Business context and reporting period
Shenandoah Telecommunications Company (Shentel) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company provides broadband and tower services in the Mid-Atlantic. Its Wireless operations are reported as discontinued operations following Sprint’s exercise of an option to purchase them.
Financial results and liquidity
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Continuing-operations revenue | $55.2 | $51.8 | $162.6 | $153.3 |
| Continuing-operations operating income (loss) | $0.5 | $0.7 | ($2.8) | ($0.2) |
| Income from continuing operations | $1.4 | $1.2 | $1.0 | $3.3 |
| Income from discontinued operations, after tax | $33.5 | $13.2 | $76.4 | $38.1 |
| Net income | $34.9 | $14.4 | $77.4 | $41.4 |
| Diluted earnings per share | $0.70 | $0.29 | $1.55 | $0.83 |
- Margins: Continuing-operations operating margin was 0.9% in Q3 2020 versus 1.3% a year earlier, and negative 1.7% for the first nine months versus negative 0.1%.
- Cash flow: Nine-month operating cash flow was $227.3 million, including $44.8 million from continuing operations and $182.5 million from discontinued operations. Investing cash outflow was $116.4 million, including $82.7 million of continuing-operations capital expenditures. Financing cash outflow was $28.5 million. Cash increased $82.4 million to $184.1 million.
- Debt and liquidity: Gross debt principal was $706.4 million ($696.4 million net of unamortized fees); the weighted-average effective rate was approximately 2.3%. Cash plus the $75 million undrawn revolver represented $259.1 million of available liquidity. The company reported compliance with its debt covenants.
- Balance sheet: Wireless disposal-group assets of $1.149 billion and liabilities of $471 million were classified as held for sale. Debt is outside that group and classified as current because the sale requires repayment.
Material changes versus the prior comparable period
- Continuing revenue rose 6.5% in Q3 and 6.1% for the nine months. Broadband and Tower drove growth, while operating expenses rose faster—7.0% in Q3 and 7.8% year to date—largely due to launching and expanding Glo Fiber and Beam.
- Broadband revenue increased 4.2% in Q3 and 4.5% year to date, but segment operating income fell 15.6% and 10.7%, respectively, as operating costs and depreciation increased. Broadband customer relationships grew to 106,314 from 94,356; broadband subscribers grew 19.8% year over year, according to management.
- Tower revenue rose 43.3% in Q3 and 35.8% year to date, supported by more tenants and higher average revenue per tenant, including amendments to intercompany leases.
- Wireless discontinued-operations income increased substantially. Results included lower depreciation and amortization, lower interest expense, and a favorable travel-revenue settlement; the year-to-date figure also includes a $25.5 million travel-revenue adjustment, of which $12.0 million related to service provided in 2019.
- Capital expenditures from continuing operations rose to $82.7 million from $48.8 million in the prior-year period, primarily reflecting broadband investment and Glo Fiber expansion.
Outlook, risks and unusual items
- Wireless sale: Sprint exercised its purchase option on August 26, 2020. On November 3, the parties aligned in principle on aspects of the appraisal process; valuation was to be determined through that process, with an assessment expected around January 20, 2021 and closing expected in Q2 2021, subject to customary regulatory approvals. The valuation and timing remained uncertain.
- The sale is expected to trigger debt repayment and settlement of interest-rate swaps. Shentel estimated sale-related expenses, including advisory fees, swap losses and debt-extinguishment loss, could range from $0 to $40 million depending on whether the sale closes.
- Management expected cash, revolver availability, disposition proceeds and continuing cash flow to meet anticipated liquidity needs for the next 12 months. It gave no specific earnings or revenue guidance in the supplied filing text.
- Risks include the uncertain Wireless appraisal and sale process, possible further disputes or delays, T-Mobile/Sprint integration effects on Wireless results and valuation, COVID-19 impacts, broadband competition and customer demand, and uncertainty around the transition from LIBOR. A 1-percentage-point rate increase would add about $6.9 million to annual interest expense before swap effects.
- Disclosure controls and procedures remained ineffective as of September 30, 2020 because previously identified material weaknesses had not been remediated. The filing also describes corrections to prior-period errors, which management deemed immaterial to those periods.
- The board declared a $0.34-per-share dividend, payable December 1, 2020 to holders of record November 12, 2020.
Important facts for investors to verify
- Progress, final appraisal value, terms, regulatory approvals and closing timing of the Wireless sale; confirm how proceeds will be used and debt repaid.
- Whether sale-triggered costs and swap or debt-extinguishment losses fall within the disclosed potential $0–$40 million range.
- Underlying profitability and cash generation of continuing Broadband and Tower operations, particularly as Glo Fiber and Beam investment and operating costs rise.
- Remediation of internal-control material weaknesses and the status of the company’s LIBOR transition and interest-rate exposure.
- Effects of COVID-19 and T-Mobile/Sprint integration on operating performance, customer trends and the Wireless appraisal.