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 March 31, 2023, Cable One provided services to more than 1.1 million residential and business customers, of which approximately 1,063,000 subscribed to data services, 167,000 subscribed to video services and 128,000 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.
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 the first quarter of 2023. The Company will also apply the updated guidance when it transitions its one remaining LIBOR-based debt instrument to SOFR by June 30, 2023. The adoption of ASU 2020-04 did not, and will 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
March 31, | | |
| 2023 | | 2022 | | | | |
| Residential: | | | | | | | |
| Data | $ | 242,697 | | | $ | 230,153 | | | | | |
| Video | 70,286 | | | 84,658 | | | | | |
| Voice | 9,748 | | | 11,896 | | | | | |
| Business services | 76,260 | | | 76,498 | | | | | |
| Other | 22,903 | | | 23,521 | | | | | |
| Total revenues | $ | 421,894 | | | $ | 426,726 | | | | | |
| | | | | | | |
| Franchise and other regulatory fees | $ | 7,101 | | | $ | 8,094 | | | | | |
| Deferred commission amortization | $ | 1,303 | | | $ | 1,253 | | | | | |
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 March 31, 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, $21.1 million was recognized during the three months ended March 31, 2023. Noncurrent deferred revenue liabilities consist of up-front charges and installation fees from business customers.
3. OPERATING ASSETS AND LIABILITIES
Accounts receivable consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Trade receivables | $ | 40,489 | | | $ | 48,958 | |
| Income taxes receivable | — | | | 1,668 | |
Other receivables(1) | 9,385 | | | 26,948 | |
| Less: Allowance for credit losses | (3,725) | | | (3,191) | |
| Total accounts receivable, net | $ | 46,149 | | | $ | 74,383 | |
(1)Balance includes amounts due from Clearwave Fiber for services provided under a transition services agreement of $3.9 million and $15.6 million as of March 31, 2023 and December 31, 2022, respectively.
The changes in the allowance for credit losses were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Beginning balance | $ | 3,191 | | | $ | 2,541 | | | | | |
| Additions - charged to costs and expenses | 2,491 | | | 1,718 | | | | | |
| Deductions - write-offs | (3,451) | | | (3,261) | | | | | |
| Recoveries collected | 1,494 | | | 1,582 | | | | | |
| Ending balance | $ | 3,725 | | | $ | 2,580 | | | | | |
Prepaid and other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Prepaid repairs and maintenance | $ | 12,605 | | | $ | 4,059 | |
| Software implementation costs | 1,401 | | | 1,349 | |
| Prepaid insurance | 2,080 | | | 3,506 | |
| Prepaid rent | 3,196 | | | 2,125 | |
| Prepaid software | 7,240 | | | 8,897 | |
| Deferred commissions | 4,666 | | | 4,596 | |
| Interest rate swap asset | 23,707 | | | 25,794 | |
| Prepaid income tax payments | 12,891 | | | — | |
| All other current assets | 13,519 | | | 6,846 | |
| Total prepaid and other current assets | $ | 81,305 | | | $ | 57,172 | |
Other noncurrent assets consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Operating lease right-of-use assets | $ | 11,266 | | | $ | 11,325 | |
| Deferred commissions | 9,026 | | | 8,916 | |
| Software implementation costs | 6,135 | | | 6,472 | |
| Debt issuance costs | 3,545 | | | 1,904 | |
| Debt investment | 2,133 | | | 2,102 | |
| Assets held for sale | 889 | | | 914 | |
| Interest rate swap asset | 19,023 | | | 40,289 | |
| All other noncurrent assets | 3,889 | | | 2,755 | |
| Total other noncurrent assets | $ | 55,906 | | | $ | 74,677 | |
Accounts payable and accrued liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Accounts payable | $ | 34,052 | | | $ | 39,554 | |
| Accrued programming costs | 20,111 | | | 20,456 | |
| Accrued compensation and related benefits | 19,047 | | | 26,515 | |
| Accrued sales and other operating taxes | 10,739 | | | 14,541 | |
| Accrued franchise fees | 2,730 | | | 3,902 | |
| Deposits | 6,200 | | | 6,236 | |
| Operating lease liabilities | 4,010 | | | 3,924 | |
| Accrued insurance costs | 6,217 | | | 5,525 | |
| Cash overdrafts | 15,151 | | | 9,445 | |
| Interest payable | 10,651 | | | 5,801 | |
| Income taxes payable | — | | | 13,006 | |
| All other accrued liabilities | 16,947 | | | 15,613 | |
| Total accounts payable and accrued liabilities | $ | 145,855 | | | $ | 164,518 | |
Other noncurrent liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Operating lease liabilities | $ | 6,618 | | | $ | 6,733 | |
| Accrued compensation and related benefits | 8,956 | | | 8,973 | |
| Deferred revenue | 7,725 | | | 8,070 | |
MBI Net Option (as defined in note 4)(1) | 172,330 | | | 164,350 | |
| All other noncurrent liabilities | 3,174 | | | 4,224 | |
| Total other noncurrent liabilities | $ | 198,803 | | | $ | 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 $7.2 million and $165.1 million, respectively, as of March 31, 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).
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. 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 and expects to fund the remaining $27.8 million during 2023.
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. As Tristar Acquisition I Corp, a special-purpose acquisition company ("Tristar") is publicly traded, the carrying value of the Company's Tristar investment is remeasured to fair value on a quarterly basis using market information.
The carrying value of the Company's equity investments consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Ownership Percentage | | March 31,
2023 | | December 31,
2022 |
| Cost Method Investments | | | | | |
| MetroNet | <10% | | $ | 7,000 | | | $ | 7,000 | |
Nextlink(1) | <20% | | 77,245 | | | 77,245 | |
| Point Broadband | <10% | | 42,623 | | | 30,373 | |
| Tristar | <10% | | 23,995 | | | 23,413 | |
| Visionary | <10% | | 7,190 | | | 7,190 | |
| Ziply | <10% | | 22,222 | | | 22,222 | |
| Others | <10% | | 13,301 | | | 13,624 | |
| Total cost method investments | | | $ | 193,576 | | | $ | 181,067 | |
| | | | | |
| Equity Method Investments | | | | | |
| Clearwave Fiber | ~58% | | $ | 395,284 | | | $ | 409,514 | |
MBI(2) | 45.0% | | 568,672 | | | 571,075 | |
Wisper(3) | 40.4% | | 33,685 | | | 33,565 | |
| Total equity method investments | | | $ | 997,641 | | | $ | 1,014,154 | |
| | | | | |
| Total equity investments | | | $ | 1,191,217 | | | $ | 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 $172.3 million and $164.4 million as of March 31, 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.
(3)Wisper ISP, LLC, a wireless internet service provider ("Wisper").
The carrying value of MBI exceeded the Company’s underlying equity in MBI’s net assets by approximately $496.4 million and $497.8 million as of March 31, 2023 and December 31, 2022, respectively.
Equity method investment income (losses), which increase (decrease) the carrying value of the respective investment, and which are recorded on a one quarter lag, and the change in fair value of the Company's Point Broadband investment and MBI Net Option were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Equity Method Investment Income (Loss) | | | | | | | |
| Clearwave Fiber | $ | (14,231) | | | $ | — | | | | | |
MBI(1) | (2,403) | | | 2,781 | | | | | |
| Wisper | 120 | | | 999 | | | | | |
| Total | $ | (16,514) | | | $ | 3,780 | | | | | |
| | | | | | | |
| Other Income (Expense), Net | | | | | | | |
Mark-to-market adjustments(2) | $ | 12,833 | | | $ | 125 | | | | | |
| MBI Net Option change in fair value | $ | (7,980) | | | $ | 84,610 | | | | | |
(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 March 31, 2023, the Company recognized $0.8 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 three months ended March 31, 2022, the Company recognized $6.7 million of its pro rata share of MBI’s net income and $4.0 million of its pro rata share of basis difference amortization.
(2)Amount includes a $12.3 million non-cash mark-to-market gain on its investment in Point Broadband in 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.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Cable distribution systems | $ | 2,519,620 | | | $ | 2,454,452 | |
| Customer premise equipment | 345,942 | | | 339,132 | |
| Other equipment and fixtures | 446,490 | | | 450,301 | |
| Buildings and improvements | 138,562 | | | 138,467 | |
| Capitalized software | 66,167 | | | 58,740 | |
| Construction in progress | 228,061 | | | 230,644 | |
| Land | 12,541 | | | 12,541 | |
| Right-of-use assets | 9,197 | | | 11,323 | |
| Property, plant and equipment, gross | 3,766,580 | | | 3,695,600 | |
| Less: Accumulated depreciation and amortization | (2,041,920) | | | (1,993,845) | |
| Property, plant and equipment, net | $ | 1,724,660 | | | $ | 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 March 31, 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 $67.3 million and $67.1 million for the three months ended March 31, 2023 and 2022, respectively.
6. GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill was $928.9 million as of both March 31, 2023 and December 31, 2022. The Company has not historically recorded any impairment of goodwill.
Intangible assets consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 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 | | | $ | 243,037 | | | $ | 541,344 | | | $ | 784,381 | | | $ | 225,445 | | | $ | 558,936 | |
| Trademarks and trade names | 2.7 – 4.2 | | 11,846 | | | 7,201 | | | 4,645 | | | 11,846 | | | 6,675 | | | 5,171 | |
| Wireless licenses | 10 – 15 | | 1,418 | | | 322 | | | 1,096 | | | 1,418 | | | 286 | | | 1,132 | |
| Total finite-lived intangible assets | | | $ | 797,645 | | | $ | 250,560 | | | $ | 547,085 | | | $ | 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 | | | | | | | $ | 2,648,431 | | | | | | | $ | 2,666,585 | |
Intangible asset amortization expense was $18.2 million and $20.8 million for the three months ended March 31, 2023 and 2022, respectively.
The future amortization of existing finite-lived intangible assets as of March 31, 2023 was as follows (in thousands):
| | | | | | | | |
| Year Ending December 31, | | Amount |
| 2023 (remaining nine months) | | $ | 54,463 | |
| 2024 | | 65,828 | |
| 2025 | | 60,840 | |
| 2026 | | 55,326 | |
| 2027 | | 51,445 | |
| Thereafter | | 259,183 | |
| Total | | $ | 547,085 | |
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.
7. DEBT
The carrying amount of long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Senior Credit Facilities (as defined below) | $ | 2,269,030 | | | $ | 2,273,904 | |
| Senior Notes (as defined below) | 650,000 | | | 650,000 | |
| Convertible Notes (as defined below) | 920,000 | | | 920,000 | |
| Finance lease liabilities | 4,740 | | | 4,844 | |
| Total debt | 3,843,770 | | | 3,848,748 | |
| Less: Unamortized debt discount | (15,255) | | | (16,313) | |
| Less: Unamortized debt issuance costs | (25,346) | | | (23,913) | |
| Less: Current portion of long-term debt | (18,919) | | | (55,931) | |
| Total long-term debt | $ | 3,784,250 | | | $ | 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 March 31, 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.
Refer to the table below summarizing the Company’s outstanding term loans as of March 31, 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.
As of March 31, 2023, the Company had approximately $1.8 billion of aggregate outstanding term loans and $488.0 million of borrowings and $512.0 million available for borrowing under the Revolving Credit Facility. A summary of the Company’s outstanding term loans as of March 31, 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% | | $ | 240,000 | | | 10/30/2029(2) | | $ | 223,750 | | | SOFR + 10 bps | | 2.25% | | 7.16% |
| Term Loan B-3 | | 6/14/2019 10/30/2020 2/22/2023 | | 325,000 300,000 150,000 | | 1.0% | | 755,030 | | | 10/30/2029(2) | | 704,695 | | | SOFR + 10 bps | | 2.25% | | 7.16% |
| Term Loan B-4 | | 5/3/2021 | | 800,000 | | | 1.0% | | 786,000 | | | 5/3/2028 | | 746,000 | | | LIBOR | | 2.00% | | 6.84% |
| Total | | | | $ | 1,825,000 | | | | | $ | 1,781,030 | | | | | $ | 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 LIBOR 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).
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 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 | (8,870) | | | (6,386) | | | (15,256) | | | (9,610) | | | (6,703) | | | (16,313) | |
| Less: Unamortized debt issuance costs | (242) | | | (180) | | | (422) | | | (262) | | | (189) | | | (451) | |
| Net carrying amount | $ | 565,888 | | | $ | 338,434 | | | $ | 904,322 | | | $ | 565,128 | | | $ | 338,108 | | | $ | 903,236 | |
Interest expense on the Convertible Notes consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| 2026 Notes | | 2028 Notes | | Total | | 2026 Notes | | 2028 Notes | | Total | | | | | | | | | | | | |
| Contractual interest expense | $ | — | | | $ | 970 | | | $ | 970 | | | $ | — | | | $ | 970 | | | $ | 970 | | | | | | | | | | | | | |
| Amortization of discount | 740 | | | 318 | | | 1,058 | | | 740 | | | 318 | | | 1,058 | | | | | | | | | | | | | |
| Amortization of debt issuance costs | 20 | | | 9 | | | 29 | | | 20 | | | 9 | | | 29 | | | | | | | | | | | | | |
| Total interest expense | $ | 760 | | | $ | 1,297 | | | $ | 2,057 | | | $ | 760 | | | $ | 1,297 | | | $ | 2,057 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Effective interest rate | 0.5 | % | | 1.5 | % | | | | 0.5 | % | | 1.5 | % | | | | | | | | | | | | | | |
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):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Revolving Credit Facility portion: | | | |
| Other noncurrent assets | $ | 3,545 | | | $ | 1,904 | |
| Term loans and Notes portion: | | | |
| Long-term debt (contra account) | 25,346 | | | 23,913 | |
| Total | $ | 28,891 | | | $ | 25,817 | |
The Company recorded debt issuance cost amortization of $1.3 million for both the three months ended March 31, 2023 and 2022 within interest expense in the condensed consolidated statements of operations and comprehensive income. The Company capitalized $7.7 million and wrote-off $3.3 million of debt issuance costs during the three months ended March 31, 2023 in connection with the entry into the New Credit Agreement.
The future maturities of outstanding borrowings as of March 31, 2023 were as follows (in thousands):
| | | | | | | | |
| Year Ending December 31, | | Amount |
| 2023 (remaining nine months) | | $ | 13,683 | |
| 2024 | | 18,244 | |
| 2025 | | 18,244 | |
| 2026 | | 593,244 | |
| 2027 | | 18,244 | |
| Thereafter | | 3,177,371 | |
| Total | | $ | 3,839,030 | |
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 March 31, 2023, $10.3 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 March 31, 2023.
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):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Assets: | | | |
| Current portion: | | | |
| Prepaid and other current assets | $ | 23,707 | | | $ | 25,794 | |
| Noncurrent portion: | | | |
| Other noncurrent assets | $ | 19,023 | | | $ | 40,289 | |
| Total interest rate swap asset | $ | 42,730 | | | $ | 66,083 | |
| | | |
| Stockholders’ Equity: | | | |
| Accumulated other comprehensive income | $ | 32,279 | | | $ | 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
March 31, | | |
| 2023 | | 2022 | | | | |
| Interest (income) expense | $ | (5,644) | | | $ | 7,609 | | | | | |
| | | | | | | |
| Unrealized gain (loss) on cash flow hedges, gross | $ | (23,352) | | | $ | 75,831 | | | | | |
| Less: Tax effect | 5,410 | | | (18,461) | | | | | |
| Unrealized gain (loss) on cash flow hedges, net of tax | $ | (17,942) | | | $ | 57,370 | | | | | |
The Company does not hold any derivative instruments for speculative trading purposes.
9. FAIR VALUE MEASUREMENTS
Financial Assets and Liabilities. The Company has estimated the fair values of its financial instruments as of March 31, 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 March 31, 2023 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Carrying
Amount | | Fair
Value | | Fair Value
Hierarchy |
| Assets: | | | | | |
| Cash and cash equivalents: | | | | | |
| Money market investments | $ | 85,944 | | | $ | 85,944 | | | Level 1 |
| Commercial paper | $ | 40,073 | | | $ | 39,867 | | | Level 2 |
| Other noncurrent assets (including current portion): | | | | | |
| Interest rate swap asset | $ | 42,730 | | | $ | 42,730 | | | Level 2 |
| | | | | |
| Liabilities: | | | | | |
| Long-term debt (including current portion): | | | | | |
| Term loans | $ | 1,781,030 | | | $ | 1,753,395 | | | Level 2 |
| Revolving Credit Facility | $ | 488,000 | | | $ | 475,800 | | | Level 2 |
| Senior Notes | $ | 650,000 | | | $ | 529,750 | | | Level 2 |
| Convertible Notes | $ | 920,000 | | | $ | 716,818 | | | Level 2 |
| Other noncurrent liabilities: | | | | | |
| MBI Net Option | $ | 172,330 | | | $ | 172,330 | | | 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). Commercial paper is primarily held with high-quality companies and is valued using quoted market prices for investments similar to the commercial paper (level 2). Money market investments and commercial paper 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Cable One | | MBI | | Cable One | | MBI |
| Equity volatility | 35.0 | % | | 31.0 | % | | 34.0 | % | | 31.0 | % |
| EBITDA volatility | 10.0 | % | | 10.0 | % | | 10.0 | % | | 10.0 | % |
| EBITDA risk-adjusted discount rate | 7.5 | % | | 8.5 | % | | 7.5 | % | | 8.5 | % |
| Cost of debt | 7.8 | % | | | | 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.
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 three months ended March 31, 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 475,397 held at March 31, 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 $200.4 million of remaining share repurchase authorization under the Share Repurchase Program as of March 31, 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 March 31, 2023, the Company has repurchased 561,459 shares of its common stock at an aggregate cost of $499.6 million, including 56,766 shares purchased at an aggregate cost of $41.8 million during the three months ended March 31, 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 three months ended March 31, 2023 and 2022 were $2.2 million and $4.7 million, for which the Company withheld 3,132 and 2,681 shares of common stock, respectively.
11. EQUITY-BASED COMPENSATION
Our stockholders most recently 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 March 31, 2023, 415,502 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
March 31, | | |
| 2023 | | 2022 | | | | |
| Restricted Stock | $ | 5,210 | | | $ | 4,637 | | | | | |
| SARs | 375 | | | 568 | | | | | |
| Total | $ | 5,585 | | | $ | 5,205 | | | | | |
The Company recognized excess tax shortfalls of $1.2 million and excess tax benefits of $0.6 million during the three months ended March 31, 2023 and 2022, respectively. The deferred tax asset related to all outstanding equity-based awards was $5.8 million and $6.6 million as of March 31, 2023 and December 31, 2022, respectively.
Restricted Stock. A summary of Restricted Stock activity during the three months ended March 31, 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 | 65,857 | | $ | 696.08 | |
| Forfeited | (6,316) | | $ | 1,757.08 | |
| Vested and issued | (9,648) | | $ | 1,586.62 | |
| Outstanding as of March 31, 2023 | 92,360 | | $ | 951.63 | |
| | | |
| Vested and deferred as of March 31, 2023 | 6,726 | | $ | 866.52 | |
At March 31, 2023, there was $46.5 million of unrecognized compensation expense related to Restricted Stock, which is expected to be recognized over a weighted average period of 2.1 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 three months ended March 31, 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 |
| | | | | | | | | |
| | | | | | | | | |
| Forfeited | (375) | | $ | 1,274.05 | | | $ | 280.58 | | | | | |
| | | | | | | | | |
| Outstanding as of March 31, 2023 | 40,740 | | $ | 1,071.03 | | | $ | 262.83 | | | $ | 494 | | | 5.8 |
| | | | | | | | | |
| Exercisable as of March 31, 2023 | 32,990 | | $ | 908.39 | | | $ | 217.83 | | | $ | 494 | | | 5.4 |
At March 31, 2023, there was $2.5 million of unrecognized compensation expense related to SARs, which is expected to be recognized over a weighted average period of 1.0 year.
12. INCOME TAXES
The Company’s effective tax rate was 23.2% and 19.8% for the three months ended March 31, 2023 and 2022, respectively.
The increase in the effective tax rate for the three months ended March 31, 2023 compared to the prior year quarter was due primarily to a $18.5 million increase in income tax expense related to a change in the valuation allowance associated with the MBI Net Option, partially offset by a $4.9 million tax expense for the deferred tax liability establishment in the prior year quarter associated with the Clearwave Fiber Contribution that did not recur.
13. OTHER INCOME AND EXPENSE
Other income (expense) consisted of the following (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2023 | | 2022 | | | | |
| MBI Net Option fair value adjustment | $ | (7,980) | | | $ | 84,610 | | | | | |
| Write-off of debt issuance costs | (3,340) | | | — | | | | | |
| Interest and investment income | 3,941 | | | 3,443 | | | | | |
Mark-to-market adjustments and other(1) | 12,673 | | | 7 | | | | | |
| Other income (expense), net | $ | 5,294 | | | $ | 88,060 | | | | | |
(1)The three months ended March 31, 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.
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
March 31, | | |
| 2023 | | 2022 | | | | |
| Numerator: | | | | | | | |
| Net income - basic | $ | 57,426 | | | $ | 171,476 | | | | | |
| Add: Convertible Notes interest expense, net of tax | 1,543 | | | 1,543 | | | | | |
| Net income - diluted | $ | 58,969 | | | $ | 173,019 | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average common shares outstanding - basic | 5,718,745 | | 6,018,881 | | | | |
Effect of dilutive equity-based compensation awards(1) | 5,601 | | 21,834 | | | | |
Effect of dilution from if-converted Convertible Notes(2) | 404,248 | | 404,248 | | | | |
| Weighted average common shares outstanding - diluted | 6,128,594 | | 6,444,963 | | | | |
| | | | | | | |
| Net Income per Common Share: | | | | | | | |
| Basic | $ | 10.04 | | | $ | 28.49 | | | | | |
| Diluted | $ | 9.62 | | | $ | 26.85 | | | | | |
| | | | | | | |
| Supplemental Net Income per Common Share Disclosure: | | | | | | | |
Anti-dilutive shares from equity-based compensation awards(1) | 25,313 | | 16,319 | | | | |
(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.
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 March 31, 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.