Attached files
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2011
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from__________ to __________
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Commission File No.: 000-09881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA
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54-1162807
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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500 Shentel Way, Edinburg, Virginia 22824
(Address of principal executive offices) (Zip Code)
(540) 984-4141
(Registrant's telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares of the registrant’s common stock outstanding on October 21, 2011 was 23,786,193.
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
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September 30,
2011
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December 31, 2010
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||||||
Current Assets
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||||||||
Cash and cash equivalents
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$ | 21,862 | $ | 27,453 | ||||
Accounts receivable, net
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20,915 | 20,634 | ||||||
Income taxes receivable
|
6,470 | 2,576 | ||||||
Materials and supplies
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5,310 | 6,360 | ||||||
Prepaid expenses and other
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3,932 | 3,770 | ||||||
Assets held for sale
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6,967 | 9,305 | ||||||
Deferred income taxes
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620 | 702 | ||||||
Total current assets
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66,076 | 70,800 | ||||||
Investments, including $2,041 and $2,287 carried at fair value
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8,453 | 9,090 | ||||||
Property, plant and equipment, net
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300,110 | 280,051 | ||||||
Other Assets
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||||||||
Intangible assets, net
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83,201 | 90,389 | ||||||
Cost in excess of net assets of businesses acquired
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10,962 | 10,962 | ||||||
Deferred charges and other assets, net
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4,339 | 5,145 | ||||||
Net other assets
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98,502 | 106,496 | ||||||
Total assets
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$ | 473,141 | $ | 466,437 |
See accompanying notes to unaudited condensed consolidated financial statements.
(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
September 30, 2011
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December 31, 2010
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||||||
Current Liabilities
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||||||||
Current maturities of long-term debt
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$ | 21,911 | $ | 14,823 | ||||
Accounts payable
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7,790 | 12,237 | ||||||
Advanced billings and customer deposits
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10,022 | 8,067 | ||||||
Accrued compensation
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2,627 | 3,278 | ||||||
Liabilities held for sale
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1,017 | 910 | ||||||
Accrued liabilities and other
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7,590 | 5,583 | ||||||
Total current liabilities
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50,957 | 44,898 | ||||||
Long-term debt, less current maturities
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164,087 | 180,289 | ||||||
Other Long-Term Liabilities
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||||||||
Deferred income taxes
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41,901 | 35,902 | ||||||
Deferred lease payable
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4,056 | 3,734 | ||||||
Asset retirement obligations
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6,905 | 6,542 | ||||||
Other liabilities
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4,656 | 4,767 | ||||||
Total other liabilities
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57,518 | 50,945 | ||||||
Commitments and Contingencies
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||||||||
Shareholders’ Equity
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||||||||
Common stock
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21,086 | 19,833 | ||||||
Retained earnings
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179,493 | 170,472 | ||||||
Total shareholders’ equity
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200,579 | 190,305 | ||||||
Total liabilities and shareholders’ equity
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$ | 473,141 | $ | 466,437 |
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended September 30,
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Nine Months Ended
September 30,
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|||||||||||||||
2011
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2010
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2011
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2010
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|||||||||||||
Operating revenues
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62,657 | $ | 53,233 | $ | 184,640 | $ | 137,192 | |||||||||
Operating expenses:
|
||||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below
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25,514 | 21,265 | 76,792 | 50,601 | ||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
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14,199 | 14,180 | 41,438 | 32,770 | ||||||||||||
Depreciation and amortization
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13,774 | 12,202 | 42,155 | 28,927 | ||||||||||||
Total operating expenses
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53,487 | 47,647 | 160,385 | 112,298 | ||||||||||||
Gain on sale of directory
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- | 4,000 | - | 4,000 | ||||||||||||
Operating income
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9,170 | 9,586 | 24,255 | 28,894 | ||||||||||||
Other income (expense):
|
||||||||||||||||
Interest expense
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(2,003 | ) | (2,416 | ) | (6,668 | ) | (2,992 | ) | ||||||||
Gain (loss) on investments, net
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(250 | ) | (11 | ) | (499 | ) | (153 | ) | ||||||||
Non-operating income, net
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195 | 275 | 703 | 543 | ||||||||||||
Income from continuing operations before income taxes
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7,112 | 7,434 | 17,791 | 26,292 | ||||||||||||
Income tax expense
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3,497 | 3,229 | 8,070 | 10,994 | ||||||||||||
Net income from continuing operations
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3,615 | 4,205 | 9,721 | 15,298 | ||||||||||||
Earnings (loss) from discontinued operations, net of tax (expense) benefit of $392, $109, $436 and $(41), respectively
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(613 | ) | (171 | ) | (700 | ) | 62 | |||||||||
Net income
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$ | 3,002 | $ | 4,034 | $ | 9,021 | $ | 15,360 | ||||||||
Basic and diluted income (loss) per share:
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||||||||||||||||
Net income from continuing operations
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$ | 0.15 | $ | 0.17 | $ | 0.41 | $ | 0.65 | ||||||||
Net earnings (loss) from discontinued operations
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(0.02 | ) | - | (0.03 | ) | - | ||||||||||
Net income
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$ | 0.13 | $ | 0.17 | $ | 0.38 | $ | 0.65 | ||||||||
Weighted average shares outstanding, basic
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23,781 | 23,738 | 23,773 | 23,724 | ||||||||||||
Weighted average shares, diluted
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23,823 | 23,883 | 23,823 | 23,799 |
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Shares |
Common
Stock
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Retained
Earnings
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Accumulated
Other
Comprehensive
Income (Loss)
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Total
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||||||||||||||||
Balance, December 31, 2009
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23,681 | $ | 17,890 | $ | 160,230 | $ | (2,448 | ) | $ | 175,672 | ||||||||||
Comprehensive income:
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||||||||||||||||||||
Net income
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- | - | 18,075 | - | 18,075 | |||||||||||||||
Reclassification adjustment for unrealized loss from pension plans included in net income, net of tax
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- | - | - | 2,596 | 2,596 | |||||||||||||||
Net unrealized gain from pension plans, net of tax
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- | - | - | (148 | ) | (148 | ) | |||||||||||||
Total comprehensive income
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20,523 | |||||||||||||||||||
Dividends declared ($0.33 per share)
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- | - | (7,833 | ) | - | (7,833 | ) | |||||||||||||
Dividends reinvested in common stock
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29 | 520 | - | - | 520 | |||||||||||||||
Stock-based compensation
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- | 792 | - | - | 792 | |||||||||||||||
Common stock issued through exercise of incentive stock options
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57 | 561 | - | - | 561 | |||||||||||||||
Net excess tax benefit from stock options exercised
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- | 70 | - | - | 70 | |||||||||||||||
Balance, December 31, 2010
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23,767 | $ | 19,833 | $ | 170,472 | $ | - | $ | 190,305 | |||||||||||
Comprehensive income:
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||||||||||||||||||||
Net income
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- | - | 9,021 | - | 9,021 | |||||||||||||||
Total comprehensive income
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9,021 | |||||||||||||||||||
Stock-based compensation
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- | 1,335 | - | - | 1,335 | |||||||||||||||
Common stock issued for share awards
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19 | - | - | - | - | |||||||||||||||
Common stock repurchased
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(5 | ) | (92 | ) | - | - | (92 | ) | ||||||||||||
Common stock issued
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- | 10 | - | - | 10 | |||||||||||||||
Balance, September 30, 2011
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23,781 | $ | 21,086 | $ | 179,493 | $ | - | $ | 200,579 |
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
|
||||||||
2011
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2010
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|||||||
Cash Flows From Operating Activities
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||||||||
Net income
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$ | 9,021 | $ | 15,360 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
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||||||||
Non-cash impairment charge
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645 | - | ||||||
Depreciation
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33,732 | 26,040 | ||||||
Amortization
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8,423 | 2,887 | ||||||
Provision for bad debt
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2,559 | 844 | ||||||
Stock based compensation expense
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1,335 | 539 | ||||||
Pension settlement and curtailment expenses
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- | 3,964 | ||||||
Excess tax benefits on stock option exercises
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- | (70 | ) | |||||
Deferred income taxes
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6,081 | 152 | ||||||
Net (gain) loss on disposal of equipment
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(1,035 | ) | 316 | |||||
Realized (gain) on sale of directory
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- | (4,000 | ) | |||||
Realized loss on disposal of investments
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27 | 147 | ||||||
Unrealized (gains) losses on investments
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236 | (229 | ) | |||||
Net (gain) loss from patronage and equity investments
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13 | 67 | ||||||
Other
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51 | 576 | ||||||
Changes in assets and liabilities:
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||||||||
(Increase) decrease in:
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||||||||
Accounts receivable
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(2,876 | ) | (4,031 | ) | ||||
Materials and supplies
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1,050 | 707 | ||||||
Income taxes receivable
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(3,894 | ) | 5,531 | |||||
Increase (decrease) in:
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||||||||
Accounts payable
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(4,449 | ) | (841 | ) | ||||
Deferred lease payable
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319 | 237 | ||||||
Income taxes payable
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- | 512 | ||||||
Other prepaids, deferrals and accruals
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3,283 | 4,989 | ||||||
Net cash provided by operating activities
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$ | 54,521 | $ | 53,697 | ||||
Cash Flows From Investing Activities
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||||||||
Purchase and construction of property, plant and equipment
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$ | (52,505 | ) | $ | (33,940 | ) | ||
Cash paid for acquisition of business
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- | (147,613 | ) | |||||
Cash received on sale of directory
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- | 4,000 | ||||||
Cash paid to acquire prepaid subscriber rights
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- | (6,884 | ) | |||||
Proceeds from sale of assets
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1,170 | - | ||||||
Proceeds from sale of equipment
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60 | 503 | ||||||
Purchase of investment securities
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(84 | ) | (114 | ) | ||||
Proceeds from sale of investment securities
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444 | 54 | ||||||
Net cash used in investing activities
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$ | (50,915 | ) | $ | (183,994 | ) |
(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
Cash Flows From Financing Activities
|
||||||||
Principal payments on long-term debt
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$ | (9,115 | ) | $ | (25,595 | ) | ||
Amounts borrowed under debt agreements
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- | 189,800 | ||||||
Cash paid for debt issuance costs
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- | (3,445 | ) | |||||
Excess tax benefits on stock option exercises
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- | 70 | ||||||
Repurchases of stock
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(92 | ) | - | |||||
Proceeds from exercise of incentive stock options
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10 | 557 | ||||||
Net cash provided by (used in) financing activities
|
$ | (9,197 | ) | $ | 161,387 | |||
Net increase (decrease) in cash and cash equivalents
|
$ | (5,591 | ) | $ | 31,090 | |||
Cash and cash equivalents:
|
||||||||
Beginning
|
27,453 | 12,054 | ||||||
Ending
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$ | 21,862 | $ | 43,144 | ||||
Supplemental Disclosures of Cash Flow Information
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||||||||
Cash payments for:
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||||||||
Interest
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$ | 5,600 | $ | 2,392 | ||||
Income taxes
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$ | 5,447 | $ | 5,225 |
During the third quarter of 2011, the Company traded in certain PCS equipment for equipment with additional capacity and received credits of $2.2 million against the purchase price of the new equipment.
See accompanying notes to unaudited condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein. All such adjustments were of a normal and recurring nature. These statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The balance sheet information at December 31, 2010 was derived from the audited December 31, 2010 consolidated balance sheet. Operating revenues and income from operations for any interim period are not necessarily indicative of results that may be expected for the entire year.
2. Discontinued Operations
In September 2008, the Company announced its intention to sell its Converged Services operation, and the related assets and liabilities were reclassified as held for sale in the consolidated balance sheet and the historical operating results were reclassified as discontinued operations. Depreciation and amortization on long-lived assets was also discontinued.
During 2009 and 2010, the Company determined that the fair value of Converged Services had declined. Accordingly, the Company recorded an impairment loss of $17.5 million ($10.7 million, net of taxes) as of March 31, 2009, and recorded an additional impairment loss of $1.9 million ($1.1 million, net of taxes) as of December 31, 2010, to reduce the carrying value of these assets to their estimated fair value less cost to sell. Enhancements to the physical assets since the impairment recorded at December 31, 2010, have been capitalized and immediately expensed during 2011, in the amount of $0.2 million and $0.4 million in the three months and nine months ended September 30, 2011, respectively.
During the first quarter of 2011, the Company made the decision to transfer service contracts and related equipment for five Converged Services’ properties that were within the Shentel Cable franchised cable footprint and could be serviced by the Company’s nearby cable headends. These properties, with an aggregate net book value of approximately $0.4 million, were transferred to Shentel Cable and have been reclassified from discontinued operations for all prior periods. The Company recorded an adjustment to depreciation expense of $0.1 million to reduce the carrying value of the assets transferred to the lower of their carrying value net of the impairment charge or the carrying value as if depreciation had been recorded on these assets at all times.
During the second quarter of 2011, the Company sold service contracts and related equipment for seven Converged Services’ properties to a third-party purchaser, receiving cash proceeds of $0.9 million (with an additional $0.1 million in proceeds placed in escrow for twelve months). The total proceeds approximated the carrying value of the assets sold.
During the third quarter of 2011, the Company sold service contracts and related equipment for two Converged Services’ properties to third party purchasers, receiving cash proceeds of $0.3 million. The total proceeds approximated the carrying value of the assets sold.
At September 30, 2011, negotiations with potential purchasers continue. Based upon indications of interest made by potential buyers in recent months, the Company has determined that the fair value of Converged Services has declined. Accordingly, the Company recorded an impairment loss of $0.6 million ($0.4 million, net of taxes) as of September 30, 2011, to reduce the carrying value of these assets to their estimated fair value less cost to sell.
Assets and liabilities held for sale consisted of the following:
September 30, 2011
|
December 31, 2010
|
|||||||
Assets held for sale:
|
||||||||
Property, plant and equipment, net
|
$ | 4,966 | $ | 6,614 | ||||
Intangible assets, net
|
640 | 706 | ||||||
Deferred charges
|
670 | 1,310 | ||||||
Other assets
|
691 | 675 | ||||||
$ | 6,967 | $ | 9,305 | |||||
Liabilities:
|
||||||||
Other liabilities
|
$ | 1,017 | $ | 910 |
Discontinued operations included the following amounts of operating revenue and income (loss) before income taxes:
Three Months Ended
|
|||||||
September 30,
|
|||||||
2011
|
2010
|
||||||
Operating revenues
|
$ | 2,531 | $ | 2,816 | |||
Earnings (loss) before income taxes
|
$ | (1,005 | ) | $ | (280 | ) |
Nine Months Ended
|
|||||||
September 30,
|
|||||||
2011
|
2010
|
||||||
Operating revenues
|
$ | 8,868 | $ | 9,358 | |||
Earnings (loss) before income taxes
|
$ | (1,136 | ) | $ | 103 |
3. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
September 30, 2011
|
December 31, 2010
|
|||||||
Plant in service
|
$ | 516,853 | $ | 466,658 | ||||
Plant under construction
|
18,775 | 25,515 | ||||||
535,628 | 492,173 | |||||||
Less accumulated amortization and depreciation
|
235,518 | 212,122 | ||||||
Net property, plant and equipment
|
$ | 300,110 | $ | 280,051 |
During the third quarter of 2011, the Company traded in certain PCS equipment for equipment with additional capacity and received credits of $2.2 million against the purchase price of the new equipment. The Company recognized a gain of $1.4 million on the trade-in.
4. Earnings per share
Basic net income (loss) per share was computed on the weighted average number of shares outstanding. Diluted net income (loss) per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Of 511 thousand and 383 thousand shares and options outstanding at September 30, 2011 and 2010, respectively, 363 thousand and 213 thousand were anti-dilutive, respectively. These options have been excluded from the computations of diluted earnings per share for their respective period. There were no adjustments to net income for either period.
5. Investments Carried at Fair Value
Investments include $2.0 million and $2.3 million of investments carried at fair value as of September 30, 2011 and December 31, 2010, respectively, consisting of equity, bond and money market mutual funds. These investments were acquired under a rabbi trust arrangement related to a non-qualified supplemental retirement plan maintained by the Company. During the nine months ended September 30, 2011, the Company recognized $27 thousand in net losses on dispositions of investments, recognized $17 thousand in dividend and interest income from investments, and recognized net unrealized losses of $236 thousand on these investments. Fair values for these investments held under the rabbi trust were determined by Level 1 quoted market prices for the underlying mutual funds.
6. Financial Instruments
Financial instruments on the consolidated balance sheets that approximate fair value include: cash and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, and long-term debt. Due to the relatively short time frame to maturity of the Company’s fixed rate debt, fair value approximates its carrying value.
The Company measures its interest rate swap at fair value based on information provided by the counterparty and recognizes it as a liability on the Company’s condensed consolidated balance sheet. Changes in the fair value of the swap are recognized in interest expense, as the Company did not designate the swap agreement as a cash flow hedge for accounting purposes.
7. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers. The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Wireline, and (3) Cable TV. A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company as well as certain general and administrative costs historically charged to Converged Services that cannot be allocated to discontinued operations.
The Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate of Sprint Nextel. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
The Wireline segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long distance access services throughout Shenandoah County and portions of northwestern Augusta County, Virginia, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor, including portions of West Virginia and Maryland.
The Cable TV segment provides video, internet and voice services in Virginia, West Virginia and Maryland. It includes the operations acquired from JetBroadBand, LLC, since July 30, 2010, and the operations acquired from Suddenlink since November 30, 2010.
The financial information below includes revenues and related expenses billed by one segment of the Company to another segment within the Company. These internal revenues and related expenses are eliminated in order to arrive at the consolidated total revenues and expenses as shown below. All individual segment financial results include these internal revenues and expenses, which are only eliminated at the consolidated level.
Selected financial data for each segment is as follows:
Three months ended September 30, 2011
(In thousands)
|
Wireless
|
Wireline
|
Cable TV
|
Other
|
Eliminations
|
Consolidated
Totals
|
||||||||||||||||||
External revenues
|
||||||||||||||||||||||||
Service revenues
|
$ | 34,403 | $ | 3,604 | $ | 14,532 | $ | - | $ | - | $ | 52,539 | ||||||||||||
Other
|
3,286 | 4,829 | 2,003 | - | - | 10,118 | ||||||||||||||||||
Total external revenues
|
37,689 | 8,433 | 16,535 | - | - | 62,657 | ||||||||||||||||||
Internal revenues
|
800 | 3,994 | 83 | - | (4,877 | ) | - | |||||||||||||||||
Total operating revenues
|
38,489 | 12,427 | 16,618 | - | (4,877 | ) | 62,657 | |||||||||||||||||
Operating expenses
|
||||||||||||||||||||||||
Costs of goods and services, exclusive of depreciation and amortization shown separately below
|
12,667 | 4,887 | 12,082 | 36 | (4,158 | ) | 25,514 | |||||||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
|
7,028 | 1,891 | 5,271 | 728 | (719 | ) | 14,199 | |||||||||||||||||
Depreciation and amortization
|
5,868 | 2,156 | 5,692 | 58 | - | 13,774 | ||||||||||||||||||
Total operating expenses
|
25,563 | 8,934 | 23,045 | 822 | (4,877 | ) | 53,487 | |||||||||||||||||
Operating income (loss)
|
12,926 | 3,493 | (6,427 | ) | (822 | ) | - | 9,170 |
Three months ended September 30, 2010
(In thousands)
|
Wireless
|
Wireline
|
Cable TV
|
Other
|
Eliminations
|
Consolidated
Totals
|
||||||||||||||||||
External revenues
|
||||||||||||||||||||||||
Service revenues
|
$ | 28,624 | $ | 3,596 | $ | 10,663 | $ | - | $ | - | $ | 42,883 | ||||||||||||
Other
|
4,341 | 4,715 | 1,294 | - | - | 10,350 | ||||||||||||||||||
Total external revenues
|
32,965 | 8,311 | 11,957 | - | - | 53,233 | ||||||||||||||||||
Internal revenues
|
763 | 3,375 | 14 | - | (4,152 | ) | - | |||||||||||||||||
Total operating revenues
|
33,728 | 11,686 | 11,971 | - | (4,152 | ) | 53,233 | |||||||||||||||||
Operating expenses
|
||||||||||||||||||||||||
Costs of goods and services, exclusive of depreciation and amortization shown separately below
|
12,236 | 4,318 | 8,318 | 56 | (3,663 | ) | 21,265 | |||||||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
|
5,886 | 1,828 | 6,200 | 755 | (489 | ) | 14,180 | |||||||||||||||||
Depreciation and amortization
|
6,401 | 2,000 | 3,746 | 55 | - | 12,202 | ||||||||||||||||||
Total operating expenses
|
24,523 | 8,146 | 18,264 | 866 | (4,152 | ) | 47,647 | |||||||||||||||||
Gain on sale of directory
|
- | 4,000 | - | - | - | 4,000 | ||||||||||||||||||
Operating income (loss)
|
9,205 | 7,540 | (6,293 | ) | (866 | ) | - | 9,586 |
Nine months ended September 30, 2011
(In thousands)
|
Wireless
|
Wireline
|
Cable TV
|
Other
|
Eliminations
|
Consolidated
Totals
|
||||||||||||||||||
External revenues
|
||||||||||||||||||||||||
Service revenues
|
$ | 100,413 | $ | 10,850 | $ | 43,594 | $ | - | $ | - | $ | 154,857 | ||||||||||||
Other
|
9,687 | 13,906 | 6,190 | - | - | 29,783 | ||||||||||||||||||
Total external revenues
|
110,100 | 24,756 | 49,784 | - | - | 184,640 | ||||||||||||||||||
Internal revenues
|
2,391 | 12,021 | 199 | - | (14,611 | ) | - | |||||||||||||||||
Total operating revenues
|
112,491 | 36,777 | 49,983 | - | (14,611 | ) | 184,640 | |||||||||||||||||
Operating expenses
|
||||||||||||||||||||||||
Costs of goods and services, exclusive of depreciation and amortization shown separately below
|
39,671 | 14,238 | 35,441 | 100 | (12,658 | ) | 76,792 | |||||||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
|
21,225 | 5,558 | 14,134 | 2,474 | (1,953 | ) | 41,438 | |||||||||||||||||
Depreciation and amortization
|
18,242 | 6,260 | 17,478 | 175 | - | 42,155 | ||||||||||||||||||
Total operating expenses
|
79,138 | 26,056 | 67,053 | 2,749 | (14,611 | ) | 160,385 | |||||||||||||||||
Operating income (loss)
|
33,353 | 10,721 | (17,070 | ) | (2,749 | ) | - | 24,255 |
Nine months ended September 30, 2010
(In thousands)
|
Wireless
|
Wireline
|
Cable TV
|
Other
|
Eliminations
|
Consolidated
Totals
|
||||||||||||||||||
External revenues
|
||||||||||||||||||||||||
Service revenues
|
$ | 81,415 | $ | 10,595 | $ | 17,955 | $ | - | $ | - | $ | 109,965 | ||||||||||||
Other
|
10,309 | 14,852 | 2,066 | - | - | 27,227 | ||||||||||||||||||
Total external revenues
|
91,724 | 25,447 | 20,021 | - | - | 137,192 | ||||||||||||||||||
Internal revenues
|
2,268 | 10,076 | 37 | - | (12,381 | ) | - | |||||||||||||||||
Total operating revenues
|
93,992 | 35,523 | 20,058 | - | (12,381 | ) | 137,192 | |||||||||||||||||
Operating expenses
|
||||||||||||||||||||||||
Costs of goods and services, exclusive of depreciation and amortization shown separately below
|
32,108 | 13,075 | 16,152 | 188 | (10,922 | ) | 50,601 | |||||||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
|
14,808 | 6,994 | 9,957 | 2,470 | (1,459 | ) | 32,770 | |||||||||||||||||
Depreciation and amortization
|
16,927 | 5,860 | 5,945 | 195 | - | 28,927 | ||||||||||||||||||
Total operating expenses
|
63,843 | 25,929 | 32,054 | 2,853 | (12,381 | ) | 112,298 | |||||||||||||||||
Gain on sale of directory
|
- | 4,000 | - | - | - | 4,000 | ||||||||||||||||||
Operating income (loss)
|
30,149 | 13,594 | (11,996 | ) | (2,853 | ) | - | 28,894 |
A reconciliation of the total of the reportable segments’ operating income to consolidated income from continuing operations before income taxes is as follows:
Three Months Ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
Total consolidated operating income
|
$ | 9,170 | $ | 9,586 | ||||
Interest expense
|
(2,003 | ) | (2,416 | ) | ||||
Non-operating income (expense), net
|
(55 | ) | 264 | |||||
Income from continuing operations before income taxes
|
$ | 7,112 | $ | 7,434 |
Nine Months Ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
Total consolidated operating income
|
$ | 24,255 | $ | 28,894 | ||||
Interest expense
|
(6,668 | ) | (2,992 | ) | ||||
Non-operating income (expense), net
|
204 | 390 | ||||||
Income from continuing operations before income taxes
|
$ | 17,791 | $ | 26,292 |
The Company’s assets by segment are as follows:
(In thousands)
|
September 30,
2011
|
December 31,
2010
|
||||||
Wireless
|
$ | 135,428 | $ | 124,854 | ||||
Wireline
|
82,195 | 78,552 | ||||||
Cable TV
|
207,087 | 208,039 | ||||||
Other (includes assets held for sale)
|
393,878 | 393,340 | ||||||
Combined totals
|
818,588 | 804,785 | ||||||
Inter-segment eliminations
|
(345,447 | ) | (338,348 | ) | ||||
Consolidated totals
|
$ | 473,141 | $ | 466,437 |
8. Income Taxes
The Company files U.S. federal income tax returns and various state and local income tax returns. With few exceptions, years prior to 2008 are no longer subject to examination. The Company is under audit in the state of Maryland for the 2007, 2008 and 2009 tax years. No other state or federal income tax audits were in process as of September 30, 2011.
9. Long-Term Debt
As of September 30, 2011 and December 31, 2010, the Company’s outstanding long-term debt consisted of the following:
(In thousands)
|
September
2011
|
December
2010
|
||||||
CoBank (fixed term loan)
|
$ | 5,157 | $ | 6,984 | ||||
Term Loan A
|
180,310 | 187,428 | ||||||
Other debt
|
531 | 700 | ||||||
185,998 | 195,112 | |||||||
Current maturities
|
21,911 | 14,823 | ||||||
Total long-term debt
|
$ | 164,087 | $ | 180,289 |
As of September 30, 2011, the Company was in compliance with the covenants in its Credit Agreement.
10. Subsequent Events
On October 17, 2011, the Company’s Board of Directors declared a dividend of $0.33 per share payable on December 1, 2011, to shareholders of record as of November 9, 2011. The Company expects to pay out approximately $7.8 million excluding the effect of dividend reinvestments.
In November 2011, the Company executed two asset purchase agreements to sell certain Converged Services properties to two buyers for a total of $4.7 million. The Company closed on the sale of some of these properties and received $2.2 million on November 7, 2011. Two additional closings are expected in the next 60 to 90 days following receipt of consents necessary for the transfer of the properties. The Company continues to negotiate with purchasers on the remaining Converged Services properties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements. All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters are forward-looking statements. We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct. The Company’s actual results could be materially different from its expectations because of various factors, including those discussed below and under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010. The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010, including the financial statements and related notes included therein.
General
Overview. Shenandoah Telecommunications Company is a diversified telecommunications company providing both regulated and unregulated telecommunications services through its wholly owned subsidiaries. These subsidiaries provide wireless personal communications services (as a Sprint PCS Affiliate of Sprint Nextel) and local exchange telephone services, as well as cable television, video, Internet and data services, long distance, fiber optics facilities, and leased tower facilities. The Company has the following three reporting segments, which it operates and manages as strategic business units organized by lines of business:
|
*
|
The Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate of Sprint Nextel. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
|
|
*
|
The Wireline segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long-distance access services throughout Shenandoah County and portions of Rockingham and Augusta Counties, Virginia, and leases fiber optic facilities, throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor, including portions of West Virginia and Maryland.
|
|
*
|
The Cable TV segment provides video, internet and voice services in franchise areas throughout Virginia, West Virginia and Maryland.
|
|
*
|
A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company, as well as certain general and administrative costs historically charged to Converged Services that cannot be allocated to discontinued operations.
|
In September 2008, the Company announced its intention to sell its Converged Services operation, and the related assets and liabilities were reclassified as held for sale in the consolidated balance sheet and the historical operating results were reclassified as discontinued operations. Depreciation and amortization on long-lived assets was discontinued.
In March, 2009, the Company recorded an impairment loss of $17.5 million ($10.7 million, net of taxes) to reduce the carrying value of these assets to their estimated fair value less cost to sell. In December 2010, the Company recorded an additional impairment charge of $1.9 million ($1.1 million, net of tax), to reduce the carrying value of these assets to their revised estimated fair value less cost to sell. In March, 2011, the Company transferred service contracts for five properties from Converged Services to Shentel Cable, as these properties are located in the Company’s franchise cable footprint as a result of the JetBroadBand acquisition. Operating results for these properties have been reclassified as continuing operations for all periods presented, and the Company recorded an adjustment to depreciation expense of $0.1 million to reduce the carrying value of assets transferred to the lower of their carrying value net of the impairment charge or the carrying value as if depreciation had been recorded on these assets at all times.
During the second quarter of 2011, the Company sold service contracts and related equipment for seven Converged Services’ properties to a third-party purchaser, receiving cash proceeds of $0.9 million (with an additional $0.1 million in proceeds placed in escrow for twelve months). During the third quarter of 2011, the Company sold service contracts and related equipment for two Converged Services’ properties to third-party purchasers, receiving cash proceeds of $0.3 million. The total proceeds approximated the carrying value of the assets sold in these transactions.
At September 30, 2011, negotiations with several potential purchasers continue. Based upon indications of interest made by potential buyers in recent months, the Company has determined that the fair value of Converged Services has declined. Accordingly, the Company recorded an impairment loss of $0.6 million ($0.4 million, net of taxes) as of September 30, 2011, to reduce the carrying value of these assets to their estimated fair value less cost to sell.
In November 2011, the Company executed two asset purchase agreements to sell certain Converged Services properties to two buyers for a total of $4.7 million. The Company closed on the sale of some of these properties and received $2.2 million on November 7, 2011. Two additional closings are expected in the next 60 to 90 days following receipt of consents necessary for the transfer of the properties. The Company continues to negotiate with purchasers on the remaining Converged Services properties.
Acquisition of Virgin Mobile Customers and Initiation of Prepaid Wireless Sales
In July 2010, the Company amended its agreement with Sprint Nextel to incorporate approximately 50,000 Virgin Mobile customers in our service area, and effective July 11, 2010, the Company began selling Virgin Mobile and Boost prepaid products and services. The Company incurs significant costs of acquisition (including handset subsidies, commissions, and other sales and marketing costs) in the month of customer activation. Due to expensing all costs of acquisition in the month of acquisition, the Company expected that the sale of prepaid products and services would have a net negative impact on operating results until the base of customers was sufficient such that the aggregate monthly revenue less recurring expenses exceeded the up-front costs for new activations. During the third quarter of 2011, the Company reached this point on a monthly basis, and expects that monthly results will generally be positive in future periods.
Cable Acquisitions
On July 30, 2010, the Company completed the acquisition of cable operations and subscribers from JetBroadBand for approximately $148 million in cash. The acquired cable operations offer video, high speed Internet and voice services that at the time of acquisition represented approximately 66,000 revenue generating units in southern Virginia and southern West Virginia. The acquired networks pass approximately 115,000 homes. The operating results of the acquired cable operations are now included in the Company’s Cable Television segment, significantly impacting that segment’s operating revenues and expenses in subsequent periods.
On November 30, 2010, the Company completed the acquisition of two small cable systems from Suddenlink for $4.5 million. These systems are located in West Virginia and Maryland, pass approximately 7,000 homes and represented approximately 4,200 revenue generating units.
Sale of Directory
In September 2010, the Company sold the rights to publish telephone directories in its service territories for $4.0 million and recorded an equivalent gain on the sale.
Results of Operations
Three Months Ended September 30, 2011 Compared with the Three Months Ended September 30, 2010
Consolidated Results
The Company’s consolidated results from continuing operations for the third quarters of 2011 and 2010 are summarized as follows:
(in thousands)
|
Three Months Ended
September 30,
|
Change
|
||||||||||||||
2011
|
2010
|
$ | % | |||||||||||||
Operating revenues
|
$ | 62,657 | $ | 53,233 | $ | 9,424 | 17.7 | |||||||||
Operating expenses
|
53,487 | 47,647 | 5,840 | 12.3 | ||||||||||||
Gain on sale of directory
|
- | 4,000 | (4,000 | ) | (100.0 | ) | ||||||||||
Operating income
|
9,170 | 9,586 | (416 | ) | (4.3 | ) | ||||||||||
Interest expense
|
(2,003 | ) | (2,416 | ) | 413 | (17.1 | ) | |||||||||
Other income (expense)
|
(55 | ) | 264 | (319 | ) | (120.8 | ) | |||||||||
Income before taxes
|
7,112 | 7,434 | (322 | ) | (4.3 | ) | ||||||||||
Income tax expense
|
3,497 | 3,229 | 268 | 8.3 | ||||||||||||
Net income from continuing operations
|
$ | 3,615 | $ | 4,205 | $ | (590 | ) | (14.0 | ) |
Operating revenues
For the three months ended September 30, 2011, operating revenues increased $9.4 million, or 17.7%. The increase was due to incremental cable segment revenues of $4.6 million (primarily from the additional month of revenue in 2011 from the cable acquisition which occurred at the end of July 2010), $3.5 million in incremental net revenues from prepaid PCS customers, and $1.1 million in increased postpaid PCS revenues, all compared to the third quarter of 2010. All other revenues (Wireline, tower revenues, and PCS equipment revenues) increased $0.2 million, net, in the third quarter of 2011 from the third quarter of 2010.
Operating expenses
For the three months ended September 30, 2011, operating expenses increased $5.8 million, or 12.3%, compared to the 2010 period. This increase included $1.6 million of additional depreciation and amortization expense, including $1.9 million associated with the cable systems acquired in July and December of 2010, offset by a reduction of $0.6 million in the amortization resulting from the acquisition of prepaid subscribers in the third quarter of 2010. Other cable segment operating expenses increased $2.9 million overall; the 2010 cable segment operating expenses included $3.0 million in transaction related expenses, approximately offsetting the additional month of expenses in 2011. Costs associated with prepaid PCS offerings increased $1.8 million in the 2011 third quarter, excluding amortization on the acquired subscribers. Costs related to the expansion of the wireless network and the provision of high-speed wireless internet data access services added $0.8 million in incremental site rent, power and backhaul costs. The Company recognized gains totaling $1.4 million on trade-ins of PCS equipment during the third quarter of 2011.
Gain on sale of directory
During the third quarter of 2010, the Company sold its telephone directory publishing rights for $4 million.
Interest expense
The decrease in interest expense resulted primarily from changes in the fair value of the Company’s interest rate swap, which added $0.5 million to interest expense during the third quarter of 2010, but only $0.2 million during the third quarter of 2011.
Income tax expense
The Company’s effective tax rate on income from continuing operations increased from 43.4% in the third quarter of 2010 to 49.2% in the third quarter of 2011 due to operating improvements in the Wireless segment adding to taxable income in generally higher tax states while operating losses in the Cable segment reduce taxable income in generally lower tax states.
Net income from continuing operations
For the three months ended September 30, 2011, net income from continuing operations decreased $0.6 million, reflecting primarily the $4.0 million gain on the directory sale in 2010 partially offset by the $3.0 million of one-time costs of the cable acquisition incurred in 2010, net of taxes.
Nine Months Ended September 30, 2011 Compared with the Nine Months Ended September 30, 2010
Consolidated Results
The Company’s consolidated results from continuing operations for the first nine months of 2011 and 2010 are summarized as follows:
(in thousands)
|
Nine Months Ended
September 30,
|
Change
|
||||||||||||||
2011
|
2010
|
$ | % | |||||||||||||
Operating revenues
|
$ | 184,640 | $ | 137,192 | $ | 47,448 | 34.6 | |||||||||
Operating expenses
|
160,385 | 112,298 | 48,087 | 42.8 | ||||||||||||
Gain on sale of directory
|
- | 4,000 | (4,000 | ) | (100.0 | ) | ||||||||||
Operating income
|
24,255 | 28,894 | (4,639 | ) | (16.1 | ) | ||||||||||
Interest expense
|
(6,668 | ) | (2,992 | ) | (3,676 | ) | 122.9 | |||||||||
Other income (expense)
|
204 | 390 | (186 | ) | (47.7 | ) | ||||||||||
Income before taxes
|
17,791 | 26,292 | (8,501 | ) | (32.3 | ) | ||||||||||
Income tax expense
|
8,070 | 10,994 | (2,924 | ) | (26.6 | ) | ||||||||||
Net income from continuing operations
|
$ | 9,721 | $ | 15,298 | $ | (5,577 | ) | (36.5 | ) |
Operating revenues
For the nine months ended September 30, 2011, operating revenues increased $47.4 million, or 34.6%. The increase was primarily due to incremental cable segment revenues of $29.9 million resulting largely from the cable acquisitions which occurred in the latter half of 2010, and to $13.3 million in incremental net revenues from prepaid PCS customers. Postpaid PCS revenues increased $5.7 million over the first nine months of 2010. All other revenues decreased $1.4 million, net, in the first nine months of 2011 compared to 2010, principally due to the loss of directory revenues following the sale in third quarter 2010.
Operating expenses
For the nine months ended September 30, 2011, operating expenses increased $48.1 million, or 42.8%, compared to the 2010 period. This included an increase of $13.2 million of depreciation and amortization expense, including $11.5 million associated with the cable systems acquired in late 2010 and $0.9 million of amortization associated with the prepaid subscribers acquired in the third quarter of 2010. Excluding depreciation and one-time transaction related costs, cable segment operating costs increased $26.4 million overall in 2011 over 2010. Costs (other than amortization) associated with prepaid PCS offerings increased $11.5 million in 2011 over 2010. Costs related to the expansion of the wireless network and the provision of high-speed wireless internet data access services added $2.3 million in incremental site rent, power and backhaul costs. All other operating expenses decreased $5.3 million in the first nine months of 2011, compared to the 2010 nine-month period. This decrease is primarily attributable to recording certain non-recurring expenses in 2010. These expenses included $3.8 million related to the settlement of the Company’s defined benefit pension plan and curtailment of the non-qualified supplemental retirement plan, and $3.1 million in cable acquisition transaction costs.
Interest expense
The increase in interest expense resulted primarily from the increased borrowings used to fund the JetBroadband cable acquisition in July 2010. The Company also reversed $0.4 million of interest previously capitalized to plant under construction, increasing interest expense for 2011.
Income tax expense
The Company’s effective tax rate on income from continuing operations increased from 41.8% in the nine months ended September 30, 2010 to 45.4% in the first nine months of 2011 due to operating improvements in the Wireless segment adding to taxable income in generally higher tax states while operating losses in the Cable segment reduce taxable income in generally lower tax states.
Net income from continuing operations
For the nine months ended September 30, 2011, net income from continuing operations decreased $5.6 million, reflecting costs of acquiring prepaid PCS and cable customers, the higher interest costs associated with funding the cable acquisitions, and the absence in 2011 of the gain on the sale of the directory recorded in 2010.
Wireless
The Company’s Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, through Shenandoah Personal Communications Company (“PCS”), a Sprint PCS Affiliate of Sprint Nextel. This segment also leases land on which it builds Company-owned cell towers, which it leases to affiliated and non-affiliated wireless service providers, throughout the same four-state area described above, through Shenandoah Mobile Company (“Mobile”).
PCS receives revenues from Sprint Nextel for subscribers that obtain service in PCS’s network coverage area. PCS relies on Sprint Nextel to provide timely, accurate and complete information to record the appropriate revenue for each financial period. Postpaid revenues received from Sprint Nextel are recorded net of certain fees retained by Sprint Nextel. These fees totaled 16.8% of net postpaid billed revenue, as defined, until June 2010, when Sprint Nextel exercised its right to re-evaluate the net service fee component, and increased the total fees retained by Sprint Nextel to 20%. Sprint Nextel retains a 6% management fee on prepaid revenues.
The following tables show selected operating statistics of the Wireless segment as of the dates shown:
Sept. 30,
|
Dec. 31,
|
Sept. 30,
|
Dec. 31,
|
|||
2011
|
2010
|
2010
|
2009
|
|||
Retail PCS Subscribers – Postpaid (1)
|
243,548
|
234,809
|
230,612
|
222,818
|
||
Retail PCS Subscribers – Prepaid
|
98,272
|
66,956
|
56,203
|
n/a
|
||
PCS Market POPS (000) (2)
|
2,397
|
2,337
|
2,339
|
2,327
|
||
PCS Covered POPS (000) (2)
|
2,114
|
2,049
|
2,052
|
2,033
|
||
CDMA Base Stations (sites)
|
508
|
496
|
484
|
476
|
||
EVDO-enabled sites
|
402
|
381
|
346
|
334
|
||
EVDO Covered POPS (000) (2)
|
2,053
|
1,981
|
1,960
|
1,940
|
||
Towers, Company owned
|
149
|
146
|
142
|
140
|
||
Non-affiliate cell site leases
|
219
|
216
|
211
|
196
|
Three Months Ended
|
Nine Months Ended
|
|||||
September 30,
|
September 30,
|
|||||
2011
|
2010
|
2011
|
2010
|
|||
Gross PCS Subscriber Additions – Postpaid
|
16,126
|
16,716
|
46,285
|
48,587
|
||
Net PCS Subscriber Additions – Postpaid
|
2,686
|
3,175
|
8,739
|
7,794
|
||
Gross PCS Subscriber Additions – Prepaid
|
19,545
|
14,289
|
65,579
|
14,289
|
||
Net PCS Subscriber Additions – Prepaid (3)
|
6,940
|
6,296
|
31,316
|
6,296
|
||
PCS Average Monthly Retail Churn % - Postpaid
|
1.85%
|
1.88%
|
1.69%
|
1.82%
|
||
PCS Average Monthly Retail Churn % - Prepaid (4)
|
4.43%
|
5.02%
|
4.50%
|
5.02%
|
1)
|
Postpaid subscriber counts for December 31, 2010 have been reduced by 888 to exclude certain rate plans incorrectly counted as subscribers in the latter months of 2010.
|
2)
|
POPS refers to the estimated population of a given geographic area and is based on information purchased from third parties. Market POPS are those within a market area which the Company is authorized to serve under its Sprint PCS affiliate agreements, and Covered POPS are those covered by the Company’s network.
|
3)
|
Net Prepaid Additions excludes 49,885 subscribers purchased July 1, 2010.
|
4)
|
Prepaid churn for 2010 reflects results for the three months ended September 30, 2010 in both the three months and nine months ended September 30, 2010, columns shown above. Prepaid activity initiated effective July 1, 2010.
|
Three Months Ended September 30, 2011 Compared with the Three Months Ended September 30, 2010
(in thousands)
|
Three Months Ended
September 30,
|
Change
|
||||||||||||||
2011
|
2010
|
$ | % | |||||||||||||
Segment operating revenues
|
|
|
||||||||||||||
Wireless service revenue
|
$ | 34,403 | $ | 28,624 | $ | 5,779 | 20.2 | |||||||||
Tower lease revenue
|
2,302 | 2,078 | 224 | 10.8 | ||||||||||||
Equipment revenue
|
1,107 | 1,712 | (605 | ) | (35.3 | ) | ||||||||||
Other revenue
|
677 | 1,314 | (637 | ) | (48.5 | ) | ||||||||||
Total segment operating revenues
|
38,489 | 33,728 | 4,761 | 14.1 | ||||||||||||
Segment operating expenses
|
||||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below
|
12,667 | 12,236 | 431 | 3.5 | ||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
|
7,028 | 5,886 | 1,142 | 19.4 | ||||||||||||
Depreciation and amortization
|
5,868 | 6,401 | (533 | ) | (8.3 | ) | ||||||||||
Total segment operating expenses
|
25,563 | 24,523 | 1,040 | 4.2 | ||||||||||||
Segment operating income
|
$ | 12,926 | $ | 9,205 | $ | 3,721 | 40.4 |
Operating revenues
Wireless service revenue increased $5.8 million, or 20.2%, for the three months ended September 30, 2011, compared to the comparable 2010 period. Net prepaid revenue represented $3.5 million of this increase. Gross postpaid service revenues increased by $3.7 million. Total credits against gross billed revenue, including fees retained by Sprint Nextel and bad debt write-offs, increased $1.4 million, or 11.4%, from the third quarter of 2010. These increases are primarily related to the growth in postpaid service revenue. Fees retained by Sprint Nextel increased by $0.7 million, or 11.1%, while bad debt write-offs increased by $0.3 million, or 18.1%, and all other credits increased $0.4 million, primarily due to contract buy-out costs incurred in a marketing program to attract new customers. A 5.8% increase in average subscribers in the current quarter compared to the 2010 third quarter, and $2.0 million in incremental data fees charged on smart phones activated since January 31, 2011, both contributed to the increase in gross postpaid service revenues.
The increase in tower lease revenue resulted primarily from additional cell site leases.
The decrease in equipment revenue resulted from decreases in both the number of handsets sold and the revenue recognized per handset in 2011 compared to the third quarter of 2010, while the decrease in other revenue resulted primarily from a one-time adjustment in 2010 to reflect longer lease terms on certain leases.
Cost of goods and services
Cost of goods and services increased $0.4 million, or 3.5%, in 2011 from the third quarter of 2010. Costs of the expanded network coverage and expansion of EVDO coverage and capacity resulted in a $0.8 million increase in network costs including rent for additional tower and co-location sites, power and backhaul line costs. Handset costs associated with prepaid customer acquisitions generated $0.7 million of incremental costs, while postpaid handset costs decreased $0.2 million. Cost of service increased $0.4 million due to increased costs for 4G usage paid through Sprint to Clearwire. These increases were partially offset by a $1.4 million gain on trade-in of wireless network assets.
Selling, general and administrative
Selling, general and administrative costs increased $1.1 million, or 19.4%, in the third quarter of 2011 over the comparable 2010 period. Costs associated with prepaid customers accounted for $0.9 million of the increase, including $0.5 million to support the existing subscriber base and the remaining $0.4 million in costs associated with 37% growth in gross adds in the third quarter of 2011 over 2010’s third quarter. Operating taxes and other sales and marketing costs accounted for the remainder of the increase.
Depreciation and amortization
Depreciation and amortization decreased $0.5 million in 2011 over the 2010 third quarter, due to a $0.6 million decrease in amortization of the initial purchase cost of acquired prepaid customers, which decreases each month in relation to churn in this customer base.
Nine Months Ended September 30, 2011 Compared with the Nine Months Ended September 30, 2010
(in thousands)
|
Nine Months Ended
September 30,
|
Change
|
||||||||||||||
2011
|
2010
|
$ | % | |||||||||||||
Segment operating revenues
|
|
|
||||||||||||||
Wireless service revenue
|
$ | 100,413 | $ | 81,415 | $ | 18,998 | 23.3 | |||||||||
Tower lease revenue
|
6,677 | 6,032 | 645 | 10.7 | ||||||||||||
Equipment revenue
|
3,735 | 4,218 | (483 | ) | (11.5 | ) | ||||||||||
|
1,666 | 2,327 | (661 | ) | (28.4 | ) | ||||||||||
Total segment operating revenues
|
112,491 | 93,992 | 18,499 | 19.7 | ||||||||||||
Segment operating expenses
|
||||||||||||||||
Cost of goods and services, exclusive of depreciation and amortization shown separately below
|
39,671 | 32,108 | 7,563 | 23.6 | ||||||||||||
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
|
21,225 | 14,808 | 6,417 | 43.3 | ||||||||||||
Depreciation and amortization
|
18,242 | 16,927 | 1,315 | 7.8 | ||||||||||||
Total segment operating expenses
|
79,138 | 63,843 | 15,295 | 24.0 | ||||||||||||
Segment operating income
|
33,353 | $ | 30,149 | $ | 3,204 | 10.6 |
Operating revenues
Wireless service revenue increased $19.0 million, or 23.3%, for the nine months ended September 30, 2011, compared to the comparable 2010 period. Net prepaid revenue represented $13.3 million of this increase. The Company first began offering prepaid services in July 2010 when it purchased 50,000 Virgin Mobile customers. A substantial portion of the increase in prepaid revenues relates to offering prepaid products for all nine months of 2011 and less than three months of 2010. In addition, prepaid customers have grown from the initial 50,000 acquired from Sprint Nextel to over 98,000 at September 30, 2011.
Postpaid revenues grew by $5.7 million in 2011 over 2010. Average postpaid subscribers increased 5.7% in the 2011 nine months compared to the 2010 nine months while incremental data fees charged on smart phones added $4.2 million to 2011 postpaid wireless service revenue, contributing to an 8.8% increase in postpaid service revenue. Total credits against gross billed revenue, including fees retained by Sprint Nextel and bad debt write-offs, increased $4.2 million from the first nine months of 2010, principally due to the increase in the net service fee from 8.8% to 12.0% effective June 1, 2010, and to the growth in service revenues. Fees retained by Sprint Nextel increased by $2.9 million, or 20.1%, while bad debt write-offs decreased by $0.4 million, or 9.9%, and all other credits increased $1.0 million.
The increase in tower lease revenue resulted primarily from additional cell site leases.
The decrease in equipment revenue resulted from decreases in both the number of handsets sold and the average revenue per unit sold in 2011, while the decrease in other revenue resulted from a one-time adjustment in 2010 to reflect longer lease terms on certain leases.
Cost of goods and services
Cost of goods and services increased $7.6 million, or 23.6%, in 2011 from the first nine months of 2010. Prepaid gross additions grew from 14,289 for the 2010 period to 65,579 for 2011, principally due to six additional months of activity in 2011. This growth caused an increase in handset costs associated with prepaid customer acquisitions of $5.5 million, while postpaid handset costs increased $0.4 million. Costs of the expanded network coverage and expansion of EVDO coverage and capacity resulted in a $2.3 million increase in network costs including rent for additional tower and co-location sites, power and backhaul line costs. These increases were partially offset by a $1.4 million gain on trade-in of wireless network assets.
Selling, general and administrative
Selling, general and administrative costs increased $6.4 million, or 43.3%, in the nine months of 2011 over the comparable 2010 period. Costs associated with prepaid customers accounted for $5.8 million of the increase in costs, principally marketing and selling costs, including $2.7 million in costs associated with having over four times as many prepaid gross adds in 2011 and $3.1 million to support the existing customer base, and supporting that base for over six additional months in 2011. Operating taxes accounted for $0.3 million of incremental costs, while sales and marketing costs for prepaid and postpaid sales accounted for the remainder of the increase.
Depreciation and amortization
Depreciation and amortization increased $1.3 million in 2011 over the first nine months of 2010, due principally to $0.9 million of amortization of the initial purchase cost of acquired prepaid customers. The remainder of the increase resulted from capital projects for EVDO capability and new towers and cell sites placed in service since second quarter of 2010.
Shenandoah Mobile Company
As noted above, the Wireless segment includes the operations of the Company’s Mobile subsidiary that leases land from third-party landlords, builds cell towers on that land, and leases space on those towers to affiliates (principally PCS) and non-affiliated cell phone providers. For the third quarter of 2011, Mobile generated $2.3 million in rent revenue, up from $2.1 million in the 2010 third quarter, primarily from additional non-affiliate leases. Other revenue declined $0.8 million in the 2011 third quarter from 2010; the Company recorded a one-time adjustment in 2010 relating to revised lease terms on certain leases. Operating expenses totaled $1.3 million in the 2011 third quarter, up from $1.2 million in 2010. The increase resulted primarily from rents on additional tower sites added in late 2010 and early 2011 and the loss on disposal of certain equipment recorded in 2011.
For the year to date period, rent revenue increased $0.6 million to $6.7 million in the 2011 nine month period; other revenue declined $0.9 million, primarily related to the one-time charge described above. Operating expenses increased $0.5 million, as in the third quarter due to increased rent expense for sites as well as the loss on disposed assets. Depreciation expense also added $0.1 million to the 2011 nine month variance.
Cable Television
The Cable Television segment provides analog, digital and high-definition television service under franchise agreements in Virginia, West Virginia and Maryland, as well as internet and voice services in these markets.
The Company has been upgrading its cable systems since early 2009, and by December 2010 had completed upgrades to the systems acquired in late 2008. The Company has introduced expanded video and internet service offerings as market upgrades were completed beginning in the second half of 2009, and began introducing voice service in several upgraded markets as the first quarter of 2010 ended. The Company has continued rolling out expanded video services, internet and voice services to additional markets as upgrades have been completed.
The Company closed on the acquisition of cable operations from JetBroadBand effective July 30, 2010, and Suddenlink effective November 30, 2010. For the cable operations acquired in July 2010, systems passing approximately 21% of the homes have been upgraded. The Cable segment results include the operating results of the acquired operations from July 30, 2010 and November 30, 2010, forward, respectively.
The following table shows selected operating statistics of the Cable Television segment as of the dates shown:
Sept. 30,
2011
|
Dec. 31,
2010(1)
|
Sept. 30,
2011
|
Dec. 31,
2010(1)
|
|||
Homes Passed (2)
|
181,351
|
178,763
|
171,662
|
56,268
|
||
Video
|
||||||
Customers (3)
|
66,179
|
67,235
|
64,524
|
23,022
|
||
Penetration (4)
|
36.5%
|
37.6%
|
37.6%
|
40.9%
|
||
Digital video customers (5)
|