assets, net
 
328,831

 
366,029

Goodwill
 
149,070

 
146,497

Operating lease right-of-use assets
 
400,489

 

Deferred charges and other assets
 
50,469

 
49,891

Total assets
 
$
1,850,866

 
$
1,484,766

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
 
$
31,634

 
$
20,618

Accounts payable
 
26,470

 
35,987

Advanced billings and customer deposits
 
8,127

 
7,919

Accrued compensation
 
6,915

 
9,452

Current operating lease liabilities
 
44,178

 

Accrued liabilities and other
 
14,731

 
14,563

Total current liabilities
 
132,055

 
88,539

Long-term debt, less current maturities, net of unamortized loan fees
 
696,378

 
749,624

Other long-term liabilities:
 
 
 
 
Deferred income taxes
 
129,651

 
127,453

Deferred lease
 

 
22,436

Asset retirement obligations
 
29,956

 
28,584

Retirement plan obligations
 
10,311

 
11,519

Noncurrent operating lease liabilities
 
359,985

 

Other liabilities
 
16,676

 
14,364

Total other long-term liabilities
 
546,579

 
204,356

Shareholders’ equity:
 
 
 
 
Common stock, no par value, authorized 96,000; 49,857 and 49,630 issued and outstanding at September 30, 2019 and December 31, 2018, respectively
 

 

Additional paid in capital
 
48,083

 
47,456

Retained earnings
 
427,925

 
386,511

Accumulated other comprehensive income (loss), net of taxes
 
(154
)
 
8,280

Total shareholders’ equity
 
475,854

 
442,247

Total liabilities and shareholders’ equity
 
$
1,850,866

 
$
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
(in thousands, except per share amounts)
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Operating revenue:
2019
 
2018
 
2019
 
2018
Service revenue and other
$
138,832

 
$
142,768

 
$
424,122

 
$
419,819

Equipment revenue
16,320

 
15,963

 
48,787

 
49,551

Total operating revenue
155,152

 
158,731

 
472,909

 
469,370

Operating expenses:
 
 
 
 
 
 
 
Cost of services
50,164

 
47,886

 
149,179

 
146,362

Cost of goods sold
15,825

 
15,036

 
46,336

 
46,007

Selling, general and administrative
27,178

 
27,452

 
83,070

 
86,117

Depreciation and amortization
36,626

 
40,028

 
120,158

 
124,632

Total operating expenses
129,793

 
130,402

 
398,743

 
403,118

Operating income
25,359

 
28,329

 
74,166

 
66,252

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(7,505
)
 
(9,001
)
 
(22,981
)
 
(27,184
)
Other
1,099

 
1,054

 
3,562

 
2,882

Income before income taxes
18,953

 
20,382

 
54,747

 
41,950

Income tax expense
4,599

 
4,848

 
13,333

 
10,207

Net income
14,354

 
15,534

 
41,414

 
31,743

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate hedge, net of tax
(1,494
)
 
465

 
(8,434
)
 
4,360

Comprehensive income
$
12,860

 
$
15,999

 
$
32,980

 
$
36,103

 
 
 
 
 
 
 
 
Net income per share, basic and diluted:
 
 
 
 
 
 
 
Basic net income per share
$
0.29

 
$
0.31

 
$
0.83

 
$
0.64

Diluted net income per share
$
0.29

 
$
0.31

 
$
0.83

 
$
0.63

Weighted average shares outstanding, basic
49,857

 
49,559

 
49,827

 
49,527

Weighted average shares outstanding, diluted
50,129

 
50,117

 
50,110

 
50,044

 
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, June 30, 2019
 
49,857

 
$
47,138

 
$
413,571

 
$
1,340

 
$
462,049

Net income
 

 

 
14,354

 

 
14,354

Other comprehensive loss, net of tax
 

 

 

 
(1,494
)
 
(1,494
)
Stock based compensation
 

 
936

 

 

 
936

Stock options exercised
 

 

 

 

 

Common stock issued
 

 
9

 

 

 
9

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 

 

 

 

 

Balance, September 30, 2019
 
49,857

 
$
48,083

 
$
427,925

 
$
(154
)
 
$
475,854

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance, December 31, 2018
 
49,630

 
$
47,456

 
$
386,511

 
$
8,280

 
$
442,247

Net income
 

 

 
41,414

 

 
41,414

Other comprehensive loss, net of tax
 

 

 

 
(8,434
)
 
(8,434
)
Stock based compensation
 
184

 
3,433

 

 

 
3,433

Stock options exercised
 
29

 
81

 

 

 
81

Common stock issued
 

 
25

 

 

 
25

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(62
)
 
(2,912
)
 

 

 
(2,912
)
Common stock issued to acquire non-controlling interest in nTelos
 
76

 

 

 

 

Balance, September 30, 2019
 
49,857

 
$
48,083

 
$
427,925

 
$
(154
)
 
$
475,854

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
Balance, June 30, 2018
 
49,558

 
$
46,172

 
$
369,511

 
$
12,125

 
$
427,808

Net income
 

 

 
15,534

 

 
15,534

Other comprehensive gain, net of tax
 

 

 

 
465

 
465

Stock based compensation
 
1

 
1,171

 

 

 
1,171

Common stock issued
 

 
8

 

 

 
8

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 

 
(1
)
 

 

 
(1
)
Balance, September 30, 2018
 
49,559

 
$
47,350

 
$
385,045

 
$
12,590

 
$
444,985

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
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
 

 

 
31,743

 

 
31,743

Other comprehensive gain, net of tax
 

 

 

 
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,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
41,414

 
$
31,743

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
104,503

 
106,002

Amortization
 
15,655

 
18,630

Accretion of asset retirement obligations
 
1,093

 
710

Bad debt expense
 
1,215

 
1,362

Stock based compensation expense, net of amount capitalized
 
3,158

 
4,578

Deferred income taxes
 
4,999

 
(1,989
)
Net gain from patronage and investments
 
(3,035
)
 
(2,412
)
Amortization of long-term debt issuance costs
 
2,596

 
3,472

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,894
)
 
(5,492
)
Inventory, net
 
704

 
741

Current income taxes
 
2,299

 
14,932

Waived management fee
 
29,016

 
28,164

Other assets
 
(15,073
)
 
(13,393
)
Operating lease right-of-use assets
 
38,262

 

Lease liabilities
 
(32,173
)
 

Accounts payable
 
7,023

 
(1,913
)
Deferred lease
 

 
4,159

Other deferrals and accruals
 
(3,303
)
 
(494
)
Net cash provided by operating activities
 
193,459

 
188,800

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(107,038
)
 
(92,309
)
Cash disbursed for acquisitions
 
(10,000
)
 
(52,000
)
Cash disbursed for FCC spectrum licenses
 
(16,742
)
 

Proceeds from sale of assets and other
 
156

 
539

Net cash used in investing activities
 
(133,624
)
 
(143,770
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(44,666
)
 
(46,375
)
Proceeds from revolving credit facility borrowings
 

 
15,000

Principal payments on revolving credit facility
 

 
(15,000
)
Proceeds from exercises of stock options
 
81

 

Taxes paid for equity award issuances
 
(2,912
)
 
(2,033
)
Other
 
(9
)
 

Net cash used in financing activities
 
(47,506
)
 
(48,408
)
Net increase (decrease) in cash and cash equivalents
 
12,329

 
(3,378
)
Cash and cash equivalents, beginning of period
 
85,086

 
78,585

Cash and cash equivalents, end of period
 
$
97,415

 
$
75,207


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 September 30, 2019
 
Nine Months Ended September 30, 2019
Lease income from operating leases - fixed
 
$
2,149

 
$
6,219


 

 

Operating lease expense
 
18,151

 
51,811


 


 


Amortization of finance lease assets
 
158

 
399

Interest on finance lease liabilities
 
14

 
59

Subtotal finance lease cost
 
172

 
458


 


 


Total lease expense
 
$
18,323

 
$
52,269

Substantially all of the Company's sublease income from operating leases relates to fixed lease payments.

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. Operating lease expense includes variable lease payments and short-term lease expense, both of which are immaterial. Variable lease expenses represent payments that are dependent on a rate or index, or on usage of the asset.

The following table summarizes other information related to operating and finance leases:
(in thousands)
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
 


 


Operating cash flows used by leases
 
$
16,002

 
$
46,546

Leased assets obtained in exchange for new operating lease liabilities
 
43,647

 
69,407








8

Index


The following table summarizes the lease terms and discount rates:
 
 
September 30,
2019
Weighted-average remaining lease term (years)
 
 
   Operating leases
 
8

   Finance leases
 
16

Weighted-average discount rate
 
 
   Operating leases
 
4.6
%
   Finance leases
 
5.2
%

The following table summarizes the expected maturity of lease liabilities at September 30, 2019:
(in thousands)
 
Operating Leases
 
Finance Leases
 
Total
2019
 
$
12,742

 
$
63

 
$
12,805

2020
 
64,474

 
174

 
64,648

2021
 
65,087

 
174

 
65,261

2022
 
63,341

 
174

 
63,515

2023
 
59,885

 
174

 
60,059

2024 and thereafter
 
242,115

 
1,704

 
243,819

   Total lease payments
 
507,644

 
2,463

 
510,107

Less: Interest
 
103,481

 
748

 
104,229

   Present value of lease liabilities
 
$
404,163

 
$
1,715

 
$
405,878


The Company's finance lease liabilities are presented in the accrued liabilities and other and the other liabilities lines of the unaudited condensed consolidated balance sheets. 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 at cell sites and dedicated fiber-optic strands to third parties. These agreements have been 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 lease revenue associated with these agreements. The following table summarizes the total minimum rental receipts under lease agreements at September 30, 2019:
(in thousands)
 
Operating Leases
2019
 
$
1,774

2020
 
6,621

2021
 
4,526

2022
 
3,432

2023
 
1,801

2024 and thereafter
 
4,978

   Total lease income
 
$
23,132



Note 3. Revenue from Contracts with Customers

The Company earns revenue primarily through the sale of its wireless service. Additional revenue is earned from the sale of wireless equipment; from business, residential and enterprise services which provide video, broadband, and voice services; and

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Index

from tower and other services. Refer to Note 14, Segment Reporting, for a tabular summary of revenue for the three and nine months ended September 30, 2019.

Wireless service
The Company earns revenue primarily through the sale of its wireless service by providing network access to Sprint under the affiliate agreement. Wireless service revenue is variable based on billed revenue to Sprint’s subscribers that originated 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, estimates of bad debt, 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.

Under our affiliate agreement with Sprint, we have historically earned and recognized monthly revenue of $1.5 million for providing service to Sprint customers who pass through our network area ("Travel Revenue"). While we continue to provide these services to Sprint, the agreed upon payments were suspended by Sprint on April 30, 2019. Accordingly, we have ceased recognizing revenue for the services provided after that date until a new prospective fee can be agreed. We have commenced final dispute resolution proceedings to settle this dispute and expect it to be settled by early 2020.

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 within the Sprint Affiliate Area. The Company determined that reimbursements to Sprint including the cost of prepaid handsets and commissions, and postpaid commissions paid by Sprint to third-party resellers, 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. Contract asset balances and activity for 2019 were as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Beginning balance
 
$
73,789

 
$
57,256

 
$
65,674

 
$
51,103

Contract payments
 
20,761

 
16,421

 
56,477

 
44,790

Contract amortization
 
(14,930
)
 
(11,861
)
 
(42,531
)
 
(34,077
)
Ending balance
 
$
79,620

 
$
61,816

 
$
79,620

 
$
61,816



Wireless equipment
The Company also earns revenue through the sale of wireless equipment. The Company owns and operates Sprint-branded retail stores within the Sprint Affiliate Area 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 its 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.

Business, residential and enterprise
The Company also earns revenue in the Cable and Wireline segments from the sale of business, residential, and enterprise services to customers where the performance obligations are to provide cable, broadband, and telephone network services, sell and lease equipment and wiring services, and lease fiber-optic cable. The Company's arrangements for residential services 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.


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Index

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 and Other
The Company also earns revenue from tower and other services. Tower revenue consists primarily of tower collocation space on cell towers owned by the Company accounted for under Topic 842, Leases. Other revenue includes network access-related charges for service provided to customers across the segments.

Future performance obligations
On September 30, 2019, the Company had approximately $3.5 million allocated to unsatisfied performance obligations, which excludes contracts with original expected duration of one year or less. The following table summarizes the approximate amounts expected to be recognized as revenue after September 30, 2019.
 
 
Amount Expected to be Recognized as Revenue:
(in thousands)
 
 
2019
 
$
219

2020
 
850

2021
 
770

2022 and thereafter
 
1,707

Total
 
$
3,546



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 the Cable and Wireline segments. Capitalized contract assets, including commissions and installation costs, are amortized on a straight-line basis over the average customer life of 44 months and 72 months for Cable and Wireline, respectively. 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 were as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Beginning Balance
 
$
10,476

 
$
9,755

 
$
10,091

 
$
9,841

Contract payments
 
1,840

 
1,613

 
4,996

 
4,246

Contract amortization
 
(1,399
)
 
(1,339
)
 
(4,170
)
 
(4,058
)
Ending Balance
 
$
10,917

 
$
10,029

 
$
10,917

 
$
10,029




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 remaining useful lives of the acquired property, plant and equipment were approximately 2.5 years to 12.5 years and the estimated useful lives for subscriber relationships were 7 years at the time of the acquisition. Big Sandy was a provider of cable television, telephone and high speed internet services. 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 estimates may be revised during the one year measurement period provided by the authoritative guidance applicable to business combinations.

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Index


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 Shentel has continued access to the spectrum. Determination of EBV is made by an independent appraisal process.

Note 6. Earnings Per Share ("EPS")

Basic EPS was computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS was computed under the treasury stock method 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 unvested equity awards that are expected to vest 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)
 
2019
 
2018
 
2019
 
2018
Calculation of net income per share:
 
 
 
 
 
 
 
 
Net income
 
$
14,354

 
$
15,534

 
$
41,414

 
$
31,743

Basic weighted average shares outstanding
 
49,857

 
49,559

 
49,827

 
49,527

Basic net income per share
 
$
0.29

 
$
0.31

 
$
0.83

 
$
0.64

 
 
 
 
 
 
 
 
 
Effect of stock options outstanding:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
49,857

 
49,559

 
49,827

 
49,527

Effect from dilutive shares and options outstanding
 
272

 
558

 
283

 
517

Diluted weighted average shares outstanding
 
50,129

 
50,117

 
50,110

 
50,044

Diluted net income per share
 
$
0.29

 
$
0.31

 
$
0.83

 
$
0.63



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)
 
2019
 
2018
 
2019
 
2018
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive
 
93

 
13

 
109

 
60




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Index


Note 7Investments

Investments consist of the following:
(in thousands)
September 30,
2019
 
December 31,
2018
Domestic equity funds
$
1,681

 
$
1,409

International equity funds
421

 
370

Total investments carried at fair value
2,102

 
1,779

 
 
 
 
CoBank
8,368

 
7,705

Equity in other telecommunications partners
767

 
782

Total investments carried at cost
9,135

 
8,487

 
 
 
 
Other
614

 
522

Total equity method investments
614

 
522

 
 
 
 
Total investments
$
11,851

 
$
10,788



The Company determines classification for investments at the date individual investments are acquired. The appropriateness of such classification is periodically reassessed. The Company monitors the 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. The domestic and international equity funds are carried at their fair value as determined by using the net asset value expedient.

Note 8. Property, Plant and Equipment

Property, plant and equipment consisted of the following:
(in thousands)
 
Estimated Useful Lives
 
September 30,
2019
 
December 31, 2018
Land
 
 
 
$
6,936

 
$
6,723

Buildings and structures
 
10 - 40 years
 
231,962

 
213,657

Cable and fiber
 
15 - 40 years
 
321,963

 
309,928

Equipment and software
 
3 - 20 years
 
839,624

 
791,401

Plant in service
 
 
 
1,400,485

 
1,321,709

Plant under construction
 
 
 
70,674

 
81,409

Total property, plant and equipment
 
 
 
1,471,159

 
1,403,118

Less: accumulated amortization and depreciation
 
 
 
782,643

 
701,759

Property, plant and equipment, net
 
 
 
$
688,516

 
$