Shenandoah Telecommunications Company (Shentel) — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 26, 2016. Shentel provides wireless, cable, wireline, broadband, voice and fiber services across parts of Virginia, West Virginia, Pennsylvania and Maryland. The filing’s historical share and per-share data reflect a two-for-one stock split effective December 31, 2015.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $342.5 million | $326.9 million | +4.8% |
| Operating income | $74.1 million | $61.9 million | +19.6% |
| Operating margin | 21.6% | 18.9% | +2.7 percentage points |
| Net income | $40.9 million | $33.9 million | +20.6% |
| Diluted EPS | $0.83 | $0.70 | +18.6% |
| Cash from operations | $119.3 million | $115.0 million | +$4.3 million |
| Capital expenditures | $69.7 million | $68.2 million | +$1.5 million |
| Cash and equivalents | $76.8 million | $68.9 million | +$7.9 million |
| Total debt, including current maturities | $201.3 million | $224.3 million | -$23.0 million |
Net margin was 11.9%, versus 10.4% in 2014. Cash from operations less capital expenditures was approximately $49.6 million. Current assets were $127.9 million and current liabilities $61.2 million. The company reported covenant compliance: leverage ratio 1.35 against a maximum 2.00; debt-service coverage 4.24 against a minimum 2.50; and equity-to-assets 46.1% against a minimum 35.0%. The filing gives an annualized effective interest rate of approximately 3.21% after the interest-rate swap.
Fourth-quarter 2015 revenue was $87.3 million, operating income $21.7 million and net income $12.1 million, compared with $82.8 million, $16.3 million and $8.6 million, respectively, in fourth-quarter 2014.
Material changes and operating trends
- Cable: Segment revenue rose 15.5% to $97.6 million, and operating income improved to $0.5 million from a $10.1 million loss. Internet customers and higher-speed plan mix supported growth; video customers declined and programming and retransmission costs increased.
- Wireless: Segment revenue rose 0.6% to $208.8 million and operating income increased 7.4% to $75.0 million. Postpaid customers grew 8.6% to 312,512, while prepaid customers fell 1.6% to 142,840. Postpaid service revenue was pressured by lower-revenue handset financing plans; lower handset costs helped segment results.
- Wireline: Segment revenue increased 7.0% to $67.4 million and operating income rose 4.4% to $16.4 million, with growth in carrier access, fiber and internet revenues. Telephone access lines declined to 20,252 from 21,612.
- Adjusted OIBDA, a non-GAAP measure defined by the company, increased to $150.9 million from $132.1 million. Review the filing’s reconciliation and stated limitations when comparing this measure.
Outlook, transactions and risks
- Pending nTelos acquisition and Sprint transactions: The proposed acquisition had an indicated equity value of approximately $208 million; Shentel also planned to repay nTelos debt of about $520 million as of year-end. The transactions were subject to conditions, including regulatory approval, and were expected to close in late Q1 or early Q2 2016. The termination deadline was extended to June 28, 2016. The filing describes new conditional financing facilities of up to $960 million in aggregate, not year-end borrowings.
- Customer and systems migration could extend through 2017. Shentel warned that aggregate non-recurring integration costs could be as much as twice earlier estimates. It also disclosed merger-related transaction costs in 2015 and potential termination fees if the deal failed.
- 2016 capital expenditures were revised to an expected $218.5 million, including $120.3 million for the nTelos wireless network. Excluding the acquisition’s effects, management said existing cash, operating cash flow and available credit were expected to fund planned spending and obligations for at least 12 months.
- Key exposures include reliance on Sprint for a substantial portion of revenue—56.3% in 2015—and for wireless billing, customer care and other services; intense wireless and video competition; declining legacy telephone lines; programming costs; and potential reductions in regulated access or universal-service revenues.
- Other uncertainties include new broadband/net-neutrality rules and litigation, a West Virginia inquiry into internet-provider practices, and regulatory approvals and integration execution for the pending transactions. Two putative class actions challenged the merger; Shentel said it considered the claims without merit and intended to defend them. Management characterized ordinary-course claims as not expected to materially affect the company.
- Dividends were $0.24 per share in 2015. The credit agreement restricts future dividends. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether the nTelos acquisition and Sprint transactions closed, and the final purchase, debt repayment, financing and regulatory terms.
- Actual integration timeline and costs versus the filing’s warning of a potentially extended migration and materially higher one-time costs.
- Performance of the 2016 capital program, particularly the planned wireless-network investment, and the effect on cash generation and leverage.
- Trends in Sprint-related revenue and postpaid wireless economics, including the effects of handset financing, churn and the January 2016 fee reallocation.
- Whether cable growth and improved segment results persist despite declining video subscribers and rising programming costs.
- Any material developments in the merger litigation, regulatory matters, access-charge or universal-service rules, and broadband regulation.