Business context and reporting period
Shenandoah Telecommunications Company (Shentel) filed this unaudited Form 10-Q for the quarter ended September 30, 2016. It provides wireless, cable, wireline, fiber and tower services. Results include nTelos only from its May 6, 2016 acquisition date, so comparisons with 2015 are not on a like-for-like basis.
On May 6, Shentel acquired nTelos for approximately $665.4 million in cash, net of cash acquired, and exchanged acquired spectrum and customer rights with Sprint for expanded affiliate territory and related contract rights. The expanded Sprint affiliate agreement runs through 2029.
Financial performance and position
Amounts below are in millions except per-share data. Q3 refers to the three months ended September 30; nine-month comparisons are for the periods ended September 30.
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $156.8 | $85.2 | $379.7 | $255.2 |
| Operating income (loss) | $(3.9) | $15.1 | $10.3 | $52.4 |
| Operating margin | (2.5%) | 17.7% | 2.7% | 20.5% |
| Net income (loss) | $(7.6) | $8.0 | $(0.7) | $28.8 |
| Diluted EPS | $(0.16) | $0.16 | $(0.01) | $0.59 |
| Operating cash flow | Not presented separately | Not presented separately | $105.8 | $83.1 |
For the first nine months, capital expenditures were $102.9 million, versus $39.6 million a year earlier. Operating cash flow less reported capital expenditures was approximately $3.0 million, before acquisition spending and other investing items.
At September 30, cash and cash equivalents were $27.5 million, with an additional $2.2 million of restricted cash. Total assets were $1.434 billion and shareholders’ equity was $298.3 million. Debt was $828.9 million before $19.4 million of unamortized loan fees, or $809.6 million net; the reported annualized interest measures vary by calculation, with the debt note citing approximately 3.83% and MD&A approximately 4.16% after swaps and loan costs. The company reported compliance with its debt covenants: leverage ratio 2.78 versus a 3.75 maximum and debt-service coverage ratio 4.51 versus a 2.00 minimum.
Management’s non-GAAP adjusted OIBDA was $73.7 million for Q3 and $170.2 million for the nine months, compared with $36.8 million and $110.8 million, respectively, in 2015. Continuing OIBDA, which deducts the benefit of waived Sprint management fees, was $64.2 million and $154.6 million. These company-defined measures exclude specified expenses and are not substitutes for GAAP results.
Material changes versus the prior comparable period
- Revenue rose 84.1% in Q3 and 48.8% for the nine months, primarily reflecting the nTelos acquisition and expanded Sprint territory. Wireless revenue increased 132.3% in Q3 and 72.7% for the nine months.
- Profitability weakened materially: Q3 operating results shifted to a loss, and nine-month net income shifted to a small loss. Higher acquisition-related integration costs, depreciation and amortization, and interest expense were key factors.
- Q3 operating expenses increased to $160.8 million from $70.1 million; nine-month expenses rose to $369.4 million from $202.8 million. Reported integration and acquisition expense was $15.3 million in Q3 and $35.8 million for the nine months.
- Interest expense increased to $8.8 million in Q3 from $1.8 million and to $16.4 million for the nine months from $5.7 million, reflecting acquisition-related borrowing.
- Wireless operating indicators reflect the expanded footprint: postpaid subscribers were 718,785 at September 30, versus 303,527 a year earlier. Average monthly churn increased to 2.01% for postpaid and 5.43% for prepaid in Q3, from 1.40% and 4.72%, respectively.
- Cable segment revenue grew 12.9% in Q3 and 11.9% for the nine months, supported by subscriber growth and higher revenue per subscriber. Wireline revenue increased 8.4% and 12.9%, respectively, primarily from fiber and access contracts.
Outlook, management commentary and risks
- Management estimated total nTelos integration and acquisition expenses of $106–$126 million, excluding approximately $24 million of debt issuance costs. It reported $43.9 million incurred through September 30, including amounts classified in expense categories beyond the separate integration and acquisition line.
- The 2016 capital-spending estimate was reduced from $218.5 million to $179.4 million. Management said cash on hand, operating cash flow and expected borrowing availability should fund planned capital expenditures, debt service and other needs for at least 12 months.
- Management identified nTelos integration, realizing anticipated synergies, customer migration, and reliance on Sprint for billing, collections, customer care and related data as important execution and operating risks. Integration of legacy nTelos systems and customers was expected to continue into 2017.
- Debt is largely variable-rate. The company estimated that a 1 percentage-point rate increase would add approximately $8.2 million to annual interest expense before swaps; swaps cover approximately half of expected outstanding variable-rate debt. The credit agreement includes leverage, coverage and minimum-liquidity requirements.
- Other considerations include ongoing network investment needs, competition and customer retention, operating lease commitments of $485.2 million, and pension and postretirement obligations assumed with nTelos. The company said no off-balance-sheet arrangements existed other than operating leases.
- The filing gives no specific full-year revenue or earnings guidance. The Board approved a $0.25-per-share dividend payable December 1, 2016, with an expected payout of approximately $12.2 million before reinvestments.
Important facts for investors to verify
- Review the final nTelos purchase-price allocation and valuation adjustments; the filing says the allocation remained preliminary.
- Track actual integration spending against the $106–$126 million estimate, and progress and costs for migrating legacy nTelos customers to Sprint systems.
- Assess whether acquired wireless subscribers, churn, service economics and integration synergies support the acquisition’s expected returns.
- Monitor debt amortization, variable interest exposure, covenant headroom, liquidity and the funding required for planned network investment and dividends.
- Consider the reported earnings alongside non-GAAP OIBDA, noting the adjustments and that the measures do not reflect capital spending, interest, taxes or all recurring costs.