Shenandoah Telecommunications Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Shentel provides wireless, broadband and tower services in the Mid-Atlantic. The filing compares results with the three months ended March 31, 2019.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $153.2 million | $158.8 million; down 3.6% |
| Operating income / margin | $23.1 million / 15.0% | $24.8 million / 15.6% |
| Net income | $13.3 million | $13.9 million; down 4.5% |
| Diluted EPS | $0.27 | $0.28 |
| Adjusted OIBDA (non-GAAP) | $64.2 million | $67.7 million |
| Operating cash flow | $61.1 million | $61.7 million |
| Capital expenditures | $32.3 million | $44.4 million |
| Cash and cash equivalents | $120.2 million | $101.7 million at Dec. 31, 2019 |
| Debt, net of loan fees | $712.2 million | $720.1 million at Dec. 31, 2019 |
| Total available liquidity | $195.2 million | $120.2 million cash plus $75.0 million undrawn revolver |
Cash from operations less capital expenditures was approximately $28.8 million, versus $17.2 million in Q1 2019. Gross term-loan principal was $723.5 million; the reported weighted average interest rate was approximately 3.2%. Interest expense fell 21.9% to $6.2 million. The company was in compliance with its debt covenants: leverage ratio 2.41 against a maximum of 3.25; debt-service coverage 5.48 against a minimum of 2.00. Its reported minimum-liquidity measure was $195.0 million against a $25.0 million requirement.
Material changes and operating trends
- Wireless: Revenue declined 7.5% to $104.1 million and operating income fell 3.2% to $23.4 million. Lower travel fees and equipment sales were partly offset by subscriber growth. Postpaid and prepaid service revenue were broadly flat year over year; the company had stopped recognizing disputed Sprint travel-fee revenue after April 30, 2019.
- Broadband: Revenue grew 6.2% to $49.8 million, driven by residential broadband subscriber growth and enterprise fiber connections. Operating income was essentially unchanged at $10.0 million as higher Glo Fiber launch, selling and network-expansion costs offset revenue gains.
- Tower: Revenue rose 23.0% to $3.7 million, reflecting more tenants and higher lease rates; operating income increased to $1.8 million.
- Consolidated expenses decreased 2.9%, including lower wireless depreciation and amortization as certain nTelos assets became fully depreciated. Corporate and broadband costs rose, including Glo Fiber launch spending.
Outlook, risks and unusual items
- T-Mobile/Sprint affiliate agreement: On April 1, 2020, after the quarter-end, T-Mobile completed its acquisition of Sprint and delivered a conversion notice to Shentel. The agreement provides for 90 days of negotiations; if no agreement is reached, T-Mobile may have an option to buy Shentel’s wireless assets for 90% of “Entire Business Value.” If it does not exercise that option, Shentel may have an option to buy the legacy T-Mobile network and subscribers in its area. The outcome could materially affect operations, financial statements and the value of the company’s shares; terms and transaction financing were uncertain.
- COVID-19: Approximately 40% of Sprint-branded retail stores were temporarily closed in mid-March, contributing to lower equipment revenue and cost of goods sold. Shentel expanded certain broadband offers and introduced a $25 prepaid internet service. Management expected temporary disruption to wireless momentum but could not predict the pandemic’s full effect on demand, collections, operations or cash flow. To date, collections and expected credit losses had not been materially affected.
- Liquidity outlook: Management expected cash, operating cash flow and revolver availability to cover anticipated business needs for the next 12 months. This is not numerical earnings guidance; future capital needs and cash flows remain subject to demand, investment plans and the T-Mobile negotiations.
- Sprint travel-fee dispute: Shentel continued to provide pass-through network services without recognizing the previously agreed fee after Sprint suspended payments. The company expected the dispute-resolution process to produce a resolution in Q2 2020.
- Interest-rate exposure: Variable-rate debt was $723.5 million. A 1 percentage-point rate increase would add about $7.1 million to annual interest expense before swap effects. Swaps covered approximately 45.4% of debt; their fair value moved to a $5.5 million liability at quarter-end, contributing to a $6.1 million after-tax comprehensive loss for the quarter.
- Prior-period corrections: The company revised 2019 comparative financial information for errors involving demo handsets and property, plant and equipment. It assessed the errors as immaterial to previously issued statements; corrections increased 2019 basic and diluted EPS by $0.02.
- Controls and contingencies: Previously identified material weaknesses in internal control over financial reporting remained unremediated, and disclosure controls were deemed ineffective as of March 31, 2020. Management reported additional review procedures and accounting hires. The company said ordinary-course legal claims were not probable or reasonably possible of material loss.
Most important facts for investors to verify
- Negotiation progress and any resulting change in the T-Mobile affiliate relationship, asset-sale option, or network/subscriber purchase rights.
- Resolution and prospective economics of the Sprint travel-fee dispute, including whether related revenue is recognized in later periods.
- COVID-19 effects on wireless additions and equipment sales, broadband customer collections, contract-asset refund estimates and cash flows.
- Remediation of internal-control weaknesses and the accuracy of subsequent financial reporting.
- Debt covenants, interest-rate exposure and planned capital spending, particularly investment in Glo Fiber and network expansion.