Shenandoah Telecommunications Company (Shentel) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 26, 2020. Shentel provides wireless and broadband communications services in the Mid-Atlantic. Its reporting segments were reorganized into Wireless, Broadband and Tower; prior segment results were recast for comparison.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $633.9 million | $630.9 million | +0.5% |
| Operating income / margin | $97.0 million / 15.3% | $93.2 million / 14.8% | +4.1% operating income |
| Net income | $54.9 million | $46.6 million | +17.9% |
| Diluted EPS | $1.10 | $0.93 | Up $0.17 |
| Cash from operations | $259.1 million | $265.6 million | Down 2.4% |
| Capital expenditures | $138.8 million | $136.6 million | Up $2.2 million |
Adjusted OIBDA, a non-GAAP measure, was $260.9 million versus $264.6 million, down 1.4%. Operating margin improved despite slightly lower adjusted OIBDA. Interest expense fell 15.4% to $29.5 million, contributing to the net-income increase; the effective tax rate was 22.7%, compared with 25.0%.
At year-end, cash and cash equivalents were $101.7 million. Gross debt principal was $732.0 million; reported debt net of unamortized fees was $720.1 million. The company reported $75.0 million of undrawn revolving capacity and total available liquidity of $176.7 million. It was in compliance with credit covenants: leverage ratio 2.4 against a maximum 3.5, debt-service coverage 5.8 against a minimum 2.0, and covenant liquidity $176.4 million against a $25 million minimum. The weighted average debt rate was approximately 3.3%; interest-rate swaps covered about 46% of principal.
Segments and changes from 2018
- Wireless: Revenue declined 1.6% to $443.4 million; operating income increased 0.6% to $88.5 million. Subscriber growth lifted postpaid and prepaid revenue, but travel revenue fell $12.0 million after Sprint suspended the agreed payments. Wireless service revenue also reflects the company’s Sprint affiliate accounting arrangements.
- Broadband: Revenue rose 5.9% to $193.9 million and operating income rose 2.2% to $42.5 million. Cable residential and SMB revenue increased 8.2%, and enterprise/wholesale fiber revenue rose 13.4%; RLEC revenue declined 12.3%. Total RGUs increased 1.5% to 191,227, while video RGUs continued to fall.
- Tower: Revenue increased 6.5% to $13.0 million and operating income increased 21.8% to $5.9 million. The company owned 225 towers, up from 208.
Operating expenses were broadly flat at $536.9 million. Segment mix and cost movements included higher Broadband spending to support Glo Fiber and network expansion, offset in part by lower Wireless depreciation and selling costs. Operating cash flow declined amid working-capital changes. Investing cash outflow was $165.3 million, including $138.8 million of capital spending, the $10.0 million Big Sandy Broadband acquisition and $16.7 million for FCC spectrum licenses. Financing cash outflow was $77.2 million, including $53.2 million of debt principal payments, dividends and $7.2 million of share repurchases.
Outlook, risks and notable items
- Management said operating cash flow and available funding should meet anticipated liquidity needs for the next 12 months and longer term, while noting that cash generation, borrowing access and future capital needs are uncertain. No specific earnings or revenue guidance was provided.
- Glo Fiber launched in Harrisonburg, Virginia in Q4 2019. It generated just $19,000 of 2019 revenue and incurred $2.9 million of operating expense; management expected operating losses in a new market for approximately the first two years. Broadband invested $19.0 million in Glo Fiber and fixed wireless in 2019.
- The Sprint travel-fee dispute was in binding arbitration, with management expecting a resolution in Q2 2020. The outcome was uncertain. Sprint generated approximately 70% of 2019 consolidated revenue, and about 80% of accounts receivable were due from Sprint.
- The proposed T-Mobile–Sprint combination could affect Shentel’s affiliate arrangement. Under specified circumstances, the combined company could have rights to purchase Shentel’s wireless operating assets under the agreement; loss of the relationship would affect a major revenue source.
- Competition, wireless pricing and churn, video cord-cutting, rising programming costs, regulatory changes, network investment demands, cybersecurity and weather-related disruptions are identified risks. A 1 percentage-point rise in interest rates would add approximately $7.2 million in annual interest expense before swap effects.
- Adoption of lease accounting in 2019 added $392.6 million of operating lease right-of-use assets and $395.0 million of operating lease liabilities to the balance sheet; the filing says adoption did not materially affect earnings, cash flows, liquidity or loan covenants. The company also revised useful lives for certain tower, antenna and fiber assets, reducing 2019 depreciation expense by approximately $3.0 million.
- The financial-statement audit opinion was unqualified, but management and the auditor concluded internal control over financial reporting was ineffective due to material weaknesses involving staffing and expertise, property and depreciation, purchasing, and treasury. The auditor issued an adverse opinion on internal controls. Management described phased remediation efforts for 2020.
Important facts for investors to verify
- Progress and financial impact of the Sprint travel-fee arbitration, and any changes to the affiliate relationship following the proposed T-Mobile–Sprint transaction.
- Whether Glo Fiber and fixed wireless achieve planned customer uptake and reduce launch-period losses, and how related capital spending develops.
- Remediation of the disclosed internal-control material weaknesses and whether subsequent filings report effective controls.
- Debt repayment, interest-rate exposure, covenant headroom and capacity to fund network investment alongside dividends and repurchases.
- Quality and durability of Broadband growth, including broadband penetration gains versus declining video and RLEC customers, and ongoing programming and maintenance costs.