SHENANDOAH TELECOMMUNICATIONS CO quarterly report, Q2 FY2020

Business context and reporting period

Shenandoah Telecommunications Company (Shentel) provides wireless, broadband, and tower services in the Mid-Atlantic. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; financial amounts below are in millions unless noted.

Financial performance

• Q2 revenue rose 6.7% year over year and six-month revenue rose 1.6%. Q2 operating income increased 79.0%; six-month operating income increased 35.3%.
• Six-month operating cash flow was $128.9, compared with $129.6 in 2019. Capital expenditures were $66.6, versus $79.1; investing cash outflow was $67.5. Cash increased $42.1 to $143.7.
• At June 30, cash was $143.7 and the undrawn revolver was $75.0, for reported available liquidity of $218.7. Net debt was $704.3 (gross principal $715.0); weighted average interest rate was about 2.5%. The company was compliant with covenants: leverage ratio 2.3 versus a maximum 3.25, debt-service coverage 5.7 versus a minimum 2.00.
• Total assets were $1,880.6 and shareholders’ equity was $511.5. Current liabilities were $145.3 and current assets were $299.5.

Material changes versus prior period

• Q2 wireless revenue included $21.0 of retroactive travel fees recognized after arbitration reset Sprint’s fee at $1.5 per month through December 2021. Sprint paid the $21.0 in July. Without this unusual catch-up, reported wireless growth and earnings would have been lower.
• Wireless segment operating income rose to $43.9 from $20.9, primarily reflecting the travel revenue settlement and lower depreciation and amortization as certain nTelos assets became fully depreciated. Broadband operating income fell to $8.8 from $11.9 as costs rose faster than revenue; Tower operating income increased to $2.2 from $1.1.
• Broadband revenue grew 3.3% in Q2 and 4.7% in the six-month period, supported by subscriber growth and enterprise fiber. Broadband operating costs increased with Glo Fiber and Beam launches and network expansion.
• Interest expense declined 32.9% in Q2 and 27.3% for six months, principally due to lower LIBOR, a 25-basis-point reduction in the applicable base rate, and debt repayments.
• Six-month accumulated other comprehensive loss was $5.7, primarily reflecting the decline in fair value of interest-rate swaps as LIBOR fell.

Outlook, risks, contingencies, and unusual items

• T-Mobile/Sprint relationship: Negotiations on a mutually acceptable continued-affiliation arrangement had not concluded by June 30. T-Mobile had until August 31, 2020 to exercise an option to buy Shentel’s wireless assets for 90% of defined “Entire Business Value,” determined through the agreement’s appraisal process. If it did not, Shentel could then elect to buy legacy T-Mobile network and subscriber assets in its service area. The outcome could materially change operations and financial statements. T-Mobile announced plans to begin brand, rate-plan, sales, and network integration on August 2; management said future wireless results were likely to be adversely affected, with the impact uncertain.
• During Q2, a Sprint collection-policy change accelerated about 4,400 postpaid nonpayment disconnects into reported subscriber results. Excluding these, postpaid net additions would have been 3,021 for Q2 and 6,598 for six months. COVID-19 also reduced wireless store traffic and gross additions; broadband benefited from stronger demand, including record data net additions of 6,000.
• COVID-19 effects included $1.2 of wireless contra-revenue tied to deferred customer disconnections, $1.4 of prepaid customer credits, and $1.1 of payroll expense for idled or public-facing employees. Management could not predict the pandemic’s future effect on financial results or cash flows.
• Management expected cash, operating cash flow, and revolver availability to cover anticipated liquidity needs for the next 12 months. No specific earnings or revenue guidance was provided. Future capital needs depend in part on network investment and the T-Mobile outcome.
• Variable-rate debt principal was $715.0, with swaps covering $317.6, or about 44.4%. A 1-percentage-point rate increase would add about $7.0 to annual interest expense before swap effects. The LIBOR transition after 2021 creates uncertainty about borrowing costs and hedge effectiveness.
• The company corrected immaterial prior-period errors related to demo handsets and property, plant, and equipment; the corrections increased 2019 basic and diluted EPS by $0.02. It also reported that previously identified material weaknesses in internal control over financial reporting remained unremediated and disclosure controls were ineffective as of June 30, 2020.
• The company said pending legal claims were not probable or reasonably possible of a material loss. It adopted new credit-loss and cloud-computing implementation-cost accounting standards without significant financial-statement impact.

Most important facts for investors to verify

• Whether T-Mobile exercised its wireless-asset purchase option by August 31, and the resulting transaction or affiliation terms, valuation, and capital structure.
• How much of Q2’s earnings growth reflects the $21.0 retroactive travel-fee settlement, and how wireless performance changes as T-Mobile integrates Sprint operations.
• Subscriber trends after adjusting for the accelerated nonpayment disconnects and the effects of COVID-19 on wireless sales, customer collections, and broadband demand.
• Progress in remediating internal-control material weaknesses and whether future filings report effective controls.
• Debt, liquidity, capital spending, and interest-rate exposure, including the effect of the LIBOR transition and continued broadband network expansion.