Cable One, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017. Cable One provides data, video and voice services in 21 states. Results include NewWave, acquired May 1, 2017, while the comparable 2017 quarter does not.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $265.8 million | $207.4 million | +28.1% |
| Operating income | $64.7 million | $58.6 million | +10.4% |
| Net income | $40.7 million | $32.1 million | +26.6% |
| Diluted EPS | $7.08 | $5.60 | +26.4% |
| Adjusted EBITDA (non-GAAP) | $123.2 million | $97.2 million | +26.7% |
| Cash from operations | $94.7 million | $78.3 million | +21.0% |
| Capital expenditures | $41.0 million | $35.9 million | +$5.1 million |
Operating margin was approximately 24.3%, versus 28.2% a year earlier; net margin was approximately 15.3%, versus 15.5%. Adjusted EBITDA margin was approximately 46.3%, versus 46.9%. The filing cautions that Adjusted EBITDA is a non-GAAP measure and is not a substitute for net income or cash available for discretionary use.
Revenue growth reflected NewWave and organic gains in residential data and business services. Excluding NewWave, revenue grew 4.7%, net income grew 17.7% and Adjusted EBITDA grew 7.4% year over year, according to management.
Liquidity, debt and capital returns
- Cash and cash equivalents were $185.5 million at March 31, 2018; working capital was $115.1 million. The company reported $196.9 million available on its revolving facility.
- Total debt carrying amount was $1.192 billion, including $450 million of 5.75% notes due 2022. Term Loan A and B balances were approximately $245.3 million and $496.3 million, at stated rates of 4.06% and 4.56%, respectively. Debt covenants were satisfied at quarter-end.
- Cash increased $23.7 million during the quarter. Operating cash flow less cash capital expenditures was approximately $53.7 million, calculated from reported figures.
- The company paid $10.0 million in dividends and $2.3 million for share repurchases during the quarter. The declared quarterly dividend was $1.75 per share.
Material changes and operating trends
- NewWave drove much of the reported year-over-year increase. Including acquired operations, total customer relationships rose 21.2% and total PSUs rose 20.2%. In legacy Cable One systems, customer relationships declined 0.9% and total PSUs declined 3.4%; residential video PSUs fell 11.2%.
- Residential data revenue increased 31.4% and business services revenue increased 39.8%, including acquisition effects. Legacy-system revenue grew 4.7%; legacy video revenue declined 4.1% and legacy voice revenue declined 8.9%.
- Operating costs rose 37.1%, faster than revenue, partly due to NewWave. Excluding NewWave, operating expenses increased 2.0%. SG&A rose 9.8% as reported but declined 4.0% excluding NewWave.
- Interest expense increased 93.6% to $14.7 million, primarily reflecting debt incurred to fund the NewWave acquisition. The reported disposal result also shifted from a $6.1 million gain in Q1 2017 to a $6.6 million loss in Q1 2018.
- The effective tax rate fell to 19.6% from 37.3%, mainly reflecting the federal corporate tax-rate reduction and $2.4 million of tax benefits from equity awards.
Outlook, risks and unusual items
- Management said cash, operating cash flow and credit facilities should support expected needs over the next 12 months, subject to operating performance and other conditions. It expected $38–$42 million of cash tax savings in 2018.
- Management expected to spend up to $50 million in 2018 and 2019, in addition to $10 million spent in 2017, to upgrade NewWave systems. Q1 capital expenditures were $41.0 million.
- Management expects residential data and business services growth, while anticipating continuing declines in residential video and voice. It cited competition, programming and retransmission costs, regulation, franchise renewals, cybersecurity, vendor availability, acquisition integration and interest-rate exposure among the risks.
- On April 23, 2018, after quarter-end, Cable One repriced Term Loan B margins to 1.75% for LIBOR borrowings and 0.75% for base-rate borrowings. Management estimated approximately $2.5 million of annual interest savings before transaction costs; debt issuance costs were $2.0 million.
- The company adopted ASC 606 retrospectively; reported prior-period figures were recast. The change deferred certain installation revenues and customer commissions over time and did not materially affect results or cash flows. The filing also describes revision of Q1 2017 financial statements for prior labor-capitalization accounting errors; the correction did not change operating cash flow.
- Management reported no material legal proceedings or material changes to previously disclosed risk factors. It stated disclosure controls were effective and described new controls for NewWave systems and ASC 606 implementation.
Investor verification priorities
- Separate NewWave’s contribution from organic performance; verify trends in legacy subscriber counts and revenue, particularly residential video and voice.
- Assess whether data and business-service growth, pricing and NewWave integration can offset legacy customer declines and higher operating costs.
- Review debt maturities, variable-rate exposure, covenant headroom and the realized savings and costs from the April 2018 repricing.
- Track capital spending against the NewWave upgrade plan, cash generation, dividend commitments and share repurchases.
- Confirm final tax-reform accounting and the expected cash tax savings, and review the disclosed prior-period financial-statement revision.