Shenandoah Telecommunications Company (Shentel) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. Shentel provides wireless, cable, wireline, broadband, and fiber services in parts of Virginia, West Virginia, Pennsylvania, and Maryland. Its wireless business operates as a Sprint affiliate.
Financial and operating performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Operating revenue | $288.1 million | $251.1 million | +14.7% |
| Operating income | $34.7 million | $32.3 million | +7.3% |
| Operating margin | 12.0% | 12.9% | Down 0.9 percentage points |
| Net income from continuing operations | $16.6 million | $13.5 million | +22.6% |
| Net income | $16.3 million | $13.0 million | +25.5% |
| Diluted EPS | $0.68 | $0.55 | Up $0.13 |
| Cash from operating activities | $97.0 million | $80.9 million | +$16.1 million |
| Capital expenditures | $89.1 million | $74.7 million | +$14.4 million |
| Year-end cash and cash equivalents | $71.1 million | $15.9 million | +$55.2 million |
| Total debt, including current maturities | $232.2 million | $180.6 million | +$51.6 million |
Operating cash flow less capital expenditures was approximately $7.9 million. The company reported total assets of $570.7 million and shareholders’ equity of $207.8 million at year-end. Its 2012 dividend was $0.33 per share, unchanged from 2011.
- Wireless: Segment revenue was $179.6 million, up 17.1%; operating income was $53.4 million, up 23.0%. Year-end postpaid subscribers rose 5.7% to 262,892 and prepaid subscribers rose to 128,177. Postpaid churn was 1.79%; prepaid churn was 3.67%.
- Cable: Segment revenue was $76.3 million, up 12.1%, but the segment recorded an operating loss of $29.5 million, including an $11.0 million goodwill impairment. Video customers declined while high-speed internet and voice customers increased.
- Wireline: Segment revenue was $54.7 million, up 10.4%, and operating income was $13.8 million, essentially flat. Access lines fell to 22,297 from 23,083.
Material changes and unusual items
- Wireless revenue growth reflected subscriber gains, smartphone data fees, and prepaid growth. Cable growth reflected higher average revenue-generating units, customer upgrades, and price increases.
- Sprint reimbursed Shentel $11.8 million in the fourth quarter for incorrectly calculated prepaid-program cost allocations dating from 2010 through September 2012. Shentel recorded the reimbursement as a 2012 expense reduction; management said $1.2 million and $4.9 million related to 2010 and 2011, respectively.
- The cable business recorded an $11.0 million goodwill write-off after weaker-than-expected margins and penetration, economic weakness, and ongoing upgrade spending. Cable franchise rights remained unimpaired, but their estimated fair value exceeded carrying value by only about $3.4 million.
- Network Vision/4G LTE deployment drove $89.1 million of capital spending and $8.4 million of additional depreciation from revised asset lives. The company had upgraded 224 of 516 wireless sites by year-end; LTE service was available at 200 sites.
- Two 2012 storms caused approximately $0.8 million of network repair costs, primarily affecting cable operations.
- The September 2012 refinancing established a $230 million variable-rate Term Loan A and a $50 million revolving facility, which was undrawn at year-end. The company reported covenant compliance: leverage ratio 2.07 versus a 3.00 maximum; debt-service coverage 5.83 versus a 2.50 minimum; and equity-to-assets 36.4% versus a 30.0% minimum.
Outlook, risks, and contingencies
- Management budgeted $125.2 million of 2013 capital expenditures, including $60.7 million for wireless network upgrades and $23.1 million for cable upgrades and related spending. Network Vision work was expected to be substantially complete by the end of the third quarter of 2013, with all sites expected to be upgraded before year-end.
- Management expected the effective tax rate to decline to approximately 40% in 2013 and believed cash, operating cash flow, and available borrowing capacity would fund planned spending and obligations for at least 12 months.
- Interest-rate exposure is significant: $230.0 million of debt was variable-rate at year-end; the filing estimates a 1 percentage-point rate increase would add approximately $2.3 million to annual interest expense. Swaps hedge a substantial portion of the variable-rate exposure.
- Sprint-related concentration is material: approximately 58.6% of 2012 revenue was generated by or through Sprint and customers using Sprint’s network. Sprint also supplies billing, customer care, collections, and other key services. The postpaid net service fee cap was scheduled to rise from 12% to 14% on July 1, 2013, subject to the agreement’s provisions.
- Other principal risks include intense wireless and cable competition, subscriber churn, programming-cost increases, regulatory changes to access charges and universal-service support, execution and cost risks in network upgrades, weather damage, and the company’s ability to meet credit covenants and refinance debt.
- The filing reported no legal proceedings and no material off-balance-sheet arrangements. The remaining Converged Services disposal involved five properties expected to generate approximately $0.2 million; completion was anticipated in early 2013.
Important facts for investors to verify
- Reconcile the filing’s adjusted OIBDA figures: one table reports $105.952 million for 2012, while the reconciliation reports $106.765 million.
- Assess the recurring earnings and cash-flow effect of the $11.8 million Sprint reimbursement, the $11.0 million goodwill impairment, and accelerated depreciation; these items materially affect comparisons.
- Track 2013 capital spending, LTE deployment and operating costs, and whether subscriber and revenue growth translate into stronger margins and free cash flow.
- Review debt repayment, interest-rate sensitivity, covenant headroom, and the restrictions on dividends under the credit agreement.
- Monitor cable customer trends and franchise valuation: the filing reports video-customer declines and limited fair-value headroom for cable franchise rights.
KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.