Cable One, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Business context and performance
Cable One provides residential and business data, video and voice services in 21 states. At quarter-end it served 818,579 customer relationships. The January 8 acquisition of Clearwave contributed to 2019 results; accordingly, comparisons include acquired operations for only part of the period.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $285.7 | $268.4 | $564.3 | $534.2 |
| Operating income | $74.1 | $70.7 | $141.8 | $135.3 |
| Net income | $36.4 | $43.8 | $75.1 | $84.4 |
| Diluted EPS | $6.35 | $7.65 | $13.13 | $14.73 |
| Adjusted EBITDA (non-GAAP) | $137.6 | $127.2 | $270.7 | $250.5 |
| Operating cash flow | Not separately reported | Not separately reported | $212.5 | $196.6 |
Financial condition and material changes
- Q2 revenue grew 6.4%; six-month revenue grew 5.6%. Q2 operating margin was approximately 25.9% versus 26.3%; net margin was approximately 12.7% versus 16.3%. Adjusted EBITDA margin was approximately 48.2% versus 47.4%. For the six-month periods, Adjusted EBITDA margin was approximately 48.0% versus 46.9%. Adjusted EBITDA is a company-defined non-GAAP measure.
- Growth was led by business services (+29.3% Q2; +27.2% six months) and residential data (+8.5%; +8.4%). Residential video revenue declined 3.9% in Q2 and 4.8% for six months; advertising revenue also fell. Customer counts showed the same mix shift: data and business services PSUs increased, while video PSUs fell 9.3% overall year over year.
- Operating expenses excluding depreciation and amortization rose 4.3% in Q2, slower than revenue growth; SG&A rose 10.9%, and depreciation and amortization rose 11.8%. For six months, SG&A increased 15.6%, reflecting rebranding, acquisition-related, marketing, compensation and insurance costs.
- Net income declined despite higher operating income. Q2 interest expense rose 23.8% to $18.5 million; six-month interest expense rose 23.4% to $36.6 million, primarily due to higher debt and interest rates. Other expense included a $6.5 million premium on redemption of $450 million of 5.75% notes and debt-issuance-cost write-offs and financing expenses.
- Six-month capital expenditures were $110.5 million versus $90.9 million. Investing cash outflow was $465.8 million, including $356.9 million net cash paid for Clearwave. Cash declined to $102.3 million from $264.1 million at year-end; working capital was $12.7 million versus $184.2 million.
- Debt carrying value at June 30 was $1.30 billion, excluding debt issuance costs and including current maturities. The company had $344.5 million available under its $350 million revolving facility, net of letters of credit, and reported compliance with debt covenants. Outstanding facility borrowings bore rates of 3.91%–4.41%.
- Interest-rate swaps fixed the base rate on $850 million of variable-rate debt; a further $350 million swap begins in June 2020. A hypothetical 100-basis-point LIBOR increase was estimated to raise annual interest expense by $4.6 million based on June 30 exposure.
Outlook, commentary and risks
- No numerical earnings or revenue guidance is provided. Management expects continued growth in residential data and business services, ongoing declines in residential video and voice, and continued investment in broadband capacity and acquired-market upgrades. It believes cash, operating cash flow and credit facilities will support needs over the next 12 months, subject to business and market conditions.
- The company agreed to acquire Fidelity Communications for $525.9 million in cash, subject to customary adjustments and closing conditions, and expected completion early in Q4 2019. Funding was expected from cash, revolving capacity and new debt. Management cited growth, margin expansion and potential synergies; completion, integration and realization of benefits remain uncertain.
- Clearwave was acquired for $358.8 million cash. Its preliminary purchase allocation included $183.2 million of goodwill; valuation remained subject to finalization. Clearwave contributed $6.8 million of Q2 revenue and $1.2 million net income.
- Key disclosed risks include competition, programming and retransmission costs, technology changes, cybersecurity, regulation and franchise renewals, variable-rate debt and acquisition execution. The company reported no material change to previously disclosed risk factors, no material legal proceeding in Part II, and effective disclosure controls as of June 30.
- The board approved a $2.25-per-share dividend on August 6, payable September 6, subject to the stated record date. Management says dividends are expected to continue, subject to board approval.
Important facts for investors to verify
- Whether Fidelity closed on the expected timetable, how it was financed, and its eventual contribution to revenue, earnings and leverage.
- How much reported growth reflects organic performance versus Clearwave, and whether data/business growth can offset continuing video and voice declines.
- Debt balances, floating-rate exposure, covenant headroom and available liquidity after the Fidelity transaction.
- Whether capital spending and acquisition integration deliver the expected capacity, customer and margin benefits.
- The persistence of rebranding, acquisition and financing costs, and the assumptions behind Adjusted EBITDA and the continuing dividend.