Cable One, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited financial statements. Cable One completed its spin-off from Graham Holdings Company (GHC) on July 1, 2015 and thereafter operated as an independent public company. Historical results reflect the company as managed within GHC and may not represent future standalone costs or performance.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $202.7m | $205.1m | $405.6m | $413.7m |
| Operating income | $35.8m | $43.4m | $71.7m | $82.8m |
| Net income | $21.4m | $26.9m | $43.5m | $51.2m |
| Diluted earnings per share | $3.67 | $4.60 | $7.45 | $8.76 |
| Adjusted EBITDA (non-GAAP) | $77.8m | $79.7m | $152.4m | $153.4m |
| Free cash flow (non-GAAP) | $45.0m | $35.5m | $93.1m | $74.9m |
Operating margin was approximately 17.7% in Q2 2015 versus 21.2% in Q2 2014, and 17.7% for the first half versus 20.0% in the prior-year period. These margins are calculated from reported revenue and operating income. The estimated annual effective tax rate was 38.5%, compared with 38.1%.
- Cash flow: First-half cash from operations was $117.2m, compared with $114.3m. Cash capital expenditures were $74.4m, versus $85.8m; the company’s non-GAAP FCF calculation uses $59.3m of capital expenditures for the period.
- Cash and liquidity: Cash and cash equivalents were $105.5m at June 30, compared with $6.4m at year-end 2014. Working capital was positive $48.9m, versus a $45.5m deficit at year-end.
- Debt: Total principal debt was $550m: $450m of 5.75% senior unsecured notes due 2022 and a $100m term loan due in 2020. A $200m revolving facility was available; the filing reports no revolver borrowing at quarter-end. Debt is secured under the credit facilities, while the notes are unsecured.
- Capital return: Cable One paid GHC a $450m one-time dividend on June 29, funded in connection with its financing transactions. Parent company equity fell to $414.0m from $853.3m at year-end.
Material changes and operating trends
Q2 revenue declined 1.2% year over year and first-half revenue declined 1.9%. Residential data and business services grew, but this did not fully offset losses in video and voice. Q2 operating income fell 17.6%; first-half operating income fell 13.4%. Net income declined 20.2% in Q2 and 15.0% for the first half.
| Selected service revenue | Q2 change year over year | First-half change year over year |
|---|---|---|
| Residential video | Down 7.3% | Down 8.4% |
| Residential data | Up 12.7% | Up 9.4% |
| Residential voice | Down 30.6% | Down 20.5% |
| Business services | Up 16.3% | Up 16.8% |
| Advertising sales | Down 17.6% | Down 12.5% |
Over the 12 months through June 30, total customer relationships decreased 3.8% and total primary service units decreased 8.5%. Residential video customers fell 19.1%; residential data customers rose 2.4%, while business customers increased 7.1%. Lower video subscriber counts reduced programming costs, contributing to lower operating expense. However, selling, general and administrative expense rose 13.1% in Q2, chiefly from spin-off-related accelerated equity compensation, billing-system conversion costs and higher salaries and benefits. Depreciation and amortization also increased.
Outlook, risks and unusual items
- Management expects continued growth in residential data and business services, but anticipates future declines in residential video and voice revenue. It plans to focus on higher-margin services, cost control, high-lifetime-value customers and broadband plant upgrades.
- Management expected 2015 capital expenditures of $140m–$165m; $59.3m was reported for the first half under the company’s capital expenditure disclosure. Management said significant near-term projects were expected to be completed, potentially freeing cash otherwise used for investment.
- Management stated that cash, credit facilities and operating cash flow were expected to fund the operating plan and planned capital spending for the next 12 months, subject to operating performance and broader conditions. No earnings or revenue guidance was provided.
- Key risks include competition from telecom providers, satellite and over-the-top video services; programming and retransmission costs; customer attrition; regulation of broadband and other services; franchise renewal; network and information-system security; and execution of the standalone business. Cable One cited the FCC’s 2015 Title II broadband action and said future regulatory outcomes were uncertain.
- Contractual obligations totaled $1.188bn, including $546.3m of programming commitments and $550.0m of debt principal. The company reported ordinary-course litigation but said no existing matter was likely to have a material effect; no material legal proceedings were listed in Part II.
- Unusual items include $3.7m of incremental Q2 stock-compensation expense from GHC’s spin-off-related modification of awards. Subsequent to quarter-end, Cable One granted 36,612 restricted shares valued at approximately $13.9m and authorized repurchases of up to $250m, subject to a 600,000-share cap.
Important facts for investors to verify
- Whether data and business-services growth can offset continued video and voice subscriber and revenue declines.
- Standalone operating costs and cash generation after the end of GHC-provided corporate services and historical expense allocations.
- Debt-service capacity, credit-facility leverage covenants, and the effect of the $450m dividend on financial flexibility.
- Actual 2015 capital spending versus the $140m–$165m expectation, and the timing and returns of broadband upgrades.
- Programming commitments, regulatory developments, and the terms and execution of the newly authorized share-repurchase program.