Shenandoah Telecommunications Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; amounts below are in U.S. dollars, with financial figures generally in millions unless noted.
Business context
The company provides wireless, cable, and wireline telecommunications services. Wireless operates as a Sprint PCS affiliate; Cable provides video, internet, and voice; Wireline provides telephone, internet, and fiber services. The filing presents Converged Services as discontinued operations.
Financial performance and position
- Q2 revenue: $71.4 million, up 16.0% from $61.6 million. Operating income was $11.1 million, up 39.3%; operating margin was approximately 15.6%, versus 13.0%. Continuing-operations net income was $5.7 million, versus $3.0 million; total net income, after discontinued-operation losses, was $5.6 million ($0.23 per diluted share), versus $3.0 million ($0.13).
- First-half revenue: $140.2 million, up 14.9% from $122.0 million. Operating income rose 32.3% to $20.0 million; operating margin was approximately 14.2%, versus 12.4%. Continuing-operations net income was $10.1 million, versus $6.1 million; total net income was $10.0 million ($0.42 per diluted share), versus $6.0 million ($0.25).
- Segment performance: Q2 Wireless revenue increased 17.9% to $44.3 million and operating income increased 20.7% to $12.5 million. Cable revenue rose 12.9% to $19.0 million; its operating loss narrowed to $4.0 million from $4.9 million. Wireline revenue rose 12.4% to $13.8 million, while operating income decreased 2.5% to $3.3 million.
- Cash flow: First-half operating cash flow was $44.5 million, compared with $34.3 million. Investing used $28.0 million, including $32.3 million of capital expenditures; financing used $11.0 million, including $10.9 million of debt principal payments. Cash increased $5.4 million to $21.3 million. The increase in income taxes payable contributed $14.8 million to operating cash flow.
- Debt and liquidity: Total debt was $169.7 million at June 30, down from $180.6 million at year-end; the weighted-average interest rate was approximately 3.40%. The company reported $50 million available under its revolver and potential incremental term borrowing capacity of up to $100 million, subject to restrictions. It was in compliance with debt covenants. Current assets were $56.8 million and current liabilities $54.6 million.
- Non-GAAP measure: Adjusted OIBDA was $26.9 million in Q2, versus $23.0 million, and $51.9 million for the first half, versus $44.4 million. The filing cautions that this measure is not a substitute for GAAP results.
Material changes and management commentary
- Revenue growth was led by Wireless and Cable. Management cited higher subscriber counts and revenue per subscriber; Wireless also benefited from smartphone data fees and prepaid growth. Wireline growth reflected increased fiber and facilities leases, partly offset by lower access revenue.
- Operating costs increased 12.5% in both Q2 and the first half, including higher handset subsidies, network/backhaul costs, sales and marketing, and depreciation. The company began replacing wireless cell-site equipment under Sprint’s Network Vision upgrade plan; it had replaced equipment at ten sites by Q2 and expected to complete the replacements by the end of 2013.
- A one-time estimate revision to cell-site asset-removal obligations reduced the liability by approximately $2.0 million and the related asset by $1.1 million, lowering Q2 depreciation expense by $0.9 million. Wireless accelerated depreciation was approximately $1.8 million in Q2 and $4.0 million in the first half; management expected elevated charges through 2012 and at a lower level in 2013.
- Management budgeted approximately $138 million of 2012 capital expenditures, including about $60 million for Network Vision and $34 million for Cable. It stated that cash, operating cash flow, and expected borrowing availability should fund requirements for at least the next 12 months. The company was negotiating to refinance its credit facilities to increase term-loan capacity and extend repayment terms; no completed refinancing was reported.
- Converged Services sales continued: seven properties remained at June 30, with five negotiated sales targeted for completion within 90 days and the company ending its relationship with the other two. Management anticipated no further impairments.
Risks, contingencies, and unusual items
- Wireless depends materially on Sprint Nextel for billing, collections, customer care, and other services. Sprint remits approximately 56% of company operating revenue, and the company relies on Sprint-provided information to record a substantial portion of revenue and receivables.
- Approximately $165.9 million of debt was variable-rate at June 30. The filing estimates a 1 percentage-point rate increase would add about $1.7 million to annual interest expense. A swap covering one-third of variable-rate debt was scheduled to run through July 2013.
- Network Vision entails significant capital spending and expected increases in operating costs through 2013. Other stated risks include demand, competition, regulation, technology changes, Sprint relationship performance, and the company’s ability to attract and retain Cable customers.
- Maryland tax audits covered 2007–2009 and a Pennsylvania audit covered 2009. No material change to previously disclosed risk factors was reported. The filing states that disclosure controls were effective and that there were no material second-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether wireless subscriber and revenue growth continues to offset higher handset, backhaul, and upgrade-related costs.
- Actual Network Vision and total capital spending versus the 2012 budget, and the timing and cost effects of the network transition.
- Progress and terms of the proposed credit refinancing, covenant headroom, and exposure to variable interest rates.
- Whether the first-half operating cash-flow increase is sustainable, given the significant increase in income taxes payable.
- Completion and proceeds of the remaining Converged Services property sales, and any final costs or impairments.