Shenandoah Telecommunications Company — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. The company provides wireless services as a Sprint PCS affiliate, cable services, wireline services and fiber/tower leasing. Amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $84.3 | $80.5 | +4.8% |
| Operating income | $18.5 | $15.7 | +18.2% |
| Operating margin | 22.0% | 19.5% | +2.5 percentage points |
| Net income | $10.3 | $8.6 | +19.4% |
| Diluted earnings per share | $0.42 | $0.36 | +$0.06 |
| Adjusted OIBDA (non-GAAP) | $35.7 | $31.7 | +12.5% |
| Operating cash flow | $23.8 | $32.6 | Down $8.8 |
| Capital expenditures | $9.5 | $17.2 | Down $7.7 |
Revenue growth and lower wireless handset costs contributed to improved earnings. Net interest expense was $1.9 million, versus $2.0 million; income tax expense was $6.9 million, and the effective tax rate was 40.0%. Operating cash flow fell, mainly due to timing of payments for prepaid assets, accounts payable and accrued expenses. Cash and cash equivalents were $77.2 million at quarter-end, up from $68.9 million at December 31, 2014.
At March 31, 2015, total debt was $218.5 million: $23.0 million current and $195.5 million long-term. The company reported an approximately 3.40% annualized effective interest rate after the swap. It paid $5.75 million of scheduled principal in the quarter. The company reported compliance with debt covenants: leverage ratio 1.58 against a maximum 2.50; debt service coverage 6.22 against a minimum 2.50; and equity/assets 43.6% against a minimum 35.0%.
Material changes and operating drivers
- Wireless: Segment revenue rose 2.8% to $52.5 million and operating income rose 15.7% to $19.4 million. Prepaid subscriber growth supported service revenue; reduced postpaid handset costs, with financing-plan handsets borne by Sprint, helped expenses. Postpaid and prepaid subscriber counts increased year over year, while prepaid churn rose to 4.76% from 4.27%.
- Cable: Revenue increased 13.8% to $23.3 million, helped by 6.7% growth in average revenue-generating units, pricing and higher-tier services. The operating loss narrowed to $0.7 million from $2.0 million. Programming costs, including retransmission fees, increased; video customers declined year over year while internet and voice customers grew.
- Wireline: Revenue declined 1.2% to $15.6 million and operating income fell 12.0% to $3.8 million. Lower carrier-access and fiber revenue, including the absence of favorable prior-year NECA pool adjustments, and higher SG&A and depreciation weighed on results.
- Consolidated operating expenses increased 1.5%. Lower cost of goods and services was more than offset by higher SG&A and depreciation and amortization.
Outlook, risks and notable items
- Management expects an approximately 40% effective tax rate for the remainder of 2015, absent unanticipated adjustments.
- The 2015 capital expenditure budget is $74.8 million: $24.3 million Wireless, $21.8 million Cable, $20.9 million Wireline and $7.8 million Other. Management believes cash, operating cash flow and expected credit availability will fund planned investment and obligations for at least the next 12 months; future capital needs may differ with demand and market developments.
- The $218.5 million debt is variable-rate. A 1 percentage-point rate increase would add approximately $2.1 million to annual interest expense before the swap. The swap covers about 76% of debt; $52.6 million of variable-rate debt was unhedged. Management estimated the swap would add $1.3 million to annual interest expense at then-current rates.
- Wireless depends materially on Sprint for billing, collections, customer care and other services; Sprint remits approximately 57% of company operating revenue. The company relies on Sprint data to record a substantial portion of revenue and receivables. Management identified Sprint relationship and execution, competition, regulation, technology changes, customer growth and financing costs among factors that could affect results.
- The company reported no material changes to the risk factors in its 2014 Form 10-K, no off-balance-sheet arrangements other than operating leases, and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective at March 31, 2015.
- A cash-flow hedge generated a $0.9 million after-tax other comprehensive loss in the quarter. The company estimated $1.3 million would be reclassified from accumulated other comprehensive income as increased interest expense over the next 12 months.
Important facts for investors to verify
- Whether continued subscriber gains and cable pricing can offset declining video customers and rising programming costs.
- How Sprint handset-financing arrangements, operational dependence and revenue reporting affect wireless growth, margins and cash collection.
- Whether planned capital spending and weaker operating cash flow affect cash balances, debt reduction or future funding needs.
- The effects of rate movements on unhedged debt, the swap and interest expense, as well as continued covenant compliance.
- The sustainability of Q1 margin and earnings improvement, including the role of handset-cost timing and other period-specific factors.