Cable One, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; dollar amounts below are in millions unless stated otherwise. Cable One provides residential and business data, video and voice services across 21 states. The 2017 comparison includes NewWave only from its May 1, 2017 acquisition, while 2018 includes it for the full period.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $268.4 | $241.0 | $534.2 | $448.4 |
| Operating income | $70.7 | $57.5 | $135.3 | $116.1 |
| Net income | $43.8 | $27.9 | $84.4 | $60.0 |
| Diluted EPS | $7.65 | $4.85 | $14.73 | $10.45 |
| Adjusted EBITDA (non-GAAP) | $127.1 | $113.3 | $250.3 | $210.5 |
| Operating cash flow | Not provided separately | Not provided separately | $196.6 | $130.9 |
| Capital expenditures | Not provided separately | Not provided separately | $90.9 | $76.4 |
Q2 revenue rose 11.4%, operating income 22.9%, net income 57.2% and Adjusted EBITDA 12.2% year over year. Approximate operating and net margins were 26.3% and 16.3%, versus 23.9% and 11.6% in Q2 2017. For the six months, revenue grew 19.1%, operating income 16.6%, net income 40.8% and Adjusted EBITDA 18.9%; approximate operating margin was 25.3% versus 25.9%. Comparisons are affected by the additional NewWave months in 2018.
Revenue trends and material changes
- Q2 residential data revenue increased 18.3% to $122.5 million; business services rose 18.4% to $38.5 million. Growth reflected NewWave, organic customer gains, pricing and reduced package discounting.
- Residential video revenue increased 3.1% to $87.5 million in Q2, but video subscribers fell 11.8% year over year. Residential voice revenue declined 8.0% to $10.5 million; voice subscribers fell 9.3%.
- Excluding legacy NewWave systems, Q2 revenue grew 5.1% to $219.4 million. Legacy-system data and business service revenues increased, while video and voice revenue declined.
- Across the company, total PSUs declined 3.4% and customer relationships declined 0.7% year over year. Business PSUs increased 8.2%, while residential PSUs fell 4.4%.
- Six-month cash flow from operations increased 50.2%, primarily reflecting higher Adjusted EBITDA, lower cash tax payments and working-capital movements, partly offset by higher cash interest. Cash capital spending increased year over year.
Margins, expenses and unusual items
Q2 operating expenses excluding depreciation and amortization were $91.8 million, or 34.2% of revenue, compared with 34.9% a year earlier. Selling, general and administrative expense was $54.2 million, or 20.2% of revenue, versus 21.1%. Six-month depreciation and amortization rose 11.7% to $97.8 million. The six-month results included a $9.4 million net loss on asset disposals, compared with a $5.7 million net gain in 2017, primarily related to a property sale. Adjusted EBITDA is a non-GAAP measure and excludes specified costs; it is not a substitute for cash flow or net income.
The effective tax rate fell to 22.6% for Q2 and 21.2% for the first half, from 38.6% and 37.9%, respectively. The company attributed the decline principally to the federal corporate tax-rate reduction, with state-rate benefits and equity-compensation tax benefits also contributing to first-half results.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $203.5 million, working capital was $134.2 million and total assets were $2.23 billion.
- Total debt principal was $1.189 billion, including $450 million of 5.75% senior notes due 2022 and $738.8 million outstanding under senior credit facilities. Term Loan A and B borrowings each carried a 4.09% rate at quarter-end. The company reported compliance with debt covenants.
- Revolving-credit availability was $196.9 million after $3.1 million of letters of credit. An April 2018 repricing lowered Term Loan B margins; management estimated approximately $2.5 million of annual interest savings before transaction costs.
- First-half financing cash outflow was $63.0 million, including $22.6 million of share repurchases and $20.0 million of dividends paid. The Q2 dividend was $1.75 per share. On August 7, the Board approved a $2.00-per-share dividend payable September 7, subject to the stated record date.
Outlook, risks and contingencies
- Management said cash, available credit and operating cash flow should support operations and planned spending over the next 12 months, subject to business and economic conditions. It expected $38–$42 million of cash tax savings in 2018.
- The company expects to spend up to $50 million during 2018 and 2019, in addition to $10 million spent in 2017, to upgrade NewWave systems, including capacity improvements, all-digital video, 32-channel bonding, a planned 1 Gbps product launch and billing-system integration.
- Management expects residential data and business services growth to continue, while residential video and voice revenues face ongoing pressure. Competition, programming and retransmission costs, regulation, cyber and network security, interest rates, debt service and the ability to integrate NewWave are identified risks.
- Disclosure controls were deemed ineffective at June 30 because of a material weakness in access and change-management controls for the NewWave billing system. No financial-statement misstatement was identified; management targeted system conversion and remediation by year-end 2018.
- The company reported ordinary-course litigation and stated that, based on information then available, existing matters were not likely to have a material effect. It also disclosed regulatory uncertainty and contingent franchise-related commitments; it did not expect payments under related surety bonds and letters of credit.
- No specific revenue, earnings or margin guidance was provided. Interim results may not indicate future performance.
Important facts for investors to verify
- Progress and effectiveness of the NewWave billing-system conversion and remediation of the material weakness.
- Underlying organic growth and customer trends, separating NewWave acquisition effects from legacy operations, particularly continued data and business growth versus video and voice subscriber losses.
- Delivery of planned NewWave upgrades, related capital spending and any expected operating benefits or synergies.
- Debt, variable-rate interest exposure, covenant headroom and the realized savings from the Term Loan B repricing.
- Cash generation, tax-savings realization, and the sustainability of the increased dividend and share repurchases.
- Effects of the asset-disposal loss and the revised 2017 comparative statements. The filing says 2017 results were revised for previously identified accounting errors and recast for ASC 606; the filing states the error correction did not change first-half 2017 operating cash flow.