Shenandoah Telecommunications Company (Shentel) — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Shentel provides Sprint-branded wireless service and Shentel-branded cable, internet, voice and fiber services. The results include nTelos operations for all of 2017, compared with only part of 2016 after its May 2016 acquisition.
Financial performance and liquidity
- Revenue: $612.0 million, up 14.3% from $535.3 million. Wireless segment revenue rose 17.1% to $455.1 million, principally reflecting the expanded territory; Cable revenue increased 9.6% to $119.2 million; Wireline revenue increased 5.7% to $79.3 million.
- Operating income: $46.5 million, up 106.5% from $22.5 million. Operating margin was approximately 7.6%, versus 4.2%. Acquisition-related depreciation and amortization remained substantial; acquisition, integration and migration expense fell to $11.0 million from $42.2 million.
- Net income and EPS: Net income was $66.4 million, or $1.35 per basic share, compared with a net loss of $0.9 million, or $0.02 per share, in 2016. Pretax income was $13.3 million. The 2017 result included a $53.4 million non-cash tax benefit from remeasuring deferred taxes after the federal tax rate reduction; it is not representative of operating earnings.
- Cash flow and capital spending: Operating cash flow was $222.9 million, versus $161.5 million. Capital expenditures were $146.5 million, down from $173.2 million. Investing activities used $151.5 million; financing activities used $29.0 million. Cash increased to $78.6 million from $36.2 million.
- Debt and liquidity: Gross debt was $836.5 million; reported debt net of $14.5 million of unamortized loan fees was $822.0 million. The weighted-average effective interest rate was 4.23%; debt was variable-rate, with swaps covering about half. Covenant liquidity was $151.9 million, including cash and revolver availability. Shentel reported compliance with its leverage, debt-service coverage and minimum-liquidity covenants.
- Dividends: Declared cash dividends were $0.26 per share for 2017, up from $0.25. Debt-agreement restrictions apply to future distributions.
Material changes and operating trends
- Wireless service revenue increased 19.9%; postpaid and prepaid subscriber counts grew 2% and 9%, respectively. Postpaid monthly churn rose to 2.04% from 1.84%; prepaid churn declined to 5.07% from 6.72%.
- Cable revenue growth reflected higher internet subscribers and revenue per subscriber, while video users declined and video penetration fell. Cable operating income improved to $15.8 million from $7.0 million.
- Wireline operating income was $21.0 million, up 2.1%, as fiber and carrier-access revenue growth more than offset higher costs. Local telephone access lines declined 2.8% to 17,933.
- Growth and higher costs reflect the nTelos acquisition and territory expansion. Shentel reported cumulative nTelos acquisition, integration and migration costs of approximately $75.7 million through 2017, excluding debt issuance costs.
Outlook, risks and unusual items
- Investment outlook: Shentel budgeted approximately $163 million of 2018 capital expenditures, including $103 million for Wireless network upgrades and expansion. Management expected cash, operating cash flow and available borrowing capacity to fund planned spending and obligations for at least the next 12 months; this is subject to operating and financing risks.
- Post-year-end expansion: Effective February 1, 2018, Shentel agreed to expand its Sprint territory into parts of Kentucky, Pennsylvania, Tennessee, Virginia and West Virginia. Consideration was initially $60 million plus up to $5 million for equipment; a subscriber reconciliation reduced the purchase price by $8 million. The agreement includes network build-out requirements.
- Financing update: A February 2018 credit amendment reduced interest rates on certain loans by approximately 50 basis points and permitted up to $1.5 million in annual charitable contributions to the Shentel Foundation.
- Key business risks: Sprint generated 72% of 2017 revenue, and Sprint controls important wireless functions and customer-facing arrangements. Intense competition, pricing pressure, subscriber churn, network investment needs, regulation and declining landline customers may affect results. A 1 percentage-point increase in rates was estimated to add about $8.2 million to annual interest expense before swaps.
- Controls and audit: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end due to material weaknesses involving staffing, risk assessment, information and communication, monitoring, lease and tax accounting, reconciliations and supporting documentation. KPMG issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Management outlined a 2018 remediation plan.
- Other matters: The nTelos pension plans were underfunded by approximately $5.6 million at year-end. Management did not expect a required cash contribution in 2018. No legal proceeding was reported in Part I; the notes state management did not expect litigation to materially adversely affect the financial statements.
Important facts for investors to verify
- How much of earnings and cash generation is recurring after excluding the $53.4 million tax benefit and acquisition-related items.
- Whether planned 2018 network investment and the Sprint territory expansion generate sufficient subscriber growth and returns without straining covenant headroom.
- Progress in remediating the material weaknesses and whether controls become effective in subsequent filings.
- Sprint’s continued operational and commercial support, given its 72% share of revenue and Shentel’s dependence on Sprint systems and agreements.
- Exposure to variable interest rates, scheduled debt repayments and the terms governing dividends and other uses of cash.