Shenandoah Telecommunications Company — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited results; dollar amounts below are in millions unless otherwise noted. The company provides wireless, cable, wireline, fiber and tower services. Comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $72.9 | $62.7 | $213.1 | $184.6 |
| Operating income | $5.4 | $9.2 | $25.4 | $24.3 |
| Operating margin | 7.4% | 14.6% | 11.9% | 13.1% |
| Income from continuing operations | $1.4 | $3.6 | $11.5 | $9.7 |
| Net income, including discontinued operations | $1.4 | $3.0 | $11.4 | $9.0 |
| Diluted EPS | $0.06 | $0.13 | $0.47 | $0.38 |
- Cash flow: Nine-month operating cash flow was $77.5 versus $54.5 in 2011; capital expenditures were $53.6 versus $52.5. Cash and equivalents were $94.6 at September 30, up from $15.9 at year-end 2011. Management attributed part of the operating cash flow increase to tax refunds.
- Liquidity and debt: Total debt was $232.9, including $2.7 current maturities, compared with $180.6 at December 31, 2011. The company reported $50 million of undrawn revolver availability and potential incremental borrowing capacity of up to $100 million, subject to restrictions. Equity was $209.6; total assets were $552.8.
- Margins and non-GAAP measure: Adjusted OIBDA was $22.6 in Q3 versus $22.2, and $74.6 for nine months versus $66.7. The company cautions this non-GAAP measure excludes, among other things, capital spending, debt service, taxes and share-based compensation and is not a substitute for GAAP results.
Material changes and operating trends
- Q3 revenue rose 16.3%, but operating expenses rose 26.1%; operating income fell 41.0% and continuing-operations income fell 60.9%. Higher costs and depreciation more than offset growth.
- Nine-month revenue increased 15.4% and continuing-operations income increased 18.8%, despite operating expenses increasing 17.0%. Wireless contributed $20.1 million of the revenue increase, cable $6.6 million and wireline $3.6 million.
- Wireless revenue benefited from subscriber growth, smartphone data usage and higher revenue per subscriber. At September 30, postpaid subscribers were 258,867 and prepaid subscribers 122,454. Q3 segment operating income declined to $8.2 million from $12.9 million, with higher handset subsidies, network costs, selling expenses and accelerated depreciation.
- Cable revenue increased, while video customers declined to 60,443 from 64,655 a year earlier. Internet and voice units grew. The segment continued to report an operating loss: $5.6 million in Q3 and $14.2 million year to date, both improved from 2011.
- Wireline revenue grew, particularly from fiber and facility leases; access-line counts continued to decline. Q3 segment operating income was broadly flat at $3.4 million.
Outlook, financing, risks and unusual items
- Network Vision: The company expected to launch 4G LTE in portions of its wireless footprint in Q4 2012, had replaced 80 cell sites by September 30, and expected to complete equipment replacement by the end of 2013. Accelerated depreciation and higher network, backhaul and lease costs were expected to persist, though depreciation at lower elevated levels, into 2013.
- Capital spending: 2012 capex expectations were reduced from approximately $138 million to $115 million, including approximately $55 million for Network Vision. Management said cash on hand and operating cash flow should fund planned spending, debt service and other needs for at least the next 12 months.
- Refinancing and interest-rate exposure: A September 2012 CoBank-led credit agreement refinanced existing debt and funded planned needs. The $230 million Term Loan A matures in 2019; scheduled quarterly principal payments of $5.75 million begin in December 2014. The company reported covenant compliance at quarter-end. Swaps covered most variable-rate debt; approximately $56 million was expected to become unprotected when the existing swap expires in July 2013. A 1% rate increase on that amount was estimated to add about $0.6 million to annual interest expense.
- Unusual items: Q3 interest expense included a $0.8 million pretax write-off of unamortized loan costs. A revised asset-retirement estimate reduced liabilities by about $2.0 million and Q2 depreciation expense by $0.9 million. A new cash-flow hedge produced a $1.1 million after-tax unrealized loss in other comprehensive income; the company estimated $1.6 million would be reclassified to interest expense over the next 12 months.
- Discontinued operations: The company continued winding down its Converged Services operation. Six properties remained at quarter-end; four were in negotiated sale processes and the company was ending its relationship with two. Management anticipated no additional impairments. Nine-month discontinued-operations losses were $0.2 million.
- Key risks and dependencies: Wireless operations depend substantially on Sprint Nextel for billing, collections, customer care and other services; Sprint-related remittances represent approximately 56% of company revenue. Other stated risks include customer growth and retention, technology and regulatory changes, capital availability, and execution and costs of network upgrades. The filing reported no material change to previously disclosed risk factors. Management did not expect SoftBank’s announced proposed acquisition of a controlling stake in Sprint to affect the company’s contractual arrangements.
- Tax and contingencies: Q3 effective tax rate increased to 59.2% from 49.0%, which management attributed to revisions to estimates in the prior-year tax provision; the nine-month effective rate was 45.4% in both years. Maryland and Pennsylvania state tax audits were ongoing. The filing also disclosed $100.5 million of future minimum operating lease payments and $59.6 million of purchase obligations, including $49 million related to the primary Network Vision vendor.
Important facts for investors to verify
- Whether subscriber and revenue growth can outpace wireless handset, marketing, backhaul and other network costs—and whether margins recover as Network Vision depreciation and upgrade spending progress.
- The pace and economics of LTE deployment, expected completion by the end of 2013, and the effect of revised capital spending on network performance and cash needs.
- Debt covenant headroom, scheduled principal repayments, swap terms and the cost of refinancing or unhedged debt after the July 2013 swap expiry.
- Cash-flow quality, including the contribution of tax refunds and working-capital movements, alongside substantial capex and contractual commitments.
- Wireless reliance on Sprint Nextel and the trend in cable video losses, internet and voice growth, and the remaining Converged Services property dispositions.