Cable One, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2015. Cable One provides broadband data, video and voice services across 19 states, primarily in non-metropolitan markets. It became an independent, publicly traded company on July 1, 2015, following its spin-off from Graham Holdings Company (GHC). The 2015 results cover the full year, but the company operated as a GHC subsidiary through June 30; pre-spin financials include allocated GHC costs and may not represent standalone results.
Financial and operating metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $807.3 million | $814.8 million | (0.9%) |
| Operating income | $161.7 million | $163.8 million | (1.3%) |
| Operating margin | 20.0% | 20.1% | Down 0.1 percentage point |
| Net income | $89.0 million | $147.3 million | (39.6%) |
| Net margin | 11.0% | 18.1% | Down 7.1 percentage points |
| Adjusted EBITDA (non-GAAP) | $317.7 million | $305.5 million | 4.0% |
| Free cash flow (non-GAAP) | $161.6 million | $128.1 million | 26.2% |
| Operating cash flow | $246.4 million | $205.8 million | 19.7% |
| Cash capital expenditures | $156.1 million | $177.4 million | (12.0%) |
Revenue mix shifted toward growth products: residential data revenue rose 10.8% to $294.5 million and business services rose 15.5% to $88.7 million. Residential video revenue fell 8.0% to $332.7 million; residential voice fell 19.6% to $50.1 million. Operating expenses excluding depreciation and amortization declined 5.2%, while SG&A rose 2.7% and depreciation and amortization rose 4.8%.
At year-end, cash was $119.2 million, total assets $1.409 billion, and long-term debt including current maturities was approximately $549.1 million. Net debt was approximately $429.9 million. Working capital was positive $39.5 million, versus a $45.5 million deficit in 2014. The current ratio was approximately 1.31. The company reported compliance with debt covenants.
Debt included $450 million of 5.75% senior unsecured notes due 2022 and $98.8 million outstanding under a variable-rate term loan; the $200 million revolver was undrawn. A 100-basis-point increase in LIBOR was estimated to add about $1.0 million in annual interest expense. The company paid a $1.50-per-share quarterly dividend in December and repurchased 38,136 shares for $16.4 million during 2015.
Material changes versus prior periods
- Net income declined principally because 2014 included a $75.2 million pretax gain from the sale of wireless spectrum licenses, while 2015 included $16.1 million of interest expense on debt incurred for the spin-off.
- Revenue has declined for two consecutive years: 1.3% in 2014 and 0.9% in 2015. Data and business-services growth partly offset sustained video and voice declines.
- Residential video customers fell 19.8% in 2015 and residential voice customers fell 15.2%; residential data customers increased 2.5%. Total PSUs declined 8.9%. New billing-system counting changes affected homes-passed and business-customer comparisons, and historical counts were not adjusted.
- Adjusted EBITDA increased despite slightly lower revenue, while free cash flow increased as cash capital expenditures declined from 2014’s elevated level.
Outlook, commentary, risks and unusual items
- Management prioritizes residential data, business services, higher-lifetime-value customers, cost control and free cash flow. It expects data and business-services growth to continue, while anticipating further declines in residential video and voice.
- Planned network projects included completing plant reinforcement and all-digital video conversion, moving from four-channel to 32-channel bonding, and rolling out 1-gigabit service. Management expected a significant portion of these projects to be completed by the end of 2016, with capital spending then declining. No formal revenue or earnings guidance was provided.
- Management said existing cash, credit facilities and operating cash flows were expected to fund the operating plan, planned capital expenditures and quarterly dividends for the next 12 months, subject to operating performance and other conditions.
- Key risks include competition from telephone companies, satellite and OTT providers; rising programming and retransmission costs; technology and customer attrition risks; regulatory uncertainty, including Title II/net-neutrality rules; franchise renewal and pole-attachment costs; cybersecurity and service disruption; and the company’s new standalone cost structure and debt obligations.
- Contractual obligations totaled $1.101 billion, including estimated programming commitments of $469.0 million and debt principal of $549.1 million. Programming commitments are estimates based on subscriber levels and may vary.
- Goodwill and indefinite-lived franchise assets totaled about $581.8 million, approximately 41% of total assets. Management’s 2015 qualitative impairment assessments found no impairment.
Investor facts to verify
- Confirm the trajectory of data and business-services growth against continued video and voice subscriber losses, including the effect of billing-system counting changes.
- Track 2016 broadband-project completion, subsequent capital spending and whether anticipated free-cash-flow improvement materializes.
- Assess debt service, variable-rate exposure, covenant headroom, dividends and repurchases against cash generation and the $200 million undrawn revolver.
- Evaluate post-spin standalone expenses and compare reported results with the GHC-allocated historical cost base.
- Review the outcome of material regulatory proceedings and the sensitivity of franchise-asset valuations to customer, revenue, programming-cost and discount-rate assumptions.