UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2023
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _____ to _____
Commission File Number:001-36863
___________________
Cable One, Inc.
(Exact name of registrant as specified in its charter)
___________________
| Delaware | 13-3060083 | |||||||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
210 E. Earll Drive, Phoenix, Arizona | 85012 | |||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
(602) 364-6000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
| Common Stock, par value $0.01 | CABO | New York Stock Exchange | ||||||||||||
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 þ No o
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | þ | Accelerated filer | o | ||||||||||||||
| Non-accelerated filer | o | Smaller reporting company | o | ||||||||||||||
| Emerging growth company | o | ||||||||||||||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
Description of Class | Shares Outstanding as of October 27, 2023 | |||||||
| Common stock, par value $0.01 | 5,616,731 | |||||||
CABLE ONE, INC.
FORM 10-Q
TABLE OF CONTENTS
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | ||||||||
References herein to “Cable One,” “us,” “our,” “we” or the “Company” refer to Cable One, Inc., together with its wholly owned subsidiaries.
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business, strategy, acquisitions and strategic investments, dividend policy, financial results and financial condition. Forward-looking statements often include words such as “will,” “should,” “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors, which are discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”):
•rising levels of competition from historical and new entrants in our markets;
•recent and future changes in technology, and our ability to develop, deploy and operate new technologies, service offerings and customer service platforms;
•our ability to continue to grow our residential data and business services revenues and customer base;
•increases in programming costs and retransmission fees;
•our ability to obtain hardware, software and operational support from vendors;
•risks that we may fail to realize the benefits anticipated as a result of our purchase of the remaining interests in Hargray Acquisition Holdings, LLC (“Hargray”) that we did not already own (the “Hargray Acquisition”);
•risks relating to existing or future acquisitions and strategic investments by us;
•risks that the implementation of our new enterprise resource planning system disrupts business operations;
•the integrity and security of our network and information systems;
•the impact of possible security breaches and other disruptions, including cyber-attacks;
•our failure to obtain necessary intellectual and proprietary rights to operate our business and the risk of intellectual property claims and litigation against us;
•legislative or regulatory efforts to impose network neutrality and other new requirements on our data services;
•additional regulation of our video and voice services;
•our ability to renew cable system franchises;
•increases in pole attachment costs;
•changes in local governmental franchising authority and broadcast carriage regulations;
•the potential adverse effect of our level of indebtedness on our business, financial condition or results of operations and cash flows;
•the restrictions the terms of our indebtedness place on our business and corporate actions;
•the possibility that interest rates will continue to rise, causing our obligations to service our variable rate indebtedness to increase significantly;
•the transition away from the London Interbank Offered Rate ("LIBOR") and the adoption of alternative reference rates;
•risks associated with our convertible indebtedness;
•our ability to continue to pay dividends;
•provisions in our charter, by-laws and Delaware law that could discourage takeovers and limit the judicial forum for certain disputes;
•adverse economic conditions, labor shortages, supply chain disruptions, changes in rates of inflation and the level of move activity in the housing sector;
•pandemics, epidemics or disease outbreaks, such as the COVID-19 pandemic, have, and may continue to, disrupt our business and operations, which could materially affect our business, financial condition, results of operations and cash flows;
•lower demand for our residential data and business services products;
•fluctuations in our stock price;
•dilution from equity awards, convertible indebtedness and potential future convertible debt and stock issuances;
•damage to our reputation or brand image;
•our ability to retain key employees (whom we refer to as associates);
•our ability to incur future indebtedness;
•provisions in our charter that could limit the liabilities for directors; and
•the other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), including but not limited to those described under "Risk Factors" in our 2022 Form 10-K.
Any forward-looking statements made by us in this document speak only as of the date on which they are made. We are under no obligation, and expressly disclaim any obligation, except as required by law, to update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
ii
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CABLE ONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
See accompanying notes to the condensed consolidated financial statements.
1
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (dollars in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Revenues | $ | 420,348 | $ | 424,718 | $ | 1,266,266 | $ | 1,280,528 | ||||||||||||||||||
| Costs and Expenses: | ||||||||||||||||||||||||||
| Operating (excluding depreciation and amortization) | 109,682 | 120,487 | 334,651 | 358,299 | ||||||||||||||||||||||
| Selling, general and administrative | 92,726 | 86,018 | 265,641 | 264,571 | ||||||||||||||||||||||
| Depreciation and amortization | 82,918 | 87,222 | 255,586 | 263,564 | ||||||||||||||||||||||
| (Gain) loss on asset sales and disposals, net | 2,492 | 2,952 | 10,714 | 7,615 | ||||||||||||||||||||||
| (Gain) loss on sales of businesses | — | — | — | (13,833) | ||||||||||||||||||||||
| Total Costs and Expenses | 287,818 | 296,679 | 866,592 | 880,216 | ||||||||||||||||||||||
| Income from operations | 132,530 | 128,039 | 399,674 | 400,312 | ||||||||||||||||||||||
| Interest expense | (43,384) | (36,389) | (127,766) | (98,549) | ||||||||||||||||||||||
| Other income (expense), net | (20,536) | 834 | (17,354) | 96,960 | ||||||||||||||||||||||
| Income before income taxes and equity method investment income (loss), net | 68,610 | 92,484 | 254,554 | 398,723 | ||||||||||||||||||||||
| Income tax provision | 20,694 | 21,891 | 63,939 | 86,165 | ||||||||||||||||||||||
| Income before equity method investment income (loss), net | 47,916 | 70,593 | 190,615 | 312,558 | ||||||||||||||||||||||
| Equity method investment income (loss), net | (8,444) | 14 | (38,473) | (1,230) | ||||||||||||||||||||||
| Net income | $ | 39,472 | $ | 70,607 | $ | 152,142 | $ | 311,328 | ||||||||||||||||||
| Net Income per Common Share: | ||||||||||||||||||||||||||
| Basic | $ | 7.03 | $ | 12.10 | $ | 26.87 | $ | 52.47 | ||||||||||||||||||
| Diluted | $ | 6.81 | $ | 11.53 | $ | 25.81 | $ | 49.70 | ||||||||||||||||||
| Weighted Average Common Shares Outstanding: | ||||||||||||||||||||||||||
| Basic | 5,611,278 | 5,836,731 | 5,663,198 | 5,933,372 | ||||||||||||||||||||||
| Diluted | 6,026,285 | 6,261,257 | 6,074,898 | 6,357,955 | ||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges and other, net of tax | $ | 18,569 | $ | 47,251 | $ | 22,338 | $ | 137,301 | ||||||||||||||||||
| Comprehensive income | $ | 58,041 | $ | 117,858 | $ | 174,480 | $ | 448,629 | ||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
2
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| (dollars in thousands, except per share data) | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Gain (Loss) | Treasury Stock, at cost | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 5,641,056 | $ | 62 | $ | 589,738 | $ | 1,704,241 | $ | 53,800 | $ | (580,101) | $ | 1,767,740 | |||||||||||||||||||||||||||||||
| Net income | — | — | — | 39,472 | — | — | 39,472 | |||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges and other, net of tax | — | — | — | — | 18,569 | — | 18,569 | |||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 10,235 | — | — | — | 10,235 | |||||||||||||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | (125) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (23,875) | — | — | — | — | (16,495) | (16,495) | |||||||||||||||||||||||||||||||||||||
| Withholding tax for equity awards | (135) | — | — | — | — | (89) | (89) | |||||||||||||||||||||||||||||||||||||
Dividends paid to stockholders ($2.95 per common share) | — | — | — | (16,699) | — | — | (16,699) | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | 5,616,921 | $ | 62 | $ | 599,973 | $ | 1,727,014 | $ | 72,369 | $ | (596,685) | $ | 1,802,733 | |||||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Gain (Loss) | Treasury Stock, at cost | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 5,916,571 | $ | 62 | $ | 566,796 | $ | 1,664,176 | $ | 7,255 | $ | (332,785) | $ | 1,905,504 | |||||||||||||||||||||||||||||||
| Net income | — | — | — | 70,607 | — | — | 70,607 | |||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges and other, net of tax | — | — | — | — | 47,251 | — | 47,251 | |||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 5,860 | — | — | — | 5,860 | |||||||||||||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | 469 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (89,000) | — | — | — | — | (115,322) | (115,322) | |||||||||||||||||||||||||||||||||||||
| Withholding tax for equity awards | (80) | — | — | — | — | (105) | (105) | |||||||||||||||||||||||||||||||||||||
Dividends paid to stockholders ($2.85 per common share) | — | — | — | (16,663) | — | — | (16,663) | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 5,827,960 | $ | 62 | $ | 572,656 | $ | 1,718,120 | $ | 54,506 | $ | (448,212) | $ | 1,897,132 | |||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
| (dollars in thousands, except per share data) | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Gain (Loss) | Treasury Stock, at cost | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 5,766,011 | $ | 62 | $ | 578,154 | $ | 1,624,406 | $ | 50,031 | $ | (494,680) | $ | 1,757,973 | |||||||||||||||||||||||||||||||
| Net income | — | — | — | 152,142 | — | — | 152,142 | |||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges and other, net of tax | — | — | — | — | 22,338 | — | 22,338 | |||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 21,819 | — | — | — | 21,819 | |||||||||||||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | (4,102) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (141,551) | — | — | — | — | (99,614) | (99,614) | |||||||||||||||||||||||||||||||||||||
| Withholding tax for equity awards | (3,437) | — | — | — | — | (2,391) | (2,391) | |||||||||||||||||||||||||||||||||||||
Dividends paid to stockholders ($8.65 per common share) | — | — | — | (49,534) | — | — | (49,534) | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | 5,616,921 | $ | 62 | $ | 599,973 | $ | 1,727,014 | $ | 72,369 | $ | (596,685) | $ | 1,802,733 | |||||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Gain (Loss) | Treasury Stock, at cost | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 6,046,362 | $ | 62 | $ | 555,640 | $ | 1,456,543 | $ | (82,795) | $ | (136,355) | $ | 1,793,095 | |||||||||||||||||||||||||||||||
| Net income | — | — | — | 311,328 | — | — | 311,328 | |||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges and other, net of tax | — | — | — | — | 137,301 | — | 137,301 | |||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 17,016 | — | — | — | 17,016 | |||||||||||||||||||||||||||||||||||||
| Issuance of equity awards, net of forfeitures | 17,025 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (232,637) | — | — | — | — | (307,031) | (307,031) | |||||||||||||||||||||||||||||||||||||
| Withholding tax for equity awards | (2,790) | — | — | — | — | (4,826) | (4,826) | |||||||||||||||||||||||||||||||||||||
Dividends paid to stockholders ($8.35 per common share) | — | — | — | (49,751) | — | — | (49,751) | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 5,827,960 | $ | 62 | $ | 572,656 | $ | 1,718,120 | $ | 54,506 | $ | (448,212) | $ | 1,897,132 | |||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
CABLE ONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | 152,142 | $ | 311,328 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 255,586 | 263,564 | ||||||||||||
| Non-cash interest expense, net | 6,804 | 7,124 | ||||||||||||
| Equity-based compensation | 21,819 | 17,016 | ||||||||||||
| Write-off of debt issuance costs | 3,340 | — | ||||||||||||
| Change in deferred income taxes | 135 | 32,472 | ||||||||||||
| (Gain) loss on asset sales and disposals, net | 10,714 | 7,615 | ||||||||||||
| (Gain) loss on sales of businesses | — | (13,833) | ||||||||||||
| Equity method investment (income) loss, net | 38,473 | 1,230 | ||||||||||||
| Fair value adjustments | 27,077 | (88,020) | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable, net | (11,948) | 12,510 | ||||||||||||
| Prepaid and other current assets | (5,272) | (14,848) | ||||||||||||
| Accounts payable and accrued liabilities | 7,238 | 25,107 | ||||||||||||
| Deferred revenue | 3,554 | (484) | ||||||||||||
| Other | 1,839 | 9,012 | ||||||||||||
| Net cash provided by operating activities | 511,501 | 569,793 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Cash paid for debt and equity investments | (15,520) | (25,075) | ||||||||||||
| Capital expenditures | (255,428) | (307,252) | ||||||||||||
| Change in accrued expenses related to capital expenditures | 694 | 3,985 | ||||||||||||
| Proceeds from sales of property, plant and equipment | 1,062 | 3,609 | ||||||||||||
| Proceeds from sales of equity investments | 56,730 | — | ||||||||||||
| Proceeds from sales of operations | — | 9,227 | ||||||||||||
| Net cash used in investing activities | (212,462) | (315,506) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Proceeds from long-term debt borrowings | 638,000 | — | ||||||||||||
| Payment of debt issuance costs | (8,096) | — | ||||||||||||
| Payments on long-term debt | (752,922) | (25,762) | ||||||||||||
| Repurchases of common stock | (99,614) | (307,031) | ||||||||||||
| Payment of withholding tax for equity awards | (2,391) | (4,826) | ||||||||||||
| Dividends paid to stockholders | (49,534) | (49,751) | ||||||||||||
| Net cash used in financing activities | (274,557) | (387,370) | ||||||||||||
| Change in cash and cash equivalents | 24,482 | (133,083) | ||||||||||||
| Cash and cash equivalents, beginning of period | 215,150 | 388,802 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 239,632 | $ | 255,719 | ||||||||||
| Supplemental cash flow disclosures: | ||||||||||||||
| Cash paid for interest, net of capitalized interest | $ | 115,093 | $ | 83,602 | ||||||||||
| Cash paid for income taxes, net of refunds received | $ | 76,305 | $ | 18,497 | ||||||||||
See accompanying notes to the condensed consolidated financial statements.
5
CABLE ONE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business. Cable One is a fully integrated provider of data, video and voice services to residential and business customers in 24 Western, Midwestern and Southern U.S. states. As of September 30, 2023, Cable One provided services to approximately 1.1 million residential and business customers, of which approximately 1,057,000 subscribed to data services, 149,000 subscribed to video services and 122,000 subscribed to voice services.
On January 1, 2022, the Company closed a joint venture transaction in which the Company contributed certain fiber operations (including certain fiber assets of Hargray and a majority of the operations of Delta Communications, L.L.C. ("Clearwave")) (the "Clearwave Fiber Contribution") and certain unaffiliated third-party investors contributed cash to a newly formed entity, Clearwave Fiber LLC ("Clearwave Fiber"). The Company's approximately 58% investment in Clearwave Fiber was valued at $440.0 million as of the closing date. Clearwave Fiber is reported on Cable One’s balance sheet under the equity method of accounting, with the proportionate share of its net income (loss) each period reflected within Cable One's consolidated financial statements on a one quarter lag. Refer to note 4 for further details on this transaction and on the Company’s other equity investments.
Basis of Presentation. The condensed consolidated financial statements and accompanying notes thereto have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“GAAP”) for interim financial information; and (ii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the SEC. As permitted under such guidance, certain notes and other financial information normally required by GAAP have been omitted. Management believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations and cash flows as of and for the periods presented herein. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the 2022 Form 10-K.
The December 31, 2022 year-end balance sheet data presented herein was derived from the Company’s audited consolidated financial statements included in the 2022 Form 10-K, but does not include all disclosures required by GAAP. The Company’s interim results of operations may not be indicative of its future results.
Certain reclassifications have been made to prior period amounts to conform to the current year presentation.
Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company, including its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting. Accounting Standards Codification 280 - Segment Reporting requires the disclosure of factors used to identify an entity’s reportable segments. Based on the Company’s chief operating decision maker’s review and assessment of the Company’s operating performance for purposes of performance monitoring and resource allocation, the Company determined that its operations, including the decisions to allocate resources and deploy capital, are organized and managed on a consolidated basis. Accordingly, management has identified one operating segment, which is its reportable segment, under this organizational and reporting structure.
Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates and underlying assumptions.
6
Recently Adopted Accounting Pronouncements. In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR and other reference rates that are to be discontinued. The Company applied the updated guidance when it transitioned certain of its debt instruments and interest rate swaps from LIBOR to the Secured Overnight Financing Rate ("SOFR") during 2023. The adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements.
2. REVENUES
Revenues by product line and other revenue-related disclosures were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Residential: | |||||||||||||||||||||||
| Data | $ | 247,420 | $ | 233,834 | $ | 736,957 | $ | 697,317 | |||||||||||||||
| Video | 62,295 | 80,525 | 198,719 | 249,944 | |||||||||||||||||||
| Voice | 9,080 | 10,494 | 28,334 | 33,105 | |||||||||||||||||||
| Business services | 75,575 | 75,847 | 228,648 | 228,999 | |||||||||||||||||||
| Other | 25,978 | 24,018 | 73,608 | 71,163 | |||||||||||||||||||
| Total revenues | $ | 420,348 | $ | 424,718 | $ | 1,266,266 | $ | 1,280,528 | |||||||||||||||
| Franchise and other regulatory fees | $ | 6,513 | $ | 7,796 | $ | 20,473 | $ | 23,852 | |||||||||||||||
| Deferred commission amortization | $ | 1,445 | $ | 1,282 | $ | 4,202 | $ | 3,799 | |||||||||||||||
Other revenues are comprised primarily of regulatory revenues, advertising sales, late charges and reconnect fees.
Fees imposed on the Company by various governmental authorities, including franchise fees, are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities. As the Company acts as principal, these fees are reported in video and voice revenues on a gross basis with corresponding expenses included within operating expenses in the condensed consolidated statements of operations and comprehensive income.
Deferred commission amortization expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income.
Current deferred revenue liabilities consist of refundable customer prepayments, up-front charges and installation fees. As of September 30, 2023, the Company’s remaining performance obligations pertain to the refundable customer prepayments and consist of providing future data, video and voice services to customers. Of the $23.7 million of current deferred revenue at December 31, 2022, nearly all was recognized during the nine months ended September 30, 2023. Noncurrent deferred revenue liabilities consist of up-front charges and installation fees from business customers.
7
3. OPERATING ASSETS AND LIABILITIES
Accounts receivable consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Trade receivables | $ | 69,975 | $ | 48,958 | |||||||
| Income taxes receivable | — | 1,668 | |||||||||
Other receivables(1) | 20,318 | 26,948 | |||||||||
| Less: Allowance for credit losses | (3,962) | (3,191) | |||||||||
| Total accounts receivable, net | $ | 86,331 | $ | 74,383 | |||||||
(1)Balance includes amounts due from Clearwave Fiber for services provided under a transition services agreement of $4.3 million and $15.6 million as of September 30, 2023 and December 31, 2022, respectively. The September 30, 2023 balance also includes a $9.7 million receivable from the federal government under the Secure and Trusted Communications Networks Reimbursement Program.
The changes in the allowance for credit losses were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Beginning balance | $ | 3,658 | $ | 3,255 | $ | 3,191 | $ | 2,541 | |||||||||||||||
| Additions - charged to costs and expenses | 2,774 | 2,979 | 6,996 | 6,774 | |||||||||||||||||||
| Deductions - write-offs | (3,627) | (4,324) | (10,006) | (10,216) | |||||||||||||||||||
| Recoveries collected | 1,157 | 1,323 | 3,781 | 4,134 | |||||||||||||||||||
| Ending balance | $ | 3,962 | $ | 3,233 | $ | 3,962 | $ | 3,233 | |||||||||||||||
Prepaid and other current assets consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Prepaid repairs and maintenance | $ | 5,936 | $ | 4,059 | |||||||
| Software implementation costs | 1,559 | 1,349 | |||||||||
| Prepaid insurance | 5,071 | 3,506 | |||||||||
| Prepaid rent | 4,024 | 2,125 | |||||||||
| Prepaid software | 8,618 | 8,897 | |||||||||
| Deferred commissions | 5,279 | 4,596 | |||||||||
| Interest rate swap asset | 31,767 | 25,794 | |||||||||
| Prepaid income tax payments | 2,394 | — | |||||||||
| All other current assets | 3,769 | 6,846 | |||||||||
| Total prepaid and other current assets | $ | 68,417 | $ | 57,172 | |||||||
8
Other noncurrent assets consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Operating lease right-of-use assets | $ | 10,643 | $ | 11,325 | |||||||
| Deferred commissions | 9,629 | 8,916 | |||||||||
| Software implementation costs | 5,831 | 6,472 | |||||||||
| Debt issuance costs | 3,275 | 1,904 | |||||||||
| Debt investment | 2,196 | 2,102 | |||||||||
| Assets held for sale | 889 | 914 | |||||||||
| Interest rate swap asset | 64,042 | 40,289 | |||||||||
| All other noncurrent assets | 5,165 | 2,755 | |||||||||
| Total other noncurrent assets | $ | 101,670 | $ | 74,677 | |||||||
Accounts payable and accrued liabilities consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accounts payable | $ | 42,879 | $ | 39,554 | |||||||
| Accrued programming costs | 18,499 | 20,456 | |||||||||
| Accrued compensation and related benefits | 21,242 | 26,515 | |||||||||
| Accrued sales and other operating taxes | 18,627 | 14,541 | |||||||||
| Accrued franchise fees | 2,694 | 3,902 | |||||||||
| Deposits | 6,032 | 6,236 | |||||||||
| Operating lease liabilities | 3,444 | 3,924 | |||||||||
| Accrued insurance costs | 5,933 | 5,525 | |||||||||
| Cash overdrafts | 21,327 | 9,445 | |||||||||
| Interest payable | 11,395 | 5,801 | |||||||||
| Income taxes payable | 1,230 | 13,006 | |||||||||
| All other accrued liabilities | 18,668 | 15,613 | |||||||||
| Total accounts payable and accrued liabilities | $ | 171,970 | $ | 164,518 | |||||||
Other noncurrent liabilities consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Operating lease liabilities | $ | 6,689 | $ | 6,733 | |||||||
| Accrued compensation and related benefits | 8,894 | 8,973 | |||||||||
| Deferred revenue | 15,928 | 8,070 | |||||||||
MBI Net Option (as defined in note 4)(1) | 203,000 | 164,350 | |||||||||
| All other noncurrent liabilities | 2,320 | 4,224 | |||||||||
| Total other noncurrent liabilities | $ | 236,831 | $ | 192,350 | |||||||
(1)Represents the net value of the Company’s call and put options associated with the remaining equity interests in MBI (as defined in note 4), consisting of liabilities of $9.9 million and $193.1 million, respectively, as of September 30, 2023 and liabilities of $6.5 million and $157.9 million, respectively, as of December 31, 2022. Refer to notes 4 and 9 for further information on the MBI Net Option (as defined in note 4).
9
4. EQUITY INVESTMENTS
On January 1, 2022, the Company closed a joint venture transaction in which the Company contributed certain fiber operations (including certain fiber assets of Hargray and a majority of the operations of Clearwave) and certain unaffiliated third-party investors contributed cash to a newly formed entity, Clearwave Fiber. The Company's approximately 58% investment in Clearwave Fiber was valued at $440.0 million as of the closing date. The Company recognized a non-cash gain of $22.1 million associated with this transaction in the quarter ended March 31, 2022.
On March 24, 2022, the Company invested an additional $5.4 million in Point Broadband Holdings, LLC, a fiber internet service provider ("Point Broadband"). On April 1, 2022, the Company contributed its Tallahassee, Florida system to MetroNet Systems, LLC, a fiber internet service provider ("MetroNet"), in exchange for cash consideration of $7.0 million and an equity interest of less than 10% in MetroNet valued at $7.0 million. On June 1, 2022, the Company completed a minority equity investment for a less than 10% ownership interest in Visionary Communications, Inc., an internet service provider ("Visionary"), for $7.2 million. The Company invested an additional $0.8 million in Visionary in April 2023, and another $0.8 million in September 2023. On September 6, 2022, the Company entered into a subscription agreement with Northwest Fiber Holdco, LLC, a fiber internet service provider ("Ziply"), under which the Company agreed to invest up to $50.0 million in Ziply for a less than 10% equity interest. The Company funded $22.2 million in November 2022, $13.9 million in May 2023 and expects to fund the remaining $13.9 million in the fourth quarter of 2023. In July 2023, the Company's equity investment in Wisper ISP, LLC, a wireless internet service provider ("Wisper"), was redeemed for total cash proceeds of $35.9 million, which resulted in the recognition of a $1.8 million non-cash gain. Also in July 2023, the Company divested its equity investment in Tristar Acquisition I Corp, a special-purpose acquisition company ("Tristar"), for total cash proceeds of $20.9 million, which resulted in the recognition of a $3.4 million non-cash loss.
The carrying value of the Company’s equity investments without readily determinable fair values are determined based on fair valuations as of their respective acquisition dates.
10
The carrying value of the Company's equity investments consisted of the following (dollars in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Ownership Percentage | Carrying Value | Ownership Percentage | Carrying Value | ||||||||||||||||||||
| Cost Method Investments | |||||||||||||||||||||||
| MetroNet | <10% | $ | 7,000 | <10% | $ | 7,000 | |||||||||||||||||
Nextlink(1) | <20% | 77,245 | <20% | 77,245 | |||||||||||||||||||
| Point Broadband | <10% | 42,623 | <10% | 30,373 | |||||||||||||||||||
| Tristar | — | — | <10% | 23,413 | |||||||||||||||||||
| Visionary | <10% | 8,822 | <10% | 7,190 | |||||||||||||||||||
| Ziply | <10% | 36,111 | <10% | 22,222 | |||||||||||||||||||
| Others | <10% | 13,770 | <10% | 13,624 | |||||||||||||||||||
| Total cost method investments | 185,571 | 181,067 | |||||||||||||||||||||
| Equity Method Investments | |||||||||||||||||||||||
| Clearwave Fiber | ~58% | 374,166 | ~58% | 409,514 | |||||||||||||||||||
MBI(2) | 45.0% | 567,448 | 45.0% | 571,075 | |||||||||||||||||||
| Wisper | — | — | 40.4% | 33,565 | |||||||||||||||||||
| Total equity method investments | 941,614 | 1,014,154 | |||||||||||||||||||||
| Total equity investments | $ | 1,127,185 | $ | 1,195,221 | |||||||||||||||||||
(1)AMG Technology Investment Group, LLC, a wireless internet service provider ("Nextlink").
(2)The Company holds a call option to purchase all but not less than all of the remaining equity interests in Mega Broadband Investments Holdings LLC, a data, video and voice services provider (“MBI”) that the Company does not already own between January 1, 2023 and June 30, 2024. If the call option is not exercised, certain investors in MBI hold a put option to sell (and to cause all members of MBI other than the Company to sell) to the Company all but not less than all of the remaining equity interests in MBI that the Company does not already own between July 1, 2025 and September 30, 2025. The call and put options (collectively referred to as the “MBI Net Option”) are measured at fair value using Monte Carlo simulations that rely on assumptions around MBI’s equity value, MBI’s and the Company’s equity volatility, MBI’s and the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA” and as adjusted, “Adjusted EBITDA”) volatility, risk adjusted discount rates and the Company’s cost of debt, among others. The final MBI purchase price allocation resulted in $630.7 million being allocated to the MBI equity investment and $19.7 million and $75.5 million being allocated to the call and put options, respectively. The MBI Net Option is remeasured at fair value on a quarterly basis. The carrying value of the MBI Net Option liability was $203.0 million and $164.4 million as of September 30, 2023 and December 31, 2022, respectively, and was included within other noncurrent liabilities in the condensed consolidated balance sheets. Refer to note 9 for further information on the MBI Net Option.
The carrying value of MBI exceeded the Company’s underlying equity in MBI’s net assets by $491.8 million and $497.8 million as of September 30, 2023 and December 31, 2022, respectively.
11
Equity method investment income (losses), which increase (decrease) the carrying value of the respective investment, and are recorded on a one quarter lag, along with certain other operating information, were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Equity Method Investment Income (Loss) | |||||||||||||||||||||||
| Clearwave Fiber | $ | (8,086) | $ | (3,550) | $ | (35,348) | $ | (14,475) | |||||||||||||||
MBI(1) | (387) | 3,243 | (3,627) | 11,318 | |||||||||||||||||||
| Wisper | 29 | 321 | 502 | 1,927 | |||||||||||||||||||
| Total | $ | (8,444) | $ | 14 | $ | (38,473) | $ | (1,230) | |||||||||||||||
| Other Income (Expense), Net | |||||||||||||||||||||||
Mark-to-market adjustments(2) | $ | 45 | $ | 95 | $ | 13,130 | $ | (80) | |||||||||||||||
| Gain (loss) on sale of equity investments, net | $ | (1,558) | $ | — | $ | (1,558) | $ | — | |||||||||||||||
| MBI Net Option change in fair value | $ | (23,910) | $ | (2,800) | $ | (38,650) | $ | 88,100 | |||||||||||||||
(1)The Company identified a $186.6 million difference between the fair values of certain of MBI’s finite-lived intangible assets and the respective carrying values recorded by MBI, of which $84.0 million was attributable to the Company’s 45% pro rata portion. The Company is amortizing its share on an accelerated basis over the lives of the respective assets. For the three months ended September 30, 2023, the Company recognized $2.2 million of its pro rata share of MBI’s net income and $2.5 million of its pro rata share of basis difference amortization. For the three months ended September 30, 2022, the Company recognized $6.4 million of its pro rata share of MBI’s net income and $3.2 million of its pro rata share of basis difference amortization. For the nine months ended September 30, 2023, the Company recognized $4.6 million of its pro rata share of MBI’s net income and $8.3 million of its pro rata share of basis difference amortization. For the nine months ended September 30, 2022, the Company recognized $21.7 million of its pro rata share of MBI’s net income and $10.3 million of its pro rata share of basis difference amortization.
(2)Amount for the nine months ended September 30, 2023 includes a $12.3 million non-cash mark-to-market gain on the Company's investment in Point Broadband during the first quarter of 2023 as a result of an observable market transaction in Point Broadband’s equity.
The Company assesses each equity investment for indicators of impairment on a quarterly basis. No impairments were recorded for any of the periods presented.
12
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Cable distribution systems | $ | 2,424,495 | $ | 2,454,452 | |||||||
| Customer premise equipment | 374,990 | 339,132 | |||||||||
| Other equipment and fixtures | 385,385 | 450,301 | |||||||||
| Buildings and improvements | 139,929 | 138,467 | |||||||||
| Capitalized software | 72,193 | 58,740 | |||||||||
| Construction in progress | 183,704 | 230,644 | |||||||||
| Land | 13,641 | 12,541 | |||||||||
| Right-of-use assets | 10,402 | 11,323 | |||||||||
| Property, plant and equipment, gross | 3,604,739 | 3,695,600 | |||||||||
| Less: Accumulated depreciation and amortization | (1,857,265) | (1,993,845) | |||||||||
| Property, plant and equipment, net | $ | 1,747,474 | $ | 1,701,755 | |||||||
The Company contributed $280.0 million of property, plant and equipment, net, to the Clearwave Fiber joint venture on January 1, 2022 and recognized a $22.1 million non-cash gain on the transaction in the first quarter of 2022.
The Company classified $0.9 million of property, plant and equipment as held for sale as of both September 30, 2023 and December 31, 2022. Such assets are included within other noncurrent assets in the condensed consolidated balance sheets.
Depreciation and amortization expense for property, plant and equipment was $64.8 million and $66.4 million for the three months ended September 30, 2023 and 2022, respectively, and $201.1 million and $201.2 million for the nine months ended September 30, 2023 and 2022, respectively.
13
6. GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill was $928.9 million as of both September 30, 2023 and December 31, 2022. The Company has not historically recorded any impairment of goodwill.
Intangible assets consisted of the following (dollars in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Useful Life Range (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||
| Finite-Lived Intangible Assets | |||||||||||||||||||||||||||||||||||||||||
| Customer relationships | 13.5 – 17 | $ | 784,381 | $ | 278,223 | $ | 506,158 | $ | 784,381 | $ | 225,445 | $ | 558,936 | ||||||||||||||||||||||||||||
| Trademarks and trade names | 2.7 – 4.2 | 11,846 | 8,255 | 3,591 | 11,846 | 6,675 | 5,171 | ||||||||||||||||||||||||||||||||||
| Wireless licenses | 10 – 15 | 1,418 | 394 | 1,024 | 1,418 | 286 | 1,132 | ||||||||||||||||||||||||||||||||||
| Total finite-lived intangible assets | $ | 797,645 | $ | 286,872 | $ | 510,773 | $ | 797,645 | $ | 232,406 | $ | 565,239 | |||||||||||||||||||||||||||||
| Indefinite-Lived Intangible Assets | |||||||||||||||||||||||||||||||||||||||||
| Franchise agreements | $ | 2,100,546 | $ | 2,100,546 | |||||||||||||||||||||||||||||||||||||
| Trademark and trade name | 800 | 800 | |||||||||||||||||||||||||||||||||||||||
| Total indefinite-lived intangible assets | $ | 2,101,346 | $ | 2,101,346 | |||||||||||||||||||||||||||||||||||||
| Total intangible assets, net | $ | 2,612,119 | $ | 2,666,585 | |||||||||||||||||||||||||||||||||||||
Intangible asset amortization expense was $18.2 million and $20.8 million for the three months ended September 30, 2023 and 2022, respectively, and $54.5 million and $62.4 million for the nine months ended September 30, 2023 and 2022, respectively.
The future amortization of existing finite-lived intangible assets as of September 30, 2023 was as follows (in thousands):
| Year Ending December 31, | Amount | |||||||
| 2023 (remaining three months) | $ | 18,154 | ||||||
| 2024 | 65,828 | |||||||
| 2025 | 60,840 | |||||||
| 2026 | 55,326 | |||||||
| 2027 | 51,445 | |||||||
| Thereafter | 259,180 | |||||||
| Total | $ | 510,773 | ||||||
Actual amortization expense in future periods may differ from the amounts above as a result of intangible asset acquisitions or divestitures, changes in useful life estimates, impairments or other relevant factors.
14
7. DEBT
The carrying amount of long-term debt consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Senior Credit Facilities (as defined below) | $ | 2,159,908 | $ | 2,273,904 | |||||||
| Senior Notes (as defined below) | 650,000 | 650,000 | |||||||||
| Convertible Notes (as defined below) | 920,000 | 920,000 | |||||||||
| Finance lease liabilities | 5,312 | 4,844 | |||||||||
| Total debt | 3,735,220 | 3,848,748 | |||||||||
| Less: Unamortized debt discount | (13,106) | (16,313) | |||||||||
| Less: Unamortized debt issuance costs | (23,477) | (23,913) | |||||||||
| Less: Current portion of long-term debt | (19,019) | (55,931) | |||||||||
| Total long-term debt | $ | 3,679,618 | $ | 3,752,591 | |||||||
Senior Credit Facilities. Prior to February 22, 2023, the Company had in place a credit agreement (the "Credit Agreement") that provided for senior secured term loans in original aggregate principal amounts of $700.0 million maturing in 2025 (the “Term Loan A-2”), $250.0 million maturing in 2027 (the “Term Loan B-2”), $625.0 million maturing in 2027 (the “Term Loan B-3”) and $800.0 million maturing in 2028 (the "Term Loan B-4"), as well as a $500.0 million revolving credit facility maturing in 2025 (the “Revolving Credit Facility” and, together with the Term Loan A-2, the Term Loan B-2, the Term Loan B-3 and the Term Loan B-4, the “Senior Credit Facilities”). The Revolving Credit Facility also gives the Company the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility.
On February 22, 2023, the Company amended and restated the Credit Agreement (as amended and restated, the "New Credit Agreement") to, among other things, (i) increase the aggregate principal amount of commitments under the Revolving Credit Facility by $500.0 million to $1.0 billion; (ii) extend the scheduled maturity of the Revolving Credit Facility from October 2025 to February 2028; (iii) upsize the outstanding principal amount under the Term Loan B-3 by $150.0 million to $757.0 million (the "TLB-3 Upsize"); (iv) extend the scheduled maturities of the Term Loan B-2 and the Term Loan B-3 from October 2027 to October 2029 (subject to adjustment as described in the notes to the table below summarizing the Company's outstanding term loans as of September 30, 2023); (v) increase the fixed spreads on the Term Loan B-2 and the Term Loan B-3 from 2.00% to 2.25%; and (vi) transition the benchmark interest rate for the Revolving Credit Facility, the Term Loan B-2 and the Term Loan B-3 from LIBOR to SOFR plus a 10 basis point credit spread adjustment. Except as described above, the New Credit Agreement did not make any material changes to the principal terms of the Term Loan B-2, the Term Loan B-3, the Term Loan B-4 or the Revolving Credit Facility. Upon the effectiveness of the New Credit Agreement, the Company drew $488.0 million under the Revolving Credit Facility and, together with the net proceeds from the TLB-3 Upsize, repaid all $638.3 million aggregate principal amount of its outstanding Term Loan A-2. In July 2023, the Company transitioned the benchmark interest rate for the Term Loan B-4 from LIBOR to SOFR plus a credit spread adjustment that ranges from approximately 11.4 basis points to 42.8 basis points based on the interest period elected.
The Company repaid $50.0 million of the outstanding Revolving Credit Facility borrowings during each of the second and third quarters of 2023, reducing the outstanding balance to $388.0 million as of September 30, 2023.
Refer to the table below summarizing the Company’s outstanding term loans as of September 30, 2023 and notes 10 and 19 to the Company’s audited consolidated financial statements included in the 2022 Form 10-K for further details on the Senior Credit Facilities.
15
As of September 30, 2023, the Company had approximately $1.8 billion of aggregate outstanding term loans and $388.0 million of borrowings and $612.0 million available for borrowing under the Revolving Credit Facility. A summary of the Company’s outstanding term loans as of September 30, 2023 is as follows (dollars in thousands):
| Instrument | Draw Date(s) | Original Principal | Amortization Per Annum(1) | Outstanding Principal | Final Scheduled Maturity Date | Final Scheduled Principal Payment | Benchmark Rate | Fixed Margin | Interest Rate | |||||||||||||||||||||||||||||||||||||||||||||||
| Term Loan B-2 | 1/7/2019 | $ | 250,000 | 1.0% | $ | 238,750 | 10/30/2029(2) | $ | 223,750 | SOFR + 10 bps | 2.25% | 7.67% | ||||||||||||||||||||||||||||||||||||||||||||
| Term Loan B-3 | 6/14/2019 10/30/2020 2/22/2023 | 325,000 300,000 150,000 | 1.0% | 751,158 | 10/30/2029(2) | 704,695 | SOFR + 10 bps | 2.25% | 7.67% | |||||||||||||||||||||||||||||||||||||||||||||||
| Term Loan B-4 | 5/3/2021 | 800,000 | 1.0% | 782,000 | 5/3/2028 | 746,000 | SOFR + 11.4 bps | 2.00% | 7.43% | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,825,000 | $ | 1,771,908 | $ | 1,674,445 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Payable in equal quarterly installments (expressed as a percentage of the original principal amount and subject to customary adjustments in the event of any prepayment). All loans may be prepaid at any time without penalty or premium (subject to customary SOFR breakage provisions).
(2)The final maturity date of the Term Loan B-2 and the Term Loan B-3, in each case, will adjust to May 3, 2028 if greater than $150.0 million aggregate principal amount of the Term Loan B-4 (together with any refinancing indebtedness in respect of the Term Loan B-4 with a final maturity date prior to the date that is 91 days after October 30, 2029) remains outstanding on May 3, 2028.
Senior Notes. In November 2020, the Company issued $650.0 million aggregate principal amount of 4.00% senior notes due 2030 (the “Senior Notes”). The Senior Notes bear interest at a rate of 4.00% per annum payable semi-annually in arrears on May 15th and November 15th of each year. The terms of the Senior Notes are governed by an indenture dated as of November 9, 2020 (the “Senior Notes Indenture”), among the Company, the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A. (“BNY”), as trustee.
At any time and from time to time prior to November 15, 2025, the Company may redeem some or all of the Senior Notes for cash at a redemption price equal to 100% of their principal amount, plus the “make-whole” premium described in the Senior Notes Indenture and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Beginning on November 15, 2025, the Company may redeem some or all of the Senior Notes at any time and from time to time at the applicable redemption prices listed in the Senior Notes Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time and from time to time prior to November 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of Senior Notes with funds in an aggregate amount not exceeding the net cash proceeds from one or more equity offerings at a redemption price equal to 104% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
Upon the occurrence of a Change of Control and a Below Investment Grade Rating Event (each as defined in the Senior Notes Indenture), the Company is required to offer to repurchase the Senior Notes at 101% of the principal amount of such Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
Convertible Notes. In March 2021, the Company issued $575.0 million aggregate principal amount of 0.000% convertible senior notes due 2026 (the “2026 Notes”) and $345.0 million aggregate principal amount of 1.125% convertible senior notes due 2028 (the “2028 Notes” and, together with the 2026 Notes, the “Convertible Notes,” and the Convertible Notes collectively with the Senior Notes, the “Notes”). The terms of the 2026 Notes and the 2028 Notes are each governed by a separate indenture dated as of March 5, 2021 (collectively, the “Convertible Notes Indentures” and together with the Senior Notes Indenture, the “Indentures”), in each case, among the Company, the guarantors party thereto and BNY, as trustee.
The 2026 Notes do not bear regular interest, and the principal amount of the 2026 Notes does not accrete. The 2028 Notes bear interest at a rate of 1.125% per annum. Interest on the 2028 Notes is payable semiannually in arrears on March 15th and September 15th of each year, unless earlier repurchased, converted or redeemed. The 2026 Notes are scheduled to mature on March 15, 2026, and the 2028 Notes are scheduled to mature on March 15, 2028. The initial conversion rate for each of the 2026 Notes and the 2028 Notes is 0.4394 shares of the Company’s common stock per $1,000 principal amount of 2026 Notes and 2028 Notes, as applicable (equivalent to an initial conversion price of $2,275.83 per share of common stock).
16
The Convertible Notes are convertible at the option of the holders. The method of conversion into cash, shares of the Company’s common stock or a combination thereof is at the election of the Company. Prior to the close of business on the business day immediately preceding December 15, 2025, the 2026 Notes will be convertible at the option of the holders only upon the satisfaction of specified conditions and during certain periods. On or after December 15, 2025, holders may convert their 2026 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the relevant maturity date. Prior to the close of business on the business day immediately preceding December 15, 2027, the 2028 Notes will be convertible at the option of the holders only upon the satisfaction of specified conditions and during certain periods. On or after December 15, 2027, holders may convert their 2028 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the relevant maturity date. If the Company undergoes a “fundamental change” (as defined in the applicable Convertible Notes Indenture), holders of the applicable series of Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes of such series at a purchase price equal to 100% of the principal amount of the Convertible Notes of such series to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.
The Company may not redeem the 2026 Notes prior to March 20, 2024 and it may not redeem the 2028 Notes prior to March 20, 2025. No “sinking fund” is provided for the Convertible Notes. On or after March 20, 2024 and prior to December 15, 2025, the Company may redeem for cash all or any portion of the 2026 Notes, at its option, and on or after March 20, 2025 and prior to December 15, 2027, the Company may redeem for cash all or any portion of the 2028 Notes, at its option, in each case, if the last reported sale price per share of common stock has been at least 130% of the conversion price for such series of Convertible Notes then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes of such series to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date.
In addition, following a “make-whole fundamental change” (as defined in the applicable Convertible Notes Indenture) or if the Company delivers a notice of redemption in respect of any Convertible Notes of a series, in certain circumstances, the conversion rate applicable to such series of Convertible Notes will be increased for a holder who elects to convert any of such Convertible Notes in connection with such a make-whole fundamental change or convert any of such Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be.
The carrying amounts of the Convertible Notes consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| 2026 Notes | 2028 Notes | Total | 2026 Notes | 2028 Notes | Total | ||||||||||||||||||||||||||||||
| Gross carrying amount | $ | 575,000 | $ | 345,000 | $ | 920,000 | $ | 575,000 | $ | 345,000 | $ | 920,000 | |||||||||||||||||||||||
| Less: Unamortized discount | (7,366) | (5,740) | (13,106) | (9,610) | (6,703) | (16,313) | |||||||||||||||||||||||||||||
| Less: Unamortized debt issuance costs | (201) | (162) | (363) | (262) | (189) | (451) | |||||||||||||||||||||||||||||
| Net carrying amount | $ | 567,433 | $ | 339,098 | $ | 906,531 | $ | 565,128 | $ | 338,108 | $ | 903,236 | |||||||||||||||||||||||
Interest expense on the Convertible Notes consisted of the following (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2026 Notes | 2028 Notes | Total | 2026 Notes | 2028 Notes | Total | 2026 Notes | 2028 Notes | Total | 2026 Notes | 2028 Notes | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contractual interest expense | $ | — | $ | 970 | $ | 970 | $ | — | $ | 970 | $ | 970 | $ | — | $ | 2,911 | $ | 2,911 | $ | — | $ | 2,911 | $ | 2,911 | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of discount | 756 | 325 | 1,081 | 756 | 325 | 1,081 | 2,244 | 963 | 3,207 | 2,244 | 963 | 3,207 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of debt issuance costs | 21 | 9 | 30 | 21 | 9 | 30 | 61 | 27 | 88 | 61 | 28 | 89 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest expense | $ | 777 | $ | 1,304 | $ | 2,081 | $ | 777 | $ | 1,304 | $ | 2,081 | $ | 2,305 | $ | 3,901 | $ | 6,206 | $ | 2,305 | $ | 3,902 | $ | 6,207 | |||||||||||||||||||||||||||||||||||||||||||||||
| Effective interest rate | 0.5 | % | 1.5 | % | 0.5 | % | 1.5 | % | 0.5 | % | 1.5 | % | 0.5 | % | 1.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
17
General. The Notes are senior unsecured obligations of the Company and are guaranteed by the Company’s wholly owned domestic subsidiaries that guarantee the Senior Credit Facilities or that guarantee certain capital market debt of the Company in an aggregate principal amount in excess of $250.0 million.
Each Indenture contains covenants that, among other things and subject to certain exceptions, limit (i) the Company’s ability to consolidate or merge with or into another person or sell or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries (taken as a whole) and (ii) the ability of the guarantors to consolidate with or merge with or into another person. The Senior Notes Indenture also contains a covenant that, subject to certain exceptions, limits the Company’s ability and the ability of its subsidiaries to incur any liens securing indebtedness for borrowed money.
Each Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, default in payment of principal or interest, breach of other agreements or covenants in respect of the relevant Notes by the Company or any guarantors, failure to pay certain other indebtedness at final maturity, acceleration of certain indebtedness prior to final maturity, failure to pay certain final judgments, failure of certain guarantees to be enforceable and certain events of bankruptcy, insolvency or reorganization; and, in the case of each Convertible Notes Indenture, failure to comply with the Company’s obligation to convert the relevant Convertible Notes under the applicable Convertible Notes Indenture and failure to give a fundamental change notice or a notice of a make-whole fundamental change under the applicable Convertible Notes Indenture.
Unamortized debt issuance costs consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Revolving Credit Facility portion: | |||||||||||
| Other noncurrent assets | $ | 3,275 | $ | 1,904 | |||||||
| Term loans and Notes portion: | |||||||||||
| Long-term debt (contra account) | 23,477 | 23,913 | |||||||||
| Total | $ | 26,752 | $ | 25,817 | |||||||
The Company recorded debt issuance cost amortization of $1.1 million and $1.3 million for the three months ended September 30, 2023 and 2022, respectively, and $3.6 million and $4.0 million for the nine months ended September 30, 2023 and 2022, respectively, within interest expense in the condensed consolidated statements of operations and comprehensive income. The Company capitalized $7.8 million and wrote-off $3.3 million of debt issuance costs during the nine months ended September 30, 2023.
The future maturities of outstanding borrowings as of September 30, 2023 were as follows (in thousands):
| Year Ending December 31, | Amount | |||||||
| 2023 (remaining three months) | $ | 4,561 | ||||||
| 2024 | 18,244 | |||||||
| 2025 | 18,244 | |||||||
| 2026 | 593,244 | |||||||
| 2027 | 18,244 | |||||||
| Thereafter | 3,077,371 | |||||||
| Total | $ | 3,729,908 | ||||||
On May 3, 2022, the Company entered into a letter of credit agreement with MUFG Bank, Ltd. ("MUFG") which provides for an additional $75.0 million letter of credit issuing capacity. As of September 30, 2023, $11.9 million of letters of credit issuances were held for the benefit of performance obligations under government grant programs and certain general and liability insurance matters and bore interest at a rate of 1.00% per annum.
The Company was in compliance with all debt covenants as of September 30, 2023.
18
8. INTEREST RATE SWAPS
The Company is party to two interest rate swap agreements, designated as cash flow hedges, to manage the risk of fluctuations in interest rates on its variable rate SOFR debt. Changes in the fair values of the interest rate swaps are reported through other comprehensive income until the underlying hedged debt’s interest expense impacts net income, at which point the corresponding change in fair value is reclassified from accumulated other comprehensive income to interest expense.
A summary of the significant terms of the Company’s interest rate swap agreements is as follows (dollars in thousands):
| Entry Date | Effective Date | Maturity Date(1) | Notional Amount | Settlement Type | Settlement Frequency | Fixed Base Rate | |||||||||||||||||||||||||||||||||||
Swap A(2) | 3/7/2019 | 3/11/2019 | 3/11/2029 | $ | 850,000 | Receive one-month SOFR, pay fixed | Monthly | 2.595% | |||||||||||||||||||||||||||||||||
Swap B(3) | 3/6/2019 | 6/15/2020 | 2/28/2029 | 350,000 | Receive one-month SOFR, pay fixed | Monthly | 2.691% | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,200,000 | |||||||||||||||||||||||||||||||||||||||
(1)Each swap may be terminated prior to the scheduled maturity at the election of the Company or the financial institution counterparty under the terms provided in each swap agreement.
(2)Swap A was amended effective February 28, 2023 to transition the reference rate from LIBOR to SOFR, resulting in the fixed base rate changing from 2.653% to 2.595%.
(3)Swap B was amended effective March 1, 2023 to transition the reference rate from LIBOR to SOFR, resulting in the fixed base rate changing from 2.739% to 2.691%.
The combined fair values of the Company’s interest rate swaps are reflected within the condensed consolidated balance sheets as follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets: | |||||||||||
| Current portion: | |||||||||||
| Prepaid and other current assets | $ | 31,767 | $ | 25,794 | |||||||
| Noncurrent portion: | |||||||||||
| Other noncurrent assets | 64,042 | 40,289 | |||||||||
| Total interest rate swap asset | $ | 95,809 | $ | 66,083 | |||||||
| Stockholders’ Equity: | |||||||||||
| Accumulated other comprehensive income | $ | 72,561 | $ | 50,221 | |||||||
The combined effect of the Company’s interest rate swaps on the condensed consolidated statements of operations and comprehensive income was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Interest (income) expense | $ | (7,971) | $ | 1,463 | $ | (20,784) | $ | 14,873 | |||||||||||||||
| Unrealized gain (loss) on cash flow hedges, gross | $ | 24,463 | $ | 62,517 | $ | 95,809 | $ | 181,588 | |||||||||||||||
| Less: Tax effect | (5,893) | (15,269) | (23,248) | (44,327) | |||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges, net of tax | $ | 18,570 | $ | 47,248 | $ | 72,561 | $ | 137,261 | |||||||||||||||
The Company does not hold any derivative instruments for speculative trading purposes.
19
9. FAIR VALUE MEASUREMENTS
Financial Assets and Liabilities. The Company has estimated the fair values of its financial instruments as of September 30, 2023 using available market information or other appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the following fair value estimates are not necessarily indicative of the amounts the Company would realize in an actual market exchange.
The carrying amounts, fair values and related fair value hierarchy levels of the Company’s financial assets and liabilities as of September 30, 2023 were as follows (in thousands):
| September 30, 2023 | |||||||||||||||||
Carrying Amount | Fair Value | Fair Value Hierarchy | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Money market investments | $ | 168,581 | $ | 168,581 | Level 1 | ||||||||||||
| Other noncurrent assets (including current portion): | |||||||||||||||||
| Interest rate swap asset | $ | 95,809 | $ | 95,809 | Level 2 | ||||||||||||
| Liabilities: | |||||||||||||||||
| Long-term debt (including current portion): | |||||||||||||||||
| Term loans | $ | 1,771,908 | $ | 1,758,619 | Level 2 | ||||||||||||
| Revolving Credit Facility | $ | 388,000 | $ | 382,180 | Level 2 | ||||||||||||
| Senior Notes | $ | 650,000 | $ | 493,155 | Level 2 | ||||||||||||
| Convertible Notes | $ | 920,000 | $ | 733,827 | Level 2 | ||||||||||||
| Other noncurrent liabilities: | |||||||||||||||||
| MBI Net Option | $ | 203,000 | $ | 203,000 | Level 3 | ||||||||||||
Money market investments are held primarily in U.S. Treasury securities and registered money market funds and are valued using a market approach based on quoted market prices (level 1). Money market investments with original maturities of three months or less are included within cash and cash equivalents in the condensed consolidated balance sheets. Interest rate swaps are measured at fair value within the condensed consolidated balance sheets on a recurring basis, with fair value determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (level 2). The fair value of the term loans, Revolving Credit Facility, Senior Notes and Convertible Notes are estimated based on market prices for similar instruments in active markets (level 2). The fair value of the MBI Net Option is measured using Monte Carlo simulations that use inputs considered unobservable and significant to the fair value measurement (level 3).
The assumptions used to determine the fair value of the MBI Net Option consisted of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Cable One | MBI | Cable One | MBI | ||||||||||||||||||||
| Equity volatility | 39.0 | % | 33.0 | % | 34.0 | % | 31.0 | % | |||||||||||||||
| EBITDA volatility | 10.0 | % | 10.0 | % | 10.0 | % | 10.0 | % | |||||||||||||||
| EBITDA risk-adjusted discount rate | 8.0 | % | 9.0 | % | 7.5 | % | 8.5 | % | |||||||||||||||
| Cost of debt | 9.5 | % | 7.5 | % | |||||||||||||||||||
The Company regularly evaluates each of the assumptions used in establishing the fair value of the MBI Net Option. Significant changes in any of these assumptions could result in a significantly lower or higher fair value measurement. A change in one of these assumptions is not necessarily accompanied by a change in another assumption. Refer to note 4 for further information on the MBI Net Option.
The carrying amounts of accounts receivable, accounts payable and other financial assets and liabilities approximate fair value because of the short-term nature of these instruments.
20
Nonfinancial Assets and Liabilities. The Company’s nonfinancial assets, such as property, plant and equipment, intangible assets and goodwill, are not measured at fair value on a recurring basis. Assets acquired, including identifiable intangible assets and goodwill, and liabilities assumed in acquisitions are recorded at fair value on the respective acquisition dates, subject to potential future measurement period adjustments. Nonfinancial assets are subject to fair value adjustments when there is evidence that impairment may exist. No material impairments were recorded during the nine months ended September 30, 2023 or 2022.
10. STOCKHOLDERS’ EQUITY
Treasury Stock. Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the condensed consolidated financial statements. Treasury shares of 558,478 held at September 30, 2023 include shares repurchased under the Company’s share repurchase programs and shares withheld for withholding tax, as described below.
Share Repurchase Program. On May 20, 2022, the Company's board of directors (the "Board") authorized up to $450.0 million of share repurchases (with no cap as to the number of shares of common stock) (the "Share Repurchase Program"). The Company had $143.1 million of remaining share repurchase authorization under the Share Repurchase Program as of September 30, 2023. Additional purchases under the Share Repurchase Program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since the Company first became publicly traded in 2015 through September 30, 2023, the Company has repurchased 646,244 shares of its common stock at an aggregate cost of $556.9 million, including 141,551 shares purchased at an aggregate cost of $99.6 million during the nine months ended September 30, 2023.
Tax Withholding for Equity Awards. At the employee’s option, shares of common stock are withheld by the Company upon the vesting of restricted stock and exercise of stock appreciation rights (“SARs”) to cover the applicable statutory minimum amount of employee withholding taxes, which the Company then pays to the taxing authorities in cash. The amounts remitted during the nine months ended September 30, 2023 and 2022 were $2.4 million and $4.8 million, for which the Company withheld 3,437 and 2,790 shares of common stock, respectively.
11. EQUITY-BASED COMPENSATION
Our stockholders approved the Cable One, Inc. 2022 Omnibus Incentive Compensation Plan (the “2022 Plan”) at the annual meeting of stockholders held May 20, 2022. The 2022 Plan provides for grants of incentive stock options, non-qualified stock options, restricted stock awards, SARs, restricted stock units (“RSUs”), performance restricted stock units ("PRSUs"), cash-based awards, performance-based awards, dividend equivalent units (“DEUs” and, together with restricted stock awards, RSUs and PRSUs, “Restricted Stock”) and other stock-based awards, including deferred stock units and superseded and replaced the Amended and Restated Cable One, Inc. 2015 Omnibus Incentive Compensation Plan. Directors, officers, employees and consultants of the Company are eligible for grants under the 2022 Plan as part of the Company’s long-term incentive compensation programs. At September 30, 2023, 418,613 shares were available for issuance under the 2022 Plan.
Compensation expense associated with equity-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the award, with forfeitures recognized as incurred. The Company’s equity-based compensation expense, included within selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income, was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Restricted Stock | $ | 9,830 | $ | 5,250 | $ | 20,637 | $ | 15,072 | |||||||||||||||
| SARs | 405 | 610 | 1,182 | 1,944 | |||||||||||||||||||
| Total | $ | 10,235 | $ | 5,860 | $ | 21,819 | $ | 17,016 | |||||||||||||||
21
The Company recognized excess tax shortfalls of $0.2 million and excess tax benefits of $0.1 million during the three months ended September 30, 2023 and 2022, respectively, and excess tax shortfalls of $1.8 million and excess tax benefits of $0.7 million during the nine months ended September 30, 2023 and 2022, respectively. The deferred tax asset related to all outstanding equity-based awards was $6.7 million and $6.6 million as of September 30, 2023 and December 31, 2022, respectively.
Restricted Stock. A summary of Restricted Stock activity during the nine months ended September 30, 2023 is as follows:
Restricted Stock | Weighted Average Grant Date Fair Value Per Share | ||||||||||
| Outstanding as of December 31, 2022 | 42,467 | $ | 1,611.99 | ||||||||
| Granted | 69,136 | $ | 743.67 | ||||||||
Forfeited(1) | (7,159) | $ | 1,670.38 | ||||||||
| Vested and issued | (13,128) | $ | 1,492.43 | ||||||||
| Outstanding as of September 30, 2023 | 91,316 | $ | 967.19 | ||||||||
| Vested and deferred as of September 30, 2023 | 6,161 | $ | 903.66 | ||||||||
(1)Includes 4,093 shares forfeited upon the final achievement determination for certain performance-based restricted stock awards.
At September 30, 2023, there was $45.6 million of unrecognized compensation expense related to Restricted Stock, which is expected to be recognized over a weighted average period of 1.7 years.
The significant inputs and resulting weighted average grant date fair value for market-based award grants were as follows:
| 2023 | ||||||||
| Risk-free interest rate | 4.1 | % | ||||||
| Expected volatility | 39.1 | % | ||||||
| Simulation term | 2.99 years | |||||||
| Weighted average grant date fair value | $ | 774.30 | ||||||
Stock Appreciation Rights. A summary of SARs activity during the nine months ended September 30, 2023 is as follows:
Stock Appreciation Rights | Weighted Average Exercise Price | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value (in thousands) | Weighted Average Remaining Contractual Term (in years) | |||||||||||||||||||||||||
| Outstanding as of December 31, 2022 | 41,115 | $ | 1,072.88 | $ | 262.99 | $ | 591 | 6.1 | |||||||||||||||||||||
| Exercised | (374) | $ | 707.17 | $ | 169.54 | $ | 5 | — | |||||||||||||||||||||
| Forfeited | (375) | $ | 1,274.05 | $ | 280.58 | ||||||||||||||||||||||||
| Expired | (4,875) | $ | 936.78 | $ | 219.98 | ||||||||||||||||||||||||
| Outstanding as of September 30, 2023 | 35,491 | $ | 1,093.30 | $ | 269.69 | $ | — | 5.3 | |||||||||||||||||||||
| Exercisable as of September 30, 2023 | 29,491 | $ | 952.93 | $ | 230.80 | $ | — | 4.9 | |||||||||||||||||||||
At September 30, 2023, there was $1.7 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 0.7 years.
22
12. INCOME TAXES
The Company’s effective tax rate was 30.2% and 23.7% for the three months ended September 30, 2023 and 2022, respectively, and 25.1% and 21.6% for the nine months ended September 30, 2023 and 2022, respectively.
The increase in the effective tax rate for the three months ended September 30, 2023 compared to the prior year period was due primarily to an increase of $5.8 million in income tax expense related to a change in the valuation allowance associated with the MBI Net Option, partially offset by a decrease of $2.3 million in income tax expense related to equity method investment net losses.
The increase in the effective tax rate for the nine months ended September 30, 2023 compared to the prior year period was due primarily to an increase of $25.9 million in income tax expense related to a change in the valuation allowance associated with the MBI Net Option, partially offset by a decrease of $9.9 million in income tax expense related to equity method investment net losses.
13. OTHER INCOME AND EXPENSE
Other income (expense) consisted of the following (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| MBI Net Option fair value adjustment | $ | (23,910) | $ | (2,800) | $ | (38,650) | $ | 88,100 | |||||||||||||||
| Write-off of debt issuance costs | — | — | (3,340) | — | |||||||||||||||||||
| Interest and investment income | 4,836 | 3,358 | 13,258 | 9,843 | |||||||||||||||||||
| Gain (loss) on sale of equity investments, net | (1,558) | — | (1,558) | — | |||||||||||||||||||
Mark-to-market adjustments and other(1) | 96 | 276 | 12,936 | (983) | |||||||||||||||||||
| Other income (expense), net | $ | (20,536) | $ | 834 | $ | (17,354) | $ | 96,960 | |||||||||||||||
(1)Amount for the nine months ended September 30, 2023 includes a $12.3 million non-cash mark-to-market gain on the Company's investment in Point Broadband as a result of an observable market transaction in Point Broadband’s equity.
23
14. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The denominator used in calculating diluted net income per common share further includes any common shares available to be issued upon vesting or exercise of outstanding equity-based compensation awards if such inclusion would be dilutive, calculated using the treasury stock method, and any common shares to be issued upon conversion of the Convertible Notes, calculated using the if-converted method.
The computation of basic and diluted net income per common share was as follows (dollars in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income - basic | $ | 39,472 | $ | 70,607 | $ | 152,142 | $ | 311,328 | |||||||||||||||
| Add: Convertible Notes interest expense, net of tax | 1,561 | 1,561 | 4,655 | 4,655 | |||||||||||||||||||
| Net income - diluted | $ | 41,033 | $ | 72,168 | $ | 156,797 | $ | 315,983 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares outstanding - basic | 5,611,278 | 5,836,731 | 5,663,198 | 5,933,372 | |||||||||||||||||||
Effect of dilutive equity-based compensation awards(1) | 10,759 | 20,278 | 7,452 | 20,335 | |||||||||||||||||||
Effect of dilution from if-converted Convertible Notes(2) | 404,248 | 404,248 | 404,248 | 404,248 | |||||||||||||||||||
| Weighted average common shares outstanding - diluted | 6,026,285 | 6,261,257 | 6,074,898 | 6,357,955 | |||||||||||||||||||
| Net Income per Common Share: | |||||||||||||||||||||||
| Basic | $ | 7.03 | $ | 12.10 | $ | 26.87 | $ | 52.47 | |||||||||||||||
| Diluted | $ | 6.81 | $ | 11.53 | $ | 25.81 | $ | 49.70 | |||||||||||||||
| Supplemental Net Income per Common Share Disclosure: | |||||||||||||||||||||||
Anti-dilutive shares from equity-based compensation awards(1) | 25,861 | 13,068 | 25,861 | 13,068 | |||||||||||||||||||
(1)Equity-based compensation awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per common share calculation.
(2)Based on a conversion rate of 0.4394 shares of common stock per weighted $1,000 principal amount of Convertible Notes outstanding during all periods presented.
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15. COMMITMENTS AND CONTINGENCIES
Contractual Obligations. The Company has obligations to make future payments for goods and services under certain contractual arrangements. These contractual obligations secure the future rights to various goods and services to be used in the normal course of the Company’s operations. In accordance with applicable accounting rules, the future rights and obligations pertaining to firm commitments, such as certain purchase obligations under contracts, are not reflected as assets or liabilities in the condensed consolidated balance sheets.
As of September 30, 2023, with the exception of debt payments (refer to note 7 for the updated future maturities of outstanding borrowings table), there have been no material changes to the contractual obligations previously disclosed in the 2022 Form 10-K.
In addition, the Company incurs recurring utility pole rental costs and fees imposed by various governmental authorities, including franchise fees, as part of its operations. However, these costs are not included in the Company’s contractual obligations as they are cancellable on short notice, in the case of pole rental costs, or are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities, in the case of fees imposed by governmental authorities. The Company also has franchise agreements requiring plant construction and the provision of services to customers within the franchise areas. In connection with these obligations under existing franchise agreements, the Company obtains surety bonds or letters of credit guaranteeing performance to municipalities and public utilities and payment of insurance premiums. Payments under these arrangements are required only in the remote event of nonperformance.
Litigation and Legal Matters. The Company is subject to complaints and administrative proceedings and has been a defendant in various civil lawsuits that have arisen in the ordinary course of its business. Such matters include contract disputes; actions alleging negligence, invasion of privacy, trademark, copyright and patent infringement, and violations of applicable wage and hour laws; statutory or common law claims involving current and former employees; and other matters. Although the outcomes of any legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, the Company believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its business, financial condition, results of operations or cash flows.
Regulation in the Company’s Industry. The Company’s operations are extensively regulated by the Federal Communications Commission (the "FCC"), some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease-and-desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. Future legislative and regulatory changes could adversely affect the Company’s operations.
Equity Investments. The Company has certain obligations with respect to certain of its equity investments. Refer to note 4 for further information.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2022 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our 2022 Form 10-K. Our results of operations and financial condition discussed herein may not be indicative of our future results and trends.
Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all totals, percentages and year-over-year changes are calculated using exact numbers. Minor differences may exist due to rounding.
Overview
We are a leading broadband communications provider committed to connecting customers and communities to what matters most. We strive to deliver an effortless experience by offering solutions that make our customers’ lives easier, and by relating to them personally as our neighbors and local business partners. Powered by our fiber-rich infrastructure, the Cable One family of brands provides residential customers with a wide array of connectivity and entertainment services, including Gigabit speeds, advanced Wi-Fi and video. For businesses ranging from small and mid-market up to enterprise, wholesale and carrier, we offer scalable, cost-effective solutions that enable businesses of all sizes to grow, compete and succeed. We believe the services we provide are critical to the development of new businesses and drive economic growth in the non-metropolitan, secondary and tertiary markets that we serve in 24 Western, Midwestern and Southern states. As of September 30, 2023, approximately 74% of our customers were located in seven states: Arizona, Idaho, Mississippi, Missouri, Oklahoma, South Carolina and Texas. We provided service to approximately 1.1 million residential and business customers out of approximately 2.8 million homes passed as of September 30, 2023. Of these customers, approximately 1,057,000 subscribed to data services, 149,000 subscribed to video services and 122,000 subscribed to voice services.
We generate substantially all of our revenues through three primary product lines. Ranked by share of our total revenues through the first nine months of 2023, they are residential data (58.2%), business services (data, voice and video provided to businesses: 18.1%) and residential video (15.7%). The profit margins, growth rates and/or capital intensity of these three primary product lines vary significantly due to competition, product maturity and relative costs.
We focus on growing our higher margin businesses, namely residential data and business services, rather than on growing revenues through maximizing customer primary service units (“PSUs”) across all of our service offerings. Our strategy acknowledges the industry-wide trends of declining profitability of residential video services and declining revenues from residential voice services. The declining profitability of residential video services is due primarily to increasing programming costs and retransmission fees and competition from other streaming content providers, and the declining revenues from residential voice services are due primarily to the increasing use of wireless voice services instead of residential voice services. Separately, we have also historically focused on retaining customers who are likely to produce higher relative value over the life of their service relationships with us, are less attracted by discounting, require less support and churn less. This strategy has focused on increasing Adjusted EBITDA, driving higher margins and delivering attractive levels of Adjusted EBITDA less capital expenditures.
Excluding the effects of our recently completed and any potential future acquisitions and divestitures, the trends described above have impacted, and are expected to further impact, our three primary product lines in the following ways:
•Residential data. We have experienced significant growth in residential data customers and revenues since 2013. We expect growth for this product line to continue over the long-term as we believe upgrades made in our broadband capacity, our ability to offer higher access speeds than many of our competitors, the reliability and flexibility of our data service offerings and our Wi-Fi support service will enable us to continue to grow average monthly revenue per unit ("ARPU") from our existing customers over the long-term and capture additional market share from both data subscribers who use other providers as well as households in our footprint that do not yet subscribe to data services from any provider. Our broadband plant generally consists of a fiber-to-the-premises or hybrid fiber-coaxial network with ample unused capacity, and we offer our data customers internet products at faster speeds than those available from competitors in most of our markets. We believe that the capacity and reliability of our networks exceeds that of our competitors in most of our markets and best positions us to meet the continuously increasing consumption demands of customers. We experienced elevated growth rates in residential data customers and revenues during the first two years of the COVID-19 pandemic, but have seen more subdued growth in recent quarters due in part to macroeconomic headwinds and continued competition in certain areas of our footprint.
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•Business services. We have experienced significant growth in business data customers and revenues since 2013. We attribute this growth to our strategic focus on increasing sales to business customers and our efforts to attract enterprise business customers. We expect to experience continued growth in business data customers and revenues over the long-term. Margins for products sold to business customers have remained attractive, which we expect will continue.
•Residential video. Residential video service is an increasingly costly and fragmented business, with programming costs and retransmission fees continuing to escalate in the face of a proliferation of streaming content alternatives. We intend to continue our strategy of focusing on the higher-margin businesses of residential data and business services while de-emphasizing our residential video business. As a result of our video strategy, we expect that residential video customers and revenues will decline further in the future. We now offer Sparklight® TV, an internet protocol-based ("IPTV") video service that allows customers with our Sparklight TV app to stream our video channels from the cloud. This transition from linear to IPTV video service enables us to reclaim bandwidth, freeing up network capacity to increase data speeds and capacity across our network.
We continue to experience increased competition, particularly from telephone companies; fiber, municipal and cooperative overbuilders; fixed wireless access data providers; over-the-top video providers; and direct broadcast satellite television providers. Because of the levels of competition we face, we believe it is important to make investments in our infrastructure. In addition, a key objective of our capital allocation process is to invest in initiatives designed to drive revenue and Adjusted EBITDA expansion. We continue to invest capital to, among other things, increase fiber density and coverage, expand our footprint, increase plant and data capacity, enhance network reliability and improve the customer experience. We offer Gigabit data service to nearly all of our homes passed and have deployed DOCSIS 3.1, which, together with Sparklight TV, further increases our network capacity and enables future growth in our residential data and business services product lines.
We expect to continue to devote financial resources to infrastructure improvements in existing and newly acquired markets as well as to expand high-speed data service in areas adjacent to our existing network. We believe these investments are necessary to continually meet our customers’ needs and to remain competitive. The capital enhancements associated with recent acquisitions include rebuilding low-capacity markets; reclaiming bandwidth from analog video services; implementing 32-channel bonding; deploying DOCSIS 4.0; consolidating back office functions such as billing, accounting and service provisioning; migrating products to legacy Cable One platforms; and expanding our high-capacity fiber network.
Our primary goals are to continue growing residential data and business services revenues, to increase profit margins and to deliver strong Adjusted EBITDA and Adjusted EBITDA less capital expenditures over the long-term. To achieve these goals, we intend to continue our disciplined cost management approach, remain focused on customers with expected higher relative value, supplement our growth by targeting a broader scope of incremental customers, including more value-conscious customers, combat competitive threats in our markets through more targeted pricing and product offerings and follow through with further planned investments in broadband plant upgrades, including the deployment of DOCSIS 4.0 capabilities and new data service offerings for residential and business customers. We also plan to continue seeking broadband-related acquisition and strategic investment opportunities in rural markets in addition to pursuing organic growth through market expansion projects. Given our strategic focus on our higher margin residential data and business services product lines, we assess our level of capital expenditures relative to Adjusted EBITDA, unlike others in our industry who may compare their capital expenditures to revenues due to their much larger residential video customer bases.
In recent years, in addition to full acquisitions, we have made investments in several broadband-centric providers serving non-urban markets that follow various strategies similar to our own. Such strategic investments capitalize on opportunities that may not have existed under a full ownership model, allow us to participate more aggressively in the fiber expansion business and may potentially provide future acquisition or investment opportunities, while allowing our management team to focus on our core business and without burdening our cash flow.
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Results of Operations
Key Performance Measures Summary
The following table summarizes certain key measures of our results of operations (dollars in thousands):
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Revenues | $ | 420,348 | $ | 424,718 | $ | (4,370) | (1.0) | % | |||||||||||||||
| Total costs and expenses | $ | 287,818 | $ | 296,679 | $ | (8,861) | (3.0) | % | |||||||||||||||
| Income from operations | $ | 132,530 | $ | 128,039 | $ | 4,491 | 3.5 | % | |||||||||||||||
| Net income | $ | 39,472 | $ | 70,607 | $ | (31,135) | (44.1) | % | |||||||||||||||
| Cash flows from operating activities | $ | 180,152 | $ | 216,708 | $ | (36,556) | (16.9) | % | |||||||||||||||
| Cash flows from investing activities | $ | (12,932) | $ | (100,335) | $ | 87,403 | (87.1) | % | |||||||||||||||
| Cash flows from financing activities | $ | (88,322) | $ | (140,632) | $ | 52,310 | (37.2) | % | |||||||||||||||
Adjusted EBITDA(1) | $ | 230,000 | $ | 224,620 | $ | 5,380 | 2.4 | % | |||||||||||||||
| Capital expenditures | $ | 77,815 | $ | 100,515 | $ | (22,700) | (22.6) | % | |||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Revenues | $ | 1,266,266 | $ | 1,280,528 | $ | (14,262) | (1.1) | % | |||||||||||||||
| Total costs and expenses | $ | 866,592 | $ | 880,216 | $ | (13,624) | (1.5) | % | |||||||||||||||
| Income from operations | $ | 399,674 | $ | 400,312 | $ | (638) | (0.2) | % | |||||||||||||||
| Net income | $ | 152,142 | $ | 311,328 | $ | (159,186) | (51.1) | % | |||||||||||||||
| Cash flows from operating activities | $ | 511,501 | $ | 569,793 | $ | (58,292) | (10.2) | % | |||||||||||||||
| Cash flows from investing activities | $ | (212,462) | $ | (315,506) | $ | 103,044 | (32.7) | % | |||||||||||||||
| Cash flows from financing activities | $ | (274,557) | $ | (387,370) | $ | 112,813 | (29.1) | % | |||||||||||||||
Adjusted EBITDA(1) | $ | 690,068 | $ | 678,636 | $ | 11,432 | 1.7 | % | |||||||||||||||
| Capital expenditures | $ | 255,428 | $ | 307,252 | $ | (51,824) | (16.9) | % | |||||||||||||||
(1)Adjusted EBITDA is a non-GAAP measure. See "Use of Adjusted EBITDA" below for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.
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PSU and Customer Counts
Selected subscriber data for the periods presented was as follows (in thousands, except percentages):
| As of September 30, | Annual Net Gain (Loss) | ||||||||||||||||||||||
| 2023 | 2022 | Change | % Change | ||||||||||||||||||||
| Residential data PSUs | 958.8 | 965.4 | (6.6) | (0.7) | % | ||||||||||||||||||
| Residential video PSUs | 140.5 | 190.3 | (49.9) | (26.2) | % | ||||||||||||||||||
| Residential voice PSUs | 81.7 | 95.0 | (13.3) | (14.0) | % | ||||||||||||||||||
| Total residential PSUs | 1,181.0 | 1,250.7 | (69.8) | (5.6) | % | ||||||||||||||||||
| Business data PSUs | 98.6 | 96.4 | 2.2 | 2.3 | % | ||||||||||||||||||
| Business video PSUs | 8.4 | 11.8 | (3.3) | (28.2) | % | ||||||||||||||||||
| Business voice PSUs | 40.0 | 41.0 | (1.1) | (2.6) | % | ||||||||||||||||||
| Total business services PSUs | 147.0 | 149.2 | (2.2) | (1.5) | % | ||||||||||||||||||
| Total data PSUs | 1,057.4 | 1,061.8 | (4.4) | (0.4) | % | ||||||||||||||||||
| Total video PSUs | 148.9 | 202.1 | (53.2) | (26.3) | % | ||||||||||||||||||
| Total voice PSUs | 121.6 | 136.0 | (14.4) | (10.6) | % | ||||||||||||||||||
| Total PSUs | 1,327.9 | 1,399.9 | (72.0) | (5.1) | % | ||||||||||||||||||
| Residential customer relationships | 994.6 | 1,020.0 | (25.4) | (2.5) | % | ||||||||||||||||||
| Business customer relationships | 102.7 | 102.1 | 0.6 | 0.6 | % | ||||||||||||||||||
| Total customer relationships | 1,097.3 | 1,122.1 | (24.8) | (2.2) | % | ||||||||||||||||||
| Homes passed | 2,754.4 | 2,693.7 | 60.7 | 2.3 | % | ||||||||||||||||||
In recent years, our customer mix has shifted away from double- and triple-play packages combining data, video and/or voice services, which is in line with our strategy of focusing on our higher margin residential data and business services product lines. This is largely because some residential video customers have defected to direct broadcast satellite services and over-the-top offerings and households continue to discontinue residential voice services. In addition, we have focused on selling data-only packages to new customers rather than cross-selling video to these customers.
Use of Nonfinancial Metrics and ARPU
We use various nonfinancial metrics to measure, manage and monitor our operating performance on an ongoing basis. Such metrics include homes passed, PSUs and customer relationships. Homes passed represents the number of serviceable and marketable homes and businesses passed by our active plant. A PSU represents a single subscription to a particular service offering. Residential bulk multi-dwelling PSUs are generally classified as residential and are counted at the individual unit level. Business voice customers who have multiple voice lines are counted as a single PSU. A customer relationship represents a single customer who subscribes to one or more PSUs.
We believe homes passed, PSU and customer relationship counts are useful to investors in evaluating our operating performance. Similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measures of homes passed, PSUs and customer relationships may not be directly comparable to similarly titled measures reported by other companies.
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We use ARPU to evaluate and monitor the amount of revenue generated by each type of service subscribed to by customers and the contribution to total revenues as well as to analyze and compare growth patterns. Residential ARPU values represent the applicable residential service revenues (excluding installation and activation fees) divided by the corresponding average of the number of PSUs at the beginning and end of each period, divided by the number of months in the period, except that for any PSUs added or subtracted as a result of an acquisition or divestiture occurring during the period, the associated ARPU values represent the applicable residential service revenues (excluding installation and activation fees) divided by the pro-rated average number of PSUs during such period. Business services ARPU values represent business services revenues divided by the average of the number of business customer relationships at the beginning and end of each period, divided by the number of months in the period, except that for any business customer relationships added or subtracted as a result of an acquisition or divestiture occurring during the period, the associated ARPU values represent business services revenues divided by the pro-rated average number of business customer relationships during such period.
We believe ARPU is useful to investors in evaluating our operating performance. ARPU and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of ARPU may not be directly comparable to similarly titled measures reported by other companies.
Comparison of Three Months Ended September 30, 2023 to Three Months Ended September 30, 2022
Revenues
Revenues decreased $4.4 million, or 1.0%, due primarily to decreases in residential video and residential voice revenues, partially offset by an increase in residential data and other revenues.
Revenues by service offering for the three months ended September 30, 2023 and 2022, together with the percentages of total revenues that each item represented for the periods presented, were as follows (dollars in thousands):
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 vs. 2022 | |||||||||||||||||||||||||||||||||
| Revenues | % of Total | Revenues | % of Total | $ Change | % Change | ||||||||||||||||||||||||||||||
| Residential data | $ | 247,420 | 58.9 | % | $ | 233,834 | 55.1 | % | $ | 13,586 | 5.8 | % | |||||||||||||||||||||||
| Residential video | 62,295 | 14.8 | % | 80,525 | 19.0 | % | (18,230) | (22.6) | % | ||||||||||||||||||||||||||
| Residential voice | 9,080 | 2.2 | % | 10,494 | 2.5 | % | (1,414) | (13.5) | % | ||||||||||||||||||||||||||
| Business services | 75,575 | 18.0 | % | 75,847 | 17.9 | % | (272) | (0.4) | % | ||||||||||||||||||||||||||
| Other | 25,978 | 6.2 | % | 24,018 | 5.7 | % | 1,960 | 8.2 | % | ||||||||||||||||||||||||||
| Total revenues | $ | 420,348 | 100.0 | % | $ | 424,718 | 100.0 | % | $ | (4,370) | (1.0) | % | |||||||||||||||||||||||
Residential data service revenues increased $13.6 million, or 5.8%, due primarily to increased customer subscriptions to premium tiers, migration of existing customers to higher tiers and a rate adjustment implemented during the second quarter of 2023.
Residential video service revenues decreased $18.2 million, or 22.6%, due primarily to a decrease in residential video subscribers.
Residential voice service revenues decreased $1.4 million, or 13.5%, due primarily to a decrease in residential voice subscribers.
Business services revenues decreased $0.3 million, or 0.4%, due primarily to a decrease in business video subscribers largely offset by an increase in business data subscribers.
Other revenues increased by $2.0 million, or 8.2%, due primarily to an increase in regulatory revenues.
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ARPU for the indicated service offerings for the three months ended September 30, 2023 and 2022 were as follows:
Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $109.7 million for the three months ended September 30, 2023 and decreased $10.8 million, or 9.0%, compared to the three months ended September 30, 2022. The decrease in operating expenses was primarily attributable to $14.8 million of lower programming and franchise expenses as a result of video customer losses, partially offset by higher rent expense of $1.3 million and property taxes of $1.2 million. Operating expenses as a percentage of revenues were 26.1% and 28.4% for the three months ended September 30, 2023 and 2022, respectively.
Selling, general and administrative expenses were $92.7 million for the three months ended September 30, 2023 and increased $6.7 million, or 7.8%, compared to the three months ended September 30, 2022. The increase in selling, general and administrative expenses was primarily attributable to higher labor and other compensation-related costs of $4.1 million and marketing costs of $4.1 million, partially offset by lower property taxes of $1.7 million. Selling, general and administrative expenses as a percentage of revenues were 22.1% and 20.3% for the three months ended September 30, 2023 and 2022, respectively.
Depreciation and amortization expense was $82.9 million for the three months ended September 30, 2023 and decreased $4.3 million, or 4.9%, compared to the three months ended September 30, 2022. The decrease in depreciation and amortization expense was primarily due to lower intangible asset amortization expense of $2.6 million, driven by the use of accelerated amortization methods for certain customer relationship intangible assets, and lower depreciation expense of 1.7 million. Depreciation and amortization expense as a percentage of revenues was 19.7% and 20.5% for the three months ended September 30, 2023 and 2022, respectively.
Interest Expense
Interest expense was $43.4 million for the three months ended September 30, 2023 and increased $7.0 million, or 19.2%, compared to the three months ended September 30, 2022. The increase was driven primarily by higher interest rates.
Other Income (Expense), Net
Other expense, net, was $20.5 million for the three months ended September 30, 2023 and consisted primarily of a $23.9 million non-cash loss on fair value adjustment associated with the MBI Net Option and a $1.6 million loss on the sale of equity investments, partially offset by $4.8 million of interest and investment income. Other income, net, was $0.8 million for the three months ended September 30, 2022 and consisted primarily of interest and investment income, partially offset by a $2.8 million non-cash loss on fair value adjustment associated with the MBI Net Option.
Income Tax Provision
Income tax provision was $20.7 million and $21.9 million for the three months ended September 30, 2023 and 2022, respectively, and our effective tax rate was 30.2% and 23.7% for the three months ended September 30, 2023 and 2022, respectively. The increase in the effective tax rate was due primarily to an increase of $5.8 million in income tax expense related to a change in the valuation allowance associated with the MBI Net Option, partially offset by a decrease of $2.3 million in income tax expense related to equity method investment net losses.
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Equity Method Investment Income (Loss), Net
Equity method investment loss, net, was $8.4 million for the three months ended September 30, 2023 and consisted primarily of our $8.1 million and $0.4 million pro rata share of net losses from our Clearwave Fiber and MBI investments, respectively. Equity method investment income, net, was minimal for the three months ended September 30, 2022 and consisted of our $3.2 million and $0.3 million pro rata share of earnings from our MBI and Wisper investments, respectively, offset by our $3.6 million pro rata share of the net loss from our Clearwave Fiber investment.
Net Income
Net income was $39.5 million for the three months ended September 30, 2023 compared to $70.6 million for the three months ended September 30, 2022.
Unrealized Gain (Loss) on Cash Flow Hedges and Other, Net of Tax
Unrealized gain on cash flow hedges and other, net of tax was $18.6 million for the three months ended September 30, 2023 compared to a $47.3 million unrealized gain for the three months ended September 30, 2022. The $28.7 million decrease was due to smaller increases in forward interest rates for the three months ended September 30, 2023 compared to the prior year period.
Comparison of Nine Months Ended September 30, 2023 to Nine Months Ended September 30, 2022
Revenues
Revenues decreased $14.3 million, or 1.1%, due primarily to decreases in residential video and residential voice revenues, partially offset by an increase in residential data and other revenues.
Revenues by service offering for the nine months ended September 30, 2023 and 2022, together with the percentages of total revenues that each item represented for the periods presented, were as follows (dollars in thousands):
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 vs. 2022 | |||||||||||||||||||||||||||||||||
| Revenues | % of Total | Revenues | % of Total | $ Change | % Change | ||||||||||||||||||||||||||||||
| Residential data | $ | 736,957 | 58.2 | % | $ | 697,317 | 54.5 | % | $ | 39,640 | 5.7 | % | |||||||||||||||||||||||
| Residential video | 198,719 | 15.7 | % | 249,944 | 19.5 | % | (51,225) | (20.5) | % | ||||||||||||||||||||||||||
| Residential voice | 28,334 | 2.2 | % | 33,105 | 2.6 | % | (4,771) | (14.4) | % | ||||||||||||||||||||||||||
| Business services | 228,648 | 18.1 | % | 228,999 | 17.9 | % | (351) | (0.2) | % | ||||||||||||||||||||||||||
| Other | 73,608 | 5.8 | % | 71,163 | 5.6 | % | 2,445 | 3.4 | % | ||||||||||||||||||||||||||
| Total revenues | $ | 1,266,266 | 100.0 | % | $ | 1,280,528 | 100.0 | % | $ | (14,262) | (1.1) | % | |||||||||||||||||||||||
Residential data service revenues increased $39.6 million, or 5.7%, due primarily to increased customer subscriptions to premium tiers, migration of existing customers to higher tiers and a rate adjustment implemented during the second quarter of 2023.
Residential video service revenues decreased $51.2 million, or 20.5%, due primarily to a decrease in residential video subscribers.
Residential voice service revenues decreased $4.8 million, or 14.4%, due primarily to a decrease in residential voice subscribers.
Business services revenues decreased $0.4 million, or 0.2%, due primarily to the divestiture of certain operations that generated $3.5 million of business service revenues during the nine months ended September 30, 2022 and a decrease in business video subscribers, largely offset by an increase in business data subscribers.
Other revenues increased by $2.4 million, or 3.4%, due primarily to an increase in regulatory revenues.
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ARPU for the indicated service offerings for the nine months ended September 30, 2023 and 2022 were as follows:
| Nine Months Ended September 30, | 2023 vs. 2022 | ||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Residential data | $ | 84.92 | $ | 80.62 | $ | 4.30 | 5.3 | % | |||||||||||||||
| Residential video | $ | 141.50 | $ | 127.40 | $ | 14.10 | 11.1 | % | |||||||||||||||
| Residential voice | $ | 36.34 | $ | 36.80 | $ | (0.46) | (1.2) | % | |||||||||||||||
| Business services | $ | 248.77 | $ | 251.61 | $ | (2.84) | (1.1) | % | |||||||||||||||
Costs and Expenses
Operating expenses (excluding depreciation and amortization) were $334.7 million for the nine months ended September 30, 2023 and decreased $23.6 million, or 6.6%, compared to the nine months ended September 30, 2022. The decrease in operating expenses was primarily attributable to $41.0 million of lower programming and franchise expenses as a result of video customer losses, partially offset by increases of $7.8 million in property taxes, $2.7 million in rent expense, $2.4 million in health insurance costs, $1.7 million in labor and other compensation-related costs, $1.7 million in maintenance costs and $1.5 million in software costs. Operating expenses as a percentage of revenues were 26.4% and 28.0% for the nine months ended September 30, 2023 and 2022, respectively.
Selling, general and administrative expenses were $265.6 million for the nine months ended September 30, 2023 and increased $1.1 million, or 0.4%, compared to the nine months ended September 30, 2022. The increase in selling, general, and administrative expenses was primarily attributable to increases of $5.0 million in labor and other compensation-related costs, $4.6 million in marketing costs and $3.2 million in software costs, partially offset by decreases of $5.3 million in property taxes, $4.3 million in health insurance costs and $2.2 million in professional services costs. Selling, general and administrative expenses as a percentage of revenues were 21.0% and 20.7% for the nine months ended September 30, 2023 and 2022, respectively.
Depreciation and amortization expense was $255.6 million for the nine months ended September 30, 2023 and decreased $8.0 million, or 3.0%, compared to the nine months ended September 30, 2022. The decrease in depreciation and amortization expense was primarily due to lower intangible asset amortization expense of $7.9 million driven by the use of accelerated amortization methods for certain customer relationship intangible assets. Depreciation and amortization expense as a percentage of revenues was 20.2% and 20.6% for the nine months ended September 30, 2023 and 2022, respectively.
We recognized a $22.1 million non-cash gain associated with the Clearwave Fiber Contribution and $8.3 million in non-cash losses associated with the dispositions of our Tallahassee, Florida system and certain other non-core assets during the nine months ended September 30, 2022.
Interest Expense
Interest expense was $127.8 million for the nine months ended September 30, 2023 and increased $29.2 million, or 29.6%, compared to the nine months ended September 30, 2022. The increase was driven primarily by higher interest rates.
Other Income (Expense), Net
Other expense, net, was $17.4 million for the nine months ended September 30, 2023 and consisted primarily of a $38.7 million non-cash loss on fair value adjustment associated with the MBI Net Option, a $3.4 million loss on the sale of the Tristar equity investment and $3.3 million of debt issuance costs written off in connection with the entry into the New Credit Agreement, partially offset by $13.3 million of interest and investment income, a $12.3 million non-cash mark-to-market gain on the investment in Point Broadband and a $1.8 million gain on the redemption of the Wisper equity investment. Other income, net, was $97.0 million for the nine months ended September 30, 2022 and consisted primarily of an $88.1 million non-cash gain on fair value adjustment associated with the MBI Net Option and $9.8 million of interest and investment income.
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Income Tax Provision
Income tax provision was $63.9 million and $86.2 million for the nine months ended September 30, 2023 and 2022, respectively, and our effective tax rate was 25.1% and 21.6% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the effective tax rate was due primarily to an increase of $25.9 million in income tax expense related to a change in the valuation allowance associated with the MBI Net Option, partially offset by a decrease of $9.9 million in income tax expense related to equity method investment net losses.
Equity Method Investment Income (Loss), Net
Equity method investment loss, net, was $38.5 million for the nine months ended September 30, 2023 and consisted of our $35.3 million and $3.6 million pro rata share of net losses from our Clearwave Fiber and MBI investments, respectively, partially offset by our $0.5 million pro rata share of earnings from our Wisper investment. Equity method investment loss, net, was $1.2 million for the nine months ended September 30, 2022 and consisted of our $14.5 million pro rata share of the net loss from our Clearwave Fiber investment partially offset by our $11.3 million and $1.9 million pro rata share of earnings from our MBI and Wisper investments, respectively.
Net Income
Net income was $152.1 million for the nine months ended September 30, 2023 compared to $311.3 million for the nine months ended September 30, 2022.
Unrealized Gain (Loss) on Cash Flow Hedges and Other, Net of Tax
Unrealized gain on cash flow hedges and other, net of tax was $22.3 million and $137.3 million for the nine months ended September 30, 2023 and 2022, respectively. The $115.0 million decrease was due to smaller increases in forward interest rates during the nine months ended September 30, 2023 compared to the prior year period.
Use of Adjusted EBITDA
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income reported in accordance with GAAP. Adjusted EBITDA is reconciled to net income below, the most directly comparable GAAP financial measure.
Adjusted EBITDA is defined as net income plus interest expense, income tax provision, depreciation and amortization, equity-based compensation, severance and contract termination costs, (gain) loss on deferred compensation, acquisition-related costs, (gain) loss on asset sales and disposals, system conversion costs, (gain) loss on sales of businesses, equity method investment (income) loss, other (income) expense and other unusual items, as provided in the reconciliation tables below. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our business as well as other non-cash or special items and is unaffected by our capital structure or investment activities. This measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of debt financing. These costs are evaluated through other financial measures.
We use Adjusted EBITDA to assess our performance. In addition, Adjusted EBITDA generally correlates to the measure used in the leverage ratio calculations under the New Credit Agreement and the Senior Notes Indenture to determine compliance with the covenants contained in the New Credit Agreement and the ability to take certain actions under the Senior Notes Indenture. Adjusted EBITDA is also a significant performance measure used by us in connection with our incentive compensation programs. Adjusted EBITDA does not take into account cash used for mandatory debt service requirements or other non-discretionary expenditures, and thus does not represent residual funds available for discretionary uses.
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| Three Months Ended September 30, | 2023 vs. 2022 | ||||||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | $ Change | % Change | |||||||||||||||||||
| Net income | $ | 39,472 | $ | 70,607 | $ | (31,135) | (44.1) | % | |||||||||||||||
| Plus: Interest expense | 43,384 | 36,389 | 6,995 | 19.2 | % | ||||||||||||||||||
| Income tax provision | 20,694 | 21,891 | (1,197) | (5.5) | % | ||||||||||||||||||
| Depreciation and amortization | 82,918 | 87,222 | (4,304) | (4.9) | % | ||||||||||||||||||
| Equity-based compensation | 10,235 | 5,860 | 4,375 | 74.7 | % | ||||||||||||||||||
| Severance and contract termination costs | 1,217 | — | 1,217 | NM | |||||||||||||||||||
| (Gain) loss on deferred compensation | — | (45) | 45 | (100.0) | % | ||||||||||||||||||
| Acquisition-related costs | 409 | 281 | 128 | 45.6 | % | ||||||||||||||||||
| (Gain) loss on asset sales and disposals, net | 2,492 | 2,952 | (460) | (15.6) | % | ||||||||||||||||||
| System conversion costs | 199 | 311 | (112) | (36.0) | % | ||||||||||||||||||
| Equity method investment (income) loss, net | 8,444 | (14) | 8,458 | NM | |||||||||||||||||||
| Other (income) expense, net | 20,536 | (834) | 21,370 | NM | |||||||||||||||||||
| Adjusted EBITDA | $ | 230,000 | $ | 224,620 | $ | 5,380 | 2.4 | % | |||||||||||||||
NM = Not meaningful.
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||||
| Net income | $ | 152,142 | $ | 311,328 | $ | (159,186) | (51.1) | % | ||||||||||||||||||
| Plus: Interest expense | 127,766 | 98,549 | 29,217 | 29.6 | % | |||||||||||||||||||||
| Income tax provision | 63,939 | 86,165 | (22,226) | (25.8) | % | |||||||||||||||||||||
| Depreciation and amortization | 255,586 | 263,564 | (7,978) | (3.0) | % | |||||||||||||||||||||
| Equity-based compensation | 21,819 | 17,016 | 4,803 | 28.2 | % | |||||||||||||||||||||
| Severance and contract termination costs | 1,217 | — | 1,217 | NM | ||||||||||||||||||||||
| (Gain) loss on deferred compensation | — | (205) | 205 | (100.0) | % | |||||||||||||||||||||
| Acquisition-related costs | 859 | 2,784 | (1,925) | (69.1) | % | |||||||||||||||||||||
| (Gain) loss on asset sales and disposals, net | 10,714 | 7,615 | 3,099 | 40.7 | % | |||||||||||||||||||||
| System conversion costs | 199 | 1,383 | (1,184) | (85.6) | % | |||||||||||||||||||||
| (Gain) loss on sales of businesses, net | — | (13,833) | 13,833 | (100.0) | % | |||||||||||||||||||||
| Equity method investment (income) loss, net | 38,473 | 1,230 | 37,243 | NM | ||||||||||||||||||||||
| Other (income) expense, net | 17,354 | (96,960) | 114,314 | (117.9) | % | |||||||||||||||||||||
| Adjusted EBITDA | $ | 690,068 | $ | 678,636 | $ | 11,432 | 1.7 | % | ||||||||||||||||||
NM = Not meaningful.
We believe that Adjusted EBITDA is useful to investors in evaluating our operating performance. Adjusted EBITDA and similar measures with similar titles are common measures used by investors, analysts and peers to compare performance in our industry, although our measure of Adjusted EBITDA may not be directly comparable to similarly titled measures reported by other companies.
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Financial Condition: Liquidity and Capital Resources
Liquidity
Our primary funding requirements are for our ongoing operations, capital expenditures, potential acquisitions and strategic investments, payments of quarterly dividends and share repurchases. We believe that existing cash balances, our Senior Credit Facilities and operating cash flows will provide adequate support for these funding requirements over the next 12 months. However, our ability to fund operations, make capital expenditures, make future acquisitions and strategic investments, pay quarterly dividends and make share repurchases depends on future operating performance and cash flows, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
As part of our 45% minority equity interest in MBI, we acquired the right, but not the obligation, to purchase all but not less than all of the remaining equity interests in MBI that we do not already own between January 1, 2023 and June 30, 2024 (the "Call Option"). If we do not exercise the Call Option, then investors affiliated with GTCR LLC, a private equity firm based in Chicago, have the right, but not the obligation, to sell (and to cause all members of MBI other than us to sell) to us and, in such case, we are obligated to purchase all but not less than all of the direct and indirect equity interests in MBI that we do not already own between July 1, 2025 through September 30, 2025 (the "Put Option"). The purchase price payable upon the exercise of the Call Option or the Put Option, as applicable, will be calculated under a formula based on a multiple of MBI’s adjusted EBITDA. We have not yet obtained the capital that we believe will be necessary to pay the purchase price if either the Call Option or the Put Option are exercised.
The following table shows a summary of our net cash flows for the periods indicated (dollars in thousands):
| Nine Months Ended September 30, | 2023 vs. 2022 | ||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 511,501 | $ | 569,793 | $ | (58,292) | (10.2) | % | |||||||||||||||
| Net cash used in investing activities | (212,462) | (315,506) | 103,044 | (32.7) | % | ||||||||||||||||||
| Net cash used in financing activities | (274,557) | (387,370) | 112,813 | (29.1) | % | ||||||||||||||||||
| Change in cash and cash equivalents | $ | 24,482 | $ | (133,083) | $ | 157,565 | (118.4) | % | |||||||||||||||
| Cash and cash equivalents, beginning of period | 215,150 | 388,802 | (173,652) | (44.7) | % | ||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 239,632 | $ | 255,719 | $ | (16,087) | (6.3) | % | |||||||||||||||
NM = Not meaningful.
The $58.3 million year-over-year decrease in net cash provided by operating activities was primarily attributable to higher tax and interest payments and the timing of working capital changes, partially offset by an increase in Adjusted EBITDA.
The $103.0 million decrease in net cash used in investing activities from the prior year period was due primarily to the combined proceeds of $56.7 million from the sale of the Wisper and Tristar equity investments during 2023, a $48.5 million decrease in cash paid for capital expenditures and a $9.6 million decrease in cash paid for debt and equity investments compared to the prior year period, partially offset by $9.2 million of proceeds from the sales of operations during 2022 that did not recur.
The $112.8 million decrease in net cash used in financing activities from the prior year period was due primarily to $629.9 million of net proceeds from Revolving Credit Facility borrowings and the TLB-3 Upsize during 2023 and a $207.4 million decrease in share repurchases compared to the prior year period, partially offset by the repayment of the $638.3 million aggregate principal amount of our outstanding Term Loan A-2 and the repayment of $50.0 million of Revolving Credit Facility borrowings during each of the second and third quarters of 2023.
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On May 20, 2022, our Board authorized up to $450.0 million of share repurchases (with no cap as to the number of shares of common stock). We had $143.1 million of remaining share repurchase authorization under the Share Repurchase Program as of September 30, 2023. Additional purchases under the Share Repurchase Program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions. Since we first became publicly traded in 2015 through September 30, 2023, we have repurchased 646,244 shares of our common stock at an aggregate cost of $556.9 million, including 141,551 shares purchased at an aggregate cost of $99.6 million during the nine months ended September 30, 2023. We may, from time to time, continue to opportunistically repurchase shares depending on the trading price of our common stock, market conditions and other factors.
We currently expect to continue to pay comparable quarterly cash dividends on shares of our common stock, subject to approval of the Board. During the third quarter of 2023, the Board approved a quarterly dividend of $2.95 per share of common stock, which was paid on September 15, 2023, resulting in a total dividend distribution of $16.7 million.
Financing Activity
Senior Credit Facilities
Prior to February 22, 2023, the Credit Agreement provided for the Term Loan A-2, the Term Loan B-2, the Term Loan B-3, the Term Loan B-4 and the Revolving Credit Facility. The Revolving Credit Facility gives us the ability to issue letters of credit, which reduce the amount available for borrowing under the Revolving Credit Facility.
On February 22, 2023, we amended and restated the Credit Agreement to, among other things, (i) increase the aggregate principal amount of commitments under the Revolving Credit Facility by $500.0 million to $1.0 billion; (ii) extend the scheduled maturity of the Revolving Credit Facility from October 2025 to February 2028; (iii) upsize the outstanding principal amount under the Term Loan B-3 by $150.0 million to $757.0 million; (iv) extend the scheduled maturities of the Term Loan B-2 and the Term Loan B-3 from October 2027 to October 2029 (subject to adjustment as described in the notes to the table below summarizing our outstanding term loans as of September 30, 2023); (v) increase the fixed spreads on the Term Loan B-2 and the Term Loan B-3 from 2.00% to 2.25%; and (vi) transition the benchmark interest rate for the Revolving Credit Facility, the Term Loan B-2 and the Term Loan B-3 from LIBOR to SOFR plus a 10 basis point credit spread adjustment. Except as described above, the New Credit Agreement did not make any material changes to the principal terms of the Term Loan B-2, the Term Loan B-3, the Term Loan B-4 or the Revolving Credit Facility. Upon the effectiveness of the New Credit Agreement, we drew $488.0 million under the Revolving Credit Facility and, together with the net proceeds from the TLB-3 Upsize, repaid all $638.3 million aggregate principal amount of our outstanding Term Loan A-2. In July 2023, we transitioned the benchmark interest rate for the Term Loan B-4 from LIBOR to SOFR plus a credit spread adjustment that ranges from approximately 11.4 basis points to 42.8 basis points based on the interest period elected.
We repaid $50.0 million of the outstanding Revolving Credit Facility borrowings during each of the second and third quarters of 2023, collectively reducing the outstanding balance to $388.0 million as of September 30, 2023. In October 2023, we repaid an additional $50.0 million of the outstanding Revolving Credit Facility borrowings, further reducing the outstanding balance to $338.0 million.
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As of September 30, 2023, we had approximately $1.8 billion of aggregate outstanding term loans and $388.0 million of borrowings and $612.0 million available for borrowing under the Revolving Credit Facility. A summary of our outstanding term loans as of September 30, 2023 is as follows (dollars in thousands):
| Instrument | Draw Date(s) | Original Principal | Amortization Per Annum(1) | Outstanding Principal | Final Scheduled Maturity Date | Final Scheduled Principal Payment | Benchmark Rate | Fixed Margin | Interest Rate | |||||||||||||||||||||||||||||||||||||||||||||||
| Term Loan B-2 | 1/7/2019 | $ | 250,000 | 1.0% | $ | 238,750 | 10/30/2029(2) | $ | 223,750 | SOFR + 10 bps | 2.25% | 7.67% | ||||||||||||||||||||||||||||||||||||||||||||
| Term Loan B-3 | 6/14/2019 10/30/2020 2/22/2023 | 325,000 300,000 150,000 | 1.0% | 751,158 | 10/30/2029(2) | 704,695 | SOFR + 10 bps | 2.25% | 7.67% | |||||||||||||||||||||||||||||||||||||||||||||||
| Term Loan B-4 | 5/3/2021 | 800,000 | 1.0% | 782,000 | 5/3/2028 | 746,000 | SOFR + 11.4 bps | 2.00% | 7.43% | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,825,000 | $ | 1,771,908 | $ | 1,674,445 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Payable in equal quarterly installments (expressed as a percentage of the original principal amount and subject to customary adjustments in the event of any prepayment). All loans may be prepaid at any time without penalty or premium (subject to customary SOFR breakage provisions).
(2)The final maturity date of the Term Loan B-2 and the Term Loan B-3, in each case, will adjust to May 3, 2028 if greater than $150.0 million aggregate principal amount of the Term Loan B-4 (together with any refinancing indebtedness in respect of the Term Loan B-4 with a final maturity date prior to the date that is 91 days after October 30, 2029) remains outstanding on May 3, 2028.
Senior Notes
In November 2020, we completed the offering of $650.0 million aggregate principal amount of Senior Notes due 2030. The Senior Notes bear interest at a rate of 4.00% per annum payable semi-annually in arrears on May 15th and November 15th of each year. The Senior Notes are required to be guaranteed on a senior unsecured basis by each of our existing and future wholly owned domestic subsidiaries that guarantees our obligations under our Senior Credit Facilities or that guarantees certain capital markets debt of ours or a guarantor in an aggregate principal amount in excess of $250.0 million.
Convertible Notes
In March 2021, we completed the Convertible Notes offering of $575.0 million aggregate principal amount of 2026 Notes and $345.0 million aggregate principal amount of 2028 Notes. The Convertible Notes are senior unsecured obligations of ours and are guaranteed by our wholly owned domestic subsidiaries that guarantee the Senior Credit Facilities or that guarantee certain of our Notes in an aggregate principal amount in excess of $250.0 million. The 2026 Notes do not bear regular interest, and the principal amount of the 2026 Notes do not accrete. The 2028 Notes bear interest at a rate of 1.125% per annum. Interest on the 2028 Notes is payable semiannually in arrears on March 15th and September 15th of each year, unless earlier repurchased, converted or redeemed. The 2026 Notes are scheduled to mature on March 15, 2026, and the 2028 Notes are scheduled to mature on March 15, 2028. The initial conversion rate for each of the 2026 Notes and the 2028 Notes is 0.4394 shares of our common stock per $1,000 principal amount of 2026 Notes and 2028 Notes, as applicable (equivalent to an initial conversion price of $2,275.83 per share of common stock). The initial conversion price of each of the 2026 Notes and the 2028 Notes represents a premium of 25.0% over the last reported sale price of $1,820.83 per share of our common stock on March 2, 2021. The Convertible Notes are convertible at the option of the holders. The method of conversion into cash, shares of our common stock or a combination thereof is at our election.
Other Debt-Related Information
Unamortized debt issuance costs consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Revolving Credit Facility portion: | |||||||||||
| Other noncurrent assets | $ | 3,275 | $ | 1,904 | |||||||
| Term loans and Notes portion: | |||||||||||
| Long-term debt (contra account) | 23,477 | 23,913 | |||||||||
| Total | $ | 26,752 | $ | 25,817 | |||||||
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We recorded debt issuance cost amortization of $1.1 million and $1.3 million for the three months ended September 30, 2023 and 2022, respectively, and $3.6 million and $4.0 million for the nine months ended September 30, 2023 and 2022, respectively, within interest expense in the condensed consolidated statements of operations and comprehensive income. During 2023, we capitalized $7.8 million and wrote-off $3.3 million of debt issuance costs.
The unamortized debt discount associated with the Convertible Notes was $13.1 million and $16.3 million as of September 30, 2023 and December 31, 2022, respectively. We recorded debt discount amortization of $1.1 million for both the three months ended September 30, 2023 and 2022, and $3.2 million for both the nine months ended September 30, 2023 and 2022, within interest expense in the condensed consolidated statements of operations and comprehensive income.
On May 3, 2022, we entered into a letter of credit agreement with MUFG which provides for an additional $75.0 million of letter of credit issuing capacity, of which $11.9 million was utilized as of September 30, 2023.
We were in compliance with all debt covenants as of September 30, 2023.
We are party to two interest rate swap agreements to convert our interest payment obligations with respect to an aggregate of $1.2 billion of our variable rate SOFR indebtedness to a fixed rate. Under the first swap agreement, with respect to a notional amount of $850.0 million, our monthly payment obligation is determined at a fixed base rate of 2.595%. Under the second swap agreement, with respect to a notional amount of $350.0 million, our monthly payment obligation is determined at a fixed base rate of 2.691%. Both interest rate swap agreements are scheduled to mature in the first quarter of 2029 but each may be terminated prior to the scheduled maturity at our election or that of the financial institution counterparty under the terms provided in each swap agreement. We recognized income of $8.0 million and expense of $1.5 million on interest rate swaps during the three months ended September 30, 2023 and 2022, respectively, and income of $20.8 million and expense of $14.9 million on interest rate swaps during the nine months ended September 30, 2023 and 2022, respectively, which were reflected within interest expense in the condensed consolidated statements of operations and comprehensive income.
Refer to notes 10 and 12 to our audited consolidated financial statements included in the 2022 Form 10-K and notes 7 and 8 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our financing activity, outstanding debt and interest rate swaps.
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Capital Expenditures
We have significant ongoing capital expenditure requirements as well as capital enhancements associated with acquired operations, including rebuilding low capacity markets; reclaiming bandwidth from analog video services; implementing 32-channel bonding; deploying DOCSIS 4.0; consolidating back office functions such as billing, accounting and service provisioning; migrating products to legacy Cable One platforms; and expanding our high-capacity fiber network. Capital expenditures are funded primarily by cash on hand and cash flows from operating activities.
Our capital expenditures by category for the nine months ended September 30, 2023 and 2022 were as follows (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
Customer premise equipment(1) | $ | 45,021 | $ | 77,182 | |||||||
Commercial(2) | 27,712 | 24,954 | |||||||||
Scalable infrastructure(3) | 27,656 | 46,057 | |||||||||
Line extensions(4) | 33,523 | 33,570 | |||||||||
Upgrade/rebuild(5) | 47,377 | 62,609 | |||||||||
Support capital(6) | 74,139 | 62,880 | |||||||||
| Total | $ | 255,428 | $ | 307,252 | |||||||
(1)Customer premise equipment includes costs incurred at customer locations, including installation costs and customer premise equipment (e.g., modems and set-top boxes).
(2)Commercial includes costs related to securing business services customers and PSUs, including small and medium-sized businesses and enterprise customers.
(3)Scalable infrastructure includes costs not related to customer premise equipment to secure growth of new customers and PSUs or provide service enhancements (e.g., headend equipment).
(4)Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
(5)Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.
(6)Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles) and capitalized internal labor costs not associated with customer installation activities.
Contractual Obligations and Contingent Commitments
As of September 30, 2023, with the exception of debt payments (refer to note 7 of the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for the updated future maturities of outstanding borrowings table), there have been no material changes to the contractual obligations and contingent commitments previously disclosed in the 2022 Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or financing arrangements with special-purpose entities.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
An accounting policy is considered to be critical if it is important to our results of operations and financial condition and if it requires management’s most difficult, subjective and complex judgments in its application.
There have been no material changes to our critical accounting policy and estimate disclosures described in our 2022 Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from changes in market rates and prices. There have been no material changes to the market risk disclosures described in the 2022 Form 10-K other than as set forth below.
As of September 30, 2023, we had $650.0 million, $575.0 million and $345.0 million aggregate principal amount of the Senior Notes, 2026 Notes and 2028 Notes, respectively, outstanding. Although the Senior Notes and 2028 Notes are based on fixed rates and the 2026 Notes do not bear interest, changes in interest rates could impact the fair market value of such notes. As of September 30, 2023, the fair market values of the Senior Notes, 2026 Notes and 2028 Notes were $493.2 million, $472.9 million and $260.9 million, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management is responsible for establishing and maintaining adequate disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation as of September 30, 2023 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on the Company’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in the 2022 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Certain information relating to common stock repurchases by the Company and any affiliated purchasers within the meaning of Rule 10b-18(a)(3) under the Exchange Act during the three months ended September 30, 2023 were as follows (dollars in thousands, except per share data):
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
July 1 to 31, 2023(2) | 19,760 | $ | 675.03 | 19,625 | $ | 146,188 | ||||||||||||||||||||
| August 1 to 31, 2023 | 4,250 | $ | 725.69 | 4,250 | $ | 143,104 | ||||||||||||||||||||
| September 1 to 30, 2023 | — | $ | — | — | $ | 143,104 | ||||||||||||||||||||
| Total | 24,010 | $ | 684.00 | 23,875 | ||||||||||||||||||||||
(1)On May 20, 2022, the Company's Board authorized up to $450.0 million of share repurchases (with no cap as to the number of shares of common stock), which was announced on May 23, 2022 (the "Share Repurchase Program"). The authorization does not have an expiration date. The Company had $143.1 million of remaining share repurchase authorization under the Share Repurchase Program as of September 30, 2023. Additional purchases under the Share Repurchase Program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including share price and business and market conditions.
(2)Includes shares withheld from associates to satisfy estimated tax withholding obligations in connection with the vesting of restricted stock and/or exercises of SARs under the Company's incentive compensation plans. The average price paid per share for the common stock withheld was based on the closing price of the Company’s common stock on the applicable vesting or exercise measurement date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any "non-Rule 10b5-1 trading arrangement" (as defined in Item 408(c) of Regulation S-K).
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ITEM 6. EXHIBITS
Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |||||||
| 104 | The cover page of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included within the Exhibit 101 attachments). | |||||||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Cable One, Inc. (Registrant) | |||||||||||
| By: | /s/ Julia M. Laulis | ||||||||||
| Name: | Julia M. Laulis | ||||||||||
| Title: | Chair of the Board, President and Chief Executive Officer | ||||||||||
Date: November 2, 2023
| By: | /s/ Todd M. Koetje | ||||||||||
| Name: | Todd M. Koetje | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
Date: November 2, 2023
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