Shenandoah Telecommunications Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting changes
Shenandoah Telecommunications provides wireless services as a Sprint PCS affiliate, cable video/internet/voice services, and wireline voice, broadband, video, and fiber services. Beginning in 2014, the company moved Shenandoah County video operations from Cable to Wireline and changed allocation of certain corporate expenses to Other; comparative segment data was recast.
Financial performance
- Revenue: $80.5, up 5.8% from $76.0. Wireless revenue rose 6.1% to $51.1, Cable rose 10.6% to $20.5, and Wireline rose 4.5% to $15.8, including intersegment revenue.
- Profit: Operating income was $15.7, up 3.1%; net income was $8.6, up 3.2%; diluted EPS was $0.36 versus $0.35. Approximate operating margin was 19.5%, compared with 20.0% in Q1 2013.
- Costs: Operating expenses increased 6.5% to $64.8, faster than revenue. Depreciation and amortization rose $1.4, primarily following completion of the Network Vision upgrade. Interest expense declined $0.1 to $2.0.
- Adjusted OIBDA: $31.7 versus $29.6, a non-GAAP measure defined by the company; it excludes depreciation and amortization, asset-sale gains/losses, and share-based compensation, among other limitations.
- Cash flow: Operating cash flow was $32.6 versus $22.7. Capital spending was $17.2 versus $26.0; investing cash use totaled $17.1. Cash increased $15.4 during the quarter to $53.7. Higher operating cash flow principally reflected tax-related working-capital movements, including net tax refunds in 2014 versus taxes paid in 2013.
- Balance sheet and liquidity: Total assets were $596.6 at March 31, versus $597.0 at year-end. Current assets were $102.3 and current liabilities $41.1. Debt totaled $230.0, including $11.5 of current maturities; shareholders’ equity was $243.6.
- Debt and covenants: The company reported a 3.40% annualized weighted-average interest rate after swaps, reduced to an effective 2.71% after lender patronage credits. It had $50 available under its revolver and potential incremental term loans up to $100, subject to restrictions. It reported compliance with covenants: leverage ratio 1.87 versus a 3.00 maximum; debt-service coverage 11.70 versus a 2.50 minimum; equity-to-assets 40.8% versus a 32.5% minimum.
Material changes and segment trends
- Wireless: Revenue increased $2.9, driven by postpaid data and subscriber growth and prepaid growth. Average postpaid and prepaid subscribers grew 4.3% and 5.3%, respectively, year over year. Postpaid net service revenue growth was partly offset by Sprint increasing its net service fee from 12% to 14% effective August 2013, a stated impact of about $0.9 for the quarter. Prepaid monthly churn increased to 4.27% from 3.87%; postpaid churn improved to 1.73% from 1.87%.
- Cable: Revenue increased $2.0, supported by 5.8% average revenue-generating-unit growth, rate increases, and higher-tier service selections. The segment remained loss-making at the operating level, with a $2.0 loss versus a $2.3 loss. Video customers declined year over year, while high-speed internet customers increased.
- Wireline: Revenue increased $0.7 and operating income increased $0.5 to $4.4. Fiber lease revenue increased, while access revenue and certain transition-service revenue declined. Telephone access lines and video customers continued to fall year over year.
- Consolidated comprehensive income was $8.3 versus $8.9, reflecting a $0.3 after-tax unrealized loss on the cash-flow hedge in 2014 versus a gain in 2013.
Outlook, risks, and unusual items
- Capital plan: The 2014 capital expenditure budget was $74, including $22 for network expansion and $16 of success-based spending dependent on new revenues. About $17 of the budget represented projects delayed from 2013. Management expected cash, operating cash flow, and available credit to fund planned spending and obligations for at least the next 12 months.
- Wireless plan change: Sprint Framily plans began being sold in April 2014. Management expected the no-handset-subsidy plan to change the mix of service revenue, equipment revenue, and cost of goods sold beginning in Q2; the scale depends on customer selection.
- Interest-rate exposure: Debt was variable-rate. A 1 percentage-point rate increase was estimated to add about $2.3 annually to interest expense before swap effects. A $174.6 notional cash-flow swap covered about 76% of debt through 2019; management estimated it would add $1.6 to interest expense over the next 12 months. The filing also reported $55.4 of variable-rate debt without interest-rate protection.
- Key dependencies and risks: Wireless operations rely substantially on Sprint for billing, collections, customer care, and other services; Sprint remitted approximately 59% of company revenue. Other risks include competition, regulation, technology changes, customer growth, capital needs, and interest rates. Management cited no material change to previously reported risk factors.
- Other items: A one-time $0.4 gain related to Network Vision disposal costs affected Wireless costs. Maryland tax audits for 2009–2011 and a Pennsylvania audit for 2009 were ongoing. Management reported effective disclosure controls and no material first-quarter changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether Wireless subscriber and revenue growth continues, and how Sprint’s service-fee terms and Framily plan affect net revenue and handset economics.
- Whether Cable’s customer growth and higher service revenue can improve its operating profitability despite video subscriber losses and rising programming costs.
- Progress against the $74 capital budget, expected returns on network expansion, and the effect of delayed projects and success-based spending on cash flow.
- Debt covenant headroom, refinancing or repayment requirements, and actual interest expense under changing rates and the existing swap.
- Sprint’s continued performance and the reliability of information it supplies, given the company’s reliance on Sprint for a substantial portion of revenue reporting and operations.