Shenandoah Telecommunications Company (Shentel) — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Shentel provides wireless services as a Sprint affiliate, cable video, internet and voice services, and wireline and fiber services across parts of Virginia, West Virginia, Pennsylvania and Maryland. Wireless generated about 59% of 2013 revenue through Sprint and its customers.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Operating revenue | $308.9 million | $288.1 million |
| Operating income; operating margin | $55.4 million; 17.9% | $34.7 million; 12.0% |
| Net income from continuing operations | $29.6 million | $16.6 million |
| Diluted EPS | $1.23 | $0.69 from continuing operations |
| Cash from operations | $94.3 million | $97.0 million |
| Capital expenditures | $117.0 million | $89.1 million |
Revenue grew 7.2%; continuing-operations net income rose 78.2%. Operating margin improved largely because 2012 included an $11.0 million Cable goodwill impairment. Cash from operations less capital expenditures was negative $22.8 million in 2013. Fourth-quarter 2013 revenue was $78.0 million, operating income $12.4 million, net income $6.7 million and EPS $0.27, versus $75.0 million, $9.3 million, $4.9 million and $0.21, respectively, in fourth-quarter 2012.
Segments. Wireless revenue increased 10.3% to $198.1 million and operating income increased 12.7% to $60.1 million. Cable revenue increased 6.7% to $81.4 million, but reported an operating loss of $14.6 million; 2012’s loss included the goodwill impairment. Wireline revenue fell 1.4% to $53.9 million and operating income declined 6.8% to $12.9 million. Cable internet and voice customers grew, while video customer counts continued to decline.
Liquidity and debt. At year-end, cash and cash equivalents were $38.3 million, current assets $98.0 million and current liabilities $44.0 million. Debt totaled $230.0 million, including $5.75 million current, with a reported effective annualized rate of approximately 3.40% after the swap. The company had no revolver borrowings and $50 million of revolver availability. It reported compliance with covenants: leverage ratio 1.91 against a maximum of 3.00, debt-service coverage 9.86 against a minimum of 2.50, and equity-to-assets 39.2% against a minimum of 30.0%. The 2013 dividend was $0.36 per share.
Material changes and unusual items
- Wireless and Cable drove revenue growth. Postpaid and prepaid subscribers rose 4.1% and 6.9%, respectively; the Cable segment’s revenue-generating units increased 4.7%.
- Shentel completed upgrades to substantially all 526 wireless base stations under Sprint’s Network Vision program. The project contributed to $117.0 million of 2013 capital expenditures. The company recorded $3.4 million of accelerated depreciation in 2013, compared with $8.4 million in 2012.
- Effective August 1, 2013, Sprint’s net service fee increased from 12% to 14%, raising total fees retained on postpaid revenue to 22%; management cited a $1.2 million reduction in 2013 postpaid revenue.
- 2012 operating expenses included an $11.8 million Sprint reimbursement for historical prepaid-cost allocation errors, including $6.1 million attributable to 2010 and 2011, and an $11.0 million Cable goodwill impairment. These items materially affect year-over-year comparisons.
- Shentel completed the sale of the remaining Converged Services assets in 2013; the business had been reported as discontinued operations.
Outlook, commentary and risks
- Management budgeted $74.0 million of capital expenditures for 2014, including $25.1 million for Wireless, $22.5 million for Wireline and $18.9 million for Cable. It expected wireless spending to be lower than in 2013 and cable upgrade spending to decline. Management believed available cash, operating cash flow and, if needed, credit facilities would fund requirements for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management expected an approximately 40% effective tax rate in 2014. It also expected to replace microwave backhaul at about 150 sites with fiber in 2015 or 2016.
- Key exposures include Sprint dependence for network, billing, customer care and collections; Sprint-related revenue concentration; competitive pressure on pricing, subscriber retention and programming costs; and regulatory changes that may reduce access-charge or Universal Service Fund revenue.
- All $230.0 million of debt was variable-rate, with approximately 76% covered by an interest-rate swap through 2019. The filing estimates that a 1 percentage-point rate increase would add about $2.3 million to annual interest expense before swap effects; $55.4 million of debt had no rate protection.
- Operating leases totaled $140.8 million in disclosed future minimum payments. Cable franchise rights of $64.1 million were indefinite-lived and subject to impairment testing; their estimated fair value exceeded carrying value by approximately $6.1 million at year-end.
- The filing cited the January 2014 court decision striking down major portions of the FCC’s net-neutrality rules, while noting uncertainty about future regulation. It reported no material legal proceedings, and KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Wireless subscriber growth and revenue can persist despite increased Sprint fees, competitive pricing and Sprint’s control of key operating functions.
- Whether 2014 capital spending and future network investment can be funded while maintaining cash generation, covenant headroom and dividend capacity.
- How normalized operating expenses and profitability compare with reported results after accounting for the 2012 Sprint reimbursement and Cable impairment.
- Whether Cable’s operating loss improves as customer mix shifts toward internet and voice, and whether franchise-right valuations remain supportable.
- The timing and financial impact of access-charge and USF reforms, the unhedged debt exposure, and the company’s significant lease commitments.