Business context and reporting period
Shenandoah Telecommunications Company (Shentel) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Its principal businesses are Wireless (as a Sprint PCS affiliate), Cable, and Wireline. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $82.3 | $77.5 | $244.1 | $231.0 |
| Operating income | $14.1 | $13.3 | $45.6 | $43.0 |
| Net income | $8.0 | $6.7 | $25.2 | $22.9 |
| Diluted EPS | $0.33 | $0.28 | $1.04 | $0.95 |
| Operating margin | 17.2% | 17.1% | 18.7% | 18.6% |
Revenue rose 6.1% in Q3 and 5.7% year to date; net income increased 19.1% and 10.1%, respectively. Adjusted OIBDA, a company-defined non-GAAP measure, was $33.3 million in Q3 versus $28.7 million and $98.0 million for nine months versus $89.6 million. The company cautions that adjusted OIBDA does not replace GAAP results and excludes, among other items, depreciation, capital expenditures, interest, taxes, and share-based compensation.
- Segment trends: Q3 Wireless revenue increased 5.3% to $52.2 million and operating income grew 5.1% to $17.3 million. Cable revenue grew 9.7% to $21.0 million, but its operating loss widened to $4.1 million from $3.5 million. Wireline revenue increased 5.9% to $15.9 million and operating income rose 27.2% to $4.4 million.
- Cash flow and investment: Nine-month operating cash flow was $91.3 million, compared with $73.5 million; management attributed the increase primarily to using excess tax payments carried over from 2013. Capital expenditures were $51.2 million, down from $80.8 million. Cash increased to $78.6 million from $38.3 million. Operating cash flow less capital expenditures was approximately $40.1 million, versus negative $7.3 million in the prior-year period.
- Debt and liquidity: Total debt was $230.0 million, including $23.0 million classified as current; cash exceeded current liabilities ($57.1 million), and reported cash less total debt was approximately $151.4 million of net debt. The company reported $50 million available under its revolving facility and potential incremental term borrowing of up to $100 million, subject to restrictions. It was in compliance with covenants. Its weighted average debt rate was approximately 3.40% after the swap, or approximately 2.71% after lender patronage credits.
- Balance sheet: Total assets were $614.6 million and shareholders’ equity was $260.7 million at September 30, 2014, compared with $597.0 million and $234.3 million, respectively, at December 31, 2013.
Material changes, outlook, and risks
- Wireless growth reflected higher postpaid and prepaid subscriber counts; average postpaid subscribers grew 4.8% year over year in Q3. Cable growth was supported by more revenue-generating units, pricing and equipment rentals, while video customer counts continued to decline. Wireline benefited from new facility-lease contracts, including affiliate network-upgrade work.
- Operating expenses increased 6.0% in Q3 and 5.6% year to date. Higher handset and programming costs, disposal of obsolete network equipment, and increased depreciation following Network Vision and cable upgrades contributed. Q3 asset-disposal losses were notably higher than the prior-year quarter.
- Management forecast 2014 capital spending of approximately $64 million, below the $74 million budget, with Cable somewhat over its initial segment budget. It expected cash, operating cash flow, and available borrowings to fund planned spending, scheduled debt service, other needs, and covenant compliance for at least the next 12 months. No revenue or earnings guidance was provided. Management expected an effective tax rate of approximately 39.5%, absent unanticipated adjustments.
- Quarterly term-loan repayments of $5.75 million were scheduled to begin December 31, 2014. The company had $230 million of variable-rate debt; it estimated that a 1 percentage-point rate increase would add about $2.3 million of annual interest expense before the swap effect. The swap covered about 76% of debt; $55.4 million remained without interest-rate protection. Management estimated the swap would increase interest expense by about $1.5 million over the next 12 months at then-current rates.
- Key exposures include dependence on Sprint for wireless billing, collections, customer care, and other services; Sprint remitted approximately 59% of company revenue. Results also depend on subscriber growth and retention, programming and network costs, competition, regulation, technology changes, and interest rates. The company reported no material changes to the risk factors in its 2013 Form 10-K. A Maryland state tax audit for 2010 and 2011 was ongoing; the filing does not quantify a potential exposure.
- After quarter-end, the board declared a $0.47-per-share dividend payable December 1, 2014, expected to total approximately $11.3 million before dividend reinvestments.
Important facts for investors to verify
- Whether Wireless subscriber and revenue growth continues, and how Sprint-affiliate fees, service performance, and the concentration of revenue through Sprint affect results.
- Whether Cable can improve profitability while video subscribers decline and programming and network costs rise.
- Actual capital spending versus the $64 million forecast, and the impact of completed network upgrades on depreciation and future cash needs.
- Debt repayment and interest-rate exposure, including swap terms, covenant headroom, and the scheduled quarterly repayments.
- The cash-flow benefit from tax-payment timing, the outcome of the Maryland tax audit, and the company’s ability to sustain dividends alongside investment requirements.