Shenandoah Telecommunications Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Shentel provides broadband communications and cell-tower colocation services in the Mid-Atlantic. The filing is unaudited.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $66.9 | $62.2 | $197.4 | $182.6 |
| Operating income (loss) | $(1.8) | $0.9 | $(5.3) | $5.5 |
| Continuing operations income (loss) | $(2.7) | $6.5 | $(6.6) | $11.1 |
| Net income (loss) | $(2.7) | $892.8 | $(6.6) | $997.4 |
| Operating cash flow, continuing operations | Not presented by quarter | $56.2 | $31.6 |
- Q3 revenue grew 7.5%; nine-month revenue grew 8.1%. Growth was led by Broadband, including residential and SMB revenue, Glo Fiber expansion, and commercial fiber connections. Tower revenue also increased.
- Operating margins were negative 2.6% for Q3 and negative 2.7% for the nine-month period, versus positive 1.4% and 3.0%, respectively, in 2021. Expense growth outpaced revenue growth, including higher compensation, maintenance, depreciation, and Broadband expansion costs.
- Broadband operating income fell to $4.8 million in Q3 from $9.4 million, and to $17.1 million for nine months from $27.9 million. Broadband operating margins were 7.7% and 9.3%, respectively, versus 16.2% and 16.5% in 2021.
- Q3 and nine-month 2022 diluted loss per share from continuing operations was $0.05 and $0.13, respectively. Prior-year reported net income included the Wireless business sale; it is not a like-for-like comparison with 2022.
Liquidity, debt, and investment
- At September 30, cash and equivalents were $33.0 million; total assets were $922.5 million and shareholders’ equity was $642.5 million.
- Gross variable-rate debt was $25.0 million, borrowed in July 2022; debt net of loan fees was $25.0 million. The stated interest rate was 4.64% at quarter-end; the company also reported a 3.89% annualized weighted-average rate. It had $375.0 million of facility availability and reported total available liquidity of $408.0 million.
- Nine-month capital expenditures were $132.4 million, compared with $118.8 million in 2021, primarily reflecting Glo Fiber network expansion. Cash declined by $51.3 million over the period to $33.0 million.
- Management expects capital expenditures to exceed continuing-operations cash flow through 2025 and plans to expand Glo Fiber to potentially reach more than 450,000 passings. It expects to draw the remaining $275 million available under delayed-draw term loans by June 2023.
- Management said cash, operating cash flow, and Credit Agreement availability should meet anticipated needs for the next 12 months. The company was in compliance with its debt covenants at quarter-end.
Material changes, outlook, and risks
- Shentel agreed to sell certain Beam fixed-wireless spectrum licenses and leases for approximately $21.1 million: $17.3 million cash and $3.8 million of liabilities assumed. Closing is expected in the first half of 2023, subject to regulatory approvals and other conditions. The company plans to cease remaining Beam operations upon or before closing.
- Beam-related actions drove a $4.1 million impairment charge in the first half of 2022 and a further $0.5 million in Q3; depreciation was also accelerated for assets expected to be decommissioned.
- The 2021 comparison includes the sale of the Wireless business to T-Mobile, completed July 1, 2021, and a special dividend of approximately $937 million. Nine-month 2021 net income included $986.4 million from discontinued operations, including the sale gain. There was no material discontinued-operations income in 2022.
- Management cited higher expenses and lower investment income among factors pressuring results. The filing provides no specific revenue or earnings guidance.
- The company disclosed that its disclosure controls and procedures remained ineffective at September 30, 2022 because remediation of previously identified material weaknesses was not complete. Management stated that the financial statements were prepared in accordance with U.S. GAAP and fairly presented the periods reported.
- Additional risks include variable-rate debt and the uncertain financial effect of transitioning from LIBOR, which is expected to be phased out for remaining tenors by June 30, 2023; planned borrowing could increase exposure to rising rates. Management also cited economic, labor, regulatory, competitive, and customer-demand uncertainties. It did not expect current litigation to have a material adverse financial impact.
- For 2021, the company revised previously issued interim statements to correct an immaterial error, primarily affecting service costs and income from continuing operations.
Important facts for investors to verify
- Whether the Beam spectrum transaction receives regulatory approval and closes on the expected timeline, and the cost and timing of ending remaining Beam operations.
- Glo Fiber build-out pace, customer additions, revenue growth, and whether broadband margins recover as expansion spending and depreciation increase.
- Actual timing and amount of planned debt draws and capital expenditures, covenant headroom, and sensitivity to interest-rate and LIBOR-replacement changes.
- Progress and testing results for remediation of the disclosed material weaknesses in internal controls.
- Collection of the expected approximately $29.5 million income-tax refund and achievement of grant-related build-out milestones; no grant amounts had been recognized by September 30, 2022.