Business context and reporting period
Shenandoah Telecommunications Company (Shentel) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Its businesses are Wireless (as a Sprint PCS affiliate), Cable, and Wireline. Results include nTelos operations only after its May 6, 2016 acquisition, making year-over-year comparisons—especially for Wireless—affected by acquisition timing.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Revenue | $153.3 million, up 17.6% | $307.1 million, up 37.8% |
| Operating income | $8.3 million, versus a $6.2 million loss | $18.9 million, up 24.8% |
| Operating margin | 5.4%, versus (4.7%) | 6.2%, versus 6.8% |
| Net income (loss) | $(0.1) million, versus $(7.0) million; EPS was $0.00 | $2.3 million, down 67.2%; EPS was $0.05 |
| Adjusted OIBDA (non-GAAP) | $69.4 million, versus $55.9 million | $143.0 million, versus $96.3 million |
| Continuing OIBDA (non-GAAP) | $60.3 million, versus $49.8 million | $124.9 million, versus $90.2 million |
For the first half, operating cash flow was $86.8 million, compared with $50.4 million. Capital expenditures were $68.8 million, versus $60.1 million. Cash and cash equivalents were $59.8 million at June 30, 2017, compared with $36.2 million at December 31, 2016. Current assets were $158.1 million and current liabilities $112.2 million.
Gross term-loan debt was $860.8 million; the balance-sheet carrying amount, net of unamortized loan fees, was $844.0 million. The effective annualized interest rate was approximately 4.06% after swaps and loan costs. Approximately 50% of expected outstanding variable-rate debt was hedged. A 1 percentage-point rate increase was estimated to add about $8.4 million to annual interest expense before swap effects.
Material changes versus the prior comparable period
- Second-quarter revenue rose $22.9 million, primarily from Wireless growth associated with nTelos; Cable also grew, while Wireline growth was mainly tied to fiber sales. First-half revenue increased $84.3 million, with most of the Wireless increase attributed to the acquisition.
- Second-quarter operating income improved from a loss to profit, helped by a $16.5 million reduction in integration and acquisition costs. First-half operating income increased, but net income declined as interest expense rose $11.0 million to $18.5 million.
- Wireless first-half segment operating income fell 43.1% to $15.5 million despite higher revenue, reflecting higher acquired-network costs and depreciation and amortization. Cable and Wireline segment operating income increased.
- Debt increased from $847.9 million at year-end to $860.8 million gross, including $25.0 million of additional Term Loan A-2 borrowing and scheduled repayments. Cash increased by $23.6 million during the first half.
Outlook, management commentary, risks, and unusual items
- Management budgeted $155.2 million in 2017 capital expenditures, including wireless network upgrades and expansion. It spent $68.8 million in the first half and expected cash, operating cash flow, and available borrowings to fund planned spending and obligations for at least the next 12 months.
- Shentel expects approximately $18.3 million of nTelos integration and acquisition expenses in 2017, in addition to $54.7 million incurred in 2016. It reported $12.5 million of such costs in the first half of 2017 and expects them to decline as integration winds down.
- The April 2017 expansion of the Sprint affiliate territory added areas in five states and approximately 25,000 subscribers. Shentel plans to invest approximately $32 million over three years to upgrade and expand network coverage there.
- Credit covenants were met at June 30: leverage ratio 2.91 versus a maximum 3.75; debt-service coverage 4.35 versus a minimum 2.00; and minimum liquidity of $133.4 million versus a $25 million requirement. Management noted that covenant noncompliance could adversely affect liquidity.
- Key exposures include reliance on Sprint for billing, customer care, collections, and data used to record substantial Wireless revenue; customer growth and churn; competition and regulatory changes; and variable interest rates. Postpaid churn was 2.00% in the quarter versus 1.56% a year earlier. Prepaid churn was affected by government recertification of Assurance Lifeline customers.
- Management reported that disclosure controls remained ineffective at June 30 because previously identified material weaknesses had not been remediated. The company was continuing remediation and integration of nTelos controls. Management nevertheless stated that the financial statements fairly presented the reported periods.
- The filing corrected an immaterial prior-period cash-flow classification error for the first half of 2016, reducing both operating cash flow and investing cash flow by approximately $10.4 million, with no effect on net cash change or cash balances. Management anticipated that the revenue-recognition standard effective in 2018 could have a significant impact; it expected the 2019 lease standard to have a material impact.
Important facts for investors to verify
- How much reported Wireless growth reflects acquired nTelos subscribers versus underlying organic performance, and whether subscriber churn and migration trends improve.
- Whether planned network investment and integration deliver the expected operating returns, and whether actual capital spending tracks the $155.2 million budget.
- Debt repayment capacity and exposure to interest-rate increases, including the effectiveness and coverage of swaps.
- Progress in remediating material weaknesses and the reliability of Sprint-provided billing, subscriber, and revenue information.
- The eventual financial-statement effects of the new revenue-recognition and lease-accounting standards.