Cable One, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone Q4 filing. Cable One provides residential and business data, video and voice services across 19 states, primarily in non-metropolitan markets. It served 657,222 customer relationships and passed approximately 1.7 million homes at year-end. The company became independent of Graham Holdings in July 2015, so historical periods before then reflect allocated parent-company costs and are not fully comparable.
Financial and operating performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $819.6 million | $807.3 million | +1.5% |
| Operating income | $188.2 million | $161.7 million | +16.4% |
| Net income | $98.9 million | $89.0 million | +11.1% |
| Diluted EPS | $17.14 | $15.19 | +12.8% |
| Adjusted EBITDA (non-GAAP) | $350.5 million | $317.7 million | +10.3% |
| Cash from operations | $251.8 million | $246.4 million | +2.2% |
| Cash and cash equivalents at year-end | $138.0 million | $119.2 million | +$18.8 million |
Operating margin was approximately 23.0%; net margin was approximately 12.1%. Adjusted EBITDA margin was approximately 42.8%; Adjusted EBITDA is a company-defined non-GAAP measure and does not reflect debt service or capital spending.
- Revenue mix: Residential data $344.2 million (+16.9%); video $294.8 million (-11.4%); business services $100.3 million (+13.0%); residential voice $42.9 million (-14.4%); advertising $27.5 million (-11.4%). Residential data and business services rose to 54.2% of revenue, from 47.5% in 2015.
- Customers: Residential data customers increased 1.8% to 469,053; residential video customers fell 12.4% to 306,563; residential voice customers fell 12.0% to 97,724. Total customer relationships declined 1.1%, while total PSUs declined 4.3%.
- Costs and taxes: Operating costs excluding depreciation and amortization fell 2.1%, and SG&A fell 4.7%. Depreciation and amortization was $142.2 million. Interest expense rose to $30.2 million from $16.1 million. The effective tax rate was 39.3%.
- Cash investment and shareholder returns: NCTA-defined capital expenditures were $125.5 million, down from $166.4 million; cash paid for property, plant and equipment was $141.7 million. The company repurchased $56.4 million of shares and paid $34.4 million in dividends in 2016; dividends declared were $6.00 per share.
Debt, liquidity and commitments
At December 31, 2016, gross debt including capital leases was $545.3 million, comprising $450 million of 5.75% senior unsecured notes due 2022 and $95.0 million of term loans. The balance sheet also reported $6.25 million of current debt and $530.9 million of long-term debt, net of issuance costs. The company had $197.2 million available under its revolving credit facility and reported working capital of $74.8 million. It was in compliance with debt covenants at year-end. Variable-rate term loans were at 2.34%; management estimated a 100-basis-point LIBOR increase would add about $1.0 million in annual interest expense.
Contractual obligations totaled $1.16 billion, including $550.2 million of estimated programming commitments and $545.3 million of debt. The company stated that cash, credit facilities and operating cash flow were expected to fund its operating plan, planned capital expenditures, quarterly dividends and the NewWave acquisition over the next 12 months.
Material changes, outlook and risks
- Growth in data and business services more than offset declining video and voice revenue. Management is prioritizing higher-margin data and business services, while expecting video and residential voice revenue to continue declining.
- Management said the multi-year broadband investment program was substantially completed in 2016. The upgrades expanded average plant bandwidth to approximately 750 MHz, enabled 32-channel bonding and made 1 Gbps service available to nearly 70% of residential homes passed. Management expected 1 Gbps availability across current markets by the end of 2017.
- On January 18, 2017, Cable One agreed to acquire NewWave for $735 million in cash, subject to customary adjustments, regulatory approvals and other closing conditions. It anticipated closing in Q2 2017 and expected to fund the purchase with $650 million of committed senior secured loans and cash on hand. Completion, financing conditions, integration and realization of expected benefits remain material uncertainties.
- Beginning in 2017, a change in estimate for capitalizing certain construction and installation labor was expected to increase annual capitalized labor by $28 million to $33 million, with a corresponding reduction in expense and increase in capital expenditures. This is an estimate, not a reported 2016 result.
- Key risks include competition from telephone companies, other cable operators and OTT video providers; programming-cost and retransmission-fee increases; franchise renewal and pole-attachment costs; regulatory changes affecting broadband pricing and network management; cyber and network disruptions; and acquisition execution and added leverage.
- FY2016 included a $4.1 million net gain on sale of a cable system. FY2014 net income included a $75.2 million gain from sale of wireless spectrum, making that prior-year comparison unusual. No material legal proceedings were reported. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- Whether residential data and business-services growth can offset continued video and voice subscriber and revenue declines.
- The sustainability of improved operating income and Adjusted EBITDA, including the effect of lower capital spending after the broadband upgrade program.
- NewWave closing status, final purchase price and financing terms, and resulting debt, interest expense and integration performance.
- Actual 2017 capital expenditures and expense effects of the labor-capitalization estimate change.
- Cash generation, dividend capacity and share repurchases after the acquisition, given debt covenants and the company’s stated dependence on future operating cash flows.