Shenandoah Telecommunications Company — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The company provides wireless, wireline and cable services; comparisons are affected by 2010 cable acquisitions and the prepaid wireless launch.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $62.7m | $53.2m | $184.6m | $137.2m |
| Operating income | $9.2m | $9.6m | $24.3m | $28.9m |
| Income from continuing operations | $3.6m | $4.2m | $9.7m | $15.3m |
| Net income, including discontinued operations | $3.0m | $4.0m | $9.0m | $15.4m |
| Diluted EPS | $0.13 | $0.17 | $0.38 | $0.65 |
| Adjusted OIBDA, non-GAAP | $22.2m | $21.1m | $66.5m | $61.3m |
Revenue increased 17.7% in Q3 and 34.6% year to date, driven mainly by acquired cable operations and prepaid wireless. Operating margin was approximately 14.6% in Q3 versus 18.0% in 2010, which included a $4.0m directory-sale gain; excluding that gain, prior-year Q3 margin was approximately 10.5%. Nine-month operating margin was 13.1% versus 21.1% including the prior-year gain. Continuing-operations net income fell 14.0% in Q3 and 36.5% year to date.
For the first nine months, operating cash flow was $54.5m (versus $53.7m); capital expenditures were $52.5m (versus $33.9m), leaving approximately $2.0m after capital expenditures. Cash declined $5.6m to $21.9m.
At September 30, total debt was $186.0m, down from $195.1m at year-end 2010; cash was $21.9m. Debt included $180.3m under Term Loan A and $5.2m of fixed-term borrowing. The company reported a 3.59% weighted-average annualized interest rate and $50m available under its revolver. Current assets were $66.1m and current liabilities $51.0m. The company was in compliance with its debt covenants; reported leverage was 2.16 against a maximum of 2.50.
Material changes and drivers
- Wireless segment revenue rose 14.1% in Q3; operating income increased 40.4% to $12.9m. Prepaid subscribers reached 98,272, and management said prepaid results had turned positive on a monthly basis during Q3.
- Cable revenue rose 38.8% in Q3, substantially reflecting acquired systems and additional months of ownership. The segment reported a $6.4m Q3 operating loss and a $17.1m nine-month operating loss; network upgrade, programming, marketing and depreciation costs weighed on results.
- Wireline revenue rose 6.3% in Q3, but segment operating income declined to $3.5m from $7.5m, including the absence of the prior-year $4.0m directory-sale gain.
- Year-to-date operating expenses rose 42.8%, faster than revenue growth. Interest expense increased to $6.7m from $3.0m, principally reflecting borrowings used for the JetBroadBand acquisition.
- Converged Services remained classified as discontinued operations and held for sale. The company recorded a $0.6m impairment charge in Q3. In November, it agreed to sell certain properties for $4.7m and received $2.2m at an initial closing; further closings were subject to required consents.
Outlook, risks and unusual items
- Management budgeted approximately $84.9m of 2011 capital expenditures, predominantly for cable upgrades, and expected to finish slightly under budget. It believed cash, operating cash flow and available borrowing capacity would meet needs for at least 12 months.
- Cable operating expenses were expected to remain elevated until network upgrades were completed, targeted by Q3 2012, and for a period afterward while services were marketed.
- Shentel was discussing participation in Sprint Nextel’s Network Vision modernization plan. Participation could require significant capital spending, raise operating costs, require credit-facility changes or refinancing, and affect customer retention and results; terms and costs were not settled.
- Interest-rate exposure included $120.2m of variable-rate debt; management estimated a 1 percentage-point rate increase would add about $1.2m to annual interest expense. A swap fixed the rate on another $60.1m through July 31, 2013.
- Wireless revenue recognition depends significantly on information from Sprint Nextel, which provides billing, collections and other services and remits approximately 54% of company revenue. The filing also cites customer growth, competition, regulation and economic conditions as risks.
- The company declared a $0.33-per-share dividend payable December 1, 2011, estimated at approximately $7.8m. After that dividend, cumulative dividends and share repurchases were expected to equal about 45% of cumulative net income under the credit-agreement calculation, versus a 50% limit.
- Q3 included a $1.4m gain on trade-in of wireless equipment; the nine-month comparison was also affected by the prior-year directory-sale gain, cable acquisition costs and pension-related charges.
Important facts for investors to verify
- Whether prepaid subscriber growth and positive monthly contribution continue, and how churn and acquisition costs develop.
- Cable upgrade spending, customer penetration and the timing of progress toward the Q3 2012 upgrade target.
- Final Network Vision terms, required capital and operating costs, and any resulting amendments to debt facilities or Sprint agreements.
- Debt covenant headroom, variable-rate exposure, available liquidity and the company’s ability to fund capital spending and dividends.
- Completion proceeds and timing for remaining Converged Services property sales, including any further impairment exposure.
- Adjusted OIBDA is a non-GAAP measure; the filing cautions it excludes items including capital spending, interest, taxes and share-based compensation and is not a substitute for GAAP results.