Business Context and Reporting Period
Company: Shenandoah Telecommunications Company (Shentel)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: A diversified telecommunications provider operating three primary segments: Wireless (Sprint PCS Affiliate), Wireline (voice, DSL, fiber), and Cable TV. The company also maintains a "Converged Services" division classified as discontinued operations and held for sale since September 2008.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Operating Revenues | $41,518 | $40,102 |
| Operating Income | $11,500 | $12,012 |
| Net Income (Continuing Ops) | $6,569 | $6,157 |
| Net Income (Total) | $6,754 | $(4,212) |
| Diluted EPS (Total) | $0.29 | $(0.18) |
| Operating Cash Flow | $15,989 | $21,236 |
| Cash and Equivalents (Ending) | $18,198 | $18,653 |
| Total Debt | $31,836 | $32,960 |
| Working Capital | $32,075 | $28,007 |
Note: Total Debt calculated as Current Maturities ($5,588) + Long-term Debt ($26,248). Working Capital calculated as Current Assets ($55,062) - Current Liabilities ($22,987).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 3.5% ($1.4 million) year-over-year, driven primarily by a 4.6% increase in Wireless service revenues and growth in tower lease revenues.
- Profitability: Operating income decreased 4.3% ($0.5 million) despite revenue growth, due to a 6.9% increase in operating expenses. Incremental costs from acquired Cable TV operations and wireless network expansion (EVDO rollout) accounted for the majority of the expense increase.
- Net Income Volatility: Total Net Income swung from a loss of $4.2 million in Q1 2009 to a profit of $6.8 million in Q1 2010. The 2009 loss was heavily impacted by a $17.5 million impairment charge on assets held for sale (Converged Services), which did not recur in 2010.
- Cash Flow: Net cash provided by operating activities decreased $5.2 million to $16.0 million, attributed to timing differences in payments from Sprint and the absence of the non-cash impairment adjustment seen in the prior year.
Outlook, Management Commentary, and Risks
Acquisition Activity
On April 16, 2010, the company signed an agreement to acquire JetBroadband Holdings, LLC ("JetBB") cable operations for $148 million in cash. The deal includes approximately 66,500 revenue-generating units and is expected to close in 90-120 days pending regulatory approval. This acquisition is expected to significantly impact the Cable TV segment's revenues and expenses.
Capital Expenditures
Capital expenditures for 2010 are budgeted at approximately $41 million, a decrease from 2009. However, the company anticipates an incremental $11 million in JetBB-related capital spending in 2010 for network upgrades. Q1 2010 capital spending was $9.6 million.
Liquidity and Debt
The company has $31.8 million in total indebtedness with a weighted average interest rate of 4.60%. It has $8.4 million available under a revolving credit facility and $32.3 million available under a delayed draw term loan. The company is finalizing a new debt facility to fund the JetBB acquisition and refinance existing debt, which will likely result in higher debt balances and more restrictive covenants.
Risks and Contingencies
- Sprint Dependency: The Wireless segment relies on Sprint Nextel for billing, collections, and customer care. Approximately 64% of total operating revenues are remitted by Sprint. The company depends on Sprint's internal controls for accurate financial reporting.
- Discontinued Operations: Negotiations to sell the Converged Services division continue. Assets held for sale remain on the balance sheet at $10.7 million with no change in estimated fair value since 2009.
- Market Risk: The company has $19.7 million in variable-rate debt. A 1.00% increase in interest rates would increase annual interest expense by approximately $197,000.
Investor Verification Checklist
- JetBB Acquisition Status: Verify the closing timeline and regulatory approval status of the $148 million JetBroadband acquisition.
- Debt Restructuring: Confirm the terms of the new debt facility being negotiated to fund the acquisition and refinance existing obligations.
- Converged Services Sale: Monitor progress on the sale of the Converged Services division, which remains classified as held for sale.
- Cable Segment Performance: Assess the timeline for network upgrades in acquired cable markets and the impact on operating losses, which are expected to remain elevated until Q3 2010.
- Sprint Relationship: Review the latest SAS 70 report regarding Sprint Nextel's controls, given the company's reliance on Sprint for revenue reporting.