Shenandoah Telecommunications Company (Shentel) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Shentel provides wireless service as a Sprint affiliate, as well as cable and wireline services. Wireless accounted for approximately 61% of consolidated revenue. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $154.0 | $153.3 | $305.8 | $307.1 |
| Operating income | $18.7 | $8.3 | $33.0 | $18.9 |
| Operating margin | 12.1% | 5.4% | 10.8% | 6.2% |
| Net income (loss) | $7.8 | $(0.1) | $12.7 | $2.3 |
| Diluted EPS | $0.16 | $0.00 | $0.25 | $0.05 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $127.1 | $86.8 |
- Q2 reported revenue rose 0.5% year over year; first-half revenue fell 0.4%. Management said revenue excluding Topic 606 adoption effects would have increased about $4.8 million in Q2 and $6.8 million for the first half.
- Operating income increased 126.6% in Q2 and 74.6% for the first half. Management attributed lower expenses in part to the absence of nTelos integration and migration costs incurred in 2017. First-half net income increased to $12.7 million from $2.3 million.
- Q2 segment operating income was $19.8 million Wireless, $6.1 million Cable, and $4.8 million Wireline. Cable revenue grew 8.6% in Q2; Wireline revenue declined 2.4%. Wireless segment revenue declined 1.6% as reported, but increased about $2.2 million excluding Topic 606 effects.
- Management’s non-GAAP Adjusted OIBDA was $69.8 million in Q2 versus $69.4 million; Continuing OIBDA was $60.3 million versus $60.3 million. For the first half, Adjusted OIBDA was $138.4 million versus $143.0 million and Continuing OIBDA was $119.8 million versus $124.9 million. These measures are not GAAP and exclude specified items, including Sprint’s waived management fee.
Balance sheet, cash flow and liquidity
- At June 30, cash and cash equivalents were $65.6 million, total current assets $195.1 million and current liabilities $138.8 million. Cash was down from $78.6 million at year-end 2017.
- Gross debt was $812.3 million; debt net of unamortized fees was $799.9 million. The weighted average annualized interest rate was approximately 3.90%. The company made $24.3 million of principal payments in the first half.
- First-half capital expenditures were $62.3 million, and investing cash outflow was $113.9 million, including the $52.0 million Sprint territory expansion payment. Financing cash outflow was $26.3 million.
- Shentel reported compliance with its debt covenants: total leverage ratio 2.89x versus a maximum 3.75x; debt-service coverage 3.40x versus a minimum 2.00x; and covenant liquidity of $139.3 million versus a $25 million minimum.
Material changes, outlook and risks
- Revenue accounting: Shentel adopted Topic 606 on January 1, 2018 using the modified retrospective method; 2017 comparisons were not restated. The change records certain Sprint reimbursements as reductions of revenue and defers related costs, and reports equipment-financing sales and costs gross rather than net. It materially changed reported revenue and expense classifications. Adoption increased opening retained earnings by $50.0 million.
- Sprint expansion: Effective February 1, 2018, Shentel paid $52.0 million for rights to serve additional areas in Kentucky, Pennsylvania, Virginia and West Virginia, adding about 1.1 million population points. Up to a further $5.0 million may be payable after equipment acceptance. The agreement includes network build-out requirements.
- Capital plans and liquidity outlook: The company budgeted approximately $163 million in 2018 capital expenditures, including $103 million for Wireless. Management believes cash, operating cash flow and available credit facilities should fund planned spending, debt service and other needs for at least the next 12 months; it cautioned that cash generation and borrowing capacity are not assured.
- Customer and rate exposure: Wireless depends on Sprint, including its billing, customer-care and collections functions. Variable-rate debt was $812.3 million; management estimated a 1 percentage-point rate increase could add about $7.8 million to annual interest expense before swap effects. Interest-rate swaps cover approximately half of variable-rate debt.
- Controls: Disclosure controls remained ineffective at June 30, 2018 because previously reported material weaknesses in internal control over financial reporting had not yet been remediated. Management stated the financial statements fairly present results in all material respects, while remediation and testing continue.
- The filing provides no specific earnings or revenue guidance. Management cited competitive, economic, regulatory, technology, labor, customer-demand and Sprint-relationship risks; it reported no necessary updates to the risk factors in its 2017 Form 10-K.
Important facts for investors to verify
- Assess underlying wireless revenue and profitability using comparable accounting, given Topic 606’s significant presentation changes and un-restated prior-period figures.
- Track Sprint concentration, subscriber trends, churn, expansion-area build-out and any additional payment tied to equipment acceptance.
- Monitor leverage, covenant headroom, interest rates, swap coverage, capital spending and cash conversion.
- Follow remediation and independent testing of the disclosed material weaknesses and ineffective disclosure controls.
- Confirm whether the 2018 capital budget and management’s stated 12-month liquidity expectation remain achievable.