Shenandoah Telecommunications Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise. The filing presents Wireless as discontinued operations after its sale to T-Mobile on July 1, 2021; continuing results principally reflect Broadband and Tower.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue from continuing operations | $62.2m | $55.2m | $182.6m | $162.6m |
| Operating income (loss) | $1.2m | $0.5m | $6.2m | ($2.8m) |
| Operating margin | 1.9% | 0.9% | 3.4% | (1.7%) |
| Income from continuing operations | $6.7m | $1.4m | $11.6m | $1.0m |
| Net income | $893.1m | $34.9m | $998.0m | $77.4m |
| Cash provided by operating activities | Not separately presented for the quarter | $152.6m total; $31.6m continuing | $227.3m total; $44.8m continuing |
- Net income includes discontinued operations income of $886.3m in Q3 and $986.4m for the nine months, primarily reflecting the Wireless sale. It is not representative of recurring continuing-operations earnings.
- Broadband revenue grew 14.2% in Q3 and 12.4% year to date; Broadband operating income was $9.7m in Q3 and $28.6m year to date. Tower revenue rose 9.9% year to date to $13.7m, with operating income of $7.4m.
- Cash and cash equivalents were $532.5m at September 30, versus $195.4m at December 31, 2020. The company reported $932.5m of total available liquidity, including $400m of undrawn credit facilities.
- Capital expenditures were $118.8m for the nine months, compared with $82.7m in the prior-year period. Net cash provided by investing activities was $1.825bn, principally due to the Wireless disposition.
- At September 30, the company had no borrowings under its new credit agreement. It had repaid approximately $681m of prior debt at the sale closing. The $400m facilities comprise a $100m revolver and two delayed-draw term loans of $150m each. No long-term debt balance was reported at quarter end.
Material changes and notable items
- Shentel sold its Wireless assets and operations to T-Mobile for approximately $1.94bn cash consideration, inclusive of about $60m related to waived management fees and net of certain transaction expenses. The sale generated a reported pretax gain of approximately $1.225bn.
- The sale and debt repayment substantially changed the balance sheet. Current assets fell from $1.409bn at year-end 2020 to $574.0m, while current liabilities fell from $1.208bn to $485.4m. The September balance includes $432.8m of income taxes payable, largely related to the sale.
- The company paid a special dividend of $18.75 per share on August 2, totaling approximately $937m. Q3 diluted net income per share was $17.81, including $17.68 from discontinued operations; diluted continuing-operations EPS was $0.13.
- Continuing revenue growth was offset by higher expansion-related expenses. Q3 operating expenses rose 11.6%, while revenue rose 12.8%. For the first nine months, Broadband operating income declined 3.4% despite revenue growth, as operating expenses grew faster.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expects cash on hand, continuing cash flow and credit availability to cover anticipated needs for the next 12 months, but cautions that cash generation and access to financing are not assured.
- Management expects capital expenditures to exceed cash flow from continuing operations through 2025 as it expands Glo Fiber into markets covering more than 450,000 homes passed. It expects to draw on the credit agreement beginning in Q1 2022.
- Management expects approximately $428m of transaction-related income tax payments in December 2021; the liability remains subject to change following final purchase-price allocation.
- Broadband expansion and customer growth are key priorities. Broadband homes and businesses passed increased to 296,196 from 230,002 year over year; customer relationships rose to 118,143 from 106,314. Management expects RLEC revenue to continue declining, primarily due to DSL subscriber losses and reduced government support.
- The credit agreement requires a total net leverage ratio no greater than 4.25:1 and debt service coverage ratio of at least 2.00:1; the company reported compliance at quarter end. Management identified uncertainty around the transition from LIBOR and its potential effect on future borrowing costs.
- The FCC delayed issuance of $16.2m of CBRS Priority Access Licenses pending review of certain shareholders’ aggregate spectrum ownership. The company said it was working to resolve the issue and did not consider a material loss probable or reasonably possible.
- Disclosure controls and procedures remained ineffective at September 30 because previously identified material weaknesses in internal control over financial reporting had not been remediated. Management said it performed additional procedures and concluded the financial statements fairly present results in all material respects.
- After quarter end, the board declared a $0.07-per-share dividend payable December 1, 2021. The company also adopted a resolution to terminate its frozen pension plan effective December 31, 2021; the financial impact was still being evaluated.
Important facts for investors to verify
- Final tax cost and cash payment timing for the Wireless sale, including the estimated $428m liability and final purchase-price allocation.
- Underlying recurring Broadband and Tower performance apart from the Wireless-sale gain, and whether Broadband growth can outpace the associated operating and capital costs.
- Timing and scale of Glo Fiber and Beam investment, expected credit-facility draws, and compliance with debt covenants as borrowing begins.
- Progress resolving the CBRS license delay, the LIBOR replacement process, and remediation of the disclosed internal-control material weaknesses.
- Financial and funding consequences of terminating the pension plan, which management had not yet determined in this filing.