Shenandoah Telecommunications Company (Shentel) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Shentel provides wireless service as a Sprint affiliate, plus cable, wireline, and fiber services in the Mid-Atlantic.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $158.9 million | $156.5 million | $317.8 million | $310.6 million |
| Operating income | $24.0 million | $21.2 million | $48.8 million | $37.9 million |
| Operating margin | 15.1% | 13.5% | 15.4% | 12.2% |
| Net income | $13.2 million | $9.6 million | $27.1 million | $16.2 million |
| Basic/diluted EPS | $0.26/$0.26 | $0.19/$0.19 | $0.54/$0.54 | $0.33/$0.32 |
- Q2 revenue rose 1.5% year over year; operating expenses decreased 0.3%. Net income increased 36.6%, aided by lower interest expense and higher other income.
- For the first half, revenue increased 2.3% and net income 66.9%. Operating expenses declined 1.4%; lower interest expense and lower wireless amortization also contributed to improved earnings.
- Q2 Adjusted OIBDA, a company-defined non-GAAP measure, was $67.0 million versus $63.7 million; first-half Adjusted OIBDA was $134.6 million versus $125.9 million. The company revised its definition in Q2 and applied it to comparative periods.
Cash flow, debt and liquidity
- First-half operating cash flow was $129.6 million, compared with $127.1 million. Capital expenditures were $79.1 million versus $62.3 million; investing cash outflow was $89.0 million. Financing cash outflow was $27.6 million, including $24.8 million of debt principal payments.
- Cash and equivalents were $98.1 million at June 30, 2019, up from $85.1 million at year-end 2018. Management reported total available liquidity of $173.1 million, including $75.0 million available under its revolver.
- Debt, net of unamortized fees, was $747.0 million; gross term-loan debt was $760.5 million. The annualized weighted-average interest rate was approximately 3.79%. The company reported covenant compliance: leverage ratio 2.41 against a maximum of 3.50; debt-service coverage 4.61 against a minimum of 2.00.
- Adoption of lease accounting brought $369.7 million of operating lease right-of-use assets and $370.8 million of operating lease liabilities onto the June 30 balance sheet. Management said adoption did not materially affect earnings, cash flows, liquidity, or loan covenants.
Material changes and operating developments
- Cable was the main Q2 growth driver: segment revenue rose 8.0% to $34.7 million, reflecting Big Sandy, broadband subscriber growth, higher broadband packages and video rates, and fiber demand. Cable operating income increased 11.6% to $6.8 million.
- Wireless revenue declined 0.5% to $114.1 million in Q2. Subscriber and equipment-related growth was offset in part by lower travel revenue. Wireless operating income was $22.0 million, down 1.0%.
- Wireline revenue increased 2.2% to $19.5 million in Q2, with operating income up 6.3% to $5.1 million. The company attributed revenue growth partly to timing of regulatory support funds.
- On February 28, 2019, Shentel acquired Big Sandy Broadband assets for $10 million, expanding Cable operations in eastern Kentucky.
- The company began initial deployment of a fiber-to-the-home product in three markets. It incurred $0.8 million of related Q2 expenses and expects further costs before the product generates revenue.
Outlook, risks and unusual items
- Management expects cash on hand, operating cash flow, and credit-facility availability to fund planned capital expenditures, scheduled debt service, and other needs for at least the next 12 months. It expects continued network and infrastructure investment; no specific earnings or revenue guidance was provided.
- Sprint suspended agreed travel-fee payments on April 30, 2019. Shentel stopped recognizing revenue for those services after that date pending agreement on a new prospective fee; management expected resolution in Q3 2019. The filing reports a significant Sprint relationship, with the affiliate agreement’s initial term through November 2029 and renewal options.
- Interest-rate exposure remains material: approximately half of gross variable-rate debt was covered by swaps. The filing estimates a 1 percentage-point rate increase would add about $7.5 million to annual interest expense before swap effects; the swaps offset approximately half of the change.
- Disclosure controls and procedures remained ineffective at June 30 because previously identified material weaknesses in internal control over financial reporting had not been remediated. Management nevertheless stated the interim financial statements fairly present the company’s financial position and results in all material respects.
- After quarter-end, Shentel closed on spectrum licenses on July 9 for $13.8 million; the broader agreements involve $17.0 million at closing and approximately $4.0 million over lease terms, with certain leased-license closings subject to regulatory approvals.
- Other notable items: the company reported $19.3 million of first-half cash savings from Sprint’s waived management fee, expected to continue through 2022; a Q2 unrealized interest-rate-hedge loss reduced comprehensive income.
Important facts for investors to verify
- Whether and on what terms Shentel and Sprint resolve the suspended travel-fee payments, and the ongoing economics and duration of the affiliate relationship.
- Progress, costs, and subscriber uptake for FTTH, and whether Cable growth and margins persist after Big Sandy integration.
- Capital expenditure requirements, debt repayment schedule, interest-rate sensitivity, and covenant headroom; distinguish reported debt from substantial lease liabilities.
- Remediation and independent testing of the disclosed material weaknesses in internal controls.
- Completion and total costs of the spectrum-license agreements, including required regulatory approvals.