Shenandoah Telecommunications Company — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015. Shentel provides wireless service as a Sprint affiliate, cable services, wireline services and fiber connectivity. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $85.2 | $82.3 | $255.2 | $244.1 |
| Operating income | $15.1 | $14.1 | $52.4 | $45.6 |
| Net income | $8.0 | $8.0 | $28.8 | $25.2 |
| Diluted EPS | $0.33 | $0.33 | $1.17 | $1.04 |
| Adjusted OIBDA (non-GAAP) | $36.8 | $33.3 | $110.8 | $97.9 |
Revenue increased 3.6% in Q3 and 4.5% year to date; operating income rose 6.7% and 14.8%, respectively. Net income was essentially flat in Q3 but increased 14.0% for the first nine months. Operating margin was approximately 17.7% in Q3 (17.2% prior year) and 20.5% year to date (18.7% prior year); these percentages are calculated from reported figures.
- Segment trends: Cable revenue grew 16.2% in Q3 and 15.3% year to date, driven chiefly by internet subscriber growth, higher-speed plans and pricing. Cable continued to report an operating loss, though it narrowed to $0.6 million in Q3 and $1.7 million year to date. Wireless revenue declined 1.1% in Q3 but rose 1.2% year to date; subscriber growth and lower handset costs helped operating income. Wireline revenue increased, but operating income declined 10.5% in Q3 and 6.2% year to date.
- Cash flow and investment: Nine-month operating cash flow was $83.1 million, versus $91.3 million. Capital expenditures were $39.6 million, versus $51.2 million. Operating cash flow less capital expenditures was approximately $43.5 million, compared with $40.1 million. Cash increased to $87.3 million from $68.9 million at year-end 2014.
- Debt and liquidity: Debt totaled $207 million at September 30, including $23 million current and $184 million long term. The effective annualized interest rate after the swap was approximately 3.15%. The company reported compliance with debt covenants; leverage ratio was 1.44 against a maximum of 2.50, and debt service coverage was 4.08 against a minimum of 2.50.
- Margins and costs: Nine-month operating expenses increased 2.2%, slower than revenue growth. Lower wireless handset costs were partly offset by higher selling, general and administrative costs, depreciation, cable programming and network costs. The reported effective tax rate was 40.0% for the first nine months.
Material developments, outlook and risks
- nTelos transaction: Shentel agreed to acquire nTelos for $9.25 per share in cash, with stated equity value of approximately $208 million, and to repay its outstanding debt, reported at $523 million as of June 30, 2015. The transaction was expected to close by early 2016. Related Sprint arrangements are intended to add approximately 581,000 customers to Shentel’s affiliate base and extend the affiliate relationship through 2029. Shentel reported $3.2 million of acquisition expenses year to date, including $2.1 million in Q3.
- Planned financing: A fully underwritten credit commitment of up to $960 million was arranged to finance the transaction, refinance existing debt and support network investment. At closing, Shentel expected approximately $810 million of long-term debt and $75 million of cash; the revolver and an additional $75 million delayed-draw term loan were not expected to be drawn at close. Debt service requirements would increase after closing.
- Unusual depreciation adjustment: A programming logic error in the fixed-asset system led to additional depreciation expense of $2.6 million in Q3 and $2.0 million for the nine-month period. Management said most of the correction affected Wireless. Depreciation also increased because of network investment.
- Management outlook: The company projected 2015 capital spending of approximately $70 million, below its $74.8 million budget, and expected an effective tax rate of about 40% for the remainder of 2015. Management believed existing cash, operating cash flow and available borrowings would fund planned needs for at least 12 months. A wireline broadband offering expansion was planned for Q4 2015; management could not predict its operating impact and anticipated possible declines in telephone access lines.
- Key risks: Wireless operations depend on Sprint for billing, collections, customer care and other services; Sprint remits approximately 57% of Shentel’s operating revenue. Other stated exposures include customer demand, competition, regulation, technology, execution of the nTelos transaction, increased post-acquisition debt service and interest-rate movements. A 1 percentage-point rate increase would add approximately $1.98 million in annual interest expense before the swap; $49.8 million of variable-rate debt was unhedged. The filing reported no material changes to the risk factors in the 2014 Form 10-K.
- Shareholder actions: The board declared a $0.48-per-share dividend payable December 1, 2015, and a two-for-one stock split effective for holders of record December 31, 2015.
Important facts for investors to verify
- Completion timing, financing terms and integration assumptions for the nTelos acquisition, including the expected debt and cash balances at closing.
- Whether the Sprint customer transition, fee reductions and affiliate agreement extension deliver the expected economics and customer growth.
- Wireless postpaid and prepaid subscriber trends, churn, and the revenue and cost effects of handset financing and leasing plans.
- Whether Cable subscriber growth and pricing can offset rising programming costs, and whether Wireline fiber investments produce adequate returns.
- The financial-statement effect and period attribution of the fixed-asset depreciation correction, and the company’s actual 2015 capital spending.
- Interest-rate exposure and covenant headroom as borrowing increases; the filing states disclosure controls were effective and no material internal-control changes occurred.