Shenandoah Telecommunications Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results. Shenandoah provides wireless, cable, wireline, and related telecommunications services. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Revenue: $68.8, up 13.9% from $60.4 in Q1 2011. Wireless revenue rose 17.0% to $42.7, led by postpaid smartphone data and prepaid growth; Cable revenue rose 12.4% to $18.6. Wireline revenue increased 6.8% to $12.9.
- Profit: Operating income was $8.8, up 24.3%; net income was $4.5, versus $3.0. Diluted earnings per share were $0.19, versus $0.13. Continuing-operations income was $4.4, up 44.1% per the consolidated comparison table.
- Margins: Operating margin was approximately 12.8%, compared with 11.7% a year earlier. Adjusted OIBDA, a company-defined non-GAAP measure, was $25.0 versus $21.4; its margin was approximately 36.3% versus 35.4%. Cable remained loss-making at the operating-income level, though its loss narrowed to $4.5 from $5.7.
- Cash flow and investment: Operating cash flow was $22.5, up from $18.0; capital expenditures were $14.8, compared with $16.1. Cash increased to $19.6 from $15.9. The operating cash flow increase included a $11.1 reduction in income taxes receivable.
- Debt and liquidity: Debt totaled $175.1, down from $180.6 at year-end; $21.9 was classified as current maturities. The company reported a 3.58% annualized weighted-average interest rate and $50 available under its revolving facility. Current assets were $57.0 and current liabilities $53.1. The company was in compliance with credit covenants.
- Balance sheet: Total assets were $471.6 and shareholders’ equity $202.4 at March 31, 2012.
Material changes versus Q1 2011
- Revenue growth was led by Wireless: postpaid service revenue benefited from smartphone data and subscriber growth, while prepaid service revenue grew nearly 58%. Cable growth reflected more revenue-generating units, expanded offerings, and price increases.
- Operating expenses increased 12.5% to $60.0, including higher wireless handset, network, marketing, and depreciation costs. Wireless operating income rose only 4.5% despite segment revenue growth of 17.0%.
- Wireline operating income was essentially flat at $3.8. Access revenue declined, while fiber facilities lease revenue increased.
- Other income improved, primarily because of investment results. The effective tax rate on continuing operations eased to 42.6% from 43.0%.
- Discontinued operations generated $0.1 of income versus a $0.03 loss. Converged Services revenue fell to $0.8 from $3.3 as the business continued to be sold.
Outlook, risks, and unusual items
- Network Vision: The company plans approximately $138 of capital expenditures in 2012, including approximately $60 for its wireless network upgrade and $34 for Cable. Wireless equipment replacement was expected to begin in Q2 2012 and finish by year-end 2013. The filing expects elevated accelerated depreciation through 2012 and at a lower, but still elevated, level in 2013; Q1 included approximately $2.0 of accelerated depreciation.
- Management expected Network Vision to increase operating costs, including from backhaul arrangements and cell-site leases. Management believed available cash, operating cash flow, and credit facilities would cover planned needs for at least the next 12 months. The company was also considering refinancing its credit facilities.
- Interest-rate exposure: $170.8 of variable-rate debt bore interest at 3.25%; a 1 percentage-point rate increase was estimated to add approximately $1.7 annually to interest expense. A swap covered one-third of variable-rate debt through July 2013.
- Business and reporting risks: Wireless operations rely significantly on Sprint Nextel for billing, collections, customer care, and financial data; Sprint remitted approximately 56% of total operating revenue. The company also cited risks from competition, regulation, technology changes, customer demand, and its ability to attract and retain customers.
- Converged Services disposition: Contracts covered the remaining assets held for sale, but transfers required property-owner consents where applicable. Management expected completion within 60 to 90 days. Q1 sales generated $1.1 in cash, with another $0.4 placed in escrow; sale proceeds approximated carrying value.
- The filing reported no material changes to previously disclosed risk factors, no material control changes, and no material impact expected from recently issued accounting standards not yet adopted.
Important facts for investors to verify
- Whether prepaid and postpaid subscriber growth continues, and whether churn and subscriber additions remain favorable.
- Actual Network Vision spending, upgrade timing, accelerated depreciation, and resulting wireless operating costs.
- Completion and proceeds of the remaining Converged Services sales, including required consents and escrow amounts.
- Cash conversion excluding the sizable tax-receivable collection benefit, and funding needs against the 2012 capital plan.
- Variable-rate debt exposure, covenant headroom, and any refinancing or additional borrowing terms.
- Reliance on Sprint Nextel for a substantial share of revenue and for key operating and financial information.