Shenandoah Telecommunications Company (Shentel) — Q2 2022 Form 10-Q
Business and period: The company provides broadband services and cell-tower colocation in the Mid-Atlantic. This unaudited report covers the three and six months ended June 30, 2022; the prior-year comparison includes the Wireless business, which was sold to T-Mobile on July 1, 2021.
Financial performance and position
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Revenue | $66.0 million, up 8.8% | $130.4 million, up 8.3% |
| Operating income (loss) | ($3.1 million); margin (4.8%) | ($3.5 million); margin (2.7%) |
| Continuing operations net income (loss) | ($3.2 million), or ($0.06) per share | ($3.8 million), or ($0.08) per share |
| Operating cash flow, continuing operations | Not separately provided | $38.7 million, versus $28.2 million |
| Capital expenditures | Not separately provided | $88.7 million, versus $79.6 million |
Q2 operating expenses rose 18.6% to $69.2 million, outpacing revenue growth. The company recorded a $4.1 million Beam fixed-wireless impairment. At June 30, cash was $33.3 million, total assets $891.4 million, and shareholders’ equity $643.4 million. No Credit Agreement borrowings were outstanding at June 30; cash plus stated availability under the term loans and revolver totaled $433.3 million. Lease liabilities had a present value of $56.5 million. Capital expenditures exceeded continuing-operations cash flow by approximately $50.0 million for the first half.
Changes versus prior comparable periods
- Revenue grew, led by Broadband. Q2 Broadband revenue increased 9.2%; Tower revenue increased 1.9%. For the first half, Broadband revenue increased 8.7% and Tower revenue 2.9%.
- Broadband operating income fell to $4.1 million from $8.2 million in Q2, and to $12.3 million from $18.5 million for the first half. Expansion-related costs, higher depreciation, and the Beam impairment weighed on results.
- Consolidated continuing-operations results shifted from profit to loss: first-half operating income of $4.6 million in 2021 became an operating loss of $3.5 million in 2022. The 2021 periods also included substantial discontinued-operations income from the Wireless business sale, making total net income comparisons less representative of ongoing operations.
- Cash from continuing operations increased $10.6 million year over year for the first half, with management attributing the increase to working-capital changes. Capital spending increased $9.1 million, primarily for Glo Fiber expansion.
Outlook, risks, and unusual items
- Management expects capital expenditures to exceed cash flow from continuing operations through 2025 while expanding Glo Fiber to potentially more than 450,000 passings. It expects cash, operating cash flow, and Credit Agreement availability to cover anticipated liquidity needs for the next 12 months, but provides no specific earnings or revenue guidance.
- On July 1, 2022, Shentel drew $25 million under delayed-draw term loans and expected to draw a further $275 million by June 2023. Management also expected $29.7 million of income-tax refunds in the second half of 2022.
- Glo Fiber growth and network buildout are accompanied by higher staffing, maintenance, compensation, advertising, software, and depreciation costs. Management cautions that actual capital needs and cash generation may vary with demand, competition, labor and capital availability, regulation, technology, and other external conditions.
- Shentel stopped operating 20 of 55 Beam sites during Q2, recorded the impairment and contract-termination costs, and expects to decommission those sites by year-end 2022. It began exploring strategic alternatives for remaining Beam assets and operations.
- The company received a Virginia grant award of up to approximately $57.8 million; a Maryland award of up to approximately $10.2 million was announced in July. No grant amounts had been recognized as of June 30. Awards depend on buildout milestones and ongoing performance conditions.
- The FCC completed review in July of a spectrum-license application: licenses with a $12.1 million deposit value and a $4.0 million refund were expected in Q3. Certain other FCC spectrum licenses were classified as held for sale.
- Management reported previously identified material weaknesses in internal control and concluded disclosure controls remained ineffective as of June 30. Remediation continued, with a stated goal of completion during 2022, but no assurance of timing was given. The filing also revised 2021 comparative figures for an immaterial prior-period error.
- Management did not expect current litigation to have a material adverse financial effect. No risk-factor updates to the 2021 Form 10-K were identified.
Important facts for investors to verify
- Progress, cost, customer uptake, and returns on the Glo Fiber expansion, including the path toward the stated passings target.
- Actual borrowing, interest costs, and covenant or liquidity implications as delayed-draw loans fund planned capital spending.
- Whether operating cash flow can support the investment program, given first-half capital expenditures substantially exceeded operating cash flow.
- Resolution of the Beam strategic review, decommissioning costs, and any further impairments or restructuring charges.
- Grant milestone achievement, reimbursement timing, and the FCC spectrum-license issuance and refund.
- Remediation and independent assessment of the disclosed material weaknesses in internal control.