Shenandoah Telecommunications Company — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Shentel provides broadband and tower services in the Mid-Atlantic. Its Wireless operations are classified as discontinued operations following the planned sale to T-Mobile; continuing results principally reflect Broadband and Tower.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Continuing revenue | $59.7 million | $53.1 million |
| Operating income (loss), continuing operations | $2.4 million | $(1.4) million |
| Operating margin, continuing operations | 4.0% | (2.6)% |
| Income from continuing operations | $3.0 million | $0.2 million |
| Income from discontinued operations, net of tax | $48.5 million | $13.1 million |
| Net income | $51.5 million | $13.3 million |
| Diluted EPS | $1.03 | $0.27 |
| Operating cash flow, continuing operations | $9.1 million | $13.3 million |
| Capital expenditures, continuing operations | $39.5 million | $23.4 million |
At March 31, 2021, cash was $229.2 million and total available liquidity, including the undrawn $75 million revolver, was $304.2 million. Gross debt was $689.4 million, with a weighted-average interest rate of approximately 2.2%; net debt carrying value was $680.5 million. The company reported compliance with its debt covenants. Total assets were $2.08 billion and shareholders’ equity was $634.0 million.
Material changes and operating trends
- Continuing revenue grew 12.3%, led by 16.0% growth in Residential & SMB revenue, reflecting higher broadband customers and Glo Fiber expansion. Broadband revenue rose 10.8%, while Broadband operating income declined 2.2% to $10.4 million as operating expenses rose faster than revenue; its margin fell to 18.9% from 21.4%.
- Tower revenue increased 25.1% to $4.7 million, driven by more tenants and higher average revenue per tenant; Tower operating income rose 50.5% to $2.7 million.
- Continuing operating expenses increased 5.2%, primarily due to costs supporting Glo Fiber and Beam launches. Continuing operating cash flow declined by $4.1 million, which management attributed to working-capital changes.
- Net income growth was largely attributable to discontinued Wireless operations. Wireless income benefited from lower depreciation and amortization after assets held for sale ceased being depreciated in Q3 2020, lower operating lease amortization, higher travel revenue, and lower interest expense. These items make the year-over-year earnings comparison less representative of ongoing operations.
Outlook, transaction, and risks
- The Wireless asset sale is expected to generate approximately $1.95 billion in proceeds, with after-tax proceeds estimated at approximately $1.5 billion. Closing was expected in Q3 2021, subject to a definitive purchase agreement, pending FCC and West Virginia PSC approvals, and customary conditions. The HSR waiting period expired April 26, 2021.
- Sale proceeds are required to repay outstanding debt. Management expected to repay approximately $692 million of term loans and settle related swaps at closing, and proposed a special dividend of $18.75 per share, approximately $932 million, after closing, subject to Board approval.
- Management expected the workforce reduction to lower annualized continuing-operations expenses by approximately $4 million. It recorded $0.6 million of continuing-operations severance expense and expected a further $1.1 million at sale completion. A further $3.9 million of discontinued-operations severance was expected at completion.
- Sale completion could trigger advisory fees, severance, recognition of swap losses, and debt-extinguishment losses; the estimated reasonably possible expense range was $0–$36 million.
- Management expected capital expenditures to exceed cash flow from continuing operations through 2023 as it expands Glo Fiber and Beam. It believed available cash, disposition proceeds, and continuing cash flows would cover liquidity needs for the next twelve months, while noting risks to cash generation and financing availability.
- Debt and swaps reference LIBOR, whose continuation after 2021 was uncertain; the financial effect of transition could not yet be estimated. A 1 percentage-point increase in market rates would add approximately $6.8 million to annual interest expense before swap effects.
- Disclosure controls remained ineffective at March 31, 2021 because previously identified material weaknesses had not been remediated. Management reported additional procedures and concluded the financial statements fairly presented the company’s position and results. No risk-factor updates to the 2020 Form 10-K were identified; ordinary-course legal claims were not considered likely to result in a material loss.
Most important facts for investors to verify
- Whether and when the Wireless sale closes, the final proceeds and taxes, and required regulatory approvals.
- Whether the proposed $18.75-per-share special dividend receives Board approval and is paid as expected.
- Debt repayment, swap settlement, and the actual transaction-related charges compared with the disclosed $0–$36 million range.
- Broadband customer growth, margins, and capital spending as Glo Fiber and Beam expand.
- Progress in remediating material weaknesses in disclosure controls and managing LIBOR transition exposure.