Cable One, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Cable One provides residential and business data, video and voice services across 21 U.S. states. It reported 818,330 customer relationships and 1,124,482 primary service units at quarter-end.
Financial highlights
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $278.6 million | $265.8 million; up 4.8% |
| Operating income | $67.7 million; 24.3% margin | $64.7 million; 24.3% margin |
| Net income | $38.7 million | $40.7 million; down 4.7% |
| Diluted EPS | $6.78 | $7.08 |
| Adjusted EBITDA | $133.1 million; 47.8% of revenue | $123.3 million; up 8.0% |
| Operating cash flow | $104.4 million | $94.7 million |
| Capital expenditures | $46.6 million | $41.0 million |
| Cash and cash equivalents | $187.6 million at March 31 | $264.1 million at December 31, 2018 |
| Total debt, including lease liabilities | $1.429 billion gross carrying amount | $1.180 billion at December 31, 2018 |
Operating cash flow less capital expenditures was approximately $57.8 million. The company reported $101.2 million of working capital and $195.9 million of availability under its revolving credit facility. It was in compliance with debt covenants at quarter-end. Interest expense rose 22.9% to $18.1 million; outstanding term borrowings bore rates of 4.25%–4.49%. A 100-basis-point LIBOR increase was estimated to add $1.3 million to annual interest expense at March 31, after interest-rate swaps.
Material changes and operating trends
- Revenue growth reflected higher residential data and business services revenue, Clearwave, a residential video rate adjustment and business modem rental charges. Data revenue increased 8.3% to $129.8 million; business services revenue increased 25.1% to $47.1 million.
- Video revenue declined 5.6% to $83.8 million and voice revenue declined 9.8% to $9.6 million. Video and voice subscriber losses continued: total video PSUs fell 8.6% year over year and total voice PSUs fell 4.9%. Total customer relationships increased 2.1%.
- Operating expenses excluding depreciation and amortization were nearly flat; SG&A increased 20.6% to $61.4 million, principally due to acquisition costs, marketing and Clearwave expenses. Depreciation and amortization increased 10.4% to $53.8 million.
- Net income declined despite revenue growth, with higher interest expense, taxes and SG&A contributing. The effective tax rate rose to 24.6% from 19.6%.
- Clearwave closed January 8 for $358.8 million in cash, funded with cash and a new $250 million term loan. It contributed $6.1 million of revenue and $1.0 million of net income through March 31. The preliminary purchase allocation included $183.2 million of goodwill and remains subject to adjustment.
Outlook, financing, risks and unusual items
- Management said cash, credit facilities and operating cash flows should support expected requirements over the next 12 months, while noting funding depends on future operating performance and other factors. No specific full-year revenue or earnings guidance is provided in the filing.
- Management expects residential data and business services growth to continue, while video and residential voice revenues are expected to decline. It plans to focus on higher-margin services, cost management and broadband investment. Up to $35 million of 2019 spending was expected for upgrades and integration of acquired operations.
- On April 1, Cable One agreed to acquire Fidelity Communications’ business and related assets for $525.9 million, subject to customary adjustments, regulatory approvals and other closing conditions; closing was expected in Q4 2019. The company cited growth, margin-expansion and synergy opportunities, but cautioned that timing, approvals, integration and realizing benefits are uncertain.
- Subsequent financing arrangements included a $325 million delayed-draw Term Loan B-3 commitment and, on May 8, new facilities including a $250 million term loan, a $450 million delayed-draw term loan and a $350 million revolver. Proceeds were intended in part to refinance existing facilities, redeem the $450 million notes, and fund Fidelity. The filing states the B-3 had not been drawn as of May 9.
- Q1 investing cash outflow was $405.0 million, primarily reflecting the Clearwave acquisition. Financing provided $224.0 million, including $250 million of new debt. The quarterly dividend was $2.00 per share; $11.4 million was paid. The company also repurchased 5,984 shares for $5.1 million.
- Acquisition-related costs were $5.2 million, including $3.3 million attributed to Clearwave. The quarter included $1.4 million of system-conversion costs and $0.5 million of rebranding costs, which are excluded from the company’s Adjusted EBITDA measure. Adjusted EBITDA is non-GAAP and should not be viewed as a substitute for net income or cash available for discretionary uses.
- Interest-rate swaps covering $1.2 billion of variable-rate debt produced a $38.6 million pre-tax fair-value loss recorded in other comprehensive income; $2.3 million of the loss was expected to be reclassified to interest expense within 12 months. Management identified competition, programming costs, regulation, cybersecurity, leverage and interest rates among relevant risks. It reported no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect based on information available.
Key facts for investors to verify
- Whether data and business-services growth can offset continuing video and voice subscriber and revenue declines.
- Final Clearwave purchase accounting, integration costs and contribution to results; and whether expected benefits are realized.
- Fidelity closing status, regulatory conditions, final funding mix, resulting leverage and integration or synergy assumptions.
- Debt refinancing and note redemption execution, covenant headroom, variable-rate exposure and the effect of future borrowing on interest costs.
- Cash generation after capital expenditures, acquisition spending, dividends and repurchases, alongside management’s stated liquidity assessment.
- Whether customer-count comparisons account for the disclosed Q1 2019 change in residential video PSU counting methodology following the NewWave billing conversion.