Shenandoah Telecommunications Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The company provides Sprint-branded wireless service and Shentel-branded cable, wireline, internet, and related services. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $158.8 | $154.1 | +3.1% |
| Operating income | $24.8 | $16.8 | +47.9% |
| Operating margin | 15.6% | 10.9% | +4.7 percentage points |
| Net income | $13.9 | $6.6 | +111.3% |
| Diluted earnings per share | $0.28 | $0.13 | +$0.15 |
| Cash from operating activities | $61.7 | $60.9 | +$0.8 |
Revenue growth reflected subscriber growth in Wireless and Cable. Operating expenses declined 2.4%, mainly from Wireless network-cost reductions, while lower interest expense also supported earnings growth. Net margin increased to 8.8% from 4.3%.
Segments and material changes
- Wireless: Revenue rose 2.5% to $115.7 million and operating income increased 46.7% to $25.3 million. Service revenue grew 5.3%, supported by postpaid and prepaid subscriber growth; equipment revenue fell 12.0%.
- Cable: Revenue rose 6.3% to $33.7 million, while operating income increased 3.2% to $5.7 million. Broadband users rose to 71,549 from 65,141 year over year. Higher-speed service and network investment increased costs.
- Wireline: Revenue declined 4.0% to $18.9 million and operating income fell 8.9% to $4.3 million, partly reflecting lower carrier-access and fiber revenue.
- Acquisition: On February 28, 2019, the company acquired Big Sandy Broadband assets for $10 million, expanding Cable into eastern Kentucky. The preliminary purchase accounting included $2.6 million of goodwill.
Cash, debt, and liquidity
- Cash and cash equivalents were $69.9 million at March 31, down from $85.1 million at year-end.
- Operating cash flow was $61.7 million. Investing activities used $54.4 million, including $44.4 million of capital expenditures and the $10 million Big Sandy acquisition. Financing activities used $22.5 million, including $19.9 million of debt principal payments and a voluntary $15 million repayment.
- Gross debt was $765.3 million; the balance-sheet carrying amount, net of unamortized fees, was $751.3 million. The weighted-average interest rate was approximately 3.78%. The company had $75 million available under its revolver.
- At quarter-end, covenant measures were within requirements: leverage ratio 2.42 versus a maximum 3.50; debt-service coverage 3.42 versus a minimum 2.00; and reported minimum liquidity of $144.6 million versus a $25 million minimum.
- Management said cash on hand, operating cash flow, and expected credit-facility availability should fund planned spending and obligations for at least the next 12 months.
Outlook, risks, and unusual items
- 2019 capital expenditures were budgeted at approximately $149.5 million, including $64.1 million for Wireless, $55.0 million primarily for Cable, and $20.5 million for Wireline.
- Wireless operations depend significantly on Sprint, including the affiliate relationship and Sprint’s billing, customer-care, and collection functions. The agreement extends through November 2029, subject to its terms.
- Debt is variable-rate. Interest-rate swaps cover approximately half of outstanding variable-rate debt; the filing estimates a 1 percentage-point rate increase would add about $7.6 million to annual interest expense before swap effects. Approximately $392.4 million of variable-rate debt had no interest-rate protection.
- Sprint waived $9.6 million of management fees in Q1 under the affiliate agreement. The company includes this benefit in Adjusted OIBDA but excludes it from Continuing OIBDA; the waiver is expected to continue until a cumulative cap is reached, expected in 2022. These are non-GAAP measures and should not replace GAAP results.
- The company adopted the new lease standard on January 1, 2019, recording operating lease right-of-use assets and liabilities. Management said adoption did not materially affect earnings, cash flows, liquidity, or loan covenants; prior-period figures were not retrospectively adjusted.
- Management reported that previously identified material weaknesses in internal control over financial reporting remained unremediated, and disclosure controls were still ineffective at March 31, 2019. Management nevertheless concluded the interim financial statements fairly presented the periods shown.
- No earnings or revenue guidance was provided. The filing cautions that capital needs, demand, interest rates, regulation, technology, and the Sprint relationship could affect results and cash flows.
Key facts for investors to verify
- Whether Wireless subscriber and service-revenue growth continues, and how performance changes with the Sprint affiliate relationship.
- Progress on the $149.5 million capital program, its funding, and the resulting cash generation and debt repayment.
- Interest-rate exposure, swap coverage, revolver availability, and continued compliance with debt covenants.
- Big Sandy integration, subscriber trends, and the effect of Cable investment on segment margins.
- Remediation of the disclosed material weaknesses in internal controls.