Shenandoah Telecommunications Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited consolidated results. Shentel provides wireless, cable, wireline, fiber and tower services, including wireless service as a Sprint affiliate. Comparisons below are with Q1 2015 unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $92.6 million | $84.3 million | +9.8% |
| Operating income | $21.3 million | $18.5 million | +15.0% |
| Net income | $13.9 million | $10.3 million | +35.0% |
| Diluted EPS | $0.28 | $0.21 | +33.3% |
| Operating margin | 23.0% | 22.0% | +1.0 percentage point |
| Cash from operations | $43.2 million | $23.8 million | +$19.3 million |
| Capital expenditures | $20.5 million | $9.5 million | +$11.0 million |
Adjusted OIBDA, a non-GAAP measure, was $40.4 million versus $35.8 million, with a margin of approximately 43.7% versus 42.5%. Management cautions that this measure does not replace GAAP results and excludes, among other things, capital expenditures, interest and taxes.
Revenue growth reflected higher wireless, cable and wireline results. Cable revenue rose 13.4% and segment operating income improved to $0.6 million from a $0.7 million loss. Wireline revenue rose 17.9% and operating income increased 33.1% to $5.1 million. Wireless revenue rose 7.6%, but segment operating income increased only 2.5% to $19.9 million as expenses grew faster.
Liquidity, debt and capital spending
- Cash and cash equivalents were $89.2 million at March 31, up from $76.8 million at December 31, 2015. Current assets were $129.0 million and current liabilities $55.0 million.
- Debt was approximately $194.0 million net of unamortized loan fees at quarter-end; the filing also reports $195.5 million of variable-rate debt before those fees. The effective annualized rate after the swap and loan costs was approximately 3.48%. Scheduled quarterly principal payments are $5.75 million; the remaining expected balance of about $120.75 million is due September 30, 2019.
- The company was in compliance with debt covenants: leverage ratio 1.27 against a maximum of 2.00; debt-service coverage 4.36 against a minimum of 2.50; and equity-to-assets ratio 48.2% against a minimum of 35.0%.
- 2016 capital expenditure budget was $218.5 million, including $120.3 million for wireless network upgrades and expansion related to nTelos. Management expected cash, operating cash flow and available borrowing to fund the acquisition, capital plans and other obligations for at least the next twelve months.
Material changes and notable items
- Effective January 1, 2016, Sprint’s fees on postpaid revenue declined, while certain items previously covered by those fees became separately settled. The change increased reported wireless revenue by $4.9 million and expenses by $3.6 million, for a net positive effect. The company remains reliant on Sprint for key operating functions and data used to record a substantial portion of revenue.
- The effective tax rate fell to 31.4% from 40.0%, primarily due to discrete tax benefits from early adoption of new share-based compensation accounting guidance. This contributed to net income growth.
- Cash from operations increased substantially, partly due to higher net income and timing of receipts and payments, including prepaid assets, payables and deferred revenue. Investing cash use was $22.8 million, including $20.5 million of property and equipment spending and $2.5 million for an acquisition.
- On January 1, 2016, Shentel acquired Colane Cable Company assets, adding 3,299 video, 1,405 internet and 302 voice customers.
- Q1 included $0.3 million of nTelos acquisition-related expenses. The FCC granted the remaining regulatory approval on April 15, after quarter-end; the parties expected the transaction to close in May 2016.
Outlook, risks and contingencies
Shentel agreed to acquire nTelos for $9.25 per share in cash, with stated equity value of approximately $208 million, and to pay off nTelos debt of $520 million reported at December 31, 2015. The company arranged $960 million of credit facilities to finance the transaction, refinance existing debt and fund network upgrades. At closing, it expected total long-term debt of approximately $785 million; the revolver and an additional $100 million delayed-draw term loan were not expected to be drawn at closing. The transaction will expand the Sprint affiliate footprint, and the Sprint affiliate relationship was extended five years through 2029.
Interest-rate exposure remains material: the company estimated a 1 percentage-point increase in rates would add about $1.9 million to annual interest expense before the swap; approximately 76% of variable-rate debt was covered by the swap. The swap was expected to add approximately $0.8 million to interest expense over the next twelve months under then-current rates. Other risks include Sprint’s performance and reporting, competition and customer retention, regulatory or technology changes, execution of the nTelos integration and planned network investment, and the need for future financing. Management reported no material change in the risk factors from its 2015 Form 10-K. No material litigation contingency amounts are specified in the supplied filing text.
Important facts for investors to verify
- Whether and when the nTelos transaction closed, its final financing terms, total post-closing debt and integration costs.
- Whether the Sprint fee and separately settled expense changes continue to benefit wireless economics, and the accuracy and timeliness of Sprint-provided operating and financial data.
- Whether the $218.5 million capital budget is achieved, particularly the nTelos-related wireless investment, and how spending affects free cash flow.
- Whether cable subscriber growth and wireline fiber revenues persist, and whether wireless subscriber additions and churn improve.
- The sustainability of Q1’s lower tax rate and the extent to which operating cash flow reflects recurring performance versus working-capital timing.