Cable One, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Cable One provides residential and business data, video and voice services. Results include approximately two months of Hargray operations, acquired May 3, 2021, and exclude the Anniston system divested in October 2020; year-over-year comparisons therefore include significant scope changes.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $401.7 million | $328.3 million | $743.0 million | $649.5 million |
| Operating income | $115.4 million | $90.7 million | $217.8 million | $183.4 million |
| Net income | $106.2 million | $62.5 million | $174.7 million | $131.9 million |
| Diluted EPS | $16.68 | $10.63 | $28.00 | $22.66 |
| Adjusted EBITDA | $213.2 million | $163.2 million | $393.6 million | $320.9 million |
Q2 revenue increased 22.4%; management attributed growth principally to Hargray, residential data and business services. Residential data revenue rose 26.6% and business services 31.0%; residential video and voice revenue were approximately flat. For the first half, revenue rose 14.4%, with residential data up 22.6% and business services up 17.7%, while video fell 5.4% and voice fell 8.0%.
Q2 operating margin was approximately 28.7% versus 27.6% a year earlier; net margin was approximately 26.4% versus 19.0%. Adjusted EBITDA increased 30.7% in Q2 and 22.7% for the first half. Higher depreciation, acquisition costs and interest expense partly offset revenue growth.
Cash flow and capital spending: First-half operating cash flow was $347.6 million, versus $272.2 million. Capital expenditures were $161.2 million, versus $143.4 million; operating cash flow less capital expenditures was approximately $186.5 million (prior year: $128.8 million). Investing cash outflow was $2.106 billion, principally reflecting the Hargray purchase; financing cash inflow was $1.632 billion. Cash declined to $449.0 million from $574.9 million at year-end.
Debt and liquidity: At June 30, total debt carrying amount was approximately $3.904 billion, including $2.329 billion of term loans, $650 million of 4.00% senior notes due 2030 and $920 million of convertible notes due 2026 and 2028. Cash was $449.0 million and $459.0 million was available under the revolving credit facility. The company reported covenant compliance. It had $1.2 billion of variable-rate debt hedged by interest-rate swaps; a hypothetical 100-basis-point increase in LIBOR would raise annual interest expense by $11.3 million based on period-end exposure.
Material changes and unusual items
- On May 3, Cable One acquired Hargray’s remaining approximately 85% for approximately $2.0 billion in cash, implying $2.2 billion enterprise value. The purchase was funded with cash and new debt, including an $800 million term loan and proceeds from convertible notes. Hargray contributed $50.6 million of Q2 revenue and $4.4 million of net income.
- Q2 and first-half results included a $33.4 million noncash gain from remeasuring Cable One’s prior Hargray investment. Other income also included a noncash loss on the MBI option: $21.4 million for Q2 and $15.8 million for the first half.
- Q2 tax benefit was $8.6 million, including the effect of reversing a deferred tax liability on the prior Hargray investment. The resulting negative effective tax rate (-8.7%) contributed to reported net income growth. First-half effective tax rate was 4.9%.
- Debt and interest expense rose following acquisition financing and convertible-note issuance. The convertible notes can create dilution or require cash settlement depending on conversion and settlement choices.
- The new ERP system was implemented in Q2; integration and control work for Hargray was ongoing. Management said disclosure controls were effective, while it continued evaluating internal controls at Hargray.
Outlook, commentary and risks
- No specific quantitative revenue, earnings or cash-flow guidance is provided in the filing. Management expects continued growth over the long term in residential data and business services, continued declines in residential video, and ongoing investment in broadband capacity and fiber expansion.
- Management reported that pandemic-related actions had no notable negative impact in the first half and that data customer growth and retention continued to support revenue. It cautioned that customer growth, bad debt expense and the persistence of reduced costs remain uncertain.
- Key risks include competition, programming and retransmission costs, acquisition integration and realization of Hargray benefits, substantial leverage and variable interest rates, convertible-note cash and dilution exposure, cybersecurity and network integrity, regulation, and possible ERP disruption.
- The company expects to continue quarterly dividends subject to Board approval; it paid $2.50 per share in Q2. It reported no material adverse effect expected from existing legal proceedings and no defaults under senior securities.
Investor verification points
- Separate Hargray’s contribution and acquisition-related accounting from organic operating trends; note that subscriber and ARPU classifications for some Hargray bulk accounts were not yet aligned.
- Assess earnings quality: reported profit includes the Hargray remeasurement gain and a significant tax benefit, while MBI option remeasurement and higher financing costs also affected results.
- Review debt service, maturities, covenant capacity, interest-rate exposure and potential cash settlement or dilution under the convertible notes.
- Track residential data and business growth against video and voice declines, capital expenditure needs, and management’s expected slower pace of pandemic-related data growth.
- Monitor Hargray integration, ERP implementation, internal-control evaluation and the realization of anticipated acquisition and fiber-expansion benefits.