Cable One, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Cable One provides broadband data, video and voice services across 21 states, primarily in non-metropolitan markets. FY 2018 includes a full year of NewWave, acquired May 1, 2017; FY 2017 includes eight months, limiting direct comparability.
Financial and operating highlights
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1,072.3 million | $960.0 million |
| Operating income | $267.9 million | $236.3 million |
| Net income | $164.8 million | $235.2 million |
| Diluted EPS | $28.77 | $40.92 |
| Adjusted EBITDA (non-GAAP) | $500.8 million | $443.6 million |
| Operating cash flow | $407.8 million | $324.5 million |
| Capital expenditures | $217.8 million | $179.4 million |
| Cash and cash equivalents at year-end | $264.1 million | $161.8 million |
| Total debt, including capital leases | $1,180.3 million | $1,194.6 million |
| Working capital at year-end | $184.2 million | $76.7 million |
Revenue rose 11.7%; operating income rose 13.4%; Adjusted EBITDA rose 12.9%. Net income fell 29.9%, mainly because FY 2017 included a $114.0 million tax benefit from federal tax reform. FY 2018’s effective tax rate was 22.3%, versus a negative 23.7% in 2017. Operating margin was approximately 25.0% and net margin approximately 15.4% in 2018. Operating cash flow less capital expenditures was approximately $190.0 million.
Revenue mix shifted toward higher-margin services: residential data revenue increased 18.4% to $492.8 million and business services increased 19.0% to $156.0 million. Residential video revenue increased 3.3% overall, partly reflecting NewWave and a surcharge, despite a 10.5% year-over-year decline in video subscribers; residential voice revenue declined 5.6%. Data and business services together represented 60.5% of revenue, compared with 57.1% in 2017. Management said Adjusted EBITDA margins for residential data and business services were approximately six and seven times the residential video margin, respectively.
At year-end, Cable One served 804,865 customer relationships and had 1,115,431 primary service units (PSUs). Customer relationships increased 0.9%, while total PSUs declined 2.3%; data PSUs grew and video and voice PSUs fell. FY 2018 fourth-quarter revenue was $269.9 million and net income was $42.0 million, compared with $257.7 million and $144.3 million, respectively, in fourth-quarter 2017. The prior-year quarterly net income included the substantial tax-reform benefit.
Liquidity, debt and capital allocation
Operating cash flow increased $83.3 million, supported by higher Adjusted EBITDA and lower cash tax payments, partly offset by higher interest payments. The company had $195.9 million available under its revolving facility at December 31, 2018 and reported compliance with debt covenants. Debt included $730.0 million of variable-rate senior credit facilities and $450.0 million of 5.75% fixed-rate notes due 2022. Management estimated that a 100-basis-point increase in LIBOR would raise annual interest expense by $7.3 million.
Cash used in investing activities was $214.3 million, including $217.8 million of capital expenditures, partly offset by other proceeds and timing items. Cash used in financing included $42.9 million of dividends, $26.6 million of share repurchases and $14.4 million of debt repayments. Dividends declared were $7.50 per share for 2018. The board approved a $2.00-per-share quarterly dividend in February 2019, subject to the usual considerations.
Outlook, developments and principal risks
- Management expects continued growth in residential data and business services, while anticipating further declines in residential video and voice. No numerical revenue, earnings or EBITDA guidance is provided.
- The company expects to spend up to $35 million in 2019 to upgrade NewWave and acquired operations, in addition to nearly $27 million spent on NewWave improvements in 2017–2018. Priorities include network capacity, all-digital video, system conversion and fiber expansion.
- On January 8, 2019, Cable One completed its $357.0 million cash acquisition of Clearwave, financed in part with a new $250 million variable-rate term loan. The purchase price allocation was still being finalized at filing.
- The planned Sparklight rebrand was expected to begin in summer 2019; management noted execution, cost and customer-retention risks. New residential internet plans and pricing began rolling out in January 2019.
- Material risks include competition from fiber, telephone and wireless providers, municipal networks and OTT video; rising programming and retransmission costs; subscriber declines in video and voice; variable-rate debt and refinancing constraints; franchise and regulatory uncertainty, including net neutrality; cybersecurity and service outages; and acquisition integration.
- A material weakness in access and change-management controls for the acquired NewWave billing system was identified in 2018. Management said it was remediated after conversion to Cable One’s legacy billing system in the fourth quarter; no financial-statement misstatement resulted. The auditor reported effective internal control over financial reporting as of year-end.
- The filing reports no material pending legal proceeding and no goodwill or intangible-asset impairment in the periods presented. It records a $14.2 million net loss on asset disposals in 2018, primarily related to equipment write-offs and asset retirements.
Investor verification priorities
- Separate organic growth from NewWave acquisition effects; assess whether data and business-service growth persists as video and voice customers decline.
- Reconcile reported earnings with the prior-year tax benefit and review the company’s non-GAAP Adjusted EBITDA definition and adjustments.
- Track capital spending, post-capex cash generation, dividends and repurchases alongside debt repayment and liquidity needs.
- Assess interest-rate exposure and the leverage impact of Clearwave, including final purchase accounting and integration costs.
- Monitor video programming costs, regulatory and franchise developments, and the effectiveness of the NewWave billing-control remediation.