Shenandoah Telecommunications Company (Shentel) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Shentel operates Wireless (as a Sprint PCS affiliate), Cable, and Wireline businesses.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $76.0 | $68.8 | +10.4% |
| Operating income | $15.2 | $8.8 | +72.5% |
| Operating margin | 20.0% | 12.8% | +7.2 percentage points |
| Income from continuing operations | $8.4 | $4.4 | +89.5% |
| Net income | $8.4 | $4.5 | +86.9% |
| Diluted EPS | $0.35 | $0.19 | +$0.16 |
| Operating cash flow | $22.7 | $22.5 | +$0.3 |
| Capital expenditures | $26.0 | $14.8 | +$11.2 |
Operating cash flow less capital expenditures was negative $3.3 million, versus positive $7.6 million in Q1 2012. The company reported $67.1 million cash at March 31, 2013, down from $71.1 million at year-end. Current assets were $107.8 million and current liabilities $44.8 million (current ratio about 2.4).
Total debt was $231.4 million, including $230.0 million of variable-rate Term Loan A debt; reported long-term debt, net of current maturities, was $230.2 million. Annualized weighted-average interest rate was approximately 2.97%. The company had $50 million available under its revolving facility and potential access to up to $100 million in incremental term loans, subject to restrictions. It reported compliance with debt covenants.
Material changes and operating trends
- Wireless revenue rose 12.9% to $48.2 million, with segment operating income up 50.4% to $15.8 million. Growth reflected higher postpaid smartphone data revenue and subscriber growth, as well as prepaid service growth. Postpaid subscribers were 263,957 and prepaid subscribers 134,404 at quarter-end.
- Cable revenue increased 7.1% to $19.9 million; its operating loss narrowed to $3.4 million from $4.5 million. Higher average revenue-generating units and pricing contributed, while video customers continued to decline year over year.
- Wireline revenue increased 6.2% to $13.7 million, but operating income decreased 6.9% to $3.5 million as expenses rose faster than revenue. Access and facilities-lease revenue increased; telephone access lines and dial-up subscribers declined.
- Consolidated operating expenses increased only 1.3%, to $60.8 million. Depreciation and amortization fell to $14.0 million from $15.8 million, partly because Q1 2012 included $2.0 million of accelerated depreciation for Network Vision equipment replacements; Q1 2013 included $0.8 million.
Outlook, risks and notable items
- Management budgeted $125.2 million of capital expenditures for 2013, including wireless Network Vision upgrades, network capacity and fiber expansion. It expected to replace substantially all existing wireless cell-site equipment by Q3 2013; 274 sites had been upgraded by March 31.
- Management said cash, operating cash flow and expected credit-facility availability should fund planned spending, scheduled debt service and other needs for at least the next 12 months. This is management’s assessment, not a guarantee.
- Interest-rate exposure remains material: a 1 percentage-point increase would add about $2.3 million to annual interest expense on variable-rate debt before swaps. The company said approximately $55 million of variable-rate debt would be unhedged after August 2013. It estimated that $1.6 million would be reclassified into interest expense over the next 12 months under its cash-flow hedge.
- Wireless operations rely on Sprint for billing, collections, customer care and other functions; Sprint remits approximately 58% of company operating revenue. Shentel also relies on Sprint-provided information to record a substantial portion of wireless revenue and receivables.
- Sprint’s net service fee cap was scheduled to increase from 12% to 14% on July 1, 2013 if an analysis supports the increase. The filing also notes competing proposed offers for Sprint announced after quarter-end, which could adversely affect Sprint and Shentel.
- Q1 2013 included a $3.16 million credit for traded-in PCS equipment, applied against new equipment purchases. The Q1 2012 comparison included a $1.695 million adjusted-prepaid-results item in the company’s non-GAAP adjusted OIBDA reconciliation; adjusted OIBDA was $29.6 million in Q1 2013 versus $26.7 million in Q1 2012. The filing cautions that this non-GAAP measure is not a substitute for GAAP results.
- One remaining property from discontinued Converged Services operations, valued at $55,000, was under an agreement to sell, expected to be finalized by August 1, 2013. Related 2013 operations were not significant.
Key facts for investors to verify
- Whether wireless subscriber and revenue growth continues, and how the scheduled Sprint fee-cap change affects economics.
- Progress, spending and completion timing for Network Vision and the full-year capital-expenditure plan.
- Cash generation relative to capital spending, debt service and any further financing needs.
- Variable-rate debt exposure, swap costs and covenant headroom if interest rates rise.
- Potential effects of changes in Sprint’s ownership or operating arrangements, given Shentel’s reliance on Sprint and share of revenue.
- Whether Cable’s improving operating loss can continue despite declining video customers, and whether Wireline expense growth moderates.