Shenandoah Telecommunications Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; amounts below are in millions of dollars unless otherwise noted.
Business context
Shentel provides wireless services as a Sprint affiliate, cable video/internet/voice, and wireline and fiber services. Its reportable segments are Wireless, Cable, and Wireline. The company filed as an accelerated filer.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $77.5 | $71.4 | $153.5 | $140.2 |
| Operating income | $14.5 | $11.1 | $29.7 | $20.0 |
| Net income | $7.8 | $5.6 | $16.2 | $10.0 |
| Diluted EPS | $0.33 | $0.23 | $0.67 | $0.42 |
| Operating margin | 18.7% | 15.6% | 19.4% | 14.2% |
Q2 revenue rose 8.5% and operating income rose 30.2% year over year; first-half revenue rose 9.5% and operating income rose 48.9%. Adjusted OIBDA, a non-GAAP measure, was $31.3 million in Q2 (up from $28.5 million) and $60.9 million for the first half (up from $55.2 million). Management cautions that this measure excludes, among other things, capital expenditures, interest, taxes, and share-based compensation.
Cash flow and investment: First-half operating cash flow was $52.2 million, versus $44.5 million a year earlier. Capital expenditures were $48.5 million, versus $32.3 million; operating cash flow less capital expenditures was approximately $3.7 million. Cash increased to $73.4 million from $71.1 million at year-end 2012. The company also received $10.8 million of credits against new equipment purchases through a PCS equipment trade-in.
Debt and liquidity: Debt was $230.7 million, including $230.0 million of variable-rate Term Loan A. The company reported a 3.60% annualized weighted-average borrowing rate after swaps and $50 million available under its revolving facility, plus potential incremental term borrowing subject to restrictions. It was in compliance with credit covenants; actual leverage was 1.89 against a maximum of 3.00, and debt service coverage was 8.98 against a minimum of 2.50.
Changes and operating drivers
- Wireless led growth: Q2 segment revenue increased 12.4% to $49.8 million; first-half revenue increased 12.6% to $97.9 million. Smartphone data fees and subscriber growth lifted postpaid revenue; prepaid revenue also grew. Wireless operating income rose 20.6% in Q2 and 34.2% for the first half.
- Cable improved but remained loss-making at the operating level: Q2 revenue rose 6.0% to $20.1 million and the operating loss narrowed to $3.6 million from $4.0 million. First-half revenue rose 6.5%; the operating loss narrowed to $7.0 million from $8.5 million. Internet and voice customer counts increased, while video customers declined.
- Wireline was broadly stable: Q2 revenue was nearly flat at $13.8 million, while operating income increased to $3.7 million. First-half revenue increased 3.2% to $27.6 million and operating income was $7.2 million.
- Operating expenses grew more slowly than revenue overall. Higher wireless marketing and prepaid support costs, network rent and backhaul costs related to Network Vision, and cable programming costs were notable offsets to growth.
Outlook, risks, and unusual items
- Management budgeted $125.2 million of 2013 capital expenditures, primarily for wireless Network Vision upgrades and capacity, cable network upgrades, fiber expansion, and IT. It expected cash on hand, operating cash flow, and available credit to fund planned needs and debt service for at least the next 12 months.
- At June 30, 427 of 525 wireless sites had been upgraded; the company expected to replace substantially all existing cell-site equipment by Q3 2013. First-half accelerated depreciation related to Network Vision was $2.6 million.
- Sprint notified Shentel that its retained net service fee would rise from 20% to 22% effective August 1, 2013. Management estimated this would reduce revenue by approximately $0.3 million per month at then-current activity. Shentel relies on Sprint for billing, collections, customer care, and significant financial information; Sprint remitted approximately 59% of total company revenue.
- After the July 2013 expiration of a 2010 interest-rate swap and planned payoff of fixed-rate debt, management expected the weighted-average interest rate to be about 3.41% at current LIBOR rates. Approximately $55 million of variable-rate debt would then be unhedged. A 1 percentage-point rate increase would add approximately $2.3 million to annual interest expense before swaps; the remaining cash-flow hedge was estimated to add $1.6 million to annual interest expense at then-current rates.
- Comprehensive income included a $3.3 million after-tax unrealized gain on the cash-flow hedge for the first half. The company estimated $1.6 million of accumulated hedge amounts would be reclassified as increased interest expense over the next 12 months. No significant 2013 discontinued-operation results were reported; the legacy Converged Services properties had been disposed of by June 30.
- The filing provides no specific full-year revenue or earnings guidance. Results remain subject to competition, regulation, technology and demand changes, interest rates, execution of network investments, and the company’s relationship with Sprint. Maryland and Pennsylvania state tax audits were ongoing for specified earlier tax years.
Important facts for investors to verify
- Whether subscriber growth, especially in prepaid wireless, can continue alongside higher prepaid churn and the Sprint fee increase.
- Progress, remaining costs, and expected benefits from Network Vision and the planned 2013 capital program.
- Wireless and Cable customer trends, including continued video subscriber declines and Cable’s operating losses.
- Interest-rate exposure, swap expiration and hedge costs, debt covenant headroom, and available borrowing capacity.
- Sprint’s operational and reporting role, and the basis for management’s estimate of the fee increase’s monthly revenue impact.