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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, 2020
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
https://cdn.kscope.io/74f4abec31fc07bc0fad872bc1a58132-shenimagea13.jpg
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
49,842,000
(Title of Class)
(Trading Symbol)
(Name of Exchange on which Registered)
(The number of shares of the registrant's common stock outstanding on April 24, 2020)
 
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.
 
 
 
 
 
 
 
 
 
 
 




2




SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
120,232

 
$
101,651

Accounts receivable, net of allowance for doubtful accounts of $410 and $533, respectively
61,526

 
63,541

Income taxes receivable
8,157

 
10,306

Inventory, net of allowances of $71 and $66, respectively
7,071

 
5,728

Prepaid expenses and other
60,923

 
60,527

Total current assets
257,909

 
241,753

Investments
12,011

 
12,388

Property, plant and equipment, net
695,920

 
701,514

Intangible assets, net
299,458

 
314,147

Goodwill
149,070

 
149,070

Operating lease right-of-use assets
382,973

 
392,589

Deferred charges and other assets
53,436

 
53,352

Total assets
$
1,850,777

 
$
1,864,813

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
$
31,672

 
$
31,650

Accounts payable
30,384

 
40,295

Advanced billings and customer deposits
8,414

 
8,358

Accrued compensation
5,787

 
10,075

Current operating lease liabilities
44,204

 
42,567

Accrued liabilities and other
19,183

 
14,391

Total current liabilities
139,644

 
147,336

Long-term debt, less current maturities, net of unamortized loan fees
680,531

 
688,464

Other long-term liabilities:
 
 
 
Deferred income taxes
137,674

 
137,567

Asset retirement obligations
37,422

 
36,914

Benefit plan obligations
11,980

 
12,675

Noncurrent operating lease liabilities
343,723

 
352,439

Other liabilities
19,153

 
16,990

Total other long-term liabilities
549,952

 
556,585

Shareholders’ equity:
 
 
 
Common stock, no par value, authorized 96,000; 49,842 and 49,671 issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

Additional paid in capital
43,158

 
42,110

Retained earnings
443,290

 
430,010

Accumulated other comprehensive (loss) income, net of taxes
(5,798
)
 
308

Total shareholders’ equity
480,650

 
472,428

Total liabilities and shareholders’ equity
$
1,850,777

 
$
1,864,813


See accompanying notes to unaudited condensed consolidated financial statements.

3


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
 
Three Months Ended
March 31,
Revenue:
2020
 
2019
Service revenue and other
$
140,188

 
$
143,231

Equipment revenue
13,000

 
15,612

Total revenue
153,188

 
158,843

Operating expenses:
 
 
 
Cost of services
49,565

 
49,518

Cost of goods sold
12,671

 
14,637

Selling, general and administrative
30,991

 
28,722

Depreciation and amortization
36,911

 
41,179

Total operating expenses
130,138

 
134,056

Operating income
23,050

 
24,787

Other income (expense):
 
 
 
Interest expense
(6,211
)
 
(7,954
)
Other
733

 
1,287

Income before income taxes
17,572

 
18,120

Income tax expense
4,292

 
4,210

Net income
13,280

 
13,910

Other comprehensive income:
 
 
 
Unrealized loss on interest rate hedge, net of tax
(6,106
)
 
(2,728
)
Comprehensive income
$
7,174

 
$
11,182

 
 
 
 
Net income per share, basic and diluted:
 
 
 
Basic net income per share
$
0.27

 
$
0.28

Diluted net income per share
$
0.27

 
$
0.28

Weighted average shares outstanding, basic
49,888

 
49,775

Weighted average shares outstanding, diluted
50,036

 
50,115


See accompanying notes to unaudited condensed consolidated financial statements.



4


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
 
 
Shares of Common Stock (no par value)
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance, December 31, 2019
 
49,671

 
$
42,110

 
$
430,010

 
$
308

 
$
472,428

Net income
 

 

 
13,280

 

 
13,280

Other comprehensive loss, net of tax
 

 

 

 
(6,106
)
 
(6,106
)
Stock based compensation
 
137

 
2,985

 

 

 
2,985

Common stock issued
 

 
8

 

 

 
8

Shares retired for settlement of employee taxes upon issuance of vested equity awards
 
(42
)
 
(1,945
)
 

 

 
(1,945
)
Common stock issued to acquire non-controlling interest in nTelos
 
76

 

 

 

 

Balance, March 31, 2020
 
49,842

 
$
43,158

 
$
443,290

 
$
(5,798
)
 
$
480,650

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
388,496

 
$
8,280

 
$
444,232

Net income
 

 

 
13,910

 

 
13,910

Other comprehensive 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

 
$
402,406

 
$
5,552

 
$
454,599


See accompanying notes to unaudited condensed consolidated financial statements.


5


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(in thousands)
 
 
 
 
Three Months Ended
March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
13,280

 
$
13,910

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
32,468

 
35,520

Amortization of intangible assets
4,868

 
5,659

Accretion of asset retirement obligations
404

 
350

Bad debt expense
205

 
367

Stock based compensation expense, net of amount capitalized
2,905

 
1,714

Deferred income taxes
2,135

 
(3,378
)
Gain from patronage and investments
(339
)
 
(1,140
)
Amortization of long-term debt issuance costs
674

 
963

Changes in assets and liabilities:
 
 
 
Accounts receivable
2,543

 
(3,127
)
Inventory, net
(1,343
)
 
(1,975
)
Current income taxes
2,149

 
7,588

Operating lease right-of-use assets
12,939

 
7,779

Waived management fee
9,798

 
9,628

Other assets
(3,489
)
 
(1,460
)
Accounts payable
(4,400
)
 
4,641

Lease liabilities
(10,402
)
 
(9,662
)
Other deferrals and accruals
(3,287
)
 
(5,714
)
Net cash provided by operating activities
61,108

 
61,663

 
 
 
 
Cash flows used in investing activities:
 
 
 
Capital expenditures
$
(32,299
)
 
(44,420
)
Cash disbursed for acquisitions

 
(10,000
)
Proceeds from sale of assets and other
274

 
45

Net cash used in investing activities
(32,025
)
 
(54,375
)
 
 
 
 
Cash flows used in financing activities:
 
 
 
Principal payments on long-term debt
$
(8,530
)
 
(19,889
)
Taxes paid for equity award issuances
(1,945
)
 
(2,698
)
Other
(27
)
 
72

Net cash used in financing activities
(10,502
)
 
(22,515
)
Net increase (decrease) in cash and cash equivalents
18,581

 
(15,227
)
Cash and cash equivalents, beginning of period
101,651

 
85,086

Cash and cash equivalents, end of period
$
120,232

 
$
69,859

See accompanying notes to unaudited condensed consolidated financial statements.

6


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

Note 1Basis of Presentation and Other Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019.

The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingencies at the date of the unaudited interim consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.

T-Mobile Acquisition of Sprint
On April 1, 2020, T-Mobile US, Inc. (“T-Mobile”) announced the completion of its business combination with Sprint Corporation (“Sprint”) and subsequently delivered to the Company a notice of Network Technology Conversion, Brand Conversion and Combination Conversion (a “Conversion Notice”) pursuant to the terms of our affiliate agreement. The affiliate agreement provides for a 90-day period following receipt of the Conversion Notice for the parties to negotiate mutually agreeable terms and conditions under which the Company would continue as an affiliate of T-Mobile. The affiliate agreement further provides that, if T-Mobile and the Company have not negotiated a mutually acceptable agreement within the 90-day period, then T-Mobile would have a period of 60 days thereafter to exercise an option to purchase the assets of our Wireless operations for 90% of the "Entire Business Value," (as defined under our affiliate agreement). If T-Mobile does not exercise its purchase option, the Company would then have a 60-day period to exercise an option to purchase the legacy T-Mobile network and subscribers in our service area. If the Company does not exercise its purchase option, T-Mobile must sell or decommission its legacy network and customers in our service area. The outcome of these proceedings could significantly impact our business operations and financial statements.

COVID-19
On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. While we do not operate in the densely populated urban markets that have been most-affected by the pandemic, our postpaid gross additions, equipment revenue, and cost of goods sold decreased as stay-at-home directives led to the temporary closure of approximately 40% of our Sprint-branded retail stores in mid-March.

Our wireless and broadband internet services are essential during a time of social distancing. Nonetheless, national unemployment rates increased markedly in April. Sprint also adopted the Keep Americans Connected pledge and T-Mobile chose to change subscriber collection policies following its April 1, 2020 acquisition of Sprint. It is reasonably possible that these risks and uncertainties could impact the collectability of our accounts receivable and revenue. It is also reasonably possible that they could impact the measurement of our wireless segment’s contract asset, which is reduced by an estimated refund obligation for amounts that T-Mobile is later unable to collect from its subscribers. We update that estimate based upon trends in our refund experience. To-date, our collection experience and expected credit losses have not been materially affected. We will continue to monitor the impacts of this unprecedented pandemic and will prospectively revise our estimates as appropriate.

We do not currently anticipate any material impairments of our long-lived assets or of our indefinite-lived intangible assets as a result of COVID-19.

Revision of Prior Period Financial Statements
In connection with the preparation of our unaudited condensed consolidated financial statements for the three months ended March 31, 2020, we determined that certain errors existed in our previously issued financial statements. Specifically:
Prepaid and other assets, as of December 31, 2019, were understated by $2.7 million, deferred tax liabilities were understated by $0.7 million, and retained earnings were understated by $2.0 million as the result of a failure to properly account for handsets that were utilized as demo phones in certain wireless retail stores within our area of operation. All of the impact to retained earnings is attributable to 2017 and prior years.
Property, plant and equipment, net, and deferred income tax liabilities as of December 31, 2019 were understated by $1.4 million and $0.4 million, respectively. Depreciation expense was overstated by $1.4 million for the year and quarter ended

7


December 31, 2019. Income tax expense and net income were understated by $0.4 million and $1.0 million, respectively, for the year and quarter ended December 31, 2019.

We evaluated these errors under the U.S. Securities and Exchange Commission's ("SEC's") authoritative guidance on materiality and the quantification of the effect of prior period misstatements on financial statements, and we have determined that the impact of these errors on our prior period consolidated financial statements is immaterial. However, since the correction of these errors in the first quarter of 2020 could have become material to our results of operations for the year ending December 31, 2020, we revised our prior period financial statements to correct these errors herein. For the year and quarter ended December 31, 2019, the correction of these errors resulted in a $0.02 increase in both basic and diluted earnings per share.

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 2019 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:

The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses ("ASC 326"): Measurement of Credit Losses on Financial Instruments, as of January 1, 2020 using the modified retrospective transition method. ASC 326 requires the application of a current expected credit loss (“CECL”) impairment model to financial assets measured at amortized cost including trade accounts receivable, net investments in leases, and certain off-balance-sheet credit exposures. Under the CECL model, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. Furthermore, the CECL model requires financial assets with similar risk characteristics to be analyzed on a collective basis. There was no significant impact to condensed consolidated financial statements upon adoption.

The Company adopted ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software ("ASC 350"): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, as of January 1, 2020. ASC 350 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Upon adoption of the standard, implementation costs were capitalized in the period incurred and will be amortized over the term of the hosting arrangement. There was no significant impact to condensed consolidated financial statements upon adoption.

Note 2. Revenue from Contracts with Customers
 
Refer to Note 13, Segment Reporting, for a summary of our revenue streams, which are discussed further below.

Wireless Segment Revenue

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 triggered the final dispute resolution option with Sprint which we expect will lead to a resolution for travel fee revenue in the second quarter of 2020.

Below is a summary of the Wireless segment's contract asset:
 
 
Three Months Ended
March 31,
(in thousands)
 
2020
 
2019
Beginning Balance
 
$
84,663

 
$
65,674

Contract payments
 
18,245

 
18,151

Contract amortization against revenue
 
(16,710
)
 
(13,454
)
Ending Balance
 
$
86,198

 
$
70,371





8


Our Wireless contract asset is reduced by an estimated obligation to refund amounts that Sprint is later unable to collect from its subscribers. This refund obligation totaled $7.0 million at both March 31, 2020 and December 31, 2019.

Broadband Segment Revenue

Below is a summary of the Broadband segment's capitalized contract acquisition costs:
 
 
Three Months Ended
March 31,
(in thousands)
 
2020
 
2019
Beginning Balance
 
$
11,005

 
$
10,091

Contract payments
 
1,685

 
1,699

Contract amortization
 
(1,027
)
 
(1,381
)
Ending Balance
 
$
11,663

 
$
10,409



Future performance obligations
On March 31, 2020, the Company had approximately $3.2 million allocated to unsatisfied performance obligations that will be satisfied at the rate of approximately $0.8 million per year.

Note 3.  Investments

Investments consist of the following:
(in thousands)
March 31, 2020
 
December 31, 2019
SERP Investments at fair value
$
1,706

 
$
2,278

Cost method investments
9,739

 
9,497

Equity method investments
566

 
613

Total investments
$
12,011

 
$
12,388



SERP Investments at fair value: The Supplemental Executive Retirement Plan (“SERP”) is a benefit plan that provides deferred compensation to certain employees. The Company holds the related investments in a rabbi trust as a source of funding for future payments under the plan. The SERP’s investments were designated as trading securities and will be liquidated and paid out to the participants upon retirement. The benefit obligation to participants is always equal to the value of the SERP assets under ASC 710 Compensation. Changes to the investments fair value are presented in Other income (expense), while the reciprocal changes in the liability are presented in selling, general and administrative expense.

Cost Method Investments:  Our investment in CoBank’s Class A common stock represented substantially all of our cost method investments with a balance of $9.0 million and $8.7 million at March 31, 2020 and December 31, 2019, respectively. We recognized approximately $1.0 million and $0.9 million of patronage income in Other income (expense) in the three months ended March 31, 2020 and 2019, respectively. Historically, approximately 75% of the patronage distributions were in cash and 25% in equity.

Equity Method Investments: At March 31, 2020, the Company had a 20.0% ownership interest in Valley Network Partnership (“ValleyNet”). The Company and ValleyNet purchase capacity on one another’s fiber network. We recognized revenue of $0.2 million from providing service to ValleyNet during both of the three months ended March 31, 2020 and 2019. We recognized cost of service of $0.8 million and $0.7 million for the use of ValleyNet’s network during both of the three months ended March 31, 2020 and 2019, respectively.


9


Note 4Property, Plant and Equipment

Property, plant and equipment consisted of the following:
($ in thousands)
Estimated Useful Lives
 
March 31,
2020
 
December 31,
2019
Land
 
 
 
 
 
$
7,143

 
$
6,976

Buildings and structures
10
-
40
years
 
238,728

 
232,730

Cable and fiber
15
-
40
years
 
348,658

 
334,260

Equipment and software
3
-
20
years
 
870,089

 
867,898

Plant in service
 
 
 
 
 
1,464,618

 
1,441,864

Plant under construction
 
 
 
 
 
59,097

 
56,827

Total property, plant and equipment
 
 
 
 
 
1,523,715

 
1,498,691

Less: accumulated amortization and depreciation
 
 
 
 
 
827,795

 
797,177

Property, plant and equipment, net
 
 
 
 
 
$
695,920

 
$
701,514



Note 5. Goodwill and Intangible Assets

There were no changes to goodwill during the three months ended March 31, 2020.

Other intangible assets consisted of the following:
 
March 31, 2020
 
December 31, 2019
(in thousands)
Gross
Carrying
Amount
 
Accumulated Amortization and Other
 
Net
 
Gross
Carrying
Amount
 
Accumulated Amortization and Other
 
Net
Indefinite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Cable franchise rights
$
64,334

 
$

 
$
64,334

 
$
64,334

 
$

 
$
64,334

FCC spectrum licenses
13,839

 

 
13,839

 
13,839

 

 
13,839

Railroad crossing rights
141

 

 
141

 
141

 

 
141

Total indefinite-lived intangibles
78,314

 

 
78,314

 
78,314

 

 
78,314

 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Sprint affiliate contract expansion - Wireless
455,305

 
(241,231
)
 
214,074

 
455,305

 
(226,712
)
 
228,593

FCC spectrum licenses
4,659

 
(160
)
 
4,499

 
4,659

 
(97
)
 
4,562

Acquired subscribers - Cable
28,065

 
(25,700
)
 
2,365

 
28,065

 
(25,600
)
 
2,465

Other intangibles
463

 
(257
)
 
206

 
463

 
(250
)
 
213

Total finite-lived intangibles
488,492

 
(267,348
)
 
221,144

 
488,492

 
(252,659
)
 
235,833

Total intangible assets
$
566,806

 
$
(267,348
)
 
$
299,458

 
$
566,806

 
$
(252,659
)
 
$
314,147



We acquired Big Sandy Broadband, Inc. (“Big Sandy”) on February 28, 2019. The $10 million acquisition price was allocated as follows within our broadband segment: $4.6 million of property, plant and equipment; $2.8 million of subscriber relationships; and $2.6 million of goodwill.

In 2016, we acquired nTelos Holdings Corp. and immediately transferred certain of the acquired assets to Sprint in an interrelated nonmonetary exchange. In the exchange, we received a corresponding expansion of our Sprint Affiliate Area, future billings associated with Sprint subscribers already in that expanded area, and an increase in the price that Sprint would pay to buy our Wireless asset group in the event that either party chooses not to renew the affiliate agreement. Sprint also agreed to waive up to $4.2 million of our monthly management fee, not to exceed $255.6 million in total, over a multi-year period. We accounted for these collective rights as an affiliate contract expansion (“ACE”) intangible, which is amortized over the expected benefit period and further reduced as management fees are waived by Sprint. We realized management fee waivers of $9.8 million and

10


$9.6 million during the three months ended March 31, 2020 and 2019, respectively, and $147.0 million since the date of the business combination.

During 2017 and 2018, we entered into purchase agreements with Sprint to further expand our affiliate territory to include areas around Parkersburg, West Virginia, and Richmond, Virginia, respectively. The relevant portion of these payments were also capitalized as ACE intangible assets.

Amounts paid in connection with the acquisition of a business are presented as amortization expense in our income statement. Amounts paid to Sprint outside of a business combination are accounted for as consideration paid to a customer with amortization presented as a reduction of Service and other revenue in our unaudited condensed consolidated statements of comprehensive income.

Amortization of intangible assets was $4.9 million and $5.7 million for the three months ended March 31, 2020 and 2019, respectively.

Note 6.     Other Assets and Accrued Liabilities

Prepaid expenses and other, classified as current assets, included the following:
(in thousands)
 
March 31,
2020
 
December 31,
2019
Wireless contract asset
 
$
46,552

 
$
44,844

Broadband contract acquisition and fulfillment costs
 
4,029

 
4,898

Prepaid maintenance expenses
 
3,252

 
3,329

Interest rate swaps
 

 
1,382

Other
 
7,090

 
6,074

Prepaid expenses and other
 
$
60,923

 
$
60,527



Deferred charges and other assets, classified as long-term assets, included the following:
(in thousands)
 
March 31,
2020
 
December 31, 2019
Wireless contract asset
 
$
39,646

 
$
39,819

Broadband contract acquisition and fulfillment costs
 
7,634

 
6,107

Interest rate swaps
 

 
1,252

Prepaid expenses and other
 
6,156

 
6,174

Deferred charges and other assets
 
$
53,436

 
$
53,352



Accrued liabilities and other, classified as current liabilities, included the following:
(in thousands)
 
March 31, 2020
 
December 31, 2019
Sales and property taxes payable
 
$
5,259

 
$
3,789

Accrued programming costs
 
3,053

 
3,023

Interest rate swaps
 
2,731

 

Asset retirement obligations
 
137

 
148

Financing leases
 
97

 
94

FCC spectrum license obligations
 
28

 
105

Other current liabilities
 
7,878

 
7,232

Accrued liabilities and other
 
$
19,183

 
$
14,391




11


Other liabilities, classified as long-term liabilities, included the following:
(in thousands)
 
March 31,
2020
 
December 31, 2019
Noncurrent portion of deferred lease revenue
 
$
12,291

 
$
12,449

FCC spectrum license obligations
 
1,703

 
1,699

Noncurrent portion of financing leases
 
1,543

 
1,591

Interest rate swaps
 
2,769

 

Other
 
847

 
1,251

Other liabilities
 
$
19,153

 
$
16,990


Market expectations of the projected London Interbank Offering Rate (LIBOR) decreased significantly during the first quarter of 2020, which drove the fair value of our interest rate swaps to a liability. Refer to Note 9, Derivatives and Hedging for more information.

Note 7. Leases

At March 31, 2020, our operating leases had a weighted average remaining lease term of nine years and a weighted average discount rate of 4.3%. Our finance leases had a weighted average remaining lease term of fifteen years and a weighted average discount rate of 5.1%.

During the three months ended March 31, 2020 and 2019, we recognized $17.8 million and $16.9 million of operating lease expense, respectively. We recognized $0.1 million of interest and depreciation expense on finance leases during the three months ended March 31, 2020 and 2019. Operating lease expense is presented in cost of service or selling, general and administrative expense based on the use of the relevant facility. Variable lease payments and short-term lease expense were both immaterial. We remitted $15.5 million and $14.7 million of operating lease payments during the three months ended March 31, 2020 and 2019, respectively. We also obtained $3.3 million and $4.6 million of leased assets in exchange for new operating lease liabilities during the three months ended March 31, 2020 and 2019, respectively.

The following table summarizes the expected maturity of lease liabilities at March 31, 2020:
(in thousands)
 
Operating Leases
 
Finance Leases
 
Total
2020
 
$
45,222

 
$
108

 
$
45,330

2021
 
66,042

 
174

 
66,216

2022
 
64,256

 
174

 
64,430

2023
 
60,770

 
174

 
60,944

2024
 
56,105

 
174

 
56,279

2025 and thereafter
 
191,726

 
1,532

 
193,258

Total lease payments
 
484,121

 
2,336

 
486,457

Less: Interest
 
96,194

 
696

 
96,890

Present value of lease liabilities
 
$
387,927

 
$
1,640

 
$
389,567



We recognized $2.1 million and $2.0 million of operating lease revenue during the three months ended March 31, 2020 and 2019, respectively, related to the cell site colocation space and dedicated fiber optic strands that we lease to our customers, which is included in Service and other revenue in the unaudited condensed consolidated statements of comprehensive income. Substantially all of our lease revenue relates to fixed lease payments.

12


Below is a summary of our minimum rental receipts under the lease agreements in place at March 31, 2020:
(in thousands)
 
Operating Leases
2020
 
$
5,527

2021
 
5,775

2022
 
4,742

2023
 
3,112

2024
 
1,915

2025 and thereafter
 
4,192

Total
 
$
25,263


Note 8Long-Term Debt

Our syndicated Credit Agreement includes a $75 million, five-year undrawn revolving credit facility, as well as the following outstanding term loans:
(in thousands)
March 31,
2020
 
December 31,
2019
Term loan A-1
$
251,288

 
$
258,571

Term loan A-2
472,221

 
473,469

 
723,509

 
732,040

Less: unamortized loan fees
11,306

 
11,926

Total debt, net of unamortized loan fees
$
712,203

 
$
720,114



Term Loan A-1 bears interest at one-month LIBOR plus a margin of 1.50%, while Term Loan A-2 bears interest at one-month LIBOR plus a margin of 1.75%. LIBOR resets monthly. Our cash payments for interest were $5.8 million and $7.2 million during the three months ended March 31, 2020 and 2019, respectively.

As shown below, as of March 31, 2020, the Company was in compliance with the financial covenants in its credit agreements.
 
 
Actual
 
Covenant Requirement
Total leverage ratio
2.41

 
3.25
or Lower
Debt service coverage ratio
5.48

 
2.00
or Higher
Minimum liquidity balance (in millions)
$
195.0

 
$25.0
or Higher


Note 9Derivatives and Hedging

The Company's interest rate swaps are pay-fixed (1.16%), receive-variable (one month LIBOR) that hedged approximately 45.4% of outstanding debt with outstanding notional amounts totaling $328.7 and $339.8 million March 31, 2020 and December 31, 2019, respectively. 

The fair value of these instruments was estimated using an income approach and observable market inputs. The hedge was determined to be highly effective and therefore all of the change in its fair value was recognized through Other comprehensive income. During the three months ended March 31, 2020 the fair market value decreased by $8.1 million due to a decline in the one month LIBOR. They were presented as follows:
(in thousands)
 
March 31,
2020
 
December 31,
2019
Balance sheet location of derivative financial instruments:
 

 

Prepaid expenses and other
 
$

 
$
1,382

Deferred charges and other assets, net
 

 
1,252

Accrued liabilities and other
 
2,731

 

Other liabilities
 
2,769

 

Total derivatives designated as hedging instruments
 
$
5,500

 
$
2,634



13



The table below summarizes changes in accumulated other comprehensive income (loss) by component:
(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, 2019
$
2,634

 
$
(2,326
)
 
$
308

Net change in unrealized gain (loss)
(7,706
)
 
1,921

 
(5,785
)
Amounts reclassified from accumulated other comprehensive income (loss) to interest expense
(428
)
 
107

 
(321
)
Net current period other comprehensive income (loss)
(8,134
)
 
2,028

 
(6,106
)
Balance as of March 31, 2020
$
(5,500
)
 
$
(298
)
 
$
(5,798
)


Note 10Income Taxes

The Company files U.S. federal income tax returns and various state income tax returns. The Company is not subject to any state or federal income tax audits as of March 31, 2020. The Company's returns are generally open to examination from 2016 forward and the net operating losses acquired in the acquisition of nTelos are open to examination from 2002 forward.

The Company’s effective tax rate for the three months ended March 31, 2020 was approximately 24.4%, as compared with approximately 23.2% for the three months ended March 31, 2019. The Company had no significant cash payments or refunds for income taxes during the three months ended March 31, 2020 and 2019.

Note 11.  Stock Compensation

During the three months ended March 31, 2020, the Company granted approximately 70 thousand restricted stock units (RSUs) to employees and approximately 14 thousand RSUs to members of the board of directors, at a market price of $48.47 per award. Under the terms of the award agreements, the RSUs granted to employees vest in fourths on the anniversary date of the grants through 2024. The RSUs granted to the members of the board of directors vest fully on the first anniversary of the grant date. Additionally, approximately 40 thousand Relative Total Shareholder Return (“RTSR”) awards were granted to employees at a value of $56.32 per award. Pursuant to the terms of the RTSR awards, the Company’s stock performance over a three-year period, ending December 31, 2022, will be compared to a group of peer companies, and the actual number of shares to be issued will be determined based upon the performance of the Company’s stock as compared with that of the peer group. The actual number of shares to be issued ranges from 0 shares (if the Company’s stock performance is in the bottom 25% of the peer group) to 150% of the awards granted (if the Company’s stock performance is in the top 25% of the peer group). The Company's stock based compensation award vesting is subject to requirements relating to continued employment with the Company through the service or performance periods, and to special vesting provisions in case of a change of control, death, disability or retirement.


14


We utilize the treasury stock method to calculate the impact on diluted earnings per share that potentially dilutive stock-based compensation awards have. The following table indicates the computation of basic and diluted earnings per share:
 
Three Months Ended
March 31,
(in thousands, except per share amounts)
2020
 
2019
Calculation of net income per share:
 
 
 
Net income
$
13,280

 
$
13,910

Basic weighted average shares outstanding
49,888

 
49,775

Basic net income per share
$
0.27

 
$
0.28

 
 
 
 
Effect of stock-based compensation awards outstanding:
 
 
 
Basic weighted average shares outstanding
49,888

 
49,775

Effect from dilutive shares and options outstanding
148

 
340

Diluted weighted average shares outstanding
50,036

 
50,115

Diluted net income per share
$
0.27

 
$
0.28


There were fewer than 125 thousand anti-dilutive awards outstanding during the three months ended March 31, 2020 and 2019.

Note 12.  Commitments and Contingencies

We are committed to make payments to satisfy our lease liabilities and long-term debt. The scheduled payments under those obligations are summarized in the respective notes above. We are also committed to make annual payments of approximately $108.0 thousand on our FCC spectrum license obligation through 2039.

The Company is subject to claims and legal actions that may arise in the ordinary course of business. The Company does not believe that any of these pending claims or legal actions are either probable or reasonably possible of a material loss.


15


Note 13.  Segment Reporting

Three Months Ended March 31, 2020
(in thousands)
Wireless
 
Broadband
 
Tower
 
Corporate & Eliminations
 
Consolidated
External revenue
 
 
 
 
 
 
 
 
 
Postpaid
$
74,928

 
$

 
$

 
$

 
$
74,928

Prepaid
13,109

 

 

 

 
13,109

Tower lease

 

 
1,797

 

 
1,797

Cable, residential and SMB (1)

 
34,943

 

 

 
34,943

Fiber, enterprise and wholesale

 
5,488

 

 

 
5,488

Rural local exchange carrier

 
4,756

 

 

 
4,756

Travel, installation, and other
3,351

 
1,816

 

 

 
5,167

Service revenue and other
91,388

 
47,003

 
1,797

 

 
140,188

Equipment
12,750

 
250

 

 

 
13,000

Total external revenue
104,138

 
47,253

 
1,797

 

 
153,188

Revenue from other segments

 
2,533

 
1,933

 
(4,466
)
 

Total revenue
104,138

 
49,786

 
3,730

 
(4,466
)
 
153,188

Operating expenses


 
 
 
 
 
 
 
 
Cost of services
33,439

 
19,243

 
939

 
(4,056
)
 
49,565

Cost of goods sold
12,528

 
143

 

 

 
12,671

Selling, general and administrative
9,428

 
9,499

 
526

 
11,538

 
30,991

Depreciation and amortization
25,299

 
10,871

 
470

 
271

 
36,911

Total operating expenses
80,694

 
39,756

 
1,935

 
7,753

 
130,138

Operating income (loss)
$
23,444

 
$
10,030

 
$
1,795

 
$
(12,219
)
 
$
23,050

_______________________________________________________
(1)
 SMB refers to Small and Medium Businesses.

16



Three Months Ended March 31, 2019
(in thousands)
Wireless

Broadband
 
Tower

Corporate & Eliminations

Consolidated
External revenue





 








Postpaid
$
76,182


$

 
$


$


$
76,182

Prepaid
13,130



 




13,130

Tower lease



 
1,763




1,763

Cable, residential and SMB


32,426

 




32,426

Fiber, enterprise and wholesale


4,828

 




4,828

Rural local exchange carrier