Business context and reporting period
Shenandoah Telecommunications Company (Shentel) filed this Form 10-K for the fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Shentel provides wireless service as a Sprint PCS affiliate and offers cable, wireline, broadband, voice, fiber-leasing and tower-leasing services across parts of Virginia, West Virginia, Pennsylvania and Maryland.
Wireless is the largest business: about 58.5% of 2014 operating revenue was generated by or through Sprint and its customers. The company had 287,867 postpaid and 145,162 prepaid wireless customers at year-end. Management changed segment reporting in 2014, moving Shenandoah County video operations to Wireline and recording certain shared corporate costs in Other; prior periods were recast.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $326.9 million | $308.9 million |
| Operating income | $61.9 million | $55.4 million |
| Net income | $33.9 million | $29.6 million |
| Diluted earnings per share | $1.39 | $1.23 |
| Net cash provided by operations | $115.0 million | $94.3 million |
| Capital expenditures | $68.2 million | $117.0 million |
| Cash and cash equivalents at year-end | $68.9 million | $38.3 million |
| Total debt at year-end | $224.3 million | $230.0 million |
Revenue rose 5.8%, operating income 11.8%, and net income 14.5% year over year. Operating margin was approximately 18.9% versus 17.9% in 2013; net margin was approximately 10.4% versus 9.6% (calculated from reported figures). Adjusted OIBDA, a non-GAAP measure, was $132.1 million, up from $118.6 million. Interest expense was $8.1 million; the effective tax rate was 39.5%.
Operating cash flow less capital expenditures was approximately $46.8 million. The company had $50 million available under its revolver, with no borrowing outstanding. Its variable-rate term loan had a 2.67% stated rate at year-end and an approximately 3.40% annualized effective rate after the swap. About 76% of debt was covered by an interest-rate swap. Covenant ratios were within limits: leverage 1.67x, debt-service coverage 8.57x, and equity-to-assets 41.7%.
Fourth-quarter 2014 revenue was $82.8 million, operating income $16.3 million and net income $8.6 million; diluted EPS was $0.35. Fourth-quarter 2013 figures were $78.0 million, $12.4 million, $6.7 million and $0.27, respectively.
Material changes versus prior comparable period
- Wireless revenue grew $9.3 million, supported by postpaid and prepaid subscriber growth. The Sprint postpaid net service fee had risen to its 14% maximum in August 2013, reducing 2014 postpaid revenue by about $2.1 million compared with a no-increase basis.
- Cable revenue increased $8.7 million, while the segment remained loss-making: operating loss was $10.1 million, essentially unchanged from 2013. Video customers declined, but internet and voice customers and total revenue-generating units increased. Higher programming costs and network upgrade expenses weighed on results.
- Wireline revenue increased $3.6 million, mainly from fiber facility leases; operating income rose to $15.7 million. Telephone access lines continued to decline, from 22,106 to 21,612.
- Operating expenses increased 4.5%, including higher programming, maintenance, disposal and depreciation costs. Depreciation and amortization increased to $65.9 million, partly reflecting completed network upgrades.
- Capital spending fell substantially from the prior year’s Network Vision build-out. Cash increased by $30.6 million during 2014.
Outlook, commentary, risks and unusual items
- Management budgeted $74.8 million of capital expenditures for 2015: $24.3 million Wireless, $21.8 million Cable, $20.9 million Wireline and $7.8 million Other. It expects cash, operating cash flow and, if needed, credit-facility borrowing to cover planned spending and obligations for at least 12 months. No revenue or earnings forecast was provided; management estimated a 2015 effective tax rate of about 39.5%.
- Key risks include intense competition and pricing pressure across wireless, video and broadband; declining legacy telephone lines; rising programming costs; and regulatory reductions to access charges or universal-service support.
- Shentel depends materially on Sprint for its wireless brand, network, billing, collections, customer care and other support. Changes in Sprint’s performance, pricing, technology or service delivery could affect Shentel’s revenue and costs.
- Debt is predominantly variable rate. The filing estimates that a 1 percentage-point rate increase would add about $2.2 million to annual interest expense before the swap’s offset. Debt covenants, dividend limitations and secured-credit restrictions constrain financial flexibility.
- The filing describes uncertainty over broadband/net-neutrality regulation, including FCC rules adopted February 26, 2015, and notes possible legal challenges. It also reports a West Virginia Attorney General inquiry into ISP marketing and performance; the outcome and impact were uncertain.
- Potential intercarrier-compensation changes and possible refunds tied to NECA tariffs remain uncertain. The company also reports routine interconnection and compensation disputes, but Item 3 lists no material legal proceedings.
- Unusual prior-period comparability items include an $11.8 million Sprint reimbursement for prepaid-cost calculation errors recorded in 2012 and a $11.0 million goodwill impairment in 2012. Neither was recorded in 2014. Cable franchise rights were carried at $64.1 million; estimated fair value exceeded carrying value by only about $5.3 million at year-end.
Most important facts for investors to verify
- Whether subscriber growth and service revenue can continue amid wireless price competition, cable video customer declines and falling wireline access lines.
- The economics and terms of Shentel’s Sprint relationship, including the 58.5% revenue concentration and fees retained by Sprint.
- Whether cable profitability improves despite programming-cost inflation, and whether the franchise-rights valuation remains supportable.
- 2015 capital spending, operating cash flow, debt repayments and covenant headroom; confirm the impact of rates on unhedged borrowings.
- Outcomes of regulatory proceedings and the West Virginia inquiry, including any effect on access revenue, broadband obligations or costs.
- Dividend capacity under the credit agreement and the implications of the higher 2014 dividend per share ($0.47, versus $0.36 in 2013).