Cable One(CABO) - 2020 Q3 - Quarterly Report

Company Information Presents essential corporate details for Cable One, Inc., including its stock exchange listing and share structure - Registrant Name: Cable One, Inc.[4] - Trading Symbol: CABO, registered on the New York Stock Exchange[2] - Filer Status: Large accelerated filer[6] Shares Outstanding as of October 30, 2020 | Description of Class | Shares Outstanding | | :------------------- | :----------------- | | Common stock, par value $0.01 | 6,024,666 | Cautionary Statement Regarding Forward-Looking Statements Highlights the inherent uncertainties and risks that may cause actual results to differ materially from forward-looking projections - Forward-looking statements are identified by words such as 'will,' 'should,' 'anticipates,' 'estimates,' 'expects,' 'projects,' 'intends,' 'plans,' 'believes' and similar terms[13] - Actual results may vary materially due to inherent uncertainties and changes in circumstances, including government regulation, economic conditions, competition, technology changes, programming costs, acquisitions, and the COVID-19 pandemic[13][14] - The company disclaims any obligation to update or alter forward-looking statements, except as required by law[15] PART I: FINANCIAL INFORMATION Condensed Consolidated Financial Statements Presents Cable One, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive income, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining business operations, significant accounting policies, acquisitions, revenue breakdown, asset and liability details, debt, equity, and subsequent events for the periods ended September 30, 2020 and 2019 Condensed Consolidated Balance Sheets Summarizes the company's financial position, detailing assets, liabilities, and stockholders' equity as of September 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :--------------------------------- | :------------------- | :------------------ | | Total Current Assets | $739,795 | $181,488 | | Total Assets | $3,826,808 | $3,151,831 | | Total Current Liabilities | $226,543 | $189,542 | | Total Liabilities and Stockholders' Equity | $3,826,808 | $3,151,831 | Condensed Consolidated Statements of Operations and Comprehensive Income Presents the company's revenues, expenses, net income, and earnings per share for the three and nine months ended September 30, 2020 and 2019 Statements of Operations Highlights (Three Months Ended September 30, in thousands, except per share data) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :--------------------------------- | :----- | :----- | :----------- | :------------- | | Revenues | $338,962 | $284,991 | $53,971 | 18.9% | | Income from operations | $96,131 | $80,133 | $15,998 | 19.9% | | Net income | $66,287 | $49,835 | $16,452 | 33.0% | | Basic Net Income per Common Share | $11.04 | $8.77 | $2.27 | 25.9% | | Diluted Net Income per Common Share | $10.96 | $8.68 | $2.28 | 26.3% | Statements of Operations Highlights (Nine Months Ended September 30, in thousands, except per share data) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :--------------------------------- | :------- | :------- | :----------- | :------------- | | Revenues | $988,461 | $849,246 | $139,215 | 16.4% | | Income from operations | $279,566 | $221,944 | $57,622 | 25.9% | | Net income | $198,153 | $124,969 | $73,184 | 58.6% | | Basic Net Income per Common Share | $33.91 | $22.01 | $11.90 | 54.1% | | Diluted Net Income per Common Share | $33.60 | $21.81 | $11.79 | 54.1% | Condensed Consolidated Statements of Stockholders' Equity Details changes in stockholders' equity, including net income, stock issuance, and dividends, for the nine months ended September 30, 2020 - Total Stockholders' Equity increased from $841,569 thousand at December 31, 2019, to $1,384,399 thousand at September 30, 2020[25][26] - Net income for the nine months ended September 30, 2020, was $198,153 thousand[25] - Issuance of common stock contributed $469,799 thousand to equity during the nine months ended September 30, 2020[25] - Dividends paid to stockholders for the nine months ended September 30, 2020, totaled $41,498 thousand[25] Condensed Consolidated Statements of Cash Flows Outlines cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2020 and 2019 Statements of Cash Flows Highlights (Nine Months Ended September 30, in thousands) | Cash Flow Activity | 2020 | 2019 | Change (YoY) | | :--------------------------------- | :--------- | :--------- | :----------- | | Net cash provided by operating activities | $398,980 | $335,185 | $63,795 | | Net cash used in investing activities | $(299,844) | $(527,622) | $227,778 | | Net cash provided by financing activities | $400,925 | $74,172 | $326,753 | | Increase (decrease) in cash and cash equivalents | $500,061 | $(118,265) | $618,326 | | Cash and cash equivalents, end of period | $625,332 | $145,848 | $479,484 | Notes to the Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering business, accounting policies, and key financial items Note 1. Description of Business and Basis of Presentation Cable One is a fully integrated provider of data, video, and voice services to residential and business customers across 21 U.S. states, serving approximately 984,000 customers as of September 30, 2020. The company completed several acquisitions and strategic investments, including Valu-Net in July 2020, and minority equity interests in Nextlink and Wisper in 2020, with a definitive agreement to acquire a minority interest in MBI by Q4 2020. Effective Q2 2020, the company reevaluated its segment reporting and impairment testing units, now operating as a single reportable segment due to rebranding and alignment of service offerings - Cable One provides data, video, and voice services to approximately 984,000 residential and business customers in 21 U.S. states as of September 30, 2020[30] - Acquisitions: Valu-Net LLC (July 1, 2020, $38.9 million), Clearwave (Jan 8, 2019, $358.8 million), Fidelity (Oct 1, 2019, $531.4 million)[31] - Strategic Equity Investments in 2020: Nextlink ($27.2 million minority equity), Wisper ISP, LLC (approx. 40% minority equity for $25.3 million), and an agreement to acquire approx. 45% minority equity in Mega Broadband Investments Holdings LLC (MBI) for $574 million[32] - Effective Q2 2020, the Company identified one operating segment and a single goodwill reporting unit due to rebranding and alignment of service offerings[37][41] - Recently Adopted Accounting Pronouncements: ASU 2018-15 (Internal-Use Software) adopted Jan 1, 2020, resulting in $5.2 million capitalization of implementation costs; ASU 2016-13 (Credit Losses) adopted Jan 1, 2020, with no material impact[42][43] Note 2. Acquisitions Details goodwill and identifiable intangible assets recognized from recent acquisitions, including Clearwave, Fidelity, and Valu-Net Goodwill Recognized from Acquisitions (in thousands) | Acquisition | Goodwill Recognized | | :---------- | :------------------ | | Clearwave | $185,885 | | Fidelity | $71,583 | | Valu-Net | $5,279 | - Valu-Net acquisition (July 1, 2020) for $38.9 million recognized identifiable intangible assets: Customer relationships ($7.7 million, 14-year useful life), Trademark and trade name ($0.8 million, indefinite life), Franchise agreements ($11.2 million, indefinite life)[52][53] Note 3. Revenues Analyzes revenue performance by product line for the three and nine months ended September 30, 2020 and 2019, highlighting growth drivers and shifts Revenues by Product Line (Three Months Ended September 30, in thousands) | Product Line | 2020 | % of Total | 2019 | % of Total | Change (YoY) | % Change (YoY) | | :---------------- | :------- | :--------- | :------- | :--------- | :----------- | :------------- | | Residential Data | $174,527 | 51.5% | $134,320 | 47.1% | $40,207 | 29.9% | | Residential Video | $83,553 | 24.6% | $80,999 | 28.4% | $2,554 | 3.2% | | Residential Voice | $11,490 | 3.4% | $10,254 | 3.6% | $1,236 | 12.1% | | Business Services | $59,441 | 17.5% | $50,662 | 17.8% | $8,779 | 17.3% | | Other | $9,951 | 3.0% | $8,756 | 3.1% | $1,195 | 13.6% | | Total Revenues| $338,962 | 100.0% | $284,991 | 100.0% | $53,971 | 18.9% | Revenues by Product Line (Nine Months Ended September 30, in thousands) | Product Line | 2020 | % of Total | 2019 | % of Total | Change (YoY) | % Change (YoY) | | :---------------- | :------- | :--------- | :------- | :--------- | :----------- | :------------- | | Residential Data | $493,532 | 49.9% | $396,955 | 46.7% | $96,577 | 24.3% | | Residential Video | $256,203 | 25.9% | $248,834 | 29.3% | $7,369 | 3.0% | | Residential Voice | $36,038 | 3.6% | $30,584 | 3.6% | $5,454 | 17.8% | | Business Services | $175,771 | 17.8% | $147,564 | 17.4% | $28,207 | 19.1% | | Other | $26,917 | 2.8% | $25,309 | 3.0% | $1,608 | 6.4% | | Total Revenues| $988,461 | 100.0% | $849,246 | 100.0% | $139,215 | 16.4% | - Franchise and other regulatory fees: $6,298 thousand (3 months 2020), $19,261 thousand (9 months 2020)[55] - Deferred commission amortization: $1,343 thousand (3 months 2020), $4,042 thousand (9 months 2020)[55] Note 4. Operating Assets and Liabilities Details the composition and changes in accounts receivable, prepaid assets, and accounts payable, including related party balances and credit loss allowances Accounts Receivable, Net (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :-------------------------- | :----------------- | :---------------- | | Trade receivables | $41,423 | $33,467 | | Related party receivable (Wisper) | $6,796 | - | | Other receivables | $5,180 | $6,186 | | Less: Allowance for credit losses | $(3,223) | $(1,201) | | Total accounts receivable, net | $50,176 | $38,452 | Allowance for Credit Losses (Nine Months Ended September 30, in thousands) | Metric | 2020 | 2019 | | :--------------------------------------- | :------ | :------- | | Beginning balance | $1,201 | $2,045 | | Additions - charged to costs and expenses | $7,278 | $4,584 | | Deductions - write-offs | $(9,720) | $(10,423) | | Recoveries of amounts previously written off | $4,464 | $4,843 | | Ending balance | $3,223 | $1,049 | Prepaid and Other Current Assets (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :----------------------------------- | :----------------- | :---------------- | | Total prepaid and other current assets | $21,263 | $15,619 | Other Noncurrent Assets (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :-------------------------------- | :----------------- | :---------------- | | Cost method equity investments (Nextlink) | $36,837 | $206 | | Assets held for sale (Anniston System) | $16,412 | - | | Software implementation costs | $5,237 | - | | Total other noncurrent assets | $84,397 | $27,094 | Accounts Payable and Accrued Liabilities (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :--------------------------------------- | :----------------- | :---------------- | | Interest rate swap liability | $30,510 | $11,045 | | Equity investment payable (Wisper) | $13,387 | - | | Total accounts payable and accrued liabilities | $167,754 | $136,993 | Note 5. Property, Plant and Equipment Reports the net carrying amount of property, plant and equipment, including acquisition impacts and depreciation expense, for the periods presented - Property, plant and equipment, net: $1,244,264 thousand (Sep 30, 2020) vs. $1,201,271 thousand (Dec 31, 2019)[67] - Includes $13.9 million of property, plant and equipment acquired in the Valu-Net acquisition on July 1, 2020[67] - Excludes $16.4 million of property, plant and equipment from the Anniston System classified as assets held for sale[67] Depreciation and Amortization Expense for Property, Plant and Equipment (in thousands) | Period | 2020 | 2019 | | :----------------------------------- | :------- | :------- | | Three months ended September 30 | $59,800 | $44,500 | | Nine months ended September 30 | $168,400 | $144,900 | Note 6. Goodwill and Intangible Assets Details changes in goodwill and intangible assets, including amortization expense and future amortization, for the periods presented - Goodwill: $434,876 thousand (Sep 30, 2020) vs. $429,597 thousand (Dec 31, 2019), increase due to Valu-Net acquisition[69] - Total intangible assets, net: $1,298,226 thousand (Sep 30, 2020) vs. $1,312,381 thousand (Dec 31, 2019)[70] Net Carrying Amount of Intangible Assets (September 30, 2020, in thousands) | Asset Category | Net Carrying Amount | | :------------------------- | :------------------ | | Finite-Lived Intangible Assets: | | | Customer relationships | $299,157 | | Trademarks and trade names | $1,998 | | Indefinite-Lived Intangible Assets: | | | Franchise agreements | $989,571 | | Trade name | $7,500 | Intangible Asset Amortization Expense (in thousands) | Period | 2020 | 2019 | | :----------------------------------- | :------ | :------ | | Three months ended September 30 | $11,600 | $4,200 | | Nine months ended September 30 | $33,900 | $12,600 | - Future amortization of existing finite-lived intangible assets (remaining three months of 2020): $11,495 thousand[73] Note 7. Debt Outlines the company's long-term debt, including outstanding term loans, revolving credit facility availability, and debt covenant compliance - Total long-term debt, net: $1,688,973 thousand (Sep 30, 2020) vs. $1,711,937 thousand (Dec 31, 2019)[74] Outstanding Term Loans as of September 30, 2020 (in thousands) | Instrument | Outstanding Principal | Final Maturity Date | Interest Rate | | :------------ | :-------------------- | :------------------ | :------------ | | Term Loan A-2 | $680,866 | 5/8/2024 | 1.65% | | Term Loan B-1 | $483,750 | 5/1/2024 | 1.90% | | Term Loan B-2 | $246,250 | 1/7/2026 | 2.15% | | Term Loan B-3 | $320,938 | 1/7/2026 | 2.15% | | Total | $1,731,804 | | | - Revolving Credit Facility: $320.4 million available for borrowing as of September 30, 2020[76] - Debt issuance cost amortization: $1.1 million (Q3 2020), $3.3 million (9 months 2020)[79] - Future maturities of outstanding borrowings (remaining three months of 2020): $7,080 thousand[80] Note 8. Interest Rate Swaps Describes the company's interest rate swap agreements used as cash flow hedges, their fair values, and associated interest expense - Two interest rate swap agreements (cash flow hedges) to manage LIBOR debt fluctuations[81] Interest Rate Swap Agreements (in thousands) | Swap | Notional Amount | Fixed Base Rate | Maturity Date | | :--- | :-------------- | :-------------- | :------------ | | A | $850,000 | 2.653% | 3/11/2029 | | B | $350,000 | 2.739% | 2/28/2029 | | Total | $1,200,000 | | | - Combined fair value of interest rate swaps (liability): $206,919 thousand (Sep 30, 2020) vs. $89,657 thousand (Dec 31, 2019)[85] Interest Expense from Interest Rate Swaps (in thousands) | Period | 2020 | 2019 | | :----------------------------------- | :----- | :----- | | Three months ended September 30 | $7,702 | $888 | | Nine months ended September 30 | $14,750 | $1,339 | Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax (in thousands) | Period | 2020 | 2019 | | :----------------------------------- | :-------- | :-------- | | Three months ended September 30 | $5,807 | $(28,066) | | Nine months ended September 30 | $(88,277) | $(91,105) | Note 9. Fair Value Measurements Presents fair value measurements for financial instruments, categorizing them by hierarchy levels, and notes nonfinancial asset impairment testing Fair Values of Financial Instruments (September 30, 2020, in thousands) | Instrument | Carrying Amount | Fair Value | Fair Value Hierarchy | | :--------------------- | :-------------- | :--------- | :------------------- | | Money market investments | $585,391 | $585,391 | Level 1 | | Commercial paper | $20,023 | $19,987 | Level 2 | | Term loans | $1,731,804 | $1,725,564 | Level 2 | | Interest rate swaps | $206,919 | $206,919 | Level 2 | - No material impairments of nonfinancial assets (property, plant, equipment, intangible assets, goodwill) were recorded during the nine months ended September 30, 2020 or 2019[90] Note 10. Stockholders' Equity Details changes in stockholders' equity, including a public offering, treasury stock, and the share repurchase program - Public Equity Offering (May 2020): 287,500 shares of common stock, $469.8 million net proceeds[91] - Treasury Stock: 151,370 shares held as of September 30, 2020[92] - Share Repurchase Program: Authorized up to $250 million (600,000 shares); 210,631 shares repurchased for $104.9 million since inception through September 30, 2020. No repurchases in the nine months ended September 30, 2020[93] - Tax Withholding for Equity Awards (9 months ended Sep 30, 2020): $5.9 million remitted for 3,810 shares[94] Note 11. Equity-Based Compensation Reports equity-based compensation expense, available shares under the incentive plan, and unrecognized compensation for awards Equity-Based Compensation Expense (in thousands) | Period | 2020 | 2019 | | :----------------------------------- | :----- | :----- | | Three months ended September 30 | $3,867 | $3,058 | | Nine months ended September 30 | $10,514 | $9,161 | - Shares available for issuance under 2015 Plan: 128,640 as of September 30, 2020[95] - Unrecognized compensation expense for Restricted Stock: $19.1 million, weighted average period of 1.3 years[98] - Unrecognized compensation expense for SARs: $5.9 million, weighted average period of 1.1 years[99] Note 12. Income Taxes Explains the effective tax rate and its changes, primarily due to CARES Act benefits and equity-based compensation tax impacts Effective Tax Rate | Period | 2020 | 2019 | | :----------------------------------- | :---- | :---- | | Three months ended September 30 | 19.0% | 24.1% | | Nine months ended September 30 | 15.1% | 23.3% | - Decrease in effective tax rate primarily due to: $3.2 million (Q3 2020) / $13.0 million (9 months 2020) increase in income tax benefits from CARES Act NOL carryback provision[102] - Decrease in effective tax rate primarily due to: $6.0 million (9 months 2020) increase in income tax benefits from equity-based compensation awards[102] - Decrease in effective tax rate primarily due to: $1.3 million (9 months 2020) decrease in income tax expenses from state effective tax rate changes[102] Note 13. Net Income Per Common Share Presents basic and diluted net income per common share for the three and nine months ended September 30, 2020 and 2019 Net Income per Common Share (Three Months Ended September 30) | Metric | 2020 | 2019 | | :------ | :---- | :---- | | Basic | $11.04 | $8.77 | | Diluted | $10.96 | $8.68 | Net Income per Common Share (Nine Months Ended September 30) | Metric | 2020 | 2019 | | :------ | :---- | :---- | | Basic | $33.91 | $22.01 | | Diluted | $33.60 | $21.81 | Note 14. Commitments and Contingencies Discloses material changes to contractual obligations, including letters of credit for Wisper, and notes ongoing legal and regulatory exposures - No material changes to contractual obligations from 2019 Form 10-K, except for $22.0 million in letters of credit issued for Wisper's FCC broadband funding program[107][214] - Company assesses likelihood of non-performance for Wisper guarantee as remote[107] - Subject to various legal proceedings and extensive regulation by FCC, state, and local governments[108][109] Note 15. Subsequent Events Reports significant events after the reporting period, including the Anniston System contribution, senior notes offering, and credit agreement amendments - October 1, 2020: Completed contribution of Anniston System to Hargray in exchange for a minority equity interest[110] - October 26, 2020: Priced an offering of $650.0 million of 4.0% senior notes due 2030, expected to close November 9, 2020, with proceeds for general corporate purposes including the MBI Investment[111] - October 30, 2020: Third Restatement Agreement amended the Credit Agreement to upsize Term Loan B-3 by $300.0 million, extend maturities of Term Loan B-2 and B-3 to October 30, 2027, and increase the Revolving Credit Facility by $150.0 million to $500.0 million, extending its maturity and Term Loan A-2 to October 30, 2025[112] - October 30, 2020: Repaid all $483.8 million aggregate principal amount of outstanding Term Loan B-1 using net proceeds from the TLB-3 Upsize and cash on hand[112] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of Cable One's financial performance and condition, highlighting significant revenue growth driven by residential data and business services, largely due to acquisitions and organic growth. It discusses the impact of the COVID-19 pandemic on operations, customer trends, and financial results, as well as the company's strategic focus on higher-margin services, infrastructure investments, and capital allocation Overview Cable One is a fully integrated provider of data, video, and voice services to approximately 984,000 residential and business customers in 21 U.S. states, primarily in non-metropolitan markets. The company's revenue is dominated by residential data (49.9%) and residential video (25.9%). Strategic shifts since 2013 focus on growing higher-margin residential data and business services, de-emphasizing residential video and voice due to declining profitability and competition. Recent acquisitions include Clearwave (2019), Fidelity (2019), and Valu-Net (2020), with strategic investments in Nextlink, Wisper, and a planned MBI investment - Cable One serves approximately 984,000 residential and business customers in over 950 communities across 21 states, with approximately 78% of customers in Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma, and Texas[116] - Customer breakdown as of September 30, 2020: 866,000 data, 277,000 video, and 132,000 voice subscribers[116] Revenue Share by Product Line (First Nine Months of 2020) | Product Line | Share of Total Revenues | | :---------------- | :---------------------- | | Residential data | 49.9% | | Residential video | 25.9% | | Business services | 17.8% | | Residential voice | 3.6% | - Strategic shift since 2013: Focus on growing higher-margin residential data and business services, de-emphasizing residential video and voice due to declining profitability and increasing competition[120] - Infrastructure investments: Over 50% of total capital expenditures in the last three fiscal years focused on improvements to drive revenue and Adjusted EBITDA expansion, including Gigabit data service to approximately 97% of homes passed and DOCSIS 3.1 deployment[125] - Primary goals: Continue growing residential data and business services revenues, increase profit margins, deliver strong Adjusted EBITDA, and seek broadband-related acquisition and strategic investment opportunities in rural markets[127] COVID-19 Update The COVID-19 pandemic led Cable One to modify operations, including restricting in-home technician visits, closing offices, expanding work-from-home, and implementing health protocols. The company waived late charges, suspended data disconnections, offered free public Wi-Fi, and provided a low-cost data plan for low-income families. These actions, along with reduced data overage fees and diminished business sales growth, negatively impacted Adjusted EBITDA by $3.3 million (Q3 2020) and $19.8 million (9 months 2020), partially offset by increased residential data customers and lower travel costs. The ERP system implementation remains on schedule for summer 2021 - Operational modifications due to COVID-19: Restricted in-home technician visits, closed/limited office access, expanded work-from-home, implemented 'purpose pay' (concluded Sep 2020), established health protocols[130] - Customer relief efforts: Waived late charges and suspended data disconnections (concluded), opened free public Wi-Fi hotspots (extended through end of 2020), discontinued data overage fees (extended through June 2020), offered low-cost 15 Mbps residential data plan for $10/month (available through Dec 31, 2020)[131][132] - Negative Adjusted EBITDA impact from COVID-19 responses: $3.3 million (Q3 2020) and $19.8 million (9 months 2020), primarily from reduced revenues (overage fees, late charges, reconnect fees) and higher labor/operating costs[133] - Offsetting positive impacts: Greater-than-usual gain in residential data customers and associated revenue increase, lower travel costs, and sequentially lower bad debt expense in Q3 2020[133] - ERP system implementation remains on schedule for summer 2021 despite resource challenges[134] - Expected dissipation of negative impacts in Q4 2020 due to resumption of billing late charges, reconnect fees, and data overage fees, and normalization of labor costs[136] Results of Operations Analyzes the company's financial performance, including subscriber trends, revenue growth, and changes in operating expenses for the periods presented PSU and Customer Counts Details subscriber and customer relationship trends, highlighting growth in data PSUs and a shift towards single/double-play packages PSU and Customer Counts (As of September 30, in thousands, except percentages) | Metric | 2020 | 2019 | Annual Net Change | % Change | | :----------------------------- | :---- | :---- | :---------------- | :------- | | Residential data PSUs | 784 | 619 | 165 | 26.7 | | Residential video PSUs | 263 | 283 | (20) | (7.1) | | Residential voice PSUs | 96 | 91 | 4 | 4.9 | | Total residential PSUs | 1,143 | 993 | 150 | 15.1 | | Business data PSUs | 81 | 70 | 11 | 16.2 | | Business video PSUs | 14 | 15 | (1) | (7.5) | | Business voice PSUs | 36 | 30 | 6 | 20.3 | | Total business services PSUs | 131 | 115 | 16 | 14.2 | | Total data PSUs | 866 | 689 | 177 | 25.6 | | Total video PSUs | 277 | 298 | (21) | (7.1)| | Total voice PSUs | 132 | 121 | 11 | 8.7 | | Total PSUs | 1,274 | 1,108 | 166 | 15.0 | | Residential customer relationships | 897 | 744 | 153 | 20.5 | | Business customer relationships | 87 | 77 | 10 | 12.4 | | Total customer relationships | 984 | 821 | 162 | 19.8 | - Customer mix shifted from triple-play to single/double-play packages, accelerated by COVID-19 and focus on data-only sales[139] Use of Nonfinancial Metrics and Average Monthly Revenue per Unit ("ARPU") Explains the company's use of nonfinancial metrics like homes passed and PSUs, and ARPU to monitor operational and revenue performance - Nonfinancial metrics used: homes passed, PSUs (Primary Service Units), and customer relationships[140] - ARPU (Average Monthly Revenue per Unit) is used to evaluate revenue generated by each service and analyze growth patterns[143] Comparison of Three Months Ended September 30, 2020 to Three Months Ended September 30, 2019 Compares the company's financial performance for Q3 2020 versus Q3 2019, focusing on revenue growth, operating expenses, and net income Revenue Growth (Three Months Ended September 30, in thousands) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :---------------- | :------- | :------- | :----------- | :------------- | | Total Revenues | $338,962 | $284,991 | $53,971 | 18.9% | | Residential data | $174,527 | $134,320 | $40,207 | 29.9% | | Business services | $59,441 | $50,662 | $8,779 | 17.3% | - COVID-19 actions negatively impacted consolidated revenues by $3.5 million, but this was more than offset by a larger-than-usual gain in residential data customers[145] ARPU (Three Months Ended September 30) | Service | 2020 | 2019 | Change | % Change | | :---------------- | :------ | :------ | :----- | :------- | | Residential data | $74.69 | $72.09 | $2.60 | 3.6% | | Residential video | $102.72 | $93.42 | $9.30 | 10.0% | | Residential voice | $39.17 | $36.85 | $2.32 | 6.3% | | Business services | $229.10 | $219.92 | $9.18 | 4.2% | Costs and Expenses (Three Months Ended September 30, in thousands) | Expense Category | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :-------------------------------- | :------- | :------- | :----------- | :------------- | | Operating expenses (excl. D&A) | $107,303 | $94,898 | $12,405 | 13.1% | | Selling, general and administrative | $62,596 | $58,861 | $3,735 | 6.3% | | Depreciation and amortization | $71,421 | $48,737 | $22,684 | 46.5% | - Operating expenses increased due to acquired operations ($12.2 million), labor costs ($2.1 million), and repairs/maintenance ($1.4 million), partially offset by lower programming ($3.3 million)[152] - SG&A increased due to acquired operations ($7.2 million) and labor costs ($3.1 million), offset by lower bad debt ($2.9 million) and rebranding costs ($2.7 million)[153] - Interest expense increased 9.2% to $17.6 million due to additional outstanding debt and higher interest rate swap settlement expense, partially offset by lower interest rates[155] - Net income increased $16.5 million to $66.3 million[158] Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019 Compares the company's financial performance for the nine months ended September 30, 2020, versus 2019, detailing revenue, expenses, and net income Revenue Growth (Nine Months Ended September 30, in thousands) | Metric | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :---------------- | :------- | :------- | :----------- | :------------- | | Total Revenues | $988,461 | $849,246 | $139,215 | 16.4% | | Residential data | $493,532 | $396,955 | $96,577 | 24.3% | | Business services | $175,771 | $147,564 | $28,207 | 19.1% | - COVID-19 actions negatively impacted consolidated revenues by $12.1 million, but this was more than offset by a larger-than-usual gain in residential data customers[161] ARPU (Nine Months Ended September 30) | Service | 2020 | 2019 | Change | % Change | | :---------------- | :------ | :------ | :----- | :------- | | Residential data | $73.73 | $71.74 | $1.99 | 2.8% | | Residential video | $101.25 | $92.90 | $8.35 | 9.0% | | Residential voice | $39.97 | $35.53 | $4.44 | 12.5% | | Business services | $227.92 | $219.39 | $8.53 | 3.9% | Costs and Expenses (Nine Months Ended September 30, in thousands) | Expense Category | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :-------------------------------- | :------- | :------- | :----------- | :------------- | | Operating expenses (excl. D&A) | $319,259 | $285,104 | $34,155 | 12.0% | | Selling, general and administrative | $190,474 | $180,407 | $10,067 | 5.6% | | Depreciation and amortization | $202,284 | $157,416 | $44,868 | 28.5% | - Operating expenses increased due to acquired operations ($33.5 million), labor costs ($7.3 million), and repairs/maintenance ($3.8 million), partially offset by lower programming ($11.0 million)[167] - SG&A increased due to acquired operations ($19.5 million) and labor costs ($8.7 million), offset by lower rebranding ($5.6 million), health insurance ($4.9 million), acquisition-related costs ($3.4 million), and system conversion costs ($2.3 million)[170] - Net gain on asset sales and disposals of $3.1 million (2020) vs. net loss of $4.4 million (2019), including a $6.6 million non-cash gain on tower sales in 2020[172] - Net income increased $73.2 million to $198.2 million[177] Use of Adjusted EBITDA Explains Adjusted EBITDA as a non-GAAP measure for performance evaluation, debt covenant compliance, and incentive compensation, with reported values - Adjusted EBITDA is a non-GAAP measure used to assess performance, debt covenant compliance, and annual incentive compensation[179][182] Adjusted EBITDA (in thousands) | Period | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :----------------------------------- | :------- | :------- | :----------- | :------------- | | Three months ended September 30 | $174,351 | $139,956 | $34,395 | 24.6% | | Nine months ended September 30 | $495,226 | $410,672 | $84,554 | 20.6% | Financial Condition: Liquidity and Capital Resources Cable One's primary funding needs include operations, capital expenditures, acquisitions, dividends, and share repurchases. The company expects to meet these needs through existing cash, Senior Credit Facilities, the Notes Offering, and operating cash flows. Net cash from operating activities increased by $63.8 million YoY to $399.0 million for the nine months ended September 30, 2020. Net cash used in investing activities decreased by $227.8 million, while net cash from financing activities increased by $326.8 million, largely due to the $469.8 million Public Offering. Capital expenditures for the nine months ended September 30, 2020, totaled $218.0 million, with significant investments in customer premise equipment and infrastructure upgrades Net Cash Flows (Nine Months Ended September 30, in thousands) | Cash Flow Activity | 2020 | 2019 | Change (YoY) | | :--------------------------------------- | :--------- | :--------- | :----------- | | Net cash provided by operating activities | $398,980 | $335,185 | $63,795 | | Net cash used in investing activities | $(299,844) | $(527,622) | $227,778 | | Net cash provided by financing activities | $400,925 | $74,172 | $326,753 | | Increase (decrease) in cash and cash equivalents | $500,061 | $(118,265) | $618,326 | | Cash and cash equivalents, end of period | $625,332 | $145,848 | $479,484 | - Operating cash flow increase driven by higher Adjusted EBITDA ($84.6 million), lower rebranding and acquisition costs, offset by higher cash taxes and unfavorable changes in accounts receivable[189] - Investing cash flow decrease due to $356.9 million Clearwave acquisition in 2019, partially offset by increased capital expenditures ($45.9 million), Valu-Net acquisition ($38.3 million), and equity investments ($37.2 million) in 2020[190] - Financing cash flow increase primarily from $469.8 million net proceeds from Public Offering in Q2 2020, partially offset by $151.1 million reduction in net debt borrowings[191] - Share Repurchase Program: 210,631 shares repurchased for $104.9 million since inception; no repurchases in the nine months ended September 30, 2020[192] - Quarterly dividend of $2.50 per share paid in Q3 2020[193] - As of September 30, 2020, $1.7 billion in outstanding term loans and $320.4 million available under Revolving Credit Facility[197] Capital Expenditures by Category (Nine Months Ended September 30, in thousands) | Category | 2020 | 2019 | | :----------------------- | :------- | :------- | | Customer premise equipment | $52,210 | $40,764 | | Commercial | $36,888 | $29,376 | | Scalable infrastructure | $30,851 | $30,481 | | Line extensions | $14,436 | $12,793 | | Upgrade/rebuild | $43,882 | $22,522 | | Support capital | $39,727 | $40,388 | | Total | $217,994 | $176,324 | Critical Accounting Policies and Estimates Highlights the management's use of estimates and assumptions in financial reporting, emphasizing policies requiring subjective and complex judgments - Preparation of financial statements requires management estimates and assumptions based on historical experience and reasonable factors[216] - Critical accounting policies involve difficult, subjective, and complex judgments[217] Changes in Critical Accounting Policies and Estimates Discusses the reevaluation of goodwill reporting units and indefinite-lived intangible assets, resulting in a single reporting unit for both - Effective Q2 2020, reevaluated goodwill reporting units and indefinite-lived intangible assets (franchise agreements)[218][219] - Identified a single goodwill reporting unit and a single unit of account for franchise agreements, based on current operations and asset use[218][219] Quantitative and Qualitative Disclosures About Market Risk States that there have been no material changes to the market risk disclosures previously described in the 2019 Form 10-K - No material changes to market risk disclosures from the 2019 Form 10-K[221] Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020 - Management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2020[223] - Concluded that the Company's disclosure controls and procedures were effective as of September 30, 2020[224] Changes in Internal Control Over Financial Reporting Reports no material changes in internal control over financial reporting during the quarter ended September 30, 2020 - No material changes in internal control over financial reporting during the quarter ended September 30, 2020[225] PART II: OTHER INFORMATION Legal Proceedings Confirms that there are no legal proceedings to report for this period - None[226] Risk Factors This section updates risk factors, primarily focusing on the significant and uncertain impacts of the COVID-19 pandemic on operations, financial results, and business strategies. It also highlights risks associated with recent and future acquisitions and strategic investments, including integration challenges and the potential for goodwill impairment. Additionally, it addresses risks related to the implementation of a new ERP system and certain provisions in the company's charter and Delaware law that could discourage takeovers Risks Relating to Our Business Highlights business risks including COVID-19 impacts, acquisition and integration challenges, and potential issues with ERP system implementation - COVID-19 Pandemic Impacts: Significant disruptions to operations (technician access, office closures, work-from-home), negative financial impacts (reduced revenues from fees, suppressed business services growth, increased expenses), and uncertainties regarding duration and severity[230][231][232][234] - Acquisition and Strategic Investment Risks: Uncertain timing, failure to complete, integration difficulties, inability to achieve strategic objectives/cost savings, loss of key associates, diversion of management attention, maintaining customer/supplier relationships, integrating financial/IT systems, potential goodwill impairments, increased regulation, and risks related to minority ownership positions[236][240][241] - ERP System Implementation Risks: Significant investments of time/money/resources, diversion of management attention, changes to business processes and internal controls, potential for unexpected delays or technical problems[242] Risks Relating to Our Common Stock and the Securities Market Addresses risks related to anti-takeover provisions, exclusive forum clauses, and director liability limitations that may affect stockholders - Anti-Takeover Provisions: Provisions in the company's charter, by-laws, and Delaware law (e.g., staggered board, no stockholder written consent, limited special meeting calls, high vote requirements for by-law amendments, business combination limits) may discourage or delay takeovers[243][244][245][246] - Exclusive Forum Provision: Designates Delaware Court of Chancery as the sole forum for certain stockholder actions, potentially limiting stockholders' ability to choose a favorable judicial forum[247][248] - Director Liability Limitation: Charter limits personal liability of directors for breaches of fiduciary duty to the fullest extent permitted by DGCL, potentially discouraging lawsuits against directors for monetary damages[249][250][251] Unregistered Sales of Equity Securities and Use of Proceeds Reports on shares purchased for tax withholding and the remaining authorization under the company's share repurchase program - Shares purchased (July 1-31, 2020): 21 shares at an average price of $1,776.67 per share, for tax withholding[253][254] - Approximate dollar value of shares yet to be purchased under share repurchase program (as of Sep 30, 2020): $145,081 thousand[253] Defaults Upon Senior Securities Confirms that there are no defaults upon senior securities to report for this period - None[255] Mine Safety Disclosures States that this section is not applicable to the company's operations - Not applicable[256] Other Information Indicates that there is no other information to report for this period - Not applicable[257] Exhibits This section lists the exhibits filed with the Form 10-Q, including the Equity Purchase Agreement for Mega Broadband Investments Holdings LLC, the Third Restatement Agreement for the Credit Agreement, and various certifications (CEO, CFO, Sarbanes-Oxley Act). It also includes Inline XBRL Taxonomy Extension documents - Exhibit 2.1: Equity Purchase Agreement, dated September 28, 2020, for Mega Broadband Investments Holdings LLC[259] - Exhibit 10.1: Third Restatement Agreement, dated October 30, 2020, for the Credit Agreement[259] - Exhibits 31.1, 31.2, 32: Principal Executive Officer and Principal Financial Officer Certifications (Sarbanes-Oxley Act)[259] - Exhibits 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 101.INS, 104: Inline XBRL Taxonomy Extension Documents and cover page[258][261] SIGNATURES Provides the official signatures of the company's principal executive and financial officers, certifying the report - Signed by Julia M. Laulis (Chair of the Board, President and Chief Executive Officer) and Steven S. Cochran (Senior Vice President and Chief Financial Officer) on November 5, 2020[264]