Shenandoah Telecommunications Company — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. Amounts below are in millions unless otherwise noted.
Business context
Shentel is a regional telecommunications holding company operating Wireless, Wireline and Cable segments in the southeastern United States. Wireless service is provided as a Sprint PCS affiliate; Wireline includes telephone, broadband and fiber services; Cable provides video, internet and voice. Converged Services is classified as a discontinued operation and remains for sale.
Financial and operating metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Operating revenue | $251.1 | $195.2 | +28.7% |
| Operating income | $32.3 | $36.3 | -11.1% |
| Operating margin | 12.9% | 18.6% | Down 5.7 percentage points |
| Net income from continuing operations | $13.5 | $18.8 | -27.9% |
| Net income | $13.0 | $18.1 | -28.1% |
| diluted EPS | $0.55 | $0.76 | Down $0.21 |
| Adjusted OIBDA (non-GAAP) | $88.3 | $82.8 | +6.6% |
| Cash from operating activities | $80.9 | $75.2 | +$5.7 |
| Capital expenditures | $74.7 | $55.9 | +$18.8 |
| Total debt at year-end | $180.6 | $195.1 | Down $14.5 |
Year-end cash was $15.9 million, versus $27.5 million a year earlier. Current assets were $64.5 million and current liabilities $55.6 million (approximately 1.16x current ratio). Reported covenant liquidity was $64.0 million, compared with a $15.0 million minimum. The company reported covenant compliance; leverage was 2.06x against a maximum of 2.50x. Most debt was variable-rate: $175.6 million at 3.30% at year-end. A 1 percentage-point rate increase was estimated to add about $1.8 million in annual interest expense.
FY 2011 fourth-quarter revenue was $66.5 million, operating income $8.0 million, continuing-operations income $3.8 million, and net income $4.0 million. Diluted EPS was $0.16.
Material changes versus the prior comparable period
- Revenue growth was led by Wireless (+$25.6 million) and Cable (+$31.2 million). Cable benefited substantially from a full year of ownership of systems acquired in 2010; revenue also reflected 7% growth in Cable revenue-generating units.
- Wireless revenue rose 20.0% at the segment level. Prepaid customers grew to 107,100 from 66,956, while postpaid customers increased 5.9% to 248,620. Higher prepaid acquisition and handset subsidy costs contributed to higher expenses.
- Cable remained loss-making at the operating level: a $21.4 million loss versus a $15.3 million loss in 2010, as acquired-network costs and depreciation and amortization increased. Adjusted OIBDA for Cable was positive at $2.6 million.
- Wireline operating income fell 18.4% to $13.8 million, partly reflecting the absence of the $4.0 million directory-sale gain recognized in 2010.
- Operating expenses rose 34.4%, faster than revenue; higher depreciation and amortization, acquisition-related scale-up and Wireless prepaid costs weighed on GAAP operating profit. Interest expense increased to $8.3 million from $4.7 million, primarily due to acquisition financing.
Outlook, risks and unusual items
- Management budgeted approximately $138 million of capital expenditures for 2012, including $34 million for remaining Cable upgrades and $60 million for the Network Vision wireless modernization. Network Vision was estimated to cost $115 million over two years and replace virtually every wireless base station. Management expected cash, operating cash flow and available credit to fund planned needs for at least 12 months.
- Management expected higher Wireless backhaul costs during the Network Vision transition and increased depreciation, including as much as $7.3 million of accelerated depreciation in 2012 as the network is replaced. These plans and estimates are forward-looking, not guarantees.
- A February 2012 Sprint agreement enabled Shentel to build an LTE network, provided access to additional spectrum, extended the initial contract term from 2019 to 2024, and raised the contractual cap on the Sprint Net Service Fee from 12% to 14% effective July 1, 2013. Sprint-related customers and activity generated approximately 55% of total revenue per the major-customer disclosure; another filing passage cites 56.6% generated by or through Sprint in 2011.
- Key exposures include dependence on Sprint for billing, customer care, network and other support; competition and subscriber churn; execution and cost risk on Network Vision and Cable upgrades; and regulatory changes. FCC intercarrier-compensation reforms may reduce access revenues, and USF reforms may affect support payments. The filing says the size and effect of these changes could not yet be estimated.
- Converged Services generated $10.5 million of discontinued-operation revenue and a $0.5 million after-tax loss in 2011. The company recorded a $0.6 million impairment charge and reported approximately $5.2 million of sale proceeds and receivables for properties sold; $2.2 million was in escrow at year-end. Sale negotiations for remaining properties continued.
- The annual cash dividend remained $0.33 per share, subject to credit-agreement restrictions. The filing reported no legal proceedings. KPMG issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure and financial-reporting controls were effective.
Important facts for investors to verify
- Whether 2012 capital spending and Network Vision costs, schedule, financing and expected operating benefits track management’s plans.
- Whether Cable upgrades translate into subscriber gains, improved segment profitability and adequate returns on acquired assets.
- How FCC intercarrier-compensation and USF reforms affect Wireline and Wireless revenue, costs and cash flow.
- Whether Sprint remains operationally and commercially supportive, and how the 2013 Net Service Fee increase affects Wireless economics.
- Debt repayment and refinancing capacity, variable-rate exposure, covenant headroom and liquidity after planned capital expenditures.
- Final sale proceeds and any further impairment or gain/loss from the remaining Converged Services assets.