Cable One, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited. Cable One provides residential and business data, video and voice services across 21 states. The quarter includes two months of NewWave operations following its May 1 acquisition.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $241.0 million | $204.6 million | $448.5 million | $407.4 million |
| Operating income | $58.6 million | $50.6 million | $119.0 million | $97.9 million |
| Net income | $28.6 million | $26.6 million | $61.8 million | $53.7 million |
| Diluted earnings per share | $4.97 | $4.62 | $10.76 | $9.27 |
| Operating margin | 24.3% | 24.7% | 26.5% | 24.0% |
| Net margin | 11.9% | 13.0% | 13.8% | 13.2% |
| Operating cash flow | — | $130.9 million | $125.6 million |
Revenue rose 17.8% in Q2 and 10.1% in the first half, with NewWave contributing materially. Excluding NewWave, revenue increased 2.1% in Q2 and 2.2% in the first half. First-half Adjusted EBITDA, a non-GAAP measure, was $211.2 million, up 20.8%; management reported growth of 8.1% excluding both NewWave and the benefit from a change in labor-capitalization estimate.
Data and business services were the principal organic growth areas. On a legacy-only basis, residential data revenue rose 7.4% in Q2 and 7.8% in the first half, while business services revenue increased 13.9% and 13.5%, respectively. Legacy residential video and voice customer counts continued to decline; advertising revenue also fell.
Balance sheet, cash flow and capital
- Cash and cash equivalents were $89.8 million at June 30, down from $138.0 million at year-end; working capital was $30.8 million.
- Gross debt was $1.200 billion, including $750 million of new secured term loans and $450 million of 5.75% senior unsecured notes due 2022. Term Loan A and B rates were 2.93% and 3.43%, respectively. The company reported compliance with all debt covenants.
- Approximately $197.2 million remained available under the revolving facility, net of $2.8 million of letters of credit. Debt maturities total $1.103 billion thereafter, largely reflecting long-term borrowings.
- First-half investing cash outflow was $795.8 million, including $728.8 million net cash paid for NewWave and $76.4 million of capital expenditures. Financing provided $616.7 million, principally from new debt.
- The company paid $17.2 million in dividends in the first half. The Q2 dividend was $1.50 per share. First-half share repurchases were minimal at $0.4 million.
Material changes and unusual items
- Cable One acquired NewWave for $741.0 million in cash on a debt-free basis. NewWave contributed $32.2 million of revenue and $2.1 million of net income from May 1 through June 30. Purchase-price allocations remain provisional; $93.4 million of goodwill was recognized.
- A change in estimate for capitalizing certain construction and installation labor reduced expenses by $5.1 million in Q2 and $11.0 million for the first half versus the comparable periods. Management’s adjusted EBITDA growth, excluding both NewWave and this estimate change, was 8.4% for Q2 and 8.1% for the first half.
- First-half results included a $5.7 million gain on asset disposals, primarily from selling part of the former headquarters property. Acquisition-related costs were $3.2 million in Q2 and $4.7 million in the first half.
- Depreciation and amortization and interest expense increased, reflecting acquired assets and acquisition financing. First-half effective tax rate rose to 37.9% from 35.7%, primarily because $2.2 million of prior-year spin-off and state tax benefits did not recur.
Outlook, commentary and risks
No quantified financial guidance is provided. Management expects residential data and business services growth to continue, and expects residential video and voice revenues to decline over time. The company plans continued broadband infrastructure investment and cost management, and believes cash, credit facilities and operating cash flow should fund needs over the next 12 months, subject to business conditions and performance.
Key risks include intense competition from telephone companies, overbuilders, satellite and over-the-top video providers; programming costs and retransmission fees; integration and synergy realization at NewWave; and regulatory uncertainty, including potential changes to broadband open-internet rules. Management stated that existing legal matters were not expected to have a material effect, and reported no material change to previously disclosed risk factors. NewWave’s separate systems and processes are under review as Cable One evaluates related internal controls.
Investor verification points
- Separate organic performance from NewWave’s partial-period contribution and assess customer trends in legacy markets.
- Track whether the NewWave purchase-price allocation, integration, expected synergies and margin opportunities develop as planned.
- Assess the recurring impact of the labor-capitalization estimate change and the sustainability of reported cost and EBITDA growth.
- Monitor leverage, interest expense, covenant headroom, refinancing needs and the company’s ability to fund capital spending and dividends.
- Follow legacy video and voice subscriber losses, programming costs, broadband competition and regulatory developments.