Shenandoah Telecommunications Company — Q3 2017 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2017. Shentel provides wireless services as a Sprint affiliate, cable services, and wireline and fiber services. Unless stated otherwise, financial amounts below are in U.S. dollars; millions are rounded.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $151.8m | $156.8m | $458.9m | $379.7m |
| Operating income (loss) | $9.5m | $(3.9)m | $28.4m | $10.3m |
| Net income (loss) | $3.5m | $(7.6)m | $5.8m | $(0.7)m |
| Diluted earnings (loss) per share | $0.07 | $(0.16) | $0.12 | $(0.01) |
| Operating margin | 6.2% | (2.5)% | 6.2% | 2.7% |
Q3 operating revenue fell 3.2%, primarily because of lower wireless service and equipment revenue. Operating expenses declined 11.5%, largely reflecting lower nTelos integration costs, and the company moved from an operating loss to operating income. For the first nine months, revenue increased 20.9%, mainly because 2017 included nine months of nTelos operations versus approximately five months in 2016.
- Cash flow: Net cash from operations was $158.7m for the first nine months, compared with $95.4m in 2016. Investing cash outflow was $115.1m, including $109.4m of capital expenditures; financing cash outflow was $4.4m. Cash increased $39.3m to $75.5m from year-end 2016.
- Debt and interest: Gross term-loan debt was $848.6m ($833.0m net of unamortized loan fees). The effective annualized rate, including swaps and loan costs, was approximately 4.07%. Interest expense was $28.3m for the nine-month period, up from $16.4m. About half of debt was hedged; management estimated a 1 percentage-point market-rate increase would add approximately $8.3m to annual interest expense before swap effects.
- Liquidity and covenants: Cash was $75.5m and total current assets were $173.2m versus current liabilities of $129.5m. Reported covenant liquidity was $149.2m against a $25m minimum; leverage was 2.93x against a 3.75x maximum, and debt-service coverage was 3.88x against a 2.00x minimum. The company reported compliance with all covenants.
- Non-GAAP operating measures: Adjusted OIBDA was $66.9m in Q3 (versus $73.7m) and $209.9m for nine months (versus $170.2m). Continuing OIBDA was $57.9m in Q3 (versus $64.2m) and $182.8m for nine months (versus $154.6m). These company-defined measures are not substitutes for GAAP results.
Material changes versus comparable periods
- Q3 Wireless segment revenue declined $7.6m year over year; management cited lower postpaid revenue per customer, increased Sprint service fees related to nTelos migrations, reduced handset sales, and lower legacy nTelos regulatory and insurance billings. Cable revenue rose $2.5m and Wireline revenue rose $1.1m.
- Q3 integration and acquisition costs were $2.9m, compared with $20.2m a year earlier. For the first nine months, these costs were $15.4m versus $43.9m. Management attributed the decline to the winding down of nTelos migration and integration work.
- Nine-month interest expense rose $11.9m, reflecting a longer period with acquisition-related borrowings and higher LIBOR. The year-over-year revenue and expense comparisons also reflect the different periods of nTelos ownership.
- At September 30, 2017, Shentel reported 727,954 postpaid and 224,609 prepaid retail PCS subscribers. Postpaid net additions were negative in both Q3 and the nine-month period; average monthly postpaid churn increased year over year to 2.19% in Q3 and 2.08% for nine months.
Outlook, commentary, risks and unusual items
- Capital spending: Management revised its 2017 capital expenditure expectation down by $14.4m, from $155.2m to $140.8m; $109.4m had been spent through September. It planned approximately $32m over three years to upgrade and expand wireless coverage in the newly added territory. Management expected available cash, operating cash flow and credit-facility borrowings to fund planned needs for at least the next 12 months.
- Integration and expansion: Management expected approximately $16.7m of nTelos-related integration and acquisition expense in 2017; $15.4m had been incurred through September. The Sprint affiliate territory expansion added approximately 25,000 customers and authorization to serve more than 6 million POPs.
- Key operating dependencies and risks: Wireless operations rely on Sprint for billing, collections, customer care, certain network operations and financial information. The company also cited sensitivity to interest rates, customer demand, regulatory and technology changes, competition, and its ability to maintain customer growth and execute marketing and network plans.
- Controls: Management stated disclosure controls remained ineffective at September 30 because previously identified material weaknesses in internal control over financial reporting had not yet been remediated. Management nevertheless concluded the interim financial statements fairly stated the company’s financial position, results and cash flows in all material respects.
- Accounting and unusual items: Shentel plans to adopt the new revenue standard on January 1, 2018 using the modified retrospective method; it expected no significant earnings effect but anticipated possible changes in cost presentation and disclosures. Adoption of the lease standard in 2019 is expected to materially affect the financial statements through recognition of lease assets and liabilities. The filing also corrected an immaterial 2016 cash-flow presentation error, reducing both operating cash flow and investing cash outflow by approximately $10.4m without changing net cash movement or beginning and ending cash.
- Dividend: The board approved a $0.26-per-share dividend payable December 1, 2017, with an expected total payout of approximately $12.8m.
Important facts for investors to verify
- Whether wireless subscriber trends, postpaid churn and Sprint-related service fees improve or continue to pressure Wireless revenue and margins.
- Whether nTelos integration costs finish near management’s 2017 estimate and whether migration-related savings persist after Sprint fees and other costs.
- Progress against the $140.8m 2017 capital plan and the planned multi-year wireless expansion investment, including the effect on cash generation and debt repayment.
- Debt covenant headroom, variable-rate exposure and the effectiveness and coverage of interest-rate swaps as rates and debt balances change.
- Remediation of the disclosed internal-control material weaknesses and the reliability and timeliness of financial data received from Sprint.
- Actual financial-statement effects of the 2018 revenue-standard and 2019 lease-standard adoptions; the filing says the lease standard is expected to have a material impact but does not quantify it.