Cable One, Inc. — 2017 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2017; filed March 1, 2018. Cable One provides broadband data, video and voice services in 21 states, primarily in non-metropolitan markets. The company served 797,537 residential and business customer relationships across approximately 2.1 million homes passed at year-end.
Results include eight months of NewWave, acquired May 1, 2017 for $740.2 million cash. NewWave added customers and revenue, so reported year-over-year growth is not directly comparable with organic performance.
Financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $960.0 million | $819.6 million |
| Operating income | $236.0 million | $188.4 million |
| Net income | $234.0 million | $101.1 million |
| Diluted EPS | $40.72 | $17.52 |
| Adjusted EBITDA (non-GAAP) | $443.1 million | $357.4 million |
| Operating cash flow | $324.5 million | $257.1 million |
| Capital expenditures | $179.4 million | $130.8 million |
| Cash and cash equivalents at year-end | $161.8 million | $138.0 million |
| Total debt, including capital leases | $1,194.6 million | $545.3 million |
Revenue increased 17.1%; operating income increased 25.3%. Net income included a $113.0 million benefit from remeasurement of deferred taxes following federal tax reform. The effective tax rate was negative 23.3%, versus 38.1% in 2016. Calculated operating margin was approximately 24.6%, versus 23.0%; net margin was approximately 24.4%, versus 12.3%. Adjusted EBITDA margin was approximately 46.2%, versus 43.6%. Adjusted EBITDA less capital expenditures was approximately $263.7 million; this is a simple calculation, not a company-defined cash-flow measure.
Operating cash flow rose 26.2%. Investing cash outflow was $891.2 million, primarily reflecting $727.9 million net cash paid for NewWave. Working capital was $71.8 million at year-end. The company had $196.9 million available under its revolving credit facility. Net debt, calculated as reported debt less cash, was approximately $1.03 billion.
Residential data and business services generated 43.2% and 13.7% of revenue, respectively. Management said their Adjusted EBITDA margins were approximately four and five times residential video’s margin. Video programming and retransmission costs represented 50%–60% of residential video revenue in each of the prior three years.
Material changes versus the prior period
- Reported revenue growth reflected NewWave as well as organic growth. Excluding NewWave, revenue increased 1.6% to $832.8 million; legacy residential data revenue grew 7.9% and business-services revenue grew 11.8%.
- Legacy residential video revenue fell 5.5% and residential voice revenue fell 12.8%; advertising revenue declined 13.4%. Video and voice customer attrition continued despite acquisition-related increases in consolidated customer counts.
- Adjusted EBITDA rose 24.0% as reported. Excluding NewWave and the capitalized-labor accounting change, management reported growth of 6.1% to $379.2 million.
- Debt increased substantially to fund the acquisition. Year-end variable-rate term loans totaled $744.4 million; the $450 million senior notes bear fixed interest at 5.75% and mature in 2022.
- Capital expenditures increased from $130.8 million to $179.4 million. The company reported $324.5 million of operating cash flow, against $179.4 million of capital expenditures and $37.2 million of dividends paid.
Outlook, management commentary, risks and unusual items
- Management aims to grow residential data and business services, preserve margins and prioritize customers with higher lifetime value. It expects video and residential voice revenue declines to continue; it expects data and business-services growth to continue. The filing provides no specific revenue or earnings guidance.
- The company expected to spend up to $60 million over three years on NewWave system upgrades and integration, including $10 million spent in 2017. It also expects continued investment in broadband infrastructure. Management estimated 2018 cash-tax savings of approximately $38 million–$42 million from tax reform.
- NewWave contributed $127.3 million of revenue and $7.7 million of net income during 2017. Integration, realization of synergies and retention of employees and customers remain risks. NewWave represented 10% of year-end assets and 13% of 2017 revenue; its controls were excluded from management’s internal-control assessment and the auditor’s internal-control audit. New controls for its different billing systems were implemented in early 2018.
- The filing reports a change in accounting for capitalization of certain internal labor and correction of historical errors. Prior periods were revised; management said the historical error was immaterial to those periods but its cumulative correction would have been material if recorded in 2017. The 2017 accounting change increased net income by $9.1 million, including $1.59 per diluted share; the company also reported a $16.3 million reduction in expense associated with the labor-capitalization change for Adjusted EBITDA reconciliation purposes.
- Federal tax reform produced a material, largely non-cash 2017 deferred-tax benefit; the company said some tax accounting remained provisional pending its 2017 tax return. It also anticipated lower future cash taxes.
- Variable-rate debt creates interest-rate exposure: a hypothetical 100-basis-point LIBOR increase would have raised annual interest expense by approximately $7.4 million at year-end debt levels. The company reported compliance with all debt covenants at December 31, 2017.
- Key business risks include competition from telephone companies, fiber and wireless providers and streaming services; continued video programming and retransmission-cost increases; cybersecurity, service outages and severe weather; franchise renewals and pole-attachment costs; and regulatory changes. The company reported no material legal proceedings and no goodwill or intangible-asset impairment in the periods presented.
Important facts for investors to verify
- Separate NewWave’s eight-month contribution from organic growth, and track customer retention, integration costs and expected synergies.
- Assess recurring earnings and cash generation apart from the $113.0 million tax benefit and the labor-capitalization change; review the revised prior-period financial statements.
- Monitor debt repayment, variable-rate exposure, covenant headroom and the effect of the planned NewWave investment program on free cash flow.
- Track legacy data and business-services growth against video and voice subscriber losses, programming costs and retransmission fees.
- Review the final tax accounting and actual cash-tax savings, and follow implementation of NewWave financial reporting and internal controls.