SEC Filing - Shenandoah Telecommunications Co

View:

Download DOC

Download PDF

Download XLS

Download XBRL

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, 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

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

	Unaudited Condensed Consolidated Balance Sheets	3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income	4

	Unaudited Condensed Consolidated Statements of Shareholders’ Equity	5

	Unaudited Condensed Consolidated Statements of Cash Flows	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 6.	Exhibits	38

	Signatures	40

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.

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.

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.

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.

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.

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

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

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.

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.

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

Index

Note 7. Investments

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